<PAGE>
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                  FORM 10-K

(MARK ONE)
             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X]                    SECURITIES EXCHANGE ACT OF 1934
                     FOR THE YEAR ENDED DECEMBER 31, 2001

                                      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: 333-40076

                      KNOWLES ELECTRONICS HOLDINGS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                 DELAWARE                                  36-2270096
       (STATE OR OTHER JURISDICTION                     (I.R.S. EMPLOYER
     OF INCORPORATION OR ORGANIZATION)               IDENTIFICATION NUMBER)

  1151 MAPLEWOOD DRIVE, ITASCA, ILLINOIS                      60143
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                  (ZIP CODE)

       Registrant's telephone number, including area code: 630-250-5100

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

                                                       NAME OF EACH EXCHANGE ON
       TITLE OF EACH CLASS                                 WHICH REGISTERED
          None

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

                               TITLE OF EACH CLASS
                                      None

         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 (Section 229.405 of this chapter) 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. [ ]

         There is no voting stock held by non-affiliates of the registrant.
This Annual Report is being filed by the registrant as a result of
undertakings made pursuant to Section 15(d) of the Securities Exchange Act of
1934.


<PAGE>



                      KNOWLES ELECTRONICS HOLDINGS, INC.

                                  FORM 10-K

                         YEAR ENDED DECEMBER 31, 2001


                                   CONTENTS

<TABLE>
<CAPTION>
SECTION                                                                                                           PAGE
<S>                       <C>                                                                                     <C>
Part I.
      Item 1              Business...............................................................................  2
      Item 2              Properties............................................................................. 15
      Item 3              Legal Proceedings...................................................................... 16
      Item 4              Submission of Matters to a Vote of Security Holders.................................... 16

Part II.
      Item 5              Market for Registrant's Common Equity and Related Stockholder Matters.................. 16
      Item 6              Selected Financial Data................................................................ 17
      Item 7              Management's Discussion and Analysis of Financial
                          Condition and Results of Operations.................................................... 19
      Item 7A             Quantitative and Qualitative Disclosures about Market Risk............................. 36
      Item 8              Financial Statements and Supplementary Data............................................ 37
      Item 9              Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 51

Part III.
      Item 10             Directors and Executive Officers of the Registrant..................................... 52
      Item 11             Executive Compensation................................................................. 54
      Item 12             Security Ownership of Certain Beneficial Owners and Management......................... 59
      Item 13             Certain Relationships and Related Transactions......................................... 60

Part IV.
      Item 14             Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 61

Signatures                ....................................................................................... 63
</TABLE>

<PAGE>


PART I

ITEM 1.

                                   BUSINESS

OVERVIEW

         We are a leading international manufacturer of technologically
advanced products in the hearing aid and automotive components markets. We
also operate in markets for acoustics and infrared technology products. Since
our company was founded in 1946 by Hugh and Josephine Knowles, we have
leveraged our core competency in acoustic technology to build expertise in
hearing aid transducers and low voltage integrated circuit design, electronic
controls and sensors, infrared technology and precision manufacturing. We have
operations around the world with the largest facilities in the United States,
China, Malaysia and Hungary. Our 2001 revenue, operating income and EBITDA
were $223.7 million, $42.7 million and $56.7 million, respectively. Through
our three core business units, KE, Emkay and Automotive Components, we
manufacture and market products with strong market share positions in several
key markets. We believe that we have achieved these positions in our markets
as a result of our strong customer base, technological expertise,
international low cost manufacturing capability and strong management team.
Our principal executive offices are located at 1151 Maplewood Drive, Itasca,
Illinois 60143, and our telephone number is (630) 250-5100.

OUR THREE BUSINESS UNITS

         KE -- Hearing Aid Components

         KE, which accounted for approximately 62% of our 2001 revenue, is our
most significant business unit. The KE business unit designs, manufactures and
markets subminiature acoustic transducers and other components for hearing
aids. KE is the world's largest manufacturer of hearing aid transducers, with
approximately 80% of the worldwide market, and has held a major share of the
transducer market for over 30 years. The transducer is the name given to both
the microphone and the receiver in a hearing aid. The microphone is located at
the top of the hearing aid and converts surrounding sounds to electronic
signals. The circuitry then modifies the signal over the audio frequency
spectrum. These signals are transferred to the receiver, which then converts
the signals to sounds in the ear. We manufacture transducers for all hearing
aid categories, and also produce non-transducer hearing aid components under
the brand name Deltek. KE often customizes transducers to meet the
specifications of our customers, and in certain cases develops transducer
designs in partnership with our customers. KE provides data on the hearing aid
market to our customers through the publication MarkeTrak, and is a leader in
transducer technology with 41 scientists, engineers and technicians dedicated
to research and development. We have consistently and successfully maintained
our market share over the years due to our long-standing relationships with a
wide range of customers, value-added services and technological leadership.

         EMKAY -- Acoustic and Infrared Technology

         Emkay, which accounted for approximately 15% of our 2001 revenue, was
created in 1994 to explore non-hearing aid applications for our technology.
Emkay combines KE's transducer and acoustic expertise with its core
competencies in infrared technology and electronics to provide high technology
solutions for markets with high growth potential, including mobile and
automotive communications, entertainment systems, and telephony. Computer
telephony applications including internet telephony, videoconferencing, voice
identification, and voice recognition. Emkay produces and is developing a
range of microphones, speakers, headsets and infrared remote controls
primarily for sale to original equipment manufacturers in these markets. Emkay
has significant in-house research and development capabilities, with 41
engineers and technicians operating worldwide.

         Automotive Components

         Our Automotive Components business unit is comprised of two
businesses, SSPI, which produces diesel engine solenoids and electronic
governors, and Ruf, a leading producer of automotive position sensors.
Automotive Components accounted for approximately 23% (64% from SSPI and 36%
from Ruf) of our 2001 revenue. The largest percentage of SSPI's

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sales consists of solenoids for key start/stop operations of diesel engines
used in trucks (in countries outside the United States and Europe), tractors,
turf equipment, construction, generators and other industrial equipment.
Solenoids are two position linear actuators that are used mainly to start and
stop diesel engines by converting electrical energy into mechanical work.
Electronic governors, which control engine speed and power by adjusting the
engine throttle, represent a small but growing percentage of SSPI's business.

         Ruf, headquartered near Munich, Germany, was founded in 1926 and
acquired by Knowles in 1996. Approximately 85% of Ruf's business is based on
sales of position sensors for automotive applications, including passenger
vehicles and light trucks. Automotive position sensors are commonly used to
measure the position of the throttle, headlights, exhaust gas recirculation
valve, the level of suspension with respect to the road and the level of fuel
in the tank. Other developing applications for position sensors include pedal
and throttle position sensors for drive-by-wire systems and suspension height
and steering position sensors for suspension control systems for luxury
vehicles. Ruf supplies sensors to most major European first tier automotive
parts suppliers. We have been unsuccessful in divesting the Ruf position
sensor business, but it remains on the market.

COMPETITIVE STRENGTHS

         Our strong financial record is attributable to the following
competitive strengths:

         Leading International Market Position and Strong Customer Base

         -- We have been a market leader in hearing aid transducers for more
than 30 years, and our worldwide market share is approximately 80%. We protect
our leading market share by maintaining strong relationships with all of the
key manufacturers in the hearing aid industry. We offer transducers for all
hearing aid categories and often customize models to meet the specifications
of individual hearing aid manufacturers.

         -- We have also been the market leader in solenoids for diesel engine
shutdown devices for over 20 years, and our worldwide market share is
approximately 70%. Customers of SSPI include most major industrial diesel
engine manufacturer and mobile equipment builders.

         Technological Expertise

         -- We believe that we are a technological leader in each of our
business units. We offer an advanced transducer product line that is the most
comprehensive in the hearing aid industry, setting the standard for both
miniaturization and performance, and have been a technology leader in the
transducer market for over 30 years. We are also at the forefront of the voice
technology market as a result of our superior microphones and headsets and our
50 years of experience in acoustics. We believe that we are the only headset
manufacturer that also manufactures its own line of low cost high quality
microphones. With our Automotive Components unit, we have leveraged our
technological expertise to create innovative designs of solenoids, electronic
governors and position sensors for our Automotive Components customers.

         -- To enhance our technological expertise, we emphasize research and
development investment. Our 2001 research and development expenditures were
$14.7 million, or 6.6% of net sales. We have demonstrated leadership in
developing new technologies and have the scale to devote substantial resources
toward product development. In addition, we have strategically established
patent protection for our products while creating manufacturing processes that
competitors cannot readily replicate. We believe these factors serve as
barriers to entry to the hearing aid and automotive components businesses.

         International Low Cost Manufacturing Capability

         -- Since our founding more than 50 years ago, we have developed an
international network of well equipped manufacturing facilities. We operate 9
manufacturing facilities in the United States, Germany, Austria, Hungary,
Malaysia and China. We have a proven capability of moving manufacturing to
lower cost environments. Our manufacturing facilities are not unionized, with
the exception of our facilities in China, Germany and Austria, which are
required to be unionized under local law. In March 2000, we announced plans to
consolidate our worldwide manufacturing operations. The consolidation plan
included outsourcing some activities performed in Itasca and Rolling Meadows,
Illinois. In addition, we ceased production

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at our United Kingdom, Taiwanese and German manufacturing facilities.
Production from those operations was moved to China, Malaysia and Hungary. As of
December 2001, the consolidation plan is essentially complete and our headcount
related to operations that existed in March 2000 has been reduced by 18%.

         -- The manufacturing life cycles of some transducers, particularly
models for less technologically advanced applications, have been as long as 25
years, reducing our production development costs and allowing us to improve
the efficiency of our manufacturing processes. Our KE and Automotive
Components business units use automated sub-assembly operations and manual
final assembly operations. We are also working to develop automated final
assembly equipment for select products. Emkay's operations are subcontracted
in part, providing us with cost structure flexibility and allowing us to
change capacity quickly based on product demand.

GROWTH STRATEGY

         Our principal objective is to increase revenues, cash flow and
profitability by strengthening our leading market positions in our core
businesses and applying our technological expertise to new growth
opportunities in related businesses. The primary components of our strategy
are to:

         Capitalize on Growth Opportunities in the Hearing Aid Market

         Our worldwide share of the hearing aid transducer market is
approximately 80% and we have been a market leader in transducer technology
for over 30 years. We believe we will increase our sales as the hearing aid
industry continues to expand. Hearing aid penetration into the market of
potential users has historically been low, ranging from approximately 22% in
the United States to less than 1% in some emerging economies. The hearing aid
industry is projected to grow based on the following trends:

         -        technological advances and improved customer satisfaction;

         -        improvement in the cosmetic appearance and reduction in
                  stigma;

         -        growth in the elderly population;

         -        increasing use of binaural hearing aids; and

         -        increasing international penetration of hearing aids into
                  developing economies.

         Our strategy is designed to capitalize on these trends and develop
products designed to expand the hearing aid and hearing aid component market.
For example, we have developed transducers for multiple microphone hearing
aids, which provide better performance than single microphone hearing aids and
require three or four, rather than two, transducers per hearing aid. To
increase hearing aid market growth, we also collect market data that
identifies consumer needs and work with industry participants to improve
market penetration.

         Leverage Core Acoustic Expertise to Develop Innovative Products for
         Markets with High Growth Potential

         We expect to continue combining our core competency in acoustics with
other technologies such as wireless, micro-machining systems and digital signal
processing to provide high technology solutions for high growth markets,
including mobile communications, computer telephony integration, telematics
(voice controlled wireless services delivered to an automobile environment) and
home entertainment systems. Emkay has developed several new technologies and
products for these markets, including:

         SiSonic(TM) Silicon Microphone -- We have recently developed what we
         believe is the world's first solid state silicon microphone. This
         microphone's environmental robustness enables it to perform in harsh
         environments such as automobiles. Automotive applications include
         hands-free cellular telephones, voice command and control systems,
         parking-aid systems and fuel volume measurement systems. In addition,
         since the SiSonic(TM) Silicon Microphone can withstand high
         temperatures, it can be mounted to printed circuit boards using pick
         and place soldering equipment, thereby eliminating costly manual
         installations currently required for many microphone applications.

         Far-Field Microphone Array Technology -- To support the emerging
         telematics market Emkay has developed a microphone array that uses
         digital signal processing to enable clear processing of voice signals
         in a noisy environment, such as an automobile. This technology will
         facilitate clear voice communications, allow effective use of voice
         commands for vehicle control systems and enable the use of emerging
         telematic services through voice command. In non-automotive
         applications this technology can improve communication in noisy
         environments and provide a high quality signal input to voice
         recognition systems.

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         Bluetooth(TM) Wireless Headset -- Recently, we introduced one of the
         first Bluetooth(TM) certified wireless headsets. Based on the
         Bluetooth(TM) communication protocol, this headset operates at 2.4GHz
         and is designed to work with Bluetooth(TM) enabled systems including
         cellular phones now entering the market, as well as PCs, telephones,
         and other office and home systems.

         Infrared Remote Control Products -- Remote controls for use with set
         top boxes for digital television providers, for manufacturers of
         entertainment devices, and for replacement markets including universal
         remotes capable of controlling multiple entertainment devices.

         New Headset Series -- Designed by a leader in the industrial design
         business, these new headsets were created for the call center, cellular
         phone, PC, cordless phone markets. The design uses a modular approach
         for easy customization of the products to customer requirements and are
         adaptable to multiple uses.

         Strengthen Customer Relationships

         Our business units have well-established customer relationships. We
plan to continue to strengthen our existing relationships and develop new
relationships through the following.

         -- KE often customizes its transducer models to design and
manufacture transducers that meet the specifications of individual hearing aid
manufacturers. KE and Emkay also conduct joint research and product
development with some of its customers. Emkay is also involved in developing
products with its customers.

         -- We act as a leading source of consumer data for the hearing aid
industry. We have conducted more than 30 market studies for our customers and
communicate our market data that identifies consumer needs to the hearing aid
industry through our MarkeTrak reports, other publications and seminars.

         -- SSPI has a strong position in the international solenoid
marketplace and supplies over 250 customers. We anticipate that future growth
of this Automotive Components unit will come from leveraging our existing
relationships to introduce new products and services. For example, SSPI's long
standing relationships, market intelligence and reputation for quality enabled
the rapid acceptance of our new proportional actuators at several large OEM
customers in 2001.

         Maintain Low Cost and High Quality Manufacturing Leadership

         We believe that we are the lowest cost producer of hearing aid
transducers due to our relatively large volume production and market share. KE
has more than 25 years of experience operating in both Asia and Europe. During
this time, we have developed manufacturing and management systems that allow it
to operate low cost offshore facilities without compromising either quality or
level of service. Approximately 80% of our manufacturing activity is located in
China, Malaysia and Hungary to benefit from both their lower cost labor markets
and proximity to emerging product markets.

         Develop Automotive Microphone Business

         We believe the increasing focus on limiting the use of cellular phones
while operating automobiles (driven in part by existing and proposed legislation
at the state level) along with the growing popularity of voice driven navigation
systems will create demand for microphones and provide an opportunity for us to
expand.

         Pursue Strategic Acquisitions

         Strategic acquisitions have been an important element in our growth
and efforts to enhance our leading market and technological positions. We will
continue to review attractive acquisition opportunities that preserve our
financing flexibility. We will focus on acquisitions that can:

         -        enhance existing product, process and technological
                  capabilities;

         -        provide us with growth opportunities that complement our
                  acoustic expertise; and/or

         -        expand our presence in new geographic areas.


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PRODUCTS

         KE

         KE primarily manufactures hearing aid transducers, including
microphones and receivers, that are sold to hearing aid manufacturers. KE
offers transducers for all types of hearing aids, from the smallest which
completely fit in the canal to the largest which are body-worn, and often
customizes models to meet the specifications of individual hearing aid
manufacturers. KE also occasionally conducts joint research and product
development with some of its customers. In addition to transducers, KE sells
other hearing aid components under the brand name Deltek, including trimmers,
volume controls and connectors for hearing aid manufacturers. These other
products represented a very small percentage of our sales in 2001.

         KE also acts as a source of consumer data for the hearing aid
industry. It provides free market data to its customers through distribution
of its publication MarkeTrak and has conducted more than 30 market studies for
its customers.

         Emkay

         Emkay produces and is developing a range of microphones, speakers,
headsets and infrared remote controls primarily for sale to original equipment
manufacturers. Major products are discussed below.

         Microphones. Emkay has leveraged its microphone technology to create
devices for diverse applications, Emkay is completing the development of a low
cost silicon microphone based on traditional semiconductor manufacturing
processes. The technology offers significant advantages over traditional
microphones used in high volume mass market consumer products such as cellular
telephones and PDA's These advantages include significantly reduced assembly
costs and greater tolerances in high temperature applications. The company
also markets boom-mounted microphones for use in conference rooms, helmets,
aerospace and civil/military communications; high sensitivity condenser
microphones for laptop computers, wireless phones and modem accessories;
computer monitor microphones; lapel microphones; and noise canceling and
waterproof microphones for headsets, helmets and handsets.

         Wired Headsets. Emkay manufactures a variety of wired, noise
canceling headsets used general telephony markets such as call centers and
computer telephony applications including internet based telephony and voice
recognition.

         Wireless Headsets. Emkay is one of the first manufacturers to bring
to market a wireless headset certified to version 1.1 of the international
Bluetooth specification. Bluetooth is an emerging global standard to enhance
wireless voice and data transfers and maintain the interoperability of devices
employing the standard.

         Infrared Remote Controls. Emkay has developed several infrared remote
control products, including remote controls for televisions and digital
broadcast services that provide Internet access. These products include an
infrared keyboard to facilitate email, internet browsing and shopping along
with remotes with gamepad features to facilitate playing electronic games
provide by the broadcast service provider. Emkay's remote controls have been
introduced in Europe both in the retail market and as a platform for sales to
original equipment manufacturers in connection with specific applications.


         Automotive Components

         Diesel Engine Solenoids. SSPI produces solenoids used to control
diesel engines, as well as certain natural gas, liquid propane and gasoline
engines, in industrial, marine and construction applications. These products
serve various functions including key start/stop, throttle and choke control
and emergency engine shutdown. Solenoid kits made by SSPI include mounting
hardware, brackets and linkage accessories for connecting the solenoid to the
engine and fuel system. We rigorously test these kits to meet the highest
industry standards.

         Electronic Governors. SSPI's electronic governors are used to control
the speed and power of industrial engines used in applications such as
electric power generators, compressors, tractors, hydraulic pumps and man
lifts. SSPI's Advanced Proportional Engine Control System (APECS) addresses
the increasingly sophisticated equipment of its customers by comparing

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actual engine speed to the desired operational parameters of the equipment
using a digital microprocessor and proprietary software and adjusting the
throttle of the engine accordingly.

         Position Sensors. Ruf has fifty years of experience producing
position sensors and associated components. These components are sold in the
automotive, industrial, telecommunications, computer and appliance markets.
The majority of Ruf's sensors are custom designed for specific customer
applications such as throttle position sensors, headlight range control
sensors, fuel level sensors, steering sensors and pedal position sensors. Ruf
is investing in efforts to produce contactless sensors designed to increase
the life and reliability of position sensors by reducing wear. As part of
these efforts, Ruf has both developed its own contactless technology and
purchased a license for an alternative type of contactless technology.

RESEARCH AND DEVELOPMENT

         Our 2001 research and development expenditures were $14.7 million, or
6.6% of net sales. We focus on leveraging our acoustic research for use by all
three of our business units. We are carrying out extensive research and
development on producing a silicon microphone using the emerging technology of
the micro-machining of silicon (also referred to as micro-electro mechanical
systems). We believe that we have a leading position in this application of
micro-electro mechanical systems and are continuing development of manufacturing
processes that will deliver production quantities. There is a team of eight
engineers within Emkay that is working on development of the silicon microphone.

         KE

         KE's research and development group consists of 41 scientists,
engineers and technicians located in Itasca, Illinois, focused on
technologically improved new product. KE believes that its ability to rapidly
develop new transducers with superior performance is critical to sustaining
its market share and margins. Applied research and advanced modeling lead to
new and creative products, which we believe gives KE a competitive advantage
as hearing aid manufacturers look for technology improvements in their
components.

         Planned new products and improvements include receivers with improved
maximum power output, significantly reduced vibration, screenless damping
using Ferrofluid(R), and microphone improvements with respect to a
analog/digital (A/D) signal converter, programmable digitally controlled gain
amplifier, co-joined ultra-thin microphone pairs, noise reduction, improved
electrostatic discharge thresholds and significantly reduced cellular
telephone interference.

         Emkay

         Emkay has developed a significant in-house research and development
effort, with 41 engineers and technicians. Over the next five years, Emkay
will continue to focus its research and development efforts on acoustics,
radio frequency, infrared, video image sensing, micro-electro mechanical
systems and digital signal processing products for the mobile communications,
voice recognition, digital television, computer telephony integration and
telematics markets. Emkay is also concentrating on the development of a "far
field" microphone system which employs an array of microphones that focuses on
a particular speaker while canceling other background noise. We have licensed
digital sound processing technology to further the development of this
microphone system. We expect to leverage this microphone technology for the
development of additional products for our KE and Automotive Components units.

         Emkay has decentralized research and development groups located in
the United States, Austria and Taiwan in order to coordinate closely with
regional sales and marketing teams, and more efficiently meet the demands of
local markets. Research and development efforts for micro-electro mechanical
systems for the production of silicon microphones, digital signal processing
technology and far field microphone technology is conducted in the United
States, infrared product development is conducted in Austria and wireless
headset product development is conducted in Taiwan.

         Automotive Components

         SSPI. SSPI's advanced development group currently employs 18
engineers for the design and development of new actuators and solenoids.

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         Ruf. Ruf products are developed using high performance workstations
that allow products to be transferred to production in a short period of time.
Final designs are tested in a complete product verification laboratory to
determine product reliability. Ruf employs 33 engineers and technicians at its
facility near Munich in the design, development and testing of sensors. Ruf
formed a new advanced technology group to design, develop, and test
contactless sensor and other new products. New designs are being tested on
applications at tier-one automotive parts manufacturers. In addition, Ruf is
one of the few sensor suppliers that maintains its own chemists to formulate
proprietary resistance inks which determine the performance of the product.
This allows flexibility and quick response to customer requirements.

MANUFACTURING

         We operate from seven manufacturing facilities in the United States,
Austria, Hungary, Malaysia and China. We believe that our facilities meet our
present needs and that our properties are generally well-maintained and suitable
for their intended uses. We believe that we generally have sufficient capacity
to satisfy the demand for our products in the foreseeable future. We
periodically evaluate the composition of our various manufacturing facilities in
light of current and expected market conditions and demand.

         In March 2000, we announced plans to consolidate our worldwide
manufacturing operations. The consolidation plan included outsourcing some
activities performed in Itasca and Rolling Meadows, Illinois. In addition, we
ceased production at our United Kingdom, Taiwanese and German manufacturing
facilities. Production from those operations was moved to China, Malaysia and
Hungary. As of December 2001, the consolidation plan is essentially complete and
our headcount related to operations that existed in March 2000 has been reduced
by 18%.

         KE

         KE operates manufacturing facilities in Illinois, Malaysia and China.
Several sub-assembly processes are automated, but transducer assembly is
largely manual. Manual transducer assembly has proven to be a cost-flexible
production method and KE's workforce is generally highly stable and
semi-skilled. KE is also working to develop automated final assembly equipment
for select products.

         The total production space available to KE is approximately 85%
utilized and our transducer manufacturing facilities are ISO 9000 certified.

         Emkay

         Several of Emkay's assembly processes are automated, although the
assembly operations are largely manual and performed by subcontractors in
China and Taiwan. Capacity can be increased as demand increases.

         Automotive Components

         SSPI. Most of SSPI's finished products for the North American and
European markets are manufactured in Niles, Illinois. Finished products for
the Asian markets are manufactured in Suzhou, China. Components such as coils
and stamping are primarily manufactured in Suzhou. All of SSPI's manufacturing
facilities are ISO 9000 certified and the Niles facility is QS 9000 certified
(the highest quality standard for automotive manufacturing facilities). The
Suzhou facility plans to achieve QS 9000 certification in 2002.

         Ruf. Ruf manufactures finished products in Ajka, Hungary and an
engineering center in Hoehenkirchen, Germany. The Hungarian facility was
opened in July 1997 to support European automotive customers and employs more
than 270 people. Sensitive sub-assembly manufacturing, such as screen printing
of the resistance lacquers, is performed in climate controlled clean rooms to
ensure high quality. The facilities in Hoehenkirchen and Ajka are QS 9000
certified.

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SALES AND MARKETING

         KE

         KE sells directly to hearing aid manufacturers through its 33-member
sales group which operates from offices in Illinois, United Kingdom and Japan.
Australia is covered by an independent sales representative. Pricing of KE's
products is based on a volume/price grid in which volume discounts are provided
based on actual purchases. From time to time, KE reduces prices to meet
competition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

         Emkay

         Emkay sells most of its products through a 31 member direct sales
force to original equipment manufacturers including Plantronics, Shure,
Phillips Electronics, IBM and HTC. Emkay's sales force and independent sales
representatives are located in the United States, United Kingdom, Germany,
France, Austria, Japan, Taiwan, China and Australia.

         Automotive Components

         SSPI. Solenoids and electronic governors are generally sold directly to
manufacturers of diesel engines and mobile industrial equipment. SSPI's sales
force and independent sales representatives are located in the United States,
the United Kingdom, China, Germany and Canada. SSPI also maintains independent
distributors in Japan, Brazil, Canada, Korea, Australia, Thailand and several
other European countries. This direct distribution system is expected to
continue due to the specialized design of products for particular customers.
SSPI often works in conjunction with its major customers to design and
manufacture customized products.

         Ruf. Ruf's products are sold primarily in Europe to tier one
automotive suppliers. Ruf's sales force and independent sales representatives
are located in the United States, Germany, and Italy. Most products are custom
designed for specific application requirements. Ruf has a strong project
management system that helps ensure that demanding automotive development and
delivery timetables are met. In addition, Ruf has developed an experienced
North American sales team based in Monroe, Michigan.

CUSTOMERS

         KE

         KE is the principal supplier of transducers to all of the major hearing
aid manufacturers, including GN Resound, Oticon, Phonak, Rion, Siemens, Sonic
Innovations, Starkey Laboratories and Widex. In 2001, KE's top ten customers
represented approximately 86% of sales with Siemens accounting for more than 10%
of consolidated sales.

         Emkay

         Emkay's top customers for voice recognition products include IBM and
marketers of language learning software. Generally, customers for voice command
and control products include computer and communications original equipment
manufacturers and computer peripheral manufacturers. Top customers for Emkay's
products are NTL, Philips Electronics, Plantronics, Shure, Supportplus, Tatung
and TW Electronics. In 2001, Emkay's top ten customers represented approximately
47% of sales.

         Automotive Components

         SSPI. SSPI provides engine control solenoids to every major diesel
engine manufacturer. Its top customers include Bobcat, Cummins, Ford, John
Deere, Kubota and Yanmar. SSPI's top ten customers comprised 60% of its
worldwide sales in 2001.

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         Ruf. Ruf manufactures sensors and components for many of Europe's
largest tier one automotive suppliers. Ruf's products can be found in
automobiles produced by Audi, BMW, Ferrari, Fiat, Ford, Honda, Jaguar, Mercedes,
Nissan, Opel, Peugot Renault, Rolls Royce and Volvo. Ruf's top ten customers
accounted for approximately 78% of 2001 sales.


COMPETITION

         KE

         KE has held a major share of the transducer market for over 30 years,
and its worldwide market share was approximately 80% in 2001. KE's principal
competitor is Microtronic, which we believe had a significant portion of the
remaining market share in 2001. Microtronic generally prices their products
below our pricing levels and this difference has increased due to the strength
of the U.S. Dollar relative to European currencies.

         Emkay

         The voice recognition, digital television, computer telephony
integration and mobile communications markets are highly competitive and in
many cases highly fragmented. Many companies compete with Emkay in its
targeted markets, generally on the basis of technological expertise, price,
product quality, reliability and on-time delivery. These competitors include
large consumer electronics, communications equipment and acoustic component
product companies as well as a number of smaller specialized companies.

         Automotive Components

         SSPI. As the leading producer of key start/stop diesel engine solenoid,
SSPI had worldwide market share of approximately 70% in 2001. SSPI also held a
very small share of the worldwide electronic governor market in 2001. SSPI
competes with a variety of U.S. and non-U.S. companies in these two markets.

