SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

(X)    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
       ACT OF 1934 (NO FEE REQUIRED)

                     For the Fiscal Year ended June 27, 1998
                                       OR

(  )   TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES 
       EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
          For the transition period from _____________ to _____________

                         Commission File Number: 1-9716

                              DONNELLY CORPORATION
             (Exact name of registrant as specified in its charter)

         Michigan                                        38-0493110
(State of other jurisdiction 
of incorporation or  organization)             (IRS Employer Identification No.)

               49 West Third Street, Holland, Michigan 49423-2813
               (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:           (616) 786-7000

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

Title of each class                    Name of each exchange on which registered
Class A Common Stock                            New York Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act:  None

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K 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 the Form 10-K or any amendment to this
Form 10-K. _X_

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant was $115,184,916 as of August 31, 1998.

Number of  shares  outstanding  of each of the  registrant's  classes  of common
stock, as of August 31, 1998.

         5,788,343  shares  of Class A Common  Stock par  value,  $.10 per share
         4,292,657 shares of Class B Common Stock par value, $.10 per share
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                                                                              2

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  registrant's  Annual Report to Shareholders for the fiscal year
ended June 27, 1998, are  incorporated by reference into Part II of this report.
Portions  of  the  registrant's  proxy  statement  for  its  annual  meeting  of
shareholders  to be held October 16, 1998,  are  incorporated  by reference into
Part III of this report.

                                     PART I.

ITEM 1.           BUSINESS

FORWARD LOOKING STATEMENTS

This  report  contains  forward-looking  statements  within  the  meaning of the
Private  Securities   Litigation  Reform  Act  of  1995.  The  terms  "believe,"
"anticipate,"  "intend," "goal," "expect," and similar  expressions may identify
forward-looking  statements.  Investors are cautioned  that any  forward-looking
statements,  including  statements  regarding  the  intent,  belief  or  current
expectations  of the Company or its  management,  are not  guarantees  of future
performance  and involve risks and  uncertainties,  and that actual  results may
differ  materially  form  those in  forward-looking  statements  as a result  of
various factors including, but not limited to (i) general economic conditions in
the markets in which the Company  operates,  (ii)  fluctuation  in  worldwide or
regional  automobile  and light truck  production,  (iii)  changes in  practices
and/or policies of the Company's significant customers,  (iv) market development
of specific products of the Company, including digital optics and electrochromic
mirrors,   (v)  whether  the  Company   successfully   implements  the  European
restructuring  and (vi) other  risks and  uncertainties.  The  Company  does not
intend to update these forward-looking statements.

ITEM 1 (a)        GENERAL DEVELOPMENT OF BUSINESS

The Company's  fiscal year ends on the Saturday  nearest June 30, and its fiscal
quarters end on the Saturdays  nearest  September 30,  December 31, March 31 and
June 30. All year and quarter  references  are relating to the Company's  fiscal
years and quarters, unless otherwise noted.

The  Company  is  primarily  engaged,  either  solely or through  several  joint
ventures,  in the design,  manufacture,  marketing  and sale of products for the
automotive industry including one or more of the following  technologies;  glass
products, prisms, plastic molding, electronics,  electrochromic products, optics
and  metal  diecasting.  The  Company  also  supplies  glass  coatings  for  the
transportation, electronics and computer industries.

The  Company  is  committed  to  improving  shareholder  value  through  focused
development  of core  automotive  businesses,  primarily  by  increasing  dollar
content per vehicle through introduction of new technologies,  increasing volume
through  penetration  into new and emerging markets and improving the efficiency
of operations.  Consistent with its strategy, in 1998, the Company has continued
to build  volume  growth for its existing  products,  introduced  new  products,
expanded its equipment and facilities and has implemented several joint ventures
to enhance global market penetration.

On November 3, 1997,  the Company  formed Lear Donnelly  Overhead  Systems,  LLC
("Lear  Donnelly"),  a 50% owned joint venture with Lear  Corporation  ("Lear").
Lear Donnelly is engaged in the design,  development  and production of overhead
systems  for the  global  automotive  market.  Prior to the joint  venture,  the
Company  manufactured and sold components of overhead interior  automotive trim.
The Company believes that this joint venture enhances the Company's  competitive
market position in the global market by creating a broader market for components
and being able to offer complete interior automotive overhead systems.

As part of the  Company's  strategy,  in  1998,  the  Company  entered  into two
additional joint ventures in emerging  automotive  markets. In 1998, the Company
formed   a  joint   venture   in  Sao   Paulo,   Brazil,   Donnelly/Arteb   LTDA
("Donnelly/Arteb"), to manufacture interior and exterior automotive mirrors. The
Company also formed
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                                                                               3

Varitronix  EC  (Malaysia)   Sdn.  Bhd.   ("Varitronix   EC"),   which  produces
electrochromic ("EC") mirror cells in the city of Penang,  Malaysia.  See Item 1
(c)  "Narrative   Description  of   Business--Joint   Ventures"  for  additional
information concerning these joint ventures.

In October  1997,  the Company  signed a joint  venture  agreement to form a new
company,  Donnex,  which will be a 50/50 joint  venture  between the Company and
Essex  specialty  Products,  Inc.,  the world's  leading  produced of automotive
adhesives  and  sealants.  Donnex  intends  to  produce  and  deliver  complete,
ready-to-install  windows  and  window  systems  to  automotive  customers  on a
just-in-time  basis and in  sequence.  It is expected  that Donnex will base its
initial operations in the Detroit, Michigan metropolitan area.

The Company is committed to its core  automotive  businesses and during the last
half of  1997,  the  Company  structured  its  non-automotive  businesses  to be
operated  independently.  In the third  quarter  of 1997,  the  Company  created
Donnelly Optics Corporation  ("DOC"), a subsidiary based in Tucson,  Arizona, to
sell and  manufacture  high-quality,  injection  molded,  diffractive and hybrid
optical lenses and systems. DOC has been incurring significant operation losses.
In addition, in the fourth quarter of 1998, DOC recognized a $3.5 million charge
against operating income,  $0.23 per share after tax, due to the cancellation of
orders for  injection-molded  lenses.  The customer orders were cancelled due to
changing market dynamics in the digital imaging sector of the computer industry.
The  Company is  exploring  alternatives  to protect its  investment  in DOC and
remain positioned for the expected growth in the digital imaging markets.

Also, effective June 29, 1997, the Company created Information  Products,  Inc.,
which the Company  believes is the world's largest  producer of specialty coated
and shaped glass for the computer touch screen industry.  Information  Products,
Inc. is a subsidiary based in Holland,  Michigan that had previously operated as
the  Company's  Information  Products  Division.   See  Item  1  (c)  "Narrative
Description  of   Business--Non-Automotive   Businesses"  for  a  more  detailed
discussion of these non-automotive businesses.

During the past three years, the Company has significantly expanded its presence
in Europe  primarily  through  the  acquisition  of a  controlling  interest  in
Donnelly Hohe GmbH & Co. KG  ("Donnelly  Hohe").  The Company  believes that the
expansion of its European  operations will play an important role in maintaining
the Company's position as a global leader in the market for automotive  rearview
mirrors and will also offer significant  opportunities for the Company to market
its modular windows,  interior  lighting,  trim components and other products in
Europe and elsewhere.  In the fourth  quarter of 1997,  the Company  announced a
restructuring  plan in Europe to realign  its  manufacturing  capacity,  improve
operating  efficiencies  and to reduce  future  operating  costs,  primarily  by
reducing the number of nonproduction  employees. Due to changes in management at
the Company's European operations,  implementation of the restructuring plan was
delayed until the fourth quarter of 1998. In addition,  late in the fiscal year,
Donnelly's  Senior  Management  Team made the commitment to dedicate  additional
management resources from North America to assist in the European restructuring.
Early in fiscal 1999, the Company assigned four Senior North American executives
to long-term assignments in Europe and removed the European COO, Hans Huber, who
has left the Company.

The  Company was  incorporated  in Michigan  in 1936.  The  Company's  corporate
offices are located at 49 West Third Street, Holland, Michigan,  49423-2813, and
its telephone  number is (616) 786-7000.  Unless otherwise noted or indicated by
the context, the term "Company" includes Donnelly Corporation,  its wholly owned
subsidiaries   and  Donnelly   Export   Corporation,   a  shareholder   Domestic
International  Sales  Corporation under the Internal Revenue Code owned entirely
by the holders of the Company's Class B Common Stock.

ITEM 1 (b)        FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Company is an  international  supplier of high quality  automotive parts and
component  systems from  manufacturing  operations in North America,  Europe and
Asia. The Company supplies  automotive  customers around the world with interior
and exterior  mirror  systems,  window  systems and  interior  lighting and trim
systems.
<PAGE>
                                                                               4

In addition, the Company,  provides products to several non-automotive  markets,
none of which are reportable segments.

ITEM 1 (c)        NARRATIVE DESCRIPTION OF BUSINESS

PRODUCTS, SERVICES, MARKETS AND METHODS OF DISTRIBUTION

Automotive Rearview Mirror Systems

The Company began producing  prismatic day/night mirror glass in 1939, and today
manufactures a wide range of interior and exterior  rearview mirror products and
believes  it is the  world's  largest  producer of  automotive  rearview  mirror
systems.

Electrochromic  Products.  The Company has made  significant  investments in the
development of solid-state,  thin-film  electrochromic  technology that has been
commercialized for mirror  applications and has potential use for various window
applications.  Electrochromic  coatings  allow the user to  darken  glass to the
desired degree through the application of an electrical current to the coating.

The Company  continues  to market  electrochromic  day/night  automotive  mirror
systems that will  automatically  dim when  headlights  approach  from the rear.
Electrochromic mirror systems are electrically dimmable to reduce the glare from
the headlights of other vehicles approaching from the rear. This system had been
the subject of litigation  between the Company and Gentex  Corporation until the
fourth  quarter  of 1996,  when the  Company  reached  a  patent  and  licensing
settlement  with  Gentex  Corporation.  The Company  has  continued  to actively
develop newer and more advanced  electrochromic  technologies for the automotive
marketplace.  The  Company  has  developed  or  licensed  a number of  promising
technologies and several are already available for commercial use.

The  Company's  GLAREFREEtm  electrochromic  mirror  technology  offers  several
advantages over competing technology.  The Company's GLAREFREEtm  electrochromic
mirrors  have  been  purchased  by  Ford,   Jaguar,   Range  Rover,  Audi,  PSA,
Mercedes-Benz,  Volvo,  Renault and Honda. These purchase agreements represent a
significant  step forward in the Company's  positioning  as a strong player in a
global market for electrochromic mirrors that industry sources expect to grow to
$1 billion.  With strong  technologies to offer and having favorably settled the
patent  issues that have  hampered its ability to compete in recent  years,  the
Company has set ambitious goals for increasing its electrochromic  mirror market
share in the years ahead.

Interior  Rearview  Mirrors.  The  Company has a  predominant  share of the U.S.
market for interior rearview  prismatic  mirrors and in 1998 sold  approximately
18.7 million units worldwide.  The interior  rearview mirror product line ranges
from the basic day/night flip mirror to rear-vision  systems that  incorporate a
variety of  sophisticated  electronic  features  into complex  modular  interior
rearview  mirror  assemblies.   The  Company  continues  to  design  and  market
innovative  value-added  features  integrated  into the rearview  mirror such as
lights, electronic compasses, temperature and other displays.

The Company  manufactures and markets automotive interior rearview mirrors using
patented  electrochromic  technology  that  automatically  dims the mirror  when
headlights  approach  from  the  rear.  Electrochromic  rearview  mirrors  are a
value-added substitute for traditional prismatic base mirrors and are sold for a
higher dollar price per unit than prismatic base mirrors.  The Company  believes
that electrochromic  rearview mirrors currently represent  approximately 15% and
7% of all interior rearview mirrors sold by all suppliers to original  equipment
manufacturers in the North American and European markets,  respectively, for the
1998 model year. The market for electrochromic  mirrors continues to grow and in
1998,  electrochromic  mirrors  were offered on  approximately  46 car models in
North  America,  compared to only  approximately  19 models in 1991. The Company
believes that  electrochromic  mirrors will represent an increasing share of the
rearview mirror market,  both in terms of number of units and dollar volume, and
represent a significant growth area for the Company.
<PAGE>
                                                                               5

The  Company is in the  process of  developing  electronic  vision  systems  for
vehicles  that make use of advanced  sensors and video  microchip  technology to
control  dimmable  interior  and  exterior  mirror  systems.  Although  not  yet
commercialized,  the  development  of this  technology  is part of the Company's
strategy to be a technology leader in the market for automotive  rearview vision
systems.

Exterior  Rearview  Mirrors.  The Company has used its  expertise  and  customer
relationships  in the  interior  mirror  market to develop its product  line and
increase  its share of the market for  complete  exterior  mirror  systems.  The
expansion of the Company's European operations,  particularly the acquisition of
Donnelly Hohe, has substantially increased the Company's production capacity and
sales of exterior  rearview  mirrors,  particularly in the European market.  The
Company believes that its increased  presence in the European market will assist
the  Company  in  increasing  its sales of  exterior  rearview  mirrors in North
America  and other  markets.  The  Company  supplies  exterior  rearview  mirror
assemblies  primarily to Honda, Ford and Mazda in the United States and to major
European automakers including BMW, Volkswagen, SEAT, Renault and Audi in Europe.
The  Company  also  supplies  exterior  rearview  mirror  systems to  automakers
throughout  southern China through one of it's Chinese joint ventures.  In 1998,
General  Motors  awarded  the  largest  exterior  rearview  mirror  order in the
Company's history with business on twelve General Motors vehicles.

Exterior  rearview  mirrors are  combined  with  automatic  or manual  adjusting
mechanisms,  wire  harnesses  and other  hardware  within  an  injection-molded,
color-matched  housing and are more complex than base interior rearview mirrors.
The per vehicle sales price of exterior  mirrors  substantially  exceeds that of
interior  rearview  mirrors due to the greater  complexity of exterior  rearview
mirrors  and the fact that most new  vehicles  are  equipped  with two  exterior
rearview mirrors.

The Company  also  manufactures  and markets  dimmable  electrochromic  exterior
rearview  mirrors.  The Company  believes that  electrochromic  rearview mirrors
currently  represent  only 4% of all  exterior  rearview  mirrors  in the  North
American   market  for  the  1998  model  year.   The  Company   believes   that
electrochromic  exterior  rearview mirrors will represent an increasing share of
the rearview mirror market,  both in terms of number of units and dollar volume,
and  that  the  electrochromic  mirror  market  presents  a  significant  growth
opportunity for the Company.

In 1996, the Company introduced its patented Illuminator(TM) ground illumination
mirror,  the world's first  commercial  automotive  outside mirror that includes
remote-control  security lighting. The Illuminator(TM) can also be equipped with
electrochromic  dimming and exterior turn indicators.  The  Illuminator(TM)  was
recognized  as one of the "1996  100 Best of What's  New  Products"  by  Popular
Science magazine.  The  Illuminator(TM) was initially being offered as an option
on  the  Lincoln  Mark  VIII.   The  Company  is   aggressively   marketing  the
Illuminator(TM) to its customers.

Modular Windows

The  Company  pioneered  and today is a leading  supplier  of  modular  windows.
Modular  windows,  which have  continued to increase in  popularity  since their
introduction,  are produced by molding glass,  hardware,  weather  stripping and
other  components  into a single unit  assembly  and can be used for  automotive
windows and sunroofs.  The Company  believes its modular  windows offer improved
quality and aerodynamics,  greater design flexibility and lower production costs
for automakers than conventional automotive windows. A more recent technological
innovation  by the Company is flush  surface  windows that involve  single-sided
encapsulation,  bonding of hardware  directly to glass and the  incorporation of
color-matched body hardware into the window system.

The Company's  modular window assemblies are used for rear and liftgate windows,
quarter windows,  aperture  windows,  fixed vent windows,  roll-up windows,  sun
roofs,  rear windows and  windshields.  The Company produces modular windows for
Chrysler,  Ford,  General Motors,  Honda,  Isuzu and Toyota in North America and
Chrysler in Europe.  The  Company's  modular  windows  are used on many  popular
vehicles such as the Chrysler
<PAGE>
                                                                               6

Caravan/Voyager  minivan,  the Jeep Grand Cherokee,  the Ford Expedition and the
Ford  Taurus/Sable.  In 1998, the Company launched 24 window programs  including
important launches on the Ford heavy truck series and Dodge Ram.

The  Company   believes  that  its  materials   technology   and   manufacturing
capabilities  provide a  significant  competitive  advantage  in the  market for
modular windows.  Modular windows can be molded using polyvinyl chloride ("PVC")
or a urethane  reaction  injection  molding process ("RIM").  The PVC process is
less  expensive  primarily  because  the  material  is less  costly and does not
require  painting.  PVC,  however,  is more difficult to mold,  particularly for
large windows.  The Company believes that its ability to design and mold windows
in either process and its expertise in PVC molding are  significant  competitive
advantages.  In  addition,  the Company  offers  various  other  modular  window
technologies  including  molded-in body color panels,  flush bonded  hardware as
well as flush, single-sided encapsulation.

The Company has signed an agreement to form a new company, Donnex, which will be
a 50-50 joint venture  between the Company and Essex Specialty  Products,  Inc.,
the world's leading producer of automotive  adhesives and sealants.  Donnex will
produce and deliver  complete,  ready-to-install  windows and window  systems to
automotive  customers on a  just-in-time  basis and in sequence.  It is expected
that  Donnex  will  base  its  initial  operations  in  the  Detroit,  Michigan,
metropolitan area.

The Company  believes that the increasing use of modular windows reflects trends
in the automotive  industry towards increased levels of outsourcing,  demand for
integrated  modules  and  systems  and  reliance  on  suppliers  for  design and
manufacturing. The Company expects continued growth in the global modular window
market,  as evidenced  by the number of modular  windows  that  automakers  have
specified for future models.

Interior Lighting and Trim

In September 1997, the Company  entered into an agreement with Lear  Corporation
to form Lear Donnelly,  a joint venture for the design,  development,  marketing
and  production of interior trim overhead  systems and components for the global
market. The Company believes the formation of this joint venture strengthens the
Company's  position  as a supplier  in the global  automotive  overhead  systems
market. See Item 1 (c) "Narrative  Description of Business--Joint  Ventures" for
additional information concerning this joint venture.

Through  the Lear  Donnelly  joint  venture,  the Company  manufactures  various
interior trim products including dome lights,  interior door lights, map lights,
courtesy lamps, lighted and non-lighted grab handles, visors and trim components
such as overhead consoles.  The Company believes its automotive lighting systems
have been well  received by the  marketplace  largely  because of the  Company's
expertise in  developing  precision  optical  lenses.  The  Company's  extensive
capabilities in advanced optics technology, precision plastic injection molding,
glare management and automotive  electronics provide a competitive advantage for
the Company's  automotive  interior  lighting and overhead trim products.  These
skills enable the Company to produce  interior  lighting that is highly  focused
and directed within the vehicle which significantly  reduces unwanted spill-over
glare. The Company believes that automakers will increasingly seek suppliers who
can provide complete interior lighting and trim systems or large subsystems.

Door Handles

The Company  produces a wide variety of interior  and exterior  door handles for
Ford, Honda, Mazda, Nissan and Volvo. This product line was established based on
the  Company's  capabilities  in  color-matched  painting and plastic  injection
molding.  The Company  supplies various door handle designs  including  plastic,
diecast and  chrome-plated  door  handles as well as products  with  value-added
electronic features.
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                                                                               7

Non Automotive Businesses

The Company is committed to its core automotive businesses. However, the Company
has developed a number of non-automotive  businesses and relationships  over the
years,  which  arose from  existing  or  developed  core  technologies  that had
applications  outside of the automotive industry.  The Company's  non-automotive
businesses have been structured to be operated  independently from the Company's
core automotive business.

In the second  quarter of 1998,  the  Company  sold its 50%  interest in Applied
Films Corporation  ("AFC") located in Boulder,  Colorado in AFC's initial public
offering.  As a result of this sale,  the Company  received  $7.9 million in net
proceeds,  after taxes and related out of pocket fees, and recognized a one-time
pretax gain of approximately $4.6 million,  or $0.22 per share after tax. AFC is
primarily a  manufacturer  of thin-film  glass  coatings and related  production
equipment used in the production of liquid  crystal  displays.  The Company sold
all of its shares in AFC during an initial public offering that was completed in
November, 1997.

In the third quarter of 1997, the Company created  Donnelly Optics  Corporation,
based in  Tucson,  Arizona,  to sell  and  manufacture  high-quality,  injection
molded,  diffractive and hybrid optical lenses and systems.  Diffractive  optics
have a wide variety of uses in such industries as computers, telecommunications,
aerospace,  medical  instruments  and the auto industry.  The Company has booked
business  with  customers  in  the  digital  imaging  market,  has  developed  a
proprietary  lense system for digital  cameras and has orders to produce  highly
specialized exterior lighting lenses for a North American auto manufacturer. DOC
has been incurring  significant  operation  losses.  In addition,  in the fourth
quarter of 1998, DOC recognized a $3.5 million charge against  operating income,
or  $0.23  per  share  after  tax,  due  to  the   cancellation  of  orders  for
injection-molded  lenses.  The  customer  orders were  canceled  due to changing
market  dynamics in the digital  imaging  sector of the computer  industry.  The
Company is exploring  alternatives  to protect its  investment in DOC and remain
well positioned to profit from the potential rewards of the technologies of DOC.

Effective  June 29, 1997,  the Company  created  Information  Products,  Inc., a
Holland  based  subsidiary  that  had  previously   operated  as  the  Company's
Information Products Division.  The Company believes that Information  Products,
Inc. is the world's  largest  producer of specialty  coated and shaped glass for
the computer touch screen industry. The glass is used in a wide variety of touch
screen  applications  such as information  kiosks,  cash  registers,  industrial
controls, personalized greeting card kiosks and others.

Joint Ventures

Lear Donnelly Overhead Systems, LLC ("Lear Donnelly").  On November 3, 1997, the
Company  formed Lear Donnelly,  a 50% owned joint venture with Lear  Corporation
("Lear"). Lear Donnelly is engaged in the design,  development and production of
overhead  systems  and  components  for the global  market,  including  complete
overhead  systems,  headliners,   consoles  and  lighting  components,   vehicle
electrification  interfaces,  electronic components,  visors and assist handles.
The  Company  and  Lear  each  contributed  certain  technologies,   assets  and
liabilities for the creation of the joint venture.

Donnelly/Arteb LTDA, ("Donnelly/Arteb"). In 1998, the Company formed a 50% owned
joint  venture  with  Industrias  Arteb S.A. to produce  interior  and  exterior
mirrors for the South American automotive industry. Donnelly/Arteb is located in
Sao Paulo, Brazil. Donnelly/Arteb focused on winning new orders and establishing
its operations  early in 1999 and began  launching  several mirror  programs for
General Motors and is slated to start electrochromic  mirror assembly for the GM
Vectra  model by  mid-year.  Donnelly/Arteb  LTDA  provides  the Company  with a
presence in a rapidly growing region.

Varitronix EC (Malaysia) Sdn. Bhd.  ("Varitronix  EC"). In the fourth quarter of
1998, the Company formed  Varitronix EC, a 50% owned,  controlled  joint venture
with  Varitronix  (Malaysia)  Sdn.  Bhd.  Varitronix  EC is  located  in Penang,
Malaysia,  within a  world-class  manufacturing  facility  that began  producing
electrochromic  cells in the first quarter of 1999. With the production startup,
the Company is the only automotive  supplier in the world 
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                                                                               8

with EC  manufacturing or assembling  capabilities in North America,  Europe and
Asia.  Due to the  Company  having  board  control  of this joint  venture,  the
financial  statements of Varitronix  EC will be  consolidated  with those of the
Company.

Donnex, LLC ("Donnex").  The Company previously signed a joint venture agreement
to form a new company,  Donnex,  which will be a 50-50 joint venture between the
Company and Essex  Specialty  Products,  Inc., the world's  leading  producer of
automotive  adhesives  and  sealants.  Donnex  intends  to produce  and  deliver
complete, ready-to-install windows and window systems to automotive customers on
a just-in-time  basis and in sequence.  It is expected that Donnex will base its
initial operations in the Detroit, Michigan, metropolitan area.

Shunde  Donnelly Zhen Hua  Automotive  Systems Co. Ltd.  ("Shunde  Donnelly Zhen
Hua").  In the first quarter of 1997,  the Company  formed Shunde  Donnelly Zhen
Hua, a joint venture with Shunde Zhen Hua Automotive  Parts Co. Ltd. The Company
has a 30%  interest in the Zhen Hua joint  venture and has an option to purchase
an additional 30% interest. The Shunde Donnelly Zhen Hua joint venture, based in
the Chinese city of Shunde,  in Guangdong  Province,  manufactures  interior and
exterior mirror systems for automakers throughout southern China,  including the
Chinese operations of Volkswagen, Chrysler, and Isuzu.

Donnelly  Electronics,  LLC  ("Donnelly  Electronics").  In the first quarter of
1997,  the  Company  created  a  new  affiliate,   Donnelly  Electronics,   that
specializes  in  the  design  and  manufacture  of  electronic   components  and
sub-assemblies.  The new company is a joint  venture  between the Company and an
individual with expertise in automotive electronics technology. The Company owns
19% of  Donnelly  Electronics  with the option to acquire up to 100% of Donnelly
Electronics over time. Based in Flint,  Michigan,  Donnelly Electronics produces
the electronic components that Donnelly uses for products such as electrochromic
rearview  mirrors and  electronic  compass  systems.  The firm will also provide
electronics   development  for  future   Donnelly   products  that  may  include
rear-vision  camera  systems,  lighting  systems  and  others.  In  addition  to
supporting the automotive electronic needs of the Company,  Donnelly Electronics
pursues business with other automotive suppliers that are not competitors of the
Company as well as other business opportunities.

Shanghai  Donnelly Fu Hua Window  Systems  Company Ltd.  ("Shanghai  Donnelly Fu
Hua").  In the fourth quarter of 1996, the Company formed  Shanghai  Donnelly Fu
Hua, a 50-50 joint  venture  with  Shanghai Fu Hua Glass  Company,  Ltd.,  which
produces window systems for automotive customers in Asia and Australia. Shanghai
Fu Hua Glass  Company is itself a joint  venture  between Ford Motor Company and
Shanghai Yao Hua Glass Works. The joint venture began manufacturing encapsulated
and framed glass products in the third quarter of 1998.

VISION  Group plc  ("VISION").  The  Company is working  with  VISION to produce
electronic vision systems for the world automotive  industry using an innovative
video  microchip   developed  by  VISION.  The  Company  and  VISION  have  been
collaborating  to produce  "smart" chips that can perform a variety of functions
in a vehicle  including  control of advanced  mirror  systems,  video  displays,
lighting control and security devices.  The Company owns 25.6% of VISION,  which
is located in Edinburgh, Scotland.

KAM Truck Components,  Inc. ("KAM").  The Company owns 19% of KAM which supplies
GLARESTOPPERtm solid state  electrochromic  mirrors for large trucks. The mirror
permits truck  drivers to manually  adjust the glare of their mirrors by a range
of up to ten times.

Donnelly Yantai Electronics Corporation Limited. This 50% owned venture produces
coated glass for use in the Chinese LCD market. This operation is located in the
Yantai Peninsula of the People's Republic of China.
<PAGE>
                                                                               9

MARKETING STAFF

In North  America and Europe,  the Company  markets its  automotive  products by
combining  the  engineering  product  expertise  of  members  of  the  Company's
engineering  staff with a customer  focused sales force,  who work together with
the Company's customers' design teams early in the design process. The Company's
wholly owned  European  subsidiaries  employ a sales force located in Europe and
Japan,  and also sell through a trading  company in Japan.  Nearly all sales are
made  directly to  automakers  with the  exception of some interior and exterior
mirror glass components.

The Company markets its  non-automotive  products through a sales force who also
work in  conjunction  with the  Company's  engineers.  The  Company  works  with
potential  customers  on the  development  of new  applications  for  electronic
information display products.

NEW PRODUCT OR INDUSTRY SEGMENT INFORMATION

New  applications  in  electronics  continue to play an  increasing  role in the
Company's future.  As vehicles become more  electronically  sophisticated,  auto
manufacturers  are looking for  opportunities to pack value-added  features into
new areas of the car.  The  Company  is a leader in  developing  "plug and play"
modules that are flexible and allow  vehicle  manufacturers  to offer  different
configurations  of features  through the same module.  At the end of April 1997,
the Company  announced a new business order with a European  customer that leads
in that trend.  Included  in the order are highly  sophisticated  overhead  trim
components that are integrated with advanced optical  lighting,  all designed by
the Company,  which are to be produced at a Lear Donnelly  operation  located in
Ireland,  just outside Dublin. The overhead consoles have four optically precise
lights  integrated into the units that provide  directed light with little or no
spillover glare. Also included in the order are interior  electrochromic mirrors
that  function  as a  communications  node for a vehicle's  electronics  system,
representing a significant  first in the automotive  industry.  In essence,  the
electronics  that  control a number of  different  passenger  comfort and safety
functions have been integrated into the rearview mirror.

As discussed in Item 1 (c) "Narrative Description of Business--Joint  Ventures,"
on November 3, 1997,  the Company  formed Lear  Donnelly,  a 50-50 joint venture
with Lear  Corporation  for the design,  development  and production of overhead
systems for the global  market,  including  headliners,  consoles  and  lighting
components,  vehicle electrification interfaces,  electronic components,  visors
and assist handles.

Also as part of the  Company's  strategy,  the Company has  implemented  various
joint ventures in emerging automotive  markets.  The Company has established the
Asian and the South American markets as the top two emerging market  priorities.
As discussed in Item 1 (c) "Narrative Description of Business--Joint  Ventures,"
in the fourth quarter of 1996, the Company  formed  Shanghai  Donnelly Fu Hua, a
joint venture, which began manufacturing  encapsulated and framed glass products
in the third  quarter of 1998. In addition,  in the first  quarter of 1997,  the
Company formed an automotive mirror joint venture in China, Shunde Donnelly Zhen
Hua, which produces  automotive mirror systems in the Chinese city of Shunde. In
1998, the Company formed  Donnelly/Arteb,  an automotive mirror joint venture in
Sao Paulo,  Brazil,  which began producing mirrors for the South American market
during the first  quarter of 1999.  Also,  in the  fourth  quarter of 1998,  the
Company  formed  Varitronix EC (Malaysia)  Sdn. Bhd.  ("Varitronix  EC"),  which
produces electrochromic mirror cells in the city of Penang, Malaysia.

The  Company  has  developed  a  number  of  non   automotive   businesses   and
relationships  over the  years,  which  arose  from core  technologies  that had
applications  outside of the automotive  industry.  The Company's non automotive
businesses have been structured to be operated  independently from the Company's
core automotive business.  As discussed in Item 1 (c) "Narrative  Description of
Business--Non  Automotive Businesses," in the third quarter of 1997, the Company
created Donnelly Optics Corporation,  a subsidiary based in Tucson,  Arizona, to
sell and  manufacture  high-quality,  injection  molded,  diffractive and hybrid
optical  lenses and systems.  Also,  effective June 29, 1997, the Company formed
Information  Products,  Inc.,  which the Company believes is the world's largest
<PAGE>
                                                                              10

producer of  specialty  coated and shaped  glass for the  computer  touch screen
industry,  a subsidiary based in Holland,  Michigan that had previously operated
as the Company's  Information Products Division.  In the second quarter of 1998,
the Company  sold its 50%  interest  in Applied  Films  Corporation  in Boulder,
Colorado, in an initial public offering completed in November, 1997.

SOURCES AND AVAILABILITY OF RAW MATERIALS

The Company's  primary raw materials are glass,  paints,  resins and  adhesives.
Glass is supplied by third party glass  manufacturers and by glass manufacturers
affiliated with automakers. Paints, resins and adhesives are other important raw
materials.  Paints used by the Company are supplied primarily by four suppliers.
Most of the resins the Company uses are supplied by four primary suppliers.  The
Company believes that alternative suppliers are available for paints and resins.
Generally,  the  Company  has  multiple  sources  of  supply  for the  important
materials  and  components  used  in its  products.  Certain  adhesives  for the
Company's  flush window  systems are supplied  solely by Essex  Chemical and the
Company believes that an alternative  source of supply is not readily available.
Because of the commodity  nature of common materials such as glass and plastics,
the Company is somewhat vulnerable to price fluctuations in many of its material
purchases.

PATENTS, LICENSES, ETC.

While the Company owns  approximately  239 patents and considers them important,
the Company as a whole is not  dependent to any material  extent upon any single
patent or group of patents.  The Company  believes its  manufacturing  know-how,
design of its own  manufacturing  equipment  and  development  of  manufacturing
processes are more important than its patents.

The Company has  licensed  certain of its own  patents  and  technology  and has
licenses under certain third party patents and technology.

SEASONAL NATURE OF BUSINESS

The  Company's  net sales and net income are  subject to  significant  quarterly
fluctuations.  These  fluctuations are attributable  primarily to the production
schedules of the Company's major  automotive  customers.  The Company  generally
reports lower net sales and net income in the first half of its fiscal year than
in the second half because  domestic  automotive  production is generally  lower
during the first two quarters of the Company's fiscal year.

WORKING CAPITAL

In  September   1997,  the  Company  entered  into  an  unsecured  $160  million
multi-currency  global  revolving  credit agreement which replaces the Company's
previous  unsecured  $80 million  domestic  credit  agreement and its 75 million
Deutsche Mark revolving  Eurocredit  loan agreement.  Borrowings  under this new
agreement  bear  interest,  at the election of the Company,  at a floating  rate
under one of three  alternative  elections.  This new revolving credit agreement
terminates in September  2004, with an opportunity for the Company to extend for
one year periods with the consent of all the revolver banks.

In November 1996, the Company entered into a three-year  agreement to sell, on a
revolving  basis, an interest in a defined pool of trade accounts  receivable of
up to $50 million. At June 27, 1998 and June 28, 1997, a $40.3 million and $40.0
million interest, respectively, had been sold under this agreement with proceeds
used to reduce  revolving lines of credit.  The sale is reflected as a reduction
of accounts  receivable  and as  operating  cash flows.  As  collections  reduce
previously sold  interests,  new accounts  receivable are customarily  sold. The
proceeds of sales are less than the face amount of accounts  receivable  sold by
an amount that  approximates  the purchaser's  financing cost of issuing its own
commercial  paper backed by these  accounts  receivable.  The discount fees were
$2.1  million in 1998 and $1.1  million in 1997,  and are  included  in selling,
general and  administrative  expense. 
<PAGE>
                                                                              11

The Company,  as agent for the purchaser,  retains collection and administrative
responsibilities for the participating interests of the defined pool.

