<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                                   FORM 10-K
(MARK ONE)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
      ACT OF 1934
      FOR THE FISCAL YEAR ENDED DECEMBER 29, 1995

                                       OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      FOR THE TRANSITION PERIOD FROM _______________  TO _______________
      COMMISSION FILE NUMBER 1-5601

                       AMERICAN PRECISION INDUSTRIES INC.
             (Exact name of registrant as specified in its charter)
<TABLE>
<S>                                                 <C>
             DELAWARE                                            16-1284388
     (State of incorporation)                       (I.R.S. Employer Identification No.)

2777 WALDEN AVENUE, BUFFALO, NEW YORK                                                14225
(Address of principal executive offices)                                         (Zip Code)
</TABLE>
                                (716)  684-9700
              (Registrant's telephone number, including area code)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE  ACT:
<TABLE>
<S>                                           <C>
COMMON STOCK, $.66-2/3 PAR VALUE                        NEW YORK STOCK EXCHANGE
    (Title of each class)                     (Name of each exchange on which registered)
</TABLE>

Securities Registered Pursuant to Section 12(g) of the Act:  NONE

      Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part  III of this Form 10-K or any
amendment to this Form 10-K.   [X]

      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 
                                                -----        ------
      The aggregate market value of the voting stock held by non-affiliates of
the Registrant, at March 22, 1996 was approximately $74,703,000.

      The number of shares of Registrant's Common Stock outstanding on March
22, 1996 was 7,154,051.

            Exhibit Index can be found on page 38 of this document.





<PAGE>   2

AMERICAN PRECISION INDUSTRIES INC.
FORM 10-K ANNUAL REPORT
For the year ended December 29, 1995

TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                                    
                                                                                                                    
<S>                                                                               <C>
PART I
------                                                                           PAGE 
      ITEM  1.       BUSINESS                                                    ---- 
                          Products and Marketing                                   3
                          Competition                                              6
                          Backlog                                                  6
                     Suppliers                                                     6
                          Patents and Licenses                                     7
                          Customers                                                7
                          Research and Development                                 7
                          Environmental Matters                                    7
                          Employees                                                8
                          Lines of Business and Industry Segment Information       8
                          Foreign Operations                                       8
      ITEM  2.       PROPERTIES                                                 9-10
      ITEM  3.       LEGAL PROCEEDINGS                                            10
      ITEM  4.       SUBMISSION OF MATTERS TO A VOTE OF
                          SECURITY HOLDERS                                        10

PART II
-------
      ITEM  5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND
                          RELATED SHAREHOLDER MATTERS                             11
      ITEM  6.       SELECTED FINANCIAL DATA                                      12
      ITEM  7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                          FINANCIAL CONDITION AND RESULTS OF OPERATIONS        13-15
      ITEM  8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
      ITEM  9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS                16
                          ON ACCOUNTING AND FINANCIAL DISCLOSURE                  36

PART III.
---------
      ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE                                                
                         REGISTRANT                                               37
      ITEM 11.       EXECUTIVE COMPENSATION                                       37
      ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                         OWNERS                                                   37
      ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS               37

PART IV.
--------
      ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
                          REPORTS ON FORM 8-K                                     38
SIGNATURES                                                                     41-42
</TABLE>





                                                                               2
<PAGE>   3
                                     PART I
                                     ------
ITEM 1.        BUSINESS
               --------

         a.    PRODUCTS AND MARKETING

               The registrant and its subsidiaries (the "Company" or "API")
               conduct operations in three major industrial classifications,
               namely, Heat Transfer, Motion Technologies, and Electronic
               Components.

               The Company continues to direct its efforts towards major sales
               drives for current products in its served markets and target
               markets.  In addition, the Company continues to aggressively
               seek  profitable growth by enhancing and complementing its
               existing technology base.

               HEAT TRANSFER
               -------------

               The Heat Transfer Group, comprised of the Basco and Air
               Technologies Divisions, designs, engineers, and manufactures a
               broad range of heat transfer products which are used in a
               variety of applications, including the cooling of oil, air, and
               other gases; steam condensing; vapor recovery; and many other
               processing requirements. The Group's products are sold for use
               on various types of industrial machinery and for use in power,
               chemical, petrochemical, and refining operations.

               The Basco Division manufacturers a full line of standard and
               custom shell and tube heat exchangers, plate fin intercoolers
               and aftercoolers, and Centraflow steam surface condensers.  The
               Air Technologies Division produces a full line of aluminum
               air-to-air and air-to-liquid heat exchangers for use on air
               compressors, construction equipment, and industrial machines.

               The Group generates its bookings and sales through a network of
               sales representatives whose territories are geographically
               defined.  The majority of sales are made to original equipment
               manufacturers, with the balance of sales made to end users,
               usually for use in a plant or processing application.

               During 1995, the Group upgraded its computer hardware and
               software systems to support the upcoming growth objectives. In
               addition to the capability to support additional sales volume,
               significant benefits are expected in inventory management,
               scheduling, and cost control.

               Throughout the year the Basco Division reorganized departmental
               responsibilities into a format that fits its  future business
               operating strategy and upgraded management positions in
               Engineering, Manufacturing, and Marketing. This action, combined
               with upgrades in machinery and equipment, has positioned this
               Division to become an even larger force in the heat exchanger
               industry.  In addition, Basco has secured overseas
               representation, and as a result obtained significant business in
               Germany.

               The Air Technologies Division experienced over 30% growth during
               1995, and this, combined with healthy projections for 1996, has
               created the need for a larger facility. We expect to complete a
               new 80,000 square foot manufacturing facility in 1996. This





                                                                               3
<PAGE>   4
               move will approximately double the floor space currently in use
               and will allow for both more efficient production of current
               backlog, as well as the required space for expected future
               growth. This new facility, coupled with planned heavy
               investments in capital equipment  will enable this Division to
               pursue a leadership role in its industry. High quality,
               flexibility, and strength of design, along with serviceability
               to our customers at a competitive price, continues to drive the
               Air Technologies Division to new heights.

               The Group will continue to pursue new products and new markets
               and strive for further productivity gains and processing
               improvement to enhance value to its customers.

               MOTION TECHNOLOGIES
               -------------------

               The Motion Technologies Group is comprised of the Controls,
               Deltran, Harowe, and Rapidsyn  Divisions.  In addition, on
               January 1, 1995, the Group assumed the management of the
               day-to-day operations of Gettys Corporation, a manufacturer of
               precision industrial motors located in Racine, Wisconsin.

               During 1995, the number of facilities occupied by the Group was
               reduced from six to four. The Rapidsyn Division was relocated
               from Oceanside, California and merged into the Gettys facilities
               in Wisconsin. The Controls and Deltran facilities were also
               relocated into one larger, state-of-the-art facility in Amherst,
               New York.

               CONTROLS The Controls Division offers a complete line of drives,
               controls, power-supplies, and applications support for motion
               control systems, including factory automation, semi-conductor
               equipment, printing, packaging, and winding equipment,
               positioning tables, fluid metering, and electronics assembly
               applications. During 1995, the Division continued to focus its
               efforts on developing the Intelligent Drive family of products.
               This product line provides the user with an integrated microstep
               controller and drive unit with built-in network communications.
               In 1996, plans are to continue development of the Intelligent
               Drive family, including a new brushless servo unit that will be
               directed to specific market opportunities in semi-conductor and
               medical applications.

               DELTRAN  The Deltran Division manufactures high quality
               electro-magnetic clutches and brakes used in sophisticated
               rotary control applications. During 1995, the Division developed
               a new line of spring-set brakes for servo motors. This highly
               tooled product line will allow Deltran to become a leader within
               this market, just as they are today in the office copier market.
               The Division recently formed an alliance with Xerox Corporation,
               being only the second company in the United States to do so,
               which assures Deltran a long-term, profitable relationship as
               the major supplier of clutches to Xerox world-wide. Significant
               cost reductions are planned for 1996, such as the start-up of a
               new manufacturing plant in St. Kitts, West Indies, and further
               off-shore sourcing of key components. These efforts will
               further enhance the Division's position within the highly
               competitive markets in which it focuses.

               HAROWE SERVO CONTROLS, INC. Harowe produces precision motors and
               feedback devices for medical, factory automation, and aerospace
               markets. The motors are fractional horsepower AC, DC brushless,
               and stepper types. The feedback devices





                                                                               4
<PAGE>   5
               consist of tachometers, synchros, and resolvers which provide
               velocity or position feedback. Harowe plans to  develop and
               introduce new feedback components in 1996. These will include
               resolver-to-digital electronic packages and optical encoders.
               Harowe will continue implementing cellular manufacturing that
               was initiated in 1995. These efforts have already resulted in
               shorter lead time and improved quality, productivity, and
               on-time delivery.

               RAPIDSYN  The Rapidsyn Division offers a full line of step
               motors, ranging from 2.3 inches to 4.2 inches in diameter. The
               Division also manufactures AC synchronous motors, linear
               actuators, and high performance brushless DC motors.

               The Division also began an aggressive new product development
               program that has resulted in a new high performance line of
               hybrid step motors that meet or exceed the microstepping
               accuracy and torque output of any products currently on the
               market. Patents for the new motors have been applied for.

               ELECTRONIC COMPONENTS
               ---------------------

               The Electronic Components Group is comprised of the Delevan and
               Surface Mounted Devices Divisions. These divisions design,
               manufacture, and market an extensive line of quality inductors,
               chokes, and coils to satisfy various electrical and electronic
               filtering requirements. The Group concentrates on producing high
               performance inductive devices to meet stringent government and
               customer specifications relating to high product quality,
               reliability, and dependability. The Delevan and SMD Divisions
               are world-class suppliers to the telecommunication, aerospace,
               avionics, lighting, computer, medical, and military markets.

               Global competitive forces continue to push the market towards
               improved product quality and lower product costs. This
               competition from off-shore manufacturing is being neutralized
               through major improvements in our manufacturing capabilities.
               Productivity continues to increase due to the success of our
               ISO-9001 certification, Total Quality Management practices,
               recently introduced Statistical Process Control, and High
               Performance teams. Aggressive automation and process
               streamlining contributes to reducing our overall costs and cycle
               time and to providing improved customer service.

               The Group continues an assault on winning new markets and new
               customers. The Group introduced both new product series and
               expanded existing series to enhance our presence in the high
               frequency and power markets. Two additional series are in the
               final stages of development that will allow us to further
               penetrate these growing markets. Custom designed products to
               meet specific and unique customer requirements is an additional
               area that the Group continues to grow. The net effort of our new
               and custom products in 1995 resulted in increasing our business
               base by 10% and is giving us the opportunity to service over 50
               new customers.