         Ruf. Ruf had an estimated 17% share of the western European automotive
position sensor market and a very small share of the North American market in
2001. Ruf competes with a variety of U.S. and non-U.S. companies including CTS,
Bournes, Stoneridge, Novatechnik, and Pierberg.

PATENTS, COPYRIGHTS AND TRADEMARKS

         Patents play an important role in the strategy for each of our business
units. As a matter of practice, we follow an aggressive program of filing patent
applications for all new design and development concepts as soon as practical,
subject to review for patentability, technical and commercial feasibility and
approval by the appropriate business unit. We currently have approximately 170
patents issued in 15 countries around the world. The technology covered by these
patents range from the very latest in solid state, micro-machined microphone
technology to the now well-established Class D amplifier in hearing aid
transducers.

         In addition to patents, we have more than 100 trademarks registrations
and applications for registration in 20 countries around the world and 8
registered domain names for Internet web sites.

         Although we have no registered copyrights, we have unregistered
copyrights in our original works of authorship. In addition, we have in excess
of 150 unregistered trade names used to identify our products and a number of
trade secret processes used to design and manufacture our products.

         Our patents and other intellectual property rights may not protect us
from competition. In addition, patents by their nature are of limited duration,
and several of our patents will expire during the next two years.

EMPLOYEES

         We had 2,629 employees as of December 31, 2001. Of these, approximately
57% were production employees and approximately 43% were staff. Geographically,
509 of our employees are based in North America, 1,494 employees are based in
Asia and 626 employees are based in Europe. With the exception of employees in
China, Germany and Austria, who are required to be unionized under local law,
none of our employees are members of labor unions. We have good relationships
with our employees and turnover is relatively low.

ENVIRONMENTAL MATTERS

         Our facilities, like similar manufacturing facilities, are subject to
a range of stringent environmental laws and regulations, including those
relating to air emissions, wastewater discharges, the handling and disposal of
solid and hazardous waste, and the remediation of contamination associated
with the current and historic use of hazardous substances or materials.

                                      10

<PAGE>

Based on the information available to us, environmental laws currently in
force and the advice and assessment of our environmental consultants, we do
not consider that we have any material environmental liabilities or failures
to comply with applicable environmental laws.

REGULATION

         Hearing aid manufacturers are subject to a variety of regulatory
agency requirements in the United States and in various other countries in
which they sell hearing aids. Manufacturers of hearing aids are subject to the
United States Food, Drug, and Cosmetic Act and other federal statutes and
regulations governing, among other things, the design, manufacture, testing,
safety, labeling, storage, record keeping, reporting, approval, advertising
and promotion of medical devices.

         Sales of hearing aids outside the United States are also subject to
regulatory requirements that vary from country to country. Similar
requirements to those in place in the United States are imposed on hearing aid
manufacturers by the European Union. All hearing aid manufacturers are
required to obtain quality assurance certifications for their components to
sell their products in the European Union. Accordingly, KE maintains ISO 9001
and ISO 9002 quality assurance certifications which subject KE's operations to
periodic surveillance audits.


                                      11

<PAGE>



                                   INDUSTRY

         We apply our acoustic technology capabilities in several markets,
including hearing aids and acoustic and infrared technology. In addition, we
manufacture diesel engine solenoids, electronic governors and position sensors
for the automotive components market.

HEARING AID TRANSDUCERS

         Hearing aids have three basic internal components: a microphone,
signal processing and amplification circuitry, and a receiver. The microphone
is located at the top of the hearing aid and converts surrounding sounds to
electronic signals. The circuitry then modifies the signal over the audio
frequency spectrum. These signals are transferred to the receiver, which then
converts the signals to sounds in the ear. The transducer is the name given to
both the microphone and the receiver. Transducers are critical to the
performance capabilities of any hearing aid. Without high performance
transducers, the processing capabilities of hearing devices are ineffective.

         Hearing aid manufacturers distribute their products through hearing
aid fitters, referred to as dispensers, which are either audiologists or
hearing instrument specialists. An audiologist has a masters degree in
audiology and is National Board Certified by the American Speech and Hearing
Association Board. Hearing instrument specialists are licensed and may or may
not be National Board Certified. Ear, nose and throat physicians' offices,
hospitals and clinics typically employ only audiologists, whereas retail
settings employ both audiologists and hearing instrument specialists.

         Significant factors affecting demand for hearing aids include the
following:

         -- Technological advances. A number of technological advances made in
recent years have increased consumer satisfaction by decreasing the size and
improving the performance of hearing aids. The development of programmable,
digital and multiple microphones devices, greater applicability of computer
software, increased use of high technology circuitry, enhanced performance in
noisy environments and improved hearing aid casings are expected to further
improve product performance and increase consumer satisfaction.

         -- Fitting and after sales care. Improved fitting of hearing aids,
both physically and audiologically, is an important factor affecting growth of
the hearing aid market. Additionally, a few dispensers are introducing after
sales care of patients and their hearing aids, including personal visits to
older clients.

         -- Improvement in cosmetic appearance and reduction in stigma.
Through technological advances, some higher priced hearing aids have become so
small that they are virtually invisible, although occlusion (ear blockage) in
connection with their use must be managed. At the same time, the stigma
associated with hearing loss may be decreasing, as there has been an increase
in the number of baby boomers (between ages 45 to 54) who admitted to having a
hearing loss.

         -- Growing elderly population. 30% of the population over the age of
65 has historically had a hearing loss problem. The 2000 U.S. Census indicated
that 35 million people were age 65 or older. The U.S. Census Bureau also
projects that the population age 65 or older will be 39.7 million people in
2010, and five years later in 2015, 46 million.

         -- Greater use of binaural hearing aids. Clinical data has
demonstrated that the use of binaural hearing aids (i.e., two hearing aids per
user) benefits individuals with a hearing loss in both ears. Increased use of
binaural hearing aids would result in more transducer sales (four per hearing
aid user instead of two).

         -- Undiagnosed hearing loss. We estimate that approximately 10% of
the U.S. population has some form of hearing loss, and that a relatively high
proportion of this population is either unaware of their hearing loss since it
has occurred gradually over time or has not sought medical advice. There are
considerable opportunities to increase sales to this group by educating them
on the signs of hearing loss and encouraging them to visit physicians who can
diagnose the hearing loss and recommend purchase of a hearing aid. The
development of a systematic program of routine hearing screening could also
lead to significantly more referrals for treatment.

                                      12

<PAGE>

         -- International penetration. According to industry studies,
approximately 10% of the population in developed countries could benefit from
hearing aids, but only approximately 2% of the population in developed
countries owns them. Since two-thirds of the worldwide population over 65 will
be in developing countries by 2025, there are substantial opportunities for
increased use of hearing aids in developing economies such as China, India and
eastern Europe, especially as hearing aids become more affordable.

         -- Price sensitive market segments. The average price of hearing aids
in the United States was approximately $1,446 in 2001 according to a survey in
The Hearing Journal, making them too expensive for a large portion of the
elderly population who rely on fixed incomes. Several manufacturers have
entered the low price hearing aid market to explore opportunities in this
segment.

ACOUSTIC AND INFRARED TECHNOLOGY

The Emkay business unit began operations in 1994 leveraging our acoustic and
infrared competencies to target new growth markets within the digitally
enhanced and converging information technology (IT), telecomm and broadcasting
industries. Critical to the successful evolution of specific markets within
these industries will be the speed and quality of the acoustic, audio and data
input technology.

CTI

         - Computer telephony integration embraces many examples of ways in
which the computer and telephone (fixed line and cellular) can be integrated
to provide value added telephony and has for a long time been synonymous with
large call centers. However recent technological advancements means CTI is now
addressing the needs within the larger corporate and smaller enterprise
environments.

         These platforms are currently being reinforced with acoustically
driven applications, such as voice mail, Internet telephony, text to speech
conversion, voice identification, video conferencing and voice recognition. To
support these applications, Emkay has developed a range of ultra noise
canceling wired and wireless (based on the international Bluetooth standard)
CTI headsets.


         Automotive

          - Industry officials expect half of the cars manufactured in the U.S.,
Japan and Western Europe to have in-vehicle communications and entertainment
systems by 2005.

         Using natural voice commands the user can dial phone numbers, check
e-mail, receive navigational information, change radio stations, play CD disks
and run third party software applications. It is expected that every major
automotive manufacturer will offer in car telematic systems by 2004 and that 6
million users will subscribe to telematic services offered by wireless carriers,
car makers or internet service providers by 2006.

         Emkay has been aggressively promoting its range of acoustic
components and sub-assemblies for such hostile environments to AutoPC
suppliers and global automotive manufacturers and has developed single and
multiple microphone assemblies (supported by noise reduction software
techniques) for specific in vehicle applications.

         Multi-Media

         With the trend toward digital television provided by broadcast, cable
and satellite providers, new services previously that were available only
through PC access to the internet can now be accessed through television. The
consumer can now access on-line banking, on-line gaming, home shopping,
e-mail, chat and other integrated home entertainment without the need of a PC.

                                      13

<PAGE>

         Emkay has developed a complete infrared (IR) input transmission
portfolio of game pad, keyboard, pre-programmed and voice driven remote
control to simplify this on-line access. Further a unique IR-transmission
system that allows bi-directional communication for 4 individual game pads
and an increase of more than 40% battery life has been developed for OEM
customers.

AUTOMOTIVE COMPONENTS

         Diesel Engine Solenoids

         Solenoids are two position linear actuators that are used mainly to
start and stop diesel engines by converting electrical energy into mechanical
work. We believe the North American diesel engine solenoid market is about $30
million. Longer-lasting engines and alternative technologies, developed
principally in response to stringent vehicle emissions regulations in the
United States and Europe, are expected to constrain unit demand in both the
original equipment manufacturer and the aftermarket (replacement) segments of
the solenoid market. The western European diesel engine solenoid market is
estimated to be $10 million. The Asian and South American markets for
solenoids are expected to grow over the next 5 years due to economic growth
driving the demand for diesel engines.

         Electronic Governors

         Electronic governors control engine speed and power by adjusting the
engine throttle. The North American electronic governor market is about $50
million. Increased future demand is projected based on the increased need for
precision speed control of small governors and the increased use of advanced
control drive-by-wire systems in small mobile industrial equipment. The
western European electronic governor market is about $15 million, with the
rest of the world approximately $45 million.

         Position Sensors

         Automotive position sensors are commonly used to measure the position
of the throttle, headlights, exhaust gas recirculation valve, the level of
suspension with respect to the road and the level of fuel in the tank. Vehicle
production is the major determinant of demand for position sensors. According
to industry sources, worldwide vehicle production is projected to remain
relatively flat over the near term. However, new and expanded applications,
including pedal and throttle position sensors for advanced control
"drive-by-wire" systems and suspension height and steering position sensors
for suspension control systems for luxury vehicles, are expected to increase
the number of position sensors used in each vehicle. These new applications
are already being widely used in Europe and are now being incorporated in the
United States. A transition to contactless sensors is expected in the next
five years. Contactless sensors are being designed by us and others to
increase the life and reliability of position sensors by reducing wear.
Although contactless sensors are more expensive than contact sensors, we
expect contactless technologies to offer greater functionality and longevity
than the existing contact sensor technology. In addition, there is an ongoing
shift in diesel fuel injection technology, partially in response to more
stringent emissions regulations. This new technology, unlike existing
technology, uses sensors of a type that we do not manufacture. The North
American automotive position sensor market is approximately $150 million. The
western European market is about $125 million, while the rest of the world is
approximately $120 million.

                                      14

<PAGE>

ITEM 2.
                                            PROPERTIES

<TABLE>
<CAPTION>
                                                                                         SQUARE FEET
                                             Owned/      Lease                                   Automotive
Location                            Usage    Leased    Expiration            KE          EMKAY   Components      Total
<S>                                <C>      <C>       <C>            <C>               <C>      <C>            <C>
U.S.
Elgin, IL                            Mfg.    Owned                         71,800                               71,800
Itasca, IL                         Hdqtrs.   Owned                         57,900        3,000                  60,900
Lisle, IL                            Eng.    Leased    2/28/2003                                   21,000       21,000
Niles, IL                            Mfg.    Owned                                                 70,900       70,900
Monroe, MI                          Sales    Leased    8/31/2003                                      300          300
                                                                      --------------------------------------------------
                                                                          129,700        3,000     92,200      224,900

EUROPE
Neumarkt, Austria                    Mfg.    Owned                          4,000       54,400                  58,400
Hohenkirchen, Germany      Sales and Eng.    Leased    3/31/2005                                  203,800      203,800
Ajka, Hungary                        Mfg.    Owned                                      22,900                  22,900
Ajka, Hungary                        Mfg.    Owned                                                 70,000       70,000
Burgess Hill, UK                    Sales    Leased    3/31/2021            8,000        2,500      4,500       15,000
                                                                      --------------------------------------------------
                                                                           12,000       79,800    278,300      370,100

ASIA
Pudong, China                       Sales    Leased    6/30/2002              100          100                     200
Suzhou, China (No. 20)               Mfg.    Leased     1/1/2005           21,000                               21,000
Suzhou, China (Block B)              Mfg.    Leased     1/1/2005           12,400          500                  12,900
Suzhou, China (No. 16)               Mfg.    Leased     1/1/2005                                   15,100       15,100
Tokyo, Japan                        Sales    Leased    6/30/2002              300          300                     600
Penang, Malaysia **                  Mfg.    Owned                         57,500                               57,500
Singapore                            Eng.    Leased    12/31/2002                        1,700                   1,700
Weifang, China                       Mfg.    Leased    9/30/2005                        32,900                  32,900
Taipei, Taiwan                      Sales    Owned                                      86,000                  86,000
                                                                      --------------------------------------------------
                                                                           91,300      121,500     15,100      227,900

                                                                      --------------------------------------------------
GRAND TOTAL                                                               233,000      204,300    385,600      822,900
                                                                      ==================================================
</TABLE>

** Land lease expires 09/18/2049




                                       15

<PAGE>



ITEM 3.   LEGAL MATTERS

          The Company has no material pending or threatened litigation.

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

          Not applicable.

PART II

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

          Not applicable.


                                      16

<PAGE>


PART II

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                          1997(7)             1998            1999            2000           2001
                                                     ------------------------------------------------------------------------------
<S>                                                  <C>                   <C>            <C>            <C>             <C>
Statement of Operations Data
Net sales                                                   $218,150        $234,899        $229,106       $238,123        $223,721
Cost and Expenses
    Cost of Sales (8)                                        124,588         136,236         147,665        134,069         124,587
    Research and Development                                  12,232          14,419          13,891         13,380          14,684
    Selling and administrative expense                        33,267          33,075          33,421         36,342          41,470
    Recapitalization expense (1)                                   0               0          10,674              0               0
    Restructuring expense (2)                                      0               0               0         18,440             317
                                                     -------------------------------------------------------------------------------
Operating income                                             $48,063         $51,169         $23,455        $35,892         $42,663
Interest income                                                  566             278             883            959             146
Interest expense                                               (392)           (634)        (23,194)       (43,341)        (37,756)
Miscellaneous, net                                           (1,455)         (1,058)           (123)              0               0
                                                     -------------------------------------------------------------------------------
Income (loss) from continuing operations
    before income taxes                                       46,782          49,755           1,021        (6,490)           5,053
Income tax expense (benefit)                                   9,856           7,107           8,980        (1,627)           6,532
                                                     -------------------------------------------------------------------------------
Income (loss) from continuing operations                      36,926          42,648         (7,959)        (4,863)         (1,479)
Income from discontinued operations
    less applicable taxes(3)                                   6,729           6,936           2,556              0               0
                                                     -------------------------------------------------------------------------------
Net income (loss)                                            $43,655         $49,584        ($5,403)       ($4,863)        ($1,479)
                                                     ===============================================================================
</TABLE>

<TABLE>
<S>                                                  <C>                   <C>            <C>            <C>             <C>
C Corporation Pro Forma Data(4)- unaudited:
    C Corporation pro forma income taxes(4)                  $11,600         $18,500         $19,125       --             --
    C Corporation pro forma income (loss) from
    continuing operations adjusted for
    income taxes                                             $35,182         $31,255       ($18,104)       --             --

Other Financial Data
Depreciation and amortization                                $10,348         $11,235         $12,638        $12,406         $13,683
Capital Expenditures                                          12,129          16,326          14,500         16,151          21,276
Cash flows from operating activities                          52,395          56,078          49,274         22,835           9,448
Cash flows from investing activities                        (12,129)        (16,326)        (14,500)       (15,488)        (17,614)
Cash flows from financing activities                        (50,669)        (41,733)        (19,055)       (12,160)         (6,152)
EBITDA(5)                                                     58,411          62,404          46,767         66,738          56,663
Ratio of earnings to fixed charges(6)                           36.5X           39.1X           1.0X                           1.1X

Balance Sheet Data:
Cash and cash equivalents                                      8,872           7,060          23,798         17,076           2,446
Total assets                                                 258,513         271,175         190,334        191,757         177,882
Long term debt including current maturities                    1,300          --             350,134        348,807         339,773
Preferred stock mandatorily redeemable
in 2019                                                       --              --             194,250        213,675         235,042
Total common stockholders' equity (deficit)                  212,474         223,230        (410,498)      (444,617)       (467,890)
</TABLE>

                                                        See accompanying notes.

                                       17

<PAGE>

(1)       The "Recapitalization expenses" consisted primarily of bonuses,
          special one-time recognition payments to employees, termination
          costs of a supplemental executive retirement plan and legal,
          accounting, public relations and other professional fees.

(2)       The "Restructuring expenses" are related to the restructuring
          announced in March 2000. The Company consolidated its worldwide
          manufacturing operations by ending production at five manufacturing
          facilities and either outsourcing component production or moving final
          assembly to lower cost locations in Malaysia, China and Hungary.
          Through December 2001, these actions reduced our global workforce by
          about 18%.

(3)       Net income from discontinued operations represents the activity of
          The Finance Company of Illinois, an equipment financing business
          that was distributed to our preexisting stockholders on June 29,
          1999.

(4)       Effective January 1, 1997, our stockholders elected under the S
          Corporation rules of the Internal Revenue Code to have Knowles'
          income included in their own income for federal income tax purposes.
          As a result of the Recapitalization, we terminated our S Corporation
          status for federal income tax purposes effective June 29, 1999. For
          informational purposes, the selected historical consolidated
          financial data includes an unaudited pro forma presentation of
          income taxes which would have been recorded if we had been a C
          Corporation.

(5)       "EBITDA" is defined as earnings before interest, taxes, depreciation,
          amortization, miscellaneous income/expense, and for the twelve months
          ended December 31, 2001 and 2000, expenses relating to our
          restructuring announced in March 2000, and for the twelve months ended
          December 31, 1999, our recapitalization expenses. EBITDA should not be
          construed as an alternative to operating income, or net income, as
          determined in accordance with GAAP, as an indicator of our operating
          performance, or as an alternative to cash flows generated by
          operating, investing and financing activities. EBITDA is presented
          solely as a supplemental disclosure because we believe that it is a
          widely used measure of operating performance. Because EBITDA is not
          calculated under GAAP, it may not be comparable to similarly titled
          measures reported by other companies.

(6)       The ratio of earnings to fixed charges has been computed by dividing
          earnings available for fixed charges (income from continuing
          operations before income taxes and fixed charges) by fixed charges
          (interest expense plus one-third of rental expense (the portion
          deemed representative of the interest factor)). Knowles earnings
          were inadequate to cover fixed charges for the twelve months ended
          December 31, 2000 by approximately $6.5 million.

(7)       Effective for the calendar year 1997 reporting period, we changed
          our fiscal year from one ending on June 30 to one ending on December
          31.

(8)       During the fourth quarter of 2001, the Company changed its method of
          determining the cost of domestic inventories from the LIFO method to
          the FIFO method. Prior year results have been restated to reflect the
          retroactive application of this tax accounting change; 2000 and 1999
          results were decreased by $1,011 and $1,674, respectively. 1998 and
          1997 results were increased by $1,402 and $478, respectively.


                                      18

<PAGE>
ITEM 7.

                   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion should be read in conjunction with the
"Selected Consolidated Financial Data" and our consolidated financial statements
and the related notes included elsewhere in this report on Form 10-K.

OVERVIEW

          We are a leading international manufacturer of technologically
advanced products in the hearing aid and automotive components markets. We also
operate in markets for acoustics and infrared technology products that have
higher growth potential. Since we were founded in 1946, we have leveraged our
core competency in acoustic technology to build expertise in hearing aid
transducer and low voltage integrated circuit design, electronic controls and
sensors, infrared technology and precision manufacturing in the United States
and other countries. We have numerous international operations with our largest
facilities in the United States, China, Malaysia, Germany and Austria. Our 2001
revenue, operating income and EBITDA, as reported, were $223.7 million, $42.7
million and $56.3 million, respectively. Our 2001 operating income and EBITDA,
adjusted for our restructuring charges of $0.3 million, were $43.0 million and
$56.7 million, respectively.

          The company borrowed $200 million under a bank credit agreement plus
$153.2 million under a senior subordinated note agreement associated with its
recapitalization June 30, 1999. The company is required to maintain certain
ratios of EBITDA in order to be in compliance with its bank credit agreement
covenants and to access its revolving credit facility. The company was in
compliance with its leverage and interest coverage ratios and its other covenant
requirements as of December 31, 2001. However, the company is required to meet
more stringent leverage ratios and interest coverage ratios each quarter of
2002.

          As a result of a $4.0 million unanticipated reduction in inventory
that was identified as part of the 2001 year end close we had less working
capital at December 31, 2001 than we had forecasted. First quarter 2002 sales
and resulting EBITDA also were considerably less than projected at the time of
the December 2001 amendment to the bank credit agreement, resulting in $6.0
million less in cash collections and higher payable disbursements than expected.
Therefore, we were not in compliance with our required leverage ratio and our
required interest coverage under the bank credit agreement as of March 31, 2002.
As a result, we did not make the interest payment on our senior subordinated
notes scheduled for April 15, 2002 on that date. We subsequently obtained an
Amendment and Waiver dated May 10, 2002 to our Credit Agreement and on May 14,
2002 made the interest payment on our senior subordinated notes that was
scheduled for April 15, 2002. The Amendment and Waiver waived our non-compliance
with the required interest coverage ratio for the period ended March 31, 2002
and the leverage ratio for the period January 1, 2002 through March 31, 2002,
and amended these required ratios for the periods after March 31, 2002 through
the first quarter of 2003. This Amendment and Waiver also limits capital
expenditures for the year 2002 to $15 million, prevents us from making any
acquisitions of another company or business, decreases the revolving credit
facility to $18.25 million (from $25 million), caps at $2 million the amount of
net cash proceeds from asset sales that we can apply to buying new assets and
requires the company to receive additional funding of at least $10 million by
September 3, 2002 which must be used to pay down the outstanding balance on the
revolving credit facility to $8.25 million. In connection with the Amendment and
Waiver, the company and Doughty Hanson entered into an Investor Funding
Agreement that requires Doughty Hanson to invest or purchase participating bank
loans in an amount up to $10 million if the company is unable to meet the
September 3, 2002 funding requirement by other means. In connection with the
Amendment and Waiver, the company paid an up front fee of about $475,000 and the
interest rate spreads were increased 50 basis points. We expect to be able to
comply with the required covenants through March 31, 2003. However we can
provide no assurance that we will meet the revised covenants through March 31,
2003 or the more stringent covenants thereafter. The inability to meet the
required covenants could have a material adverse effect on the company's
financial condition, results of operations and liquidity.

BUSINESS SEGMENTS

          The company is organized into three business segments. They are as
follows:

          -       KE-HEARING AID COMPONENTS. KE, our most significant business
                  unit, designs, manufactures and markets subminiature
                  acoustic transducers and other components for hearing aids.
                  The transducer is the name given to both the microphone and
                  receiver in a hearing aid. KE is the world's largest
                  manufacturer of hearing aid transducers.

          -       EMKAY -ACOUSTICS AND INFRARED TECHNOLOGY. Emkay began
                  business in 1994 to explore non-hearing aid applications for
                  our technology. Emkay combines KE's transducer and acoustic
                  expertise with its core competencies in infrared technology
                  and electronics to provide high technology solutions for
                  markets with high growth potential including mobile phones,
                  PDA type devices accessing the web, computer telephony
                  integration, and automotive communications and entertainment
                  systems.

          -       AUTOMOTIVE COMPONENTS(ACG). Our Automotive Components
                  business unit is comprised of two businesses, Synchro-Start
                  Products, Inc. ("SSPI"), which produces diesel engine
                  solenoids and electronic governors, and Ruf Electronics GmbH
                  ("Ruf"), a leading producer of automotive position sensors.
                  We are continuing to explore opportunities to divest the Ruf
                  position sensor business, which accounts for approximately
                  35% of the sales and a negligible portion of the EBITDA of
                  this segment. We currently do not know when the business
                  will be sold, nor for how much.

          The following table sets forth our net sales growth from each segment
the last three years.

<TABLE>
<CAPTION>
                                  1999 VS 1998            2000 VS 1999              2001 VS 2000
                                  ------------            ------------              ------------
<S>                              <C>                     <C>                       <C>
KE                                     0.9%                     4.0%                     -1.4%
Emkay                                  2.3%                    10.1%                     -4.6%
Automotive Components                -11.2%                     0.4%                    -17.6%
    Total                             -2.5%                     3.9%                     -6.0%
</TABLE>


                                      19

<PAGE>


          The following table sets forth the approximate percentage of our net
sales from each segment.

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                                                      -----------------------
SEGMENT                                                                      1999              2000             2001
-------                                                                      ----              ----             ----
<S>                                                                         <C>               <C>              <C>
KE  ..................................................................          59.1%            59.2%            62.1%
Emkay.................................................................          14.1%            14.9%            15.2%
Automotive Components.................................................          26.8%            25.9%            22.7%
                                                                            --------         --------         --------
    Total.............................................................         100.0%           100.0%           100.0%
                                                                            ========         ========         ========
</TABLE>

          The following table sets forth the percentage of our operating
income from each segment. The percentages for the year ended December 31, 1999
exclude one-time recapitalization expenses of $10.7 million and special
charges of $8.9 million, for the year ended December 31, 2000 exclude one-time
restructuring charges of $18.4 million and for the year ended December 31,
2001 exclude one-time restructuring charges of $0.3 million. (All periods
exclude unallocated corporate expenses.)

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                                                     -----------------------
SEGMENT                                                                      1999              2000             2001
-------                                                                      ----              ----             ----
<S>                                                                          <C>               <C>              <C>
KE  ..................................................................         115.4%            91.1%           101.9%
Emkay.................................................................           4.3%             6.9%             1.4%
Automotive Components.................................................          -5.1%            12.8%            15.3%
Unallocated amount - Corporate overhead...............................         -14.6%           -10.8%           -17.6%
                                                                            --------         --------         --------
    Total.............................................................         100.0%           100.0%           100.0%
                                                                            ========         ========         ========
</TABLE>

          Net sales. We recognize net sales when title to the products
transfers to the customer, which typically is upon the shipment of
products to the customers.

          Growth in net sales for KE has generally been driven by demographics,
technological advances and improved hearing aids. There has been growing price
competition in KE's market over the last several years. KE believes that demand
for improved transducers and an expanding market for hearing aids will more than
offset this decline in existing transducer prices.

          Net sales for Emkay have been driven by the emergence of new markets
for acoustic and infrared technologies and our penetration of those markets. The
market for Emkay's products has been growing substantially, due to technological
advances in and increased penetration of mobile phones, PDA type devices that
access the web, and computer telephony integration products. Emkay also is in
voice recognition headsets. We believe that sales of complex voice recognition
products will not increase substantially until voice recognition software
provides better performance. We also believe that sales of voice recognition
products have stagnated as a result of consumer dissatisfaction with product
performance. Additionally, there has been price competition in these markets.

          Net sales from Automotive Components are generally driven by the
sale of diesel engine solenoids and position sensors. Sales of diesel engine
solenoid products for use as replacement parts fluctuate substantially from
quarter to quarter, which can have a noticeable effect on the operating income
of the Automotive Components segment. In the last several years, the diesel
engine solenoid market has been flat in the United States, declining in
western Europe and growing in the rest of the world. We expect net sales of
these solenoids to grow slowly. Net sales of position sensors products are
driven by sales of new automobiles and trucks, which are expected to remain
relatively flat. However, we expect advanced "drive-by wire" control systems
to be included in more new luxury vehicles, and later across other product
lines of the automotive manufacturers, which would result in more position
sensors being installed per vehicle. In "drive-by-wire" control systems there
is no direct mechanical connection between the actions taken by the driver and
the vehicle's response, i.e., the steering wheel is not connected by the
steering column to the front tires, but is instead connected to an electronic
control system that signals the tires to be turned by a separate mechanical
process.