Other than the items summarized  above, the Company does not believe that it, or
industries  which it serves in general,  have any special  practices  or special
conditions   affecting  working  capital  items  that  are  significant  for  an
understanding of the Company's business.

IMPORTANCE OF LIMITED NUMBER OF CUSTOMERS

In 1998,  approximately  73% of the  Company's  net sales were to the  following
major automobile manufacturers:
<TABLE>
         <S>                                         <C>
         Ford Motor Company                           27%
         Chrysler Corporation                         20%
         Honda of America Mfg., Inc.                   8%
         BMW                                           7%
         VW                                            6%
         General Motors Corporation                    5%
                                                     ----
                  Total                               73%
                                                     ====
</TABLE>
The loss of any one of these customers  would have a material  adverse effect on
the Company.

BACKLOG OF ORDERS

As of June 27, 1998,  and June 28,  1997,  the  Company's  backlog of orders was
approximately $149 million and $150 million,  respectively. The Company believes
that all of its existing  backlog will be  delivered  during the current  fiscal
year.  The  Company  generally  sells to  automakers  on the basis of  long-term
purchase  contracts or one-year  purchase  orders,  which generally  provide for
releases for approximately 30 to 90 days of production. Unshipped products under
these releases and short-term purchase orders constitute the Company's backlog.

GOVERNMENT CONTRACTS

The  Company  does not believe  that any  portion of its  business is subject to
renegotiation  of profits or  termination of contracts or  sub-contracts  at the
election of the government.

COMPETITION

Competition  in the  markets  for the  Company's  automotive  products  is based
primarily on manufacturing  capabilities,  design, quality, cost and delivery. A
number of the  Company's  competitors  are divisions or  subsidiaries  of larger
corporations,  including  vertically  integrated glass  companies,  with greater
financial  resources  than the Company and with  well-established  relationships
with  automakers.  The level and nature of  competition  involving the Company's
automotive products are varied.

Interior Rearview Mirrors. While the Company has a predominant share of the U.S.
interior  rearview  prismatic  mirror  market,  the  Company  is  aware  of many
competitors in this market. The Company knows of one principal competitor in the
U.S.  electrochromic  market  and one in the U.S.  lighted  mirror  market.  The
Company has several  worldwide  competitors  for interior  mirror glass sales in
Japan and Europe,  although  the Company  believes  each  interior  mirror glass
competitor has a smaller market share than the Company.  In Europe,  the Company
competes with several other  manufacturers of complete  interior rearview mirror
assemblies.

The Company's principal competitor for automatic electrochromic rearview mirrors
is Gentex  Corporation,  which  currently has a dominant share of the market for
electrochromic  mirrors. The Company and Gentex Corporation had been involved in
patent litigation with respect to certain aspects of electrochromic  technology.
The litigation
<PAGE>
                                                                              12

previously  had an adverse  impact on the Company's  ability to market  interior
electrochromic  mirrors  in the  United  States  and  Europe.  During the fourth
quarter of 1996,  the Company  reached a patent and  licensing  settlement  with
Gentex Corporation, and management believes that this settlement facilitates its
efforts to market electrochromic mirrors.

Exterior  Rearview  Mirrors.  The Company has many  competitors in the worldwide
exterior  rearview  mirror market.  With the Company's  recent  acquisition of a
controlling  interest in  Donnelly  Hohe,  the Company is a leading  producer of
automotive exterior rearview mirrors. The Company has one competitor in the U.S.
market for automatic exterior electrochromic mirrors.

Modular  Windows.  The Company has many  competitors  in the  worldwide  modular
window market.  Certain  competitors are major automotive glass manufacturers or
are closely  associated  with  automobile  or glass  manufacturers.  The Company
believes that the glass  manufacturers  could further vertically  integrate into
glass molding and that these companies  would be significant  competitors due to
their size.  However,  the Company believes that it is still a technology leader
for glass encapsulation and metal bonding of attachments to glass.

Other  Products.  There are many  competitors  in the  market  for the  interior
lighting  and trim  products  produced by Lear  Donnelly,  which  include  Magna
International  and  Johnson  Controls,  Inc.  With  respect  to its  information
products  business,  the Company  believes it is the world's leading producer of
coated bent glass for the CRT-based  electronic display and interactive  systems
market.  The Company has numerous  competitors  in the optical  digital  imaging
markets.  Competition  in all of these product areas is based on price,  service
and quality.

RESEARCH AND DEVELOPMENT

Continued emphasis on effective  research and product  development is a key part
of the  Company's  strategy for future  growth.  The Company  believes  that its
technological  and product  development  capabilities will enable the Company to
provide  sophisticated  integrated  modules  and  systems  and  to  perform  the
increased responsibilities automotive suppliers are expected to manage.

In 1998,  1997 and  1996,  research  and  development  expenditures  were  $36.4
million, $32.5 million and $27.7 million,  respectively,  or 4.8%, 4.8% and 6.3%
of the  Company's  net sales for  those  years.  The  Company  expects  to spend
approximately  4.5%  to  5.0%  of its  net  sales  each  year  on  research  and
development.  Approximately  80%  of  the  Company's  research  and  development
expenditures  are  product  specific  and  conducted  by the  Company's  product
engineers. The Company has a corporate applied research group, including several
Ph.D's,  located at research facilities in Holland,  Michigan, and at a separate
applied research center in Tucson,  Arizona.  The Company owns numerous U.S. and
foreign patents and has licenses for other patents and  technology.  The Company
also licenses  certain of its own patents and technology to others.  The Company
believes its manufacturing  know-how,  design of its own manufacturing equipment
and  development  of  manufacturing  processes are other  important  competitive
advantages.

HUMAN RESOURCES

The Company  believes its human resources are one of its fundamental  strengths.
The Company has  operated  for over 45 years under a  team-based,  participative
management  system.  The  Company  believes  that this  approach  has  increased
productivity  by emphasizing  employee  opportunity and  participation  aimed at
continuous  improvement.  The Company  believes  this  emphasis  has resulted in
enhanced long-term productivity, cost control and product quality and has helped
the Company attract and retain capable  employees.  The Company was rated one of
the 100 best  companies to work for in America in the most recent edition (1998)
of the Fortune Magazine list of the "100 Best Companies to Work for in America."

The  Company   currently  has  approximately   5,500  employees   worldwide  and
approximately  3,100 work in the Company's North American operations in the U.S.
and Mexico. The Company's non-North American employees
<PAGE>
                                                                              13

are  primarily  located in  Germany,  Ireland,  France and  Spain.  The  Company
considers its relationship with its employees to be good.

The Company's United States workforce is non-union.  The Company's workforces in
Ireland,  Mexico  and  France  are  unionized,  as are  the  workforces  of most
companies in these countries.  The Company's workforce in Germany is represented
by a works council  which has employee  representation.  The  workforces of most
companies  in Germany are  required to be  represented  by works  councils.  The
Company's  workforce  in Spain  is  non-union.  The  Company  has no  collective
bargaining  agreements  in  Ireland  or  Mexico,  where  non-economic  terms  of
employment are governed by statute.  The Company  negotiates  wages and benefits
approximately annually with its German, Spanish and Irish workforce. The Company
negotiates wages approximately annually and benefits  approximately  bi-annually
with its workforce in Mexico.  The Company's French subsidiary is subject to the
salary schedule and conditions collectively agreed to on a national and regional
basis between employers and employees in the plastics  industry.  The Company is
currently reducing its European workforce as part of its European  restructuring
plan. See Item 7, "Management's  Discussion and Analysis of Financial Conditions
and Results of Operations."

ENVIRONMENTAL MATTERS

Like similar companies, the Company's operations and properties are subject to a
wide variety of increasingly  complex and stringent  federal,  state,  local and
international laws and regulations,  including those governing the use, storage,
handling,  generation,  treatment,  emission, release, discharge and disposal of
certain  materials,  substances and wastes, the remediation of contaminated soil
and  groundwater,   and  the  health  and  safety  of  employees  (collectively,
"Environmental  Laws"). As such, the nature of the Company's  operations exposes
it to the risk of  claims  with  respect  to such  matters  and  there can be no
assurances that material costs or liabilities will not be incurred in connection
with such claims.

Certain Environmental Laws regulate air emissions,  water discharges,  hazardous
materials and wastes and require public disclosure related to the use of various
hazardous or toxic  materials.  The  Company's  operations  are also governed by
Environmental  Laws relating to workplace  safety and worker health.  Compliance
with  Environmental  Laws  may  require  the  acquisition  of  permits  or other
authorizations  for certain  activities and compliance with various standards or
procedural requirements.

Based upon its experience to date, the Company  believes that the future cost of
compliance   with  existing   Environmental   Laws,   and  liability  for  known
environmental  claims  pursuant  to such  Environmental  Laws,  will  not have a
material  adverse  effect on the  Company's  financial  position  or  results of
operations  and cash flows.  However,  future events,  such as new  information,
changes  in  existing  Environmental  Laws or  their  interpretation,  and  more
vigorous  enforcement  policies  of  regulatory  authorities,  may give  rise to
additional expenditures or liabilities that could be material.

ITEM 1 (d)        INFORMATION ABOUT FOREIGN OPERATIONS

During 1998,  approximately 34% of combined  consolidated net sales were derived
from  the  operations  of  the  Company's  consolidated  European  subsidiaries.
Approximately  11% of combined  consolidated  net sales were derived from export
shipments  from the Company's  United States  operations to customers in foreign
countries.  The Company has licensed major  automotive glass companies in Europe
and Japan to manufacture  modular  windows for sale in foreign markets using the
Company's technology.

In the second  quarter of 1997,  the Company began  consolidating  the financial
statements of Donnelly  Hohe, a subsidiary  based in  Collenberg,  Germany.  The
Company's  financial  statements for the years ended June 27, 1998, and June 28,
1997, are consolidated using Donnelly Hohe's financial  statements as of and for
the twelve month
<PAGE>
                                                                              14

period  ended May 31,  1998,  and the nine  month  period  ended  May 31,  1997,
respectively.  See  Notes  l  and  3  to  the  combined  consolidated  financial
statements in Item 8 for a more thorough discussion.

North  American  revenues are revenues  produced by assets located in the United
States and Mexico. Export revenues are foreign revenues produced by identifiable
assets  located  in the  United  States.  European  revenues  are  generated  by
identifiable assets at the Company's  subsidiaries located in Germany,  Ireland,
Spain and France.  The Company  operates two  subsidiaries in Germany,  Donnelly
Hohe GmbH & Co. KG and Donnelly Hohe Schleiz GmbH & Co. KG; two  subsidiaries in
Ireland,  Donnelly  Mirrors Limited and Donnelly Visions Systems Europe Limited;
one in Spain,  Donnelly  Hohe  Espana  S.A.;  one in France,  Donnelly  EuroGlas
Systems SARL; and one in Mexico,  Donnelly de Mexico,  S.A. de C.V. A summary of
the Company's operations by geographic area follows:
<TABLE>
In thousands               Year ended      1998           1997           1996
------------------------------------------------------------------------------
<S>                                      <C>           <C>            <C>
Revenues:
North American:
     United States..................     $420,544      $390,852       $338,355
       Export:
         Americas...................       76,433        54,302         49,655
         Asia.......................        3,313         2,825            532
         Europe.....................        2,002         1,829          1,917
         Other......................          350            76           ----
                                         -------------------------------------
                                          502,642       449,884        390,873
European............................      260,669       221,413         49,112
                                         -------------------------------------
                                         $763,311      $671,297       $439,571
                                         =====================================

In thousands               Year ended      1998           1997          1996
------------------------------------------------------------------------------

Operating Income (Loss):

North American......................     $ 19,654      $ 25,528       $ 17,208
European............................          720        (7,847)        (3,717)
                                         -------------------------------------
                                         $ 20,374      $ 17,681       $ 13,491
                                         =====================================

Identifiable Assets:

North American......................     $228,511      $200,100       $232,370
European............................      149,374       158,193         39,122
                                         -------------------------------------
                                         $377,885      $358,293       $271,492
                                         =====================================
</TABLE>
Fluctuating  exchange rates and other factors beyond the control of the Company,
such as tariff and foreign economic  policies,  may affect future results of the
Company's foreign operations.

ITEM 2.           PROPERTIES

The Company, solely or through several joint ventures, owns or leases facilities
which are located throughout North America,  Europe, Asia and South America. The
location,  square footage and use of the most  significant  facilities at August
31, 1998, were as follows:
<PAGE>
                                                                              15



LOCATION
<TABLE>
Location of Facility                                 Square Footage                              Use
--------------------                                 --------------                              ---
<S>                                                      <C>               <C>
Holland, Michigan (9)*                                   846,000           Manufacturing, Warehouse and Office
Holland, Michigan **                                      68,000           Manuafacturing and Office
Grand Haven, Michigan (2)*                               145,000           Manufacturing, Warehouse and Office
Newaygo, Michigan*                                       177,000           Manufacturing, Warehouse and Office
Detroit, Michigan*                                         4,000           Sales and Marketing Office
Marlette, Michigan**                                     200,000           Manufacturing and Office
Mt. Sterling, Kentucky                                    45,000           Manufacturing, Warehouse and Office
Tucson, Arizona (2)*                                      49,000           Manufacturing, Warehouse and Office
Naas, Ireland                                             88,000           Manufacturing, Warehouse and Office
Manorhamilton, Ireland                                    25,000           Manufacturing, Warehouse and Office
Dublin, Ireland**                                         30,000           Manufacturing, Warehouse and Office
Langres, France*                                          35,000           Manufacturing, Warehouse and Office
Collenberg, Germany (2)*                                 228,000           Manufacturing, Warehouse and Office
Dorfprozelten, Germany (2)*                              319,000           Manufacturing, Warehouse and Office
Schleiz, Germany (2)*                                     95,000           Manufacturing, Warehouse and Office
Monterrey, Mexico                                         40,000           Manufacturing, Warehouse and Office
Barcelona, Spain                                          60,000           Manufacturing, Warehouse and Office
Palmela, Portugal                                         17,000           Warehouse and Office
Prestice, Czech Republic **                               90,000           Manufacturing and Office
Shunde City, China (2)**                                 100,000           Manufacturing, Warehouse and Office
Shanghai, China **                                        11,000           Manufacturing and Office
Penang, Malaysia **                                       20,000           Manufacturing and Office
Sao Bernardo do Compo, Brazil **                          25,000           Manufacturing and Office
Goteborg, Sweden *                                         4,000           Sales, Marketing and Design Office
Tokyo, Japan *                                             2,000           Sales and Marketing Office
</TABLE>
      *Leased  facilities.  Three of the nine Holland,  Michigan  facilities are
     leased. One of the two Grand Haven,  Michigan  facilities is leased. One of
     the two Tucson, Arizona facilities is leased.  Approximately 142,000 square
     feet of the  Dorfprozelten,  Germany  facility  is  leased.  One of the two
     Schleiz,  as well as, one of the two  Collenberg,  Germany  facilities  are
     leased.

    **Owned or leased by a joint venture.

The Company believes its facilities are modern,  well-maintained  and adequately
insured and are primarily  utilized.  Because of its rapid growth in sales,  the
Company is continually evaluating the need for additional office,  manufacturing
and warehouse space.

As of June 27, 1998, the Company had capital  expenditures  purchase commitments
outstanding of approximately $13.2 million.

ITEM 3.  LEGAL PROCEEDINGS

On January 21, 1997, Midwest Manufacturing Holdings,  L.L.C. ("Midwest") filed a
lawsuit against the Company in Cook County,  Illinois Circuit Court with respect
to terminated  discussions regarding the possibility of Midwest's acquisition of
the Company's  Information Products business.  The litigation was removed to the
Federal  District Court for the Northern  District of Illinois.  Midwest alleges
that a verbal agreement to purchase the Information  Products  business had been
reached,  and filed its  lawsuit in an attempt to compel the  Company to proceed
with the sale or to pay Midwest damages.  On February 5, 1998, the court granted
the Company's motion for summary  judgment on the remaining two counts.  Midwest
has appealed the court's  decision to the U.S. 
<PAGE>
                                                                              16

Seventh Circuit Court of Appeals.  Management believes that the claim by Midwest
will be resolved without a material effect on the Company's  financial condition
or results of operations and liquidity.

On  February  3, 1998,  the  Company  reached a final  settlement  with  Happich
Fahrzeug-InnausstaHung GmbH concerning a joint venture that had been the subject
of  arbitration.  As a result of the  settlement,  the Company was awarded  100%
ownership of the former joint venture,  which was subsequently  transferred into
the Lear Donnelly joint venture, received payment for damages and costs incurred
and entered into other  agreements  with respect to certain  technology  and the
supply of parts.

On February 10, 1998, the Company filed a patent infringement  action,  Donnelly
Corporation v. Britax  Rainsfords,  Inc.,  which is pending in the United States
District Court for the Western  District of Michigan.  The lawsuit  alleges that
the production and sale by Britax of rear view mirrors  incorporating a security
light  infringes on a Company  patent.  The Company seeks an injunction  against
Britax as well as  unspecified  damages.  Britax  has  denied  infringement  and
asserts that the  Company's  patent is invalid and  unenforceable.  In a related
action,  on May 18,  1998,  Britax sued the Company in the High Court of England
seeking to invalidate two of the Company's  English patents which  correspond to
the United States patents subject to the litigation  described above. On July 3,
1998, the Company brought an action in the High Court of England alleging patent
infringement  by Britax and seeking  injunctive  relief and damages.  Management
believes that the Britax  litigation will be resolved without a material adverse
effect on the  Company's  financial  condition  or  results  of  operations  and
liquidity.

The Company  and a Chinese  company,  Shunde-Ronqui  Zhen Hua  Automotive  Parts
Plant, formed a joint venture company in 1996 to manufacture  automotive,  truck
and motorcycle rearview mirrors in the People's Republic of China. Disputes have
arisen  between the Company and its joint venture  partner and the Company is in
the process of commencing arbitration proceedings to terminate the joint venture
and to recover  damages.  The Company  believes that the outcome will not have a
material effect on the Company's financial condition or results of operation and
liquidity.

On May 12, 1998,  Metagel  Industria E Cornercio Ltda filed a complaint  against
the Company in the U.S. District Court for the Eastern District of Michigan. The
complaint requests a declaratory  judgment of noninfringement  and invalidity of
certain Company patents  related to lights  integrated into automotive  mirrors.
The Company believes that the litigation will not have a material adverse effect
on the Company's financial condition or results of operation and liquidity.

The Company and its subsidiaries are involved in certain other legal actions and
claims,  including  environmental  claims,  arising  in the  ordinary  course of
business.  Management  believes that such litigation and claims will be resolved
without  material  effect  on  the  Company's  financial  position,  results  of
operations and liquidity, individually and in the aggregate.

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

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the fiscal year ended June 27, 1998.
<PAGE>
                                                                              17

ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE REGISTRANT

Senior Corporate and Executive Officers of Registrant.  The Senior Corporate and
Executive Officers of the Company are as follows:
<TABLE>
                                                              Positions and                      Year First Elected
Name                                       Age                Offices Held                       Executive Officer
<S>                                        <C>                <C>                                         <C>
J. Dwane Baumgardner, Ph.D.                 58                Chairman, Director,                         1978
                                                              CEO, President
John F. Donnelly, Jr.                       46                COO of Europe                               1986
Donn J. Viola                               53                COO of North America                        1996
Maryam Komejan                              47                Senior Vice President,                      1993
                                                              Corporate Secretary
Niall R. Lynam, Ph.D.                       44                Senior Vice President                       1992
Scott E. Reed                               41                Senior Vice President, CFO                  1998
Russell B. Scaffede                         49                Senior Vice President, Global               1998
                                                              Manufacturing
Ronald L. Winowiecki                        31                Chief Accounting Officer, Corporate         1998
                                                              Controller
</TABLE>
John F.  Donnelly,  Jr.,  is a  descendant  of Bernard  P.  Donnelly,  Sr.,  the
Company's  founder,  and is the brother of Joan E.  Donnelly,  a director of the
Company. B. Patrick Donnelly,  III, Joan E. Donnelly,  Thomas E. Leonard, Gerald
T.  McNeive,  Jr. and Rudolph B.  Pruden,  all  Directors  of the  Company,  are
descendants of, or are married to descendants of Bernard P. Donnelly.  There are
no other  family  relationships  between  or  among  the  above-named  executive
officers.  There  are  no  arrangements  or  understandings  between  any of the
above-named officers pursuant to which any of them was named an officer.

Dwane  Baumgardner has been Chief  Executive  Officer and a director since 1982,
Chairman of the Board since 1986 and President since 1994. John F. Donnelly, Jr.
was elected  Chief  Operating  Officer of the Company's  European  operations in
September  1998.  Prior to that  time he was  Senior  Vice  President  from 1993
through 1998.  Donn Viola joined the Company as Chief  Operating  Officer of the
Company's North America operations in August 1996. Prior to joining the Company,
he was Senior  Executive Vice President,  Chief Operating  Officer and member of
the Board of Directors  for Mack Trucks  Incorporated  from 1994 to 1996 and was
Executive Vice President of  Manufacturing,  Purchasing and Quality from 1990 to
1994.  Maryam Komejan has been Senior Vice President  since 1995, Vice President
since 1993 and Corporate  Secretary  since 1989.  Niall Lynam was elected Senior
Vice President and Chief  Technical  Officer in 1996.  Prior to that time he was
Vice  President  from 1992 through 1996.  Scott Reed joined the Company as Chief
Financial Officer in September of 1998. Prior to joining the Company,  he served
as Director of International  Finance for Chrysler Corporation from 1995 to 1998
and was Manager of Finance, Production Platform from 1993 to 1995. Russ Scaffede
has been Senior Vice President since April 1998 and Vice President since October
1995.  Prior to joining the Company,  he was employed  from 1993 to 1995, by RWD
Technologies,   Inc.,  a  consulting   firm  engaged  in  the   development  and
implementation  of  lean  manufacturing  systems.  Ron  Winowiecki  was  elected
Corporate  Controller  in August 1998.  Prior to that time he was  Controller of
North American  Operations  since December 1996 and Assistant  Controller  since
1993.

Officers are elected annually.
<PAGE>
                                                                              18

                                    PART II.

ITEM 5.         MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
                MATTERS

The Company's  common stock is traded on the New York Stock  Exchange  under the
symbol "DON".  Prior to March 10, 1997,  the  Company's  stock was listed on the
American Stock Exchange under the symbol "DON". Market quotations  regarding the
range of high  and low  sales  prices  of the  Company's  common  stock  were as
follows:
<TABLE>

     Fiscal                      1998                 Dividends
     Quarter              High             Low         Declared
     ----------------------------------------------------------
     <S>               <C>              <C>             <C>
     First             $23.75           $16.75          $  .10
     Second             22.44            17.50             .10
     Third              19.31            16.25             .10
     Fourth             22.38            18.00             .10
     ---------------------------------------------------------


     Fiscal                      1997                 Dividends
     Quarter              High             Low         Declared
     ----------------------------------------------------------
     First             $14.70           $11.80          $  .08
     Second             17.90            14.10             .08
     Third              20.00            16.00             .10
     Fourth             17.38            14.38             .10
     ---------------------------------------------------------
</TABLE>
As of August 31, 1998, the Company had approximately  1,000 holders of record of
shares of Class A Common Stock.

ITEM 6.  SELECTED FINANCIAL DATA
<TABLE>
In thousands, except
per share data                          1998           1997            1996             1995            1994
------------------------------------------------------------------------------------------------------------
<S>                                 <C>            <C>            <C>               <C>            <C>
Net sales                           $763,311       $671,297       $439,571          $383,340       $337,262

Gross profit                        $130,632       $126,668       $ 81,741          $ 82,568       $ 73,632
Nonrecurring charges
  (gain)                            $  3,468       $  9,965       $  2,399          $ (2,265)      $  1,184
Operating income                    $ 20,374       $ 17,681       $ 13,491          $ 17,033       $ 13,121
Income before taxes on
 income                             $ 19,179       $ 12,005       $ 12,349          $ 16,823       $ 11,008
Income from continuing
 operations                         $ 13,009       $ 10,020       $  8,454          $ 11,009       $  7,258
</TABLE>
<PAGE>
                                                                              19
<TABLE>
In thousands, except
per share data                          1998           1997             1996            1995            1994
------------------------------------------------------------------------------------------------------------
<S>                                 <C>            <C>            <C>               <C>            <C>
Income from continuing
  operations per common
  share - Basic                     $      1.30    $      1.01    $       0.86      $      1.14    $     0.75
Income from continuing
  operations per common
   share - Diluted                  $      1.29    $      1.00    $       0.85      $      1.12    $      .73
Dividends declared per
  common share                      $      0.40    $      0.36    $       0.32      $      0.26    $      0.26
Total assets                        $   377,885       $358,293    $    271,492         $223,788    $   183,801
Debt including current
  maturities                        $   123,761       $122,901       $ 101,916      $    66,802    $    53,485
Preferred stock                     $       531      $     531    $        531      $       531    $       531
Shareholders' equity
  (total)                           $   103,282      $  93,827      $   88,852      $    82,900    $    70,826
</TABLE>

ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
                  AND FINANCIAL CONDITION

Incorporated  by  reference  from  the  1998  Annual  Report,   see  "Management
Discussion  and Analysis of Results of Operations  and  Financial  Condition" at
pages 25-31, which is filed as Exhibit 13 to this Form 10-K report.

ITEM 7(a)         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The  Company  is  exposed to changes  in  interest  rates and  foreign  currency
exchange  primarily in its cash,  debt and foreign  currency  transactions.  The
Company holds derivative instruments,  including interest rate swaps and forward
foreign currency  contracts.  Derivative  instruments used by the Company in its
hedging  activities  are  viewed as risk  management  tools and are not used for
trading or speculative  purposes.  Analytical  techniques are used to manage and
monitor  foreign  exchange and interest rate risk and include market  valuation.
The Company  believes it is, to a lesser  degree,  subject to commodity risk for
price changes that relate to certain  manufacturing  operations that utilize raw
commodities.  The  Company  manages  its  exposure  to changes  in those  prices
primarily  through its  procurement  and sales  practices.  This exposure is not
considered material to the Company.

A discussion  of the  Company's  accounting  policies for  derivative  financial
instruments is included in the Summary of Significant Accounting Policies in the
Notes to the Combined Consolidated Financial Statements.  Additional information
relating  to  financial  instruments  and debt is included in Note 9 - Financial
Instruments  and Note 7 - Debt and Other  Financing  Arrangements.  Quantitative
disclosures  relating  to  financial  instruments  and debt are  included in the
tables below.

International  operations,  excluding  U.S.  export sales which are  principally
denominated in U.S.  dollars,  constitute a significant  portion of the revenues
and  identifiable  assets of the  Company  and  totaled  $261  million  and $149
million, respectively, as of and for the year ended June 27, 1998, most of which
were denominated in Deutsche marks. The Company has significant loans to foreign
affiliates which are denominated in foreign currencies. Foreign currency changes
against the U.S. dollar affect the foreign  currency  translation  adjustment of
the  Company's  net  investment  in these  affiliates  and the foreign  currency
transaction  adjustments  on  long-term  advances to  affiliates,  which  impact
consolidated equity of the Company.  International  operations result in a large
volume of foreign currency commitment and transaction  exposures and significant
foreign  currency  net asset  exposures.  Since  the  Company  manufactures  its
products in a number of locations  around the world,  it has a cost base that is
diversified over a number of different  currencies,  as well as the U.S. dollar,
which serves to
<PAGE>
                                                                              20

counterbalance  partially  its  foreign  currency  transaction  risk.  Selective
foreign currency commitments and transaction exposures are partially hedged. The
Company does not hedge its exposure to translation  gains and losses relating to
foreign  currency net asset  exposures;  however,  when possible,  it borrows in
local  currencies  to reduce  such  exposure.  The  Company  is also  exposed to
fluctuations in other currencies including: British pounds, French francs, Irish
punts,  Japanese yen, Mexican pesos and Spanish  pesetas.  The fair value of the
foreign currency contracts  outstanding has been immaterial each of the last two
years.

The Company's cash position includes amounts  denominated in foreign currencies.
The Company manages its worldwide cash requirements  considering available funds
among its subsidiaries and the cost  effectiveness with which these funds can be
accessed.  The  repatriation  of cash  balances  from  certain of the  Company's
affiliates  could have adverse tax  consequences.  However,  those  balances are
generally  available  without  legal  restrictions  to  fund  ordinary  business
operations.  The  Company  has and will  continue  to  transfer  cash from those
affiliates to the parent and to other  international  affiliates when it is cost
effective to do so.

The Company  manages  its  interest  rate risk in order to balance its  exposure
between fixed and variable rates while  attempting to minimize  interest  costs.
Approximately  half of the Company's  long-term  debt is fixed and an additional
$30 million is effectively fixed through interest rate swaps as outlined below.

Interest Rate Sensitivity:
Principal (Notional) Amount by Expected Maturity
<TABLE>
                                                                                                               Fair value
Year ending    In Thousands         1999       2000       2001       2002       2003    Thereafter      Total     6/27/98
-------------------------------------------------------------------------------------------------------------------------
Liabilities:
<S>                              <C>           <C>        <C>       <C>        <C>          <C>        <C>       <C>
Long-term debt
   Fixed Rate                    $     0       $  7,000   $ 11,667  $ 10,604   $ 11,517     $ 15,937   $ 56,725  $ 58,540
   Avg. Interest Rate      6.93%

   Variable Rate                 $ 2,067       $  1,894   $  1,866  $    250   $ 18,372     $ 42,532   $ 66,981  $ 66,981
   Avg. Interest Rate      4.44%

Interest Rate Derivative Financial Instruments Related to Debt:

Interest Rate Swaps
  Pay Variable/Receive Fixed    $        0     $       0  $      0  $  5,000   $ 25,000     $      0   $ 30,000  $ (1,140)
   Avg. Pay Rate           7.17%
   Avg. Receive Rate       6.14%
</TABLE>
Exchange Rate Sensitivity:
Principal (Notional) Amount by Expected Maturity
<TABLE>
                                                                                                                Fair value
Year ending    In Thousands         1999       2000       2001       2002       2003    Thereafter      Total     6/27/98
-------------------------------------------------------------------------------------------------------------------------
Liabilities:
<S>                                <C>        <C>        <C>        <C>         <C>        <C>         <C>        <C>
Long-term debt
   Fixed Rate - US Dollar          $    0     $ 7,000    $ 11,667   $ 10,604    $ 11,517   $ 15,937    $ 56,725   $ 58,540

   Variable Rate - US Dollar       $  133     $   119    $    117   $     54    $  3,869   $ 15,911    $ 20,203   $ 20,203
   Variable Rate -
        Deutsche mark              $1,934     $ 1,775    $  1,749   $    196    $ 12,658   $ 23,547    $ 41,859   $ 41,859
   Variable Rate-Other             $    0     $     0    $      0   $      0    $  1,845   $  3,074    $  4,919   $  4,919
</TABLE>
<PAGE>
                                                                              21

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following  combined  consolidated  financial  statements which appear in the
1998 Annual Report are incorporated by reference:

         Combined Consolidated Statements of Income - Page 32.

         Combined Consolidated Balance Sheets - Page 33.

         Combined Consolidated Statements of Cash Flows - Page 34.

         Combined Consolidated Statements of Shareholders' Equity - Page 35.

         Notes to the Combined Consolidated Financial Statements - Pages 36-46.

         Management's Responsibility for Financial Reporting - Page 47.

         Report of Independent Certified Public Accountants - Page 48.

Quarterly  financial  data relating to the results of  operations  for the years
ended June 27,  1998,  and June 28, 1997,  appears in the 1998 Annual  Report in
Note 17 of the Notes to the Combined  Consolidated  Financial Statements at Page
46 and is incorporated herein by reference. The foregoing is filed as Exhibit 13
to this Form 10-K report.

ITEM 9            CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE


Not applicable.

                                    PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors of  Registrant.  Information  relating to the  directors  and director
nominees  of the  Registrant  contained  in the  Registrant's  definitive  Proxy
Statement for its Annual  Meeting of  Shareholders  to be held October 16, 1998,
and filed pursuant to Regulation 14A, is incorporated by reference.

Executive  Officers of the  Registrant.  Information  relating to the  executive
officers of the Company is included in Item 4 of Part I of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Information  relating to executive  compensation  is contained under the caption
"Executive  Compensation"  in the Company's  definitive  Proxy Statement for its
Annual Meeting of  Shareholders  to be held October 16, 1998 and the information
within those sections is incorporated by reference.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  sections  entitled  "Voting  Securities  and  Principal  Holders  Thereof",
"Nominees for Election as Directors" and "Securities Ownership of Management" in
the definitive  Proxy Statement for the Company's Annual Meeting of Shareholders
to be held  October 16, 1998,  and the  information  within  those  sections are
incorporated by reference.
<PAGE>
                                                                              22

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The section  entitled  "Certain  Transactions" in the definitive Proxy Statement
for the Company's  Annual Meeting of  Shareholders  to be held October 16, 1998,
and the information within that section is incorporated by reference.

                                    PART IV.

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


(a)  DOCUMENTS FILED AS PART OF THIS REPORT

1.  Financial  Statements.  The  Registrant's  combined  consolidated  financial
statements,  for the year  ended  June 27,  1998,  together  with the  Report of
Independent  Certified  Public  Accountants  appear in the 1998 Annual Report on
pages 32-48 and are  incorporated  by  reference  and are filed as Exhibit 13 to
this Form  10-K  report.  The  supplemental  financial  information  listed  and
appearing hereafter should be read in conjunction with the financial  statements
included in this report.

2. Financial Statement Schedules.  The following are included in Part IV of this
report for each of the years  ended June 27,  1998,  June 28,  1997 and June 29,
1996, as applicable:

                                                                     Page
Report of Independent Certified Public Accountants
      on Financial Statement Schedule                                 24
Schedule II, Valuation and Qualifying Accounts                        25

All other schedules are not submitted because they are not applicable or because
the  required  information  is included in the combined  consolidated  financial
statements or notes thereto.

3.  Exhibits.  Reference is made to the Exhibit Index which is found on the last
two pages of the body of this Form 10-K Annual Report preceding the exhibits.

(b)  REPORTS ON FORM 8-K

The  Company did not file any reports on Form 8-K during the year ended June 27,
1998.

 (c) EXHIBITS

The response to this  portion of Item 14 is  submitted as a separate  section of
this report.

(d)  FINANCIAL STATEMENT SCHEDULES

The response to this  section of Item 14 is  submitted as a separate  section of
this report.
<PAGE>
                                                                              23

SIGNATURES

Pursuant to the requirements of Section 13 (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.