               One of the key initiatives identified in our Five Year Strategic
               Business Plan was strengthening our customer base at both
               Divisions. Today, our customer base is diverse, including
               customers from the lighting, automotive, medical, and industrial
               segments along with our traditional markets. This diversity has
               both strengthened our backlog and reduced sales fluctuations
               that commonly occur with a narrow customer





                                                                               5
<PAGE>   6
               base. To properly support this larger customer base, the Group
               has developed a complete presence on the World Wide Web where
               customers around the world can view our product offerings,
               contact our field sales forces and distributors, request
               additional information, and generally learn about our Company.
               Likewise, each internal sales representative, has been
               "computerized" with the latest sales management software to
               quickly respond to customer needs.

               The outlook in the coming years looks promising and full of
               growth opportunities. Detailed plans, all focused on customer
               satisfaction, are being implemented to develop new products,
               enter new markets, and reduce our costs. Internal training, both
               formal and on the job, continues to strengthen the capabilities
               and skills of our workforce. This investment in training and our
               new EVA-based incentive system are key factors that will enable
               the Electronic Components Group to drive and accelerate our
               commitment to excellence in meeting both customer requirements
               and our strategic growth objectives.

               To learn more about the Group, throughout the year, please visit
               our homepage on the Internet...HTTP://WWW.DELEVAN.COM or E-mail
               us at APISALES@DELEVAN.COM or APIENG@DELEVAN.COM and communicate
               via the Internet directly with our sales or engineering team
               members.

         b.    COMPETITION
               -----------

               In each of its segments the Company faces substantial
               competition from a number of companies, some of which have
               off-shore manufacturing facilities, and many of which are larger
               and have greater resources.  In the electronic components
               market, several of our domestic competitors have become part of
               a single organization through a series of acquisitions. The
               inductor market continues to be faced with strong global
               competition and trends towards product miniaturization and lower
               costs.  The Company relies primarily on the quality of its
               products and service to meet competition.  Although the Company
               is not aware of definitive industry statistics by manufacturer
               for the products it makes, in the opinion of management, the
               Registrant is a significant competitive factor in the high
               quality micro-miniature electronic coil, electro-magnetic
               components, and compressor cooler markets.

         c.    BACKLOG
               -------

               The Company's backlog of unfilled orders believed to be firm at
               December 29, 1995 was approximately $30,441,000.  All backlog
               orders are expected to be completed in the current fiscal year.
               The following table shows the backlog of orders for products
               associated with the three business segments:

<TABLE>
<CAPTION>
                                       Heat                 Motion               Electronic
                                      Transfer            Technologies           Components               Total
                                     -----------          ------------           -----------            -----------
                <S>                  <C>                   <C>                    <C>                   <C>
                1995                 $13,778,000           $14,229,000            $2,434,000            $30,441,000

                1994                 $ 9,201,000           $10,833,000            $2,413,000            $22,447,000
</TABLE>





                                                                               6
<PAGE>   7
               Backlogs have increased for the Heat Transfer and Motion
               Technologies segments primarily due to a focused strategic
               account sales program and the general business climate. While
               the Electronic Components segment sales have increased, the
               backlog has remained steady and is the result of reduced lead
               times for delivery required by our customers.

         d.    SUPPLIERS
               ---------

               The Company is not dependent upon any single supplier for any of
               the raw materials used in manufacturing its products and has not
               encountered significant difficulties in purchasing sufficient
               quantities of raw materials on the open market.

         e.    PATENTS AND LICENSES
               --------------------

               The Company has patents covering the design and certain
               manufacturing processes for some of its surface mounted
               inductors which management believes may be material to the
               Electronic Components segment over the next several years.
               These patents have a remaining duration in excess of ten years.
               Otherwise, no single patent or group of patents is material to
               the operations of any industry segment or to the business as a
               whole.

         f.    CUSTOMERS
               ---------

               During 1995, no single customer accounted for more than 10% of
               consolidated sales.  

         g.    RESEARCH AND PRODUCT DEVELOPMENT
               --------------------------------

               The Company charges earnings directly for research and product
               development expenses.  Costs for Company-sponsored programs,
               excluding capital expenditures, were approximately $1,111,000,
               $888,000, and $602,000,  in 1995, 1994, and 1993,  respectively.

         h.    ENVIRONMENTAL MATTERS
               ---------------------

               In 1990, the U.S. Environmental Protection Agency (EPA) named
               the Company a potentially responsible party (PRP) with respect
               to hazardous substances disposed of at the Envirotek II Site
               (the Site) in Tonawanda, New York. The Company is a member of a
               steering committee which was formed to facilitate discussions
               with the EPA.  The Company was named a de minimis participant
               with respect to the first phase of the clean-up action and was
               relieved of any potential liability for the first phase clean-up
               with the payment of a minor fee.  The EPA has since advised the
               Company that its name had been removed from the PRP list. The
               State of New York has also indicated to the Envirotek II PRP
               Group its intention to pursue additional remedial measures at a
               site which surrounds the Site. It is not possible at this time
               to determine, whether and to what extent, the Company will incur
               additional liability as a result of any future government or
               private action.





                                                                               7
<PAGE>   8
         i.    EMPLOYEES
               ---------

               At December 29, 1995, 1,019 persons were employed by the Company.

         j.    LINES OF BUSINESS AND INDUSTRY SEGMENT INFORMATION
               --------------------------------------------------

               The Company's operations in 1995 were carried on through seven
               divisions and two subsidiaries.   Operations are classified into
               three industry segments based upon the characteristics of
               manufacturing processes and the nature of markets served.  The
               operating units which currently comprise the segments and their
               principal products are as follows:
<TABLE>
<CAPTION>
                                    Segment                                        Principal Products
                                    -------                                        ------------------
               <S>                                                  <C>
               Heat Transfer:
               ------------- 

               Air Technologies Division                            Air-to-air aluminum heat exchangers
               Basco Division                                       Shell and tube heat exchangers

               Motion Technologies:
               ------------------- 

               Controls Division                                    Drives, power supplies, and controllers  
               Deltran Division                                     Electro-magnetic clutches and brakes
               Harowe Servo Controls Inc.                           Resolvers and DC motors
               Harowe Servo Controls (St. Kitts) Ltd.               Resolvers and DC motors
               Rapidsyn Division                                    Step motors

               Electronic Components:
               --------------------- 

               Delevan Division                                     Axial-leaded inductors
               Surface Mounted Devices Division                     Surface mounted inductors
</TABLE>

               Amounts of revenue from sales to unaffiliated customers,
               operating profit or loss, and identifiable assets for the three
               years ended December 29, 1995, are included in Note M of the
               notes to consolidated financial statements on page(s) 34-35 of
               this document.

         k.    FOREIGN OPERATIONS
               ------------------

               Export sales, principally to Europe, Canada, and Asia, were
               approximately 14% of consolidated sales for 1995.  In 1994 and
               1993, export sales were 17% of consolidated sales and were
               principally to Europe and Canada.  The foreign sales are not
               believed to be subject to any risks other than those normally
               associated with the conduct of business in friendly nations
               having stable governments.





                                                                               8
<PAGE>   9
ITEM 2.  PROPERTIES
         ----------

        The location of the Company's facilities and their approximate
        size in terms of floor area are as follows:
<TABLE>
<CAPTION>
                                                                                Floor Area
                                        Location                                (Sq. Ft.)
                           ------------------------------------                 ----------
                           <S>                                                   <C>
                           HEAT TRANSFER

                           Buffalo                                               115,600
                           New York
                           (Walden Avenue)

                           Arcade                                                 37,500
                           New York
                           (Sandusky Road)

                           MOTION TECHNOLOGIES

                           West Chester                                           34,500
                           Pennsylvania
                           (Westtown Road)

                           Amherst                                                43,652
                           New York
                           (Hazelwood Drive)

                           Racine                                                  5,764
                           Wisconsin
                           (North Green Bay Road)

                           St. Kitts                                               6,500
                           West Indies
                           (Bourkes Road)

                           ELECTRONIC COMPONENTS

                           East Aurora                                            50,000
                           New York
                           (Quaker Road)

                           Arcade                                                 23,500
                           New York
                           (North Street)
</TABLE>





                                                                               9
<PAGE>   10
         The Walden Avenue, Quaker Road, and North Street facilities are
         owned by the Company.
         
         The facilities leased by the Company are as follows:
<TABLE>  
<CAPTION>
                                                  Approx.
         Facility Location                     Annual Rental              Leased Until
         -----------------                     -------------              ------------
         <S>                                     <C>                          <C>
         Bourkes Road                            $ 14,000                     2003
         Hazelwood Drive                         $115,000                     2002
         Westtown Road                           $152,000                     2001
         Sandusky Road                           $ 79,000                     1997
         North Green Bay Road                    $ 26,000                     1996
</TABLE>


         The Company believes all of its existing properties are well
         maintained, are suitable for the operation of its business, and
         are capable of handling production for the coming year.

ITEM 3.  LEGAL PROCEEDINGS
         -----------------

         See Item 1(h).


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

         There were no matters submitted to a vote of security holders
         during the fourth quarter of 1995.





                                                                              10
<PAGE>   11
                                    PART II
                                    -------

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

         COMMON STOCK PRICES
         
         American Precision Industries common stock is listed on the New
         York Stock Exchange and traded principally in that market.  The
         following table shows the Company's high and low prices on the
         New York Stock Exchange, as reported in the Wall Street Journal.

<TABLE>
<CAPTION>
                                                         Quarter
                                            1           2           3           4
                                          -----------------------------------------
         <S>         <C>                  <C>        <C>         <C>         <C>
         1995        High                 $9.63      $11.13      $14.75      $13.88
                     Low                  $7.63      $ 8.50      $10.13      $10.75
                                  
         1994        High                 $8.25      $ 7.63      $ 7.50      $ 8.00
                     Low                  $6.25      $ 6.88      $ 6.63      $ 7.00
</TABLE> 
         
         
         As of December 29, 1995, there were 1,076 shareholders of
         record.