          Automotive Components' net sales of sensors have recently decreased
for two reasons. First, currency changes between the German Deutschemark and
the U.S. dollar caused a reduction of approximately $4.0 million in position
sensor sales in 2000 compared to 1999. There was no significant currency
effect in the comparison of 2001 to 2000. Second, the current diesel fuel
injection pump of our largest position sensor customer is being replaced by a
new technology on some diesel engines,


                                      20
<PAGE>
 due in part to environmental regulations in Europe and North America.
Consequently, this customer reduced orders of this sensor for use on both larger
and smaller diesel engines by approximately $2.8 million from 1999 to 2000 and
$1.9 million from 2000 to 2001. We are seeking to address these declines in
sales by developing new products and establishing new customer relationships.
There is substantial price competition in the Automotive Components' market.
Original equipment manufacturers generally require scheduled price decreases.

          Cost of sales. Our cost of sales consists mainly of materials,
direct and indirect labor costs and other overhead. Other overhead includes
depreciation, equipment and tooling maintenance, shipping and manufacturing
supplies. Indirect labor payroll expense and production overhead expense make
up the largest component of cost of sales. Materials makes up the next largest
and direct labor payroll expense is the smallest component of cost of sales.
Depreciation is included as an expense in the line item that corresponds to
the asset being depreciated (i.e., manufacturing facilities are depreciated in
cost of sales, headquarter facilities are depreciated in general and
administrative expense). About 52% of our depreciation expense in 2001 and 66%
in 2000 is reflected in cost of sales.

          Most of our direct labor is performed by a semi-skilled workforce.
Therefore, we have emphasized moving manufacturing to lower wage locations,
including China, Malaysia and Hungary. We have recently expanded our
facilities in China and Hungary. In March 2000, we announced plans to
consolidate our worldwide manufacturing operations. We have outsourced some
manufacturing activities previously performed at our Itasca, Illinois facility
and we have outsourced all our manufacturing activities of our Rolling
Meadows, Illinois facility. In addition, we have ceased production at our
manufacturing facilities in the United Kingdom, Taiwan and Germany. Production
from those operations has been moved to China, Malaysia and Hungary. We have
reduced our workforce by 18% and we expect to reduce it by another 16% with
the sale of Ruf.

          KE's material costs primarily relate to unprocessed materials or
commodities, including steel, copper wire, and magnet bar stock. KE purchases
certain integrated circuits, magnets and diaphram assemblies customized
specifically for its products from outside suppliers some of which are single
sourced. Emkay's materials costs generally relate to similar unprocessed
materials or commodities. Emkay has subcontracted some of its final assembly
to third parties. These costs are included in materials costs. Automotive
Components also purchases similar unprocessed materials and commodities.

          Research and development. Research and development costs consist
mainly of personnel cost, facilities and contract costs. The principal purpose
of our research and development efforts is to strengthen the product lines of
our segments and to provide new products for growth markets.

          Sales and marketing expense. Our sales and marketing expenses
consist of personnel costs, advertising, market research and occupancy
expenses. Our selling expenses have not been a significant portion of our
period expenses, but are increasing due to Emkay, which is building a sales
and product management infrastructure to support future growth. We sell most
of our products to original equipment manufacturers and distributors, through
internal sales forces and outside sales agents.

          General and administrative expense. Our general and administrative
expenses consist of personnel costs, legal, accounting and other professional
costs, management information systems and rent. These expenses will increase
noticeably as we explore new business opportunities and invest in new systems
capabilities.

          We have replaced certain management information systems, requiring
expenditures of approximately $10 million from 2000 through 2002. Approximately
$8 million was spent in 2001, of which $6.6 million have been capitalized.

          Other income (expense). Other income (expense) consists of interest
income, interest expense and miscellaneous expenses. Due to our
recapitalization, net interest expense was $22.3 million in 1999, $43.3
million in 2000, and $37.8 million in 2001.

          Income taxes. For the first half of 1999 (prior to our
recapitalization), Knowles was an S corporation and was generally not subject
to federal income taxes. Income taxes paid during that time period relate to
Knowles' non-U.S. subsidiaries that did not have the benefit of S corporation
treatment and state and local taxes applicable to Knowles and its
subsidiaries.

                                      21

<PAGE>


Effective June 30, 1999, Knowles became a C corporation and subsequently, has
been subject to federal income taxes. Income taxes were a small net benefit in
2000 due to our ability to use a net loss carry forward from 1999. Income
taxes were 129% of pretax income in 2001 due to not being able to offset the
profitable foreign operations with the U.S. loss arising from the interest
expense. However, income taxes are expected to be closer to 60% of pretax
income in 2002.

          Income from discontinued operations. Knowles discontinued its
equipment financing business and distributed it on June 29, 1999, the day
prior to the recapitalization, to its preexisting stockholders. Net sales and
costs and expenses directly attributable to these operations are not included
in recurring operations on our income statements in the periods presented.

          Foreign exchange exposure. Our revenues are primarily denominated in
the U.S. dollar and the German Deutschemark (which was tied to  the Euro
through  2001 and replaced by the Euro in 2002). Our expenses are principally
denominated in those currencies, but are also denominated in the local
currencies of Austria, the United Kingdom, Hungary, China, Japan, Malaysia and
Taiwan. We do not hedge this exposure, since we generally incur significant
costs in the same currencies in which we have sales. As we move more production
out of Europe to Asia, we could become more exposed to relative changes in
value among the euro, the U.S. dollar and major Asian currencies.

SPECIAL CHARGES IN 1999

         During the second quarter of 1999, we recognized non-recurring expenses
related to our recapitalization of $10.7 million. These recapitalization
expenses consisted primarily of bonuses, special one-time recognition payments
to employees, termination costs of a supplemental executive retirement plan and
legal, accounting, public relations and other professional fees. In addition,
during the second and fourth quarters of 1999, we recognized special charges of
$8.9 million to increase our reserves for slow moving and obsolete inventory and
our product warranty claims. The increase in slow moving and obsolete
inventories was due to the introduction of new products in 1998 that did not
sell in 1999, management's new emphasis on managing inventory levels, which is
intended to reduce the amount of inventory on hand by more quickly disposing of
slow moving and obsolete inventory. Previously, we were more reluctant to write
off slow moving or obsolete inventory as our approach was to try to utilize the
inventory if at all possible. Our current approach is to not carry slow moving
or obsolete inventory for such lengthy periods but instead to dispose of this
inventory to reduce the carrying costs and free up warehouse capacity. The
increase in warranty reserves was due to extended warranty periods. Also, during
the third quarter of 1999, we recognized a non-recurring expense of $3.9 million
related to the amortization of deferred financing charges associated with our
subordinated bridge notes.

ACCOUNTING METHOD AND RECLASSIFICATION CHANGES MADE IN 2001

         As of October 1, 2001, the company elected to change its inventory
costing method for domestic inventories from last in, first out (LIFO) to first
in, first out (FIFO). We made the change because we believe that FIFO reflects
current economics more accurately in a deflationary environment and is the
prevalent industry practice. The manufacturing restructuring program implemented
in the second half of 2000 and completed in 2001 has reduced the direct labor
content of the product significantly and raw materials and components were
stable in price. We also have made significant changes in where various
components and subassemblies are being manufactured and therefore, we believe
the FIFO method results in a better measurement of operating results. There is
no effect on the 2001 results as reported. However, the 2000 gross margin,
operating income, and EBITDA were lowered by $1.6 million, specifically for the
KE Division by $1.2 million and for the ACG division by $0.4 million. The 2000
net income was lowered $1.0 million. The 1999 gross margin, operating income,
net income and EBITDA were lowered by $1.7 million, specifically for the KE
division.

         We also reclassified general and administrative expense at our Chinese
and Malyasian facilities from general and administrative expense to cost of
sales, since these facilities have no research and development, no sales and
marketing, and no longer have any direct shipping responsibilities. The changes
are reflected in 2001. Accordingly in 2000 $3.1 million and in 1999 $0.6 million
was reclassified from general and administrative expense to cost of sales to
conform to the current year presentation. The change primarily effected the KE
division. We also reclassified our Information Technology department expense
from the KE division to the Corporate division. In the past the IT department
served both a corporate function and as the primary North American KE division
IT operation. However, with the change to a single worldwide IT operating system
for all locations we decided that IT was more truly a corporate function. This
change has been reflected in 2001. Accordingly in 2000 $2.5 million and in 1999
$2.3 million was reclassified from the KE division to the corporate division.
We also changed our identification of research and development expenses from a
project basis to a functional department basis. The change is reflected in
2001. Accordingly, in 2000 $3.1 million and in 1999 $3.0 million was
reclassified from cost of sales to research and development.

                                      22

<PAGE>


CONSOLIDATED RESULTS OF OPERATIONS

          The table below shows the principal line items from our historical
consolidated income statements, as a percentage of our net sales, for each of
the periods discussed below.

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                                                      -----------------------
                                                                                1999             2000             2001
                                                                                ----             ----             ----
<S>                                                                           <C>              <C>              <C>
Net sales.............................................................         100.0%           100.0%           100.0%
Cost of sales.........................................................          64.4%            56.3%            55.7%
Research and development..............................................           6.1%             5.6%             6.6%
Sales and marketing expense...........................................           5.4%             5.3%             6.6%
General and administrative expense....................................           9.2%            10.0%            11.9%
Recapitalization expense..............................................           4.7%             0.0%             0.0%
Restructuring expense.................................................           0.0%             7.7%             0.1%
                                                                            --------         --------         --------
Operating income......................................................          10.2%            15.1%            19.1%
EBITDA................................................................          15.8%            20.3%            25.2%
</TABLE>

          Operating income and EBITDA, as a percentage of net sales, as
reported, were 19.1% and 25.2%, respectively, for the year ended December 31,
2001. Operating income and EBITDA, as a percentage of net sales, excluding
restructuring charges of $317, were 19.2% and 25.3%, respectively, for the
year ended December 31, 2001. Operating income and EBITDA, as a percentage of
net sales, as reported, were 15.1% and 20.3%, respectively, for the year ended
December 31, 2000. Operating income and EBITDA, as a percentage of net sales,
excluding restructuring charges of $18,440, were 22.8% and 28.0%,
respectively, for the year ended December 31, 2000. Operating income and
EBITDA, as a percentage of net sales, as reported, were 10.2% and 15.8%,
respectively, for the year ended December 31, 1999. Operating income and
EBITDA, as a percentage of net sales, excluding the recapitalization expenses
of $10.7 million and special charges of $8.9 million, were 18.8% and 24.4%,
respectively, for the year ended December 31, 1999.


YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

          The following table sets forth net sales by segment and segment net
sales as a percent of total sales.

<TABLE>
<CAPTION>
                                                             NET SALES                     PERCENT OF TOTAL SALES
                                                            YEAR ENDED                           YEAR ENDED
                                                           DECEMBER 31,                         DECEMBER 31,
SEGMENT                                               2000             2001              2000                2001
-------                                               ----             ----              ----                ----
                                                                 (in millions, except percentages)
<S>                                                <C>            <C>               <C>                  <C>
KE    ......................................        $    140.8     $      138.9             59.2%                 62.1%
Emkay ......................................              35.6             33.9             14.9%                 15.2%
Automotive Components.......................              61.7             50.9             25.9%                 22.7%
                                                    ----------     ------------      -----------          ------------
      Total.................................        $    238.1     $      223.7            100.0%                100.0%
                                                    ==========     ============      ===========          ============
</TABLE>

          Overall, consolidated net sales decreased 6% in 2001 compared to 2000.
KE's net sales decreased 1% in 2001 compared to 2000. The major cause was a
significant inventory reduction by our largest customer in the first half of the
year. As a result, first half KE sales were much weaker, while second half KE
sales were closer to the typical level. Emkay's net sales decreased 5% in 2001
compared to the same period last year primarily due to decreased sales of voice
recognition headsets. Automotive Components' net sales declined 18% primarily
due to very weak construction and agriculture equipment related

                                      23

<PAGE>

sales, lower service parts orders and lower sales at three large customers.

          The following table sets forth cost of sales by segment and segment
cost of sales as a percent of segment net sales.

<TABLE>
<CAPTION>
                                                           COST OF SALES                   PERCENT OF SEGMENT SALES
                                                            YEAR ENDED                           YEAR ENDED
                                                           DECEMBER 31,                         DECEMBER 31,
SEGMENT                                               2000             2001                 2000             2001
-------                                               ----             ----                 ----             ----
                                                                  (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                <C>             <C>                     <C>              <C>
KE    ......................................        $     70.5     $       70.3             50.1%            50.6%
Emkay ......................................              20.6             21.5             57.7%            63.4%
Automotive Components.......................              43.0             32.8             69.6%            64.5%
                                                    ----------     ------------
      Total.................................        $    134.1     $      124.6             56.3%            55.7%
                                                    ==========     ============
</TABLE>

          Consolidated cost of sales decreased by 0.6 percentage points as a
percent of sales in 2001 compared to the prior year. However, there are
noticeable differences by division. KE's cost of sales increased by 0.5
percentage points. This occurred because of quality costs associated with an
outsourced part, coupled with significant underabsorption (lower production
levels did not fully absorb overhead costs), and certain manufacturing
inefficiencies. Emkay's cost of sales increased by 5.7 percentage points due to
surplus obsolete expense and an unfavorable mix of lower margin infrared product
sales versus higher margin components and finished goods sales. The Automotive
Components Group division cost of sales declined by 5.1 percentage points due to
the SSPI manufacturing restructuring program and a favorable mix of higher
margin SSPI sales versus lower margin Ruf sales.

          The following table sets forth operating income by segment and
segment operating income as a percentage of segment net sales.

<TABLE>
<CAPTION>                                                                                          PERCENT OF
                                                         OPERATING INCOME                        SEGMENT SALES
                                                            YEAR ENDED                             YEAR ENDED
                                                           DECEMBER 31,                           DECEMBER 31,
SEGMENT                                               2000             2001              2000                2001
-------                                               ----             ----              ----                ----
                                                                  (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                <C>            <C>                  <C>                  <C>
KE    ......................................        $     54.1     $     52.2           38.4%                37.6%
Emkay ......................................               3.1           (2.5)           8.7%                -7.4%
Automotive Components.......................               5.4            6.0            8.8%                11.8%
Restructuring expenses......................             (18.4)          (0.3)
Unallocated amount - corporate overhead.....              (8.3)         (12.7)
                                                    ----------     ----------
      Total.................................        $     35.9     $     42.7           15.1%                19.1%
                                                    ==========     ==========
</TABLE>

          Excluding restructuring expenses, operating income declined by $11.3
million. The sales volume decrease accounts for $6.3 million of the operating
income decline partially offset by the gross margin improvement of $1.4
million for a net operating income decline at the gross margin level of $4.9
million. The remaining $6.4 million of the operating income decline is due to
higher period expense which includes research and development, sales and
marketing and general and administrative. The increases in period expense were
due to Emkay, which increased almost $3 million, and to Corporate, which
increased $4.4 million, partially offset by ACG, which had over a $1 million
decline in period expense. The Emkay increase was due primarily to higher
research and development expense for the silicon microphone and far field
product lines and increased sales and marketing expense for product
management. The Corporate expense increase primarily was for the new ERP
system.

                                      24

<PAGE>
Corporate expense also increased for professional fees, some of which were
associated with our attempts to sell Ruf.

         We announced a major restructuring in March 2000, resulting in a charge
in 2000 of $18.4 million. We consolidated our worldwide manufacturing
operations by ending production at five manufacturing facilities and either
outsourcing the components or moving final assembly to lower cost locations in
Malaysia, China and Hungary. The restructuring expenses were essentially
composed of severance payments to terminated employees or outplacement
expenses.

          We expect that the savings from the restructuring will eventually
reach approximately $15 million annually. These benefits also will be reduced by
the amount of cost increases that are paid to remaining employees. In addition,
during the next several months, we will continue to pursue the disposition of
the Ruf position sensor business.

          We reported operating income of $42.7 million in 2001 compared to
operating income of $35.9 million in 2000, which included significant
restructuring expenses. After adjusting out the restructuring expenses for
both years, we had adjusted operating income of $43.0 million in 2001 compared
to $54.3 million in 2000. On an adjusted basis our operating income declined
$11.3 million or 21% this year compared to last year.

          In connection with our recapitalization, we incurred $200 million of
senior debt and $153 million of senior subordinated debt. As a result,
interest expense was $37.8 million this year compared to $43.3 million last
year, with the decrease primarily due to lower interest rates in 2001 compared
to 2000.

          Income tax expense was $6.5 million this year compared to a benefit of
$1.6 million last year. The high effective tax rate in 2001 was caused by
foreign taxes not being offset by the benefit of the U.S. federal taxable loss
this year, while during the second half of 2000 the U.S. federal taxable income
was high enough to allow us to use the tax loss carryforward from the second
half of 1999.

          As a result of the interest expense and taxes (and the restructuring
charge in 2000), we reported a net loss of $1.5 million this year compared to a
net loss of $4.9 million last year.


YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

          The following table sets forth net sales by segment and segment net
sales as a percent of total sales.

<TABLE>
<CAPTION>
                                                             NET SALES                     PERCENT OF TOTAL SALES
                                                            YEAR ENDED                           YEAR ENDED
                                                           DECEMBER 31,                         DECEMBER 31,
SEGMENT                                               1999             2000              1999                2000
-------                                               ----             ----              ----                ----
                                                                 (in millions, except percentages)
<S>                                                <C>            <C>               <C>                  <C>
KE    ......................................        $    135.4     $      140.8             59.1%                 59.2%
Emkay ......................................              32.3             35.6             14.1%                 14.9%
Automotive Components.......................              61.4             61.7             26.8%                 25.9%
                                                    ----------     ------------      -----------          ------------
      Total.................................        $    229.1     $      238.1            100.0%                100.0%
                                                    ==========     ============      ===========          ============
</TABLE>

          Overall, consolidated net sales increased 4% in 2000 compared to
1999. KE's net sales increased 4% in 2000 compared to 1999. This is just
slightly lower than the expected rate of growth for KE. The first half of 2000
was much stronger than the second half. The first quarter was significantly
stronger than the normal run rate, the second and third quarters were fairly
typical, and the fourth quarter was much weaker than normal. The fourth
quarter weakness was heavily weighted toward the end of the quarter, when a
few of KE's customers began a significant inventory reduction program. Within
KE, Deltek product sales increased more than the division average, but on a
much smaller sales base. Transducer unit volume increased more than 10% in
2000, but slightly more than half the unit volume increase was offset by
reduced pricing. Emkay's net sales increased 10% in 2000 compared to 1999.
Within Emkay, finished goods product sales accounted for most of the increase,
component product sales grew at the division average and infrared product
sales were only slightly better than 1999. Infrared

                                      25

<PAGE>

product sales were only slightly better on a reported basis in 2000 compared
to 1999 due to unfavorable U.S. dollar to German Deutschemark exchange rate
changes year over year, but they increased 18% on a constant currency basis.
Automotive Components' net sales were flat in 2000 compared to 1999. SSPI
diesel solenoid net sales increased 17%, primarily due to large replacement
parts orders from their largest customer. Ruf net sales decreased 17% on a
reported basis, primarily due to unfavorable U.S. dollar to German
Deutschemark exchange rate changes. However, Ruf's net sales declined only 4%
on a constant currency basis and that decline was due to lower sales of a
specific diesel throttle position sensor for their largest customer.

          The following table sets forth cost of sales by segment and segment
cost of sales as a percent of segment net sales.

<TABLE>
<CAPTION>
                                                          COST OF SALES                     PERCENT OF SEGMENT SALES
                                                            YEAR ENDED                             YEAR ENDED
                                                           DECEMBER 31,                           DECEMBER 31,
SEGMENT                                               1999             2000                 1999                2000
-------                                               ----             ----                 ----                ----
                                                                    (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                <C>            <C>               <C>                  <C>
KE    ......................................        $     80.3     $       70.5             59.3%               50.1%
Emkay ......................................              20.9             20.6             64.7%               57.7%
Automotive Components.......................              46.5             43.0             75.7%               69.6%
                                                    ----------     ------------
      Total.................................        $    147.7     $      134.1             64.5%               56.3%
                                                    ==========     ============
</TABLE>

          Consolidated cost of sales decreased by 8.2 percentage points as a
percent of sales in 2000 compared to 1999. However, 3.9 percentage points was
due to special charges in 1999, which were not repeated in 2000. This means
that the gross margin performance improvement was approximately 4.3 percentage
points or $9 million. We believe that about half of the savings was due to
cost savings initiated in 1999 and the other half was due to the restructuring
announced and initiated in March 2000. KE's cost of sales declined by 9.2
percentage points, 6.1 percentage points due to the 1999 special charges and
3.1 percentage points due to cost savings associated with the 1999 and 2000
product transfers. Emkay's cost of sales declined by 7.0 percentage points,
1.7 percentage points due to the 1999 special charges and 4.7 percentage
points due to the June 30, 1999 increase in surplus and obsolete inventory
leaving a 2.6 percentage point gross margin performance improvement for 2000.
The Automotive Components group cost of sales declined by 6.1 percentage
points, 2.3 percentage points due to the special charges and 3.8 percentage
points due to gross margin improvement. About half of the gross margin
improvement was due to lower Ruf costs resulting from the change in the
exchange rate of the German Deutschemark to the U.S. Dollar and the other half
of the improvement was due to cost savings of the SSPI operations product
transfers.


          The following table sets forth operating income by segment and
segment operating income as a percentage of segment net sales.


<TABLE>
<CAPTION>
                                                                                                 PERCENT OF
                                                         OPERATING INCOME                      SEGMENT SALES
                                                            YEAR ENDED                           YEAR ENDED
                                                           DECEMBER 31,                         DECEMBER 31,
SEGMENT                                               1999             2000              1999                2000
-------                                               ----             ----              ----                ----
                                                                  (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                <C>            <C>                  <C>                 <C>

KE    ......................................        $     39.4     $     54.1           39.1%               38.4%
Emkay ......................................               1.4            3.1            4.5%                8.7%
Automotive Components.......................              (1.6)           5.4            2.8%                8.8%
Recapitalization expenses...................             (10.7)          --
Restructuring expenses......................              --            (18.4)
Unallocated amount - corporate overhead.....              (5.0)          (8.3)
                                                    ----------     ----------
      Total.................................        $     23.5     $     35.9           10.2%               15.1%
                                                    ==========     ==========
</TABLE>

                                      26

<PAGE>

          Almost all of the increase in operating income was due to the
improvement in the gross margin. Research and development expenses and selling
and marketing expenses combined declined 0.3 percentage points as a percent of
sales in 2000 compared to 1999, while general and administrative expenses
stayed constant as a percent of sales. KE division period expenses were down
1.1 percentage points due to much lower general and administrative expenses.
Emkay period expenses went up 2.7 percentage points, all due to research and
development expenses. Automotive Components expenses were down 5.6 percentage
points, primarily due to significantly lower research and development expenses
and general and administrative expenses. The corporate expense increased 1.3
percentage points due to the beginning of the Oracle ERP system implementation
program and to higher legal and professional services expenses.

          During the second quarter of 1999, we recognized non-recurring
expenses related to our recapitalization of $10.7 million. These
recapitalization expenses consisted primarily of bonuses, special one-time
recognition payments to employees, termination costs of a supplemental
executive retirement plan and legal, accounting, public relations and other
professional fees.

          We announced a major restructuring in March 2000, resulting in a
charge in 2000 of $18.4 million. We are consolidating our worldwide
manufacturing operations by ending production at five manufacturing facilities
and either outsourcing the components or moving final assembly to lower cost
locations in Malaysia, China and Hungary. The restructuring expenses were
essentially composed of severance payments to terminated employees or
outplacement expenses.

          The five facilities where production was eliminated with the
number of positions being eliminated and the final production dates are as
follows: (1) Burgess Hill, UK; 133 positions, June, 2000, (2) Itasca, IL, USA;
262 positions, September, 2000, (3) Taipai, Taiwan; 220 positions; March,
2001, (4) Rolling Meadows, IL, USA; 16 positions; May, 2001, and (5)
Hoenkirchen, Germany; 180 positions; September, 2001. Through December 2001,
these actions reduced our global workforce by 18%.

          We expect that the savings from the restructuring will be
approximately $15 million annually. Although some benefits began to accrue in
2000 and increased significantly in 2001, the full impact of the benefits will
not occur until 2002. These benefits also will be reduced by the amount of
cost increases that are paid to remaining employees. In addition, we continue
to explore opportunities to divest of the Ruf position sensor business.

          As a result of the restructuring charge in 2000 and the
recapitalization and special charges in 1999, we reported operating income of
$35.9 million in 2000 compared to operating income of $23.5 million in 1999.
After adjusting out the restructuring charge in 2000 and the recapitalization
and special charges in 1999, we had adjusted operating income of $54.3 million
in 2000 compared to $ 43.0 million in 1999. On an adjusted basis our operating
income increased $11.3 million or 26% in 2000 compared to 1999.

          In connection with our recapitalization, we incurred $200 million of
senior debt and $153 million of senior subordinated debt. As a result,
interest expense was $43.3 million in 2000 compared to $23.2 million in 1999
(which had only a half year of the higher interest related to the
recapitalization transaction).

          Income tax expense was a benefit of $1.6 million in 2000 compared to
an expense of $9.0 million in 1999. The difference is due to our ability to
use the tax loss carryforward from the second half of 1999, and to Knowles
being an S Corporation for federal income tax purposes the first half of 1999
and the Company not realizing the benefit of the tax loss the second half of
1999 when it just became a new C corporation.

          As a result of the interest expense and taxes (and the restructuring
charge in 2000 and the recapitalization and special charges in 1999), we
reported a net loss of $4.9 million in 2000 compared to a net loss of $5.4
million in 1999.


LIQUIDITY AND CAPITAL RESOURCES

         We have historically used available funds for capital expenditures,
inventory, accounts receivable and acquisitions. These funds have been obtained
from operating activities and from lines of credit. In the future, we will
continue to have these needs, and we will also need to fund repayments of
principal under our term loans ($9.0 million in 2002, $10.25 million in 2003,
and additional amounts thereafter). We also will have substantial interest
expense of approximately $35 to $40 million each

                                      27


<PAGE>
year.

          We are a holding company. Our subsidiaries conduct substantially all
of our consolidated operations and own substantially all of our consolidated
assets. Consequently, our cash flow and our ability to meet our debt service
obligations depends substantially upon the cash flow of our subsidiaries and the
payment of funds by our subsidiaries to us in the form of loans, dividends or
otherwise.

          The company borrowed $200 million under a bank credit agreement plus
$153.2 million under a senior subordinated note agreement associated with its
recapitalization June 30, 1999. The company is required to maintain certain
ratios of EBITDA in order to be in compliance with its bank credit agreement
covenants and to access its revolving credit facility. The two primary ratios
the company must maintain are the leverage ratio, which is total net debt
divided by EBITDA, and the interest coverage ratio, which is EBITDA divided by
net cash interest expense. The company is required to maintain its leverage
ratio below a specified level and its interest coverage ratio above a specified
level.