DONNELLY CORPORATION



/s/J. Dwane Baumgardner
Chairman, Chief Executive
Officer, and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  persons on behalf of the  Registrant in
the  capacities and on the date  indicated.  The persons named below each hereby
appoint J. Dwane  Baumgardner and Scott E. Reed, and each of them severally,  as
his or her  attorney  in  fact,  to  sign in his or her  name  and on his or her
behalf,  as a  director  or  officer  of the  Registrant,  and to file  with the
Commission any and all amendments to this report on Form 10-K.



/s/J. Dwane Baumgardner                         /s/Scott E. Reed
Chairman, Director,                             Senior Vice President,
Chief Executive Officer                         Chief Financial Officer
and President

                                                /s/Ronald L. Winowiecki
                                                Chief Accounting Officer,
                                                Corporate Controller

/s/John A. Borden                               /s/Arnold F. Brookstone
Director                                        Director

/s/B. Patrick Donnelly III                      /s/Joan E. Donnelly
Director                                        Director

/s/R. Eugene Goodson                            /s/Thomas E. Leonard
Director                                        Director

/s/Gerald T. McNeive, Jr.                       /s/Rudolph B. Pruden
Director                                        Director

/s/Donald R. Uhlmann
Director



DATE: September 11, 1998
Donnelly Corporation
Annual Report - Form 10-K
<PAGE>
                                                                              24

Report of  Independent  Certified  Public  Accountants  on  Financial  Statement
Schedule

Donnelly Corporation
Holland, Michigan


The audits  referred  to in our report  dated  August 6, 1998,  relating  to the
combined   consolidated   financial   statements  of  Donnelly  Corporation  and
subsidiaries,  which are  incorporated by reference in Item 8 of this Form 10-K,
included  the  audit  of  the  financial   statement   schedule  listed  in  the
accompanying  index. This financial  statement schedule is the responsibility of
the Company's  management.  Our  responsibility is to express an opinion on this
financial statement schedule based on our audits.

In our opinion,  such  financial  statement  schedule  presents  fairly,  in all
material respects, the information set forth therein.



/s/BDO SEIDMAN, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
August 6, 1998
<PAGE>
                                                                              25

                              DONNELLY CORPORATION
                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
<TABLE>

COLUMN A                                  COLUMN B                  COLUMN C                     COLUMN D                 COLUMN E

                                          BALANCE AT                                                                     BALANCE AT
                                          BEGINNING                                                                         END
DESCRIPTION                               OF PERIOD                 ADDITIONS                     DEDUCTIONS              PERIOD
<S>                                       <C>                       <C>                           <C>                     <C>
RESERVE FOR UNCOLLECTIBLE 
   ACCOUNTS AND SALES 
   RETURNS AND ALLOWANCES:

         YEAR ENDED JUNE 29, 1996          $575                       -- (1)                      -- (1)                    $571

         YEAR ENDED JUNE 28, 1997          $571                     $473 (2)                      -- (1)                  $1,064

         YEAR ENDED JUNE 27, 1998        $1,064                       -- (1)                      -- (1)                  $1,095


  (1)    INFORMATION IN THIS COLUMN IS NOT SIGNIFICANT
  (2)    INCREASE DUE TO CONSOLIDATION OF SUBSIDIARY
</TABLE>

<PAGE>
                            Annual Report - Form 10-K

                                  Exhibit Index

3.       Articles of  Incorporation  and Bylaws are incorporated by reference to
         Exhibit 3.1 and 3.2 of Registrant's Registration Statement on Form S-1,
         as amended,  dated March 9, 1988,  (Registration  No.  33-17167)  ("S-1
         Registration Statement").

4.       A specimen  stock  certificate of the Class A Common Stock was filed as
         part of Form 10-K for the fiscal year ended June 28, 1997, as Exhibit 4
         and is hereby incorporated herein by reference.

10.1     Multi  Currency  Revolving  Credit Loan  Agreement was filed as part of
         Form 10-QA for the quarter  ended  September  27, 1997, as Exhibit 10.1
         and is hereby incorporated herein by reference.

10.2     Nationwide  Life Insurance  Company Debt Agreement was filed as part of
         Form 10-K for the fiscal year ended July 1, 1995,  as Exhibit  10.1 and
         is hereby incorporated herein by reference.

10.3     An English  language  summary of an  Acquisition  Agreement and related
         documents  written in German  between the  Registrant,  Donnelly  GmbH,
         Donnelly Hohe GmbH & Co. KG ("Hohe") and other related  parties,  dated
         May 25, 1995,  was filed as Exhibit 2 to a Form 8-K dated June 9, 1995,
         and is hereby  incorporated  herein by reference.  An English  language
         translation of an Amendment to the  Acquisition  Agreement was filed as
         Exhibit 10.1 to Form 10-Q for the quarter ended March 28, 1998,  and is
         hereby incorporated herein by reference.

10.4     Nationwide  Life Insurance  Company Debt Agreement was filed as part of
         Form 10-K for the fiscal year ended July 2, 1994,  as Exhibit  10.1 and
         is hereby incorporated herein by reference.

10.5     The Principal  Mutual Debt Agreement was filed as part of Form 10-K for
         the  fiscal  year ended  July 3,  1993,  as Exhibit  10.2 and is hereby
         incorporated herein by reference.

10.6     The form of  Indemnity  Agreement  between  Registrant  and each of its
         directors was filed as a part of a  Registration  Statement on Form S-1
         (Registration  No.  33-17167) as Exhibit  10.8,  and the same is hereby
         incorporated herein by reference.

10.7     The  Donnelly  Corporation  Stock  Option  Plan was  filed as part of a
         Registration  Statement  on Form S-1  (Registration  No.  33-17167)  as
         Exhibit 10.9, and the same is hereby incorporated herein by reference.

10.8     The Donnelly Corporation 1987 Employees' Stock Purchase Plan, including
         amendments was originally filed as part of a Registration  Statement on
         Form S-8  (Registration  No.  33-34746) as Exhibit  28.1,  and has been
         subsequently  amended  and filed as part of Form  10-Q for the  quarter
         ended  September  27, 1997,  as Exhibit 10.2 and both such exhibits are
         hereby incorporated herein by reference.

10.9     The Donnelly  Corporation Non Employee Director's Stock Option Plan was
         filed as part of a Registration Statement on Form S-8 (Registration No.
         33-55499) as Exhibit 99, and the same is hereby  incorporated herein by
         reference.

10.10    The Donnelly Corporation Executive  Compensation Plan was filed as part
         of Form 10-K/A for the fiscal year  ending  June 29,  1996,  as Exhibit
         10.11 and is hereby incorporated by reference.

10.11    The Donnelly  Corporation Unfunded Deferred Director Fee Plan was filed
         as part of Form 10-K/A for the fiscal year  ending  June 29,  1996,  as
         Exhibit 10.12 and is hereby incorporated by reference.
<PAGE>
10.12    The Donnelly  Corporation  Pension Plan for Outside Directors was filed
         as part of Form 10-K/A for the fiscal year  ending  June 29,  1996,  as
         Exhibit 10.13 and is hereby incorporated by reference.

10.13    The Donnelly Corporation Supplemental Retirement Plan was filed as part
         of Form 10-K/A for the fiscal year  ending  June 29,  1996,  as Exhibit
         10.14 and is hereby incorporated by reference.

10.14    The Donnelly Corporation  Deferred  Compensation Plan was filed as part
         of Form 10-K/A for the fiscal year  ending  June 29,  1996,  as Exhibit
         10.15 and is hereby incorporated by reference.

10.15    Letter from Donnelly Corporation to Mr. Donn Viola dated July 12, 1996,
         as  modified  on July 22, 1996 was filed as part of Form 10-K/A for the
         fiscal  year  ending  June 29,  1996,  as  Exhibit  10.17 and is hereby
         incorporated by reference.

10.16    Letter  from  Donnelly   Corporation  to  Mr.  Russell  Scaffede  dated
         September 15, 1995 was filed as part of Form 10-K/A for the fiscal year
         ending June 29, 1996,  as Exhibit 10.18 and is hereby  incorporated  by
         reference.

10.17    An English language summary of the Security Pooling  Agreement  written
         in German  between the Registrant and Donnelly Hohe GmbH & Co. KG dated
         September 15, 1995 was filed as part of Form 10-K/A for the fiscal year
         ending June 29, 1996,  as Exhibit 10.19 and is hereby  incorporated  by
         reference.

10.18    Receivables Purchase Agreement among Donnelly Receivables  Corporation,
         Falcon Asset Securitization  Corporation and the First National Bank of
         Chicago  dated as of November 14, 1996 was filed as part of Form 10-K/A
         for the fiscal  year  ending  June 29,  1996,  as Exhibit  10.20 and is
         hereby incorporated by reference.

10.19    Lear  Donnelly  Overhead  Systems,  L.L.C.  Operating  Agreement  dated
         November  1, 1997 was filed as part of the Form  10-QA for the  quarter
         ended December 27, 1997, as Exhibit 10.1 and is hereby  incorporated by
         reference.

10.20    The Donnelly  Corporation  1997 Employee Stock Option Plan was filed as
         part of a  Registration  Statement  on Form S-8 on November  25,  1997,
         (Registration  No.  333-40987)  as  Exhibit  4, and the same is  hereby
         incorporated herein by reference.

10.21    Amended and  Restated  Operating  Agreement  for  Donnelly Electronics,
         L.L.C., dated January 1, 1998.

10.22    An Agreement by and between Donnelly Electronics,  L.L.C.  and Donnelly
         Corporation, dated January 1, 1998.

10.23    Letter  from  Donnelly  Corporation  to Mr. Scott Reed dated August 17,
         1998.

13       Certain  portions of the  Donnelly  Corporation  1998 Annual  Report to
         Shareholders.   This   information   was  delivered  to  the  Company's
         Shareholders in compliance with Rule 14(a)-3 of the Securities Exchange
         Act of 1934, as amended.

21       Schedule of Affiliates.

23       Consent of BDO Seidman, LLP, independent public accountants.

27       Financial Data Schedule.
<PAGE>
EXHIBIT 13



                      DONNELLY CORPORATION AND SUBSIDIARIES

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


FORWARD-LOOKING STATEMENTS

This  report  contains  forward-looking  statements  within  the  meaning of the
Private  Securities   Litigation  Reform  Act  of  1995.  The  terms  "believe,"
"anticipate,"  "intend," "goal," "expect," and similar  expressions may identify
forward-looking  statements.  Investors are cautioned  that any  forward-looking
statements,  including  statements  regarding  the  intent,  belief  or  current
expectations  of the Company or its  management,  are not  guarantees  of future
performance  and involve risks and  uncertainties,  and that actual  results may
differ  materially  from  those in  forward-looking  statements  as a result  of
various factors including, but not limited to (i) general economic conditions in
the markets in which the Company  operates,  (ii)  fluctuation  in  worldwide or
regional  automobile  and light truck  production,  (iii)  changes in  practices
and/or policies of the Company's significant customers,  (iv) market development
of specific products of the Company, including digital optics and electrochromic
mirrors,  (v) the completion of the European  restructuring and (vi) other risks
and uncertainties.  The Company does not intend to update these  forward-looking
statements.

OVERVIEW

The Company's  fiscal year ends on the Saturday  nearest June 30, and its fiscal
quarters end on the Saturdays  nearest  September 30,  December 31, March 31 and
June 30. Donnelly Hohe's fiscal year ends on May 31, and its fiscal quarters end
on August 31,  November 30, February 28 and May 31.  Accordingly,  the Company's
Combined  Consolidated  Financial  Statements  as of and for a period ended on a
particular  date include  Donnelly Hohe's  financial  statements as of and for a
period ended  approximately  one month before that date. The Company's  combined
consolidated  financial  statements as of and for the years ended June 27, 1998,
and June 28, 1997,  consolidate  Donnelly Hohe's financial  statements as of and
for the twelve month  period  ended May 31, 1998,  and for the nine month period
ended May 31, 1997,  respectively.  Fiscal  years ended June 27, 1998,  June 28,
1997, and June 29, 1996, each included 52 weeks. All year and quarter references
relate to the  Company's  fiscal  year and  fiscal  quarters,  unless  otherwise
stated.

On November 3, 1997,  the Company  formed Lear Donnelly  Overhead  Systems,  LLC
("Lear  Donnelly"),  a 50% owned joint venture with Lear  Corporation  ("Lear").
Lear Donnelly is engaged in the design,  development  and production of overhead
systems for the global automotive  market,  including complete overhead systems,
headliners,   consoles  and   lighting   components,   vehicle   electrification
interfaces,  electronic components, visors and assist handles ("products").  The
Company and Lear each contributed certain  technologies,  assets and liabilities
for the creation of the joint  venture.  The Company  transferred  net assets of
$7.9  million  associated  with  its  interior  trim  and  lighting  businesses,
including $10 million of debt, to the joint venture for its 50% interest.

Lear Donnelly  manufactures  products for sale to both the Company and Lear, who
are each responsible for their customer sales efforts to the original  equipment
manufacturers.  Because  existing and certain future  contracted sales have been
retained  by  the  Company,   the  existence  of  the  joint  venture  does  not
significantly impact the comparability of net sales or net income of the Company
from period to period.  Net income  recognized  by the Company  will be based on
one-half the profitability of Lear Donnelly. Due to the supply agreement between
Lear Donnelly and the parent  companies,  the sales are reported by the parents.
However,  the related net earnings of the joint venture are being  accounted for
under the equity method.  Accordingly,  the Company's gross profit and operating
margins are unfavorably impacted.

Effective April 1, 1995, the Company acquired an interest in Hohe GmbH & Co. KG,
since renamed  Donnelly Hohe GmbH & Co. KG ("Donnelly  Hohe"),  a German limited
partnership.  Donnelly Hohe, based in Collenberg,  Germany, supplies many of the
leading  European  automakers  with  interior  and exterior  rear view  mirrors,
through manufacturing facilities in Germany and Spain. Donnelly Hohe consists of
a  general  partnership  and a  limited  partnership.  The  general  partnership
controls  Donnelly  Hohe's assets and manages its  operations  while the limited
partnership  is the  recipient  of all income or losses  generated  by  Donnelly
Hohe's operations.

The  Company's  original  investment  consisted of a 48% interest in the general
partner and a 66 2/3% interest in the limited partner.  In the second quarter of
1997,  the Company  acquired an additional  controlling  interest in the general
partner.  As a result,  Donnelly Hohe's financial  statements were  consolidated
with those of the Company,  beginning with the second quarter of 1997.  From the
initial date of acquisition,  April 1, 1995,  through the first quarter of 1997,
the Company's investment in

                                                                               2
<PAGE> 
Donnelly  Hohe was  accounted  for using the equity  method of  accounting.  The
Company's limited partnership  interest has remained unchanged,  therefore,  the
consolidation  of  Donnelly  Hohe has no impact on net  income  for each  period
reported.

The  Company's  net sales and net income are  subject to  significant  quarterly
fluctuations  attributable  primarily to  production  schedules of the Company's
major  automotive  customers.  These same  factors  cause  quarterly  results to
fluctuate from year to year.  The  comparability  of the Company's  results on a
period to period basis is also affected by the Company's  implementation  of new
joint ventures, alliances, acquisitions and investments in new product lines.

RESULTS OF OPERATIONS

Comparison of 1998 to 1997

Net sales were $763.3  million in 1998  compared to $671.3  million in 1997,  an
increase  of   approximately   14%,   which  is  primarily   attributed  to  the
consolidation  of Donnelly  Hohe for the entire twelve month period and stronger
sales in the Company's North American  operations.  Pro forma net sales for 1997
were  approximately  $720 million  including  Donnelly  Hohe's net sales for the
first  quarter.  Net sales were  $209.7  million  in the fourth  quarter of 1998
compared  to $188.2  million  in the  fourth  quarter of 1997,  an  increase  of
approximately  11%, due to stronger North American sales. The Company  continues
to experience significant price pressures from its customers.  While these price
pressures  continue to impact the Company's gross profit and operating  margins,
they did not have a material impact on the Company's net sales for 1998 or 1997.

Net sales for the Company's North American operations increased by approximately
12% in 1998 compared to 1997 and 17% for the comparable  fourth quarter periods.
The  increase  was  primarily  due to programs  launched in 1997 running at full
production volumes in 1998 and new product  introductions in the modular window,
door handle and interior trim product lines.  The increase in North American net
sales occurred despite the fact that automotive  industry  production  increased
less than 3%. Net sales for the Company's  European  operations,  as reported in
the local  currencies for these  operations,  increased  moderately for the year
ended 1998 compared to 1997, including Donnelly Hohe for the entire twelve month
period for both  years.  However,  due to the  increased  strength of the dollar
relative to the  Deutsche  mark,  Irish punt and French franc for the year ended
1998 as compared to 1997, the reported consolidated net sales in dollars for the
Company's  European  operations were down slightly  compared to 1997,  including
Donnelly Hohe for the entire twelve month period for both years.

Gross  profit  margin for 1998 was 17.1%  compared to 18.9% in 1997 and 17.3% in
the fourth  quarter of 1998  compared to 18.8% in the same  period of 1997.  The
Company's  North  American  gross profit margins for 1998 were lower compared to
1997  primarily  due to the profits of the Lear  Donnelly  joint  venture  being
accounted for under the equity method and relatively  greater  revenue growth of
products with lower profit margins. The Company's North American operations have
experienced  a more rapid rate of  revenue  growth in modular  window net sales,
relative to the net sales growth of other products,  such as mirrors,  that have
higher  profit  margins.  The Company may  experience  a change in gross  profit
margin  from  period  to period  based on the  sales  growth or change in mix of
higher or lower margin products.  A favorable  arbitration award associated with
Donnelly Happich Technology, Inc. improved gross profit margins, as a percent of
sales,  slightly for 1998 (see Note 14). Gross profit for the Company's European
operations was slightly  higher due to operational  improvements  in Ireland and
continued strong operational performance for the year in Spain and France.

Selling,  general and administrative  expenses decreased to 9.2% of net sales in
1998 from 9.9% of net sales in 1997,  primarily due to the formation of the Lear
Donnelly  joint  venture.  These  costs are  lower as a percent  to sales due to
certain  general and  administrative  functions to support the interior trim and
lighting  business  transferring  to the joint  venture,  which is accounted for
under the equity method. In the fourth quarter of 1998, these expenses were 9.7%
of sales compared to 10.2% in the same period of 1997.

Research and  development  expenses were $36.4 million in 1998 compared to $32.5
million in 1997. These expenses were flat as a percent of sales in 1998 compared
to 1997.

In the fourth quarter of 1998, Donnelly Optics Corporation  ("Donnelly Optics"),
a wholly owned subsidiary in Tucson,  Arizona,  recognized a $3.5 million pretax
charge  against  operating  income,  or $0.23 per share  after  tax,  due to the
cancellation  of orders,  related to  changing  market  dynamics  in the digital
imaging  sector of the computer  industry.  The charge  primarily  consists of a
write-off of tooling and other current assets and severance of  approximately 25
manufacturing and administrative  personnel. The severance cash payments will be
completed by the end of 1999.  The Company is currently  evaluating  options for
responding to the changing market conditions.

In  the  fourth  quarter  of  1997,   the  Company   recognized  a  $10  million
restructuring   charge  in  the   Company's   European   operations  to  realign
manufacturing  capacity,  improve  operating  efficiencies  and to reduce future
operating costs, primarily by reducing the

                                                                               3
<PAGE> 
number of non-production employees. The restructuring also involves reorganizing
product lines and production to realize  efficiencies in the production process.
The costs  consist  primarily of a severance  program and  voluntary  separation
incentives in addition to other expenses associated with the plan. The severance
and separation incentive program includes approximately 230 personnel, primarily
personnel in manufacturing and administrative support functions.  Due to changes
in  management  at the  Company's  European  operations,  implementation  of the
restructuring  plan was delayed until the fourth  quarter of 1998.  Through June
27, 1998, the Company had  terminated 127 employees  under the plan and has made
cumulative  cash payments of $5.1 million,  primarily  severance and  separation
incentives.  All remaining employee  separation  benefits and related cash flows
are expected to be completed by the end of 1999.

The Company's  operating  income  increased  from $17.7 million in 1997 to $20.4
million  in  1998.  The  Company's  North  American  Automotive  Operations  and
Information  Products subsidiary  contributed strong  profitability in both 1998
and 1997.  However,  the Company's North American  operating income was lower in
1998 as a percent of sales, primarily due to losses associated with the start-up
of Donnelly Optics and an unfavorable product mix. In addition to these factors,
the Company's North American operations  experienced lower operating income as a
percent of sales due to the $3.5 million pretax charge at Donnelly  Optics.  The
formation of the Lear Donnelly  joint venture did not have a significant  impact
on the Company's  North American  operating  margins.  Operating  income for the
Company's European operations  increased for the year and fourth quarter of 1998
compared to 1997 primarily due to the impact of the restructuring charge in 1997
and improvements in the Company's Irish operations.

Interest  expense  was $8.3 and $9.5  million  in 1998 and  1997,  respectively.
Interest  expense  was lower  primarily  due to lower  average  debt during 1998
compared to 1997.  In the second  quarter of 1997,  the Company  entered into an
agreement to sell an interest in a defined pool of trade accounts receivable. As
of the Company's combined  consolidated  balance sheets, dated June 27, 1998 and
June 28, 1997, a $40.3 million and $40.0 million interest in accounts receivable
was sold  under  this  agreement,  respectively,  with  proceeds  used to reduce
revolving lines of credit. The discount expense associated with this transaction
is included in selling, general and administrative expenses.

Royalty income was $0.1 million and $1.5 million in 1998 and 1997, respectively.
Royalty  income is lower due to the completion of various  licensing  agreements
with companies in Asia.

Other income was $1.9  million and $0.8 million in 1998 and 1997,  respectively.
Other  income was higher in 1998  primarily  due to grant  income and  favorable
translation gains recognized at some of the Company's European operations.

In the second  quarter of 1997,  the Company  sold 2.5% of its holding in VISION
Group plc ("VISION  Group"),  resulting in a $0.9  million  pretax gain.  In the
second  quarter of 1998,  the Company  sold its 50%  interest  in Applied  Films
Corporation ("AFC") during an initial public offering. As a result of this sale,
the Company  received $7.9 million in net proceeds,  after taxes and related out
of pocket fees,  and  recognized a one-time  pretax gain of  approximately  $4.6
million, or $0.22 per share after tax.

The Company's  effective tax rate was 26.3% in 1998,  compared to 23.2% in 1997.
The lower tax rate in 1997 was due to operating  losses in Germany at higher tax
rates. The Company recognized lower taxes than expected in the fourth quarter of
1998 due to higher tax credits  than  expected  and tax exempt  income on higher
export sales,  combined with a reduced pretax result from the charge at Donnelly
Optics.  The  Company  has  recorded  $7.1  million  of  deferred  tax assets on
nonexpiring net operating loss  carryforwards  at June 27, 1998. The majority of
the  loss  carryforwards   resulted  from  the  European   restructuring  charge
recognized in 1997.

Minority  interest in net loss of subsidiaries was $0.4 million in 1998 compared
to $1.1 million in 1997.  Equity in losses of  affiliated  companies  was ($1.5)
million in 1998 compared to $(0.3)  million for the same period in 1997.  Equity
earnings of affiliated  companies were significantly lower in 1998 due to losses
incurred  at  VISION  Group.  The  losses  were  incurred  due  to  slower  than
anticipated  consumer  acceptance for VISION Group's integrated camera microchip
products.  The Lear Donnelly joint venture did not have a significant  impact on
the Company's equity earnings in 1998.

Net income was $13.0  million in 1998  compared  to $10.0  million in 1997.  Net
income for 1998 included a $2.2 million net gain after taxes associated with the
sale of AFC, offset by a $2.3 million  after-tax charge at Donnelly Optics.  The
consolidation  of Donnelly Hohe did not impact the  comparability  of net income
from 1997 to 1998.

The  Company  is  committed  to  improving  shareholder  value  through  focused
development  of the core  automotive  businesses,  primarily by  increasing  the
Company's dollar content per vehicle through  introduction of new  technologies,
increasing  volume  through  penetration  into  new  and  emerging  markets  and
improving the efficiency of operations.

                                                                               4
<PAGE>
The Company believes that future results of operations will be influenced by the
completion of the European  restructuring;  the  implementation of a response to
the changing  conditions in the computer  digital imaging  market;  the costs to
implement  new  software  for  manufacturing,  distribution  and  administration
applications;  and general economic and industry conditions.  In addition, early
in the first quarter of 1999, the Company's  production schedules were disrupted
due to a strike at one of the  Company's  significant  customers.  The customer,
which  represents  approximately  5% of the  Company's  net sales,  resolved the
strike in late July 1998. The loss in production for the first five weeks of the
quarter will place additional  pressure on the ability of the Company to achieve
its net income goal for the quarter.


Comparison of 1997 to 1996

Net sales were $671.3  million in 1997 compared to $439.6  million in 1996.  The
consolidation of Donnelly Hohe contributed  approximately  $164.0 million of net
sales in 1997.  Excluding  Donnelly Hohe,  consolidated  net sales for 1997 were
$507.3 million, an increase of 15% over 1996.

Net sales for the Company's North American operations increased by approximately
15% in 1997 compared to 1996.  The increase in North American net sales occurred
despite the fact that automotive industry production increased less than 5%. The
increase  was  primarily  due to  programs  launched  in  1996  running  at full
production volumes in 1997 and new product  introductions in the modular window,
door handle and  interior  trim  product  lines.  Net sales also  increased as a
result of strong  sales of vehicles  containing  Company  products,  such as the
Chrysler Caravan/Voyager and the Ford Expedition.

The  Company's  consolidated  European  sales  increased by  approximately  $172
million in 1997 from 1996 primarily due to the  consolidation  of Donnelly Hohe.
Excluding  the  consolidation  of  Donnelly  Hohe,  net sales for the  Company's
European  operations  were  approximately  17% higher due to increased  sales of
interior and electrochromic mirrors and modular windows.

Gross profit margin for 1997 was 18.9%  compared to 18.6% in 1996. The Company's
North  American  gross profit  margins were  stronger for the year due to higher
volumes,  significantly lower start-up expenses compared to 1996,  non-recurring
costs  incurred in 1996,  stronger  performance  at the Company's  subsidiary in
Mexico  and  stronger  sales  and  operational  performance  for  the  Company's
Information  Products  business.  In 1996,  the Company's  North  American gross
profit margin was negatively impacted due to the simultaneous  start-up of three
major new business  programs which  resulted in annual net sales  exceeding $100
million  in 1997.  North  American  gross  profit  margin  performance  was also
significantly  impacted in the third  quarter of 1996 by technical  difficulties
with one of the Company's suppliers on a new business program.

The Company's European gross profit margins were stronger than the previous year
primarily due to the consolidation of Donnelly Hohe and the Company's subsidiary
in France  operating at normal  production  volumes during the period.  Donnelly
Hohe's gross profit margins,  particularly  Donnelly Hohe's  operation in Spain,
are equal to or  slightly  higher  than  those of the  Company's  other  foreign
affiliates.  Partially  offsetting  these  improvements  were lower gross profit
margins at the Company's Irish operations due to a number of factors,  including
a paint supplier performance problem and price decreases resulting from currency
fluctuations  associated  with the strong Irish punt.  These have impacted gross
profit in 1997 by  approximately  $4.0 million.  The paint supplier  performance
problem is primarily due to process  related scrap  expenses and the  supplier's
difficulty in meeting customer schedules.  This has resulted in excessive scrap,
rework and freight  costs to the  Company.  The Company  has  transferred  these
products to Donnelly Hohe.

Selling,  general  and  administrative  expenses  were 9.9% of net sales in 1997
compared to 8.7% in 1996. These expenses increased from $38.1 million in 1996 to
$66.5 million in 1997. The increase  resulted from the consolidation of Donnelly
Hohe, support necessary for higher sales from new business programs, support for
the ramp-up of the Donnelly  Optics  business and from discount fees  associated
with the securitization of accounts receivable. In addition, a patent settlement
gain,  net of  litigation  expenses,  was  recognized  in  1996  resulting  in a
reduction of these expenses by 0.5% of net sales.

Research and  development  expenses were $32.5 million in 1997 compared to $27.7
million in 1996. These expenses decreased from 6.3% of net sales in 1996 to 4.8%
of net sales in 1997 due to the  consolidation  of Donnelly Hohe.  Excluding the
consolidation of Donnelly Hohe,  research and development  expenses were 5.8% of
net sales in 1997.

The fourth  quarter of 1997 included a $10 million  restructuring  charge in the
Company's  European  operations  to  realign  manufacturing  capacity,   improve
operating  efficiencies  and to reduce  future  operating  costs,  primarily  by
reducing the number of nonproduction  employees.  In the fourth quarter of 1996,
the  Company  recorded a  restructuring  charge of $2.4  million  related to the
write-down  of certain  assets and the  closure of the  Company's  manufacturing
facility in Mt.  Pleasant,  Tennessee,  including  accruals  for  severance  and
related  employee  support programs and write-off of certain assets removed from
service. The majority of these liabilities were paid or settled during the first
six months of 1997.

                                                                               5
<PAGE>
The Company's  operating  income  increased  from $13.5 million in 1996 to $17.7
million in 1997,  despite the restructuring  charge of $10 million in the fourth
quarter of 1997.  Excluding  the  restructuring  charges  and patent  gain,  the
Company's  operating margins increased from 3.1% of net sales in 1996 to 4.1% of
net sales in 1997.

The Company's North American  operating  income increased from 4.4% of net sales
in 1996 to 5.7% of net sales in 1997.  Operating margins were higher during 1997
due to higher volumes,  significantly  lower start-up expenses compared to 1996,
nonrecurring   costs  incurred  in  the  third  quarter  of  1996  and  stronger
performance  at the Company's  subsidiary  in Mexico and within the  Information
Products business. Improvements made in North American gross profit margins were
slightly  offset by higher  selling,  general and  administrative  expenses  and
research  and  development  expenses  as a percent to sales  including  start-up
losses experienced at the Company's Donnelly Optics operation.

European  operating  income  decreased from an operating loss of $3.7 million in
1996 to an operating  loss of $7.8 million  primarily  due to the  restructuring
charge  recognized in the fourth  quarter of 1997.  Excluding the  restructuring
charge,  European  operating  income increased to $1.5 million in 1997 primarily
due to the  consolidation  of  Donnelly  Hohe  and  higher  sales  and  stronger
operating performance at the Company's subsidiary in France.

Interest   expense  was  $9.5  million  and  $8.1  million  in  1997  and  1996,
respectively.  The  higher  interest  expense  was due to the  consolidation  of
Donnelly  Hohe.  Interest  expense  was  positively  impacted in 1997 due to the
securitization  of accounts  receivable in November  1996, the proceeds of which
were  used  to  reduce  the  borrowing  under  the  Company's  revolving  credit
agreement.  The discount fees of $1.1 million  associated with this  transaction
are included in administrative and general expenses.

Royalty income was $1.5 million and $5.2 million in 1997 and 1996, respectively.
Royalty  payments  associated with the sale of the  refrigerator  glass shelving
business in 1995 concluded in the fourth quarter of 1996.

In the second quarter of 1997, the Company sold 2.5% of its investment in VISION
Group shares, resulting in a $0.9 million pretax gain.

Minority  interest in net loss of subsidiaries was $1.1 million in 1997 compared
to $0.2 million in 1996.  Beginning in the second  quarter of 1997,  the Company
began  accounting for its  investment in Donnelly Hohe on a consolidated  basis,
thereby  requiring the  recognition of minority  interest in the net (income) or
loss of this  subsidiary.  Prior to the  second  quarter  of 1997,  the  Company
accounted  for its  investment  in  Donnelly  Hohe  under the  equity  method of
accounting.  Equity in earnings  (losses)  of  affiliated  companies  was ($0.3)
million in 1997 compared to $0.1 million in 1996.  The equity losses  recognized
in 1997 were  primarily due to start-up  losses  incurred at VISION Group and at
the  Company's  Chinese joint  ventures.  Slightly  offsetting  these losses was
stronger performance at AFC. The Company sold all of its shares in AFC during an
initial public offering that was completed in November 1997.

The Company's  effective tax rate was 23.2% for 1997, compared to 33.8% in 1996.
The decrease in the effective tax rate was due to  reinstatement of the research
and development tax credit in the United States,  operating losses in Germany at
higher  tax  rates  and  benefits  from  adopting  the  new  United  States  tax
regulations for most of the Company's foreign operations. The Company recorded a
tax  benefit  of $2.6  million in the  fourth  quarter on a pretax  loss of $2.4
million,  primarily due to the European  restructuring  charge recognized in the
fourth  quarter.  The  Company's  effective  tax rate for 1997  would  have been
approximately  32% without the  restructuring  charge.  The Company has recorded
$6.7 million of deferred tax assets on net operating loss  carryforwards at June
28, 1997.  The  majority of the loss  carryforwards  resulted  from the European
restructuring charge recognized in the fourth quarter of 1997.

Net  income was $10.0  million in 1997  compared  to $8.5  million in 1996.  Net
income  increased  compared  to 1996 due to higher  sales,  significantly  lower
start-up costs and improved  operational  performance  in North  America.  North
American net income was  significantly  impacted in the third quarter of 1996 by
technical  difficulties  with one of the  Company's  suppliers on a new business
program  that  resulted  in  significant  additional  costs.   Offsetting  these
improvements were the restructuring  charge taken in the fourth quarter of 1997,
losses  experienced at the Company's Irish  operations and lower royalty income.
The restructuring  charge impacted net income by $4.0 million, or $0.40 earnings
per share.  The Company's net income also included  start-up losses for Donnelly
Optics  of  approximately  $1.5  million  and $0.4  million  for 1997 and  1996,
respectively.   The   consolidation   of  Donnelly   Hohe  did  not  impact  the
comparability of net income from 1996 to 1997.

                                                                               6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

In  September  1997,  the Company  entered  into a new  unsecured  $160  million
multi-currency  global revolving credit agreement to meet the financing needs of
Donnelly  Corporation  and its majority  owned,  controlled  subsidiaries.  This
multi-currency  revolving  credit  agreement  replaces  the  Company's  previous
unsecured $80 million domestic credit agreement and its 75 million Deutsche Mark
revolving  Eurocredit loan agreement.  Borrowings  under this new agreement bear
interest,  at the election of the Company, at a floating rate under one of three
alternative  elections.  This  new  revolving  credit  agreement  terminates  in
September  2004,  with an  opportunity  for the  Company  to extend for one year
periods with the consent of all the revolver banks.

The Company's $160 million  multi-currency global revolving credit agreement had
borrowings  against it of $47.5 million in the Company's  combined  consolidated
balance  sheet  dated June 27,  1998,  compared  to no  borrowings  against  the
Company's $80 million bank  revolving  credit  agreement and borrowings of $33.4
million against the Company's 75 million Deutsche Mark (approximately $41 to $44
million) credit agreement in the Company's combined  consolidated  balance sheet
dated June 28, 1997. The Company's total long-term  borrowings at June 27, 1998,
were at the same level as the previous year.  Proceeds  associated with the sale
of the Company's investment in AFC and the transfer of debt to the Lear Donnelly
joint venture, were offset by borrowings to support capital expenditures.