                                                                              11
<PAGE>   12
ITEM 6.  SELECTED FINANCIAL DATA
         -----------------------

         FIVE YEAR SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
         OPERATIONS                  1995            1994            1993            1992            1991
         ----------------------------------------------------------------------------------------------------
         <S>                     <C>              <C>             <C>             <C>             <C>
         Revenues                $82,660,000      $65,265,000     $51,334,000     $51,295,000     $51,453,000
         
         Interest and debt
         expense                 $   238,000      $   220,000     $   244,000     $   293,000     $   399,000

         Depreciation and
         amortization            $ 2,594,000      $ 2,275,000     $ 1,712,000     $ 1,531,000     $ 1,382,000
         
         Net earnings            $ 4,731,000      $ 3,431,000     $ 2,050,000     $ 2,387,000     $ 3,635,000
         
         Net earnings per
         share                   $       .67       $      .49     $       .29     $       .34     $       .50
         
         Cash dividends
         declared per share      $     .2575       $    .2475     $      .235     $      .215     $      .195
         
         
         FINANCIAL
         CONDITION
         ----------------------------------------------------------------------------------------------------
         Current assets          $31,615,000      $25,113,000     $21,347,000     $20,447,000     $19,964,000
 
         Current liabilities     $13,152,000      $10,916,000     $ 5,362,000     $ 4,896,000     $ 4,017,000                    

         Working capital         $18,463,000      $14,197,000     $15,985,000     $15,551,000     $15,947,000
         
         Current ratio              2.4             2.3              4.0              4.2             5.0
         
         Property, plant
         and equipment, net      $12,269,000      $10,202,000     $ 8,353,000     $ 8,200,000     $ 7,989,000
                                                                                                             
         
         Total assets            $57,791,000      $45,344,000     $38,081,000     $37,369,000     $36,863,000
   
         Long-term
         liabilities             $10,292,000      $ 3,523,000     $ 3,507,000     $ 3,761,000     $ 4,778,000
         
         Shareholders'
         equity                  $34,347,000      $30,905,000     $29,212,000     $28,712,000     $28,068,000
         
         Shareholders'
         equity per share        $      4.82       $     4.38     $      4.14     $      4.07     $      3.94

         Number of shares
         outstanding at
         year-end                  7,128,000        7,064,000       7,058,000       7,055,000       7,117,000
</TABLE>





                                                                              12
<PAGE>   13
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         ---------------------------------------------------------------
         RESULTS OF OPERATIONS
         ---------------------
         FINANCIAL REVIEW - OPERATIONS
         
         REVENUES Consolidated revenues increased 26.7% as compared to
         the prior year.  Sales within the Heat Transfer segment
         increased 22.6% in 1995 and is attributable to increased sales
         of traditional water cooled heat exchangers to existing
         customers, as well as significant growth in the air cooled heat
         exchanger product line. The Electronic Components segment sales
         increased 8.7% due to a higher sales volume in a specific
         axial-leaded product, offset by the completion of a major sales
         order to one customer in 1994 which has not reoccurred in 1995.
         The increase of 45.4% in sales of the Motion Technologies
         segment is the result of the acquisition of Harowe Servo
         Controls Inc. ("Harowe") in June 1994, as well as a slightly
         higher sales volume of our previously existing motion control
         products.
         
         In 1994, consolidated revenues increased 27.1% as compared to
         1993. Sales within the Heat Transfer segment increased 22.7% in
         1994 reflecting continued demand for both air cooled and water
         cooled heat exchangers, as well as sales to new customers and
         new product offerings. Sales for the Electronic Components
         segment increased 18.8% in 1994 reflecting a broad-based
         increase in demand and a major order from one customer. The
         increased sales in the Motion Technologies segment of 43.7%
         reflect a strong market demand for motion control products. The
         1994 results of the Motion Technologies segment were also
         favorably impacted by sales of approximately $5.0 million from
         Harowe, which was acquired by the Company June 30, 1994.
         
         The Company's consolidated backlog of firm orders at December
         29, 1995 was $30,441,000, up 35.6% from the prior year. This
         reflects a 49.7% increase in the Heat Transfer segment, a minor
         increase in the Electronic Components segment, and a 31.3%
         increase in the Motion Technologies segment. A focused strategic
         account sales program and the general business climate have all
         contributed to these increases.
         
         Investment income declined $112,000, or 30.4% in 1995 as
         compared to 1994 and $107,000, or 22.5% in 1994 as compared to
         1993.  The decline for both periods reflects lower average
         investment asset balances resulting from the sale of various
         bonds to fund both current operations and the purchase of Harowe
         in June 1994 combined with lower average interest rates.





                                                                              13
<PAGE>   14
               SELLING AND ADMINISTRATIVE EXPENSES  Selling and administrative
               expenses increased  $3,219,000, or 20.7% in 1995 as compared to
               1994 and $2,646,000 or 20.5% in 1994 as compared to 1993. The
               majority of the increase in both periods  relates to: 1)
               increased commissions as a result of the increase in sales
               revenue; 2) the inclusion of Harowe's selling and administrative
               expenses for the six months in 1994 and for the full year in
               1995; and  3) the provision for bonuses under the Company's
               current incentive plans.  In spite of these increases, selling
               and administrative expenses continue to decline when expressed
               as a percent of net sales, and this is consistent with
               management's efforts to hold the growth of overhead costs below
               the growth in sales.

               RESEARCH AND PRODUCT DEVELOPMENT  Research and development
               expenses increased $223,000, or 25.1% in 1995 as compared to
               1994 and $286,000, or 47.5% in 1994 as compared to 1993. The
               increases for both periods reflects management's continued
               commitment to the design of new products and improvement of
               existing products.

               INTEREST AND DEBT EXPENSE  Interest and debt expense increased
               $18,000 or 8.2% in 1995 as compared to 1994. The increase is due
               to slightly higher interest rates offset by lower average
               principal balances in 1995. While total debt increased in 1995
               due to the industrial revenue bond financing of $6,660,000,
               there was only a minor impact on interest and debt expense since
               this financing was obtained on December 22, 1995. Another
               contributing factor is the increased activity in short-term
               borrowings in 1995 as compared to 1994.

               The decrease in interest and debt expense for 1994 as compared
               to 1993 is attributable to lower principal balances on the
               industrial revenue bonds. Offsetting the effect of the lower
               principal balances was a slight increase in interest rates from
               1993.

               INCOME TAXES Income taxes expressed as a percent of earnings
               before taxes were 34.5%, 35.3%, and 34.9%,  in 1995, 1994, and
               1993, respectively. The lower rate in 1995 can be attributed to
               the undistributed earnings of the Company's foreign subsidiary
               for which no federal tax has been provided since it is the
               intention of the Company to indefinitely reinvest those earnings
               back into the operations of that entity.

               The increased rate in 1994 is primarily the result of lower
               tax-exempt investment income as compared to 1993.

               NET EARNINGS  Net earnings increased 37.9% in 1995 as compared
               to 1994. This increase is primarily the result of the increased
               level of net sales combined with lower operating costs, when
               expressed as a percentage of revenues.

               Net earnings increased 67.4% in 1994 as compared to 1993.  A
               substantial part of this increase can be attributed to the
               increased net sales  discussed previously, offset by higher
               selling and administrative and research and product development
               costs.  The Company also recorded a fourth quarter charge of
               $217,000, after tax, to provide for the closing of the Rapidsyn
               Division plant in California and the movement of Rapidsyn's
               motor production to the Gettys Corporation facility in Racine,
               Wisconsin.





                                                                              14
<PAGE>   15
               Pursuant to a Management Contract, the Company assumed
               responsibility for the day-to-day management of Gettys as of
               January 1, 1995.

               FINANCIAL POSITION  The Company's liquidity is primarily
               generated from operations.  In addition, short-term lines of
               credit totaling $7,398,000 were available at December 29, 1995.
               Information on the Company's liquidity position for the past
               three years is as follows:

<TABLE>
<CAPTION>
                ------------------------------------------------------------------------------------------------------
                                                                  1995                1994                 1993
                ------------------------------------------------------------------------------------------------------
                <S>                                              <C>                  <C>                  <C>
                Net working capital                              $18,463,000          $14,197,000          $15,985,000

                Current ratio                                        2.4                   2.3                 4.0

                Cash flow from operations                        $ 3,786,000          $ 3,267,000          $ 3,935,000

                Cash, cash equivalents, and
                marketable securities                            $ 5,979,000          $ 3,841,000          $ 6,508,000

                Capital expenditures                             $ 4,585,000          $ 1,857,000          $ 1,814,000
</TABLE>

               The reduction in the current ratio for 1994 as compared to 1993
               can be attributed to the combination of the lower marketable
               securities balance in 1994 as a result of the purchase of
               Harowe, the inclusion of Harowe's net current assets in API's
               net working capital, and  the increase in short-term borrowings
               which were outstanding for only two business days.

               The increase in cash flow from operations in 1995 as compared to
               1994 is principally the result of increased sales and net
               income.

               The decline in cash flow from operations in 1994 as compared to
               1993 reflects increases in accounts receivable and inventories
               as a result of the increased sales and bookings in 1994.

               Cash, cash equivalents, and marketable securities for 1995
               includes $2,114,000 of restricted funds held in an escrow
               account as part of the Management Agreement between the Company
               and Gettys Corporation. These funds will be applied to the
               purchase price of the net assets of Gettys Corporation at the
               time the Company acquires those net assets pursuant to the
               exercise of the put or call option provisions of the Management
               Agreement.

               The increase in capital expenditures in 1995 as compared to 1994
               reflects the Company's investment in new machinery and equipment
               and computer systems at both the Heat Transfer and Motion
               Technologies Groups.





                                                                              15
<PAGE>   16
ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
               -------------------------------------------

               REPORT OF INDEPENDENT ACCOUNTANTS
               To the Board of Directors and Shareholders of
               American Precision Industries Inc.

               In our opinion, the accompanying consolidated balance sheet and
               the related consolidated statements of earnings and
               shareholders' equity and of cash flows present fairly, in all
               material respects, the financial position of American Precision
               Industries Inc. and its subsidiaries at December 29, 1995 and
               December 30, 1994, and the results of their operations and their
               cash flows for each of the three years in the period ended
               December 29, 1995, in conformity with generally accepted
               accounting principles.  These financial statements are the
               responsibility of the Company's management; our responsibility
               is to express an opinion on these financial statements based on
               our audits.  We conducted our audits of these statements in
               accordance with generally accepted auditing standards which
               require that we plan and perform the audit to obtain reasonable
               assurance about whether the financial statements are free of
               material misstatement.  An audit includes examining, on a test
               basis, evidence supporting the amounts and disclosures in the
               financial statements, assessing the accounting principles used
               and significant estimates made by management, and evaluating the
               overall financial statement presentation.  We believe that our
               audits provide a reasonable basis for the opinion expressed
               above.