        As a result of a $4.0 million unanticipated reduction in inventory that
was identified as part of the 2001 year end close we had less working capital at
December 31, 2001 than we had forecasted. First quarter 2002 sales and resulting
EBITDA also were considerably less than projected at the time of the December
2001 amendment to the bank credit agreement, resulting in $6.0 million less in
cash collections and higher payable disbursements than expected. Therefore, we
were not in compliance with our required leverage ratio and our required
interest coverage under the bank credit agreement as of March 31, 2002. As a
result, we did not make the interest payment on our senior subordinated notes
scheduled for April 15, 2002 on that date. We subsequently obtained an Amendment
and Waiver dated as of May 10, 2002 to our Credit Agreement and on May 14, 2002
made the interest payment on our senior subordinated notes that was scheduled
for April 15, 2002. The Amendment and Waiver waived our non-compliance with the
required interest coverage ratio for the period ended March 31, 2002 and the
leverage ratio for the period January 1, 2002 through March 31, 2002, and
amended these required ratios for the periods after March 31, 2002 through the
first quarter of 2003. This Amendment and Waiver also limits capital
expenditures for the year 2002 to $15 million, prevents us from making any
acquisitions of another company or business, decreases the revolving credit
facility to $18.25 million (from $25 million), caps at $2 million the amount of
net cash proceeds from asset sales that we can apply to buying new assets and
requires the company to receive additional funding of at least $10 million by
September 3, 2002 which must be used to pay down the outstanding balance on the
revolving credit facility to $8.25 million. In connection with the Amendment and
Waiver, the company and Doughty Hanson entered into an Investor Funding
Agreement that requires Doughty Hanson to invest or purchase participating bank
loans in an amount up to $10 million if the company is unable to meet the
September 3, 2002 funding requirement by other means. In connection with the
Amendment and Waiver, the company paid an up front fee of about $475,000 and the
interest rate spreads were increased 50 basis points. We expect to be able to
comply with the required covenants through March 31, 2003. However we can
provide no assurance that we will meet the revised covenants through March 31,
2003 or the more stringent covenants thereafter. The inability to meet the
required covenants could have a material adverse effect on the company's
financial condition, results of operations and liquidity.

          The required ratios as amended and the actual ratios for year end
1999, 2000 and 2001 are as follows:

<TABLE>
<CAPTION>
                           Leverage Ratio             Interest Coverage Ratio
                           --------------             -----------------------
                       Required         Actual        Required          Actual
<S>                    <C>              <C>           <C>               <C>
December 31, 1999        6.00            5.84           1.50             1.58
December 31, 2000        5.75            4.92           1.60             1.72
December 31, 2001        6.20            6.09           1.55             1.60
</TABLE>


          The company was in compliance with these two ratios and its other
covenant requirements as of the end of all three years. The company is required
to maintain the following amended leverage ratios and interest coverage ratios
for 2002 as follows:

<TABLE>
<CAPTION>
                              Leverage Ratio          Interest Coverage Ratio
                              --------------          -----------------------
                                Required                   Required
<S>                           <C>                     <C>
    March 31, 2002                Waived                     Waived
     June 30, 2002                6.75                       1.45
September 30, 2002                6.65                       1.45
 December 31, 2002                6.45                       1.45
</TABLE>

        Net cash provided by operating activities was $9.4 million in 2001
compared to $22.8 million in 2000. The net loss of $1.5 million in 2001 compared
to a net loss of $4.9 million in 2000. Most of the reduction in cash flow from
operations came from the fact that net income after adjustments for non-cash
charges was $7.2 million less in 2001 than 2000. Working capital was a net use
of cash of $7.6 million in 2001 compared to $1.4 million in 2000. In both years,
restructuring expense was the primary working capital use of cash. In 2001,
accrued compensation and benefits and other accrued liabilities were a use of
cash while in 2000 they were a source of cash due to higher accrued expense in
2000 and lower accrued expense in 2001.

          Net cash used in investing activities was $17.6 million in 2001
compared to $15.5 million in 2000. Investing activities for both years is
primarily net purchases of property, plant and equipment. In 2001, gross
purchases of fixed assets were $21.3 million, partially offset by the sale of
the United Kingdom plant for $3.7 million. The primary capital expenditures in
2001 were for new product tooling and production equipment and automation, but
IT hardware and software and capitalization of Oracle consulting assistance to
support the new ERP system was $6.6 million in 2001 compared to $1.3 million
in 2000.

          Net cash used in financing activities was $6.2 million in 2001 as
compared to $12.2 million in 2000. Net debt payments of $5.3 million were the
primary financing activities for 2001, while the purchase price adjustment
paid to the prior owners of Knowles of $8.3 million was the primary financing
activities for 2000.

          The amount payable to our preexisting stockholders for the repurchase
of their common stock in our recapitalization was subject to a post-closing
adjustment. In June 2000, the independent accountants appointed pursuant to
the recapitalization agreement determined that Knowles owed the preexisting
stockholders approximately $8.3 million of the $13.3 million purchase price
adjustment originally proposed by the preexisting stockholders, plus
approximately $0.7 million in interest. The purchase price adjustment was
recorded as a reduction to stockholders' equity in 2000.

          The net of the cash flow provided by operations and used in investing
and financing activities resulted in a reduction of cash of $14.6 million in
2001 compared to a reduction in cash of $6.7 million in 2000.

          Net cash provided by operating activities was $22.8 million in 2000
compared to $49.3 million in 1999. These amounts in 1999 include $30.0 million
of net cash provided by discontinued operating activities in the first half of
that year. Net cash provided by continuing operations was $22.8 million in 2000
compared to $19.2 million in 1999. Income from continuing operations was a loss
of $4.9 million in 2000 compared to a loss from continuing operations of $8.0
million in 1999. Although accounts receivable decreased by $1.0 million and
accounts payable increased by $4.0 million contributing to the availability of
cash, working capital use of cash exceeded availability due to $2.9 million of
increased inventory and $7.8 million of restructuring costs.

          Net cash used in investing activities was $15.5 million in 2000
compared to $14.5 million in 1999. Investing activities for both years is
primarily net purchases of property, plant and equipment.

          Net cash used in financing activities was $12.2 million in 2000 as
compared to $19.1 million in 1999. The issuance of preferred and common stock of
$190.6 million and the debt proceeds of $350.1 million funded the purchase of
common stock and the related recapitalization costs in the second quarter of
1999. These were partially offset by costs associated with the equity and debt
financing of $26.6 million. Dividends paid were $24.8 million in 1999.

          The net of the cash flow provided by operations and used in investing
and financing activities resulted in a reduction of cash of $6.7 million in
2000 compared to an increase in cash of $16.7 million in 1999.

         We expect capital expenditures of $13 to $15 million in 2002. Our two
largest capital expenditures during 2001 were the new ERP system hardware,
software and capitalized Oracle consulting activities and an automation project.
We expect our major capital expenditures in 2002 will be to support new product
introductions for Emkay and for new

                                      28

<PAGE>


production equipment for KE. The amount and timing of actual capital
expenditures may be different than our current expectations.

THE RECAPITALIZATION

         On June 30, 1999, Key Acquisition, L.L.C. ("Key Acquisition"), all of
whose membership interests are held by limited partnerships for which Doughty
Hanson & Co. Limited or its affiliates (collectively, "Doughty Hanson") act as
general partner, acquired control of Knowles Electronics, Inc. in a
recapitalization transaction ("Recaptilization"). On June 29, 1999, Knowles'
equipment financing business, which included certain parcels of real estate,
were distributed to our preexisting stockholders, in redemption of 10% of the
stock owned by those stockholders. As part of the June 30, 1999
recapitalization, we repurchased from our preexisting stockholders for $505.5
million 90% of our common stock remaining outstanding after the previous day's
redemption, and our preexisting stockholders exchanged their remaining common
stock for shares of the newly authorized common stock and preferred stock. In
addition, upon closing of the Recapitalization, certain of our senior officers
purchased shares of newly authorized common stock issued by Knowles. Upon the
closing of the recapitalization, Key Acquisition owned approximately 82.3% of
our newly authorized common stock and approximately 88.9% of our newly
authorized preferred stock, certain of our preexisting stockholders owned
approximately 10.3% of our common stock and approximately 11.1% of our
preferred stock, and certain of our senior officers owned approximately 7.4%
of our common stock.

         The amount payable to our preexisting stockholders for the repurchase
of their common stock in our recapitalization was subject to a post-closing
adjustment payable by Knowles to our preexisting stockholders or by our
preexisting stockholders to Key Acquisition. In June 2000, the independent
accountants appointed pursuant to the recapitalization agreement determined
that Knowles owed the preexisting stockholders approximately $8.3 million of
the $13.3 million purchase price adjustment originally proposed by the
preexisting stockholders, plus approximately $0.7 million in interest. The
purchase price adjustment was recorded as a reduction to stockholders' equity
in the second quarter of 2000. In addition, Knowles agreed to indemnify our
preexisting stockholders for any damages they suffer as a result of any breach
of the various representations, warranties and agreements made by Key
Acquisition in connection with our recapitalization.

         In connection with the Recapitalization, a syndicate of lenders led
by The Chase Manhattan Bank and Morgan Stanley Senior Funding, Inc. provided
us with a $250 million senior credit facility consisting of a $50 million
revolving credit facility, subject to certain conditions, and $200 million in
term loans. We also sold $150 million of subordinated bridge notes to Morgan
Stanley Senior Funding, Inc. and The Chase Manhattan Bank, all of which were
repaid with proceeds from the senior subordinated offering of October 15, 1999
and available cash. The Recapitalization was financed with the term loans
under the senior credit facility and subordinated bridge notes as well as a
$214.2 million equity investment by Key Acquisition, certain senior officers
of Knowles and the Knowles family. The sources and uses of funds for the
Recapitalization are summarized below:

                               SOURCES AND USES
                                (IN MILLIONS)

<TABLE>
<CAPTION>
                                SOURCES OF FUNDS                                   AMOUNT
                                ----------------                                   ------
<S>                                                                           <C>
Revolving facility(1).......................................................   $          --
Term Loan A.................................................................            50.0
Term Loan B.................................................................           150.0
Senior Subordinated Notes...................................................           150.0
Redeemable preferred stock due 2019:
    Purchased by Doughty Hanson.............................................           164.4
    Issued in exchange for common stock of preexisting stockholders.........            20.6
Common stock:
    Purchased by Doughty Hanson.............................................            24.0
Issued in exchange for common stock of preexisting stockholders.............             3.0
Purchased by senior officers................................................             2.2
                                                                               -------------
Total sources...............................................................   $       564.2
                                                                               =============
</TABLE>

                                      29

<PAGE>

<TABLE>
<CAPTION>
                        USES OF FUNDS                                              AMOUNT
                        -------------                                              ------
<S>                                                                           <C>
Cash purchase of common stock(3)............................................   $       505.5
Acquisition of common stock of pre-existing stockholders in exchange
    for new common and preferred stock......................................            23.6
Post - closing adjustment paid to preexisting stockholders(2)...............             8.3
Fees and expenses...........................................................            26.6
Cash retained by Knowles....................................................             0.2
                                                                               -------------
Total uses..................................................................   $       564.2
                                                                               =============
</TABLE>

(1)      Total availability under the revolving facility is $18.25 million,
         subject to certain conditions.

(2)      Our preexisting stockholders proposed a purchase price adjustment due
         them. Doughty Hanson counterproposed a purchase price adjustment due
         the Company. In June 2000, the independent accountants appointed
         pursuant to the recapitalization agreement determined that Knowles
         owed the preexisting stockholders approximately $8.3 million of the
         $13.3 million purchase price adjustment originally proposed by the
         preexisting stockholders, plus approximately $0.7 million in
         interest.

(3)      We also paid our preexisting stockholders $2.8 million for certain
         tax deductions they lost as a result of the recapitalization.

         Ownership of Knowles. Key Acquisition, which owns approximately 82.3%
of our common stock and 88.9% of our preferred stock, is controlled by Doughty
Hanson. Doughty Hanson was founded in 1986 as a private partnership dedicated
to originating and arranging private equity and venture capital transactions
for market-leading businesses in Europe. To date, the firm has invested $11.0
billion of capital on behalf of a variety of institutional investors, and it
has become Europe's largest independent private equity fund manager. Since its
formation, Doughty Hanson has made investments in a variety of industries,
including sanitary installation systems, flooring products, non-beverage metal
packaging, sports watches, aircraft parts, precision parts and athletic
apparel and equipment manufacturing. The investment in Knowles represents
Doughty Hanson's first major equity investment in the United States.

         Holding Company Reorganization. Subsequent to the Recapitalization,
we reorganized Knowles Electronics, Inc. as a holding company. Pursuant to a
contribution agreement on August 30, 1999 Knowles Electronics, Inc.
contributed substantially all of its assets and liabilities (other than the
capital stock of Knowles Intermediate Holding Company, Inc. and certain
foreign subsidiaries and Knowles Electronics, Inc.'s liabilities under the
Credit Agreement and Subordinated Bridge Notes) to Knowles Electronics, LLC, a
newly created Delaware limited liability company. As a result of this
reorganization, Knowles Electronics, Inc. is now a holding company that does
not conduct any significant operations. Subsequent to the transaction, Knowles
Electronics, Inc. changed its name to Knowles Electronics Holdings, Inc.

THE CREDIT AGREEMENT

         We entered into the Credit Agreement, dated as of June 28, 1999 and
amended and restated as of July 21, 1999, and further amended as of December 23,
1999, April 10, 2000, December 12, 2001, and May 10, 2002 with the Lenders named
therein, JP Morgan Chase Bank (as successor to The Chase Manhattan Bank), as
Administrative Agent and Swingline Lender, Morgan Stanley Senior Funding, Inc.,
as Syndication Agent, and Chase Securities Inc., as Lead Arranger and Book
Manager. The Credit Agreement, as amended, consists of (i) a $50 million
seven-year term loan facility ("Term Loan A"), (ii) a $150 million eight-year
term loan facility ("Term Loan B") and (iii) an $18.25 million (as amended
December 12, 2001 and May 10, 2002) seven-year revolving credit facility (the
"Revolving Facility"), subject to certain conditions. Under the terms of the
Credit Agreement, and in order to provide financing for the Recapitalization,
Term Loan A and Term Loan B were fully drawn on June 30, 1999, the closing date
of the Recapitalization. The Revolving Facility is available for working capital
and general corporate purposes. Term Loan A will amortize quarterly, with the
following payments being made at the end of each quarter during the following
periods.

                                      30

<PAGE>



<TABLE>
<CAPTION>
REPAYMENT DATES                                                                               AMOUNT
---------------                                                                               ------
<S>                                                                                     <C>
September 30, 2000 to June 30, 2001.................................................    $     1,250,000
September 30, 2001 to June 30, 2003.................................................          1,875,000
September 30, 2003 to June 30, 2006.................................................          2,500,000
                                                                                        ---------------
         Total......................................................................    $    50,000,000

         Term Loan B will amortize quarterly, with the following payments being
made at the end of each quarter during the following periods.

REPAYMENT DATES                                                                               AMOUNT
---------------                                                                               ------
September 30, 2000 to June 30, 2006.................................................    $       375,000
September 30, 2006 to June 29, 2007.................................................         35,250,000
                                                                                        ---------------
         Total......................................................................    $   150,000,000
</TABLE>


         The Revolving Facility is available as revolving credit advances or
letters of credit. This facility has no scheduled reduction in availability.
Final repayment is due on all amounts outstanding under this facility on June
30, 2006. The Credit Agreement provides for certain limitations governing
advances under the Revolving Facility, in particular limits on the amount of
letters of credit and swingline loans outstanding at any one time. In the
Amendment and Waiver dated as of May 10, 2002, the company is required to
receive additional funding of at least $10 million by September 3, 2002 to be
used to pay down the outstanding balance on the Revolving Facility to $8.25
million. In connection with the Amendment and Waiver the company and Doughty
Hanson entered into an Investor Funding Agreement that requires Doughty Hanson
to invest or, purchase participating bank loans in an amount up to $10 million
if the company is unable to meet the September 3, 2002 funding requirement by
other means.

PREPAYMENT

         In addition to the scheduled repayment dates described above, in
certain circumstances the Credit Agreement requires us to make mandatory
prepayments of outstanding amounts under Term Loans A and B, when we or our
subsidiaries receive proceeds of certain material dispositions and insurance
claims or issue certain indebtedness, and commencing in 2001 and depending on
our leverage ratio, when we have a positive adjusted cash flow in the prior
year. Indebtedness under the Credit Agreement may be voluntarily prepaid by us
in whole or in part without premium or penalty.

INTEREST RATE AND FEES

         Amounts outstanding under Term Loan A and the Revolving Facility will
bear interest, at our option, at either (1) one-, two-, three- or six-month
LIBOR plus an initial interest margin of 3.5% (as amended April 10, 2000,
December 12, 2001 and May 10, 2002) or (2) the greatest of the prime rate, a
base certificate of deposit rate plus 1.0% or the federal funds effective rate
plus 0.50% ("Alternate Base Rate"), in each case plus an initial margin of 2.5%.
Amounts outstanding under Term Loan B will bear interest, at our option, at
either (1) one-, two-, three- or six-month LIBOR plus an initial interest margin
of 4.5% (as amended April 10, 2000, December 12, 2001 and May 10, 2002) or (2)
the Alternate Base Rate plus an initial margin of 3.5%. The interest margin may
be reduced for advances under all three facilities if we, on a consolidated
basis, meet certain specified leverage ratio targets during a period consisting
of the prior four consecutive fiscal quarters. Any reduced interest margin may
be increased to the original interest margin if such leverage ratios do not
continue to be met.

         We will pay a commitment fee on the undrawn portion of the Revolving
Facility at a rate of 0.375% to 0.50% per annum, depending upon our leverage
ratio. In addition, we will pay certain agency and other fees.

GUARANTEE AND SECURITY

         Our obligations under the Credit Agreement are guaranteed by our U.S.
subsidiaries. As security for our obligations under the Credit Agreement, we
have pledged all of the shares of our U.S. subsidiaries and 65% of the shares
of our non-U.S. subsidiaries and have granted the lenders a security interest
in substantially all of our assets and the assets of our U.S. subsidiaries.

COVENANTS

                                      31

<PAGE>
         The Credit Agreement contains a number of covenants requiring us to
achieve or maintain specified consolidated financial ratios, including certain
interest expense coverage ratios and certain leverage ratios, which have been
described above. The Credit Agreement also contains general covenants which
restrict the incurrence of debt and liens, the payment of dividends, the
incurrence of substantially all other additional debt (with the exception of the
Notes), the disposition of assets, the incurrence of capital expenditures above
certain levels or the making of other investments and certain other activities
and transactions. In amendments to the Credit Agreement dated as of May 10,
2002, the company agreed to limit our capital expenditures for the year 2002 to
$15.0 million, and to limit the net proceeds from asset sales that may be
applied to acquire assets in lieu of prepayment to $2.0 million and agreed not
to make any acquisitions of another company or business.

RECENT DEVELOPMENTS

         The company was not in compliance with our required leverage ratio and
interest coverage ratio under the Credit Agreement as of March 31, 2002. As a
result, we did not make the interest payment on our senior subordinated notes
scheduled for April 15, 2002 on that date. We subsequently obtained an Amendment
and Waiver dated as of May 10, 2002 to our Credit Agreement and on May 14, 2002
made the interest payment on our senior subordinated notes that was scheduled
for April 15, 2002. The company expects to be in compliance with the covenants
in our amended Credit Agreement through March 31, 2003. However, there can be no
assurance of such compliance through March 31, 2003 or of compliance with the
more stringent covenants thereafter. The inability to meet the required
covenants could have a material adverse effect on the company's financial
condition, results of operations and liquidity.

SENIOR SUBORDINATED DEBT

         We issued Notes under an Indenture, dated October 1, 1999, among us,
the Subsidiary Guarantors and the Bank of New York, as Trustee (the
"Trustee"). The Notes are general unsecured obligations of the Company, rank
subordinate to all Senior Indebtedness of the Company and pari passu or senior
to all other Indebtedness of the Company, and are unconditionally guaranteed
on a general unsecured senior subordinated basis by all of the Company's
existing and future domestic Restricted Subsidiaries and any other Restricted
Subsidiaries of the Company that guarantee the Company's indebtedness under
the Credit Agreement.

PRINCIPAL, MATURITY AND INTEREST

         The Company issued $153,200,000 aggregate principal amount of Notes
on October 1, 1999 in denominations of $1,000 and integral multiples of
$1,000. The Notes will mature on October 15, 2009. The Notes will not be
entitled to the benefit of any mandatory sinking fund.

         Subject to the covenants described below under "Covenants" and
applicable law, the Company may issue additional Notes under the Indenture.
The Notes offered hereby and any additional Notes subsequently issued will be
treated as a single class for all purposes under the Indenture.

         Interest on the Notes will accrue at the rate of 13 1/8% per annum and
will be payable semi-annually in arrears on each April 15 and October 15 (each,
an "Interest Payment Date"), commencing on April 15, 2000. Payments will be made
to the persons who are registered Holders at the close of business on April 1
and October 1, respectively (each, a "Regular Record Date"), immediately
preceding the applicable interest payment date. As described above, the company
did not make the interest payment on our senior subordinated notes scheduled for
April 15, 2002.  We subsequently obtained an Amendment and Waiver dated as of
May 10, 2002 to our Credit Agreement and made the interest payment on our senior
subordinated notes that was scheduled for April 15, 2002 on May 14, 2002. While
the company currently expects it will have the ability to make the semi-annual
interest payment on October 15, 2002, there can be no assurance of such ability.
The failure to make the required interest payment would result in an event of
default and could have a material adverse effect on the financial condition,
results of operations and liquidity of the company.

         If by the date that is 210 days after the Issue Date the Company and
the Subsidiary Guarantors have not consummated a registered exchange offer for
the Notes or caused a shelf registration statement with respect to resales of
the Notes to be declared effective, the annual interest rate on the Notes will
increase by 0.5% until the consummation of a registered exchange offer or the
effectiveness of a shelf registration statement. The Company did not
consummate a registered exchange offer for the Notes or cause a shelf
registration statement with respect to resales of the Notes to be declared
effective within the 210 day period, and therefore began incurring the
additional interest beginning April 29, 2000.

         The Company's registration became effective September 13, 2000 and all
the notes were exchanged for registered notes on October 13, 2000. The penalty
interest accrued through that day and all but 13 days was paid with the October
15, 2000 interest payment. The remaining interest penalty was paid on the next
interest payment date, April 16, 2001.

GUARANTEES

         Payment of the principal of, premium, if any, and interest on the
Notes will be guaranteed, jointly and severally, on an unsecured senior
subordinated basis by certain Subsidiaries of the Company (the "Subsidiary
Guarantors"), each of which has guaranteed Indebtedness of the Company
incurred under the Credit Agreement. All current and future Restricted
Subsidiaries of

                                      32

<PAGE>

the Company other than Foreign Subsidiaries will be "Subsidiary Guarantors."
In addition, if any Restricted Subsidiary which is a Foreign Subsidiary
becomes a guarantor of Indebtedness of the Company incurred under the Credit
Agreement, the Company will cause such Restricted Subsidiary to guarantee the
Company's obligations under the Notes. Foreign Subsidiaries of the Company,
which have substantial assets, liabilities, net sales and income, will not
initially guarantee the Notes, and the Company does not anticipate that any
Foreign Subsidiary will at any time become a Subsidiary Guarantor.

         The Note Guarantee of any Subsidiary Guarantor may be released in
certain circumstances.

COVENANTS

         The Senior Subordinated Note Agreement also contains general
covenants, which restrict Limitation on Indebtedness, Limitation on Senior
Subordinated Indebtedness, Limitation on Restricted Payments, Limitation on
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries, and
Limitation on Liens. The Senior Subordinate Note Agreement also contains the
following covered in detail below.

         Limitation on Asset Sales

         The Company will not, and will not permit any Restricted Subsidiary
to, consummate any Asset Sale, unless: (i) the consideration received by the
Company or such Restricted Subsidiary is at least equal to the fair market
value of the assets sold or disposed of; and (ii) at least 75% of the
consideration received consists of: (A) Replacement Assets; or (B) cash or
Temporary Cash Investments, provided that the amount of: (a) any liabilities
of the Company or any such Restricted Subsidiary that are assumed by the
transferee of any such assets, provided that the Company or such Restricted
Subsidiary is irrevocably and unconditionally released in writing from all
such liabilities, or (b) any notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that are
converted within 120 days by the Company or such Restricted Subsidiary into,
shall be deemed to be cash for the purposes of determining the percentage of
cash or Temporary Cash Investments received by the Company or such Restricted
Subsidiary.

         Repurchase of Notes upon a Change of Control

         The Company must commence, within 30 days of the occurrence of a
Change of Control, and consummate an Offer to Purchase for all Notes then
outstanding, at a purchase price equal to 101% of the principal amount
thereof, plus accrued interest (if any) to the Payment Date.

         There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
any covenant that may be contained in other securities of the Company which
might be outstanding at the time). The above covenant requiring the Company to
repurchase the Notes will, unless consents are obtained, require the Company to
repay all indebtedness then outstanding which by its terms would prohibit such
Note repurchase, either prior to or concurrently with such Note repurchase.


CRITICAL ACCOUNTING POLICIES

         The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require
management to make estimates and assumptions. We believe that of our
significant accounting policies (see Note 1 to the consolidated financial
statements), the following may involve a higher degree of judgment and
complexity.

Bad Debt

         We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

Excess and Obsolete Inventory

                                      33

<PAGE>
         Significant management judgment is required to determine the reserve
for obsolete or excess inventory. Inventory on hand may exceed future demand
either because the product is outdated, or obsolete, or because the amount on
hand is more than can be used to meet future need. We currently make a 50%
provision for all inventory that has had no activity for 18 months and a 100%
provision for all inventory that had no activity for more than 36 months as well
as any additional specifically identified inventory to be excess. We also
provide for the total value of inventories that we determine to be obsolete
based on criteria such as customer demand and changing technologies. At December
31, 2001, our inventory reserves were $10.1 million, or 18% of our $56.8 million
gross inventories.

         We value our inventories at lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.

Warranties

         Products sold are generally covered by a warranty for periods ranging
from one to three years. We accrue a warranty reserve for estimated costs to
provide warranty services. Our estimate of costs to service warranty
obligations is based on historical experience and expectation of future
conditions. To the extent we experience increased warranty claim activity or
increased costs associated with servicing those claims, our warranty accrual
will increase resulting in decreased gross profit.

Deferred Tax Assets

         We account for deferred income taxes based upon differences between
the financial reporting and income tax bases of our assets and liabilities.
The measurement of deferred tax assets is adjusted by a valuation allowance,
if necessary, to recognize the extent to which, more likely than not, the
future tax benefits will be recognized.

         At December 31, 2001, we have recorded a deferred tax asset of
approximately $6.4 million, which is net of a $25.4 million valuation
allowance. We have recorded this asset as we believe it is more likely than
not that we will be able to realize the asset through future taxable income.
We base this belief upon the levels of taxable income historically generated
by our business, as well as projections of future taxable income. If future
levels of taxable income are not consistent with our expectations, we may be
required to record an additional valuation allowance, which could reduce our
net income by a material amount.


NEW ACCOUNTING PRONOUNCEMENTS

        In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which requires the Company to
adopt its provisions on January 1, 2002. The Company expects adoption of this
statement will not have a material impact on the Company's financial statements.

        Management does not anticipate that the adoption of any other new
accounting pronouncement will have a material effect on our results of
operations or on the financial position of the Company.


SEASONALITY AND QUARTERLY RESULTS OF OPERATIONS

         Our sales have been subject to a small degree of seasonality in the
past several years. In each of the last four years, our second and fourth
quarter revenues were the strongest. This seasonality of our sales resulted
primarily from very strong KE sales in the second quarter in three of the last
four years and in the fourth quarter each of the last four years and very strong
Emkay sales in the fourth quarter of three of the last four years.

         The following table sets forth net sales, costs and expenses and
operating income for 2001 by fiscal quarter. We display each of the first three
quarters of 2001 as reported and as restated. The restatement was necessary due
to the significance of two fourth quarter adjustments, namely the capitalization
of $3.3 million of ERP software implementation costs previously expensed in
those quarters and the identification of a $4.0 million unanticipated reduction
in inventory in the fourth quarter. We also reclassified general and
administrative expense in our China and Malaysia plants from general and
administrative to cost of sales.

                                      34

<PAGE>


        NET SALES, COSTS AND EXPENSES, AND OPERATING INCOME BY QUARTER
                                (IN MILLIONS)


<TABLE>
<CAPTION>
                                    AS REPORTED RESTATED  AS REPORTED  RESTATED  AS REPORTED  RESTATED
                                     MARCH 31,  MARCH 31,  JUNE 30,    JUNE 30,   SEPT.30,    SEPT. 30,   DEC. 31,
                                       2001       2001       2001        2001       2001        2001        2001
                                       ----       ----       ----        ----       ----        ----        ----
<S>                                 <C>         <C>       <C>          <C>       <C>          <C>        <C>
Net sales...........................   $ 54.7    $   54.7    $ 57.3    $  57.3    $  54.6      $ 54.6      $ 57.1
Cost of sales(1)....................     28.6        29.7      31.5       33.6       28.6        29.6        31.7
Research and development............      3.6         3.6       3.4        3.4        3.3         3.3         4.4
Selling and marketing...............      3.4         3.4       3.3        3.3        3.9         3.9         4.2
General and administrative(2).......      8.4         6.9       8.3        6.7        7.9         6.6         6.6
Recapitalization expense ...........        -           -         -          -        -             -           -
Restructuring expense...............      0.3         0.3     (2.1)      (2.1)        0.2         0.2         2.0
                                       ------    --------    ------    -------    -------      ------     -------
Operating income (loss).............   $ 10.4    $   10.8    $ 12.9    $  12.4    $  10.7      $ 11.0      $  8.2
</TABLE>


(1)      Restated for a $4.0 million unanticipated reduction in inventory which
         upon analysis related to prior quarters, identified in the fourth
         quarter and for general and administrative expenses at our China and
         Malaysian plants reclassified from general and administrative to cost
         of sales.