The Company's  current ratio was 1.5 and 1.3 at June 27, 1998 and June 28, 1997,
respectively.  Working  capital was $52.5 million at June 27, 1998,  compared to
$37.0  million at June 28,  1997.  The  increase in working  capital at June 27,
1998,  was  primarily  due to an increase in accounts  receivable,  which is the
result of higher sales for the period  compared to the previous  year and timing
of customer  payments,  offset  slightly by a decrease in prepaid  tooling.  The
Company's   North  American   customers   provide  payment  to  the  Company  on
pre-established payment dates ranging from the 28th to the 30th of each month.
Therefore, a number of customer payments were not received by June 27, 1998.

Capital  expenditures in 1998,  1997 and 1996 were $46.2 million,  $35.2 million
and $20.6 million, respectively. Capital spending in 1998 was higher compared to
the  previous  year due to the  consolidation  of  Donnelly  Hohe for the entire
twelve month  period,  expenditures  in  diffractive  optics and  electrochromic
mirrors and implementation of new manufacturing, distribution and administrative
information technology systems in North America and Europe. Capital expenditures
are  expected to continue  between  6.0%-7.0% of sales over the next year due to
the launch of new business  programs in North America and the  implementation of
new information technology systems in the Company.

The Company  believes that its long term  liquidity and capital  resource  needs
will continue to be provided  principally  by funds from  operating  activities,
supplemented by borrowings under the Company's existing credit  facilities.  The
Company also considers  equity  offerings to properly manage the Company's total
capitalization  position.  The Company  considers,  from time to time, new joint
ventures,  alliances and acquisitions,  the implementation of which could impact
the liquidity and capital resource requirements of the Company.

Except  for the  Company's  subsidiary  in  Mexico,  the value of the  Company's
long-term  consolidated assets and liabilities located outside the United States
and income and expenses  reported by the  Company's  foreign  operations  may be
affected by translation values of various functional  currencies.  The Company's
primary  foreign  investments  are  in  Germany,   Ireland,  Spain  and  France.
Translation  gain and loss  adjustments are reported as a separate  component of
shareholders'  equity. For the Company's  subsidiary in Mexico, whose functional
currency is the United  States  Dollar,  transaction  and  translation  gains or
losses are  reflected  in net income for all  accounts  other than  intercompany
balances of a long-term  investment  nature,  for which the translation gains or
losses are reported as a separate component of shareholders' equity.

The Company utilizes  interest rate swaps and foreign exchange  contracts,  from
time to time,  to manage  exposure  to  fluctuations  in  interest  and  foreign
currency  exchange  rates.  The  risk of loss to the  Company  in the  event  of
nonperformance by any party under these agreements is not deemed material.


Recently Issued Accounting Standards

Statement  of  Financial   Accounting   Standards  (SFAS)  No.  130,  "Reporting
Comprehensive  Income,"  establishes  standards  for  reporting  and  display of
comprehensive  income,  its components and  accumulated  balances in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements.  Comprehensive  income is defined to include  all  changes in equity
except those resulting from investments by owners and distributions to owners.

SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a  Business   Enterprise,"   establishes  standards  for  the  way  that  public
enterprises report

                                                                               7
<PAGE>
information about operating segments in annual financial statements and requires
reporting of selected  information about operating segments in interim financial
statements issued to the public.  It also establishes  standards for disclosures
regarding products and services, geographic areas and major customers.

SFAS Nos.  130 and 131 are  effective  for the  Company in 1999.  The results of
operations and financial  position will be unaffected by implementation of these
new standards.

SFAS No. 132,  "Employer's  Disclosures about Pensions and Other  Postretirement
Benefits,"  an amendment  of FASB  Statements  No. 87, 88, and 106,  revises the
standards for  employers'  disclosures  about  pension and other  postretirement
benefit plans.  It does not change the  measurement or the  recognition of those
plans.  This  Statement  is  effective  for the  Company in 1999,  and  requires
comparative  information  for  earlier  periods  to  be  restated.   Results  of
operations  and  financial  position  of  the  Company  will  be  unaffected  by
implementation of this new standard.

SFAS No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities,"
requires  companies to recognize all  derivatives  contracts as either assets or
liabilities  in the  balance  sheet  and to  measure  them at fair  value.  This
statement is  effective  for the Company in 2000.  Management  has not yet fully
evaluated  the  financial  statement  impact  of  implementing  this  statement.
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," provides guidance on accounting for the
costs of computer  software  developed or obtained for internal use and requires
certain costs incurred to be expensed or  capitalized  depending on the stage of
its development and nature.  The Company's  current  accounting  policy complies
with  this  Statement.  The  comparability  of the  results  of  operations  and
financial position of the Company are unaffected by this new SOP.

SOP  98-5,  "Reporting  on  Costs of  Start-Up  Activities,"  requires  costs of
start-up  activities  and  organization  costs to be expensed as incurred.  This
statement  is  effective  for the  Company in 2000.  Results of  operations  and
financial position of the Company are not expected to be materially  affected by
implementation of this new standard

No other recently  issued  accounting  standards are expected to have a material
impact on the Company.

Year 2000 Data Conversion

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

During 1997, the Company formed an ongoing  internal  review team to address the
Year 2000 issue  that  encompasses  operating  and  administrative  areas of the
Company.  A team of global  professionals  has been engaged in a process to work
with Company personnel to identify and resolve significant Year 2000 issues in a
timely manner. In addition,  executive  management regularly monitors the status
of the Company's Year 2000 remediation plans. The process includes an assessment
of issues and development of remediation plans, where necessary,  as they relate
to internally used software,  computer hardware and use of computer applications
in the Company's  manufacturing processes and products. In addition, the Company
is engaged in assessing the Year 2000 issue with significant suppliers.

The  assessment  process has been  completed  at the  Company's  North  American
operations.  With respect to the Company's European  operations,  the assessment
process has been  completed  for  computer  software  and  hardware  information
technology  systems used internally by the Company.  The process,  which has not
been completed for internally used manufacturing and administrative equipment in
Europe,  is expected  to be  completed  in the fall of 1998.  In  addition,  the
Company has initiated formal  communications with its significant  suppliers and
large customers in North America and Europe to determine the extent to which the
Company is vulnerable  to those third  parties'  failure to remediate  their own
Year 2000 issues. Finally,  related to products sold by the Company, the Company
has  determined  it has no  exposure to  contingencies  related to the Year 2000
Issue.

The  Company's  operations  in North  America  and Europe are in the  process of
replacing  their  existing   manufacturing,   distribution  and   administrative
applications. The decisions to replace these systems were primarily based on the
ongoing and  expected  future  industry  requirements  and the  inability of the
current applications to meet these expectations. The Company has not accelerated
the plans to replace  these  systems  because of the Year 2000  issue.  In North
America,  a contingency plan has been established to address the Year 2000 issue
if  the  replacement   systems  are  not  implemented  in  time.  If  necessary,
implementation of the

                                                                               8
<PAGE>
contingency  plan, which includes making current  manufacturing and distribution
software  Year 2000  compliant,  could  have a  material  adverse  impact on the
Company's results of operations and financial  condition.  The Company is in the
process of developing a contingency plan for its European operations.

The Company intends to use both internal and external resources to reprogram, or
replace and test, the software for Year 2000 modifications. The Company plans to
substantially complete its Year 2000 assessment and remediation in the summer of
1999.  The total  project cost has not yet been  determined.  However,  based on
preliminary  information,  the majority of the project cost will be attributable
to the purchase of new software to meet future industry requirements and will be
capitalized.  The total remaining project cost will be expensed as incurred over
the next twelve to eighteen  months.  To date,  the Company has not incurred any
material  costs  related  to the  assessment  of,  and  preliminary  efforts  in
connection with, its Year 2000 issues.

The costs of the project and the date on which the Company plans to complete its
Year 2000 assessment and remediation are based on management's estimates,  which
were derived  utilizing  numerous  assumptions  of future  events  including the
continued availability of certain resources,  third party modification plans and
other factors.  However,  there can be no guarantee that these estimates will be
achieved  and actual  results  could  differ  significantly  from  those  plans.
Specific  factors  that might  cause  differences  from  management's  estimates
include,  but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct  relevant  computer  codes,  and
similar  uncertainties.  Management  believes  that the Company is devoting  the
necessary  resources to identify and resolve  significant  Year 2000 issues in a
timely manner.
                                                                               9

<PAGE>
<TABLE>
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF INCOME

                                                                                        
                                                              June 27,         June 28,         June 29,        
        In thousands, except share data     Year ended           1998            1997            1996    
        ----------------------------------------------------------------------------------------------
        <S>                                                 <C>             <C>              <C>
        Net sales                                           $763,311        $671,297         $439,571        
        Cost of sales                                        632,679         544,629          357,830 
                                                            -----------------------------------------
                Gross profit                                 130,632         126,668           81,741  
        Operating expenses:                                                                             
        Selling, general and administrative                   70,372          66,530           38,123  
        Research and development                              36,418          32,492           27,728  
        Nonrecurring charges                                   3,468           9,965            2,399
                                                            -----------------------------------------   
        Total operating expenses                             110,258         108,987           68,250
                                                            -----------------------------------------  
                Operating income                              20,374          17,681           13,491
                                                            -----------------------------------------  
        Non-operating (income) expenses:                                                                                
        Interest expense                                       8,347           9,530            8,102   
        Interest income                                         (560)           (648)          (1,017) 
        Royalty income                                          (122)         (1,486)          (5,239) 
        Gain on sale of equity investments                    (4,598)           (872)               0       
        Other income, net                                     (1,872)           (848)            (704)   
                                                            -----------------------------------------
        Non-operating expenses                                 1,195           5,676            1,142
                                                            -----------------------------------------   
                Income before taxes on income                 19,179          12,005           12,349  
        Taxes on income                                        5,053           2,786            4,191
                                                            -----------------------------------------   
                Income before minority interest and                                                                     
                equity earnings                               14,126           9,219            8,158   
        Minority interest in net losses of subsidiaries          381           1,141              186     
        Equity in earnings (losses) of affiliated companies   (1,498)           (340)             110
                                                            -----------------------------------------     
        Net income                                           $13,009         $10,020           $8,454
                                                            =========================================  
        Per share of common stock:                                                                              
                                                                                       
                Basic net income per share                      1.30            1.01            0.86    
                                                                                        
                Diluted net income per share                    1.29            1.00            0.85    
                                                                                        
        The accompanying notes are an integral part of these statements.
</TABLE>                                                        


                                                                              10
<PAGE>                        
<TABLE>                                                                
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
                                                                          June 27,              June 28,                   
                                                                           1998                   1997                     
In thousands, except share data
----------------------------------------------------------------------------------------------------------
ASSETS
<S>                                                                      <C>                     <C>
Current assets:
Cash and cash equivalents                                                  $5,628                 $8,568 
Accounts receivable, less allowance of $ 1,095 and $1,064                  92,972                 67,850 
Inventories                                                                44,146                 42,484 
Customer tooling to be billed                                              19,211                 25,235 
Prepaid expenses                                                            3,460                  5,203
Deferred income taxes                                                       1,360                  3,300
                                                                         --------              ---------
       Total current assets                                               166,777                152,640
                                                                         --------              ---------
Property, plant and equipment:
Land                                                                        9,457                  9,400
Buildings                                                                  79,721                 77,795
Machinery and equipment                                                   184,473                177,700
Construction in progress                                                   21,468                 21,556
                                                                         --------              ---------
                                                                          295,119                286,451
Less accumulated depreciation                                             126,214                121,327
                                                                         --------              ---------
Net property, plant and equipment                                         168,905                165,124
Investments in and advances to affiliates                                  19,590                 15,487
Other assets                                                               22,613                 25,042
                                                                         --------              ---------
              Total assets                                               $377,885               $358,293
                                                                         ========              =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable                                                          $77,595                $76,392
Current maturities of long-term debt                                           55                    103
Accruals:
Compensation                                                               16,147                 13,765
Taxes                                                                       7,278                  8,162
Other                                                                      13,237                 17,227
                                                                         --------              ---------  
         Total current liabilities                                        114,312                115,649
                                                                         --------              ---------  
Long-term debt, less current maturities                                   123,706                122,798  
Postretirement plans                                                       23,011                 17,341  
Deferred income taxes and other                                            12,820                  8,333
                                                                         --------              ---------  
           Total liabilities                                              273,849                264,121
                                                                         --------              ---------  
Minority interest                                                             754                    345  
Shareholders' equity:
Series preferred stock: 1,000,000 shares authorized and unissued                -                      -
Preferred stock, 7 1/2% cumulative, $10 par: shares
    authorized 250,000, issued 53,112                                         531                    531  
Common stocks:
    Class A, $.10 par; shares authorized 30,000,000,
       issued 5,715,388 and 5,412,286                                         572                    541  
    Class B, $.10 par; shares authorized 15,000,000,
       issued 4,353,349 and 4,463,243                                         435                    446  
    Donnelly Export Corporation, $.01 par; shares
       authorized 600,000, issued 398,028 and 408,474                           4                      4  
Additional paid-in capital                                                 31,268                 28,765  
Cumulative foreign currency translation adjustment                         (8,083)                (6,038) 
Retained earnings                                                          78,555                 69,578
                                                                         --------              ---------  
   Total shareholders' equity                                             103,282                 93,827
                                                                         --------              ---------  
   Total liabilities and shareholders' equity                            $377,885               $358,293
                                                                         ========              =========  

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


                                                                              11
<PAGE>
<TABLE>
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS  
                                                               June 27,            June 28,            June 29,
In thousands                       Year ended                    1998                1997                1996
<S>                                                            <C>                 <C>                 <C>
---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income                                                     $13,009             $10,020             $ 8,454
Adjustments to reconcile net income to net cash from
  (for) operating activities:
Depreciation and amortization                                   22,600              21,460              12,984
Gain (loss) on sale of property and equipment                      181                (605)                  -
Gain on sale of equity investments                              (4,598)               (872)                  -
Deferred pension cost and postretirement benefits                5,670               5,315               4,934
Deferred income taxes                                            3,416              (4,723)             (2,386)
Minority interest loss                                            (841)             (1,646)               (186)
Equity in losses of affiliated companies                         1,498                 765               1,160
Nonrecurring charges                                             3,468               9,965               2,399
Changes in operating assets and liabilities:
Sale (repayment) of accounts receivable                         (2,695)             44,604                   -
Accounts receivable                                            (24,643)            (17,661)            (22,792)
Inventories                                                     (4,366)             (2,101)             (2,186)
Prepaid expenses and other current assets                        3,868              (2,074)             (6,117)
Accounts payable and other current liabilities                   2,200               9,416               3,134
Other                                                           (3,822)             (4,149)                189 
                                                            ---------------------------------------------------
     Net cash from (for) operating activities                   14,945              67,714                (413)
                                                            ---------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures                                           (46,164)            (35,151)            (20,585)
Investments in and advances to affiliates                       (1,045)             (4,537)            (13,966)
Purchase of minority interest                                        -                   -              (2,100)
Proceeds from sale of property and equipment                       677               3,078                   -
Proceeds from sale of equity investments                        11,067                 974                   -
Proceeds from sale-lease back                                    7,521                   -                   -
Change in unexpended bond proceeds                                   -               1,344                 316
Cash increase due to consolidation of subsidiary                     -               9,963                   -
Other                                                             (856)               (884)               (854)
                                                            ---------------------------------------------------
     Net cash for investing activities                         (28,800)            (25,213)            (37,189)
                                                            ---------------------------------------------------
FINANCING ACTIVITIES
Proceeds from long-term debt                                    13,798               8,433              36,195
Repayments on long-term debt                                      (429)            (39,887)                  -
Common stock issuance                                            2,128                 925                 706
Dividends paid                                                  (4,031)             (3,039)             (3,220)
Other financing                                                   (218)               (415)                  -
                                                            ---------------------------------------------------
     Net cash from (for) financing activities                   11,248             (33,983)             33,681
                                                            ---------------------------------------------------          
Effect of foreign exchange rate changes on cash                   (333)             (1,253)                  -

Increase (decrease) in cash and cash equivalents                (2,607)              8,518              (3,921)

Cash and cash equivalents, beginning of year                     8,568               1,303               5,224
                                                            ---------------------------------------------------
Cash and cash equivalents, end of year                         $ 5,628             $ 8,568            $  1,303
                                                            ===================================================
The accompanying notes are an integral part of these statements.
</TABLE>


                                                                              12
<PAGE>
<TABLE>
DONNELLY CORPORATION AND SUBSIDIARIES 
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                                               Common Stock                                  Cumulative
                                                                                                             foreign
                                                                                   Donnelly     Additional   currency
                                                 Preferred                          Export       paid-in     translation   Retained
In thousands, except share data                    stock     Class A   Class B   Corporation    capital     adjustment     earnings
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>        <C>      <C>       <C>           <C>          <C>             <C>
Balance, July 1, 1995                              $531      $418      $358      $4            $23,522      $154            $57,913

Net income                                                                                                                    8,454
Foreign currency translation adjustment                                                                     (925)          
Cash dividends declared:
Preferred stock - $.75 per share                                                                                                (40)
Common stock:
Class A - $.32 per share                                                                                                     (1,690)
Class B - $.32 per share                                                                                                     (1,435)
Common stock issued under employee benefit plans                7                                  699          
Change in investment in VISION Group plc                                                           937
Other                                                                                                                           (55)
                                                  ----------------------------------------------------------------------------------
Balance, June 29, 1996                             531        425      358         4            25,158      (771)            63,147
Net income                                                                                                                   10,020
Foreign currency translation adjustment                                                                      564
Foreign currency transaction adjustments on
   long-term advances to affiliates                                                                       (5,831)
Cash dividends declared:
Preferred stock - $.75 per share                                                                                                (40)
Common stock:
Class A - $.36 per share                                                                                                     (1,941)
Class B - $.36 per share                                                                                                     (1,608)
Issuance of common stock in a five-for-
  four stock split                                            108       88                        (204)
Common stock issued under employee benefit plans                8                                  925
Change in investment in VISION Group plc                                                         2,886
                                                  ----------------------------------------------------------------------------------
Balance, June 28, 1997                              531       541      446         4            28,765    (6,038)            69,578

Net income                                                                                                                   13,009
Foreign currency translation adjustment                                                                      261
Foreign currency transaction adjustments on
  long-term advances to affiliates                                                                        (2,306)
Cash dividends declared:
Preferred stock - $.75 per share                                                                                                (40)
Common stock:
  Class A - $.40 per share                                                                                                   (2,229)
  Class B - $.40 per share                                                                                                   (1,763)
Conversion of Class B to Class A Shares                        11     (11)
Common stock issued under employee benefit plans               20                                2,107   
Change in investment in affiliates                                                                  41
Income tax benefit arising from employee
     stock option plans                                                                            355
                                                  ----------------------------------------------------------------------------------
Balance, June 27, 1998                              $531     $572    $435        $  4          $31,268   $(8,083)           $78,555
                                                  ==================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>


                                                                              13
<PAGE>
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

The combined consolidated  financial statements include the accounts of Donnelly
Corporation,  Donnelly Export  Corporation  and all majority  owned,  controlled
subsidiaries  (the  Company)  after  all  significant   intercompany   balances,
transactions and shareholdings  have been eliminated.  Investments in 20% to 50%
owned  companies  are  accounted  for using  the  equity  method of  accounting.
Investments in affiliates representing less than 20% ownership are accounted for
under the cost  method.  Cost in excess of net assets of acquired  companies  is
being amortized on a straight-line basis over no more than a 15-year period.

In the second quarter of 1997, the Company acquired majority control of Donnelly
Hohe GmbH & Co. KG (" Donnelly  Hohe").  As a result,  Donnelly Hohe's financial
statements were  consolidated  with those of the Company beginning in the second
quarter of 1997. Prior to acquiring  control,  the Company owned 48% of Donnelly
Hohe and accounted for its investment using the equity method of accounting. The
Company  consolidates the Donnelly Hohe financial  statements from the one month
prior  to  the  Company's  period  end.  The  combined  consolidated   financial
statements  as of and for the years  ended  June 27,  1998,  and June 28,  1997,
consolidate  Donnelly Hohe's financial statements as of and for the twelve month
period  ended May 31,  1998,  and for the nine month  period ended May 31, 1997,
respectively.  Accordingly,  all  comparative  data  presented  in the  combined
consolidated  financial statements and accompanying  footnotes for 1996 does not
include  consolidated  Donnelly Hohe information.  A more detailed discussion of
the  acquisition  of Donnelly Hohe and pro forma results of operations  for 1997
and 1996 are included in Note 3.

Voting control of Donnelly Corporation and Donnelly Export Corporation is vested
in the same  shareholders  and the  corporations  are under  common  management.
Because  of  these  relationships,  the  accounts  of the two  corporations  are
combined in the financial statements as if they were a single entity.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FISCAL YEAR

The  Company's  fiscal  year is the 52 or 53 week  period  ending  the  Saturday
nearest June 30. Fiscal years ended June 27, 1998,  June 28, 1997,  and June 29,
1996,  each  included 52 weeks.  All year and quarter  references  relate to the
Company's fiscal year and fiscal quarters, unless otherwise stated.

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  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.
Although  management's  estimates  currently  are not  expected to change in the
foreseeable  future,  the costs the Company will  ultimately  incur could differ
from the amounts that are assumed to be incurred based on the assumptions made.

FOREIGN CURRENCY TRANSLATION

Except for the Company's  subsidiary in Mexico, whose functional currency is the
United  States  dollar,  financial  statements  of  international  companies are
translated  into United States dollar  equivalents at exchange rates as follows:
(1) balance sheet accounts at year-end rates and (2) income  statement  accounts
at weighted  average  monthly  exchange  rates  prevailing  during the year. The
Company's primary foreign investments are in Germany, Ireland, Spain and France.
Translation   gains  and  losses  are  reported  as  a  separate   component  of
shareholders'  equity. For the Company's  subsidiary in Mexico,  transaction and
translation  gains or losses are reflected in net income for all accounts  other
than  intercompany  balances  of a  long-term  investment  nature  for which the
translation   gains  or  losses  are   reported  as  a  separate   component  of
shareholders' equity.  Foreign currency transaction gains and losses included in
other income are not material.

REVENUE RECOGNITION

The  Company's  primary  source of  revenue  is  generated  from the sale of its
products. The Company recognizes revenue when its products are shipped.

                                                                              14
<PAGE>
CASH EQUIVALENTS

Cash equivalents  include all highly liquid investments with a maturity of three
months or less when purchased.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined by the
first-in,  first-out  (FIFO) method for domestic  inventories and on the FIFO or
average cost basis for international inventories.

CUSTOMER TOOLING TO BE BILLED

Customer  tooling  to be  billed  represents  costs  incurred  on  behalf of the
Company's customers.  These costs are recoverable at the time of tool completion
and  approval or are  recovered  in the  program's  piece price over a period of
three years or over the program's useful life.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost.  Depreciation,  which includes
amortization  of assets  under  capital  leases,  is provided  primarily  by the
straight-line  method.  Depreciation is computed over the estimated useful lives
of the assets as follows:
<TABLE>
                                                      Years
                     <S>                             <C>
                     Buildings....................   10 to 50
                     Machinery and equipment......    3 to 15
</TABLE>

For tax purposes,  useful lives and accelerated methods are used as permitted by
the taxing authorities.

The Company capitalizes certain costs associated with software developed for its
own use and amortizes such costs over the expected useful lives of the software.

INCOME TAXES

Deferred income taxes reflect the tax effects of temporary  differences  between
the financial  statement and tax basis of assets and  liabilities  and operating
loss  carryforwards.  Deferred  tax assets are reduced by a valuation  allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be  realized.  Deferred  income taxes
are  not  provided  on   cumulative   undistributed   earnings  of  the  foreign
subsidiaries  and  affiliates  because  they  are  intended  to  be  permanently
reinvested.

EARNINGS PER SHARE OF COMMON STOCK

Basic  earnings  per share is  computed by dividing  net  income,  adjusted  for
preferred stock dividends,  by the weighted average number of shares of Donnelly
Corporation common stock outstanding, retroactively adjusted for stock dividends
and stock splits. Diluted earnings per share is computed including the effect of
dilutive stock options.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company  estimates  the fair value of all  financial  instruments  where the
carrying value differs from the fair value, primarily long-term fixed-rate debt,
interest rate swaps and foreign exchange currency  contracts,  based upon quoted
amounts, the current rates available for similar financial  instruments or based
on calculations  discounting  expected cash flows at the rates currently offered
to the Company for debt of the same remaining maturities.  The carrying value of
the  Company's   variable  rate  debt  and  all  other   financial   instruments
approximates their fair value.

LONG-LIVED ASSETS

The Company reviews long-lived  assets,  including goodwill and other intangible
assets, for impairment whenever events or changes in circumstances indicate that
the  carrying  amount  of an  asset  may  not  be  fully  recoverable.  If it is
determined  that an impairment  loss has occurred based on expected  future cash
flows, a current charge to income is recognized.

                                                                              15
<PAGE>
RECLASSIFICATIONS

Certain  reclassifications  have been made to prior  year data to conform to the
current  year  presentation  and had no effect on net  income  reported  for any
period.

3.   INVESTMENTS IN AND ADVANCES TO AFFILIATES

On November 3, 1997,  the Company  formed Lear Donnelly  Overhead  Systems,  LLC
("Lear  Donnelly"),  a 50% owned joint venture with Lear  Corporation  ("Lear").
Lear Donnelly is engaged in the design,  development  and production of overhead
systems for the global automotive  market,  including complete overhead systems,
headliners,   consoles  and   lighting   components,   vehicle   electrification
interfaces,  electronic components, visors and assist handles ("products").  The
Company and Lear each contributed certain  technologies,  assets and liabilities
for the creation of the joint  venture.  In a noncash  transaction,  the Company
transferred  net assets of $7.9 million  associated  with its interior  trim and
lighting businesses, including $10 million of debt, to the joint venture for its
50% interest. These assets were transferred at their net book values.

Lear Donnelly  manufactures  products for sale to both the Company and Lear, who
are each responsible for their customer sales efforts to the original  equipment
manufacturers.  Because  existing and certain future  contracted sales have been
retained  by  the  Company,   the  existence  of  the  joint  venture  does  not
significantly impact the comparability of net sales or net income of the Company
from  period to  period.  However,  due to the  supply  agreement  between  Lear
Donnelly  and the parent  companies  and the related  net  earnings of the joint
venture being accounted for under the equity method,  the Company's gross profit
and operating margins are expected to be unfavorably impacted.

In the second  quarter of 1998,  the  Company  sold its 50%  interest in Applied
Films Corporation  during an initial public offering.  As a result of this sale,
the Company  received $7.9 million in net proceeds,  after taxes and related out
of pocket fees,  and  recognized a one-time  pretax gain of  approximately  $4.6
million, or $0.22 per share after tax.

In 1998,  Donnelly formed a joint venture with Industrias  Arteb S.A. to produce
interior and exterior mirrors for the South American  automotive  industry.  The
new company, Donnelly/Arteb,  LTDA ("Donnelly/Arteb"),  is located in Sao Paulo,
Brazil.  Donnelly/Arteb  focused on winning  new  orders  and  establishing  its
operations early in 1999. Donnelly/Arteb began launching several mirror programs
for General Motors and is slated to start electrochromic mirror assembly for the
GM Vectra model by mid-year.

Effective April 1, 1995, the Company acquired an interest in Hohe GmbH & Co. KG,
since renamed  Donnelly Hohe GmbH & Co. KG ("Donnelly  Hohe"),  a German limited
partnership.  Donnelly Hohe, based in Collenberg,  Germany, supplies many of the
leading  European  automakers  with  interior  and exterior  rear view  mirrors,
through manufacturing facilities in Germany and Spain. Donnelly Hohe consists of
a  general  partnership  and a  limited  partnership.  The  general  partnership
controls  Donnelly  Hohe's assets and manages its  operations  while the limited
partnership  is the  recipient  of all income or losses  generated  by  Donnelly
Hohe's operations.

The  Company's  original  investment  consisted of a 48% interest in the general
partner and a 66 2/3% interest in the limited partner.  In the second quarter of
1997, the Company  acquired an additional  13% interest in the general  partner,
resulting in the Company owning a controlling interest in the general partner of
Donnelly  Hohe.  As  a  result,   Donnelly  Hohe's  financial   statements  were
consolidated  with those of the Company,  beginning  with the second  quarter of
1997.  From the initial date of  acquisition,  April 1, 1995,  through the first
quarter of 1997,  the  Company's  investment  in Donnelly Hohe was accounted for
using the equity method of accounting. An additional 13% interest in the general
partner was  acquired in the third  quarter of 1997,  increasing  the  Company's
interest in the general  partnership to 74%. The Company's  limited  partnership
interest has remained unchanged,  therefore,  the consolidation of Donnelly Hohe
has no impact on net income for each period  reported.  The  unaudited pro forma
combined  consolidated  net sales, in thousands,  $719,548 and $664,376 for 1997
and 1996,  respectively,  are calculated as if the  acquisition of a controlling
interest in Donnelly Hohe had occurred at the beginning of 1996,  but may not be
indicative of the results that actually would have been achieved.

The Company has advanced 60 million  Deutsche marks to Donnelly Hohe,  valued at
$33.2 million at June 27, 1998, under  subordinated loan agreements,  20 million
in 1995,  20  million  in 1996,  and 20 million  in 1998.  Amounts  advanced  to
Donnelly  Hohe under the  subordinated  loan  agreements  provide  for 5% to 10%
interest per annum with no principal payments due until maturity between October
1, 1999, and October 1, 2000.  These advances are now eliminated as intercompany
transactions in the consolidation of Donnelly Hohe with the Company's  financial
statements.  The terms of the acquisition transaction allow Donnelly to purchase
the remaining  ownership interest in Donnelly Hohe through various options.  The
minority owners also

                                                                              16
<PAGE>
have an option to require the Company to buy their  interests  at any time based
upon a predetermined formula which is currently less than $2 million.

During 1997, 1996 and 1995, VISION Group plc ("VISION Group") sold common shares
in a private  placement and through  public  offerings.  In  conjunction  with a
public offering of VISION Group shares in the Company's  second quarter of 1997,
the Company also sold 2.5% of its investment, resulting in a $0.9 million pretax
gain. The effect of all of these transactions resulted in reducing the Company's
ownership interest from 40.4% at the date of the Company's  original  investment
to 25.6% at June 27, 1998.  The  Company's  equity in the net proceeds of VISION
Group's  sale  of new  shares  is  reflected  as an  increase  in the  Company's
investment in the net assets of VISION Group, which was approximately $6 million
at June 27, 1998, and additional paid-in capital,  net of deferred taxes, in the
accompanying  financial statements.  The aggregate market value of the Company's
investment in VISION Group,  based on the quoted market price for VISION Group's
common shares, which are listed on the London Stock Exchange,  was approximately
$9  million  at June 27,  1998.  The  aggregate  market  value of the  Company's
investment  in VISION  Group may vary  based on  business,  industry  and market
conditions.

In the first  quarter of 1997,  the  Company  formed  Shunde  Donnelly  Zhen Hua
Automotive  Systems Co., Ltd. ("Zhen Hua"), a joint venture with Shunde Zhen Hua
Automobile  Parts Co.,  Ltd.  The Company  acquired a 30%  interest in the joint
venture which manufactures  exterior mirrors for car makers throughout  southern
China, including Volkswagen,  Isuzu and Chrysler. The Company also has an option
to acquire an additional  30% interest in the joint  venture.  Zhen Hua operates
out of three existing  buildings in Shunde,  China, which are owned by the joint
venture.  Certain  manufacturing  equipment  was in place at the time the  joint
venture  was formed and 200 Zhen Hua  employees  currently  are  employed at the
facilities.  In the first quarter of 1999, Shunde Zhen Hua intends to sell their
portion  of the joint  venture  to a new  partner:  Ganxiang  Automobile  Mirror
Company, the largest automotive mirror supplier in China.

In the fourth  quarter of 1996,  the  Company  formed  Shanghai  Donnelly Fu Hua
Window Systems Company Ltd.  ("Shanghai Donnelly Fu Hua"), a 50-50 joint venture
with  Shanghai Fu Hua Glass  Company,  Ltd.  Shanghai Fu Hua Glass  Company is a
joint venture  between Ford Motor Company and Shanghai Yao Hua Glass Works.  The
joint venture has its  equipment and processes in place and began  manufacturing
encapsulated and framed glass products in the third quarter of 1998.

The Company's current equity affiliates include the following:  Lear Donnelly, a
50% owned joint venture that engages in the design,  development  and production
of overhead  systems for the global  automotive  market;  VISION Group, the sole
shareholder of VLSI Vision  Limited that produces an advanced  video  microchip;
Shanghai   Donnelly  Fu  Hua,  a  50%  owned  joint  venture  that  manufactures
encapsulated and framed glass products for the Asian automotive  industry;  Zhen
Hua, a 30% owned joint venture that manufactures exterior mirrors for car makers
throughout  southern China; and  Donnelly/Arteb,  a 50% owned joint venture that
produces  interior  and  exterior  mirrors  for the  South  American  automotive
industry.

Summarized 1998 balance sheet and income statement information for the Company's
non-consolidated  affiliates  accounted  for  using the  equity  method is shown
below.  This  information  includes  Lear  Donnelly's  eight  months,  beginning
November  1997 and ending in June  1998.  All others  presented  include  twelve
months ending in June 1998.

<TABLE>
In thousands                                                             1998
-------------------------------------------------------------------------------
<S>                                                                   <C>
Summarized Balance Sheet Information
     Current assets ........................................          $  63,526
     Noncurrent assets .....................................             49,895
     Current liabilities ...................................             30,822
     Noncurrent liabilities ................................             30,379
                                                                      ---------
     Net equity ............................................          $  52,220
                                                                      =========

Summarized Income Statement Information
     Net sales .............................................          $  96,752
     Costs and expenses ....................................            103,818
                                                                      ---------
     Net loss ..............................................          $  (7,066)
                                                                      =========
</TABLE>
Summarized 1996 income statement  information for the Company's  nonconsolidated
affiliates  accounted for using the equity  method is as follows,  in thousands:
combined net sales were  $250,904,  less costs and  expenses of $254,404,  for a
combined net loss of $3,500.  Income  statement  information  includes  Donnelly
Hohe's twelve months ended May 31, 1996. All significant

                                                                              17
<PAGE>
others presented  include twelve months ending in June of 1996. This information
is not presented for 1997 due to the consolidation of Donnelly Hohe in 1997.