               Buffalo, New York
               February 12, 1996





                                                                              16
<PAGE>   17
CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
ASSETS
--------------------------------------------------------------------------------------------------- 
                                                                     1995               1994
--------------------------------------------------------------------------------------------------- 
 <S>                                                                 <C>                <C>
 CURRENT ASSETS

 Cash and cash equivalents                                           $ 2,486,000        $ 2,135,000

 Accounts receivable less allowance for
    doubtful accounts of $264,000 and $373,000                        12,691,000         10,555,000

 Marketable securities                                                 3,493,000          1,706,000

 Inventories                                                          10,589,000          8,827,000

 Prepaid expenses                                                        967,000            862,000

 Deferred income tax benefit                                           1,389,000          1,028,000
--------------------------------------------------------------------------------------------------- 
 TOTAL CURRENT ASSETS                                                 31,615,000         25,113,000
--------------------------------------------------------------------------------------------------- 
 Investments                                                           6,277,000          3,562,000

 OTHER ASSETS

 Cost in excess of net assets acquired, net of
    accumulated amortization                                           2,153,000          2,245,000

 Prepaid pension costs                                                 2,140,000          2,005,000

 Net cash value of life insurance                                      2,222,000          1,651,000

 Other                                                                 1,115,000            566,000
--------------------------------------------------------------------------------------------------- 
 TOTAL OTHER ASSETS                                                    7,630,000          6,467,000
--------------------------------------------------------------------------------------------------- 
 PROPERTY, PLANT AND EQUIPMENT

 Land                                                                    211,000            211,000

 Buildings and improvements                                            6,183,000          5,305,000

 Machinery, equipment, and furniture                                  22,265,000         20,730,000

 Construction in process                                               1,450,000            410,000
--------------------------------------------------------------------------------------------------- 
                                                                      30,109,000         26,656,000
 Less accumulated depreciation                                        17,840,000         16,454,000
--------------------------------------------------------------------------------------------------- 
 NET PROPERTY, PLANT AND EQUIPMENT                                    12,269,000         10,202,000
--------------------------------------------------------------------------------------------------- 
                                                                     $57,791,000        $45,344,000
</TABLE>
See notes to consolidated financial statements





                                                                              17
<PAGE>   18



LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                                      1995               1994
-------------------------------------------------------------------------------------------------
 <S>                                                                <C>               <C>
 CURRENT LIABILITIES

 Short-term borrowings                                              $ 2,602,000       $ 2,000,000

 Accounts payable                                                     5,136,000         4,609,000

 Accrued compensation and payroll taxes                               3,566,000         2,523,000

 Other accrued expenses                                                 757,000           898,000

 Dividends payable                                                      463,000           441,000

 Current portion of long-term obligations                               628,000           366,000

 Federal and state income taxes                                              -             79,000

-------------------------------------------------------------------------------------------------
 TOTAL CURRENT LIABILITIES                                           13,152,000        10,916,000
-------------------------------------------------------------------------------------------------
 DEFERRED INCOME TAXES                                                1,251,000           875,000

 OTHER NONCURRENT LIABILITIES                                           413,000           176,000

 LONG-TERM OBLIGATIONS,
    less current portion                                              8,628,000         2,472,000

 SHAREHOLDERS' EQUITY

 Common stock, par value
    $.66 2/3 per share:
    Authorized - 10,000,000 shares
    Issued - 7,502,000  and
    7,442,048 shares                                                  5,001,000         4,961,000

 Additional paid-in capital                                           9,532,000         9,098,000

 Retained earnings                                                   22,629,000        19,726,000

 Net unrealized gain (loss) on
    marketable securities                                                23,000           (18,000)
-------------------------------------------------------------------------------------------------
                                                                     37,185,000        33,767,000

 Less cost of 374,262 and 378,262
    treasury shares                                                   2,838,000         2,862,000
-------------------------------------------------------------------------------------------------
 TOTAL SHAREHOLDERS' EQUITY                                          34,347,000        30,905,000
-------------------------------------------------------------------------------------------------
                                                                    $57,791,000       $45,344,000
</TABLE>
See notes to consolidated financial statements





                                                                              18
<PAGE>   19
CONSOLIDATED STATEMENT OF EARNINGS


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                                              1995              1994               1993
-------------------------------------------------------------------------------------------------------------
 <S>                                                         <C>               <C>                <C>
 NET SALES                                                   $82,403,000       $64,896,000        $50,858,000

 INVESTMENT INCOME                                               257,000           369,000            476,000
-------------------------------------------------------------------------------------------------------------
 REVENUES                                                     82,660,000        65,265,000         51,334,000

 COSTS AND EXPENSES

    Cost of products sold                                     55,289,000        43,270,000         34,404,000

    Selling and administrative                                18,801,000        15,582,000         12,936,000

    Research and product development                           1,111,000           888,000            602,000

    Interest and debt expense                                    238,000           220,000            244,000
-------------------------------------------------------------------------------------------------------------
                                                              75,439,000        59,960,000         48,186,000
-------------------------------------------------------------------------------------------------------------
 EARNINGS BEFORE INCOME TAXES                                  7,221,000         5,305,000          3,148,000

 FEDERAL AND STATE INCOME TAXES                                2,490,000         1,874,000          1,098,000
-------------------------------------------------------------------------------------------------------------
 NET EARNINGS                                               $  4,731,000       $ 3,431,000        $ 2,050,000
-------------------------------------------------------------------------------------------------------------
 NET EARNINGS PER SHARE                                     $        .67       $       .49        $       .29
-------------------------------------------------------------------------------------------------------------
 AVERAGE SHARES OUTSTANDING                                    7,090,000         7,062,000          7,057,000
</TABLE>


See notes to consolidated financial statements





                                                                              19
<PAGE>   20
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                          Net
                                                                                      Unrealized
                                                                                         Gain
                                      Common Stock         Additional                 (Loss) on         Treasury Stock
                                 -----------------------    Paid-in      Retained     Marketable     ----------------------
                                  Shares        Amount      Capital      Earnings     Securities       Shares      Amount
---------------------------------------------------------------------------------------------------------------------------
 <S>                             <C>          <C>          <C>          <C>            <C>            <C>        <C>
 BALANCE AT
 JANUARY 1, 1993                  7,433,211    $4,955,000   $9,065,000   $17,651,000    $(97,000)      378,262   $2,862,000

   Net  earnings - 1993                   -             -            -     2,050,000           -             -            -

   Stock options                                                 
   exercised, net                     2,892         3,000        8,000            -            -             -            -

   Cash dividends
   declared,
   $.235 per share                        -             -           -    (1,658,000)           -            -             -

   Net unrealized gain on
   marketable equity
   securities                             -             -           -              -      97,000             -            -
---------------------------------------------------------------------------------------------------------------------------
 BALANCE AT
 DECEMBER 31, 1993                7,436,103     4,958,000   9,073,000     18,043,000           -      378,262     2,862,000

   Net earnings - 1994                    -             -           -      3,431,000           -            -             -

   Stock options
   exercised, net                     5,945         3,000      25,000             -            -            -             -

   Cash dividends
   declared,
   $.2475 per share                       -             -           -    (1,748,000)           -            -             -

   Net unrealized (loss) 
   on marketable    
   securities                             -             -           -             -      (18,000)           -            -
---------------------------------------------------------------------------------------------------------------------------
 BALANCE AT
 DECEMBER 30, 1994                7,442,048     4,961,000   9,098,000    19,726,000      (18,000)     378,262     2,862,000

   Net  earnings - 1995                   -             -           -     4,731,000            -            -             -

   Stock options        
   exercised, net                    59,952        40,000     422,000            -             -            -             -

   Treasury shares issued  
   as bonus                               -             -      12,000            -             -       (4,000)      (24,000)

   Cash dividends            
   declared,                  
   $.2575 per  share                      -             -           -   (1,828,000)            -             -             -

   Net unrealized gain          
   on marketable equity                    
   securities                            -              -           -            -        41,000            -             -
---------------------------------------------------------------------------------------------------------------------------
 BALANCE AT
 DECEMBER 29, 1995                7,502,000    $5,001,000  $9,532,000    $22,629,000    $ 23,000      374,262    $2,838,000
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

See notes to consolidated financial statements




                                      20
     
<PAGE>   21
CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                             1995           1994           1993
------------------------------------------------------------------------------------------------------------------------------------
 <S>                                                                      <C>            <C>             <C>
 CASH FLOWS FROM OPERATING ACTIVITIES

    Net income                                                            $4,731,000     $3,431,000      $2,050,000
    Adjustments to reconcile net income to
    cash and cash equivalents provided by
    operating activities:
     Depreciation and amortization                                         2,594,000      2,275,000       1,712,000
     Gain (Loss) on sale of investments/fixed assets                          42,000              -         (37,000)
     Increase in supplemental benefit program                                125,000        176,000         148,000
     Recognition of pension income under SFAS 87                            (136,000)      (260,000)       (181,000)
     Stock compensation program                                              202,000              -               -
     Change in various allowance accounts                                    (95,000)        91,000         107,000
     Treasury stock issued as bonus                                           36,000              -               -
    (Increase) Decrease In:
     Accounts receivable                                                  (2,028,000)    (2,168,000)        738,000
     Inventories                                                          (1,785,000)    (1,267,000)       (679,000)
     Prepaid expenses                                                        (75,000)      (199,000)       (103,000)
     Prepaid federal and state income taxes                                        -         68,000         188,000
     Deferred income taxes                                                  (386,000)      (267,000)       (105,000)
     Prepaid pension cost                                                          -        (24,000)              -
     Net cash value of life insurance                                       (571,000)      (548,000)       (434,000)
     Other assets, net                                                      (475,000)      (140,000)       (105,000)
   Increase (Decrease) in:
     Accounts payable                                                        373,000        953,000         462,000
     Accrued expenses                                                        902,000      1,062,000          52,000
     Federal and state Income taxes                                          (79,000)       (93,000)              -
     Deferred Income taxes                                                   376,000         31,000         122,000 
     Other noncurrent liabilities                                             35,000        176,000               -
------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                  3,786,000      3,287,000       3,936,000
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities 
     Purchases of investments and marketable securities                   (6,233,000)    (2,546,000)     (5,850,000)
     Additions to property, plant and equipment                           (4,585,000)    (1,857,000)     (1,814,000)                
     Proceeds from investments and markable securities                     1,797,000      7,225,000       4,900,000
     Investments in Harowe Servo Controls, Inc.                                    -     (5,195,000)              -
     Proceeds from sale of fixed assets                                       36,000          7,000           1,000
------------------------------------------------------------------------------------------------------------------------------------
 NET CASH USED BY INVESTING ACTIVITIES                                    (8,985,000)    (2,366,000)     (2,763,000)
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
     Exercise of stock options                                               462,000         28,000          11,000
     Payment of long-term obligations, including current maturities         (366,000)      (519,000)       (606,000)
     Dividends paid                                                       (1,806,000)    (1,730,000)     (1,624,000)   
     Increase in long-term debt                                            6,660,000              -               -
     Increase in short-term borrowings                                       602,000      2,000,000               -
-----------------------------------------------------------------------------------------------------------------------------------
 NET CASH PROVIDED (USED)  BY FINANCING ACTIVITIES                         5,550,000       (221,000)     (2,219,000)
------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         351,000        680,000      (1,624,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                             2,135,000      1,456,000       2,502,000
------------------------------------------------------------------------------------------------------------------------------------
 CASH AND CASH EQUIVALENTS AT END OF YEAR                                 $2,486,000     $2,136,000      $1,455,000
</TABLE>
See notes to consolidated financial statements





                                                                              21
<PAGE>   22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 29, 1995, December 30, 1994, and December 31,
1993.