(2)      Restated for the capitalization of the Oracle ERP consulting costs
         previously expensed, in connection with the implementation of a new
         Oracle ERP system and for general and administrative expenses at our
         China and Malaysia plants reclassified to cost of sales.







The following table sets forth net sales, costs and expenses and operating
income by fiscal quarter for 2000. We display each of the four quarters of 2000
as reported and restated for the change from LIFO to FIFO in the U.S., the
reclassification of certain amounts previously in cost of sales to research and
development and the reclassification of general and administrative expense in
our China and Malaysia plants to cost of sales.

        NET SALES, COSTS AND EXPENSES, AND OPERATING INCOME BY QUARTER
                                (IN MILLIONS)

<TABLE>
<CAPTION>
                              AS REPORTED  AS RESTATED  AS REPORTED  AS RESTATED  AS REPORTED  AS RESTATED  AS REPORTED  AS RESTATED
                               MARCH 31,    MARCH 31,     JUNE 30,     JUNE 30,    SEPT. 30,    SEPT. 30,     DEC. 31,     DEC. 31,
                                 2000         2000         2000         2000         2000         2000          2000         2000
                                 ----         ----         ----         ----         ----         ----          ----         ----
<S>                           <C>         <C>           <C>          <C>          <C>          <C>          <C>          <C>
Net sales....................  $ 59.9      $  59.9       $ 60.7       $  60.7     $  56.4       $ 56.4       $  61.2      $  61.2
Cost of Sales(1).............    34.0         34.0         35.1          36.6        32.7         32.7          30.7         30.8
Research and Development(2)..     2.5          3.0          2.3           3.0         2.4          3.1           3.1          4.3
Selling and marketing........     3.0          3.0          3.0           3.0         3.1          3.1           3.4          3.4
General and administrative(1)     6.5          5.9          6.3           5.3         6.1          5.4           8.1          7.2
Restructuring expense(3).....    20.1         20.1          --            --         (0.3)        (0.3)         (1.4)        (1.4)
                               ------      -------       ------       -------     -------       ------       -------      -------
Operating income (loss)......  $ (6.2)     $  (6.1)      $ 14.0       $  12.8     $  12.4       $ 12.4       $  17.3      $  16.9
</TABLE>

(1)      Restated for the change from LIFO to FIFO effective October 1, 2001
         and for the reclassification of general and administrative expense in
         our China and Malaysia plants from general and administrative to cost
         of sales.

(2)      Restated for certain amounts previously included in cost of sales which
         were reclassified to research and development expense to be
         consistent with the 2001 presentation.

                                      35

<PAGE>
 (3)      The "Restructuring expenses" are related to the restructuring
          announced in March 2000. The Company consolidated its worldwide
          manufacturing operations by ending production at five manufacturing
          facilities and either outsourcing component production or moving final
          assembly to lower cost locations in Malaysia, China and Hungary.
          Through December 2001, these actions reduced our global workforce by
          about 18%.


FORWARD LOOKING STATEMENTS

         Certain of the statements that are contained in this report on Form
10-K are "forward-looking" (as defined in the Private Securities Litigation
Reform Act of 1995). These forward-looking statements are based on information
currently available to the Company as of the date of this document. Actual
events and the Company's actual results may differ materially from what is
described in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe", "expect", "anticipate", "intend",
"estimate", and similar expressions. The forward-looking statements contained in
this document involve risks and uncertainties including, but not limited to, the
following: changes in economic conditions, fluctuations in currency exchange
rates and interest rates; implementation of new software systems; improvements
in technology for complex voice recognition software; dependence on our largest
customers and key suppliers; competition; regulatory, legislative and
judicial developments, including environmental regulations; ability to generate
sufficient liquidity to service debt obligations; and ability to maintain
compliance with debt covenants.


ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We do not hedge our foreign currency exchange rate exposure. Therefore,
we are exposed to foreign currency exchange rate risks. Our revenues are
primarily denominated in the U.S. dollar and the Euro. During 2001,
approximately 75% of our revenue was denominated in U.S. dollars, approximately
16% of our revenue was denominated in German Deutschemarks, and the balance was
denominated in other foreign currencies. During 2000, the German Deutschemark
lost slightly more than 15% of its value relative to the U.S. dollar, and as a
result our reported revenue for 2000 was approximately $6.4 million less than it
would have been at 1999's exchange rate. During 2001, the effect of exchange
rates on our sales comparisons was much smaller. Our expenses are principally
denominated in the same currencies in which we have sales, allowing us to
essentially hedge through offsetting revenue and expense exposures. As a result,
during 2001, our operating income and margins were not significantly affected by
the change in the Euro exchange rate. Some of our expenses are denominated in
the local currencies of Austria, the United Kingdom, Hungary, China, Japan,
Malaysia and Taiwan, a number of which are closely tied to the U.S. dollar and
Euro. As we move more production out of Europe to Asia, we could become more
exposed to changes in the value of the euro in relation to the U.S. dollar and
major Asian currencies.

         We do not invest in speculative or derivative financial instruments.
We have significant amounts of debt that are subject to interest rate
fluctuation risk. The amounts outstanding under the term loans of the Credit
Agreement have variable interest rates, and therefore, adjust to market
conditions. An increase of 1 percentage point in the interest rate of the
loans under the Credit Agreement would increase annual interest expense by $2
million. The amount outstanding under the existing notes accrues interest at a
fixed rate of 13.125%. We have estimated the fair value of the notes as of
December 31, 2001 to be $151.7 million based on current market prices.

                                      36


<PAGE>

ITEM 8

                      KNOWLES ELECTRONICS HOLDINGS, INC.

                      CONSOLIDATED FINANCIAL STATEMENTS

                 YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

                                   CONTENTS

<TABLE>
<S>                                                                                                           <C>
Report of Independent Auditors............................................................................... 38

Consolidated Financial Statements
Consolidated Balance Sheets.................................................................................. 39
Consolidated Statements of Operations........................................................................ 40
Consolidated Statements of Changes in Stockholders' Equity (Deficit)......................................... 41
Consolidated Statements of Cash Flows........................................................................ 42
Notes to Consolidated Financial Statements................................................................... 44
</TABLE>

                                      37

<PAGE>


                        REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
Knowles Electronics Holdings, Inc.


We have audited the accompanying consolidated balance sheets of Knowles
Electronics Holdings, Inc., as of December 31, 2001, and 2000, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2001. Our audits also included the financial statement schedule
listed in the index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Knowles
Electronics Holdings, Inc., at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As described in Note 1, in 2001 the Company changed its method of accounting
for inventories.



                                             /s/ Ernst & Young LLP


February 5, 2002
except for Note 4, as to
which the date is May 14, 2002



                                      38

<PAGE>


                      KNOWLES ELECTRONICS HOLDINGS, INC.
                         CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                           December 31,
                                                                                                    2001           2000 (restated)
                                                                                               --------------      ---------------
Assets                                                                                                    (in thousands)
<S>                                                                                            <C>                 <C>
Current Assets:
          Cash and cash equivalents                                                             $       2,446       $       17,076
          Accounts receivable, less allowance for doubtful accounts of $1,095 and $1,675               39,113               41,192
          Inventories, net                                                                             46,662               48,273
          Deferred income taxes                                                                         6,096                6,916
          Prepaid expenses and other                                                                    6,082                4,334
                                                                                               --------------      ---------------
Total current assets                                                                                  100,399              117,791
Property, plant and equipment, at cost:
          Land                                                                                          6,829                6,957
          Building and improvements                                                                    32,464               31,469
          Machinery and equipment                                                                      62,026               65,482
          Furniture and fixtures                                                                       27,453               23,705
          Construction in progress                                                                      5,559                4,501
                                                                                               --------------      ---------------
             Subtotal                                                                                 134,331              132,114
Accumulated depreciation                                                                              (68,704)             (71,580)
                                                                                               --------------      ---------------
             Net                                                                                       65,627               60,534
Other assets, net                                                                                       3,105                3,855
Deferred income taxes                                                                                     330                    -
Deferred finance costs, net                                                                             8,421                9,577
                                                                                               --------------      ---------------
             Total assets                                                                       $     177,882       $      191,757
                                                                                               ==============      ===============

Liabilities and stockholders' equity (deficit)
Current liabilities:
          Accounts payable                                                                      $      17,727       $       14,471
          Accrued compensation and employee benefits                                                    7,403                9,334
          Accrued interest payable                                                                      5,096                4,898
          Accrued warranty and rebates                                                                  7,545                8,971
          Accrued restructuring costs                                                                   4,197               12,886
          Other liabilities                                                                             7,885                8,652
          Income taxes                                                                                  6,940                4,134
          Short-term debt                                                                               5,287                1,253
          Current portion of notes payable                                                              9,000                9,375
                                                                                               --------------      ---------------
Total current liabilities                                                                              71,080               73,974

Accrued pension liability                                                                               8,872                7,902
Other noncurrent liabilities                                                                                5                1,391
Notes payable                                                                                         330,773              339,432
Preferred stock mandatorily redeemable in 2019 including accumulating
              dividends of: $50,042 December 2001; $28,675 December, 2000                             235,042              213,675
Stockholders' equity (deficit):
          Common stock, Class A, $0.001 par value, 1,052,632 shares authorized,
                outstanding: 981,667 December, 2001; 983,333 December, 2000                                 -                    -
          Common stock, Class B, $0.001 par value, 52,632 shares authorized,
                none ever issued                                                                            -                    -
          Capital in excess of par value                                                               17,213               17,263
          Retained earnings (accumulated loss)                                                       (477,937)            (455,077)
          Accumulated other comprehensive income - translation adjustment                              (7,166)              (6,803)
                                                                                               --------------      ---------------
Total stockholders' equity (deficit)                                                                 (467,890)            (444,617)
                                                                                               --------------      ---------------
Total liabilities and stockholders' equity (deficit)                                            $     177,882       $      191,757
                                                                                               ==============      ===============
</TABLE>


                                      39

<PAGE>

                      KNOWLES ELECTRONICS HOLDINGS, INC.

                    CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31
                                                              2001      2000 (restated)   1999 (restated)
                                                         -------------   ------------      ------------
                                                                        (in thousands)
<S>                                                     <C>             <C>               <C>
Net sales                                                   $ 223,721      $ 238,123       $   229,106
Cost of sales                                                 124,587        134,069           147,665
                                                        -------------   ------------      ------------
Gross margin                                                   99,134        104,054            81,441

Research and development expenses                              14,684         13,380            13,891
Selling and marketing expenses                                 14,732         12,511            12,298
General and administrative expenses                            26,738         23,831            21,123
Recapitalization expenses                                           -              -            10,674
Restructuring expenses                                            317         18,440                 -
                                                         -------------   ------------      ------------
Operating income                                               42,663         35,892            23,455

Other income (expense):
Interest income                                                   146            959               883
Interest expense                                              (37,756)       (43,341)          (23,194)
Miscellaneous, net                                                  -              -              (123)
                                                         -------------   ------------      ------------
Income (loss) from continuing operations                        5,053         (6,490)            1,021
   before income taxes
Income taxes                                                   (6,532)         1,627            (8,980)
                                                         -------------   ------------      ------------
Loss from continuing operations                                (1,479)        (4,863)           (7,959)

Income from discontinued operations less
applicable income taxes of $0, $0, and $39 in
   2001, 2000 and 1999, respectively                                -              -             2,556
                                                         -------------   ------------      ------------
Net loss                                                     $ (1,479)      $ (4,863)      $    (5,403)
                                                         =============   ============      ============

Pro forma data (unaudited) (Note 1):
   Pro forma income taxes                                                                  $    19,125
                                                         ==============================================
   Pro forma loss from continuing
      operations adjusted for income taxes                                                 $   (18,104)
                                                         ==============================================
</TABLE>

                           See accompanying notes.


                                       40




<PAGE>


                      KNOWLES ELECTRONICS HOLDINGS, INC.

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                      (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                              RETAINED       COST OF     ACCUMULATED
                                                             CAPITAL IN       EARNINGS        COMMON        OTHER
                                                   COMMON     EXCESS OF     (ACCUMULATED     TREASURY   COMPREHENSIVE
                                                   STOCK      PAR VALUE       DEFICIT)        SHARES         LOSS          TOTAL
                                               -----------------------------------------------------------------------------------
<S>                                            <C>          <C>             <C>             <C>        <C>             <C>
Balance at December 31, 1998 (restated)         $   568      $       17      $ 251,159       $(27,308)     $(1,206)      $ 223,230
Net loss                                              -               -         (5,403)             -            -          (5,403)
Other comprehensive loss - Foreign
   currency translation adjustment                    -               -              -              -       (2,327)         (2,327)
                                                                                                                         ---------
Comprehensive loss                                    -               -              -              -            -          (7,730)
Other                                                 -               -           (472)             -            -            (472)
Issuance of common stock, class A and B, net          -          15,223              -              -            -          15,223
Repurchase, exchange and retirement of
   common stock                                    (511)            (17)      (531,344)             -            -        (531,872)
Retirement of treasury stock                          -               -        (27,308)        27,308
Exchange of stock for assets                        (57)              -        (74,759)             -            -         (74,816)
Dividends                                             -               -        (34,061)             -            -         (34,061)
                                               -----------------------------------------------------------------------------------
Balance at December 31, 1999 (restated)         $     -      $   15,223      $(422,188)      $      -      $(3,533)      $(410,498)
Net loss                                              -               -         (4,863)             -            -          (4,863)
Other comprehensive loss - Foreign
   currency translation adjustment                    -               -              -              -       (3,270)         (3,270)
                                                                                                                         ---------
Comprehensive loss                                    -               -              -              -            -          (8,133)
Other                                                 -               -           (285)             -            -            (285)
Issuance of common stock                              -             750              -              -            -             750
Repurchase of common stock                            -            (400)             -              -            -            (400)
Price adjustment on previously
   repurchased common stock                           -               -         (8,316)             -            -          (8,316)
Adjustment to previously accrued direct costs
   associated with issuance of common stock           -           1,690              -              -            -           1,690
Preferred stock dividends                             -               -        (19,425)             -            -         (19,425)
                                               -----------------------------------------------------------------------------------
Balance at December 31, 2000 (restated)         $     -      $   17,263      $(455,077)      $      -      $(6,803)      $(444,617)
Net loss                                              -               -         (1,479)                          -          (1,479)
Other comprehensive loss - Foreign
   currency translation adjustment                    -               -              -                        (363)           (363)
                                                                                                                         ---------
Comprehensive loss                                    -               -              -                           -          (1,842)
Other                                                 -               -            (14)                          -             (14)
Issuance of common stock                              -             250              -              -            -             250
Repurchase of common stock                            -            (300)             -                           -            (300)
Preferred stock dividends                             -               -        (21,367)                          -         (21,367)
                                               -----------------------------------------------------------------------------------
Balance at December 31, 2001                    $     -      $   17,213      $(477,937)      $      -      $(7,166)      $(467,890)
                                               ===================================================================================


</TABLE>

                           See accompanying notes.


                                      41


<PAGE>


                      KNOWLES ELECTRONICS HOLDINGS, INC.

                    CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31
                                                                         2001             2000 (RESTATED)        1999 (RESTATED)
                                                                  --------------------   -------------------    ------------------
                                                                                           (IN THOUSANDS)
<S>                                                              <C>                    <C>                    <C>
OPERATING ACTIVITIES
Loss from continuing operations                                               ($1,479)               (4,863)              ($7,959)
Adjustments to reconcile loss from
      continuing operations to net cash provided
      by operating activities:
           Depreciation and amortization                                       13,683                12,406                12,638
           Restructuring costs                                                  1,628                18,440                     -
           Amortization of deferred financing fees
                and debt discount                                               2,133                 2,679                 4,818
           Inventory obsolescence provision                                     3,976                 2,910                 6,915
           Deferred income taxes                                                 (137)               (9,388)                4,697
           (Gain) loss on disposal of fixed assets                             (2,745)                2,096                     -
           Change in assets and liabilities:
                Accounts receivable                                             2,079                 1,020                (3,783)
                Inventories                                                    (2,365)               (2,915)                 (697)
                Other current assets                                           (1,997)                 (158)                   78
                Accounts payable                                                5,472                 4,018                13,209
                Accrued restructuring costs                                    (9,891)               (7,779)                    -
                Accrued interest payable                                          198                (3,472)                    -
                Accrued compensation and benefits                              (1,931)                1,626                     -
                Other current liabilities                                      (2,193)                4,736                     -
                Other noncurrent liabilities                                      211                (1,114)               (7,879)
                Income taxes payable                                            2,806                 2,593                (2,811)
Net cash provided by discontinued operating activities                              -                     -                30,048
                                                                  --------------------   -------------------    ------------------
Net cash provided by operating activities                                       9,448                22,835                49,274

INVESTING ACTIVITIES
Proceeds from sales of property, plant & equipment                              3,662                   663                     -
Purchases of property, plant, and equipment, net                              (21,276)              (16,151)              (14,500)
                                                                  --------------------   -------------------    ------------------
Net cash used in investing activities                                         (17,614)              (15,488)              (14,500)

FINANCING ACTIVITIES
Debt proceeds (payments)                                                       (5,341)               (1,838)              350,066
Dividends paid                                                                      -                     -               (24,811)
Issuance of preferred stock and common stock                                      125                   750               190,594
Price adjustment on previously purchased treasury stock                             -                (8,316)                    -
Costs associated with equity transaction                                            -                (1,195)              (11,042)
Purchase of treasury stock                                                          -                     -              (508,315)
Costs associated with debt                                                       (636)               (1,161)              (15,547)
Repurchase of common stock                                                       (300)                 (400)                    -
                                                                  --------------------   -------------------    ------------------
Net cash used in financing activities                                          (6,152)              (12,160)              (19,055)

Effect of exchange rate changes on cash                                          (312)               (1,909)                1,019
                                                                  --------------------   -------------------    ------------------
Net increase (decrease) in cash and cash equivalents                          (14,630)               (6,722)               16,738
Cash and cash equivalents at beginning of year                                 17,076                23,798                 7,060
                                                                  --------------------   -------------------    ------------------
Cash and cash equivalents at end of year                                       $2,446               $17,076               $23,798
                                                                  ====================   ===================    ==================
Cash paid for interest                                                        $35,425               $44,134               $10,014
                                                                  ====================   ===================    ==================
Cash paid for taxes                                                            $4,457                $1,377                $6,141
                                                                  ====================   ===================    ==================
</TABLE>


                                    See accompanying notes.




                                      42




<PAGE>


                      KNOWLES ELECTRONICS HOLDINGS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (IN THOUSANDS, EXCEPT SHARE DATA)

                          DECEMBER 31, 2001 AND 2000


1.       ACCOUNTING POLICIES

BASIS OF RECAPITALIZATION AND PRESENTATION

         The consolidated financial statements of Knowles Electronics
Holdings, Inc. (the Company) include all of its subsidiaries, including
Austrian, British, French, German, Hungarian, Chinese, Japanese, Malaysian,
Singaporean and Taiwanese subsidiaries. Significant intercompany and affiliate
accounts and transactions have been eliminated.

         In connection with a reorganization as a holding company, the Company
changed its name from Knowles Electronics, Inc. to Knowles Electronics
Holdings, Inc. on September 23, 1999.

         On June 23, 1999, the Company entered into a recapitalization
agreement with Key Acquisition L.L.C., (the Investor) and the preexisting
common stockholders' of the Company (the Recapitalization). The
recapitalization transaction closed on June 30, 1999.

         In conjunction with the Recapitalization, the Company authorized and
issued, on June 30, 1999, new shares of mandatorily redeemable preferred stock
(Series A-1 and Series A-2), each with par value $0.001 per share (the
Preferred Stock), and common stock (Class A and Class B), par value $0.001 per
share (Common Stock). The Investor purchased 800,000 shares of Common Stock
for $24,000 and 164,444 shares of Series A-1 Preferred Stock for $164,444. In
addition, certain members of management purchased 71,667 shares of Common
Stock for $2,150. After the transactions related to the Recapitalization,
which are described below, the preexisting stockholders held 100,000 shares of
Common Stock and 20,556 shares of Series A-2 Preferred Stock which was
recorded at $20,556. As of December 31, 2001, the liquidation value of the
outstanding Series A-1 Preferred Stock is $208,926 and the liquidation value
of the outstanding Series A-2 Preferred stock is $26,116.

         The Preferred Stock ranks senior to all other equity securities of
the Company with respect to dividend and distribution preference. The
liquidation value of each share of Preferred Stock is $1,000. Dividends on
each share of Preferred Stock accrue at a rate of 10% per annum of the
liquidated value plus any accumulated dividends. Such dividends for the year
ended December 31, 2001, amounted to $21,367. The Preferred Stock is
mandatorily redeemable on July 2, 2019, at a redemption price per share equal
to the liquidation value plus all previously accumulated dividends and all
accrued dividends not yet paid or accumulated. The Company may, at any time,
and the holders may, upon the earlier of June 30, 2010, or an initial public
offering of the Company's Common Stock which is a primary registered offering
or the sale of all or substantially all of the Company's Common Stock or
assets, require the Company to redeem all or any portion of the Series A-1
Preferred Stock then outstanding at a price per share equal to the liquidation
value plus all accumulated and all accrued and unpaid or unaccumulated
dividends. The Series A-2 Preferred Stock is not redeemable at the Company's
option at any time. In the event of such an initial public offering, holders
of Series A-2 Preferred Stock may elect to convert the shares into Common
Stock. In addition, on each June 30, the Company has an option to exchange the
then outstanding shares of Series A-1 Preferred Stock in whole, but not part
of, for 10% Junior Subordinated Notes due 2010 of the Company, in an aggregate
principal amount equal to the sum of the liquidation value of the Series A-1
Preferred Stock plus an amount equal to all accumulated and all accrued and
unpaid, but not yet accumulated, dividends.

         Series A Preferred Stock have no voting rights; with respect to any
issue required to be voted on and approved by holders of Series A-1 Preferred
Stock, the holders of the Series A-1 Preferred Stock and the holders of Series
A-2 Preferred Stock will each vote as a single class.

         On June 29, 1999, the Company distributed the equipment financing
business and certain real estate of the Company to certain preexisting
stockholders in exchange for 10% of the common stock (see Note 9). On June 30,
1999, the Company used

                                      43

<PAGE>

the proceeds from the sale of the Preferred and Common Stock in addition to
funds obtained from a senior credit facility and bridge notes (see Note 4) to
finance the purchase of 90% of the remaining 90% of the preexisting
stockholders' common shares for $505,520. The Company also agreed to pay a
liability of $2,774 to the preexisting stockholders to reimburse for certain
tax implications of the Recapitalization. This amount represents an additional
cost of the common stock acquired from the preexisting stockholders, subject
to final purchase price adjustments. The preexisting stockholders also
exchanged their remaining shares for the newly authorized Preferred Stock and
Common Stock.

         After completion of the Recapitalization transactions, the
Investor's, preexisting stockholders', and management's ownership percentage
of the Company was approximately 82.3%, 10.3%, and 7.4%, respectively.

         The amount payable to the preexisting common stockholders for the
purchase of their common stock in the Recapitalization was subject to a
post-closing adjustment which resulted in an additional payment of $8,316 by
the Company to the preexisting stockholders.

         The Recapitalization was treated as a leveraged recapitalization in
which the issuance of the debt has been accounted for as a financing
transaction, the sales and purchases of the Company's stock have been accounted
for as capital transactions at amounts paid or received, and no changes were
made to the carrying values of the Company's assets and liabilities. In 1999 the
Company incurred $13,927 of direct costs related to the purchases and sales of
common and preferred stock which have been charged to equity. In 2000, the
Company recorded an adjustment of $1,690 related to the direct costs to reflect
the actual amounts incurred. The Company also incurred expenses of $10,674
related to special bonuses and one-time recognition payments to employees,
termination expenses of a supplemental executive retirement plan, and
professional fees which are included as Recapitalization Expenses in the
Consolidated Statement of Operations.

         As a result of the Recapitalization, the Company terminated its S
Corporation status for federal income tax purposes effective June 30, 1999.
For informational purposes, the consolidated statements of operations include
unaudited pro forma information reflecting the income taxes which would have
been recorded if the Company had been a C Corporation prior to the
Recapitalization. This information was calculated using the Federal statutory
rate in effect in each period.


DESCRIPTION OF BUSINESS

         The Company develops, manufactures, and supplies audio communications
components, primarily miniaturized electromagnetic microphones, and receivers
and ceramic and electric microphones used in hearing aids, microphones,
headsets, and accessories for the computer and communication industries. In
addition, the Company manufactures engine control and other devices for
automotive and industrial equipment and infrared remote control devices for
the consumer electronics market.

REVENUE RECOGNITION

         Revenues from the Company's products are recognized when title to the
products transfers to the customer, which typically is upon the shipment of
products to the customers.

ACCRUED WARRANTY LIABILITY

         The Company provides an accrual for estimated future warranty costs
at the time products are sold and periodically adjusts the accrual to reflect
actual experience. The warranty on products sold generally extends from one to
three years.

FOREIGN OPERATIONS

         Assets and liabilities are translated using the exchange data at the
balance sheet date and revenues and expenses are translated using
weighted-average exchange data. Translation adjustments for those entities
which have the U.S. dollar as their functional currency are recorded to the
income statement and adjustments for all other entities are recorded as a
separate component of common stockholders' equity.

                                      44


<PAGE>


CASH EQUIVALENTS

         Cash equivalents consist of highly liquid investments, having
maturities of three months or less from date of purchase, which are readily
convertible into cash.

DEFERRED FINANCE COSTS

         Deferred finance costs associated with the issuance of long-term debt
are capitalized and amortized over the life of the related debt using the
effective interest method.

INVENTORIES

         Inventories are stated at the lower of cost (first in, first out) or
market.

         During the fourth quarter of 2001, the Company changed its method of
determining the cost of domestic inventories from the LIFO method to the FIFO
method as it experienced reduced costs from offshore assembly operations and
expects continuing cost reductions. The cost of inventories on a LIFO basis at
December 31, 2001 was approximately equal to their replacement cost.
Accordingly, the Company believes that the FIFO method will result in a better
measurement of operating results. Additionally, FIFO is the prevalent method
used by other entities within the Company's industry. All previously reported
results have been restated to reflect the retroactive application of this
accounting change as required by generally accepted accounting principles. As
a result of this accounting change, previously reported retained earnings of
$247,123 at January 1, 1999 were increased by $4,036. Due principally to the
reversal of the effect of LIFO reserve liquidations in prior years, the net
loss previously reported for 2000 and 1999 was increased by $1,011 and $1,674,
respectively. The impact on previously reported interim periods as well as for
the full year 2001 is insignificant.


FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying amounts reported in the Company's balance sheets for cash
and cash equivalents, trade accounts receivable, accounts payable, and
short-term debt approximate fair value because of the short-term nature of these
instruments.

         The carrying amounts reported in the Company's balance sheets for
variable-rate long-term debt approximate fair value.

         The Company estimates the fair value of fixed rate long-term debt
obligations using current market prices available for these obligations. The
fair value of the Senior Subordinated Notes was approximately $151.7 million at
December 31, 2001.

PROPERTY, PLANT, AND EQUIPMENT

         Depreciation of property, plant, and equipment is computed
principally on a declining-balance method based on the following estimated
useful lives: Buildings and Improvements - 10 to 50 years; Leasehold
Improvements - lesser of useful life of assets or lease terms including option
periods; Machinery and Equipment - 4 to 12 years; Furniture and Fixtures - 3
to 18 years; and Computer Equipment - 3 to 5 years.

         Property, plant, and equipment are reviewed for impairment whenever
changes in circumstances indicate that the carrying value of the assets may not
be recoverable. Approximately $11 million of assets held for disposal related to
Ruf are included in net property, plant and equipment.