4.   NATURE OF OPERATIONS

The Company is an  international  supplier of high-quality  automotive parts and
component systems through manufacturing operations and various joint ventures in
North and South  America,  Europe  and Asia.  The  Company  supplies  automotive
customers around the world with rear view mirror systems, modular window systems
and interior  lighting and trim systems.  The Company also provides  products to
several nonautomotive markets.

In the second  quarter of 1997,  the Company began  consolidating  the financial
statements of Donnelly  Hohe, a subsidiary  based in  Collenberg,  Germany.  The
Company's  financial  statements for the years ended June 27, 1998, and June 28,
1997, are consolidated using Donnelly Hohe's financial  statements as of and for
the twelve month period ended May 31, 1998,  and for the nine month period ended
May 31, 1997, respectively. See Notes l and 3 for a more thorough discussion.

North  American  revenues are revenues  produced by assets located in the United
States and Mexico. Export revenues are foreign revenues produced by identifiable
assets  located  in the  United  States.  European  revenues  are  generated  by
identifiable  assets at the Company's  subsidiaries  located in Germany,  Spain,
Ireland and France.  A summary of the Company's  operations  by geographic  area
follows:
<PAGE>
<TABLE>
In thousands           Year ended          1998            1997           1996
-------------------------------------------------------------------------------
Revenues:
<S>                                    <C>            <C>             <C>
North American:
     United States ..............      $ 420,544      $ 390,852       $ 338,355
       Export:
         Americas ...............         76,433         54,302          49,655
         Asia ...................          3,313          2,825             532
         Europe .................          2,002          1,829           1,917
         Other ..................            350             76            --
                                       ----------------------------------------
                                         502,642        449,884         390,459
European ........................        260,669        221,413          49,112
                                       ----------------------------------------
                                       $ 763,311      $ 671,297       $ 439,571
                                       ========================================
Operating Income (Loss):

North American ..................      $  19,654      $  25,528       $  17,208
European ........................            720         (7,847)         (3,717)
                                       ----------------------------------------
                                       $  20,374      $  17,681       $  13,491
                                       ========================================
Identifiable Assets:

North American ..................      $ 228,511      $ 200,100
European ........................        149,374        158,193
                                       ------------------------
                                       $ 377,885      $ 358,293
                                       ========================
</TABLE>
Sales to major  automobile  manufacturers  as a percentage  of the Company's net
sales follows:
<TABLE>
Year ended                                           1998        1997        1996
---------------------------------------------------------------------------------
<S>                                                  <C>         <C>         <C>
Ford Motor Company .........................         27%         25%         22%
Chrysler Corporation .......................         20          20          33
Honda ......................................          8          11          16
BMW ........................................          7           7          --
VW .........................................          6           6          --
General Motors Corporation .................          5           5          10
                                                  ------------------------------
                                                     73%         74%         81%
                                                  ==============================
</TABLE>
                                                                              18
<PAGE>
5.   NONRECURRING CHARGES

In the fourth  quarter of 1998,  Donnelly  Optics  Corporation,  a wholly  owned
subsidiary in Tucson,  Arizona,  recognized a $3.5 million pretax charge against
operating income due to the cancellation of orders,  relating to changing market
dynamics in the digital  imaging  sector of the  computer  industry.  The charge
primarily  consists  of a  write-off  of tooling  and other  current  assets and
severance of approximately 25 manufacturing and  administrative  personnel.  The
severance cash payments will be completed by the end of 1999.

In  the  fourth  quarter  of  1997,   the  Company   recognized  a  $10  million
restructuring   charge  in  the   Company's   European   operations  to  realign
manufacturing  capacity,  improve  operating  efficiencies  and to reduce future
operating costs,  primarily by reducing the number of  nonproduction  employees.
The  restructuring  also involves  reorganizing  product lines and production to
realize efficiencies in the production process. The costs consist primarily of a
severance  program and  voluntary  separation  incentives,  in addition to other
expenses  associated  with the plan.  The  severance  and  separation  incentive
program   includes   approximately   230  personnel,   primarily   personnel  in
manufacturing and administrative support functions. Due to changes in management
at the Company's European  operations,  implementation of the restructuring plan
was delayed until the fourth quarter of 1998. Through June 27, 1998, the Company
had terminated a cumulative total of 127 employees under the plan and recognized
cumulative  cash payments of $5.1 million,  primarily  severance and  separation
incentives.  Additionally,  in 1998,  the Company  recorded a  reduction  to the
restructuring  reserve of $1.1 million pretax. All remaining employee separation
benefits and related cash flows are expected to be completed by the end of 1999.

In the fourth quarter of 1996, the Company  recorded a  restructuring  charge of
$2.4 million  related to the write-down of certain assets and the closure of the
Company's manufacturing facility in Mt. Pleasant, Tennessee,  including accruals
for severance  and related  employee  support  programs and write-off of certain
assets  removed from  service.  The majority of these  liabilities  were paid or
settled during the first six months of 1997.

6.   INVENTORIES

Inventories consist of:
<TABLE>
         In thousands                                         1998         1997
         -----------------------------------------------------------------------
         <S>                                                 <C>         <C>
         Finished products and work in process .........     $16,987      16,675
         Raw materials .................................      27,159      25,809
                                                           ---------------------
                                                             $44,146     $42,484
                                                           =====================
</TABLE>
7.   DEBT AND OTHER FINANCING ARRANGEMENTS

Debt consists of:
<TABLE>
In thousands                                                                          1998          1997
----------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>        <C>
Borrowings under revolving credit agreements at 4.61% and 4.81% ...................... $ 48,882   $ 41,532
Senior Notes, due 2004, principal payable in installments beginning
in 1999, interest at 6.67% ...........................................................   15,000     15,000
Senior Notes, due 2005, principal payable in installments beginning in
2000, interest at 7.22% ..............................................................   15,000     15,000
Senior Notes, due 2006, principal payable in installments beginning
in 2001, interest at 6.70% ...........................................................   20,000     20,000
Industrial revenue bonds:
$9,500 at adjustable  rates (3.78% at June 27, 1998 and 4.14% at June 28, 1997),
due in 2008-2010; $5,000 at a fixed rate of 8.13%, due in 2012;
$1,725 at a fixed rate of 5.75%, due in 2003 .........................................   16,225     16,225
Bank Note, principal payable in installments through 2003,
interest at 6.48%.....................................................................    1,976      3,077
Capitalized lease obligations.........................................................    3,072      5,110
Other.................................................................................    3,606      6,957
                                                                                        ------------------
Total ................................................................................  123,761    122,901

Less current maturities ..............................................................       55        103
                                                                                        ------------------
                                                                                        $123,706  $122,798
                                                                                        ==================
</TABLE>
                                                                              19
<PAGE>
In  September   1997,  the  Company  entered  into  an  unsecured  $160  million
multi-currency  global  revolving  credit agreement which replaces the Company's
previous  unsecured  $80 million  domestic  credit  agreement and its 75 million
Deutsche mark revolving  Eurocredit  loan agreement.  Borrowings  under this new
agreement  bear  interest,  at the election of the Company,  at a floating  rate
under one of three alternative  elections. A variable facility fee, currently at
 .15%, is paid on the credit line. This new revolving credit agreement terminates
in September  2004,  with an opportunity  for the Company to extend for one year
periods with the consent of all the revolver banks.

The $9.5 million industrial revenue bonds are secured by letters of credit which
expire in 2000. All industrial revenue bonds are collateralized by the purchased
land, building and equipment. The senior notes are unsecured.

The various borrowings subject the Company to certain restrictions  relating to,
among other things,  minimum net worth,  payment of dividends and maintenance of
certain  financial  ratios. At June 27, 1998, the Company was in compliance with
all related  covenants.  Retained  earnings  available for dividends at June 27,
1998, are $24.0 million.

The  Company  classifies  certain  maturities  as long term due to the intent to
refinance these under the Company's revolving credit agreement. Annual principal
maturities (excluding capitalized lease obligations) consist of:
<TABLE>
Year ending             In thousands               Amount
-------------------------------------------------------------
<S>                                                 <C>
     1999....................................       $      55
     2000....................................           7,835
     2001....................................          13,534
     2002....................................          10,854
     2003....................................          29,889
     2004 and thereafter.....................          58,522
                                                   ----------
                                                     $120,689
                                                  ===========
</TABLE>
Interest  payments of $8.6 million,  $10.4 million and $7.8 million were made in
1998, 1997 and 1996, respectively.

8.   ACCOUNTS RECEIVABLE SECURITIZATION

In November 1996, the Company entered into a three-year  agreement to sell, on a
revolving  basis, an interest in a defined pool of trade accounts  receivable of
up to $50 million. At June 27, 1998 and June 28, 1997, a $40.3 million and $40.0
million interest, respectively, had been sold under this agreement with proceeds
used to reduce  revolving lines of credit.  The sale is reflected as a reduction
of accounts  receivable  and as  operating  cash flows.  As  collections  reduce
previously sold  interests,  new accounts  receivable are customarily  sold. The
proceeds of sales are less than the face amount of accounts  receivable  sold by
an amount that  approximates  the purchaser's  financing cost of issuing its own
commercial  paper backed by these  accounts  receivable.  The discount fees were
$2.1  million in 1998 and $1.1  million in 1997,  and are  included  in selling,
general and  administrative  expense.  The Company,  as agent for the purchaser,
retains  collection and  administrative  responsibilities  for the participating
interests of the defined pool.

9.   FINANCIAL INSTRUMENTS

The Company  utilizes  interest  rate swaps and foreign  exchange  contracts  to
manage exposure to fluctuations in interest and foreign currency  exchange rates
and  accordingly  accounts for them on a hedging rather than trading basis.  The
risk of loss to the  Company in the event of  nonperformance  by any party under
these  agreements  is not  material.  At June 27,  1998 and June 28,  1997,  the
Company had interest rate swaps with an aggregate notional amount of $40 million
and $50  million,  respectively,  $10  million  and $20  million  of which  were
offsetting at June 27, 1998 and June 28, 1997,  respectively.  These effectively
converted  $30 million of the  Company's  variable  interest  rate debt to fixed
rates at June 27,  1998 and June 28,  1997.  The Company is  currently  paying a
weighted average fixed rate of 7.17%,  calculated on the notional amounts. These
swap agreements have varied  expirations  through 2003. The notional  amounts of
interest rate swaps do not represent amounts exchanged by the parties,  and thus
are not a  measure  of the  exposure  to the  Company  through  its use of these
instruments.  Net receipts or payments under the agreements are recognized as an
adjustment to interest expense.

The Company's Irish  subsidiaries enter into foreign exchange contracts to hedge
against  changes in foreign  currency  exchange  rates.  The Company had foreign
exchange contracts outstanding of $1.1 million and $2.0 million at June 27, 1998
and June 28, 1997,  respectively.  The foreign  exchange  contracts  require the
Company to exchange  foreign  currencies  for Irish punts and  

                                                                              20
<PAGE>
generally  mature within 12 months.  Deferred gains and losses are included on a
net basis in the statement of financial position as either other assets or other
liabilities and are recognized in income as part of a sale  transaction  when it
is recognized.

The carrying  value and  estimated  fair value of all financial  instruments  in
which the fair value differs from  carrying  value at June 27, 1998 and June 28,
1997, are as follows:
<TABLE>
In thousands                                       1998                                 1997
--------------------------------------------------------------------------------------------------------
                                       Carrying Value     Fair Value       Carrying Value     Fair Value
<S>                                         <C>             <C>                 <C>             <C>
Liabilities
     Long-term fixed rate debt              $56,725         $58,540             $56,725         $56,544
Derivatives
     Interest rate swaps                        ---          (1,140)                ---            (361)
     Foreign exchange contracts                 ---             100                 ---               5
</TABLE>

Statement of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting  for
Derivative  Instruments and Hedging Activities," requires companies to recognize
all  derivatives  contracts as either assets or liabilities in the balance sheet
and to measure them at fair value.  This  statement is effective for the Company
in 2000.  Management has not yet fully evaluated the financial  statement impact
of implementing this statement.

10.  BENEFIT PLANS

A. Pension Benefits

The Company  sponsors defined benefit pension plans covering  substantially  all
domestic  employees  and  employees at the Company's  Donnelly  Mirrors  Limited
facility in  Ireland.  Pension  costs for the plans are funded in amounts  which
equal or exceed  regulatory  requirements.  Benefits under these plans are based
primarily on years of service and compensation.

Assumptions and net periodic pension cost are as follows:
<TABLE>
In thousands          Year ended                   1998            1997            1996
----------------------------------------------------------------------------------------
<S>                                          <C>              <C>               <C>
Discount rate...........................        7.75%            8.00%             7.75%
Compensation increase...................        5.00%            5.00%             5.00%
Expected return on plan assets..........        9.50%            9.50%             9.50%
Service cost............................     $ 4,284          $ 3,545           $ 3,545
Interest cost...........................       5,881            5,497             5,060
Actual gain on plan assets..............      (8,678)          (6,931)           (8,528)
Net amortization and deferral...........       2,739            2,270             4,550
                                             -------------------------------------------
Net periodic pension cost...............     $ 4,226          $ 4,381           $ 4,627
                                             ==========================================
</TABLE>
The funded status of the defined benefit  pension plans is summarized  below and
reflects  recent changes made to the plan to increase the normal  retirement age
by three years to match that used for social security:
<TABLE>
In thousands                                                              1998                1997
---------------------------------------------------------------------------------------------------------
<S>                                                                   <C>               <C>
Accumulated benefit obligation, including vested benefits of
$60,711 and $51,182................................................   $ (62,195)        $ (52,812)
Effect of projected compensation increases.........................     (26,178)          (21,602)
                                                                      ----------------------------
Projected benefit obligation for service rendered to date..........     (88,373)          (74,414)
Plan assets at fair value, primarily corporate equity and debt
securities.........................................................      77,775            66,569
------
Projected benefit obligation in excess of plan assets..............     (10,598)           (7,845)
Unrecognized net transition obligation.............................         349               328
Unrecognized prior service cost....................................      (4,709)              448
Unrecognized net gain..............................................      (1,990)           (5,921)
                                                                      ----------------------------
Net pension liability..............................................   $ (16,948)        $ (12,990)
                                                                      ============================
</TABLE>

                                                                              21
<PAGE>
B. Postretirement Health Care Benefits

The  Company  provides  certain  health  care and life  insurance  benefits  for
eligible active and retired domestic  employees.  The plan contains  cost-saving
features  such  as  deductibles,  coinsurance  and a  lifetime  maximum  and  is
unfunded.  The Company  accrues,  during the  employee's  years of service,  the
expected  cost of  providing  postretirement  benefits to the  employee  and the
employee's beneficiaries and covered dependents.

The components of the net periodic postretirement benefit cost are as follows:
<TABLE>
In thousands                Year ended              1998             1997              1996
-------------------------------------------------------------------------------------------
<S>                                          <C>             <C>              <C>
Service cost.............................    $    504        $    445         $   450
Interest cost............................         977             911             830
Amortization of net transition
obligation over 22 years.................         360             360             360
Unrecognized net loss....................           9               4              20
                                             ----------------------------------------
Net periodic postretirement benefit
cost.....................................    $  1,850        $  1,720        $  1,660
                                             ========================================
</TABLE>
The postretirement  health care liability  recognized in the balance sheet is as
follows:
<TABLE>
In thousands                                         1998            1997
-------------------------------------------------------------------------
<S>                                            <C>              <C>
Retirees.................................      $ (4,992)        $ (5,478)
Other active participants................        (9,567)          (6,696)
                                               --------------------------
Accumulated postretirement benefit
obligation...............................       (14,559)         (12,174)
Unrecognized transition obligation.               6,121            6,481
Unrecognized net loss....................         2,294            1,199
                                               --------------------------
Postretirement health care liability.....      $ (6,144)        $ (4,494)
                                               ==========================
</TABLE>
The assumed  health care  inflation  rate used in measuring  the  postretirement
health care  liability  is 8% for 1999,  declining  uniformly  to 6% in 2001 and
remaining level thereafter. The health care cost trend rate has an effect on the
amounts reported.  Increasing the assumed health care inflation rate by 1% would
increase the postretirement  health care liability by $0.7 million,  and the net
periodic  postretirement  benefit cost for 1998 by $77,000. The weighted average
discount  rate  used  in  determining  the  accumulated  postretirement  benefit
obligation was 7% and 7.75% in 1998 and 1997, respectively.

11.  TAXES ON INCOME

Deferred income taxes reflect the tax effects of temporary  differences  between
the amounts of assets and liabilities for financial reporting purposes and those
amounts as measured by income tax laws.  The Company has grouped the  noncurrent
deferred  tax assets  with  other  assets and the net  noncurrent  deferred  tax
liability with certain other liabilities on the accompanying balance sheets. The
tax effects of temporary differences which give rise to a significant portion of
deferred tax assets (liabilities) are as follows:
<TABLE>
In thousands                                        1998              1997
--------------------------------------------------------------------------
<S>                                            <C>              <C>
Fixed assets...........................        $ (9,750)         $ (7,776)
Retirement plans.......................           5,904             4,462
Postretirement benefits................           2,149             1,534
Loss carryforwards.....................           7,137             6,718
Accrued expenses and other.............          (7,009)           (2,480)
Valuation allowance....................            (457)             (337)
                                               ---------------------------
Net deferred tax asset (liability).....        $ (2,026)        $   2,121
                                               ===========================
</TABLE>

                                                                              22
<PAGE>
Deferred taxes are classified in the accompanying balance sheets as follows:
<TABLE>
In thousands                                        1998           1997
-----------------------------------------------------------------------
<S>                                            <C>              <C>
Current income tax asset................       $  1,360         $ 3,299
Noncurrent income tax asset.............          5,706           4,174
Noncurrent income tax liability.........         (9,092)         (5,352)
                                               ------------------------
Net deferred tax asset (liability)......       $ (2,026)        $ 2,121
                                               ========================
</TABLE>
At June 27, 1998,  the Company has $25.4 million of  consolidated  net operating
loss carryforwards, which do not expire.
<TABLE>
In thousands              Year ended               1998              1997           1996
-----------------------------------------------------------------------------------------
<S>                                            <C>               <C>            <C>
Income before taxes on income consists of:
Domestic..................................     $21,967           $ 23,833       $15,647
Foreign...................................      (2,788)           (11,828)       (3,298)
                                               -----------------------------------------
                                               $19,179           $ 12,005       $12,349 
                                               =========================================
Tax expense (benefit) consists of:
Current:
Domestic..................................     $   828           $  6,256       $ 6,909
Foreign...................................          79                950             8
                                               -----------------------------------------
                                                   907              7,206         6,917
                                               -----------------------------------------
Deferred:
Domestic...................................      5,025                (23)       (2,156)
Foreign....................................       (879)            (4,397)         (570)
                                               -----------------------------------------
                                                 4,146             (4,420)       (2,726)
                                               -----------------------------------------
                                               $ 5,053           $  2,786       $ 4,191
                                               =========================================
</TABLE>
The  difference  between the Company's  income tax provision and the amount that
would be computed by applying  the federal  statutory  income tax rate to income
before taxes on income is reconciled as follows:
<TABLE>
In thousands              Year ended                 1998           1997              1996
--------------------------------------------------------------------------------------------
<S>                                                <C>              <C>              <C>
Income taxes at federal statutory rate.....             35%             35%              35%
Impact of:
     Available tax credits.................             (6)             (5)              ---
     Foreign subsidiary earnings...........             (1)             (4)               5
     DISC earnings.........................             (4)             (5)              (6)
     Other.................................              2               2               ---
                                                   -----------------------------------------
Effective tax rate.........................             26%             23%              34%
                                                   -----------------------------------------
Income taxes paid..........................        $  2,164        $ 9,193           $ 3,731
                                                   =========================================
</TABLE>

12.      PREFERRED STOCK AND COMMON STOCK

Each share of 7 1/2% cumulative  preferred stock is entitled to one vote for the
election of the members of the Board of Directors  not elected by the holders of
Class A Common  Stock,  and all  other  matters  at all  shareholders'  meetings
whenever  dividend  payments  are in arrears for four  cumulative  quarters.  No
arrearage  existed at June 27, 1998. The preferred  stock is redeemable in whole
or in part, if called by the Company, at $10.50 per share.  Additionally,  there
are 1,000,000 authorized shares of series preferred stock, no par value. At June
27, 1998 and June 28, 1997, no series preferred stock was outstanding.

On December 6, 1996, the Board of Directors declared a five-for-four stock split
in the form of a 25%  stock  dividend  distributed  on  January  30,  1997.  All
references  to  weighted  average  number  of shares  outstanding  and per share
information have been adjusted to reflect the stock split.

Each share of Class A Common  Stock and Class B Common  Stock is entitled to one
vote and ten votes, respectively,  at all shareholders' meetings. The holders of
Class A Common  Stock are  entitled  to elect one  quarter of the members of the
Board of Directors.  The remaining directors are elected by the holders of Class
B Common Stock and any preferred stock entitled to vote.

                                                                              23
<PAGE>
The Company has adopted the  provisions  of Statement  of  Financial  Accounting
Standards  (SFAS) No. 128,  Earnings per Share,  which  replaces the  previously
reported  primary and fully  diluted  earnings  per share with basic and diluted
earnings per share.  Unlike primary earnings per share, basic earnings per share
excludes any dilutive  effects of options and  convertible  securities.  Diluted
earnings per share is computed  similarly to fully  diluted  earnings per share.
All earnings per share amounts for all periods  presented  have been restated to
conform to the requirements of Statement No. 128.

The following table sets forth the computation of basic and diluted earnings per
share for each period reported:
<TABLE>
In thousands, except per share data            Year Ended             1998          1997          1996
------------------------------------------------------------------------------------------------------
<S>                                                              <C>            <C>            <C>
Net income                                                       $13,009        $10,020        $8,454
 Less:  Preferred stock dividends                                    (40)           (40)          (40)
                                                                 --------       --------       ------
Income available to common stockholders                           $12,969        $9,980        $8,414
                                                                 ========       =======        ======
Weighted-average shares                                             9,961         9,836         9,754
 Plus:  Effect of dilutive stock options                              111           143           111
                                                                 ========       =======        ======
 Adjusted weighted-average shares                                  10,072         9,979         9,865
                                                                 ========       =======        ======
Basic earnings per share                                            $1.30         $1.01         $0.86
                                                                 ========       =======        ======
Diluted earnings per share                                          $1.29         $1.00         $0.85
                                                                 ========       =======        ======
</TABLE>
13.  STOCK PURCHASE AND OPTION PLANS

The  Company's  Employees'  Stock  Purchase  Plan  permits  the  purchase  in an
aggregate  amount  of up to  547,250  shares of Class A Common  Stock.  Eligible
employees  may  purchase  stock at market  value,  or 90% of market value if the
price is $6.40 per share or higher,  up to a maximum of $5,000 per  employee  in
any calendar year.  The Company  issued 18,963 shares in 1998,  11,540 shares in
1997 and 21,825 in 1996 under this plan.

The Company's  Stock Option Plans permit the granting of either  nonqualified or
incentive  stock  options to certain key  employees and directors to purchase an
aggregate  amount of up to 238,093 shares of the Company's Class A Common Stock.
The options,  which become exercisable twelve months after date of grant, expire
ten years after date of grant. Although the plan administrator may establish the
nonqualified  option  price at below  market  value at date of grant,  incentive
stock options may be granted only at prices not less than the market  value.  At
June 27,  1998,  201,718  options  were  available  for grant.  A summary of the
Company's stock option activity and related information follows:
<TABLE>
                                                            Shares Under       Weighted--Average
In thousands                                                      Option         Exercise Price
<S>                                                                 <C>                   <C>
-----------------------------------------------------------------------------------------------
Outstanding at July 1, 1995                                          515                  11.41
-----------------------------------------------------------------------------------------------
Exercisable at July 1, 1995                                          429                  10.99
Granted in 1996                                                      100                  12.57
Exercised                                                           (59)                   7.96
Canceled                                                            (45)                  14.18
Outstanding at June 29, 1996                                         511                  11.80
-----------------------------------------------------------------------------------------------
Exercisable at June 29, 1996                                         421                  11.64
-----------------------------------------------------------------------------------------------
Granted in 1997                                                       97                  14.20
Exercised                                                           (79)                  10.21
Canceled                                                             (6)                  14.53
-----------------------------------------------------------------------------------------------
Outstanding at June 28, 1997                                         523                  12.45
-----------------------------------------------------------------------------------------------
Exercisable at June 28, 1997                                         426                  12.05
-----------------------------------------------------------------------------------------------
Granted in 1998                                                      164                  21.94
Exercised                                                          (171)                  10.64
Canceled                                                            (18)                  20.42
-----------------------------------------------------------------------------------------------
Outstanding at June 27, 1998                                         498                  15.92
-----------------------------------------------------------------------------------------------
Exercisable at June 27, 1998                                         350                  13.34
-----------------------------------------------------------------------------------------------
</TABLE>

                                                                              24
<PAGE>
<TABLE>
                                                                                Weighted-Average
                                                               ------------------------------------------------------
                                  Number of Options                      Option Price                 Remaining
                          ----------------------------------- -----------------------------------
Exercise Price Range        Outstanding        Exercisable     Outstanding       Exercisable      Contractual Life
------------------------- ----------------- ------------------ ----------------- ---------------- -------------------
<S>                             <C>                <C>             <C>              <C>               <C>
$  8.32 - $13.60                176                176             $  11.57         $  11.57          4.90 years
$14.10 - $22.69                 322                174             $  18.31         $  15.13          7.53 years

</TABLE>
The weighted-average  grant-date fair value was $7.53, $4.93 and $4.37 for stock
options granted in 1998, 1997 and 1996 respectively.

The Company follows Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
stock  incentive  plans.  Under APB  Opinion  No.  25,  compensation  expense is
recognized  when the market price of the  underlying  stock award on the date of
grant exceeds any related exercise price.  Accordingly,  no compensation expense
has been recognized in the accompanying financial statements.

Pro forma  information  regarding  net  income and net income per share has been
determined  as if the Company had  accounted for its stock awards using the fair
value  method  consistent  with  SFAS No.  123 and had  recognized  compensation
expense. The fair value of these awards was estimated at the date of grant using
the  Black-Scholes  option  pricing  model with the  following  weighted-average
assumptions  in 1998,  1997 and 1996  respectively:  risk free interest rates of
5.45%, 6.23% and 6.23%;  dividend yield of 2.06%, 2.2% and 2.2%; expected market
price  volatility  factor of .311, .303 and .303; and an expected option life of
seven years.

The Company's pro forma information under SFAS No. 123 is as follows:
<TABLE>
Year Ended                                              1998             1997            1996
--------------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>               <C>
Net income (In thousands):
  As reported                                           $   13,009     $    10,020       $   8,454
  Pro forma                                                 11,976           9,544           8,170

Basic net income per share of common stock:
  As reported                                           $     1.30     $      1.01       $     .86
  Pro forma                                                   1.20             .97             .83

Diluted net income per share of common stock:
  As reported                                           $     1.29     $      1.00       $     .85
  Pro forma                                                   1.19             .95             .82
</TABLE>
14.  COMMITMENTS AND CONTINGENCIES

A. Litigation

On January 21, 1997, Midwest Manufacturing Holdings,  L.L.C. ("Midwest") filed a
lawsuit against the Company in Cook County,  Illinois Circuit Court with respect
to terminated  discussions regarding the possibility of Midwest's acquisition of
the Company's Information Products business.  The litigation has been removed to
the  Federal  District  Court for the  Northern  District of  Illinois.  Midwest
alleges that a verbal  agreement to purchase the Information  Products  business
had been reached,  and has filed its lawsuit in an attempt to compel the Company
to proceed  with the sale or to pay Midwest  damages.  On February 5, 1998,  the
court  granted the  Company's  motion for summary  judgment on the remaining two
counts.  Midwest has appealed the court's  decision to the U.S.  Seventh Circuit
Court of Appeals. Management believes that the claim by Midwest will be resolved
without a material  effect on the  Company's  financial  condition or results of
operations and liquidity.

On  February  3, 1998,  the  Company  reached a final  settlement  with  Happich
Fahrzeug-InnausstaHung GmbH concerning a joint venture that had been the subject
of  arbitration.  As a result of the  settlement,  the Company was awarded  100%
ownership of the former joint venture,  which was subsequently  transferred into
the Lear Donnelly joint venture, received payment for damages and costs incurred
and entered into other  agreements  with respect to certain  technology  and the
supply of parts.

On February 10, 1998, the Company filed a patent infringement  action,  Donnelly
Corporation v. Britax  Rainsfords,  Inc.,  which is pending in the United States
District Court for the Western  District of Michigan.  The lawsuit  alleges that
the production and sale

                                                                              25
<PAGE>
by Britax of rear view mirrors  incorporating  a security  light  infringes on a
Company  patent.  The  Company  seeks an  injunction  against  Britax as well as
unspecified  damages.  Britax  has  denied  infringement  and  asserts  that the
Company's patent is invalid and  unenforceable.  In a related action, on May 18,
1998, Britax sued the Company in the High Court of England seeking to invalidate
two of the  Company's  English  patents  which are parallel to the United States
patents subject to the litigation  described above. On July 3, 1998, the Company
brought an action in the High Court of England  alleging patent  infringement by
Britax and seeking injunctive relief and damages.  Management  believes that the
Britax  litigation  will be resolved  without a material  adverse  effect on the
Company's financial condition or results of operations and liquidity

The Company and its subsidiaries are involved in certain other legal actions and
claims,  including  environmental  claims,  arising  in the  ordinary  course of
business.  Management  believes that such litigation and claims will be resolved
without  material  effect  on  the  Company's  financial  position,  results  of
operations and liquidity, individually and in the aggregate.

B. Other

As of June 27, 1998, the Company had capital  expenditure  purchase  commitments
outstanding of approximately $13.2 million.

The Company  provides a guarantee for $7.3 million in municipal  funding for the
construction of a manufacturing facility.

15.  LEASES

Future minimum lease payments, excluding renewal options, consist of:
<TABLE>
Year Ending               In thousands                   Capital Leases        Operating Leases
-----------------------------------------------------------------------------------------------
<S>                                                      <C>                   <C>
1999                                                     $   2,012             $   3,826
2000                                                         1,143                 1,754
2001                                                           112                 1,543
2002                                                            43                 1,507
2003                                                           ---                 1,203
2004 and thereafter                                            ---                 2,765
                                                        --------------------------------
Total minimum lease payments                                 3,310              $ 12,598
                                                                                ========
Less amount representing interest and other                    238
                                                        ----------
Present value of net minimum lease payments              $   3,072
                                                        ==========
</TABLE>
Donnelly  Hohe has  various  capital  leases  for  manufacturing  and  warehouse
facilities and manufacturing,  office and transportation equipment.  Included in
property,  plant and  equipment  are the  following  assets  held under  capital
leases:
<TABLE>
In thousands                        Year Ended              1998
------------------------------------------------------------------
<S>                                                       <C>
Land                                                      $     75
Buildings                                                    5,290
Machinery and equipment                                      2,644
                                                           -------
Gross property, plant and equipment under capital leases     8,009
Less accumulated depreciation                               (4,937)
                                                           -------
Net property, plant and equipment under capital leases     $ 3,072
                                                           =======
</TABLE>
The  Company  has  operating  leases for  office,  warehouse  and  manufacturing
facilities and  manufacturing  equipment.  Rental expense  charged to operations
amounted to approximately  $4.3 million for 1998, $3.8 million for 1997 and $3.8
million for 1996.  In 1998,  the Company  entered into an agreement for the sale
and leaseback of newly installed injection molding equipment.  The equipment was
sold at cost and no gain or loss was  recognized on the  transaction.  The lease
has an effective  6.4% fixed  interest  rate and a 40% balloon for the Company's
option  to  purchase  the  equipment  after  the  full  seven-year  term  and is
classified as an operating lease.


                                                                              26
<PAGE>
16.  COMMON STOCK PRICE PER SHARE - UNAUDITED

The Company's  common stock is traded on the New York Stock  Exchange  under the
Symbol  "DON." Prior to March 10, 1997,  the  Company's  stock was listed on the
American Stock Exchange under the symbol "DON." Market quotations  regarding the
range of high  and low  sales  prices  of the  Company's  common  stock  were as
follows:
<TABLE>
Fiscal                                      1998                         1997
---------------------------------------------------------------------------------------
Quarter                              High         Low               High        Low
---------------------------------------------------------------------------------------
<S>                                 <C>          <C>                <C>        <C>
First                               $  23.75     $  16.75           $ 14.70    $ 11.80
Second                                 22.44        17.50             17.90      14.10
Third                                  19.31        16.25             20.00      16.00
Fourth                                 22.38        18.00             17.38      14.38
--------------------------------------------------------------------------------------
</TABLE>
17.  QUARTERLY FINANCIAL DATA--UNAUDITED
<TABLE>
                                                         First        Second       Third         Fourth         Total
In thousands, except per share data                     Quarter       Quarter     Quarter       Quarter         Year
---------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>          <C>         <C>           <C>            <C>
1998
Net sales.........................................      $165,176     $194,800    $ 193,658     $ 209,677      $ 763,311
Gross profit......................................        27,973       33,580       32,649        36,430        130,632
Operating income .................................         3,090        6,378        6,674         4,232         20,374
Net Income........................................           986        5,169        3,373         3,481         13,009
   Basic net income per share.....................           .10          .52          .34           .35           1.30
   Diluted net income per share...................           .10          .51          .33           .34           1.29
Dividends declared per share of common stock......           .10          .10          .10           .10            .40

1997
Net sales.........................................      $113,400     $188,037    $ 181,681     $ 188,179      $ 671,297
Gross profit......................................        23,148       34,771       33,321        35,428        126,668
Operating income (loss)...........................         4,942        8,600        5,403        (1,264)        17,681
Net Income........................................         1,722        3,917        2,958         1,423         10,020
   Basic net income per share.....................           .18          .40          .30           .14           1.01
   Diluted net income per share...................           .17          .39          .29           .14           1.00
Dividends declared per share of common stock......           .08          .08          .10           .10            .36
</TABLE>
See Management's  Discussion and Analysis of Results of Operations and Financial
Condition for  discussion of the Company's  results of operations and Notes 3, 5
and 14 for a discussion  of the impact of certain  transactions  on the 1998 and
1997 quarterly results of operations.



                                                                              27
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The management of Donnelly  Corporation is responsible  for the  preparation and
integrity  of the  combined  consolidated  financial  statements  and all  other
information  contained in this Annual  Report.  The  financial  statements  were
prepared in accordance with generally accepted accounting principles and include
amounts that are based on management's informed estimates and judgments.

In fulfilling  its  responsibility  for the integrity of financial  information,
management  has  established  a system  of  internal  accounting  control  which
provides reasonable assurance that assets are properly safeguarded and accounted
for  and  that   transactions  are  executed  in  accordance  with  management's
authorization and recorded and reported properly.