A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    (1)     NATURE OF OPERATIONS American Precision Industries Inc. (the
            "Company") is a diversified manufacturing company whose principal
            lines of business include the production and sale of heat transfer
            products, motion control devices, and electronic components.  Sales
            of these products are primarily to customers in industrialized
            nations both domestic and foreign.

    (2)     CONSOLIDATION  The accounts of all subsidiaries are included in the
            consolidated financial statements.  The fiscal years consisted of
            52 weeks.  The Consolidated Balance Sheet, Statement of Earnings,
            and Statement of Cash Flows include the results of Harowe Servo
            Controls, Inc. since June 30, 1994, the date of acquisition.

    (3)     INVENTORIES  Inventories are valued at the lower of cost or market,
            net of progress payments.  At December 29, 1995 and December 30,
            1994  inventories comprising approximately 50% and 52%,
            respectively, of total inventories were valued using the last-in,
            first-out (LIFO) method.  Other inventories are priced using the
            first-in, first-out (FIFO) method.

    (4)     PROPERTY, PLANT AND EQUIPMENT  These assets are stated at cost and
            are depreciated over their estimated useful lives; building and
            improvements - 10 to 45 years; machinery, equipment, and furniture
            - 2 to 15 years.

            Expenditures for maintenance and repairs are charged to expense;
            renewals and betterments are capitalized and depreciated.
            Properties are removed from the accounts when they are disposed of,
            and the related cost and accumulated depreciation are eliminated
            from the accounts.  Associated gains and losses, if any, are
            included in consolidated net earnings.

    (5)     GOODWILL  The excess of the purchase cost over the fair value of
            net assets acquired in an acquisition (goodwill) is separately
            disclosed, net of accumulated amortization, and is being amortized
            over 25 years on a straight-line basis.  Amortization expense
            amounted to $102,000 in 1995 and $44,000 in 1994. Accumulated
            amortization of goodwill at December 29, 1995 was $146,000.

    (6)     INCOME TAXES  The Company provides for deferred income taxes under
            the asset and liability approach. This method requires the
            recognition of deferred tax liabilities and assets for the expected
            future tax consequences of temporary differences between the
            carrying amounts and tax basis of assets and liabilities. No
            provision has been made for United States income taxes applicable
            to undistributed earnings of a foreign subsidiary as it is the
            intention of the Company to indefinitely reinvest those earnings in
            the operations of that entity.





                                                                              22
<PAGE>   23
    (7)     EMPLOYEE BENEFIT PLANS  Benefits under the Company's salaried
            defined benefit and supplemental benefit plans are based upon years
            of service and average compensation during an individual's last
            years of employment for the defined benefit plan and final pay for
            the supplemental benefit plan.

            Benefits under the salaried defined benefit plan are funded
            annually based upon the maximum contribution deductible for federal
            income tax purposes.  The supplemental benefit program is funded
            through company-owned life insurance contracts on the lives of the
            participants, but the benefit obligation to certain participants
            will be offset by the participant's interest in a split-dollar
            insurance contract.

            Benefits under the hourly defined benefit plan of Harowe are based
            upon years of service, not to exceed 35, times a fixed rate
            specified in the union contract.  Benefits under this plan are
            funded annually based upon funding recommendations of the plan
            actuaries.

            All union employees are covered under defined contribution plans.
            The Company's contribution to these plans are set forth under the
            provisions of the specific union contracts.

    (8)     STOCK OPTIONS  Proceeds from the sale of common stock issued under
            employee stock option plans are credited to capital accounts.
            There are no charges to income with respect to the plans; however,
            compensation expense is recorded with respect to the increase in
            value of stock appreciation rights.

    (9)     EARNINGS PER SHARE  Earnings per share are based on the weighted
            average number of shares outstanding during each year.

    (10)    ADVERTISING  The Company expenses the production costs of
            advertising in the year in which the advertising takes place. Total
            advertising expense in 1995, 1994, and 1993 was $873,000, $664,000,
            and $514,000, respectively.

    (11)    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 and disclosure of contingent 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 these estimates.
        




                                                                              23
<PAGE>   24
B.  BUSINESS ACQUISITION AND STRATEGIC ALLIANCE

    (1)   BUSINESS ACQUISITION On June 30, 1994, the Company acquired 100% of
          the stock of Harowe Servo Controls, Inc. ("HSC"), a Delaware
          corporation and Harowe Servo Controls (St. Kitts) Limited ("HSC
          Limited"), a corporation organized under the laws of the Island of
          St.  Christopher and Nevis, from Hawker Siddeley Holdings Inc., a
          Delaware corporation, at a cost of approximately $5,200,000.  HSC and
          HSC Limited are engaged in the business of designing, manufacturing,
          and marketing precision motors, feedback devices, and related
          products for motion control applications.

          The acquisition has been accounted for by the purchase method of
          accounting, and accordingly, the purchase price has been allocated to
          the assets acquired and the liabilities assumed based on the
          estimated fair  values at the date of acquisition.  The resulting
          goodwill is being amortized on a straight-line basis over 25 years.

          The following table presents unaudited pro forma results of
          operations as if the acquisition had occurred on January 1, 1994 and
          1993, respectively, after giving effect to certain adjustments,
          including amortization of goodwill, loss of interest income on
          tax-exempt municipal bonds sold to fund the purchase cost, adjusted
          depreciation on fair value of assets acquired, and the related income
          tax effects.  The pro forma results have been prepared for
          comparative purposes only and do not purport to be indicative of what
          would have occurred had the acquisition been made at the beginning of
          1993 or of results which may occur in the future.  Furthermore, no
          effect has been given in the pro forma information for operating and
          synergistic benefits that are expected to be realized through the
          combination of the entities because precise estimates of such
          benefits cannot be quantified.

<TABLE>
<CAPTION>
                  Thousands of Dollars, Except
                   per Share Data (unaudited)                    1994                    1993
            -------------------------------------             ---------               ---------
            <S>                                                  <C>                    <C>
            Revenues                                           $ 69,631                $ 61,195

            Earnings Before Income Taxes                       $  5,641                $  3,681

            Net Earnings                                       $  3,517                $  2,335

            Net Earnings Per Share                             $   0.50                $    .33
</TABLE>

    (2)   STRATEGIC ALLIANCE On December 23, 1994, the Company entered into a
          strategic alliance with AEG Daimler-Benz Industrie of Frankfurt,
          Germany, which provided that on January 1, 1995, the Company would
          assume responsibility for the day-to-day management of Gettys
          Corporation, a manufacturer of high performance servo-motors and
          controls in Racine, Wisconsin. As part of the Management Agreement
          between the Company and Gettys Corporation, cash in the amount of
          $333,000 and marketable





                                                                              24
<PAGE>   25
          securities in the amount of $1,781,000  are held in an escrow account
          to be applied to the purchase price of the net assets of Gettys
          Corporation at the time the Company  acquires those net assets
          pursuant to the exercise of the put or call option provisions of the
          Management Agreement. In conjunction with this strategic alliance,
          the Company  moved the production of the industrial stepper motor
          line of the Rapidsyn Division into the Gettys facility during the
          first half of 1995.  In anticipation of this move,  the Company
          recorded a fourth quarter reserve in 1994 of  $350,000 ($217,000 net
          of tax) relating to the estimated cost of the relocation of the
          production facility.  This reserve consisted primarily of nonemployee
          related costs. Final relocation costs incurred in 1995 approximated
          $350,000.

C.  CASH EQUIVALENTS, MARKETABLE SECURITIES, AND INVESTMENTS

    (1)   Cash equivalents consist of money market funds, commercial paper, and
          certificates of deposit with original maturities of three months or
          less.  Marketable securities, consisting of municipal securities, are
          carried at market.  Included in marketable securities is $1,781,000
          of municipal bonds which is restricted as to use under the provisions
          of the Gettys Management Agreement. Investments primarily consist of
          marketable municipal bonds, which are carried at market. Included in
          Investments is $6,233,000 of funds obtained under industrial revenue
          bond financing. Use of these funds is restricted and can only be
          applied to the purchase of capital assets for the related expansion
          program.

          For the purpose of determining gross realized gains and losses, the
          cost of securities sold is based upon specific identification.

          During 1994, the Company adopted Statement of Financial Accounting
          Standards No. 115, Accounting for Certain Investments in Debt and
          Equity Securities.  This Statement requires that debt and equity
          securities not classified as either held-to-maturity or trading be
          classified as "available for sale" and reported at market value, with
          unrealized gains and losses reported as a separate component of
          shareholders' equity.

    (2)   Additional information pertaining to the Consolidated Statement of
          Cash Flows is as follows:

<TABLE>
<CAPTION>
            -------------------------------------------------------------------------------------------                            
                                                           1995             1994                1993                               
            -------------------------------------------------------------------------------------------                            
            <S>                                        <C>              <C>              <C>
            Cash paid during the year for:

            Interest                                      $  225,000        $  184,000         $182,000
            Income taxes net of tax refunds               $2,513,000        $2,145,000         $890,000
</TABLE>





                                                                              25
<PAGE>   26

D.  INVENTORIES

    The major classes of inventories are as follows:

<TABLE>
<CAPTION>                    
      ---------------------------------------------------------------------                             
                                                   1995             1994                                
      ---------------------------------------------------------------------                             
       <S>                                     <C>               <C>                                  
       Finished goods                          $   995,000       $  802,000                             
                                                                                                        
       Work in process                           2,538,000        3,319,000                             
                             
       Raw materials                             7,056,000        4,706,000                             
      ---------------------------------------------------------------------            
                                               $10,589,000       $8,827,000                             
</TABLE>

    Had the cost of all inventories at December 29, 1995 and December 30, 1994
    been determined by the FIFO method, the amounts thereof would have been
    greater by $1,187,000 and $1,043,000, respectively.