INCOME TAXES

         Income taxes are provided currently on financial statement earnings
of non-U.S. subsidiaries expected to be repatriated. The Company accounts for
income taxes using the asset and liability method. This approach requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities.

STOCK OPTIONS

         The Company accounts for its stock-based compensation plan using the
intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Under the intrinsic value method, compensation expense for
stock options is based on the excess, if any, of the fair value of the stock at
the date of the grant over the exercise price.

                                      45

<PAGE>
USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

NEW ACCOUNTING STANDARDS

         In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivatives Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 2000. The new Statement
requires all derivatives to be recorded on the balance sheet at fair value. If
the derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivatives will either be offset against the changes in the
fair value of the hedged item through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company adopted this statement effective January 1, 2001. The adoption had no
material effect on the Company's results of operations or on the financial
position of the Company.

RECLASSIFICATIONS

         Certain prior years' amounts have been reclassified to conform to the
2001 financial statement presentation.

2.       INVENTORY

         Inventories are as follows:

<TABLE>
<CAPTION>
                                                                                                  2001           2000
                                                                                                  ----           ----
<S>                                                                                           <C>             <C>
Raw materials.............................................................................     $   30,985      $   33,943
Work in process...........................................................................          5,789           9,217
Finished goods............................................................................         19,939          13,280
                                                                                               ----------      ----------
                                                                                                   56,713          56,440
Less allowances for:
     Obsolescence and net realizable value................................................         10,051           8,167
                                                                                               ----------      ----------
                                                                                               $   46,662      $   48,273
                                                                                               ==========      ==========
</TABLE>

3.       INCOME TAXES

         Effective January 1, 1997, the stockholders of Knowles elected under
the S Corporation rules of the Internal Revenue Code to have Knowles' income
included in their own income for federal income tax purposes. Accordingly,
Knowles was generally not subject to federal income taxes effective January 1,
1997. As a result of the Recapitalization described in Note 1, the Company
terminated its S Corporation status effective June 29, 1999. Additionally,
deferred tax assets and liabilities were reinstated on a C Corporation basis
as of June 30, 1999. The reinstatement of the deferred taxes had no impact on
the overall tax provision as a full valuation allowance was established
against the net deferred tax assets.

Income (loss) from continuing operations before income taxes consisted of the
following:

<TABLE>
<CAPTION>
                            2001              2000           1999
                          -------------------------------------------
<S>                      <C>              <C>            <C>
Domestic (U.S.)
                          $(3,583)         $ (17,613)     $ (9,814)
Foreign
                            8,636             11,123        10,835
                          -------------------------------------------

                          $ 5,053          $  (6,490)     $  1,021
                          ===========================================
</TABLE>

A reconciliation of income tax expense from continuing operations to the
statutory federal rate of 35% is as follows:


                                      46

<PAGE>

<TABLE>
<CAPTION>
                                                                   Year ended December 31
                                                                  2001      2000         1999
                                                           --------------------------------------
<S>                                                       <C>            <C>         <C>
   Statutory federal income tax expense (benefit)              $ 1,769    $(2,272)    $    357
   Effects of:
   Income not subject to tax                                         -          -       (2,838)
   State income taxes                                             (265)        25           98
   Benefits and taxes associated with foreign operations        (7,817)      (530)      (3,631)
   Taxes on unremitted foreign earnings                          5,441      7,050        3,142
   Establish net deferred tax asset                                  -          -      (11,065)
   Valuation allowance                                           7,070     (5,991)      24,896
   Reduction of prior year taxes                                     -          -       (1,321)
   Other, net                                                      334         91         (658)
                                                           --------------------------------------
   Total tax provision (benefit)                               $ 6,532    $(1,627)    $  8,980
                                                           ======================================
</TABLE>

The income tax provision (benefit) for the years ended December 31, 2001,
2000, and 1999 consists of the following:

<TABLE>
<CAPTION>
                                                                   Year ended December 31
                                                                  2001      2000       1999
                                                           --------------------------------------
<S>                                                       <C>            <C>         <C>
Current:
Federal                                                        $ 1,463    $     -     $   207
State                                                               25         25          98
Foreign                                                          5,181      7,736       3,506
                                                           --------------------------------------
Total Current                                                    6,669      7,761       3,811

Deferred
Federal                                                         (1,109)    (7,136)      3,142
State                                                              108     (1,757)          -
Foreign                                                            864       (495)      2,027
                                                           --------------------------------------
Total Deferred                                                    (137)    (9,388)      5,169
                                                           --------------------------------------
Total tax provision (benefit)                                  $ 6,532    $(1,627)    $ 8,980
                                                           ======================================
</TABLE>

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

Significant components of deferred tax assets and liabilities as of December
31, 2001 and 2000, are as follows:


                                      47

<PAGE>



<TABLE>
<CAPTION>
                                                         December 31
                                                   2001              2000
                                              ---------------------------------
<S>                                          <C>                <C>
Deferred tax assets:
Non-U.S. net operating loss carryforward      $     9,523      $     7,273
U.S. net operating loss carryforward                4,404              964
Foreign tax credits carryforward                   14,504           10,083
Pension                                             2,412            1,656
Inventory                                           3,099            4,003
Accrued expenses                                    4,728            3,829
Other, net                                          4,235            6,391
                                              ---------------------------------
Total deferred tax assets                          42,905           34,199

Deferred tax liabilities:
Taxes on unremitted foreign earnings              (10,765)          (9,366)
Other deferred tax liabilities                       (325)            (225)
                                              ---------------------------------
Total deferred tax liabilities                    (11,090)          (9,591)
Valuation allowance                               (25,389)         (18,319)
                                              ---------------------------------
Net deferred tax assets                       $     6,426      $     6,289
                                              =================================
</TABLE>

         The Company had foreign net operating loss carryforwards of $23,817
and $18,183 at December 31, 2001 and 2000, respectively, that have an
indefinite carryforward period. In addition, the Company had state net
operating loss carry forwards of $28,696 at December 31, 2001, that begin to
expire in 2019. The Company's foreign tax credit carryforward of $14,504
begins to expire in 2004. The Company has provided a valuation allowance
against the foreign NOL's, state NOL's and foreign tax credit carryforwards.

         During the fourth quarter of 2000, the Company recorded an income tax
benefit of $6.0 million due to the reversal of a valuation allowance
previously provided on the Company's deferred tax assets. The reversal of the
valuation allowance was attributed to the Company no longer being in a net
operating loss position for U.S. federal income tax purposes and therefore,
the realizability of the deferred tax assets is now more likely than not.

         The Company's future operating plan is to repatriate all foreign
earnings not needed for near term investment in that country. As a result, a
substantial portion of the unremitted earnings of the affected foreign
subsidiaries is not considered permanently reinvested. The deferred foreign
provision includes a charge of $5,441, $7,050 and $3,142 for the years ended
December 31, 2001, 2000 and 1999, respectively, for the anticipated tax
liability on the unremitted foreign earnings, which are not considered
permanently reinvested.



                                      48

<PAGE>
4.    NOTES PAYABLE

      As part of the Recapitalization transaction, the Company entered into a
senior credit agreement dated as of June 28, 1999, and amended and restated as
of July 21, 1999, and further amended as of December 23, 1999, April 10, 2000,
December 12, 2001 and May 10, 2002, with certain lenders (Senior Credit
Agreement). The credit agreement consists of $218,250 (as amended May 10, 2002),
which provides for revolving loans of $18,250 (Revolving Credit Facility) for a
period of seven years, a Term A Facility of $50,000 (Term A Facility), which has
a maturity of seven years, and a Term B Facility of $150,000 (Term B Facility),
which has a maturity of eight years. In addition, on June 30, 1999, the Company
issued Subordinated Bridge Notes (Bridge Notes) for $150,000 to certain lenders.
The Bridge Notes were subsequently repaid following the issuance by the Company
of $153,200 of 13 1/8% Senior Subordinated Notes (the Notes).

      The Term A Facility and the Revolving Credit facility bear interest, at
the Company's option, at either: (1) one-, two-, three-, or six-month LIBOR plus
3.50% (as amended May 10, 2002), or (2) the greater of the prime rate (4.75% at
December 31,2001), a base certificate of deposit rate plus 1.00%, or the federal
funds effective rate plus 0.50% (the Alternate Base Rate), in each case plus an
initial margin of 2.50%.

      The Term B Facility bears interest, at the Company's option, at either:
(1) one-, two-, three-, or six-month LIBOR plus 4.50% (as amended May 10, 2002),
or (2) Alternate Base Rate plus an initial margin on 3.50%.

      The initial margin may be reduced if the Company meets certain specified
leverage ratios during a period consisting of the prior four consecutive fiscal
quarters. Any reduced interest margin may be increased to the original margin if
such leverage ratios do not continue to be met by the Company.

      The Term A Facility is due on June 30, 2006, and is payable in quarterly
installments during the following periods:

<TABLE>
<S>                                                                      <C>
      September 30, 2000 to June 30, 2001..........................      $ 1,250
      September 30, 2001 to June 30, 2003..........................        1,875
      September 30, 2003 to June 30, 2006..........................        2,500
</TABLE>

      The Term B Facility is due on June 29, 2007, and is payable in quarterly
installments during the following periods:

<TABLE>
<S>                                                                      <C>
      September 30, 2000 to June 30, 2006..........................      $   375
      September 30, 2006 to June 29, 2007..........................       35,250
</TABLE>

      The Revolving Credit Facility expires on June 30, 2006. $2,000 was
borrowed under this facility at December 31, 2001 at an interest rate of 6.75%.

        Short-term debt includes $3,287 drawn against a line of credit by our
Austrian subsidiary.

      The balance under the Term A Facility, Term B Facility, and the Senior
Subordinated Notes (Notes) as of December 31, 2001 and 2000, is as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                               ------------
                                                            2001          2000
                                                          --------      --------
<S>                                                       <C>           <C>
Term A facility ....................................      $ 46,875      $ 48,750
Term B facility ....................................       142,125       149,625
Senior Subordinated Notes, net of discount
  of $2,427 and $2,768, respectively ...............       150,773       150,432
                                                          --------      --------
                                                           339,773       348,807
Less: Current portion ..............................         9,000         9,375
                                                          --------      --------
Total long-term notes payable ......................      $330,773      $339,432
                                                          ========      ========
</TABLE>

      The Notes were issued in a private placement on October 1, 1999, and are
due October 15, 2009, with interest payable semiannually at 13 1/8% commencing
April 15, 2000. The Company subsequently exchanged all of the privately placed
Notes for a like amount of identical Notes registered with the Securities and
Exchange Commission. The Notes rank equally with all other unsecured senior
subordinated indebtedness of the Company. The Notes are junior to all of the
Company's current and future indebtedness, except indebtedness which is
expressly not senior to the Notes.


                                       49
<PAGE>
      The Company's Senior Credit Agreement requires that the Company comply
with certain covenants and restrictions, including specific financial ratios
that must be maintained. Certain covenants and restrictions were modified in
accordance with the amendment to the Senior Credit Agreement dated December 12,
2001. The Company was in compliance with all of its debt covenants at December
31, 2001.

        However, the company was not in compliance with the required leverage
ratio and interest coverage ratio under the bank credit agreement as of March
31, 2002. Additionally, the company did not make the interest payment on the
senior subordinated notes scheduled for April 15, 2002 on that date. An
Amendment and Waiver to the credit agreement was obtained as of dated May 10,
2002 and the company made the interest payment on the senior subordinated notes
that was scheduled for April 15, 2002 on May 14, 2002. The Amendment and Waiver
waived the Company's non-compliance with the required interest coverage ratio
for the period ended March 31, 2002 and the leverage ratio for the period
January 1, 2002 through March 31, 2002, and amended these required ratios for
the periods after March 31, 2002 through the first quarter of 2003. This
Amendment and waiver also limits capital expenditures for the year 2002 to $15
million, prevents any acquisitions of another company or business, decreases the
revolving credit facility to $18.25 million (from $25 million), caps at $2
million the amount of net cash proceeds from asset sales that can be applied to
buying new assets and requires the company to receive additional funding of at
least $10 million by September 3, 2002 which must be used to pay down the
outstanding balance on the revolving credit facility to $8.25 million. In
connection with the Amendment and Waiver, the company and Doughty Hanson entered
into an Investor Funding Agreement that requires Doughty Hanson to invest or
purchase participating bank loans in an amount up to $10 million if the Company
is unable to meet the September 3, 2002 funding requirement by other means. The
company expects based on current operating forecasts that the amendments to the
covenants in the Credit Agreement will enable it to remain in compliance through
March 31, 2003 and provide sufficient financial flexibility to meet its debt
service requirements as well as other operating needs. However, there can be no
assurance of such compliance through March 31, 2003 or of compliance with the
more stringent covenants thereafter. If future actual results are lower than
planned, the company may be unable to comply with the debt covenants or make
required debt service payments. Such inability could have a material adverse
impact on the company's financial condition, results of operations or liquidity.
There are no assurances that the company could favorably resolve such a
situation.

      The Notes are unconditionally guaranteed, on a joint and several basis, by
the following wholly owned U.S. subsidiaries of the Company: Knowles Electronics
LLC, Knowles Intermediate Holding, Inc., Emkay Innovative Products, Inc.,
Knowles Manufacturing Ltd., and Synchro Start Products, Inc. The following
tables present summarized balance sheet information of the Company as of
December 31, 2001 and 2000, and summarized income statement and cash flow
information for the years ended December 31, 2001, 2000, and 1999. The column
labeled "Parent Company" represents the holding company for each of the
Company's direct subsidiaries which are guarantors of the Notes, all of which
are wholly owned by the parent company; and the column labeled "Nonguarantors"
represents wholly owned subsidiaries of the Guarantors which are not guarantors
of the Notes. Pursuant to a contribution agreement effective August 30, 1999,
Knowles Electronics, Inc., recognized in prior periods as a parent company,
contributed substantially all of its assets and liabilities (other than the
capital stock of Knowles Intermediate Holding Company, Inc. and certain foreign
subsidiaries and Knowles Electronics, Inc.'s liabilities under the Senior Credit
Agreement and Subordinated Notes) to Knowles Electronics, LLC, a newly created
Delaware limited liability company. As a result of this reorganization, Knowles
Electronics, Inc., which changed its name to Knowles Electronics Holdings, Inc.,
is now a holding company that does not conduct any significant operations.
Therefore, the 2001 and 2000 presentation reflects the current structure which
is not comparable to the other period presented as some of the amounts included
in the Parent Company column in 1999 are now included in the Guarantors column
in 2001 and 2000. The Company believes that separate financial statements and
other disclosures regarding the Guarantors, except as otherwise required under
Regulation S-X, are not material to investors.

      Summarized information as of December 31, 2001 and 2000, and for the three
years ended December 31, 2001, is as follows:

<TABLE>
<CAPTION>
                                                                            December 31, 2001
                                                                            -----------------
                                                 Parent      Guarantors    Non-Guarantors    Eliminations    Consolidated
                                                 ------      ----------    --------------    ------------    ------------
<S>                                            <C>           <C>           <C>               <C>             <C>
Cash                                           $       5      $      32       $   2,409       $      --        $   2,446
Accounts receivable                                   --         29,136          66,872         (56,895)          39,113
Inventories                                           --         21,813          24,849              --           46,662
Other current assets                                  --          6,801           5,377              --           12,178
Net property, plant and equipment                     --         29,412          36,215              --           65,627
Investment in and advances to subsidiaries        97,967        192,688          10,749        (301,404)              --
Deferred finance costs, net                        8,421             --              --              --            8,421
Other non-current assets                              --          3,311             124              --            3,435
                                               ---------      ---------       ---------       ---------        ---------
Total assets                                   $ 106,393      $ 283,193       $ 146,595       $(358,299)       $ 177,882
                                               =========      =========       =========       =========        =========
Accounts payable                               $      --      $  26,937       $  46,762       $ (55,972)       $  17,727
Accrued restructuring costs                           --          3,553             644              --            4,197
Advances from parent                              93,567         36,398          20,770        (150,735)              --
Other current liabilities                          4,156         17,986          13,693            (966)          34,869
Short-term debt                                    2,000             --           3,287              --            5,287
Noncurrent liabilities                                --          6,919           1,958              --            8,877
Notes payable                                    339,773             --              --              --          339,773
Preferred stock                                  235,042             --              --              --          235,042
Stockholders' equity (deficit)                  (568,145)       191,400          59,481        (150,626)        (467,890)
                                               ---------      ---------       ---------       ---------        ---------
Total liabilities and stockholders'
  equity (deficit)                             $ 106,393      $ 283,193       $ 146,595       $(358,299)       $ 177,882
                                               =========      =========       =========       =========        =========
</TABLE>
                                       50
<PAGE>
<TABLE>
<CAPTION>
                                                                                     DECEMBER 31, 2000
                                                                                     -----------------
                                                           PARENT       GUARANTORS    NON-GUARANTORS   ELIMINATIONS    CONSOLIDATED
                                                           ------       ----------    --------------   ------------    ------------
<S>                                                      <C>            <C>           <C>              <C>             <C>
Cash .................................................   $   7,076      $   2,847        $   7,153      $      --       $  17,076
Accounts receivable ..................................          --         39,097           53,336        (51,241)         41,192
Inventories, net .....................................          --         22,093           28,428         (2,248)         48,273
Other current assets .................................          --          7,427            5,150         (1,327)         11,250
Net property, plant and equipment ....................          --         27,309           34,090           (865)         60,534
Investments in and advances to subsidiaries ..........      97,967        111,720            6,314       (216,001)             --
Deferred finance costs, net ..........................       9,577             --               --             --           9,577
Non-current assets ...................................          --          5,991            1,293         (3,429)          3,855
                                                         ---------      ---------        ---------      ---------       ---------
Total assets .........................................   $ 114,620      $ 216,484        $ 135,764      $(275,111)      $ 191,757
                                                         =========      =========        =========      =========       =========
Accounts payable .....................................   $      --      $  24,449        $  40,156      $ (50,134)      $  14,471
Accrued restructuring costs ..........................          --          3,785            9,101             --          12,886
Advances from (to) parent ............................      57,339         (5,536)          16,558        (68,361)             --
Other current liabilities ............................       4,007         23,882           12,429         (4,329)         35,989
Short-term debt ......................................       9,375             --            1,253             --          10,628
Non-current liabilities ..............................          --          7,329            1,964             --           9,293
Notes payable ........................................     339,432             --               --             --         339,432
Preferred stock ......................................     213,675             --               --             --         213,675
Stockholders' equity (deficit) .......................    (509,208)       162,575           54,303       (152,287)       (444,617)
                                                         ---------      ---------        ---------      ---------       ---------
Total liabilities and stockholders' equity (deficit)..   $ 114,620      $ 216,484        $ 135,764      $(275,111)      $ 191,757
                                                         =========      =========        =========      =========       =========
</TABLE>


<TABLE>
<CAPTION>
                                                                             Year Ended December 31, 2001
                                                                             ----------------------------
                                                     Parent         Guarantors     Non-guarantors     Eliminations    Consolidated
                                                     ------         ----------     --------------     ------------    ------------
<S>                                                 <C>             <C>            <C>                <C>             <C>
Net Sales                                           $      --        $ 170,436        $ 175,832        $(122,547)       $ 223,721
Cost of sales                                              --          108,774          137,717         (121,904)         124,587
                                                    ---------        ---------        ---------        ---------        ---------
Gross margin                                               --           61,662           38,115             (643)          99,134
Selling, research and administrative expenses              --           37,465           19,361             (672)          56,154
Restructuring expenses                                     --            2,463           (2,146)              --              317
                                                    ---------        ---------        ---------        ---------        ---------
Operating income                                           --           21,734           20,900               29           42,663
Other income (expense):
    Interest income                                        79            1,634              450           (2,017)             146
    Interest expense                                  (37,653)            (922)          (1,093)           1,912          (37,756)
    Dividend income                                        --           29,804               --          (29,804)              --
                                                    ---------        ---------        ---------        ---------        ---------
Income (loss) before taxes                            (37,574)          52,250           20,257          (29,880)           5,053
Income taxes                                               --             (796)          (5,736)              --           (6,532)
                                                    ---------        ---------        ---------        ---------        ---------
Net income (loss)                                   $ (37,574)       $  51,454        $  14,521        $ (29,880)       $  (1,479)
                                                    =========        =========        =========        =========        =========
</TABLE>


                                       51
<PAGE>
<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31, 2000
                                                                             ----------------------------
                                                     PARENT         GUARANTORS     NON-GUARANTORS    ELIMINATIONS     CONSOLIDATED
                                                     ------         ----------     --------------    ------------     ------------
<S>                                                 <C>             <C>            <C>               <C>              <C>
Net sales ...................................       $      --        $ 182,466        $ 199,381        $(143,724)       $ 238,123
Cost of sales ...............................              --          122,222          155,797         (143,950)         134,069
                                                    ---------        ---------        ---------        ---------        ---------
Gross margin ................................              --           60,244           43,584              226          104,054
Selling, research and administrative expenses             102           30,614           19,627             (621)          49,722
Restructuring expenses ......................              --            5,401           13,039               --           18,440
                                                    ---------        ---------        ---------        ---------        ---------
Operating income (loss) .....................            (102)          24,229           10,918              847           35,892
Interest income .............................             452            1,775              407           (1,675)             959
Interest expense ............................         (43,227)            (314)          (1,476)           1,676          (43,341)
Miscellaneous, net ..........................              --              433           (1,782)           1,349               --
Dividend income .............................           4,156           33,608            1,321          (39,085)              --
                                                    ---------        ---------        ---------        ---------        ---------
Income (loss) from continuing
  operations before income taxes ............         (38,721)          59,731            9,388          (36,888)          (6,490)
Income taxes ................................              --            5,669           (3,862)            (180)           1,627
                                                    ---------        ---------        ---------        ---------        ---------
Net income (loss) ...........................       $ (38,721)       $  65,400        $   5,526        $ (37,068)       $  (4,863)
                                                    =========        =========        =========        =========        =========
</TABLE>


                                       52
<PAGE>
<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31, 1999
                                                                             ----------------------------
                                                     PARENT         GUARANTORS     NON-GUARANTORS    ELIMINATIONS     CONSOLIDATED
                                                     ------         ----------     --------------    ------------     ------------
<S>                                                 <C>             <C>            <C>               <C>              <C>
Net sales ...................................       $  97,289        $  74,745        $ 174,897       $ (117,825)       $ 229,106
Cost of sales ...............................          63,468           60,176          140,743         (116,722)         147,665
                                                    ---------        ---------        ---------        ---------        ---------
Gross margin ................................          33,821           14,569           34,154           (1,103)          81,441
Selling, research and administrative expenses          12,569           14,258           20,999             (514)          47,312
Recapitalization expenses ...................           9,190              508              976               --           10,674
                                                    ---------        ---------        ---------        ---------        ---------
Operating income ............................          12,062             (197)          12,179             (589)          23,455
Interest income .............................           3,917              561              310           (3,905)             883
Interest expense ............................         (23,210)            (298)          (1,228)           1,542          (23,194)
Miscellaneous, net ..........................            (123)              --               --               --             (123)
Dividend income .............................           8,471            1,367               --           (9,838)              --
                                                    ---------        ---------        ---------        ---------        ---------
Income (loss) from continuing
  operations before income taxes ............           1,117            1,433           11,261          (12,790)           1,021
Income taxes ................................            (277)          (3,252)          (5,451)              --           (8,980)
                                                    ---------        ---------        ---------        ---------        ---------
Income (loss) from continuing operations ....             840           (1,819)           5,810          (12,790)          (7,959)
Income from discontinued operations .........           2,556               --               --               --            2,556
                                                    ---------        ---------        ---------        ---------        ---------
Net income (loss) ...........................       $   3,396       $   (1,819)       $   5,810       $  (12,790)      $   (5,403)
                                                    =========        =========        =========        =========        =========
</TABLE>


<TABLE>
<CAPTION>
                                                                               Year Ended December 31, 2001
                                                                               ----------------------------
                                                           Parent        Guarantors    Non-guarantors   Eliminations    Consolidated
                                                           ------        ----------    --------------   ------------    ------------
<S>                                                       <C>            <C>           <C>              <C>             <C>
Net cash provided by (used in) operating activities       $(35,113)       $ 69,195        $  5,222        $(29,856)       $  9,448
                                                          --------        --------        --------        --------        --------
Proceeds from sales of property                                 --             182           3,480              --           3,662
Equity contributions into subsidiaries                          --          (8,002)             --           8,002              --
Purchases of property, plant and equipment, net                 --         (13,674)         (7,602)             --         (21,276)
                                                          --------        --------        --------        --------        --------
Net cash used in investing activities                           --         (21,494)         (4,122)          8,002         (17,614)
Debt (payments)                                             (7,375)             --           2,034              --          (5,341)
Common stock transactions                                     (175)             --              --              --            (175)
Intercompany loans                                          36,228         (35,588)           (640)             --              --
Costs associated with debt                                    (636)             --              --              --            (636)
Dividends paid                                                  --         (14,928)        (14,928)         29,856              --
Equity contributions into subsidiaries                          --              --           8,002          (8,002)             --
                                                          --------        --------        --------        --------        --------
Net cash provided by (used in) financing activities         28,042         (50,516)         (5,532)         21,854          (6,152)
Effect of exchange rate changes on cash                         --              --            (312)             --            (312)
                                                          --------        --------        --------        --------        --------
Net increase (decrease) in cash and
         cash equivalents                                   (7,071)         (2,815)         (4,744)             --         (14,630)
Cash and cash equivalents at beginning of period             7,076           2,847           7,153              --          17,076
                                                          --------        --------        --------        --------        --------
Cash and cash equivalents at end of period                $      5        $     32        $  2,409        $     --        $  2,446
                                                          ========        ========        ========        ========        ========
</TABLE>


                                       53
<PAGE>
<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31, 2000
                                                                               ----------------------------
                                                          PARENT        GUARANTORS    NON-GUARANTORS   ELIMINATIONS    CONSOLIDATED
                                                          ------        ----------    --------------   ------------    ------------
<S>                                                      <C>            <C>           <C>              <C>             <C>
Net cash provided by (used in) operating
  activities .....................................       $(28,229)       $ 55,580        $ 34,569       $ (39,085)       $ 22,835
                                                         --------        --------        --------        --------        --------
Investments in subsidiaries ......................             --          (3,300)             --           3,300              --
Purchases of property, plant and equipment, net ..             --          (5,886)         (9,602)             --         (15,488)
                                                         --------        --------        --------        --------        --------
Net cash used in investing activities ............             --          (9,186)         (9,602)          3,300         (15,488)
Issuance of preferred stock and common stock .....            750              --              --              --             750
Costs associated with equity transaction .........         (1,195)             --              --              --          (1,195)
Debt proceeds (payments) .........................         (1,625)             --            (213)             --          (1,838)
Intercompany loans ...............................         41,028         (41,099)             71              --              --
Price adjustment on previously
  purchased treasury stock .......................         (8,316)             --              --              --          (8,316)
Payment of accrued deferred finance fees .........         (1,161)             --              --              --          (1,161)
Repurchase of common stock .......................           (400)             --              --              --            (400)
Equity contributions into subsidiaries ...........             --              --           3,300          (3,300)             --
Dividends paid ...................................             --         (12,727)        (26,358)         39,085              --
                                                         --------        --------        --------        --------        --------
Net cash used in financing activities ............         29,081         (53,826)        (23,200)         35,785         (12,160)
Effect of exchange rate changes on cash ..........             --              --          (1,909)             --          (1,909)
                                                         --------        --------        --------        --------        --------
Net increase (decrease) in cash and
  cash equivalents ...............................            852          (7,432)           (142)             --          (6,722)
Cash and cash equivalents at beginning of period .          6,224          10,279           7,295              --          23,798
                                                         --------        --------        --------        --------        --------
Cash and cash equivalents at end of period .......       $  7,076        $  2,847        $  7,153        $     --        $ 17,076
                                                         ========        ========        ========        ========        ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31, 1999
                                                                                ----------------------------
                                                           PARENT       GUARANTORS     NON-GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                                           ------       ----------     --------------   ------------   ------------
<S>                                                      <C>            <C>            <C>              <C>            <C>
Net cash provided by operating activities ........       $  26,604       $  14,912        $  17,596       $  (9,838)     $  49,274
                                                         ---------       ---------        ---------       ---------      ---------
Purchases of property, plant and equipment, net ..          (7,042)         (2,948)          (4,510)             --        (14,500)
                                                         ---------       ---------        ---------       ---------      ---------
Net cash used in investing activities ............          (7,042)         (2,948)          (4,510)             --        (14,500)
Issuance of preferred stock and common stock .....         190,594              --               --              --        190,594
Costs associated with equity transaction .........         (11,042)             --               --              --        (11,042)
Debt proceeds ....................................         350,066              --               --              --        350,066
Purchase of treasury stock .......................        (508,315)             --               --              --       (508,315)
Payment of accrued deferred finance fees .........         (15,547)             --               --              --        (15,547)
Dividends paid ...................................         (24,811)         (1,857)          (7,981)          9,838        (24,811)
                                                         ---------       ---------        ---------       ---------      ---------
Net cash used in financing activities ............         (19,055)         (1,857)          (7,981)          9,838        (19,055)
Effect of exchange rate changes on cash ..........              --              --            1,019              --          1,019
                                                         ---------       ---------        ---------       ---------      ---------
Net increase (decrease) in cash and
  cash equivalents ...............................             507          10,107            6,124              --         16,738
Cash and cash equivalents at beginning of period .           5,717             172            1,171              --          7,060
                                                         ---------       ---------        ---------       ---------      ---------
Cash and cash equivalents at end of period .......       $   6,224       $  10,279        $   7,295       $      --      $  23,798
                                                         =========       =========        =========       =========      =========
</TABLE>


                                       54





<PAGE>


5.       OPERATING LEASES

         The Company leases various manufacturing facilities and office space.
Lease terms are generally from two to five years. Future minimum payments
under operating leases with initial terms of one year or more are as follows:

<TABLE>
<S>                                                        <C>
2002...................................................     $     1,896
2003...................................................           1,704
2004...................................................           1,604
2005...................................................             440
2006...................................................             174
Thereafter.............................................           1,419
                                                            -----------
                                                            $     7,237
</TABLE>

         Rent expense was $2,210, $2,846, and $2,385 for the years ended
December 31, 2001, 2000, and 1999, respectively.