The  financial   statements  have  been  audited  by  our   independent   public
accountants, BDO Seidman, LLP, whose unqualified report is presented on the next
page. The independent  accountants provide an objective assessment of the degree
to  which  management  meets  its   responsibility  for  fairness  of  financial
reporting.  They regularly  evaluate the internal control  structure and perform
such tests and other  procedures as they deem  necessary to reach and express an
opinion on the fairness of the financial statements.

The Audit  Committee  of the Board of  Directors,  consisting  solely of outside
Directors,  meets with the  independent  public  accountants  and  management to
review and discuss  the major  audit  findings,  the  adequacy  of the  internal
control   structure  and  quality  of  financial   reporting.   The  independent
accountants also have free access to the Audit Committee to discuss auditing and
financial reporting matters with or without management present.



/s/ J. Dwane Baumgardner, Ph.D.
J. Dwane Baumgardner, Ph.D.
Chairman, Chief Executive Officer and President



/s/ Ronald L. Winowiecki
Ronald L. Winowiecki
Chief Accounting Officer



                                                                              28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

DONNELLY CORPORATION
HOLLAND, MICHIGAN

We have audited the combined consolidated balance sheets of Donnelly Corporation
and subsidiaries as of June 27, 1998 and June 28, 1997, and the related combined
consolidated statements of income,  shareholders' equity and cash flows for each
of the three years in the period ended June 27, 1998. These financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the combined consolidated financial statements referred to above
present fairly,  in all material  respects,  the financial  position of Donnelly
Corporation  and  subsidiaries  as of June 27, 1998 and June 28,  1997,  and the
results of their  operations and their cash flows for each of the three years in
the period ended June 27, 1998, in conformity with generally accepted accounting
principles.


BDO Seidman, LLP
Grand Rapids, Michigan
August 6, 1998



                                                                              29

<PAGE>
EXHIBIT 10.21



                    Amended and Restated Operating Agreement



                                       For



                          Donnelly Electronics, L.L.C.




                                 January 1, 1998
<PAGE>
                                TABLE OF CONTENTS

                                                                            Page

ARTICLE 1.  THE LIMITED LIABILITY COMPANY......................................1
         1.1      Formation and Name...........................................1
         1.2      Character of Business........................................1
         1.3      Registered Office, Resident Agent............................1
         1.4      Principal Place of Business..................................1
         1.5      Partnership Classification...................................1

ARTICLE 2.  CAPITAL CONTRIBUTIONS AND ACCOUNTS.................................2
         2.1      Initial Contributions........................................2
         2.2      Capital Accounts.............................................2
         2.3      Interests in Capital.........................................2
         2.4      No Right to Withdraw.........................................2
         2.5      Additional Contributions.....................................3

ARTICLE 3.  ALLOCATIONS AND DISTRIBUTIONS......................................3
         3.1      Allocations of Profits and Losses............................3
         3.2      Distributions of Cash Flow...................................3
         3.3      Priority and Distribution of Assets..........................3

ARTICLE 4.  MANAGEMENT AND EXCULPATION.........................................3
         4.1      Management of Business.......................................3
         4.2      Powers of Managers...........................................4
         4.3      Time Devoted to Business.....................................5
         4.4      Information Relating to Company..............................5
         4.5      Records at Principal Place of Business.......................5
         4.6      Reimbursement of Managers....................................6
         4.7      Indemnification..............................................6
         4.8      Irrevocable Powers of Attorney...............................7

ARTICLE 5.  TRANSFERS OF INTERESTS.............................................7
         5.1      Restrictions on Transfer.....................................7
         5.2      Right of First Refusal.......................................8
         5.3      Other Transfers..............................................8
         5.4      Lapse of Option..............................................9
         5.5      Donnelly Purchase Option.....................................9
         5.6      Donnelly Call Option........................................11
         5.7      Member Put Option...........................................12
         5.8      Default, Bankruptcy, Etc....................................13
         5.9      Priority....................................................14


                                       i
<PAGE>
         5.10     Purchase Price and Terms....................................14
         5.11     Loss of Membership..........................................16
         5.12     Substitute or Additional Members............................16

ARTICLE 6.  DISSOLUTION AND TERMINATION.......................................17
         6.1      Dissolution.................................................17
         6.2      Final Accounting............................................17
         6.3      Liquidation.................................................17
         6.4      Distributions in Kind.......................................17
         6.5      Certificate of Dissolution..................................17

ARTICLE 7.  AMENDMENT TO AGREEMENT............................................17

ARTICLE 8.  NOTICES...........................................................18
         8.1      Method for Notices..........................................18
         8.2      Computation of Time.........................................18

ARTICLE 9.  GENERAL PROVISIONS................................................18
         9.1      Entire Agreement............................................18
         9.2      Construction Principles.....................................18
         9.3      Waivers.....................................................18
         9.4      Validity and Severability...................................18
         9.5      Counterparts................................................18
         9.6      Investment Representations..................................19


                                       ii
<PAGE>
                    Amended and Restated Operating Agreement
                                       for
                          Donnelly Electronics, L.L.C.


     Donnelly  Electronics,  L.L.C., a Michigan limited  liability  company (the
"Company"),  and each person who executes  this  Amended and Restated  Operating
Agreement or a counterpart of it (the  "Agreement") or who hereafter is admitted
as a member of the Company in accordance  with the procedures  described in this
Agreement  (individually,  a "Member," and collectively,  the "Members"),  enter
into this Amended and Restated  Operating  Agreement  effective as of January 1,
1998,  which  amends and  supersedes  that  certain  Operating  Agreement of the
Company dated effective July 30, 1996 (the "Original Agreement").

                    ARTICLE 1. THE LIMITED LIABILITY COMPANY

     1.1 Formation and Name. The Members have formed and hereby agree to operate
the Company  pursuant  to the  provisions  of this  Agreement  and the  Michigan
Limited  Liability  Company Act (the "Act").  In connection with this Agreement,
the  Members  have  caused  Articles  of  Organization   that  comply  with  the
requirements  of the Act to be properly  filed with the Michigan  Department  of
Commerce,  and shall  execute such further  documents  (including  any necessary
amendments to the Articles of  Organization)  and take such further action as is
appropriate  to  comply  with  the  requirements  of law  for the  formation  or
operation of a limited  liability  company in all states and counties  where the
Company  conducts  its  business.  The name of the  Company  shall  be  Donnelly
Electronics,  L.L.C.  The Company may conduct  business  under that name or such
other name or names as its Members shall determine from time to time.

     1.2  Character of Business.  The purposes of the Company shall be to engage
in such businesses as may be agreed upon by the Members from time to time and to
engage in activities  incidental and related thereto for which limited liability
companies may be formed under the Act  (including  the  development,  sale,  and
licensing of computer software and providing of professional services related to
computer software and hardware).

     1.3  Registered  Office,  Resident  Agent.  The location of the  registered
office of the Company  initially shall be 10410 N. Holly Road,  Holly,  Michigan
48442, and thereafter shall be such other location as the "Managers" (as defined
in Section 4.1) may designate from time to time. The Company's resident agent at
such address  initially shall be David Taylor,  and thereafter such other person
as the Managers may designate from time to time.

     1.4 Principal  Place of Business.  The location of the  principal  place of
business of the Company shall be its registered  office,  or such other place as
the Managers may designate from time to time.

     1.5 Partnership  Classification.  The Members intend that the Company shall
be operated

                                       1
<PAGE>
in a manner  consistent  with its treatment as a  "partnership"  for federal and
state income tax  purposes.  No Member shall take any action  inconsistent  with
such intent,  and the Members agree to make any amendments  hereto  required (in
the  opinion of  counsel  for the  Company)  to obtain or  maintain  partnership
classification  for  tax  purposes  from  time  to  time.   Notwithstanding  the
foregoing,  the Members have formed the Company as a limited  liability  company
under  the Act and  specifically  intend  and  agree  that  the  Company  not be
construed  as a  partnership  (including  a  limited  partnership)  or any other
venture for purposes other than tax matters.  No Member shall be construed to be
a partner in the Company or a partner of any other Member or person for purposes
other than tax matters, and the Articles of Organization, this Agreement and the
relationships  created  thereby and arising  therefrom shall not be construed to
suggest otherwise.

                  ARTICLE 2. CAPITAL CONTRIBUTIONS AND ACCOUNTS

     2.1  Initial  Contributions.  Each  Member  initially  contributed  to  the
Company's capital the property  described opposite such Member's name on Exhibit
A  attached  hereto  and  by  this  reference  made  a part  hereof.  Each  such
contribution  was made by such Member in exchange  for receipt of such  Member's
interest in the Company and was made at the time of  execution  of the  Original
Agreement  unless  otherwise  indicated on Exhibit A. Each capital  contribution
shall,  unless otherwise  consented to by the Company, be made free and clear of
any liens, claims, encumbrances, options or restrictions of any type whatsoever.

     2.2 Capital Accounts. A separate capital account shall be maintained by the
Company for each  Member.  The capital  account of each Member shall be credited
with each  Member's  capital  contribution(s)  (at net fair  market  value  with
respect to any  contributed  property)  and shall be  appropriately  adjusted to
reflect each Member's allocations of profits, gains, losses, deductions, the net
fair market value of distributions made to the Member, and any other adjustments
as required by section 704 of the Internal Revenue Code of 1986, as amended (the
"Code"),  and its  accompanying  regulations.  No interest  shall be paid on any
capital account.

     2.3  Interests  in  Capital.  The  interests  of the Members in the capital
contributed to the Company shall be those  percentages  (referred to as "Sharing
Ratios")  shown opposite their names on Exhibit A and determined by dividing the
value of each  Member's  capital  contribution  by the  total  value of all such
capital contributions as shown on Exhibit A.

     2.4 No Right to Withdraw. A Member shall have no right to withdraw,  retire
or resign as a Member of the Company,  except in connection with the transfer of
its interest in the Company in accordance  with the  provisions of Article 5. No
Member shall have the right to withdraw its capital contribution or to demand or
receive a return of its capital  contribution or any other distribution from the
Company  except as provided  in this  Agreement.  Any  attempted  withdrawal  in
violation of this provision shall result in the withdrawing  Member's forfeiture
of any  distributions  from the  Company,  and the Company  shall be entitled to
receive from the  withdrawing  Member  damages for a breach of this Agreement in
excess of the amount that would  otherwise be  distributable  to the withdrawing
Member.

                                        2
<PAGE>
     2.5  Additional  Contributions.  Members shall not be obligated to make any
additional contribution to the Company's capital. Notwithstanding the foregoing,
(a) if any court of competent jurisdiction holds that distributions (or any part
thereof)  received by a Member  pursuant to the provisions  hereof  constitute a
return of capital  and directs  that Member to pay such amount  (with or without
interest)  to or for the account of the Company or any  creditor  thereof,  such
obligation shall be the obligation of said Member and not of any other Member or
the Company,  and (b) a Member shall indemnify and hold harmless the Company and
each  other  Member  from  any  liability  or loss  incurred  by  virtue  of the
assessment  of any income tax with respect to such Member's  allocable  share of
the profits or gain of the Company.

                    ARTICLE 3. ALLOCATIONS AND DISTRIBUTIONS

     3.1  Allocations  of Profits and Losses.  The  Company's net profits or net
losses  shall be  determined  on an annual  basis and shall be  allocated to the
Members in proportion  to their  Sharing  Ratios,  provided,  however,  that for
federal income tax purposes,  income,  gain, loss, and deduction with respect to
property  contributed to the Company shall be allocated to take into account the
variation  between the federal  income tax basis of the  property to the Company
and its  fair  market  value  at the  time of its  contribution  to the  Company
pursuant to Code ss. 704(c).

     3.2 Distributions of Cash Flow. At such time or times as the Managers shall
determine,  the Company  shall  distribute to the Members in proportion to their
respective Sharing Ratios the Company's  available funds, which for this purpose
shall mean funds the Managers  determine  to be in excess of those  required for
the payment of, or the  reservation  of funds for the payment of, the  Company's
expenses,  liabilities  (contingent  or  otherwise),  capital  improvements  and
acquisitions, and other obligations of the Company. On or before April 1 of each
year, the Company shall distribute to the Members an amount equal to the pre-tax
profits of the Company for the previous  year, as  determined  for tax purposes,
multiplied  by the highest tax rate of any member with respect to the  Company's
earnings.  No distribution shall be declared or made if, after giving it effect,
the  Company  would not be able to pay its debts as they become due in the usual
course of business or the  Company's  total assets would be less than the sum of
its total liabilities.

     3.3 Priority and  Distribution of Assets.  Except as otherwise  provided in
this Agreement, no Member shall have priority over any other Member either as to
the return of capital or as to profits, losses or distributions. No Member shall
have the right to demand or receive  property  other than cash for such Member's
capital  or in  payment of such  Member's  share of  profits  or cash  flow.  No
distributions  shall be made except in proportion  to the Sharing  Ratios of the
Members.

                      ARTICLE 4. MANAGEMENT AND EXCULPATION

     4.1 Management of Business. The Company's business and affairs shall be run
by its

                                       3
<PAGE>
"Managers",  who are selected from time to time by Members holding a majority of
0the Sharing  Ratios,  provided that Managers  shall hold, in the  aggregate, at
least  twenty-five  percent (25%) of the Sharing  Ratios.  The Managers shall be
elected by the Members.

     Except as otherwise  expressly  provided by the Act or this Agreement,  the
Members shall take no part whatsoever in the control, management,  direction, or
operation of the Company's  affairs and shall have no power to bind the Company.
The  Managers may from time to time seek advice from the Members on major policy
decisions,  but the Managers  need not accept such advice,  and at all times the
Managers  shall  have the  exclusive  right to control  and manage the  Company,
except as otherwise expressly provided by the Act or this Agreement. As to those
items as to which approval,  decisions,  or actions of the Members are required,
unless otherwise  exclusively provided by law or this Agreement,  the approvals,
decisions and actions of Members  holding a majority of the Sharing Ratios shall
be binding on the Company.

     Title to the Company's assets shall be held in the Company's name.

     4.2 Powers of  Managers.  The  approval  or  consent  of a majority  of the
Managers  shall  constitute  action of the  Managers,  except that the following
items shall require the unanimous approval of all Managers:

          (a) The merger of the Company or the sale of substantially  all of the
     Company's assets.

          (b)  Requirement  of additional  capital  contributions  from existing
     Members or the acceptance of capital from new Members.

          (c) A change in the growth or nature of the business  being  conducted
     by the Company.

          (d) The  approval  of any  transaction  between  the  Company  and any
     Member,  any company  owned or  controlled by a Member or any relative of a
     Member.

          (e) The adoption of any business plan,  budget or capital  expenditure
     which would result in an operating  loss greater than shown in the Business
     Plan attached as Exhibit F.

     Notwithstanding  the foregoing,  any decision regarding the purchase by the
Company  of a Company  Interest  (as  hereinafter  defined)  from a Member  (the
"Selling  Member") shall be determined by a majority of Managers who are not the
Selling Member, any relative of the Selling Member or affiliated with any entity
which  directly or  indirectly  controls,  is  controlled  by or is under common
control with the Selling Member.

     The Managers,  acting as provided  above,  have the power, on the Company's
behalf,  to do all things  necessary or convenient to carry out the business and
affairs of the Company, including

                                       4
<PAGE>
the power to: (a)  purchase,  lease or  otherwise  acquire  any real or personal
property;  (b) sell,  convey,  mortgage,  grant a security  interest in, pledge,
lease,  exchange or otherwise dispose or encumber any real or personal property;
(c) open one or more  depository  accounts and make deposits into and checks and
withdrawals  against such accounts;  (d) borrow money,  incur  liabilities,  and
other obligations; (e) enter into any and all agreements and execute any and all
contracts, documents and instruments; (f) obtain insurance covering the business
and affairs of the Company and its property and on its  Members;  (g)  commence,
prosecute or defend any proceeding in the Company's  name;  and (h)  participate
with others in partnerships, joint ventures and other associations and strategic
alliances.  The Managers shall exercise these powers and discharge  their duties
in good faith,  with the care an  ordinarily  prudent  person in a like position
would exercise under similar circumstances,  and in a manner reasonably believed
to be in the best interests of the Company.

     4.3 Time  Devoted to Business.  The Managers  shall devote such time to the
business of the Company as they,  in their  discretion,  deem  necessary for the
efficient operation of the Company's business. The Managers shall not engage for
their own account in any  business in which the Company is  involved,  except as
otherwise provided herein.

     4.4  Information  Relating to Company.  Each Member has the right and shall
have access to and may inspect and copy all books,  records and materials in the
Company's  possession  regarding the Company or its activities.  The exercise of
the  rights  contained  in this  Article  shall  be at the  requesting  Member's
expense.

     4.5 Records at Principal  Place of Business.  The Managers  shall cause the
Company to keep at its registered office the following,  together with any books
and records of the  Company's  business and affairs as required by the Act or by
law:

          (a) a  current  list in  alphabetical  order of the full name and last
     known business street address of each Member and each Manager;

          (b)  a  copy  of  the  stamped   Articles  of  Organization   and  all
     certificates  of amendment to them,  together with  executed  copies of any
     powers of attorney  pursuant to which any certificate of amendment has been
     executed;

          (c)  copies of the  Company's  federal,  state and  local  income  tax
     returns and reports, if any, for the three most recent years;

          (d) copies of any financial statements of the Company, if any, for the
     three most recent years;

          (e)  copies  of this  Agreement  and all other  operating  agreements,
     together with copies of any amendments thereto; and

          (f) unless  otherwise  set forth in the  Articles of  Organization,  a
     written statement

                                       5
<PAGE>
     setting forth:

               (1) the amount of cash and a  description  and  statement  of the
          agreed  value of the property or services  contributed  by each Member
          and which each Member has agreed to contribute;

               (2) the times at which,  or the events on the happening of which,
          any additional  contributions  agreed to be made by each Member are to
          be made;

               (3) any right of a Member to receive  distributions which include
          a return of all or any part of the Member's contributions; and

               (4) any event upon the  happening  of which the  Company is to be
          dissolved and its affairs wound up.

     In addition,  the Managers  shall  maintain  complete and accurate books of
account of the Company's  affairs at the Company's  principal place of business.
Such books  shall be kept on such method of  accounting  as the  Managers  shall
select.  The  Company's  accounting  period  currently  ends on December 31. The
Company hereby changes its fiscal year to end on the Saturday closest to June 30
in each year, subject to approval of the Internal Revenue Service.  The Managers
shall cause the Company to close its books of account  promptly  after the close
of each fiscal  year and  prepare  and send to each  Member a statement  of such
Member's  distributive  share of income  and  expense  for  federal  income  tax
reporting purposes.

     4.6 Reimbursement of Managers. The Company shall reimburse the Managers for
all substantiated  direct  out-of-pocket  expenses they reasonably  incurred and
paid (or may yet  incur or pay) in  organizing  the  Company  and  pursuing  its
business and continuing its operations.

     4.7  Indemnification.  Except as otherwise  provided in this  Article,  the
Company may indemnify  any Manager,  employee or agent of the Company who was or
is a party or is  threatened  to be made a party  to a  threatened,  pending  or
completed action, suit or proceeding,  whether civil, criminal,  administrative,
or investigative,  and whether formal or informal, other than an action by or in
the right of the  Company,  by  reason of the fact that such  person is or was a
Manager, employee or agent of the Company, against expenses, including attorneys
fees,  judgments,  penalties,  fees and amounts paid in settlement  actually and
reasonably  incurred  by such  person in  connection  with the  action,  suit or
proceeding,  if the  person  acted in good  faith,  with the care an  ordinarily
prudent person in a like position  would  exercise under similar  circumstances,
and in a manner that such person reasonably believed to be in the best interests
of the  Company and with  respect to a criminal  action or  proceeding,  if such
person had no reasonable cause to believe such person's conduct was unlawful. To
the  extent  that a  Manager,  an  employee  or  agent of the  Company  has been
successful  on the  merits  or  otherwise  in  defense  of an  action,  suit  or
proceeding,  such person  shall be  indemnified  against  actual and  reasonable
expenses,  including  attorneys fees, incurred by such person in connection with
the action, suit or proceeding and any action, suit or proceeding brought

                                       6
<PAGE>
to enforce the mandatory  indemnification  provided herein. Any  indemnification
permitted  under this Article,  unless ordered by a court,  shall be made by the
Company only as authorized in the specific  case upon a  determination  that the
indemnification  is proper  under the  circumstances  because  the  person to be
indemnified has met the applicable standard of conduct and upon an evaluation of
the   reasonableness   of  expenses  and  amounts  paid  in   settlement.   This
determination and evaluation shall be made by a majority vote of the Members who
are  not  parties  or  threatened  to be made  parties  to the  action,  suit or
proceeding.  Notwithstanding the foregoing, no indemnification shall be provided
to any manager,  employee or agent of the Company for or in connection  with the
receipt of a financial benefit to which such person is not entitled,  voting for
or  assenting  to a  distribution  to Members  in  violation  of this  Operating
Agreement or the Act, or a knowing violation of law.

     4.8 Irrevocable  Powers of Attorney.  Each Member, by its execution of this
Agreement,  does irrevocably  constitute and appoint David Taylor, Thomas Taylor
and/or James A. Knister (the "Agent"),  with full power of substitution,  as its
true and lawful  attorney,  in its name,  place and stead,  to execute  and file
Articles of Organization  with the appropriate  depositories  and authorizes the
Agent to  execute,  acknowledge,  swear to and file (a) all  amendments  to this
Agreement or to the Articles of  Organization  required by law or  authorized or
required by the  provisions of this  Agreement or the Articles of  Organization;
(b) all certificates and other instruments  necessary to qualify or continue the
Company  as a  limited  liability  company  wherein  the  Members  have  limited
liability  in the  states  where  the  Company  may be doing  business;  (c) all
assignments, conveyances and other instruments necessary to effect the formation
and  capitalization  of the Company as contemplated  by this Agreement;  (d) all
notes, mortgages, security instruments, credit agreements and other documents to
reflect any borrowing that the Agent deems appropriate, including borrowing from
the Agent himself;  (e) all other instruments,  agreements or documents that the
Agent deems  reasonably  necessary  to conduct the  Company's  regular  business
activities  and to  carry  out the  intentions  of this  Agreement;  and (f) all
conveyances and other instruments  necessary to effect the Company's dissolution
and  termination  in  accordance  with this  Agreement.  The powers of  attorney
granted  herein  shall be deemed to be  coupled  with an  interest  and shall be
irrevocable and survive the death, incompetency or dissolution of any Member. In
the event of any conflict  between this Agreement and any  instruments  filed by
such attorney  pursuant to the power of attorney  granted in this Article,  this
Agreement shall control.

                        ARTICLE 5. TRANSFERS OF INTERESTS

     5.1 Restrictions on Transfer. No person who holds ("Holder") an interest in
the Company  ("Company  Interest")  shall sell,  exchange,  assign,  encumber or
otherwise transfer, voluntarily or involuntarily, with or without consideration,
all or part of any such Company Interest (or any interest therein),  whether now
held or hereafter  acquired  except  pursuant to other terms of this  Agreement,
unless (a) such  Holder has first  given the notices and made the offers to sell
as provided herein, and no such offer has been accepted, or (b) such transfer is
expressly  permitted  by the  terms of this  Agreement.  A Company  Interest  is
transferable  only in strict  compliance with the terms of this  Agreement.  Any
sale,  exchange,  assignment,  encumbrance or other transfer  attempted  without
strict

                                       7
<PAGE>
compliance  with this  Agreement  shall be null and void and confer no rights on
the  transferee  as against  the  Company or any  Member.  A sale or transfer in
compliance with this Agreement shall confer on the transferee only the rights of
an assignee to the subsequent  allocations and distributions of the Company, and
no permitted  transferee  shall be admitted  into the Company as a substitute or
additional Member or otherwise be permitted to participate in the management and
affairs of the  Company,  unless the  conditions  set forth in Article 5.12 have
been satisfied.



                                        8
<PAGE>
     5.2 Right of First  Refusal.  If any Holder shall  receive an offer for the
purchase of, or otherwise  desires to sell, all or part of its Company Interest,
that  Holder  shall have the right to sell the Company  Interest  subject to the
following limitations:

          (a) The Holder may procure a bona fide  written  offer,  signed by the
     prospective  purchaser and containing all terms of the offer, or the Holder
     may establish a price and terms upon which the Holder  proposes to sell his
     Company Interest.

          (b) The Holder shall promptly notify, in writing,  the Company and all
     of the Members of all terms of the offer  (submitting a copy thereof if one
     exists) or all terms on which he proposes to sell his Company Interest, and
     such notice shall be deemed to constitute an offer,  made by and binding on
     the person  required to give such notice and his  personal  representative,
     estate,  successors and assigns, to sell to the recipient(s) of such notice
     in the manner  stated  herein the Company  Interest  that is the subject of
     such notice.

          (c) The Company  shall have the option to elect,  within the longer of
     sixty  (60) days after  receipt of the notice or twenty  (20) days after an
     appraisal is completed  if one is  requested,  to purchase all but not less
     than all of that portion of the Company  Interest  described in the notice.
     The decision of the Company shall be made by the Members as provided above.

          (d) If the Company does not exercise its option to purchase, the other
     Members  shall  have,  for  thirty  (30) days  after the  Company's  option
     expires,  the option to  purchase  all but not less than all of the Company
     Interest described in the notice. If more than one such other Member elects
     to exercise  this  purchase  option,  each such  electing  Member  shall be
     entitled to purchase only that portion of the Company Interest described in
     the notice that  corresponds  to the  percentage  obtained by dividing such
     Member's  Sharing  Ratio by the total of the Sharing  Ratios of all Members
     electing to purchase.

          (e) The options  granted to the Company and to the other Members under
     this Article  shall be  exercisable  on the same terms and  conditions  set
     forth in the notice referenced in subarticle (b).

     5.3 Other Transfers. If any Holder contemplates a disposition other than by
sale, including an exchange,  assignment,  encumbrance,  or other transfer, of a
Company  Interest,  or if any person seeks to obtain an interest in such Company
Interest, whether by execution,  judgment or otherwise, the Holder, or the party
seeking to obtain the interest, as the case may be, shall notify the Company and
all Members of the name and address of the prospective transferee, the extent of
the  Company   Interest  to  be  transferred,   and  all  terms  and  conditions
contemplated  by the transfer,  and the Company and the other Members shall have
options  to  acquire  the  Company  Interest  in  accordance  with the terms and
conditions  of the options  granted in Article  5.2,  except that in lieu of the
price and terms  referenced in Article  5.2(e),  the price and terms shall be as
specified in Article 5.10.  Notwithstanding the foregoing,  transfers by Members
to spouses and children, trusts or

                                       9
<PAGE>
partnerships for the benefit of such persons or to other entities  controlled by
the Member or by the same person  controlling the Member shall not be covered by
this Article 5.3 provided  the  transferee  agrees in writing to be bound by the
terms of this Agreement.

     5.4 Lapse of Option.  After the  expiration  of the  options  described  in
Articles 5.2 and 5.3,  the Holder  shall be entitled to make the proposed  sale,
exchange, assignment,  encumbrance, or other transfer to the person named in the
notice,  or offer the  Company  Interest  for sale,  but only upon the terms and
conditions  described  in the  notice  and  subject  to the  provisions  of this
Agreement.  Provided,  however, that if the proposed sale is being made by David
Taylor or Taylor  Family  Investments,  Inc. or by Members  whose total  Company
Interest  being sold is fifty percent (50%) or more of the Sharing  Ratios,  the
sale will be permitted  only if the purchaser of those Company  Interests  shall
also acquire all of the Company Interests of any other Members electing to sell,
at the same time for the same price and on the same terms and conditions. If the
proposed sale is of Company Interests  representing  fifty percent (50%) or more
of the Sharing  Ratios,  and the  options in Articles  5.2 and 5.3 have not been
exercised, all Members agree that they will sell all their Company Interests for
the same price and on the same terms and  conditions  if such sale is not to any
relative of any other Member or any person or organization  which is directly or
indirectly  controlled  by,  controlling  or under common control with any other
Member,  or  relative  of any  Member and there are no  employment,  consulting,
non-competition or similar payments to any such person.

     If such sale, exchange,  assignment,  encumbrance, or other transfer is not
made  within  ninety (90) days after the  expiration  of the last of the options
granted in this Article,  the Company Interest shall  automatically again become
subject to the restrictions on transfer stated herein.  If such sale,  exchange,
assignment,  encumbrance  or other  transfer  is made in  compliance  with  this
Agreement,  the interest acquired by the transferee shall be merely the interest
of an assignee,  and not an interest as a Member approved in the manner provided
in Article 5.12.

     5.5 Donnelly  Purchase  Option.  The Company  hereby  grants to Donnelly an
irrevocable  option (the  "Donnelly  Purchase  Option") to subscribe  during the
option period to purchase the interest in the Company described below ("Donnelly
Option Interest") on the following terms and conditions:

          (a) Donnelly Option Interest.  The Donnelly Option Interest shall be a
     Sharing  Ratio  percentage  in an amount  sufficient  that if Donnelly  has
     previously  exercised  its option  granted as of July 30, 1996 (as amended)
     and  exercises  the Donnelly  Purchase  Option and  purchases  the Donnelly
     Option Interest, then would have a total Sharing Ratio of 60.00%.

          (b) Option Period.  The Donnelly  Purchase  Option may be exercised at
     any time from July 1, 2000, until January 31, 2003.

          (c) Condition to Exercise. Donnelly may exercise the Donnelly Purchase
     Option  only if  Donnelly  Corporation  has  previously  or  simultaneously
     exercised  the purchase  option  granted  pursuant to the Supply and Option
     Agreement dated as of July 30,

                                       10
<PAGE>
     1996, a copy of which is attached as Exhibit E to this  Agreement and which
     remains in full force and effect.

          (d) Exercise Notice.  The Donnelly  Purchase Option shall be exercised
     by written  notice from to the Company,  specifying  a date,  not more than
     thirty (30) days after the date of the notice,  on which Donnelly would pay
     the Donnelly Purchase Option Price.

          (e) Option Price. The Donnelly Purchase Option Price shall be equal to
     One  Million  Eight  Hundred  and  Forty  Thousand   Dollars   ($1,840,000)
     multiplied  by an Adjustment  Factor based upon the 2001  Adjusted  Pre-Tax
     Earnings of the Company (as  hereinafter  defined).  The Adjustment  Factor
     shall be determined by the following chart:
<TABLE>
         2001 Adjusted Pre-Tax Earnings ($mm)                  Adjustment Factor
         [to be completed based on business plan]
                  <S>                                                 <C>  
                  below $350,000                                      0.8

                  between $350,000 and $385,000                       0.9

                  between $385,000 and $470,000                       1.0

                  between $470,000 and $520,000                       1.1

                  above $520,000                                      1.2
</TABLE>
                  "2001 Adjusted  Pre-Tax  Earnings"  shall mean the earnings of
                  the  Company  for the  twelve  months  ended  on the  Saturday
                  closest  to June 30,  2001,  prior to any  interest  income or
                  interest expense and prior to federal income tax,

          (f) Payment of Purchase  Price.  The  Donnelly  Purchase  Option Price
     shall be payable upon issuance by the Company of the membership interest to
     Donnelly. If Donnelly exercises the Donnelly Purchase Option and closes the
     purchase before the accounting has been completed for the fiscal year ended
     approximately  June 30, 2001, the payment of the Donnelly  Purchase  Option
     Price  will be  deferred  until such  accounting  has been  completed.  The
     Donnelly  Purchase Option Price will be payable in cash or by conversion of
     outstanding  promissory notes  representing  amounts owed by the Company to
     Donnelly, or a combination of both, at Donnelly's discretion. Donnelly will
     be obligated to pay the Donnelly  Purchase Option Price and will be charged
     interest  from the date of  purchase  to the date of payment at an interest
     rate  equal  to the  interest  rate  paid on the  loans by the  Company  to
     Donnelly.

          (g) Conversion to a Corporation. At any time after the exercise of the
     Donnelly

                                       11
<PAGE>
     Purchase Option,  Donnelly shall have the right to require that the Company
     convert to a  corporation,  in which case the  non-Donnelly  Members of the
     Company  shall have the right to appoint two out of five  directors  of the
     Company  and actions by the  directors  on matters  referenced  in Sections
     4.2(a) - (e) of this Agreement  shall require the approval of at least four
     of the five  directors of the Company.  The options and  obligations of the
     parties  under  this  Agreement  shall  be  applicable  with  and  to  such
     corporation  and its  stock  in the same  manner  it is now  applicable  to
     Company Interests.

     5.6 Donnelly  Call Option.  Each of the Members  other than  Donnelly  (the
"Selling  Members")  hereby  grants  to  Donnelly  an  irrevocable  option  (the
"Donnelly  Call  Option")  to  purchase  all,  but not  less  than  all,  of the
outstanding  Company Interests of the Selling Members  (including any options to
purchase interests in the Company) on the following terms and conditions:

          (a) Amount.  The Donnelly Call Option may be exercised with respect to
     all,  but not less than all, of the  outstanding  Company  interests of the
     Selling  Members  other than  Donnelly  (including  any options to purchase
     interests in the Company).

          (b) Option Exercise Period.  The Donnelly Call Option may be exercised
     at any time after July 1, 2000.

          (c) Exercise  Notice.  The Donnelly  Call Option shall be exercised by
     written  notice  from  Donnelly  to the  Company  and each of the  Members,
     specifying  a date,  not more than  sixty  (60) days  after the date of the
     notice on which  Donnelly will close the  transaction  and pay the Donnelly
     Call Option Price to the Members.

          (d) Option  Price.  If the Donnelly  Call Option is exercised  between
     July 1, 2000,  and December 31,  2000,  the Donnelly  Call Option Price for
     each Selling  Member's  interest in the Company shall be equal to the ratio
     of such Selling  Member's Sharing Ratio to the Sharing Ratio of all Selling
     Members  (the  "Selling   Member's  Relative  Ratio"  -  see  Exhibit  A-1)
     multiplied by $4,300,000.

          If the Donnelly Call Option is exercised  after  January 1, 2001,  the
     Donnelly  Call  Option  Price for each  Selling  Member's  interest  in the
     Company shall be equal to such Selling  Member's  Relative Ratio multiplied
     by  the  Base  Value.  The  Base  Value  will  depend  upon  the  financial
     performance of the Company in the fiscal year ended on or about the June 30
     closest to the date of exercise of the  Donnelly  Call Option  ("Applicable
     Year").  If the Adjusted  Pre-Tax Earnings for the Company (as described in
     Section  5.5(e)) for the Applicable  Year is less than  $515,000,  then the
     Base Value will be  $4,500,000.  If the Adjusted  Pre-Tax  Earnings for the
     Company (as described in Section  5.5(e)) for the  applicable  twelve month
     period exceeds  $515,000,  then Base Value will be $4,500,000  increased by
     the lesser of such excess or $500,000.