E.  OTHER NONCURRENT LIABILITIES

    In 1995, other noncurrent liabilities consist of the noncurrent portion of
    bonus obligations under the Company's incentive plans, deferred
    compensation associated with the stock appreciation rights granted to the
    Chief Executive Officer on June 16, 1992, and options granted to certain
    members of the Board of Directors of the Company in lieu of certain
    directors' fees.

    In 1994, other noncurrent liabilities consisted of the noncurrent portion
    of bonuses under the Company's incentive plans.

F.  SHORT AND LONG-TERM OBLIGATIONS

    (1)   SHORT-TERM OBLIGATIONS  As of December 29, 1995 and December 30,
          1994, the Company had $2,602,000 and $2,000,000, respectively
          outstanding on its line of credit. These amounts were outstanding for
          four and two business days, respectively. The Company had available
          unsecured, short-term lines of credit totalling $7,398,000 and
          $8,000,000 at the prime rate on December 29, 1995 and December 30,
          1994, respectively. During 1994, the Company borrowed $4,000,000 on
          its unsecured short-term line of  credit to fund  the purchase of
          Harowe Servo Controls, Inc. which was acquired on June 30, 1994. This
          borrowing was repaid within six business days after the closing
          through the sale of certain municipal bonds.





                                                                              26
<PAGE>   27
    (2)   LONG-TERM OBLIGATIONS CONSIST OF THE FOLLOWING:

<TABLE>
<CAPTION>                            
------------------------------------------------------------------------------                                 
                                                    1995              1994                                       
------------------------------------------------------------------------------                                 
 <S>                                            <C>               <C>                                       
 Industrial revenue bonds                         $8,112,000        $1,649,000                                 
 Supplemental benefit program                      1,144,000         1,189,000                                 
------------------------------------------------------------------------------                                 
                                                   9,256,000         2,838,000                                 
                                                                                                               
 Less current obligations                            628,000           366,000                                 
------------------------------------------------------------------------------                                 
 Long-term obligations                            $8,628,000        $2,472,000                                 
</TABLE>

    During the fourth quarter of 1995, the Company obtained adjustable rate
    industrial revenue bond ("IRB") capital lease financing of $6,660,000 for
    asset purchases associated with its Air Technologies expansion program. The
    interest rate on these bonds, which approximates 60% of the prime rate, is
    adjustable every seven days in order for the Remarketing Agent to sell the
    bonds at par value. The bonds are subject to a mandatory sinking fund
    repayment schedule through 2015. Unexpended revenue bond proceeds of
    $6,233,000 were invested and held by a trustee at the end of 1995 and are
    included in Investments in the accompanying consolidated balance sheet.
    Such amount is restricted and can only be applied to the purchase of
    capital assets for the related expansion program, and such assets will be
    pledged as collateral for the bonds.

    Previously obtained adjustable rate IRB capital lease financing is
    collateralized by assets with a depreciated value of $1,501,000 at December
    29, 1995. The bonds are subject to a mandatory sinking fund repayment
    schedule through 2008 and had an average interest rate of 4.1% in 1995.
    During 1994, the Company also repaid other IRB financing obtained in prior
    years.

    All of the IRB's are subject to various restrictive covenants, with respect
    to which the Company is in compliance.

    Under the supplemental benefit program, the Company provides retirement or
    death benefits to directors and certain officers meeting specified service
    requirements.  Directors are entitled to an annual benefit of $10,000 per
    year for ten years.  Generally, participating officers are provided an
    annual benefit equal to 20% of  their current salary payable over fifteen
    years.  In the case of several executives, these benefits will be partially
    or totally funded through split-dollar life insurance contracts.  The
    estimated future benefits to be paid directly by the Company under  this
    program are accrued over the participants' service lives by estimating the
    present value of such future benefits assuming a 9% rate of interest.  The
    Company has also invested in company-owned life insurance contracts on the
    lives of the participants, the cash surrender values of which are recorded
    in Other Assets.  It is actuarially assumed that over the term of this
    program all costs will be offset by benefits provided from the underlying
    contracts.

    Over the next five years, the Company will make long-term obligation
    payments of approximately $628,000 in 1996, $724,000 in 1997, $742,000 in
    1998,





                                                                              27
<PAGE>   28
    $768,000 in 1999, and $778,000 in 2000.

G.  OPERATING LEASES

    The Company leases certain office and manufacturing facilities and
    automotive and other equipment through operating leases.  Certain of these
    provide for the payment of taxes, insurance and maintenance costs  and most
    contain renewal options.  Net future minimum lease commitments do not have
    a material impact on the consolidated financial statements.  Total rental
    expense for 1995, 1994, and 1993,  was $587,000, $568,000,  and $436,000,
    respectively.

H.  EMPLOYEE BENEFITS

    Retirement Plans - In addition to the aforementioned supplemental benefit
    program, the Company has a defined benefit retirement plan covering all
    nonunion employees ("Salaried Plan")  and makes contributions to
    union-sponsored plans.  Harowe has a defined benefit retirement plan
    covering all hourly employees in its West Chester, Pennsylvania location
    ("HSC Hourly Plan").  The total expense for such plans, net of the
    recognition of net periodic pension income was $227,000, $44,000, and
    $230,000, in 1995, 1994, and 1993, respectively.





                                                                              28
<PAGE>   29
    The following summarizes the funded status of the Company's  and Harowe's
    defined benefit retirement plans:

<TABLE>
<CAPTION>
   -----------------------------------------------------------------------------------------------------                       
                                                        1995                           1994                                    
   -----------------------------------------------------------------------------------------------------                       
                                                 HSC                           HSC                                             
                                                HOURLY       SALARIED         HOURLY          SALARIED                         
                                                 PLAN          PLAN            PLAN             PLAN                           
   -----------------------------------------------------------------------------------------------------                       
      <S>                                        <C>            <C>             <C>              <C>                           
      Actuarial present value of benefit                                                                                       
        obligations                                                                                                            
                                                                                                                               
           Vested Benefits                    $  712,000     $4,649,000      $  614,000       $4,182,000                       
                                                                                                                               
           Nonvested benefits                     17,000         74,000          20,000           49,000                       
   -----------------------------------------------------------------------------------------------------                       
      Accumulated benefit obligations            729,000      4,723,000         634,000        4,231,000                       
   -----------------------------------------------------------------------------------------------------                       
      Projected benefit obligations              729,000      5,646,000         634,000        5,048,000                       
                                                                                                                               
      Plan assets at fair value                  393,000      9,336,000         303,000        8,452,000                       
   -----------------------------------------------------------------------------------------------------                       
      Assets in excess of (less than)                                                                                          
         projected benefit obligation          (336,000)      3,690,000       (331,000)        3,404,000                       
                                                                                                                               
      Unrecognized prior service cost               -            13,000            -              51,000                       
                                                                                                                               
      Less:                                                                                                                    
                                                                                                                               
           Accumulated unrecognized net           20,000           -               -                -                          
            loss                                                                                                               
                                                                                                                               
           Unrecognized net gain at                                                                                            
             transition being recognized                                                                                       
             over 15 years                             -        614,000           -              737,000                       
                                                                                                                               
           Unrecognized net gain arising                                                                                       
             since transition                          -        973,000           -              737,000                       
   -----------------------------------------------------------------------------------------------------                       
      (Accrued) prepaid pension cost          $(316,000)     $2,116,000      $(331,000)       $1,981,000                           
</TABLE>

    Net periodic pension income (cost) associated with the salaried plan and
    the HSC Hourly Plan for 1995 and 1994 included the following components:


<TABLE>
<CAPTION>
    -------------------------------------------------------------------------------------------------                              
                                                         1995                        1994                                          
    -------------------------------------------------------------------------------------------------                              
                                                   HSC                         HSC                                                 
                                                 HOURLY       SALARIED       HOURLY        SALARIED                                
                                                  PLAN          PLAN          PLAN           PLAN                                  
    -------------------------------------------------------------------------------------------------                              
     <S>                                     <C>          <C>             <C>           <C>                                     
     Service costs - benefits earned                                                                                               
        during the period                       $(19,000)    $(347,000)      $(10,000)     $(274,000)                              
                                                                                                                                   
     Interest on projected benefit                                                                                                 
        obligations                              (51,000)     (392,000)       (23,000)      (352,000)                              
     Actual return on assets                      24,000       754,000         11,000        246,000                              
                                                                                                                                   
     Amortization of transition                                                                                                    
        assets and deferrals                          -        121,000                       660,000                              
    -------------------------------------------------------------------------------------------------                              
     Net periodic pension income (cost)         $(46,000)     $136,000       $(22,000)     $ 280,000                              
</TABLE>





                                                                              29
<PAGE>   30
    An assumed discount rate of 7.75%, a rate increase in future compensation
    of 4.0%, and an expected long-term rate of return of 9.0% have been used in
    determining the actuarial present value of projected benefit obligations of
    the Salaried Plan for 1995 and 1994. The HSC Hourly Plan includes an
    assumed discount rate and expected long-term rate of return of 7.5% for
    1995 and 1994.

I.  SHAREHOLDERS' EQUITY

    (1)  PREFERRED STOCK - None of the Company's authorized 20,000 shares of
    preferred stock (par value $50 a share) have been issued.