6.       RETIREMENT PLANS

         The Company has several noncontributory defined-benefit plans
covering approximately 80% of its U.S. employees. Benefits for salaried plans
are generally based on salary and years of service, while hourly plans are
based upon a fixed benefit rate in effect at retirement date and years of
service. The Company's funding of the plans is equal to the minimum
contribution required by ERISA. The following summarizes the activity related
to the Company's domestic plans:

<TABLE>
<CAPTION>
                                                                                  2001                      2000
                                                                                  ----                      ----
<S>                                                                         <C>                     <C>
Change in benefit obligation:
Benefit obligation at beginning of year...................................   $       53,591          $       53,531
Service cost..............................................................            1,774                   2,110
Interest cost.............................................................            3,828                   3,700
Plan amendments...........................................................              102                      --
Curtailment (gain)........................................................               --                  (2,611)
Actuarial (gain) or loss .................................................              383                  (1,329)
Benefits paid.............................................................           (2,743)                 (1,810)
                                                                             --------------          --------------
Benefit obligation at end of year.........................................           56,935                  53,591
Change in plan assets:
Fair value of plan assets at beginning of year............................           60,302                  60,113
Actual return on plan assets..............................................           (4,383)                  1,999
Benefits paid.............................................................           (2,743)                 (1,810)
                                                                             ---------------         --------------
Fair value of plan assets at end of year..................................           53,176                  60,302
                                                                             --------------          --------------
Funded status.............................................................           (3,759)                  6,711
    Unrecognized actuarial gain...........................................           (3,590)                (13,515)
    Unrecognized transition asset.........................................               --                      --
    Unrecognized prior service cost.......................................              720                     846
                                                                             --------------          --------------
Net amount recognized.....................................................   $       (6,629)         $       (5,958)
                                                                             ==============          ==============
Amounts recognized in the statement of financial
  position consist of accrued benefit liability...........................   $       (6,629)         $       (5,958)
                                                                             ==============          ==============
</TABLE>

<TABLE>
<CAPTION>
                                                            2001                    2000                 1999
                                                            ----                    ----                 ----
<S>                                                   <C>                     <C>                  <C>
Weighted-average assumption as of December 31:
Discount rate........................................           7.00%                   7.25%                7.50%
Expected return on plan assets.......................           8.00%                   8.00%                8.00%
Rate of compensation increase........................           5.20%                   5.20%                6.00%
Components of net periodic benefit cost:
Service cost.........................................  $        1,774          $        2,110       $        2,548
Interest cost........................................           3,828                   3,700                3,671
Expected return on plan assets.......................          (4,668)                 (4,403)              (4,086)
Amortization of prior service cost...................             229                     333                  333
</TABLE>

                                      55

<PAGE>
<TABLE>
<S>                                                   <C>                     <C>                  <C>
Amortization of transitional asset...................              --                    (132)                (265)
Recognized actuarial (gain)..........................            (491)                   (677)                  --
                                                       --------------          --------------       --------------
Net periodic benefit cost............................  $          672          $          931       $        2,201
                                                       ==============          ==============       ==============
</TABLE>

         The Company also has defined-benefit plans covering certain of its
foreign employees. The accrued pension liability related to these plans was
$1,954 and $1,944 at December 31, 2001 and 2000, respectively. Deferred
pension assets related to these plans were $177 and $434 at December 31, 2001
and 2000, respectively. The net periodic benefit cost related to these plans
was $344, $1,355, and $815, for the years ended December 31, 2001, 2000, and
1999, respectively.

         The Company has a defined-contribution plan covering substantially
all of its U.S. employees. The plan has funding provisions which, in certain
situations, require Company contributions based upon a formula relating to
employee gross wages, participant contributions, or hours worked. The plan
also allows for additional discretionary Company contributions based upon
profitability. The contributions made by the Company to the plan for 2001,
2000, and 1999 were $731, $481, and $315, respectively.

7.       STOCK OPTIONS

         The Company implemented the 2001 Stock Option Plan (Option Plan) during
2001. Eligibility for the Option Plan is recommended by the Chief Executive
Officer and approved by the Board of Directors. Options are for shares of Class
A Common Stock and are exercisable only from and after an initial public
offering (IPO) at a price per share equal to eighty percent of the price per
share which the underwriters pay for the stock in connection with an initial
public offering. Options are exercisable for fifty percent (50%) of the shares
on the second anniversary of the grant, and for one hundred percent (100%) of
the shares after the third anniversary of the grant. Options expire ten years
from the date of the grant. As of December 31, 2001 options for 316,733 had been
granted. The Company will record a charge for the difference between the
exercise price and the IPO price of these options upon the completion of the
IPO.

8.      SEGMENTS AND GEOGRAPHICAL INFORMATION

        The Company's continuing business consists of three operating segments:
hearing aid components, acoustic and infrared technology, and automotive
components. These three operating segments were determined based on the
applications and markets for the Company's products.

        The hearing aid components operating segment utilizes the Company's
acoustic technologies to design, manufacture, and market components for hearing
aids. The acoustic and infrared technology operating segment utilizes the
Company's acoustic and infrared technologies to design, manufacture, and market
products for high growth markets, including voice recognition, and computer
telephony integration. The automotive component operating segment designs,
manufactures, and markets diesel engine solenoids, electronic governors, and
position sensors primarily for use in automobiles and trucks.

        The Company uses the following financial information presented below to
assess performance and make resource allocation decisions:

<TABLE>
<CAPTION>
                                                      ACOUSTIC AND
                                       HEARING AID      INFRARED          AUTOMOTIVE
                                       COMPONENTS      TECHNOLOGY         COMPONENTS     TOTAL
                                       ----------      ----------         ----------     -----
<S>                                    <C>              <C>              <C>             <C>
2001
Revenues from external customers        $138,925         $33,934          $50,862         $223,721
Operating income (loss)                   55,492          (2,839)           4,974           57,627

2000
Revenues from external customers        $140,832         $35,576          $61,715         $238,123
Operating income (loss)                   45,652           2,896             (543)          48,005

1999
Revenues from external customers        $135,355         $32,311          $61,440         $229,106
Operating income (loss)                   39,379           1,293           (1,568)          39,104
</TABLE>

        The hearing aid components operating segment and the acoustic and
infrared technology operating segment utilize the same assets. The total assets
of the hearing aid components operating segment and the acoustic and infrared
technology operating segment as of December 31, 2001, 2000, and 1999 were
$104,505, $117,982, and $117,336, respectively. Depreciation expense associated
with these assets was $8,244, $8,219, and $7,462 for the years ended December
31, 2001, 2000, and 1999, respectively. Total capital expenditures for the
hearing aid components operating segment and the acoustic and infrared
technology operating segment were $18,200, $10,251, and $9,290 for the years
ended December 31, 2001, 2000, and 1999, respectively. Due to the joint use of
assets between the hearing aid components operating segment and the acoustic and
infrared technology operating segment, allocations of various costs and expenses
between these two segments are made based on their respective revenues.

        The total assets of the automotive components business unit were
$64,712, $53,734, and $48,212 as of December 31, 2001, 2000, and 1999,
respectively. Depreciation expense associated with these assets was $2,656,
$3,095, and $5,087 for the years ended December 31, 2001, 2000, and 1999,
respectively. The total capital expenditures for the automotive component
business unit were $3,076, $5,900, and $5,063 for the years ended December 31,
2001, 2000, and 1999.

        In 2001, the Company continued with restructuring of its worldwide
manufacturing operations and recorded restructuring expenses of $317, which
affected the operating segments as follows: hearing aid components ($3,292),
acoustic and infrared technology $357, automotive components $1,032, with the
remaining amount of $2,220 impacting corporate. The charge for hearing aid
components includes a gain on the sale of UK facility of $3,046.

        In 2000, the Company announced a restructure of its worldwide
manufacturing operations and recorded restructuring expenses of $18,440, which
affected the operating segments as follows: hearing aid components $8,498,
acoustic and infrared technology $116, automotive components $5,988 with the
remaining amount of $3,838 impacting corporate.

        In 1999, special charges of $8,900 were recorded to increase reserves
for slow moving and obsolete inventory and our product warranty accrual. The
special charges effected the operating segments as follows: hearing aid
components $6,955, acoustic and infrared technology $537, and automotive
components $1,408. The increases in these reserves were primarily due to an
increase in excess inventory due to noncompetitive product introduction, support
of many old product models, change in management's philosophy on disposal of
slow moving inventory, and an increase in warranty claim experience due to
extended warranty periods.

        The following is a reconciliation of segment operating income and assets
to the Company's consolidated totals:

<TABLE>
<CAPTION>

                                                                                    YEAR ENDED DECEMBER 31
                                                                                    ----------------------
                                                                           2001              2000             1999
                                                                           ----              ----             ----
<S>                                                                     <C>               <C>               <C>
PROFIT OR LOSS
Total operating income for reportable segments .................        $  57,627         $  48,005         $  39,104
Unallocated amount - corporate overhead ........................          (12,744)           (8,275)           (4,975)
Corporate restructuring and recapitalization expenses ..........           (2,220)           (3,838)          (10,674)
                                                                        ---------         ---------         ---------
Total consolidated operating income ............................           42,663            35,892            23,455
Other expense ..................................................          (37,610)          (42,382)          (22,434)
                                                                        ---------         ---------         ---------
Income (loss) from continuing operations before income taxes ...        $   5,053         $  (6,490)        $   1,021
                                                                        =========         =========         =========

ASSETS
Total assets for reportable segments ...........................        $ 169,217         $ 171,716         $ 165,548
Adjustment for actual foreign currency exchange rates and other             8,665            20,041            24,786
                                                                        ---------         ---------         ---------
Total consolidated assets ......................................        $ 177,882         $ 191,757         $ 190,334
                                                                        =========         =========         =========

GEOGRAPHIC INFORMATION
Revenues (based on origination of product shipment):
   United States ...............................................        $ 135,352         $ 136,946           133,198
   Germany .....................................................           17,856            23,504            29,539
   United Kingdom ..............................................           40,706            34,937            32,160
   Other geographic areas ......................................           29,807            42,736            34,209
                                                                        ---------         ---------         ---------
                                                                        $ 223,721         $ 238,123         $ 229,106
                                                                        =========         =========         =========

LONG-LIVED ASSETS
United States ..................................................        $  32,028         $  29,849         $  28,911
Germany ........................................................            2,126             3,399             4,519
Malaysia .......................................................            7,500             8,162             7,300
Taiwan .........................................................            6,289             6,713             7,980
Hungary ........................................................            8,830             6,466             2,440
Other geographic areas .........................................           11,959             9,800             9,495
                                                                        ---------         ---------         ---------
                                                                        $  68,732         $  64,389         $  60,645
                                                                        =========         =========         =========
</TABLE>


MAJOR CUSTOMERS

The Company is dependent on sales of products to a small number of large
customers. The Company's top ten customers accounted for approximately 59%, 57%,
and 55%, of consolidated sales in 2001, 2000, and 1999 respectively. Revenues
from one customer accounted for approximately 12%, 15% and 11% of consolidated
revenues in 2001, 2000, and 1999 respectively.

9.      DISCONTINUED OPERATIONS

         On June 29, 1999, the day prior to the closing of the
Recapitalization, the Company distributed to certain preexisting stockholders
the equipment financing business of the Company and two pieces of real estate,
with a net book value of $74,759 in redemption of 10% of the stock owned by
the stockholders. This transaction was recorded at the net book value of the
business distributed with no gain recognized. The net assets and operating
results of the equipment financing business have been reported separately as
discontinued operations for all periods presented.

         Revenues, principally interest, loan fees, and lease income, were $0,
$0, and $3,053 in fiscal 2001, 2000 and 1999 respectively.

                                      56


<PAGE>


10.     RESTRUCTURING EXPENSES

         The Company announced a major restructuring in March 2000, resulting in
a first quarter charge of $20,094. Under the restructuring plan, the Company
consolidated its worldwide manufacturing operations by ending production at five
manufacturing facilities and either outsourced component production or moved
final assembly to lower cost locations in Malaysia, China and Hungary. The
restructuring charge consisted almost entirely of severance payments to
terminated employees and outplacement expenses. Through December 31, 2000, 678
positions were eliminated of the 1,047 total positions that were planned to be
eliminated in the restructuring, and $7,779 was spent on severance and
outplacement costs. The accrued restructuring liability was increased during
2000 by $571 to reflect higher estimated severance costs. The restructuring
expenses were reduced in 2000 by $2,225 due to a pension curtailment gain
realized on the U.S. pension plans. Through December 31, 2001, 976 positions
have been eliminated of the 1,047 total positions that will be eliminated in the
restructuring. During 2001, $9,891 was spent on severance and outplacement
costs and the accrued liability was further reduced by foreign currency
translation of $426. The accrued restructuring liability was increased during
2001 by $1,628 to reflect higher estimated severance costs. Restructuring
expenses were incurred in 2001 for facility closure costs of $143, net loss on
the disposal of assets other than the United Kingdom facility of $56, employee
outplacement costs of $876 and obsolete inventory of $660. The gain on the
sale of the United Kingdom facility was $3,046.

         At the five facilities where production was eliminated, the number of
positions eliminated at each facility and the final production dates at each
facility are as follows: (1) Burgess Hill, United Kingdom; 133 positions; June
2000, (2) Itasca, Illinois; 262 positions; September 2000, (3) Taipei, Taiwan;
220 positions; March 2001, (4) Rolling Meadows, Illinois; 16 positions; March
2001, (5) Hohenkirchen, Germany; 180 positions; September 2001

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

            None.


                                      57

<PAGE>


PART III

ITEM 10.

                        DIRECTORS AND EXECUTIVE OFFICERS

         Pursuant to Knowles' by-laws, each of its directors is designated as
a "Class A director" or a "Class B director." Each Class A director is
entitled to four votes and each Class B director is entitled to one vote.
Knowles currently has five directors, two of whom are with Doughty Hanson
(Kenneth Terry and Kevin Luzak). Set forth below is certain information with
respect to our directors and officers.

<TABLE>
<CAPTION>
NAME                                           AGE                POSITION
----                                           ---                --------
<S>                                           <C>     <C>
Reg G. Garratt...........................      72      Chairman; Class B Director
James E. Knowles.........................      71      Class B Director
Kenneth John Terry.......................      37      Class A Director
Kevin Luzak..............................      38      Class A Director
John J. Zei..............................      57      President and Chief Executive Officer, Class B Director
James F. Brace...........................      56      Executive Vice President and Chief Financial Officer
Patrick W. Cavanagh......................      49      Vice President and General Manager Automotive Components
Peter H. Stevens, Jr.....................      51      Vice President and General Manager Emkay
Stephen D. Petersen......................      43      Vice President Finance and Secretary
</TABLE>

         Reg G. Garratt began his career with Knowles in 1977 as Vice
President of Marketing. He subsequently served as Senior Vice President and
President before assuming the position of Chief Executive Officer of Knowles
in 1992. He became Chairman and Chief Executive Officer in 1997. Prior to
joining Knowles, he worked 19 years in various management positions for
Honeywell, Inc. Mr. Garratt is an engineering graduate of Aston University.

         James E. Knowles is president of The Financial Corporation of
Illinois.  Prior to his current position, Mr. Knowles served as a Director of
Knowles from 1987 to 1996. He served as Chairman of the Compensation Committee
and the Audit Committee of Knowles from 1990 to 1996. Mr. Knowles also served
as President of Synergistic International Ltd. from 1969 to 1996. Mr. Knowles
holds a bachelor of science and a Master of Business Administration degree
from Stanford University.

         Kenneth John Terry is a partner of Doughty Hanson & Co. Limited,
where he has spent his entire professional career since its foundation in
1986. Mr. Terry currently serves on the Board of Directors of Dunlop Standard
Aerospace Group, Ilford Imaging Limited, Impress Group B.V., RHM Limited, LM
Group Holdings A/S.  He is a graduate of University of Leeds.

         Kevin Luzak is a corporate director of Doughty Hanson & Co., Inc. Prior
to his current position, he served in various positions at Salomon Brothers Inc
from 1991 to 1998. Mr. Luzak currently serves on the Board of Directors of
Dunlop Standard Aerospace Group Limited, Knowles Electronics, Inc., North
American Membership Group, Inc. Trend Technologies, Inc., Coastal Lumber
Company, Inc., and Neartek, Inc.

         John J. Zei joined Knowles in January, 2000 as President and Chief
Operating Officer. He was elected a Class B Director in March, 2000 and
President and Chief Executive Officer as of April, 2000. Mr. Zei was with
Siemens Hearing Instrument Corporation from 1987 to 1999 and served as
President and Chief Executive Officer from 1990 through 1999. Prior to
Siemens, John was with Beltone Electronics from 1976 to 1987. Mr. Zei is a
graduate of Loyola University, Loyola University School of Law and the
University of Chicago.

         James F. Brace joined Knowles in January, 2000 as Vice President and
Chief Financial Officer. He was elected Executive Vice President and Chief
Financial Officer as of April, 2000. Mr. Brace served as Senior Vice President
and Chief Financial Officer of Argent Healthcare Financial Services during
1999, as Vice President, Treasurer and Chief Financial Officer of Littelfuse,
Inc. from 1992 to 1998, and as Vice President, Treasurer and Chief Financial
Officer of Sanford Inc. from 1987 to 1992. Mr. Brace is a graduate of
Princeton University and the University of Chicago.

                                      58

<PAGE>

         Patrick W. Cavanagh has managed SSPI since 1992 and Automotive
Components since its inception in 1996. From 1978 to 1992, prior to joining
Knowles, he held various domestic and international management positions at
the Barber Colman Company. He is a graduate of the Milwaukee School of
Engineering.

         Peter H. Stevens, Jr. joined Knowles in January, 2001 as Vice
President, General Manager of the EMKAY Innovative Products division. Prior to
joining Knowles, he was Senior Vice President, Western Region General Manager
of Distribution Dynamics, an integrated supply chain management company to the
manufacturing industry. From 1990 to 1998, he served as Vice President General
Manager of the U.S. operations for Hirose Electric of Japan, a global
manufacturer of electronic and fiber optic connectors. He is a graduate of the
University of California, Santa Barbara and the University of California,
Irvine.

         Stephen D. Petersen joined Knowles in 1980 and served in various
accounting positions including Assistant Treasurer and Vice President -
Controller of KE. He was promoted to Vice President Finance in September 1999.
Mr. Petersen is a graduate of Augustana College, holds a Master of Management
degree from Northwestern University, and is a certified public accountant.

                                      59


<PAGE>
ITEM 11.

                            EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table provides information concerning the compensation
we paid to our senior officers for 2001, 2000, and 1999:

<TABLE>
<CAPTION>
                                                                                                 LONG-TERM
                                                              ANNUAL COMPENSATION              COMPENSATION
                                               ---------------------------------------------  --------------
                                                                                                SECURITIES
                                                                               OTHER ANNUAL     UNDERLYING           ALL OTHER
NAME AND PRINCIPAL POSITION            YEAR          SALARY        BONUS       COMPENSATION    OPTIONS/SARS      COMPENSATION (4)
---------------------------            ----          ------        -----       ------------    ------------      ----------------
<S>                                    <C>    <C>             <C>         <C>                 <C>              <C>
Reg G. Garratt                         2001     $  414,050     $  50,000           -                -            $         8,721
       Chairman                        2000        414,050       104,341           -                -                      4,113
                                       1999        410,294       101,608           -                -                  3,715,691

John J. Zei                            2001        417,194       125,000           -                -                      6,058
       President and Chief             2000        374,815       413,673           -                -                    117,711
          Executive Officer            1999              -             -           -                -                          -

James F. Brace                         2001        249,784        85,000           -                -                      6,198
       Executive Vice President        2000        219,235       184,835           -                -                      4,750
          and Chief Financial Officer  1999              -             -           -                -                          -

Patrick W. Cavanagh                    2001        175,891        71,759      10,500 (3)            -                      7,820
       Vice President & General        2000        160,333       151,109           -                -                      3,683
       Manager Automotive Components   1999        173,821         5,445   $  23,746 (1)            -                    441,113

Peter H. Stevens, Jr.                  2001        191,783        26,777           -                -                    131,754
       Vice President & General        2000              -             -           -                -                          -
       Manager Emkay (2)               1999              -             -           -                -                          -
</TABLE>

(1)      Expenses and allowances associated with Mr. Cavanagh's two year
relocation to Germany.

(2)      Peter H. Stevens, Jr. joined Knowles January, 29, 2001.

(3)      Reimbursement for executive medical.

(4)      The following chart is a breakdown of the payments made to the
executive officers under the heading "All Other Compensation". The Success
Bonuses represent one-time payments made to the executive officers in 1999 in
connection with the sale of the company. Similarly, the Tenure Bonuses
represent a one-time payment to each employee in connection with the sale of
the company. Payments were made to the executive officers under the
Supplemental Executive Retirement Plan in connection with the Plan's
termination in 1999. The Company also made contributions to the Knowles
Electronics, Inc. Employee Retirement Savings 401(k) Plan on behalf of the
executive officers and paid life insurance premiums on behalf of the executive
officers in the amounts set fourth in the chart.

                                      60

<PAGE>

<TABLE>
<CAPTION>
                                                                    SUPPLEMENTAL       KNOWLES            LIFE
                                          SUCCESS        TENURE       EXECUTIVE       401(k) PLAN       INSURANCE         MOVING
EXECUTIVE                    YEAR          BONUS          BONUS    RETIREMENT PLAN   CONTRIBUTIONS      PREMIUMS         EXPENSES
---------                    ----          -----          -----    ---------------   -------------      ---------        --------
<S>                         <C>        <C>             <C>        <C>               <C>               <C>               <C>
Reg G. Garratt               2001       $         -     $     -        $         -          $5,100     $    3,621                -
                             2000                 -           -                  -           1,700          2,413                -
                             1999         2,226,000       2,100          1,483,406           1,600          2,585                -

John J. Zei                  2001                 -           -                  -           5,250            808                -
                             2000                 -           -                  -           3,400          1,703       $  112,608
                             1999                 -           -                  -               -              -                -

James F. Brace               2001                 -           -                  -           5,250            948                -
                             2000                 -           -                  -           3,909            841                -
                             1999                 -           -                  -               -              -                -

Patrick W. Cavanagh          2001                 -           -                  -           5,100          2,720                -
                             2000                 -           -                  -           2,625          1,058                -
                             1999           397,500         350             40,918           1,287          1,058            1,058

Peter H. Stevens, Jr.        2001                 -           -                  -           1,730            295          129,729
                             2000                 -           -                  -               -              -                -
                             1999                 -           -                  -               -              -                -
</TABLE>

EXECUTIVE STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

         In connection with the Recapitalization all outstanding stock
appreciation rights and options were surrendered in exchange for a cash
payment. Our senior officers surrendered their then outstanding stock
appreciation rights and options in exchange for a cash payment equal to the
aggregate book value increases in the value of the underlying stock through
December 31, 1998. As a result, Reg G. Garratt and Patrick W. Cavanagh,
received $818,080 and $221,180 respectively. The SAR Plan was terminated as of
the Recapitalization.

PENSION PLAN

         The following table provides information concerning the estimated
annual pension benefit we pay to employees of KE and SSPI on their retirement,
based upon their years of service and their average monthly earnings prior to
their retirement (as described below).

                                      61

<PAGE>

<TABLE>
<CAPTION>
                                                                    YEARS OF SERVICE
REMUNERATION                                      15          20          25           30          35
------------                                      --          --          --           --          --
<S>                                            <C>         <C>         <C>          <C>         <C>
$ 125,000..............................         $34,000     $45,000     $56,000      $56,000     $56,000
150,000.................................         41,000      55,000      69,000       69,000      69,000
175,000.................................         48,000      64,000      80,000       80,000      80,000
200,000.................................         48,000      64,000      80,000       80,000      80,000
225,000.................................         48,000      64,000      80,000       80,000      80,000
250,000.................................         48,000      64,000      80,000       80,000      80,000
275,000.................................         48,000      64,000      80,000       80,000      80,000
300,000.................................         48,000      64,000      80,000       80,000      80,000
325,000.................................         48,000      64,000      80,000       80,000      80,000
350,000.................................         48,000      64,000      80,000       80,000      80,000
400,000.................................         48,000      64,000      80,000       80,000      80,000
450,000.................................         48,000      64,000      80,000       80,000      80,000
500,000.................................         48,000      64,000      80,000       80,000      80,000
</TABLE>

         Our pension plan, which became effective on July 1, 1963, is a
non-contributory defined benefit plan covering employees of the KE business unit
and SSPI. As of December 31, 2001, Reg G. Garratt, John Zei, Jim Brace, Patrick
W. Cavanagh, and Peter H. Stevens, Jr. have 24, 2, 2, 9 and 1 credited years of
service, respectively. Under the plan, a participant who terminates employment
with a vested benefit, and either immediately or at a later date attains his or
her early or normal retirement age is entitled to receive a monthly pension
benefit commencing on his or her normal or deferred retirement date., which may
be an early retirement date. Normal retirement is at age 65. However, early
retirement may commence any first of the month following attainment of age 55,
but benefits are actuarially reduced for early retirement. The retirement
benefit payable under the plan is equal to 2% of a participant's average monthly
covered compensation during the five consecutive years during which such
participant received his or her highest earnings within the ten year period
ending on the date of termination, multiplied by credited service up to a
maximum of twenty-five years, reduced by the participant's Social Security
offset allowance. Under the plan, the Social Security offset allowance is equal
to the product of 0.65% multiplied by (i) the participant's years of credited
service up to a maximum of twenty-five years and (ii) the lessor of: (A) the
participant's average monthly earnings over the three years prior to termination
or (B) 1/12th of the average of the Social Security taxable wage base for the 35
year period ending with the last day of the calendar year in which the
participant attains Social Security retirement age.