          (e)  Payment  of  Purchase  Price.  The  closing  of the  transactions
     contemplated by

                                       12
<PAGE>
     the Donnelly Call Option shall occur within sixty (60) days after  exercise
     of the option, if exercised prior to January 31, 2000; otherwise it will be
     closed  within  sixty  (60)  days  following  completion  of the  Company's
     financial  statements for the applicable twelve month period.  The price is
     payable  at  closing  in cash  and/or  Donnelly  Class A Common  Stock,  as
     determined by Donnelly in its sole discretion,  provided that if payment is
     made in  Donnelly  Class A  Common  Stock,  at least  50% of the  aggregate
     Donnelly  Call Option  Price  shall be payable in  Donnelly  Class A Common
     Stock.  If  Donnelly  Class A Common  Stock is used,  the  number of shares
     issued to each Selling  Member will be equal to the portion of the Donnelly
     Call Option  Price  payable in stock  divided by the  closing  price of the
     Donnelly  Class A Common Stock as printed in the Wall Street Journal on the
     fifth trading day prior to the closing date.

     5.7 Member Put Option.  Donnelly hereby grants to each of the Members other
than  Donnelly  an  irrevocable  option  (the  "Member  Put  Option") to require
Donnelly to purchase  all,  but not less than all,  of the  outstanding  Company
Interest of the Members other than Donnelly ("Selling Members") on the following
terms and conditions:

          (a)  Interests  Sold.  The Member Put  Option  may be  exercised  with
     respect to all, but not less than all, of the outstanding  interests of the
     Members other than Donnelly.

          (b) Option Exercise Period.  The Member Put Option may be exercised by
     written  notice to the Company and to Donnelly at any time in the months of
     July  through  October in any year after the  earlier of (i) any time after
     June 30, 2001, if the sum of the Adjusted  Pre-Tax  Earnings  (Loss) of the
     Company plus  $4,450,000  exceeds  $500,000 in the previous fiscal year and
     such sum in the Company's current year's budget exceeds  $500,000,  or (ii)
     June 30, 2003.

          (c)  Condition to Exercise.  The Member Put Option may be exercised if
     and only if, on the date of exercise of the Member Put Option, David Taylor
     (i) is the Chief Executive Officer of the Company, (ii) has been terminated
     as Chief  Executive  Officer of the Company for any reason other than cause
     as defined in the Company's  employment  agreement with David Taylor, (iii)
     is deceased or has been disabled for a period of thirty (30) days or more.

          (d) Exercise Notice; Power of Attorney. The Member Put Option shall be
     exercised  by  written  notice  from David  Taylor or Thomas  Taylor to the
     Company and  Donnelly,  specifying a date,  not more than thirty days after
     the date of the  notice  on  which  Donnelly  would  purchase  the  Selling
     Members' Company Interests and pay the Member Put Option Price. Recognizing
     that the  Member  Put  Option  must be  exercised  on  behalf of all of the
     Selling  Members,  the Selling  Members  hereby  irrevocably  appoint David
     Taylor  and  Thomas  Taylor,  and  either  of  them,  with  full  power  of
     substitution as their  attorneys-in-fact  to exercise the Member Put Option
     on their behalf.

          (e)  Option  Price.  The  Member  Put  Option  Price for each  Selling
     Member's

                                       13
<PAGE>
     Company  Interest  shall be equal to (i)  such  Selling  Member's  Relative
     Ratio,  multiplied  by (ii) the Member Put  Company  Value.  The Member Put
     Company Value shall be (i) $4,500,000 if the Member Put Option is exercised
     during calendar 2001, (ii) $4,900,000 if the Member Put Option is exercised
     in calendar 2002, or (iii) $5,300,000 if the Member Put Option is exercised
     after December 31, 2002.

          (f)  Payment  of  Purchase  Price.  Unless  agreed  otherwise  between
     Donnelly and David Taylor or Thomas Taylor, the closing of the transactions
     contemplated  by the Member Put Option  shall occur  within sixty (60) days
     after exercise of the Member Put Option,  if exercised prior to January 31,
     2000;  otherwise  it will be closed at the later of sixty  (60) days  after
     such  exercise  or within  sixty  (60)  days  following  completion  of the
     Company's financial  statements for the applicable twelve month period. The
     price is payable at closing in cash and/or  Donnelly  Class A Common Stock,
     as determined by Donnelly in its sole discretion,  provided that if payment
     is made in Donnelly  Class A Common  Stock,  at least 50% of the  aggregate
     Donnelly  Call Option  Price  shall be payable in  Donnelly  class A Common
     Stock.  If  Donnelly  Class A Common  Stock is used,  the  number of shares
     issued to each Selling  Member will be equal to the portion of the Donnelly
     call Option  Price  payable in stock  divided by the  closing  price of the
     Donnelly  Class A Common Stock as printed in the Wall Street Journal on the
     fifth trading day immediately preceding the closing date.

          (g)  Priority  of  Options.  In the event  the  Member  Put  Option is
     exercised  within  thirty (30) days after the  Donnelly  Call  Option,  the
     Member Put Option shall be applicable and the Donnelly Call Option shall be
     deemed not to have been exercised.

     5.8 Default,  Bankruptcy,  Etc. Each of the following  shall  constitute an
event of default with respect to any Holder of a Company Interest (a "Defaulting
Holder") described below:

          (a)  If a  Holder  defaults  in  any of  its  obligations  under  this
     Agreement,  and if the default continues for thirty (30) days after service
     of written notice by the Company to such Defaulting Holder.

          (b) If a Holder  becomes  insolvent  or  appoints  or has  appointed a
     receiver or custodian for all or a substantial portion of its assets.

          (c) If a Holder files a voluntary petition under the provisions of the
     Bankruptcy  Code  or  has  filed  against  him  as the  subject  debtor  an
     involuntary  petition  under  the  Bankruptcy  Code and  fails to  obtain a
     dismissal of the  petition  within  forty-five  (45) days after the date of
     filing.

          (d) If a Holder (other than Donnelly)  that is a  corporation,  trust,
     partnership,  limited liability company,  or other similar entity suffers a
     change of 50 percent or more of the ownership of the equity, securities, or
     other beneficial  interests therein,  or if there is a change in 50 percent
     or more of the directors,  trustees, partners, or other managers or 

                                       14
<PAGE>
     members of such entity, or if same is dissolved,  liquidated,  or otherwise
     terminated or allows to occur a sale or other transfer of substantially all
     of its assets, whether by merger, reorganization, or otherwise.

          (e) If a Holder's Company Interest shall be levied on for execution.

     If an event of default as  described in  subarticles  (a) through (e) above
occurs, then the other Members (the "Nondefaulting Members"), acting through the
Company by  majority  of  Sharing  Ratios or acting  individually  shall have an
option (i) to purchase  all, but not less than all, of the  Defaulting  Holder's
Company  Interest at the price and on the terms  specified in Article  5.10,  or
(ii) to demand that the Company be liquidated and  dissolved,  in which case all
Members shall vote in such manner as to cause such  liquidation and dissolution,
or (iii) to take no action with  respect to the event of  default.  If more than
one  Nondefaulting  Member  exercises the option to purchase under this Article,
the purchase  option shall be allocated  among them in  accordance  with Article
5.2(d) above.

     If the Nondefaulting Members exercise any option granted under this Article
5.8,  including  the  option  to  purchase  or  liquidate,  they  shall do so by
notifying the  Defaulting  Holder (or its legal  successor) of this decision any
time  within one (1) year after the  occurrence  of the event of  default,  even
though it may have been cured  before the notice of exercise  or any  bankruptcy
petition may have been dismissed, or otherwise discharged,  after the forty-five
(45) day  period  specified  above.  The  options of the  Nondefaulting  Members
granted  under this Article shall be in addition to and not in lieu of any other
options,  rights or  remedies  that may be  available  under this  Agreement  or
otherwise, and any exercise of any rights granted under this Agreement shall not
relieve the Defaulting  Holder from any  obligations  accrued before the date of
transfer of the Company Interest or any liability or damage to the Nondefaulting
Members.

     5.9 Priority. If any event,  condition or facts give rise to application or
possible  application of simultaneous options to purchase or otherwise act under
more than one  Article to any  particular  set of facts,  the  holder(s)  of the
option(s) to purchase  shall,  acting  through the Company or  individually,  by
majority  in  Sharing  Ratios,  have the  option as to which  Article is used to
effect the purchase.

     5.10 Purchase Price and Terms.

          (a) Except as otherwise  specifically  provided  herein,  the purchase
     price  for  any  Company  Interest  to  be  sold  pursuant  to  options  or
     requirements  contained in this Agreement shall be the fair market value of
     the Company as determined by an independent  appraiser  selected and agreed
     upon by the selling Member and Purchaser (the  "Appraiser"),  multiplied by
     the Sharing Ratio of the Company  Interest being sold. The Appraiser  shall
     be a qualified  business  appraiser with experience in appraising the value
     of closely-held companies. The Appraiser's determination of the fair market
     value of the Company Interest shall be final and binding on all parties and
     if required may be entered in a court of competent jurisdiction.

          If the  selling  Member or  Members  and the  Purchaser  are unable to
     reasonably  agree on the selection of an Appraiser  within twenty (20) days
     after a party has requested an

                                       15
<PAGE>
     appraisal,  then the  selling  Member or Members  shall  select a qualified
     business  Appraiser  with  experience in appraising the value of close-held
     companies  and the purchaser  shall select such an appraiser  within thirty
     (30) days after the request for appraisal. If either party fails to appoint
     an appraiser  within that time, the appraiser  appointed by the other party
     shall  determine  the  purchase  price  for  the  Company  Interests  being
     purchased.  If the  Appraisers  so selected can agree upon the value of the
     Company,  that value  shall be used to  determine  the  purchase  price for
     Company  Interests  being  purchased.  If the Appraisers so selected cannot
     agree on a value of the  Company,  they  shall  select and agree on a third
     qualified   Appraiser  with  experience  in  appraising  the   closely-held
     companies,  and the valuation of the Company agreed upon by at least two of
     the  three  Appraisers  shall be final  and  binding  on all  parties.  The
     Appraisers shall complete the appraisal within thirty (30) days after their
     appointment.

          If any part of the  purchase  price is funded by policies of insurance
     on the life of a deceased selling Member, only the cash surrender value, if
     any, and no part of the proceeds of such insurance,  shall be counted as an
     asset of the Company in connection with the appraisal.

          The valuation of the Company pursuant to this Article shall be binding
     upon all parties to this Agreement and their  successors and assigns and if
     required may be entered in a court of competent jurisdiction.

          Each party shall pay for its own  appraiser and the costs of a jointly
     appointed appraiser shall be divided equally.

          (b) Except as otherwise provided herein, if a Company Interest is sold
     and  purchased  pursuant to the  provisions  of Articles 5.2 or 5.3 of this
     Agreement,  the payment terms shall be as follows: The purchase price shall
     be paid by a down  payment of twenty  percent  (20%) of the total  purchase
     price with the balance being paid pursuant to a promissory note in the form
     of Exhibit C, requiring twenty (20) equal quarterly  principal  payments of
     principal,  plus interest at a rate equal to New York Consensus  Prime Rate
     as published in the Wall Street  Journal on the day  preceding  the payment
     date,  with  payments  commencing  three (3) months  following  the date of
     closing. The promissory note may be prepaid without premium or penalty. The
     note shall be secured by a collateral  assignment  of the Company  Interest
     being  purchased in the form of Exhibit D (the  "Collateral  Assignment and
     Security  Agreement"),  and the purchaser of said interest  shall sign such
     documents  as the seller  may  reasonably  request in order to perfect  the
     security interest  contemplated by said Collateral  Assignment and Security
     Agreement.

          (c) Except as  otherwise  provided  herein,  the closing on a purchase
     pursuant to an option or obligation set forth in this Agreement shall occur
     within thirty (30) days after the purchaser's written election to purchase.
     The specific time and place of closing shall be specified by the purchaser.

          (d) If any Member who is an individual exercises an option to purchase
     or otherwise purchases a Company Interest (or any portion thereof) from any
     other  Member  and the  purchase  price  is not paid in full in cash at the
     closing, such individual purchaser shall

                                       16
<PAGE>
     execute and deliver to the seller of such Company  Interest,  no later than
     the  time  of  closing  on such  purchase,  a sworn  statement  in  writing
     specifying  that  there  is a  business  purpose  for the  transaction  and
     specifying the type of business and business purpose for which the seller's
     extension of credit will be used  ("Business  Purpose  Affidavit") and such
     other  documentation  as the seller and its  counsel  may  reasonably  deem
     necessary  in order to comply with any and all usury  laws.  If any rate of
     interest  called for herein for any  deferred  payment  sale would,  in the
     opinion of the seller's  counsel,  be  usurious,  the seller shall have the
     option to request in lieu of such rate the maximum  rate of  interest  (not
     exceeding  the rate  specified  in  subsection  (c) above) as the  seller's
     counsel  believes to be permissible  under the then applicable  usury laws,
     and the purchaser shall comply with such request.

     5.11 Loss of  Membership.  Any Member who sells or  transfers,  or makes an
ineffective transfer,  the entire Company Interest of such Member, or all of the
rights to allocations and  distributions  represented by such Company  Interest,
shall thereupon  cease to be a Member,  and all of his or its rights relating to
the Company shall thereupon automatically terminate.

     5.12 Substitute or Additional Members.

          (a) A person shall be admitted as a substitute  or  additional  Member
     under this Agreement only after compliance with the following:

               (i) A transfer  contemplated by Article 5.4 shall be made only by
          written document,  signed by the transferor and accepted in writing by
          the  transferee,  and a duplicate  original of such document  shall be
          delivered  to the  Company and be  approved  by the  Managers  and all
          Members (which  approval may be withheld in the sole and  unrestricted
          discretion of any Member).

               (ii) The  transferee  shall  execute and deliver to the Company a
          written  agreement,  in form satisfactory to the Managers and Members,
          pursuant to which such transferee agrees to be bound by this Agreement
          and grants the power of attorney contained in this Agreement.

          (b) If a  transfer  is made  in  accordance  with  the  terms  of this
     Article, unless otherwise permitted or required by the Managers and Members
     and the Code, both of the following shall apply:

               (i) The  effective  date of such  transfer  shall be the date the
          written  documents  described  in  Article  5.12(a)(i)  and  (ii)  are
          approved by the last of all of the Members and the Managers.

               (ii) The Company, the Managers, and the Members shall be entitled
          to treat  the  transferor  as the  absolute  owner of the  transferred
          Company  Interest in all  respects  and shall incur no  liability  for
          distributions  or allocations made pursuant to Article 3 in good faith
          to such  transferor  until  such  time as the  effective  date of such
          transfer as determined under Article 5.12(a)(i).

          (c) The costs incurred by the Company associated with the admission of
     a

                                       17
<PAGE>
     substitute or additional  Member  contemplated  by this Article  (including
     reasonable  attorneys'  fees)  shall be borne  by the  transferee,  and the
     Managers' and Members' approval of transfer may be conditioned upon payment
     of such costs.


                     ARTICLE 6. DISSOLUTION AND TERMINATION

     6.1 Dissolution. The Company shall be dissolved and its affairs wound up on
the first to occur of the following events:


          (a) the written  consent of members  holding at least  eighty  percent
     (80%) of the Sharing Ratios;

          (b) the occurrence of any event or legislation  making it unlawful for
     the Company to carry on its business; or

          (c) the time  specified  as the  latest  date for  dissolution  or the
     happening of any event specified in the Company's Articles of Organization,
     as amended, or any other event causing a dissolution of a limited liability
     company under the Act.


     6.2  Final  Accounting.  In case of the  Company's  dissolution,  a  proper
accounting  shall be made from the date of the last  previous  accounting to the
date of dissolution.

     6.3 Liquidation.  Upon the Company's dissolution, the Managers shall act or
appoint  someone  to  act,  as  liquidator  to wind  up the  Company  as soon as
practical.  The liquidator  shall have full power and authority to sell,  assign
and encumber any or all of the Company's assets and to wind up and liquidate the
Company's  affairs in an orderly and prudent manner.  Upon the winding up of the
Company,  the assets of the Company shall be  distributed  first to creditors to
the extent  permitted by law, in satisfaction of Company debts,  liabilities and
obligations;  and then to Members,  first in  satisfaction  of  liabilities  for
distributions,  and then in accordance  with the Sharing Ratios then held.  Such
proceeds shall be paid to such Members within ninety (90) days after the date of
winding up.

     6.4  Distributions  in Kind. If the Members or a liquidator shall determine
that a portion of the  Company's  assets  should be  distributed  in kind to the
Members,  the  liquidator  shall  distribute  such  assets to them in  undivided
interests as tenants in common in  proportion  to their  Sharing  Ratios  unless
otherwise agreed by all members.

     6.5 Certificate of Dissolution.  Upon the completion of the distribution of
Company  assets,  the Company shall be terminated and the Members shall execute,
or cause the Company to execute, certificates of dissolution and take such other
actions as may be necessary to terminate the Company.

                        ARTICLE 7. AMENDMENT TO AGREEMENT

     Amendments to this Agreement and to the Articles of  Organization  that are
of an

                                       18
<PAGE>
inconsequential  nature (as  determined  by the  Managers) and do not affect the
rights of the Members in any material respect,  or that are contemplated by this
Agreement,  may be made by the  Managers  through the  exercise of the powers of
attorney granted in Article 4.9. Any other amendment to this Agreement or to the
Articles of  Organization  may be proposed to the Members by the  Managers,  but
shall be adopted and become effective only if approved in writing by all persons
who then are Members.

                               ARTICLE 8. NOTICES

     8.1 Method for Notices.  All notices hereunder shall be sent by first class
mail, postage prepaid,  and addressed as set forth under each Member's signature
below  (except  that any Member may from time to time give notice  changing  its
address for such  purpose)  and shall be  effective on the date of receipt or on
the fifth day after mailing, whichever is earlier.

     8.2  Computation  of Time.  In  computing  any  period of time  under  this
Agreement, the day of the act, event or default from which the designated period
of time  begins  to run  shall not be  included.  The last day of the  period so
computed shall be included, unless it is a Saturday, Sunday or legal holiday, in
which  event the  period  shall run until the end of the next day which is not a
Saturday, Sunday or legal holiday.

                          ARTICLE 9. GENERAL PROVISIONS

     9.1 Entire  Agreement.  This  Agreement  (a) contains the entire  agreement
among the parties with respect to its subject matter,  (b) except as provided in
Article 7, may not be amended nor may any rights  hereunder be waived  except by
an  instrument  in  writing  signed  by every  party  hereto  opposing  any such
amendment or waiver, (c) shall be construed in accordance with, and governed by,
the laws of the State of  Michigan,  and (d) shall bind and inure to the benefit
of the parties and their  respective  representatives,  successors  and assigns,
except as otherwise set forth.

     9.2 Construction Principles. Words in any gender shall be deemed to include
the other  genders.  The singular shall be deemed to include the plural and vice
versa.  The headings and  underlined  Article  titles are for guidance  only and
shall have no significance in the interpretation of this Agreement.

     9.3  Waivers.  Failure  or delay of any  party in  exercising  any right or
remedy  under this  Agreement  will not operate as a waiver of the terms of this
Agreement.  The express waiver by any party of a breach of any provision of this
Agreement  by any other party shall not operate or be  construed  as a waiver of
any  subsequent  breach by such party.  No waiver will be  effective  unless and
until it is in written form and signed by the waiving party.

     9.4  Validity  and  Severability.   If  any  provision  of  this  Agreement
contravenes any law and such contravention  would invalidate this Agreement,  or
if the  operation of any  provision  of this  Agreement  is  determined  by law,
administrative  regulation  or  otherwise  to  result in  classification  of the
Company  as an  association  taxable as a  corporation  for  federal  income tax
purposes,  or to make a  Member  generally  liable  for the  obligations  of the
Company,  then such provision is declared to be invalid and subject to severance
from the remaining portions of this Agreement,  and this Agreement shall be read
and  construed as through it did not contain such  provision in a manner to

                                       19
<PAGE>
give effect to the intention of the parties to the fullest extent possible.

     9.5   Counterparts.   This  Agreement  may  be  executed  in  two  or  more
counterparts,  each of  which  shall be  deemed  an  original,  but all of which
together shall  constitute one and the same instrument.  Photocopies,  facsimile
transmissions,   and  other   reproductions  of  this  executed  original  (with
reproduced  signatures)  shall be deemed  to be  original  counterparts  of this
Agreement.

     9.6  Investment  Representations.  Each  Member  understands  (a)  that the
interests  evidenced  by this  Agreement  have not  been  registered  under  the
Securities  Act  of  1933,  as  amended,  or  any  state  securities  laws  (the
"Securities  Acts")  because the Company is issuing these  interests in reliance
upon the exemptions  from the  registration  requirements of the Securities Acts
providing for issuance of securities not involving a public  offering,  (b) that
the  Company  has relied  upon the fact that the  interests  are to held by each
Member for investment  purposes  only, and (c) that exemption from  registration
under the Securities  Acts would not be available if the interests were acquired
by a Member with a view to distribution.

     Accordingly, each Member hereby confirms to the Company that such Member is
acquiring its interest hereunder for such own Member for investment and not with
a view  to the  resale  or  distribution  thereof.  Each  Member  agrees  not to
transfer, sell or offer for sale any portion of such interest unless there is an
effective  registration  or  other  qualification  relating  thereto  under  the
Securities  Acts or unless  the  Member  delivers  to the  Company an opinion of
counsel,   satisfactory  to  the  Company,   that  such  registration  or  other
qualification under such Securities Acts is not required in connection with such
transfer,  offer or sale. Each Member  understands  that the Company is under no
obligation to register the interests or to assist such Member in complying  with
any exemption from registration  under the Securities Acts if such Member should
at a later date wish to dispose of any  interest  hereunder.  Furthermore,  each
Member  realizes  that such  interests  are unlikely to qualify for  disposition
under Rule 144 of the Securities and Exchange  Commission  unless such Member is
not an "affiliate" of the Company and the interest has been  beneficially  owned
and fully paid for by such Member for at least three (3) years.

     Each Member  represents  and warrants  that prior to investing or acquiring
any interest in the Company,  such Member and its legal or other representatives
have made an independent  investigation of the Company and its business and have
had made available to them all information with respect thereto requested and/or
needed to make an  informed  decision  to  acquire  the  interest.  Each  Member
represents  and  warrants  that  it  is  a  person  possessing   experience  and
sophistication as an investor that are adequate for the evaluation of the merits
and risks of such Member's investment in the Company.

     In witness whereof, this Agreement has been executed on the dates set forth
and shall become effective when executed by all Members.

                                    Donnelly Electronics, L.L.C.


                                    By /s/ David Taylor
                                         David Taylor
                                         Its Manager

                                       20
<PAGE>
                                    /s/ David Taylor         
                                    David Taylor

                                    Address:          65 Chateaux DuLac
                                                      Fenton, MI  48430




                                       21
<PAGE>
                                     TAYLOR FAMILY INVESTMENTS, INC.



                                     By /s/ David Taylor
                                          David Taylor, President

                                     Address:          65 Chateaux DuLac
                                                       Fenton, MI 48430


                                     DONNELLY CORPORATION


                                     By /s/ James A. Knister
                                          James A. Knister
                                          Group Managing Director - Ventures

                                     Address:          49 W.  Third Street
                                                       Holland, MI 49423

                                     SKIVINGTON INVESTMENTS, INC.

                                     By /s/ James Skivington
                                          James Skivington

                                     Address:          1329 Hickory Hollow
                                                       Flint, MI  48532

                                     THOMAS TAYLOR INVESTMENTS, INC.


                                     By /s/ Thomas Taylor
                                          Thomas Taylor, President

                                     Address:          13092 Country Club Drive
                                                       Clio, MI  48420
 
                                     DILLON PROPERTIES, INC.


                                     By /s/ Gary Collins
                                          Gary Collins, President

                                     Address:          25505 W.  Twelve Mile Rd.
                                                       Suite 1900
                                                       Southfield, MI  48034


                                       22
<PAGE>
                                     WILLIAM MORGAN INVESTMENTS, INC.


                                     By /s/ William Morgan
                                          William Morgan, President

                                     Address:          13070 Country Club Drive
                                                       Clio, MI  48420


                                     /s/ David Wujciak
                                     David Wujciak

                                     Address:          15284 Bealfred
                                                       Fenton, MI  48430


                                     /s/ David Wight
                                     David Wight

                                     Address:


                                     /s/ Susan Denty
                                     Susan Denty

                                     Address:


                                     /s/ Kirk Hinkins
                                     Kirk Hinkins

                                     Address:





                                       23
<PAGE>
<TABLE>
                                    EXHIBIT A

                                      Capital Contribution
                                        (In Cash, Unless                 Sharing
Name                                  Otherwise Specified)                Ratio
<S>                                      <C>                             <C>
David Taylor                             $375,000                        27.727%

Taylor Family Investments, Inc.           375,000                        27.727%

Donnelly Corporation                      255,000                        18.854%

Skivington Investments, Inc.              105,000                         7.7643%

Thomas Taylor Investments,  Inc.          105,000                         7.7643%

Dillon Properties, Inc.                    27,500                         2.033%

William Morgan Investments, Inc.           22,500                         1.664%

David Wujciak                              27,500                         2.033%

David Wight                                $40,000                        2.958%

Susan Denty                                $10,000                         .739%

Kirk Hinkins                               $10,000                         .739%
                                           -------                          ----
Totals                                  $1,352,500                       100.00%
                                        ==========                      ========   
</TABLE>


                                       A-1
<PAGE>
                                   EXHIBIT A-1

                   Seller's Relative Ratios at January 1, 1998
<TABLE>

                                                     Capital                                   Relative
Name                                                 Contribution                              Ratio
<S>                                                  <C>                                       <C>
Dayid Taylor                                          $375,000                                 34.169%
Taylor Family Investments, Inc.                        375,000                                 34.169%
Skivington Investments, Inc.                           105,000                                  9.567%
Thomas Taylor Investments, Inc.                        105,000                                  9.567%
Dillon Properties, Inc.                                 27,500                                  2.506%
William Morgan Investments, Inc.                        22,500                                  2.050%
David Wuyciak                                           27,500                                  2.506%
David Wight                                             40,000                                  3.644%
Susan Denty                                             10,000                                   .911%
Kirk Hinkins                                            10,000                                   .911%
                                                        ------                                   -----
                                                    $1,097,500                                    100%
                                                    ==========                                 =======
</TABLE>

     The  Seller's  Relative  Ratios  are  subject  to  change  with  transfers,
redemptions  or  issuances of Member's  interests  in the Company.  any Member's
Sharing  Ratio shall be the quotient of that  Member's  Sharing Ratio divided by
the sum of the Sharing Ratios of all members other than Donnelly.
<PAGE>
                                    EXHIBIT B

                          LIST OF MEMBERS FOR ARTICLE V


                           David Taylor
                           Taylor Family Investments, Inc.
                           Skivington Investments, Inc.
                           Thomas Taylor Investments, Inc.
                           Dillon Properties, Inc.
                           William Morgan Investments, Inc.
                           David Wujciak



                                       B-1
<PAGE>
                                    EXHIBIT C

                                 PROMISSORY NOTE


$_____________________                                    ____________, Michigan
                                                            _____________, 19___


     For value received,  the undersigned,  ______________________________  (the
"Maker"),  of  ________________________,   promises  to  pay  to  the  order  of
____________________, at _________________, or such other place as the payee may
designate   by   written   notice   to  the   Maker,   the   principal   sum  of
_____________________________  Dollars ($_____________),  together with interest
thereon  at the rate of  _________________  percent  (______%)  per annum on the
principal  balance  from  time to time  outstanding,  but not in  excess  of the
highest lawful rate.

     Payment  shall  be made  in  ___________________________  (_______  ) equal
quarterly  installments  of  principal  and  interest  of  _____________________
Dollars ($ ____________ ) each,  commencing three (3) months following the above
date.  Each  payment  shall be  applied  first to  interest  and the  balance to
principal.

     The Maker hereby waives demand, presentment for payment, and, except as set
forth below, any and all notices of protest, default,  nonpayment or dishonor of
this Note.

     This Note shall be governed by and construed and  interpreted in accordance
with the laws of the state of Michigan.  In the event any provision hereof is in
conflict  with  any  statute  or  rule of law in the  state  of  Michigan  or is
otherwise unenforceable for any reason whatsoever,  then such provision shall be
deemed  severable from this Note, or enforceable to the maximum extent permitted
by law,  as the case  may be,  and the  same  shall  not  invalidate  any  other
provisions hereof.

     This Note may be prepaid, in whole or in part, at any time and from time to
time without  premium or penalty;  provided,  however,  that all prepayments are
first applied to any accrued interest and then to the last principal  payment(s)
due hereunder.

     This  Note is  executed  pursuant  to an  Amended  and  Restated  Operating
Agreement for Donnelly  Electronics,  L.L.C., dated July 1, 1998, and is secured
by a Collateral Assignment and Security Agreement.

     In the event of any default in the  payment of  principal  and/or  interest
when due  hereunder  or in the  event of any  default  under  the  terms of said
Operating Agreement,  or Collateral  Assignment and Security Agreement,  and the
same is not cured  within  thirty (30) days after  written  notice by the holder
hereof to the Maker,  then the entire  principal  balance plus accrued  interest
thereon shall,  at the option of the holder hereof,  become  immediately due and
payable without any further notice.  Notice shall be delivered  personally or by
registered or certified mail to the Maker at the address shown above, or at such
other address as the Maker shall substitute in writing to the holder hereof, and
the notice  period  shall begin to run on the date of  personal  delivery or the
date of posting of said notice.

                                       C-1
<PAGE>
     No delay or  omission on the part of the holder  hereof in the  exercise of
any right hereunder or under any agreement securing this Note shall operate as a
waiver of such right or any other right;  a waiver on any one occasion shall not
be construed as a bar to or waiver of any such right on any future occasion.

     In the event the holder hereof institutes legal proceedings to enforce this
Note or the terms of any agreement  securing this Note,  the holder hereof shall
be entitled to collect,  in addition to the indebtedness and interest  specified
therein,  all  reasonable  costs  and  expenses  of suit,  including  reasonable
attorney fees.

     The Maker  acknowledges  that the indebtedness  represented by this Note is
for the purpose of  _____________  in connection with the Maker's  business as a
_______________.




                                        ________________________________________



STATE OF MICHIGAN          )
                           ) ss.
COUNTY OF                  )

     Subscribed  and sworn to before me, a Notary Public in and for said County,
on _________, 199__ .




                                             ___________________________________

                                             Notary Public:  ________ County, MI
                                             My Commission Expires: __________




                                       C-2
<PAGE>
                                    EXHIBIT D

                  COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT

     For good and valuable consideration,  the receipt and adequacy of which are
hereby     acknowledged,      ________________________      ("Assignor"),     of
______________________ , hereby conditionally assigns to  ______________________
(the "Secured  Party"),  of  ________________________  , as  collateral  for the
payment of certain  obligations under a promissory note of approximate even date
(the "Note") executed by the Assignor as partial  consideration for the purchase
of an interest in Donnelly  Electronics,  L.L.C., a Michigan  limited  liability
company (the  "Company"),  all interest in such Company  being  purchased by the
Assignor (the "Company Interest").

     The occurrence of any of the following shall be deemed a default hereunder:
(a) a default in  payments  due under the Note beyond any grace  period  allowed
thereunder, (b) the commencement by or against the Assignor of any proceeding in
bankruptcy or insolvency (if same is not cured within forty-five (45) days after
filing) or if the  Assignor  shall  make an  assignment  for the  benefit of its
creditors or become  insolvent,  or (c) the emergence of any lien or encumbrance
or any writ of attachment,  garnishment,  execution, or other legal process upon
the Company  Interest or any part  thereof,  if same is not cured within  thirty
(30) days after notice from the Secured Party.

     Upon  occurrence of a default  hereunder,  the Secured Party shall have all
the rights and remedies of a secured party under the Michigan Uniform Commercial
Code, as amended,  and any other applicable  laws,  together with all rights and
remedies  provided for in this Collateral  Assignment,  and may sell the Company
Interest  assigned  hereunder  at public or private  sale in such manner and for
such purchase  price as the Secured Party may  determine.  The Secured Party may
purchase the Company  Interest or any part thereof at any such sale.  Out of the
proceeds of any sale, the Secured Party may retain an amount equal to the amount
due and owing  under the terms of the Note plus the  amount of the  expenses  of
sale and shall pay any balance of proceeds to the  Assignor.  If the proceeds of
sale are  insufficient  to pay the  obligations  under the Note plus expenses of
sale, the Secured Party shall remain liable for the amount of the deficiency.

     If any  notification  of intended  disposition  by the Secured Party of the
Company  Interest is required by law,  such  notification,  if mailed,  shall be
deemed  reasonably  and properly  given if mailed at least seven (7) days before
such  disposition,  postage  prepaid,  addressed  to the Assignor at the address
first above  written or at such other  address as the Assignor may have provided
to the  Secured  Party.  The rights,  duties and  obligations  hereunder  of the
Secured  Party and the  Assignor  shall,  unless  otherwise  required by law, be
governed by the provisions of the Michigan Uniform  Commercial Code, as amended,
and other  applicable  laws of the State of  Michigan.  The  Assignor  agrees to
execute and file such financing statements and/or other documents as the Secured
Party may reasonably request in order to perfect the Secured Party's interest.

     In the event of a default  hereunder,  the Assignor hereby assigns directly
to the Secured Party the right to collect and apply all distributions of Company
property to any and all  indebtedness  represented by the Note, and the Assignor
hereby  appoints the Secured  Party as the  Assignor's  attorney-in-fact,  which
appointment  is coupled with an interest and shall survive any disability of the
Assignor,  for the specific  purpose of endorsing any checks  representing  such
distributions and 

                                      D-1
<PAGE>
applying the proceeds  thereof to the  indebtedness  represented by the Note and
also for the purpose of doing such acts and things as may be  necessary in order
to  carry  out the  intent  of this  Collateral  Assignment,  including  seeking
distributions from the Company and executing and filing any financing  statement
or  continuation  thereof or such other  documentation  as the Secured Party may
deem  necessary  from time to time in order to perfect its security  interest in
the collateral assigned hereby. Notice of the exercise of the foregoing shall be
given by the Secured Party to the Assignor.

     The Assignor  represents  and warrants that this  Collateral  Assignment is
intended  to  grant  to the  Secured  Party a  first  security  interest  in the
collateral  with the intention that same be perfected.  Upon the Secured Party's
receipt of all amounts  due under the Note,  the  Assignor  shall be entitled to
have the Company  Interest  released from this  Collateral  Assignment,  and the
Secured Party shall  execute and deliver to the Assignor  such  documents as the
Assignor may reasonably request to evidence such release.