    (2)  STOCK OPTIONS - The Company has granted options to employees under
    four employee stock option plans and pursuant to the 1992 employment of the
    Company's Chief Executive Officer. Changes in outstanding options are as
    follows:

<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------------------------                                 
                                                                  Granted and       Option Price                                  
                                                                  Outstanding      Per Share ($)                                 
     ---------------------------------------------------------------------------------------------                                 
      <S>                                                        <C>               <C>                                             
      December 31, 1993 Balance                                    774,014          5.11 - 10.90                                  
                                                                                                                                   
      1994                                                                                                                         
           Granted                                                 157,500         6.875  - 7.75                                  
                                                                                                                                   
           Exercised                                                (7,059)              5.11                                      
                                                                                                                                   
           Expired or Cancelled                                    (41,277)        6.625 - 10.90                                   
     ---------------------------------------------------------------------------------------------                                 
                                                                                                                                   
      December 30, 1994 Balance                                    883,178         6.625 - 10.90                                   

      1995                                                                                                                         
                                                                                                                                   
           Granted                                                 214,350          7.75 - 13.00                                  
                                                                                                                                   
           Exercised                                               (79,430)        6.625 - 10.90                                   
                                                                                                                                   
           Expired or Cancelled                                    (14,085)         6.75 -  9.00                                 
     ---------------------------------------------------------------------------------------------                                 
      December 29, 1995 Balance                                  1,004,013         6.625 - 13.00                                   
</TABLE>


    Options outstanding at December 29, 1995 were granted at the fair market
    value on the date of grant and expire at various dates from April, 1996 to
    December, 2005.  In 1995, 125,920 options became exercisable, and, in 1994,
    109,255 options became exercisable. At  December 29, 1995,  470,970 of  the
    outstanding options were exercisable and 519,150 shares of common stock
    were available for future grants under the 1993 and 1995 stock option
    plans. All options become exercisable over a five year period at the rate
    of 20% each year.





                                                                              30
<PAGE>   31
    On June 16, 1992, the Company's new Chief Executive Officer was granted
    options to acquire 200,000 shares of the Company's common stock, along with
    50,000 stock appreciation rights ("SARs") which must be exercised in tandem
    with the exercise of the options at the rate of one SAR for each four stock
    options exercised.  The options and SARs have a term of ten years, are
    exercisable at $7.75 per share or right, the fair market value at date of
    grant, and become exercisable over a five year period at the rate of 20%
    per year.  Data relating to the CEO options are included in the table
    above. In 1995, the Company recorded compensation expenses in the amount of
    $148,000 in connection with the increase in value of these stock
    appreciation rights.

    Beginning on July 1,1995, the Company has granted stock options to each of
    five directors of the Company on the first day of each calendar quarter
    under the 1995 Directors Stock Option Plan. Under this plan, a director may
    elect to receive options in lieu of his cash annual retainer and meeting
    fees. The option exercise price is 30% of the fair market value of a share
    on the date of grant, and the cash fees foregone by the director are
    equivalent to 70% of the fair market value. Options become exercisable six
    months after date of grant and expire ten years from date of grant. Options
    outstanding on December 29, 1995 totaled 4,989 shares. None of the options
    were exercisable on that date and 45,011 shares were available for future
    grants of options under the plan.

J.  INVESTMENT INCOME

    Investment income consists of the following:

<TABLE>
<CAPTION>
    -------------------------------------------------------------------------------------------------------
                                                             1995               1994              1993     
    -------------------------------------------------------------------------------------------------------
     <S>                                               <C>                 <C>              <C>            
     Gain on sale of investments                             $      -          $  2,000           $ 79,000 
                                                                                                           
     Interest and dividend income                             257,000           367,000            397,000 
    -------------------------------------------------------------------------------------------------------
                                                             $257,000          $369,000           $476,000
</TABLE>





                                                                              31
<PAGE>   32
K.  INCOME TAXES

    The provision for income taxes includes the following:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                                                      1995              1994               1993
-----------------------------------------------------------------------------------------------------
     <S>                                              <C>               <C>                <C>
     Federal:

          Current                                     $2,114,000        $1,830,000           $936,000
          Deferred                                         4,000         (187,000)             14,000

     State:

          Current                                        368,000           280,000            145,000

          Deferred                                         4,000          (49,000)              3,000
-----------------------------------------------------------------------------------------------------
                                                      $2,490,000        $1,874,000         $1,098,000
</TABLE>


Deferred tax liabilities (assets) at December 29, 1995 and December 30, 1994 are
comprised of the following:


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                                         1995                  1994
-------------------------------------------------------------------------------------------------------
   <S>                                                               <C>                   <C>
   Accelerated depreciation                                          $    662,000           $   619,000

   Pension                                                                844,000               792,000

   Other                                                                  311,000                25,000
-------------------------------------------------------------------------------------------------------
   Gross deferred tax liabilities                                       1,817,000             1,436,000
-------------------------------------------------------------------------------------------------------
   Deferred compensation                                                 (623,000)             (577,000)

   Various reserves                                                      (634,000)             (501,000)

   Other                                                                 (698,000)             (511,000)
-------------------------------------------------------------------------------------------------------
   Gross deferred tax assets                                           (1,955,000)           (1,589,000)
-------------------------------------------------------------------------------------------------------
   Deferred tax assets valuation allowance                                   -                     -
-------------------------------------------------------------------------------------------------------
                                                                     $   (138,000)          $  (153,000)
</TABLE>





                                      32
<PAGE>   33
The provision for income tax differs  from the federal statutory rate of
34% due to the following:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                             1995          1994          1993
----------------------------------------------------------------------------------------------
<S>                                                       <C>           <C>           <C>
Statutory rate                                              34.0%         34.0%         34.0%

State income taxes, less federal effect                      3.3           2.9           2.9

Nontaxable investment income                                (0.9)         (1.7)         (3.6)

Effect of undistributed earnings
   of foreign subsidiary                                    (2.2)            -             -

Other                                                        0.3           0.1           1.6
----------------------------------------------------------------------------------------------
Effective tax rate                                          34.5%         35.3%         34.9%
</TABLE>

    The Company has not recorded deferred income taxes applicable to
    undistributed earnings of a foreign subsidiary that are indefinitely
    reinvested in foreign operations. Undistributed earnings amounted to
    approximately $525,000 at December 29, 1995. If the earnings of such
    foreign subsidiary were not reinvested, a deferred tax liability of
    approximately $217,000 would have been required.

L.  LITIGATION

    In 1990, the U.S. Environmental Protection Agency (EPA) named the Company a
    potentially responsible party (PRP) with respect to hazardous substances
    disposed of at the Envirotek II Site (the Site) in Tonawanda, New York. The
    Company is a member of a steering committee which was formed to facilitate
    discussions with the EPA. The Company was named a de minimis participant
    with respect to the first phase of the clean-up action and was relieved of
    any potential liability for the first phase clean-up with the payment of a
    minor fee. The EPA has since advised the Company that its name had been
    removed from the PRP list. The State of New York has also indicated to the
    Envirotek II PRP Group its intention to pursue additional remedial measures
    at a site which surrounds the  Site. It is not possible at this time to
    determine whether, and to what extent, the Company will incur additional
    liability as a result of any future government or private action.





                                                                              33
<PAGE>   34
M.  BUSINESS SEGMENT DATA

    The Company conducts operations in three major industrial classifications:
    Heat Transfer, Motion Technologies, and Electronic Components.  The
    operations of the Heat Transfer segment include the production and sale of
    water and air-cooled heat transfer equipment to industrial customers.
    Operations of the Motion Technologies segment comprises production and sale
    of  electro-magnetic clutches and brakes, high performance motors, step
    motors, controllers, and resolvers.  Operations of the Electronic
    Components segment involve production and sale of inductors and coils.

    Total revenues by segment consist entirely of sales to unaffiliated
    customers.  Operating profit is total revenue less operating expenses.
    Operating profit does not include the following items:  general corporate
    income and expense, investment income, interest expense, other income and
    expense, or income taxes.  Identifiable assets by segment consist of those
    assets that are, or will be, used in the segmental operations.  Corporate
    assets are principally cash, cash equivalents, marketable securities,
    investments, and other assets.

    Export sales, principally to Europe, Canada, and Asia, were approximately
    14% of consolidated sales for 1995.  In 1994 and 1993, export sales were
    17% of consolidated sales and were principally to Europe and Canada.





                                                                              34
<PAGE>   35
Information about  the Company's operations in different industries, stated in
thousands of dollars, are as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
                                                        1995             1994             1993
------------------------------------------------------------------------------------------------
<S>                                                    <C>              <C>             <C>
REVENUES

     Heat Transfer                                     $40,819          $33,276          $27,119

     Motion Technologies                                28,599           19,674           13,687

     Electronic Components                              12,985           11,946           10,052

     General Corporate                                     257              369              476
------------------------------------------------------------------------------------------------
 Consolidated                                          $82,660          $65,265          $51,334
------------------------------------------------------------------------------------------------
OPERATING PROFIT

     Heat Transfer                                     $ 5,542          $ 5,331          $ 4,182

     Motion Technologies                                 2,466              614              246

     Electronic Components                               2,058            1,790              863
------------------------------------------------------------------------------------------------
          Combined                                      10,066            7,735            5,291

     General Corporate expense, net                     (2,845)          (2,430)          (2,143)
------------------------------------------------------------------------------------------------
Earnings before income taxes                           $ 7,221          $ 5,305          $ 3,148
------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
     Heat Transfer                                     $23,673          $14,607          $11,342

     Motion Technologies                                15,179           12,370            5,489

     Electronic Components                               6,821            6,071            5,881

     General Corporate                                  12,118           12,296           15,369
------------------------------------------------------------------------------------------------
Total assets                                           $57,791          $45,344          $38,081
------------------------------------------------------------------------------------------------

DEPRECIATION
     Heat Transfer                                     $   877          $   735          $   616

     Motion Technologies                                   964              637              376

     Electronic Components                                 558              598              515

     General Corporate                                      61               62              133
------------------------------------------------------------------------------------------------
Total Depreciation                                     $ 2,460          $ 2,032          $ 1,640
------------------------------------------------------------------------------------------------

NET CAPITAL EXPENDITURES
     Heat Transfer                                     $ 1,789          $ 1,358          $   907

     Motion Technologies                                 2,218              188              491

     Electronic Components                                 449              259              107

     General Corporate                                      33               10              126
------------------------------------------------------------------------------------------------
Total net capital expenditures                         $ 4,489          $ 1,815          $ 1,631
------------------------------------------------------------------------------------------------
</TABLE>





                                      35
<PAGE>   36
N.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                                                                                            Fiscal
                                    First         Second        Third         Fourth         Year
-----------------------------------------------------------------------------------------------------
                                               (Thousands except per share information)
-----------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>            <C>           <C>           <C>
1995

Revenues                             $19,289       $20,360        $20,850       $22,161       $82,660

Gross profit                           6,254         6,410          7,264         7,186        27,114

Net earnings                           1,042         1,122          1,200         1,367         4,731

Net earnings per share                  0.15          0.16           0.17          0.19          0.67

Cash dividends             
declared per share                    0.0625        0.0650         0.0650        0.0650        0.2575

-----------------------------------------------------------------------------------------------------
1994

Revenues                             $14,294       $15,438        $18,145       $17,388       $65,265

Gross profit                           4,751         5,150          6,029         5,696        21,626

Net earnings                             680           841            934           976         3,431

Net earnings per share                  0.10          0.12           0.13          0.14          0.49

Cash dividends              
declared per share                    0.0600        0.0625         0.0625        0.0625        0.2475
</TABLE>




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

          There were no changes in accountants or disagreements with Price
          Waterhouse on accounting or financial disclosure.