         Effective January 1, 1998, we established the Supplemental Executive
Retirement Plan, an excess benefit plan designed to provide certain of our
employees with benefits in excess of those otherwise permitted under our
pension plan due to the compensation and benefit limitations placed on
qualified retirement plans under the Internal Revenue Code of 1986, as
amended. Benefits under the Supplemental Executive Retirement Plan were paid
to the following individuals in the corresponding amounts immediately prior to
the Recapitalization and the Supplemental Executive Retirement Plan was
terminated as of the Recapitalization: Mr. Garratt: $1,483,406; Mr. Cavanagh:
$40,918.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL SEVERANCE PAY PLAN

         On April 7, 1992, we entered into an employment agreement with Reg G.
Garratt. The agreement, which was amended and restated on March 15, 1998 and
amended verbally with Doughty Hanson prior to the closing of the
Recapitalization, provides for Mr. Garratt's employment as the chairman and
chief executive officer of Knowles until a replacement chief executive officer
is appointed. Mr. John Zei was appointed President and Chief Executive Officer
as of April 1, 2000. Mr. Garratt will continue to serve as chairman until
December 31, 2003, at his ongoing salary. If we terminate Mr. Garratt's
employment without cause before December 31, 2003, Mr. Garratt is entitled to
receive his base salary in effect on the date of termination through December
31, 2003, a pro-rata portion of the bonus to which he was entitled on the date
of termination, and a lump sum payment of $60,000. During the term of his
employment and for two years thereafter, Mr. Garratt is restricted from
competing with Knowles or any of its

                                      62

<PAGE>

subsidiaries and soliciting employees, distributors and customers of Knowles
or any of its subsidiaries. The employment agreement also restricts Mr.
Garratt from disclosing any confidential or proprietary information relating
to Knowles or any of its subsidiaries.

         We maintain a Change in Control Severance Pay Plan to provide for the
payment of severance benefits to selected executives whose employment terminates
in connection with a change in control of Knowles Electronics, Inc. Patrick W.
Cavanagh participated in the Change in Control Severance Pay Plan. According to
the terms of the Change in Control Severance Pay Plan, the executive is entitled
to receive up to two times his annual base salary and bonus, less any salary and
bonus paid to the executive after the change in control, if we terminate a
participating executive's employment without cause or the executive terminates
his employment as a result of an adverse modification to the terms of the
executive's employment during the two-year period following a change in control
of Knowles. The Recapitalization constitutes a change in control under the
Change in Control Severance Pay Plan.

         In 1998, we entered into success bonus agreements with our senior
officers (at that time) to provide incentives for such officers to assist in a
successful sale of the business. The agreements provide for us to pay the senior
officers a percentage of the sale price of Knowles as follows:  Reg G. Garratt:
0.42% and Patrick W. Cavanagh: 0.075%. Payment was made under each of the
success bonus agreements at the time of the Recapitalization.

         Effective January 3, 2000, John Zei became the President and Chief
Operating Officer of Knowles, with an annual salary of $325,000, a signing bonus
of $25,000 payable on the date Mr. Zei commenced his employment with Knowles,
and eligibility to participate in certain bonus plans generally available for
senior management employees. Mr. Zei succeeded Mr. Garratt as Chief Executive
Officer of Knowles on April 1, 2000.

         In connection with the commencement of his employment, Knowles has
agreed to loan Mr. Zei $300,000 to purchase Knowles' common stock at fair
market value, and Mr. Zei has purchased an additional $200,000 worth of common
stock at fair market value with his own funds. The stock is subject to
Stockholders' and Registration Rights Agreements described under the heading
"Related Party Transactions." The loan will be repayable in full on the
earlier of the sale of Knowles and the fifth anniversary of the purchase date.
In addition, Mr. Zei will be required to mandatorily prepay a portion of the
loan if he sells any of his common stock. Knowles has also agreed to pay up to
six months of reasonable interest on any bridge loan, not to exceed $750,000,
Mr. Zei incurs in connection with his relocation expenses.

         Effective January, 2000, James Brace became the Vice President and
Chief Financial Officer of Knowles, with an annual salary of $225,000 and
eligibility to participate in certain bonus plans generally available for
senior management of Knowles. In the event that Mr. Brace's employment with
Knowles is terminated by Knowles without cause, Mr. Brace will be entitled to
receive salary and benefit continuation for six months. Mr. Brace was
appointed Executive Vice President and Chief Financial Officer on April 1,
2000.

         In connection with the commencement of his employment, Mr. Brace
purchased $200,000 of common stock with his own funds and will have the
opportunity to purchase an additional $125,000 worth of Knowles' common stock
at $30 per share with his own funds. The stock is subject to the Stockholders'
and Registration Rights Agreements described under the heading "Related Party
Transactions."

         Effective January, 2001, Peter H. Stevens, Jr. became the Vice
President and General Manager - Emkay, with an annual salary of $210,000 and
eligibility to participate in certain bonus plans generally available for
senior management of Knowles.

         In connection with his employment, Mr. Stevens is eligible to receive
Common Stock in the amount of $200,000, of which $100,000 will be available as
part of his 2001 year-end incentive and the remaining $100,000 as part of
the his 2002 year-end incentive calculation.

EXECUTIVE STOCK PURCHASE AGREEMENT

                                      63

<PAGE>
\
         In connection with the purchase of Class A Common Stock by members of
management, each executive purchasing stock entered into an Executive Stock
Purchase Agreement with Knowles and Key Acquisition, LLC. Among other things,
the Executive Stock Purchase Agreements (i.) define Vested Stock, the
Executive's Put Option, and the Company's Call Option, (ii.) provides for
restrictions on the executive from competing with Knowles or soliciting its
employees and (iii.) provides for severance benefits to the executive under
certain circumstances.


COMPENSATION OF DIRECTORS

         Prior to the Recapitalization, directors who were not employees were
paid a quarterly fee of $4,500, plus a fee of $3,750 for each Board meeting
attended, $2,500 for each special meeting and, as committee members, received
$500 per committee meeting attended. Directors also received a fee of $300 per
hour for each additional hour worked. Employees and officers who are directors
received no additional compensation for services rendered as directors.

         Effective January 13, 1997, we adopted the Retirement Plan for
Outside Directors, which allows a participating director to defer all or any
portion of his or her director fees until the earlier of the director's
termination of service or the 65th birthday. Benefits under the Retirement
Plan for Outside Directors were unfunded and were paid from Knowles' general
assets. The Retirement Plan for Outside Directors was terminated in connection
with the Recapitalization.

         Following the Recapitalization, our directors no longer receive any
fees or other compensation for services rendered in their capacity as
directors.

                                      64



<PAGE>


ITEM 12.

                        SECURITY OWNERSHIP OF CERTAIN
                       BENEFICIAL OWNERS AND MANAGEMENT

         Set forth below is certain information, as of February 28, 2002,
concerning (a) the beneficial ownership of our voting securities by entities
and persons who beneficially own more than 5% of our voting securities and (b)
the ownership of our securities by our executive officers and directors. The
determinations of "beneficial ownership" of voting securities are based upon
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). This rule provides that securities will be deemed to be
"beneficially owned" where a person has, either solely or in conjunction with
others, (1) the power to vote or to direct the voting of securities and/or the
power to dispose or to direct the disposition of, the securities or (2) the
right to acquire any such power within 60 days after the date such "beneficial
ownership" is determined.


<TABLE>
<CAPTION>
                                                                 AMOUNT
                                                              BENEFICIALLY          PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1)                         OWNED(2)           OF CLASS
---------------------------------------                         --------           --------
<S>                                                           <C>                 <C>
Key Acquisition, L.L.C.
    c/o Doughty Hanson & Co. Limited
    Times Place, 45 Pall Mall, London SW1Y 5JG,
    England..............................................           800,000            81.5%
Doughty Hanson & Co. Limited(3)
    Times Place, 45 Pall Mall, London SW1Y 5JG,
    England..............................................           800,000            81.5%
</TABLE>

(1)      After the Recapitalization, various members of the Knowles family and
         trusts for the benefit of members of the Knowles family hold in the
         aggregate 100,000 shares of common stock, or 10.2% of currently
         outstanding shares of common stock. Such stockholders have the right
         to elect one of our directors pursuant to a stockholders' agreement
         with Key Acquisition, L.L.C. We have no reason to believe that
         various members of the Knowles family and trusts for the benefit of
         members of the Knowles family constitute a group, as that term is in
         Section 13(d)(3) of the Exchange Act.

(2)      Class A Common Stock

(3)      Consists only of shares of Knowles owned by Key Acquisition, L.L.C.,
         all of whose membership interests are held by limited partnerships
         for which Doughty Hanson acts as general partner.

SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT

<TABLE>
<CAPTION>
                                                                         AMOUNT
                                                                      BENEFICIALLY     PERCENT
NAME OF BENEFICIAL OWNER                         TITLE OF CLASS          OWNED        OF CLASS
------------------------                         --------------          -----        --------
<S>                                            <C>                      <C>             <C>
Reg G. Garratt...........................       Class A Common           20,000          2.0%
James E. Knowles.........................       Class A Common            9,947          1.0
                                                Series A Preferred        2,045          0.2
Kenneth John Terry.......................                   --               --           --
Kevin Luzak..............................                   --               --           --
John J. Zei..............................       Class A Common           16,667          1.7
James F. Brace...........................       Class A Common           10,833          1.1
Patrick W. Cavanagh......................       Class A Common           10,000          1.0
Peter H. Stevens Jr......................       Class A Common            3,333          0.3
Stephen D. Petersen......................       Class A Common            3,333          0.3
Combined holdings of directors and.......       Class A Common           70,780          7.6%
    executive officers as a group........       Series A Preferred        2,045          0.2%
</TABLE>

                                      65

<PAGE>


ITEM 13.

                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

DISTRIBUTION OF THE EQUIPMENT FINANCING BUSINESS

         On June 29, 1999, Knowles' equipment financing business (The
Financial Corporation of Illinois), including certain parcels of real estate,
were distributed to our preexisting stockholders, in redemption of 10% of the
stock owned by those stockholders. James E. Knowles, one of our directors, is
a stockholder of, and currently serves as the president of, The Financial
Corporation of Illinois.

SERVICE AND COMMISSION AGREEMENTS

         In connection with the Recapitalization, we entered into a Service
Agreement dated June 23, 1999 (the "Service Agreement") with Doughty Hanson &
Co. Managers Limited ("DHCM"), a subsidiary of Doughty Hanson & Co. Limited,
pursuant to which DHCM received a fee of $3,000,000 upon the successful
completion of the Recapitalization for financial advisory services related to
the Recapitalization. The Service Agreement made available the resources of
DHCM concerning a variety of financial and operational matters including
advice and assistance in negotiating the purchase of shares owned by the
Knowles family.

         Also in connection with the Recapitalization, we entered into a
Commission Agreement dated June 23, 1999 (the "Commission Agreement") with
DHCM pursuant to which DHCM received a total aggregate commission of
$2,000,000 upon the successful completion of the Recapitalization for its
services in arranging the equity financing for the Recapitalization.

STOCKHOLDERS' AND REGISTRATION RIGHTS AGREEMENTS

         In connection with the Recapitalization, Knowles and the holders of
its common stock, including Key Acquisition and certain members of management,
entered into a stockholders' agreement dated as of June 30, 1999 (the
"Stockholders' Agreement") and a registration rights agreement dated as of
June 30, 1999 (the "Registration Rights Agreement"). Among other things, the
Stockholders' Agreement and Registration Rights Agreement (i) impose certain
restrictions on the transfer of shares of common stock by such holders and
(ii) give such holders registration rights under certain circumstances. We
will bear the costs of preparing and filing any such registration statement
and will indemnify and hold harmless, to the extent customary and reasonable,
holders selling shares covered by such a registration statement. Directors and
executives of the company to date have purchased 89,167 shares of common stock
which are subject to the Stockholders' Agreement and Registration Rights
Agreement.

SOFTWARE CONTRACTS BETWEEN KNOWLES AND SEAN R. GARRATT

         Effective January 23, 1998, we entered into a software development
agreement (the "Software Development Agreement") with Daystrom Software Ltd.
("Daystrom"), a limited liability company owned by Reg G. Garratt's son, Sean
R. Garratt. Pursuant to the Software Development Agreement, Daystrom agreed to
develop and assist in the maintenance of certain voice command and control
engine software for Knowles in exchange for a fee. We renewed the Software
Development Agreement in January 1999, and it was terminated on June 16, 1999.
Pursuant to the Software Development Agreement, we paid $96,080 to Daystrom.
We entered into a new six month software development agreement on July 2, 1999
for an automatic system for optimizing hearing aid instruments. The July 2,
1999 agreement was terminated February 28, 2000.

LOAN TO JOHN J. ZEI

         In connection with the commencement of his employment, Knowles agreed
to loan Mr. Zei $300,000 to purchase Knowles' common stock at fair market
value and to pay up to six months of reasonable interest on any bridge loan,
not to exceed $750,000, Mr. Zei incurs in connection with his relocation
expenses (see the description of these items under "Employment Arrangements").

LOAN TO JAMES F. BRACE

         Knowles has loaned $50,000 to Mr. Brace, due on or before May 31,
2002, in connection with his employment. Knowles has also loaned $125,000 to
Mr. Brace to purchase Knowles common stock at fair market value.

LOAN TO PETER H. STEVENS, JR.

         In connection with the commencement of his employment, Knowles agreed
to loan Mr. Stevens up to $400,000 for a real estate bridge loan. The bridge
loan was repaid in full.

                                      66

<PAGE>


PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
                                                                                                             PAGE
                                                                                                             ----
<S>          <C>                                                                                            <C>
a)           1. Financial Statements-

                       Consolidated balance sheets-December 31, 2001 and 2000.............................   39
                       Consolidated statements of operations for each of the three years
                             in the period ended December 31, 2001........................................   40
                       Consolidated statements of stockholders' equity for each of
                             the three years in the period ended December 31, 2001........................   41
                       Consolidated statements of cash flows for each of the three
                             years in the period ended December 31, 2001..................................   42
                       Notes to consolidated financial statements.........................................   43

             2. Schedules

                       The following consolidated financial schedule of Knowles Electronics
                       Holdings, Inc. is included in response to Item 14(a)

                       II - Valuation and Qualifying Accounts.............................................   68

                       All other schedules under Regulation S-X for Knowles Electronics
                       Holdings, Inc. have been omitted because they are either
                             non-applicable, not required or because the
                             information required is included in the financial
                             statements or notes thereto.

             3. Index to Exhibits.........................................................................   70

b)                     Reports on Form 8-K
</TABLE>

         There were no reports on Form 8-K filed during the three months ended
December 31, 2001

                                      67


<PAGE>


                SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
                      KNOWLES ELECTRONICS HOLDINGS, INC.

<TABLE>
<CAPTION>
                                                                            Additions
                                                 Balance at                       Charge to other                      Balance at
                                                beginning of    Charge to costs     accounts -       Deductions -        end of
                                                   period         and expenses       describe          describe          period
                                                   ------         ------------       --------          --------          ------
                                                                                    (in thousands)
<S>                                            <C>              <C>               <C>                <C>               <C>
Year ended December 31, 2001 Reserves and
     allowances deducted from asset accounts:
          Allowance for doubtful accounts          $ 1,675           $     29                          $   609  (1)      $ 1,095
          Allowance for obsolete inventory           8,167              3,976                            2,092  (2)       10,051

Year ended December 31, 2000 Reserves and
     allowances deducted from asset accounts:
          Allowance for doubtful accounts          $ 1,200           $    542                          $    67  (3)      $ 1,675
          Allowance for obsolete inventory          12,111              2,910                            6,854  (4)        8,167

Year ended December 31, 1999 Reserves and
     allowances deducted from asset accounts:
          Allowance for doubtful accounts          $ 1,518           $    738                          $ 1,056  (5)      $ 1,200
          Allowance for obsolete inventory           6,245              6,915                            1,049  (6)       12,111
</TABLE>

(1) Uncollectible accounts written off, payments received of $120 and foreign
    currency translation gain of $11.
(2) Disposal of obsolete inventory and foreign currency translation gain of
    $135.
(3) Uncollectible accounts written off.
(4) Disposal of obsolete inventory and foreign currency translation gain of
    $293.
(5) Uncollectible accounts written off and foreign currency translation gain of
    $46.
(6) Disposal of obsolete inventory and foreign currency translation gain of
    $536.



                                      68

<PAGE>


                                  SIGNATURES

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

                        KNOWLES ELECTRONICS HOLDINGS, INC.
                                   (Registrant)

                             By:    /s/ JOHN J. ZEI
                                    -------------------------------------
                                    John J. Zei
                                    President and Chief Executive Officer

Dated: May 22, 2002

            Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE                         TITLE                                   DATE
---------                         -----                                   ----
<S>                              <C>                                     <C>
/s/ REG G. GARRATT                Chairman and Class B Director
---------------------------
Reg G. Garratt

/s/ JOHN J. ZEI                   President and Chief Executive Officer
---------------------------       Class B Director
John J. Zei

/s/ JAMES F. BRACE                Executive Vice President
---------------------------       and Chief Financial Officer
James F. Brace

/s/ KENNETH JOHN TERRY            Class A Director
---------------------------
Kenneth John Terry

/s/ KEVIN LUZAK                   Class A Director
---------------------------
Kevin Luzak

/s/ STEPHEN D. PETERSEN           Vice President Finance and Secretary
---------------------------
Stephen D. Petersen
</TABLE>

                                      69

<PAGE>


                                EXHIBIT INDEX

2.1 -    Recapitalization Agreement dated as of June 23, 1999, among Key
         Acquisition, L.L.C., Knowles Electronics Holdings, Inc. and the
         Stockholders (incorporated by reference to Exhibit 2.1 to
         Registration Statement No. 333-40076)

2.2 -    Contribution Agreement dated August 30, 1999, between Knowles
         Electronics Holdings, Inc. and Knowles Electronics, LLC (incorporated
         by reference to Exhibit 2.2 to Registration Statement No. 393-40076)

3.1 -    Second Amended and Restated Certificate of Incorporation of Knowles
         Electronics, Inc. (incorporated by reference to Exhibit 3.1 to
         Registration Statement No. 333-40076)

3.2 -    Certificate of Amendment to Second Amended and Restated Certificate
         of Incorporation of Knowles Electronics, Inc. changing its name to
         Knowles Electronics Holdings, Inc. (incorporated by reference to
         Exhibit 3.2 to Registration Statement No. 333-40076)

3.3 -    Certificate of Incorporation of Knowles Intermediate Holding, Inc.
         (incorporated by reference to Exhibit 3.3 to Registration Statement
         No. 333-40076)

3.4 -    Certificate of Incorporation of Emkay Associates, Inc. (incorporated
         by reference to Exhibit 3.4 to Registration Statement No. 333-40076)

3.5 -    Certificate of Amendment of Certificate of Incorporation of Emkay
         Associates, Inc. changing its name to Emkay Innovative Products, Inc.
         (incorporated by reference to Exhibit 3.5 to Registration Statement
         No. 333-40076)

3.6 -    Certificate of Incorporation of Knowles Manufacturing Ltd.
         (incorporated by reference to Exhibit 3.6 to Registration Statement
         No. 333-40076)

3.7 -    Certificate of Incorporation of Synchro-Start Products, Inc.
         (incorporated by reference to Exhibit 3.7 to Registration Statement
         No. 333-40076)

3.8 -    Certificate of Formation of Knowles Electronics, LLC (incorporated by
         reference to Exhibit 3.8 to Registration Statement No. 333-40076)

3.9 -    Amended and Restated By-laws of Knowles Electronics Holdings, Inc.
         (incorporated by reference to Exhibit 3.9 to Registration Statement
         No. 333-40076)

3.10 -   By-laws of Knowles Intermediate Holding, Inc. (incorporated by
         reference to Exhibit 3.10 to Registration Statement No. 333-40076)

3.11 -   By-laws of Emkay Innovative Products, Inc. (incorporated by reference
         to Exhibit 3.11 to Registration Statement No. 333-40076)

3.12 -   By-laws of Knowles Manufacturing Ltd. (incorporated by reference to
         Exhibit 3.12 to Registration Statement No. 333-40076)

3.13 -   By-laws of Synchro-Start Products, Inc. (incorporated by reference to
         Exhibit 3.13 to Registration Statement No. 333-40076)

3.14 -   Limited Liability Company Agreement of Knowles Electronics, LLC, and
         an amendment dated as of March 14, 2000 thereto (incorporated by
         reference to Exhibit 3.14 to Registration Statement No. 333-40076)


                                      70

<PAGE>

4.1 -    Indenture, dated as of October 1, 1999, among Knowles Electronics
         Holdings, Inc., the Subsidiary Guarantors and The Bank of New York,
         as trustee, relating to the 13 1/8% Senior Subordinated Notes due
         2009  (incorporated by reference to Exhibit 4.1 to Registration
         Statement  No. 333-40076)

4.2 -    Form of 13 1/8% Senior Subordinated Note due 2009 of Knowles
         Electronics Holdings, Inc. (the "Initial Note") (included as Exhibit
         A to the Indenture filed as Exhibit 4.1) (incorporated by reference
         to  Exhibit 4.2 to Registration Statement No. 333-40076)

4.3 -    Form of 13 1/8% Senior Subordinated Note due 2009 of Knowles
         Electronics Holdings, Inc. (the "Exchange Note") (included as Exhibit
         A to the Indenture filed as Exhibit 4.1) (incorporated by reference
         to Exhibit 4.3 to Registration Statement No. 333-40076)

4.4 -    Registration Rights Agreement, dated October 1, 1999, between Knowles
         Electronics Holdings, Inc., Morgan Stanley & Co. Incorporated and
         Chase Securities, Inc. (incorporated by reference to Exhibit 4.4 to
         Registration Statement No. 333-40076)

10.1 -   Credit Agreement, dated as of June 28, 1999, as amended and restated
         as of July 21, 1999, among Knowles Electronics Holdings, Inc., The
         Chase Manhattan Bank, as Administrative Agent, Morgan Stanley Senior
         Funding, Inc., as Syndication Agent and Chase Securities Inc., as
         Lead Arranger and Book Manager, and an amendment dated December 23,
         1999 and an amendment dated April 10, 2000 thereto (incorporated by
         reference to Exhibit 10.1 to Registration Statement No. 333-40076)

10.2 -   Parent Guarantee Agreement, dated as of June 30, 1999, between
         Knowles Electronics Holdings, Inc. and The Chase Manhattan Bank, as
         administrative agent (incorporated by reference to Exhibit 10.2 to
         Registration Statement No. 333-40076)

10.3 -   Subsidiary Guarantee Agreement, dated as of June 30, 1999 among
         Knowles Intermediate Holding, Inc., Emkay Innovative Products, Inc.,
         Knowles Manufacturing Ltd., Synchro-Start Products, Inc., Knowles
         Electronics, LLC, the subsidiary guarantors of Knowles Electronics
         Holdings, Inc. that are signatories thereto, and The Chase Manhattan
         Bank, as administrative agent (incorporated by reference to Exhibit
         10.3 to Registration Statement No. 333-40076)

10.4 -   Security Agreement, dated as of June 30, 1999, among Knowles
         Intermediate Holding, Inc., Emkay Innovative Products, Inc., Knowles
         Manufacturing Ltd., Synchro-Start Products, Inc., Knowles
         Electronics, LLC, the subsidiary guarantors of Knowles Electronics
         Holdings, Inc. that are signatories thereto, and The Chase Manhattan
         Bank, as administrative agent (incorporated by reference to Exhibit
         10.4 to  Registration Statement No. 333-400076)

10.5 -   Pledge Agreement, dated as of June 30, 1999 among Knowles
         Electronics, Inc., the Subsidiary Pledgors and The Chase  Manhattan
         Bank, as administrative agent (incorporated by reference to Exhibit
         10.5 to Registration Statement No.333-40076)

10.6 -   Amended and Restated Employment Agreement, dated as of June 21,
         1993, between Knowles Electronics Holdings, Inc. and Reg G.  Garratt
         (incorporated by reference to Exhibit 10.6 to Registration  Statement
         No. 333-40076)

10.7 -   Employment Agreement between Knowles Electronics Holdings, Inc.  and
         John J. Zei (incorporated by reference to Exhibit 10.7 to
         Registration Statement No. 333-40076)

10.8 -   Employment Agreement, dated December 29, 1999, between Knowles
         Electronics Holdings, Inc. and James F. Brace (incorporated by
         reference to Exhibit 10.8 to Registration Statement No. 333-40076)

10.9 -   Executive Stock Purchase Agreement, dated as of April 28, 2000,  by
         and among Knowles Electronic Holdings, Inc., John J. Zei and  Key
         Acquisition, L.L.C. (incorporated by reference to Exhibit 10.9 to
         Registration Statement No. 333-40076)

                                      71

<PAGE>

10.10 -  Executive Stock Purchase Agreement, dated as of April 28, 2000,  by
         and among Knowles Electronics Holdings, Inc., James F. Brace  and Key
         Acquisition, L.L.C. (incorporated by reference to Exhibit  10.10 to
         Registration Statement No. 333-40076)

10.11 -  Executive Stock Purchase Agreement, dated as of June 30, 1999,  by
         and among Knowles Electronics Holdings, Inc., Stephen D.  Peterson
         and Key Acquisition, L.L.C. (incorporated by reference to  Exhibit
         10.11 to Registration Statement No. 333-40076)

10.12 -  Special Severance Commitment, dated as of September 9, 1998,  between
         Knowles Electronics Holdings, Inc. and Bernard J. Smith
         (incorporated by reference to Exhibit 10.12 to Registration Statement
         No. 333-40076)

10.13 -  Change-in-Control Severance Pay Plan, dated as of September 21,
         1998, established by Knowles Electronics Holdings, Inc. (incorporated
         by reference to Exhibit 10.13 to Registration Statement No.
         333-40076)

10.14 -  Management Incentive Plan of Knowles Electronics Holdings, Inc.  for
         Calendar Year 1999 (incorporated by reference to Exhibit 10.14 to
         Registration Statement No. 333-40076)

10.15 -  Long Term Incentive Plan of Knowles Electronics Holdings, Inc.
         (incorporated by reference to Exhibit 10.15 to Registration Statement
         No. 333-40076)

10.16 -  Service Agreement, dated June 28, 1999, between Doughty Hanson &  Co.
         Managers Limited and Knowles Electronics Holdings, Inc.
         (incorporated by reference to Exhibit 10.16 to Registration Statement
         No. 333-40076)

10.17 -  Commission Agreement, dated June 28, 1999, between Doughty  Hanson &
         Co. Managers Limited and Knowles Electronics Holdings,  Inc.
         (incorporated by reference to Exhibit 10.17 to Registration Statement
         No. 333-40076)

10.18 -  Stockholders Agreement dated as of June 30, 1999, among Knowles
         Electronics Holdings, Inc., Key Acquisition, L.L.C., Management,  the
         Vendor Group, Morgan Stanley Senior Funding, Inc., Chase  Securities,
         Inc. and The Chase Manhattan Bank (incorporated by  reference to
         Exhibit 10.18 to Registration Statement No. 333-40076)

10.19 -  Registration Rights Agreement, dated as of June 20, 1999, among
         Knowles Electronics Holdings, Inc., Key Acquisition, L.L.C.,
         Management, the Existing Holder Group, Morgan Stanley Senior  Funding
         Inc., Chase Securities Inc. and The Chase Manhattan Bank
         (incorporated by reference to Exhibit 10.19 to Registration Statement
         No. 333-40076)

10.20 -  Amendment No. 3 dated as of December 12, 2001 to the Credit Agreement,
         dated as of June 28, 1999, as amended and restated as of July 21, 1999,
         and further amended as of December 23, 1999 and April 10, 2000, among
         Knowles Electronics Holdings, Inc., The Chase Manhattan Bank, as
         Administrative Agent, Morgan Stanley Senior Funding, Inc., as
         Syndication Agent and Chase Securities Inc., as Lead Arranger and Book
         Manager.

10.21 -  Amendment No. 4 and Waiver dated as of May 10, 2002 to the Credit
         Agreement, dated as of June 28, 1999, as amended and restated as of
         July 21, 1999, and further amended as of December 23, 1000 April 10,
         2000 and December 12, 2001, among Knowles Electronics Holdings, Inc.,
         The Chase Manhattan Bank, as Administrative Agent, Morgan Stanley
         Senior Funding, Inc., as Syndication Agent and Chase Securities Inc.,
         as Lead Arranger and Book Manager.

10.22 -  Investor Funding Agreement dated as of May 10, 2002 among Key
         Acquisition, LLC, a Delaware limited liability company, Knowles
         Electronics Holdings, Inc., a Delaware limited liability company, and
         JP Morgan Chase Bank, in its capacity as Administrative Agent for the
         lenders under the Credit Agreement, dated as of June 28, 1999, as
         amended and restated as of July 21, 1999, among Knowles Electronics
         Holdings, Inc., The Chase Manhattan Bank, as Administrative Agent,
         Morgan Stanley Senior Funding, Inc., as Syndication Agent and Chase
         Securities Inc., as Lead Arranger and Book Manager.

12.1 -   Calculation of Ratio of Earnings to Fixed Charges

18.1 -   Letter regarding change in accounting principle.

21.1 -   List of Subsidiaries


                                      72