                                                                              36
<PAGE>   37
                                    PART III
                                    --------


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
          --------------------------------------------------

          The information required by this item concerning the directors
          and executive officers of the Company, appearing on pages 2
          through 7 and page 11 of  the Company's definitive Proxy
          Statement, which has been filed with the Commission pursuant to
          Regulation 14A, is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION
          ----------------------

          The information required by this item concerning executive
          compensation appearing on pages 12 through 17 of the company's
          definitive Proxy Statement, which has been filed with the
          Commission pursuant to Regulation 14A, is incorporated herein by
          reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          --------------------------------------------------------------

 a) & b)  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          --------------------------------------------------------------

          The information required by this item, appearing on pages 8 and
          9 of the Company's definitive Proxy Statement which has been
          filed with the Commission pursuant to Regulation 14A, is
          incorporated herein by reference.

      c)  CHANGES IN CONTROL
          ------------------

          The Company knows of no contractual arrangements which may, at a
          subsequent date, result in a change in control of the Company.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

      a)  TRANSACTIONS WITH MANAGEMENT AND OTHERS
          ---------------------------------------

          None.
          
      b)  BUSINESS RELATIONSHIPS
          ----------------------

          None.
          
      c)  INDEBTEDNESS OF MANAGEMENT
          --------------------------

          None.
          
      d)  TRANSACTIONS WITH PROMOTERS
          ---------------------------

          None.





                                                                              37
<PAGE>   38
                                    PART IV
                                    -------

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

<TABLE>
<CAPTION>

                                                                       PAGE IN
         a)    1.  FINANCIAL STATEMENTS                               FORM 10-K
                   --------------------                               ---------
                   <S>                                                  <C>   
                   Report of Independent Accountants                       16
                   Consolidated Balance Sheet                           17-18
                   Consolidated Statement of Earnings                      19
                   Consolidated Statement of Shareholders' Equity          20
                   Consolidated Statement of Cash Flows                    21
                   Notes to Consolidated Financial Statements           22-36
</TABLE>

               2.  FINANCIAL STATEMENT SCHEDULES
                   -----------------------------

                   All schedules are omitted because they are inapplicable,
                   immaterial, or not required under the instructions, or the
                   information is included in the financial statements or notes
                   thereto.

         b)    REPORTS ON FORM 8-K
               -------------------

               There were no reports on Form 8-K for the three months ended
               December 29, 1995.

         c)    EXHIBITS
               --------

<TABLE>
<CAPTION>
                   Exhibit No.
                   -----------
                     <S>  <C>                                              <C>
                     2-A  Management Agreement dated December
                            23, 1994 among American Precision
                            Industries Inc., Gettys Corporation,
                            and Gettys Property Corporation,
                            including List of Exhibits, List of
                            Schedules, and Exhibit D - Asset
                            Purchase Agreement

                     3-A  Restated Certificate of Incorporation,
                            as amended on April 26, 1991                   e.

                     3-B  Restated By-Laws, as amended on
                            June 16, 1992                                  g.
</TABLE>





                                                                              38
<PAGE>   39

<TABLE>
<CAPTION>
c.    Exhibits (continued)
      Exhibit No.
      -----------
          <S>    <C>                                                        <C>      <C>     <C>
          10-A   Form of Agreement relating to the
                    Directors Supplemental Death Benefit
                    and Fee Continuation Plan, as amended
                    March 11, 1991                                 b.

          10-B   Form of Agreement relating to the
                    Executive Supplemental Death Benefit
                    and Retirement Plan, as amended on
                    March 11, 1991                                 b.

          10-C   Form of Indemnification Agreement with
                    directors dated February 25, 1991              c.

          10-D   Form of Indemnification Agreement with
                    officers dated February 25, 1991               b.

          10-E   Long-Term Incentive Stock Option Plan             c.

          10-F   1989 Stock Option Plan                            d.

          10-G   Amendment to the American Precision
                    Industries Inc. 1989 Stock Option Plan         j.

          10-H   Executive Employment Agreement dated
                    April 14, 1992 between Kurt Wiedenhaupt
                    and American Precision Industries Inc.         f.

          10-I   Stock Option and Tandem Stock Appreciation
                     Rights Agreement dated June 16, 1992
                     between Kurt Wiedenhaupt and American
                     Precision Industries Inc.                     f.

          10-J   Agreement dated April 24, 1992 between
                     Robert J. Fierle and American Precision
                     Industries Inc.                               f.

          10-K   Life Insurance Split-Dollar Agreement
                     dated August 26, 1992 between Kurt
                     Wiedenhaupt and American Precision
                     Industries Inc.                               h.

          10-L   Executive Supplemental Retirement Plan
                     dated July 1, 1992 between Kurt
                     Wiedenhaupt and American Precision
                     Industries Inc.                               h.
</TABLE>





                                                                              39
<PAGE>   40
<TABLE>
<CAPTION>
c.    Exhibits (continued)
      Exhibit No.
      -----------
          <S>    <C>                                                <C>   
          10-M   1993 Employees Stock Option Plan                   i.

          10-N   Amendment to the American Precision Industries
                   Inc. 1993 Employees Stock Option Plan            J.

          10-O   1995 Directors Stock Option Plan                   J.

          10-P   1995 Employees Stock Option Plan                   J.

          21     List of Subsidiaries                               *

          23     Consent of independent                         Page 43 of
                   accountants                                  Form 10-K

          27     Financial Data Schedule                            *
<FN>

*    Documents filed herewith.

</TABLE>
<TABLE>
         <S>    <C>
          a.     Incorporated by reference to Exhibits A and B in the definitive Proxy Statement dated March 22, 1991.

          b.     Incorporated by reference to Exhibits 10A-D in the Annual Report on Form 10-K for the fiscal year ended 
                 December 28, 1990

          c.     Incorporated by reference to Exhibit 4.4 in the Registration Statement on Form S-8 (#2-85320), filed 
                 July 22, 1983.

          d.     Incorporated by reference to Exhibit 4(a) in the Registration       Statement on Form S-8 (#33-31315) 
                 filed September 28, 1989.

          e.     Incorporated by reference to Exhibits 3-B and 3-D in the Annual Report on Form 10-K for the fiscal year 
                 ended January 3, 1992.

          f.     Incorporated by reference to Exhibits 10(i) - (iii) in the Quarterly Report on Form 10-Q for the fiscal 
                 quarter ended July 3, 1992.

          g.     Incorporated by reference to Exhibits B(i) - (ii) in the Quarterly Report on Form 10-Q for the fiscal 
                 quarter ended October 1, 1993.

          h.     Incorporated by reference to Exhibits 10(i) - (ii) in the Quarterly Report on Form 10-Q for the fiscal 
                 quarter ended April 2, 1993.

          i.     Incorporated by reference to Exhibit A in the definitive Proxy Statement dated March 22, 1993.
          j.     Incorporated by reference to Exhibits A-C in the definitive Proxy Statement dated March 24, 1995.
</TABLE>





                                                                              40
<PAGE>   41


                                   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.



                           AMERICAN PRECISION INDUSTRIES INC.




March 27, 1996                By:  /s/ Kurt Wiedenhaupt                      
                                   -------------------------------------------
                                   Kurt Wiedenhaupt                           
                                                       President and Director 
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
March 27, 1996                By:  /s/ John M. Murray                           
                                   -------------------------------------------
                                   John M. Murray                             
                                                       Vice President-Finance 
                                                       and Treasurer          
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
March 27, 1996                By:  /s/ Thomas M. Huebsch                      
                                   -------------------------------------------
                                   Thomas M. Huebsch
                                                       Corporate Controller





                                                                              41
<PAGE>   42
                                   SIGNATURES
                                   ----------


Pursuant to the requirement 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>
<S>                                                                  <C>                 
/s/ Robert J. Fierle                                                 February 27, 1996 
------------------------------------------                           ------------------
Robert J. Fierle     Chairman of the Board                                    Date
                                                                     
                                                                     
/s/ John M. Albertine                                                February 27, 1996
------------------------------------------                           -----------------
John M. Albertine                 Director                                    Date
                                                                     
                                                                     
                                                                     
/s/ Bernard J. Kennedy                                               February 27, 1996
------------------------------------------                           -----------------
Bernard J. Kennedy                Director                                    Date
                                                                     
                                                                     
                                                                     
/s/ Douglas J. MacMaster                                             February 27, 1996
------------------------------------------                           -----------------
Douglas J. MacMaster              Director                                    Date
                                          
                                          
/s/ Klaus K. Oertel                                                  February 27, 1996
-------------------------------------------                          -----------------
Klaus K. Oertel                   Director                                    Date
                                          
                                          
/s/ William P. Panny                                                 February 27, 1996
------------------------------------------                           -----------------
William P. Panny                  Director                                    Date
                                          
                                          
/s/ Victor Rice                                                      February 27, 1996
------------------------------------------                           -----------------
Victor Rice                       Director                                    Date
                                          
                                          
/s/ Jerre L. Stead                                                   February 27, 1996
------------------------------------------                           -----------------
Jerre L. Stead                    Director                                    Date
                                          
                                          
/s/ Kurt Wiedenhaupt                                                 February 27, 1996
------------------------------------------                           -----------------
Kurt Wiedenhaupt                  Director                                    Date
</TABLE>





                                                                              42
<PAGE>   43
                                        


                       CONSENT OF INDEPENDENT ACCOUNTANTS
                       ----------------------------------


We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-85320, 33-31315, 33-61734, and 33-71839) of
American Precision Industries Inc. of our report dated February 12, 1996
appearing on page 16 of this Form 10-K.




PRICE WATERHOUSE LLP


Buffalo, New York
March 27, 1996





                                                                              43
<PAGE>   44
                                 EXHIBIT INDEX
                                 -------------

               21         List of Subsidiaries

               23         Page 43 of              
                          Form 10-K               

               27         FDS