     This  Collateral  Assignment  shall bind and benefit the  Assignor  and the
Secured Party and their respective representatives, successors and assigns.

         Dated: ___________________, 199___.


Witnesses:                                            ASSIGNOR:

_______________________________


_______________________________                       __________________________


STATE OF MICHIGAN          )
                           ) ss.
COUNTY OF                  )

     The foregoing  instrument  was executed  before me this  __________  day of
____________, 199__, by _____________________.



                                             ___________________________________
                                             Notary Public, _________ County, MI
                                             My Commission Expires: ___________


                                       D-2
<PAGE>
                                    EXHIBIT E

                           SUPPLY AND OPTION AGREEMENT

     Option  Agreement made this 30th day of July, 1996, by and between Donnelly
Electronics,  L.L.C., a Michigan limited liability company of 62 Chateaux DuLac,
Fenton,  Michigan  48430  ("Electronics")  and  Donnelly  Corporation  of 414 E.
Forteith Street, Holland, Michigan 49423 ("Donnelly").

     Donnelly is a member of Electronics,  has loaned money to Electronics,  and
proposes to be a purchaser of product from Electronics.  Donnelly is prepared to
commit to purchase its  requirements  of certain  products from  Electronics  on
terms and conditions hereinafter specified, and Electronics is prepared to grant
Donnelly an option to purchase increased interests in Electronics.

     In  consideration  of the mutual  undertakings  hereinafter set forth,  the
parties hereto agree as follows:

     1. Requirements Contract. Donnelly hereby agrees that it will purchase from
Electronics, and Electronics agrees it will manufacture and sell to Donnelly all
the  electronic   components  required  by  Donnelly  for  its  North  American
automotive business, provided that all of the following conditions are met:

          (a) Electronics is currently  producing or has a demonstrable  ability
     to  manufacture  such  products  in the  quantity  and in  the  time  frame
     required.

          (b) The price,  quality and delivery of the products  manufactured  by
     Electronics are competitive in the market place.

          (c)  Donnelly's  customer  has not  directed  Donnelly  to use another
     source.

          (d) Donnelly remains a member of Electronics.

Donnelly's  exclusive purchase  obligation shall not apply to: (i) products also
used by  Donnelly  outside  of North  America  and  sourced by  Donnelly  to one
supplier  which  supplies that product both inside and outside of North America,
(ii) products for which Donnelly has existing contracts, or (iii) products which
are proprietary to the vendor.

     2. Grant of Option.  Electronics  hereby grants to Donnelly an  irrevocable
option to  subscribe  during the option  period to the  interest  in the Company
described below ("Option Interest") on the following terms and conditions:
<PAGE>
          (a) The Company  Interest  shall be a Sharing Ratio of 11.74% (so that
     if  Donnelly  exercised  the  option  after  the  option to be  granted  to
     management  (as approved by the Members on this date) have been  exercised,
     Donnelly would have a total Sharing Ratio of 27.5%).

          (b) The  option  may be  exercised  at any time on or before  July 30,
     1999.

          (c) The option shall be exercised by written  notice from  Donnelly to
     Electronics,  specifying  a date,  not more than thirty (30) days after the
     date of the notice on which Donnelly would pay its option price.

          (d) The Option Price shall be equal to and paid by the contribution by
     Donnelly to  Electronics of the  outstanding  principal and interest on the
     promissory  note in the  original  principal  amount of $157,500  issued to
     Donnelly by Electronics  on July 30, 1996, or in the event that  promissory
     note has been  prepaid,  then a cash  payment of  $157,500,  plus an amount
     equal to 6.75% per annum from the date hereof  until  payment of the Option
     Price. In the event there has been capital contributed to Electronics after
     the date hereof,  the Option Price shall be adjusted  upward to reflect the
     additional  capital  contribution  required  in  order  to make  Donnelly's
     capital  account with respect to the Option  Interest to be the same amount
     per  percentage of Sharing Ratio as that of the other Members on that date.
     The Option Price shall be payable at closing.

     3. Binding  Effect.  This Agreement  shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.

     IN WITNESS WHEREOF, this Agreement has been executed this 30th day of July,
1996.

                                        DONNELLY ELECTRONICS, L.L.C.
    
                                        By _________________________
                                         David Taylor, Manager


                                        DONNELLY CORPORATION

                                        By _________________________
                                         James A. Knister, Senior Vice President


                                      -2-
<PAGE>
                                    EXHIBIT F

                                  BUSINESS PLAN

<TABLE>
All numbers in (000)                                                                          Forecast based on Model Year Estimates
                                    Price at Model Year                                                   Unit volumes in model year
SALES                      1998        1999           2000             2001             2002              1998             1999
<S>                        <C>         <C>           <C>               <C>              <C>              <C>            <C>
Compass                    $20.00      $16.00        $14.00            $ 9.50            $8.50             300              130
Mirror Display boards      $18.00      $17.00        $22.00            $21.00           $20.00              80              130
Overhead consoles          $18.50      $18.00        $17.50            $17.00           $17.00               0                0
mirror ICON's,DCA          $ 5.00       $5.00        $ 5.00            $ 5.00            $5.00               0                0
RF Products                $10.00      $10.00        $10.00            $10.00           $10.00               0                0
EC mirror boards           $ 5.00       $5.00        $ 4.50            $ 4.25            $4.25                              300
new products               $10.00      $10.00        $10.00            $10.00           $10.00              40              350

Total Sales Dollars                                                                                     $7,840           $9,290

LABOR $                    8.00%            Labor costs in 000                                            $627             $743
                                            # people production                                             31               37

                                    Material Content
Compass                    $14.00       12.00         10.00              7.00             6.75           4,200            1,560
Mirror Display boards      $14.00       12.00         13.00             12.50            11.50           1,120            1,560
Overhead consoles          $11.00       12.00         12.00             11.50            11.50               0                0
mirror ICON's,DCA           $3.00        3.00          3.00              3.00             3.00               0                0
RF Products                 $6.00        6.00          6.00              6.00             6.00               0                0
EC mirror boards            $3.00        3.00          2.50              2.50             2.50               0                0
new products                $6.50       $6.50         $6.50             $6.50            $6.50             260            2,275
                       0                                                                                     0                0
MAT'L $                                                                                                 $5,580           $6,295
Freight                     1.00%                                                                           56               63
% Matl costs                                                                                            71.89%           68.44%
COST OF GOODS SOLD, MFG                                                                                 $6,263           $7,101
GROSS PROFIT, MFG                                                                                       $1,577           $2,189
G&A Holly
Lease                                                                                                      138              138
Property Taxes                                                                                              50               60
Utilities                                                                                                   40               70
Mfg Overheads              pay                                                                              45              200
                           Other                                                                            20               20
Depreciation                                                                                               300              500
Materials                  pay                                                                             200              240
                           Other                                                                            10               10
Quality                    pay                                                                                              100
                           Other                                                                             0               50
Admin                      pay                                                                             100              200
                           Other                                                                           100              100
                                                                                                                              0
Finance                    pay                                                                              60              100
                           Other                                                                            10               20
Legal                                                                                                                       100
Personnel                  pay                                                                              50               75
                           Other                                                                             0                0
Sales                      pay                                                                             100               33
                           commission                                                                                       100
                           other                                                                             0               20
---------                  ---------                                                                   -------          -------
G&A                                                                                                     $1,223           $2,403
Operating Profit                                                                                          $354            ($214)

Product Eng, Holly         Sales                                                                          $200             $200
                           Matl                                                                             50               50
                           Pay                                                                            $600           $1,000
                           other                                                                            20               50
                           Profit                                                                        ($470)           ($900)

Product Eng, Holland       Sales                                                                                            680
                           supplies                                                                                         310
                           Pay                                                                                             2204
                           bonus                                                                                             56
                           travel                                                                                           120
                           depreciation                                                                                     157
                           other                                                                                             28
                           Corporate                                                                                       62.5
                           Rent                                                                                           217.8
                           Profit                                                                        -1070          -2475.3

Advanced Dev, Tucson       Sales                                                                                              0
                           supplies                                                                                          30
                           Pay                                                                                              316
                           bonus                                                                                             10
                           travel                                                                                            70
                           other                                                                                             16
                           Corporate                                                                                        1.5
                           Rent                                                                                              42
                           Profit                                                                                          -486

Net Profit, BT & Interest                                                                               (1,186)          (4,075)

Income taxes               40.00%                                                                            0                0
Net Income after taxes before Int                                                                        (1186)           (4075)

Receivables                                                                                                653              774
Equipment Purchases (building not included)                                                               1500              650

Cash Required (assuming operating cash = 20% sales growth, before interest + depreciation)                2386             4682
Cum Cash Required (before current year interest)                                                          2386             7068

Interest                   7.00%                                                                           167              495
Total Cash Required (Cum, with interest)                                                                                   7563
Net Income after taxes and interest                                                                     (1353)            (4570)


Assumptions:               1        Operating capital requirement assumed to be 20% of sales increase
                           2        Interest to Donnelly at 7%
                           3        Corporate rent at $18,150 per month fixed
                           4        Building expansion and/or purchase not included in projection
                           5        Donnelly or bank funds operating capital requirements
                           6        Lost compass business at Ford Truck for 99MY
                           7        Pick up Gulf States Toyota comp/temp for 99MY
                           8        Retain compass at Wixom for 99MY
                           9        In 2000MY go to MiniPod compass integrated into mirror
                          10        No cost included for CEL acquisition or overhead
                          11        No cost included for European engineering
                          12        $1,000,000 invoice received from Donnelly included in 1998
                          13        1998 does not reflect the short fiscal year as DE adopts the Donnelly fiscal year
</TABLE>
<PAGE>
<TABLE>
All numbers in (000)              Forecast based on Model Year Estimates
                                                         Unit volumes in model year
SALES                        2000           2001            2002            2003          2004           2005             2006
<S>                          <C>         <C>             <C>             <C>            <C>           <C>              <C>
Compass                       300           400             600             800           1000           1000             1000
Mirror Display boards         200           400             300             500            750            750              800
Overhead consoles              75           200             300             500            750            750              750
mirror ICON's,DCA               0           200             200             200            200            200              200
RF Products                     0           200             300             500            500            500              500
EC mirror boards              500           600            8800             800           1000           1000             1000
new products                  500          1500            2500            3500           4000           4500             5000

Total Sales Dollars       $17,163       $36,150         $48,600         $69,700        $86,500        $91,500          $97,500

LABOR $
Labor costs in 000         $1,373        $2,892          $3,888          $5,576         $6,920         $7,320           $7,800
# people production            69           145             194             279            346            366              390

Compass                     3,000         2,800           4,050           5,400          6,750          6,750            6,750
Mirror Display boards       2,600         5,000           3,450           6,250          9,375          9,375           10,000
Overhead consoles             900         2,300           3,450           5,750          8,625          8,625            8,625
mirror ICON's,DCA               0           600             600             600            600            600              600
RF Products                     0         1,200           1,800           3,000          3,000          3,000            3,000
EC mirror boards            1,250         1,500           2,000           2,000          2,500          2,500            2,500
new products                3,250         9,750          16,250          22,750         26,000         29,250           32,500
                  0             0             0               0               0              0              0                0
MAT'L $                   $11,000       $23,150         $31,600         $45,750        $56,850        $60,100          $63,975
Freight                       110           232             316             458            569            601              640
% Matl costs                64.73%        64.68%          65.67%          66.29%         66.38%         66.34%           66.27%

COST OF GOODS
   SOLD, MFG              $12,483       $26,274         $35,804         $51,784        $64,339        $68,021          $72,415
GROSS PROFIT, MFG          $4,680        $9,877         $12,796         $17,917        $22,162        $23,479          $25,085
G&A Holly
Lease                         138           138             138             145            145            145              145
Property Taxes                 66            73              80              88             97            106              117
Utilities                      80            90              90              90             90            100              100
Mfg Overheads
                  pay         250           300             300             300            300            300              300
                  other        20            20              20              20             20             20               20
Depreciation                  700           900            1200            1300           1300           1500             1500
Materials
                  pay         240           280             280             350            350            350              350
                  other        10            10              10              10             10             10               10
Quality
                  pay         200           200             400             500            600            600              600
                  other        50            50              50              50             50             50               50
Admin
                  pay         300           500             500             750           1000           1000             1000
                  other       200           200             300             300            300            300              300
                                0             0               0               0              0              0                0
Finance           pay         150           150             200             200            250            250              250
                  other        20            20              20              20             20             20               20
Legal                         100           100             100             100            100            100              100
Personnel
                  pay         100           150             150             150            150            150              150
                  other         0             0               0               0              0              0                0
Sales
                  pay         300           400             400             400            500            500              500
                  commission  300           300             400             600            600            600              600
                  other        30            40              40              40             40             40               40

---------                 -------        ------         -------          ------        -------        -------           ------
G&A                        $3,254        $3,921          $4,678          $5,413         $5,922         $6,141           $6,152
Operating Profit           $1,426        $5,956          $8,118         $12,504        $16,240        $17,338          $18,933

Product Eng, Holly
         Sales               $200          $200            $200            $200           $200           $200             $200
         Matl                  50            50              50              50             50             50               50
         Pay               $1,100        $1,200          $1,300          $1,400         $1,600         $1,600           $1,800
         other                100           100             250             250            250            250              250
         Profit           ($1,050)      ($1,150)        ($1,400)        ($1,500)       ($1,700)       ($1,700)         ($1,900)

Product Eng, Holland
         Sales                0.0           0.0             0.0             0.0            0.0            0.0              0.0
         supplies           325.5         341.8           358.9           376.8          395.6          415.4            436.2
         Pay               2534.6        2914.8          3352.0          3854.8         4433.0         5098.0           5862.7
         bonus               64.4          74.1            85.2            97.9          112.6          129.5            149.0
         travel             132.0         145.2           159.7           175.7          193.3          212.6            233.8
         depreciation       172.7         190.0           209.0           229.9          252.9          278.1            305.9
         other               30.8          33.9            37.3            41.0           45.1           49.6             54.6
         Corporate           65.6          68.9            72.4            76.0           79.8           83.8             87.9
         Rent               217.8         217.8           217.8           217.8          217.8          217.8            217.8
         Profit           -3543.4       -3986.4         -4492.1         -5069.9        -5730.1        -6484.8          -7347.9

Advanced Dev, Tucson
         Sales
         supplies            31.5          33.1            34.7            36.5           38.3           40.2             42.2
         Pay                347.6         382.4           420.6           462.7          508.9          559.8            615.8
         bonus               11.0          12.1            13.3            14.6           16.1           17.7             19.5
         travel              77.0          84.7            93.2           102.5          112.7          124.0            136.4
         other               17.6          19.4            21.3            23.4           25.8           28.3             31.2
         Corporate            1.6           1.7             1.7             1.8            1.9            2.0              2.1
         Rent                42.0          42.0            42.0            42.0           42.0           42.0             42.0
         Profit              -528          -575            -627            -683           -746           -814             -889

Net Profit,
  BT & Interest            (3,696)          244           1,599           5,250          8,064          8,339            8,796

Income taxes
            40.00%              0            98             640            2100           3226           3336             3518
Net Income after
  taxes before Int.         (3696)          147             959            3150           4838           5003             5278

Receivables                  1430          3013            4050            5808           7208           7625             8125
Equipment Purchases
(building not included)       100          1500            1500            1500           1200           1000             1000

Cash Required 
 (assuming operating
 cash = 20% sales growth,
 before interest +
 depreciation)               5165          5107            3044            2697             37          -2885            -3161
Cum Cash Required
(before current year
interest)                   12233         17341           20385           23082          23119          20234            17073

Interest       7.00%          856          1214            1427            1616           1618           1416             1195
Total Cash Required
 (Cum, with interest)       13090         18555           21812           24698          24737          21651            18268
Net Income after
  taxes and interest        (4553)        (1067)           (467)           1534           3220           3587             4083


Assumptions:               1        Operating capital requirement assumed to be 20% of sales increase
                           2        Interest to Donnelly at 7%
                           3        Corporate rent at $18,150 per month fixed
                           4        Building expansion and/or purchase not included in projection
                           5        Donnelly or bank funds operating capital requirements
                           6        Lost compass business at Ford Truck for 99MY
                           7        Pick up Gulf States Toyota comp/temp for 99MY
                           8        Retain compass at Wixom for 99MY
                           9        In 2000MY go to MiniPod compass integrated into mirror
                          10        No cost included for CEL acquisition or overhead
                          11        No cost included for European engineering
                          12        $1,000,000 invoice received from Donnelly included in 1998
                          13        1998 does not reflect the short fiscal year as DE adopts the Donnelly fiscal year
</TABLE>
<PAGE>
EXHIBIT 10.22

                                    AGREEMENT


     This Agreement made as of January 1, 1998 (the  "Effective  Date") , by and
between DONNELLY  ELECTRONICS  L.L.C., a Michigan limited liability company,  of
10410  N.  Holly  Road,  Holly,  Michigan  48442  ("Electronics")  and  DONNELLY
CORPORATION of 49 W. Third Street, Holland, Michigan 49423 ("Donnelly").

     Donnelly  is  a  member  of   Electronics.   The  parties   contemplate   a
restructuring  of  Electronics'  business  under which  Electronics  will assume
Donnelly's electronics  development group. The parties recognize this is for the
long term benefit of Electronics,  but that it will create a short-term negative
cash flow.  Donnelly has agreed to loan funds to Electronics in order to provide
for this  deficit  cash flow.  Donnelly,  Electronics  and the other  members of
Electronics  have agreed upon various  options to purchase and sell interests in
Electronics as set forth in an Amended and Restated Operating  Agreement,  dated
the date hereof.

     In  consideration  of the mutual  undertakings  hereinafter set forth,  the
parties hereto agree as follows:

     1. Assumption of Operations.  Beginning on the effective date,  Electronics
will  assume  electronic   development  work  currently  operated  by  Donnelly,
including personnel and facilities. The personnel,  facilities and equipment are
all listed on Exhibit A attached hereto.
<PAGE>
          (a) The existing  employees and  independent  contractors  of Donnelly
     identified on Exhibit A ("DE Employees") shall remain employees of Donnelly
     but  shall be leased to  Electronics  on the terms set forth on the  Leased
     Employee Agreement attached as Exhibit D.

          (b) Facilities,  equipment,  overhead. In addition to the direct costs
     of the  employees  set  forth in  subparagraph  (a),  Electronics  will pay
     Donnelly $18,150 per month, to be renegotiated  annually  beginning July 1,
     1999,  based on then  current  budgets,  for the  right  to use  Donnelly's
     facilities  and  equipment  and for other  overhead  charges  and  services
     identified on Exhibit B.

     2.  Donnelly's  Electronic  Development.  Electronics  agrees  that it will
perform electronic  development projects for Donnelly's own product development,
as  requested  from  time  to time  by  Donnelly.  The  current  projects  which
Electronics is undertaking are listed on Exhibit C attached hereto.  Electronics
agrees to perform  such  development  services  at a rate equal to  Electronics'
costs for such services (including overhead).  Electronics will invoice Donnelly
monthly for the cost of those  services,  and  Donnelly  will pay such  invoices
within thirty (30) days.

     3. Financing Commitment.  Donnelly agrees that it will loan Electronics the
funds shown as being required for borrowing in the business plan attached hereto
as Exhibit G, or such other  business  plan as is  approved by  Donnelly.  Those
funds  would be loaned to  Electronics  through  the later of June 30, 2001 or a
closing under an option set forth

                                       2
<PAGE>
in Section 5.6 or 5.7 of Electronics'  Amended and Restated Operating Agreement,
at which time Donnelly's  obligation to make additional  loans shall cease.  The
loans  shall bear  interest at the rate of seven  percent  (7%) per annum and be
payable  interest only on a quarterly basis until the later of June 30, 2001, or
the  closing  under an option  set forth in Section  5.6 or 5.7 of  Electronics'
Amended  and  Restated  Operating  Agreement,  at which time the  entire  unpaid
balance  will  be due and  payable.  The  loans  will  be  subordinated  to bank
financing in the ordinary course,  but will be secured with a security  interest
in all assets of  Electronics.  Electronics  will execute a promissory  note and
security   agreement  in  the  forms  attached   hereto  as  Exhibits  E  and  F
respectively.

     4.  Ownership  and  Use  of  Technology.   The  parties   contemplate  that
Electronics will develop proprietary  technology,  some of which will be related
to Donnelly's  business.  The ownership and rights to such technology will be as
follows:

          (a) All technology  developed by Electronics  and paid for by Donnelly
     will belong to Donnelly.

          (b) All other  technology  developed by  Electronics  will be owned as
     follows:

               (i) if the  technology or its  application  relates to automotive
          rear vision,  electrochromics or automotive windows, it will belong to
          Donnelly. Electronics will execute such assignments to Donnelly as may
          be requested by Donnelly from

                                       3
<PAGE>
          time to time,  including executing patent applications and assignments
          of all patent rights in these fields, and will cooperate in filing for
          patents and protecting intellectual property rights.

               (ii) All other technology shall belong to Electronics,  provided,
          however, that Donnelly shall have a worldwide, royalty free license to
          make, use and sell devices incorporated into any of its products using
          such  technology.  In  addition,  Electronics  agrees  not to sell any
          products  using  such  technology,  or  license  any  other  person to
          manufacture or sell products, which are or are used in connection with
          automotive  rear  vision  products  (including,  but not  limited  to,
          interior and exterior automotive mirrors) or automotive windows or sun
          roofs.

     In the event  Electronics owns technology which it does not wish to patent,
Donnelly  shall have the right to apply for,  prosecute and maintain  patents on
such technology,  and upon filing of an application for such patent, Electronics
will execute  assignments  creating the technology as jointly owned  technology.
The same  restrictions  applicable to the use and  sublicensing  of Electronics'
technology as set forth above shall be applicable to jointly held technology.

                                       4
<PAGE>
     5. Extension of Option.  Pursuant to a Supply and Option Agreement  between
Electronics and Donnelly, dated July 30, 1996, Donnelly has an option to acquire
an additional sharing ratio in Electronics,  and such option may be exercised at
any time on or before July 30,  1999.  The  exercise  date in that  agreement is
hereby extended until January 31, 2002. All other terms of the option  contained
in the Supply and Option Agreement shall remain unchanged.

     IN WITNESS WHEREOF,  the parties hereto have executed this Agreement on the
day and year first above written.


                                         DONNELLY ELECTRONICS L.L.C.

                                         By /s/ David Taylor

                                         Its Manager

                                         DONNELLY CORPORATION

                                         By /s/ James A. Knister

145652/6                                 Its  Group Managing Director - Ventures

                                        5
<PAGE>
                                    EXHIBIT A

                        Personnel, Facilities, Equipment

Personnel

         Eugenie Uhlmann                Shahrnaz Motakef
         Wayne Bracelin                 Brent Bos
         Greg Devette                   Rob Dykhouse
         Rich Hicks                     Eric Hoekstra
         Mark Kramer                    Mark Lawson
         Lisa Naber                     Eldon Nyhof
         Sue Paas                       Tom Phee
         Bill Schaefer                  Ken Schierbeek
         Ken Schofield                  Paul Tarnow
         John VanDussen                 Mike Veiseh
         Kyle Cooper                    Howard Fitzgerald
         Marc Smeyers                   Zhanbo Sun
         Rob Blank

         *Val Garza                     *Mike Kokinis
         *Gordon Lanting                *Dan Whisman

         *Independent Contractors


Facilities

         Approximately  12,700  square feet of office space in one of Donnelly's
         facilities in Holland, Michigan, currently being on the second floor of
         the 40th Street facility.


Equipment

         Furniture (including office panels),  computers,  telephones,  copiers,
         facsimile  machines  currently  existing in the space being occupied by
         the personnel listed above.
<PAGE>
                                    EXHIBIT B

                     Donnelly Facility and Overhead Services



Facilities Services - housekeeping and  supervisor,  utilities,  snow and  trash
                      removal,   lawn    care,  preventative   maintenance   and
                      miscellaneous  building supplies; shared facilities.

Overhead Services -   benefits administration, accounting, payroll, HR
                      administration,  general safety, systems,
                      telecommunications, etc.
<PAGE>
                                    EXHIBIT C

                      Current Donnelly Development Projects


         BMW vision system
<PAGE>
                                    EXHIBIT D

                            LEASED EMPLOYEE AGREEMENT


     THIS LEASED  EMPLOYEE  AGREEMENT  (this  "Agreement") is entered into as of
this 1st day of  July,  1998  (the  "Effective  Date"),  by and  among  DONNELLY
CORPORATION,  a Michigan  corporation,  ("Donnelly")  and DONNELLY  ELECTRONICS,
L.L.C., a Michigan limited liability company (the "Company").

                                    RECITALS:

     WHEREAS,  Donnelly  Corporation  is a member of the Company  pursuant to an
Amended and Restated Operating  Agreement of the Company dated July 1, 1998 (the
"Operating Agreement"); and

     WHEREAS, the parties desire that the Company shall lease and may eventually
employ those Donnelly employees associated with Donnelly's  electronics business
identified on Schedule A attached hereto;

     NOW  THEREFORE,  for good and valuable  consideration  including the mutual
promises  contained  herein,  the  receipt and  sufficiency  of which are hereby
acknowledged, the parties agree as follows:

                                    ARTICLE 1
                         ASSIGNMENT OF LEASED EMPLOYEES

     1.1 "Leased  Employees"  shall mean those persons  identified on Schedule A
who are employed by Donnelly as of the Effective Date and who have been assigned
to the Company.

     1.2  Assignment of Leased  Employees.  Effective as of the Effective  Date,
Donnelly  hereby assigns the Leased  Employees  identified on Schedule A who are
currently  employed by Donnelly to perform the services performed by such Leased
Employees  immediately  prior to the Effective Date ("Services") for the term of
this Agreement. No additional Donnelly employees will be assigned to the Company
as Leased Employees under this Agreement  without the agreement of both parties.
All employees  hired after the Effective  Date will be employees of the Company,
not Leased Employees, unless otherwise agreed.

     1.3 Employee  Compensation.  While a Leased Employee is performing Services
under this Agreement,  Donnelly will pay all wages and  compensation and provide
all benefits to the Leased  Employee,  subject to payment by the Company for the
Services as
<PAGE>
provided by this Agreement.  Leased  Employees will be compensated in accordance
with Donnelly compensation practices.

     1.4  Status.  The Leased  Employees  assigned to perform  Services  for the
Company are solely the  employees  of Donnelly  and  nothing  contained  in this
Agreement  shall be  construed  to create  any other  relationship  between  the
parties.  Donnelly  has  recruited,  interviewed,  tested,  selected,  hired and
trained the Leased  Employees.  Donnelly will maintain all necessary payroll and
personnel records and compute wages and withhold applicable  federal,  state and
local taxes and social security payments for the Leased Employees.  Donnelly and
the Company shall cooperate to discipline,  review and evaluate  employees.  The
Company may terminate the services of any Leased  Employee being provided to the
Company by notifying  Donnelly,  in which case  Donnelly  shall no longer assign
such  person  to  perform   services   for  the   Company.   Donnelly  has  sole
responsibility to determine compensation and terminate Leased Employees assigned
pursuant to this Agreement, but Donnelly shall consult with the Company prior to
effecting any changes of compensation or benefits.

                                    ARTICLE 2
                       PAYMENTS BY THE COMPANY TO DONNELLY

     2.1  Payment.  The  Company  agrees  to pay  Donnelly  an  amount  equal to
Donnelly's direct costs (wages, compensation,  withholding and employment taxes,
and  bonuses) of employing  the Leased  Employees to perform the Services and an
amount  equal to  Donnelly's  indirect  actual costs  related and  appropriately
allocated  to the Leased  Employees,  including,  but not limited  to,  employee
benefits,  Employees'  compensation  insurance,  and  payments  to the  Michigan
Employment  Security  Commission.  Donnelly shall submit to the Company  monthly
invoices for the Services,  which invoices shall be due and payable within seven
(7) days of receipt.

                                    ARTICLE 3
                     WORKERS' COMPENSATION AND OTHER MATTERS

     3.1  Workers'  Compensation.  Donnelly  shall  maintain,  at  its  expense,
workers' compensation  insurance for Leased Employees,  covering any compensable
work-related  injuries or illnesses they sustain on the premises owned or leased
by the Company  during their work  assignment.  Donnelly shall provide a copy of
the workers' compensation  insurance certificate annually on its renewal date to
the Company.

     3.2 OSHA. The Company will provide  Donnelly with all information  required
under  the  Occupational  Safety  and  Health  Act,  or other  applicable  laws,
regarding any work- related injuries or illnesses  sustained by Leased Employees
while on Company premises during their work assignment.

                                       2
<PAGE>
     3.3 General Liability Insurance.  Donnelly shall maintain,  at its expense,
general  liability  insurance to cover the  tortious  actions or  negligence  of
Leased  Employees  while on the premises of Donnelly or the Company during their
work  assignment.  Donnelly  shall  provide  a copy of the  liability  insurance
certificate annually on its renewal date to the Company.

     3.4 Unemployment  Benefits.  Donnelly shall be responsible for unemployment
benefits for Leased Employees.

     3.5  Drug/Alcohol  Policy.  Leased  Employees will be subject to Donnelly's
Employee Alcohol and Drug Testing policy.  Donnelly will notify the Company if a
Leased  Employee is selected for a drug and alcohol  test,  and will  coordinate
with the Company the  scheduling of the test.  Donnelly will pay for the cost of
the  aforementioned  tests, and will recommend to the Company what  disciplinary
action must be taken in the event of a positive test result.

     3.6  Employment  Laws.  Donnelly  and the  Company  shall  comply  with the
Americans with Disabilities Act, the Civil Rights Act, the Age Discrimination in
Employment  Act, the Fair Labor  Standards Act, and other  applicable  state and
federal labor and employment laws.

     3.7  Safety.  The Company  shall  provide  the Leased  Employee  with (i) a
suitable  workplace  which  complies  with  all  applicable  safety  and  health
standards, statutes and ordinances, (ii) all necessary information, training and
safety  equipment  with  respect to  hazardous  substances,  and (iii)  adequate
instructions,   assistance,  supervision,  and  time  to  perform  the  services
requested of them. The Company is responsible  for all claims,  losses,  damages
and expenses  concerning (i) hazardous  substances and all other  pollutants and
contaminants  present  at or  released  from the  workplace  which  the  Company
provides for the Leased  Employees,  or (ii) any violations of applicable safety
or health standards, statutes and ordinances.

     3.8  Employee  Records.  Personnel  files  for  Leased  Employees  will  be
maintained by Donnelly. The Company shall provide performance feedback to Leased
Employees and will provide Donnelly with written documentation of such feedback.
All  information  contained  in  personnel  files for Leased  Employees  will be
available  to  appropriate  staff of the  Company on  request.  For each  Leased
Employee  that  becomes an employee of the  Company,  that  employee's  complete
personnel file with be transferred to the Company.

                                    ARTICLE 4
                                 INDEMNIFICATION

     Donnelly  shall  indemnify  and hold  harmless the Company,  its agents and
employees  from  and  against  any and all  claims,  losses,  actions,  damages,
expenses,  and all other

                                       3
<PAGE>
liabilities,  including  but not limited to attorney's  fees,  arising out of or
resulting from a Leased Employee's willful misconduct or reckless performance of
or failure to perform the work within the scope of the  assignment  hereunder to
the extent any such claim, loss, action,  damage,  expense or other liability is
attributable  to  bodily  injury  to or  death of any  person  or  damage  to or
destruction  of any  property,  whether  belonging  to the Company or to another
provided,  however,  that  Donnelly  shall not be liable for any injury,  death,
damage or  destruction  to the extent caused by the negligent or willful acts or
omissions of the Company,  its agents,  employees  or  contractors.  The Company
shall give  notice in writing  to  Donnelly  of any such  claim,  loss,  action,
damage,  expense or other liability  within 15 days after discovery of the event
upon  which the  claim may be based or the  learning  of such  claim,  whichever
occurs first.

                                    ARTICLE 5
                                  CONSTRUCTION

     5.1  Governing  Law. This  Agreement  shall be governed by and construed in
accordance  with the laws of the State of Michigan  without giving effect to any
applicable principles of conflicts of laws.

     5.2  Notices.  All notices and other  communications  under this  Agreement
shall be in writing  and shall be deemed to have been duly given when  delivered
(i) in person, (ii) to the extent receipt is confirmed,  by telecopy,  facsimile
or other  electronic  transmission  service,  (iii) by a  nationally  recognized
overnight  courier  service,  or (iv) by registered  or certified  mail (postage
prepaid return receipt requested), to the parties at the following address:

              To Donnelly:              Donnelly Corporation
                                        49 W.  Third St.
                                        Holland, Michigan 49423
                                        Attention: James Knister
                                        Telecopy No. (616) 786-6239

              With a copy to:           Varnum, Riddering, Howlett & Schmidt LLP
                                        Suite 1600, Bridgewater Place
                                        333 Bridge Street, N.W., P.O. Box 352
                                        Grand Rapids, Michigan 49504
                                        Attention: Daniel Molhoek
                                        Telecopy No.  (616) 336-7000

              To the Company:           Donnelly Electronics LLC
                                        10410 N.  Holly Road
                                        Holly, Michigan 48442
                                        Attention: David C.  Taylor
                                        Telecopy No.(810) 606-0147

                                       4
<PAGE>
     5.3 Severability.  If any provision of this Agreement shall be conclusively
determined by a court of competent  jurisdiction to be invalid or  unenforceable
to any extent, the remainder of this Agreement shall not be affected thereby.

     5.4 Binding Effect.  Except as otherwise  provided  herein,  this Agreement
shall inure to the benefit of and be binding upon the parties,  their respective
successors, legal representatives and permitted assigns.

     5.5 No Third Party Rights. This Agreement is intended to create enforceable
rights between the parties hereto only, and creates no rights in, or obligations
to, any other Persons whatsoever.

     5.6 Time is of Essence.  Time is of the essence in the  performance of each
and every obligation herein imposed.

     5.7 Schedules;  Incorporation by Reference.  Any reference to a Schedule or
Exhibit  to this  Agreement  contained  herein  shall be deemed to  include  any
Schedules to such Exhibit. Each of the Exhibits and Schedules to this Agreement,
and each Schedule to such Exhibits,  is hereby incorporated by reference in this
Agreement as if such  Schedules and Exhibits were set out in full in the text of
this Agreement.

     5.8  Term.  This  Agreement  shall  be for an  indefinite  term  and may be
canceled only by written agreement  executed by duly authorized  officers of the
parties hereto.

     5.9  Amendments.  This  Agreement  may not be  amended  except  by  written
agreement executed by duly authorized officers of all of the parties hereto.

     5.10 Entire  Agreement;  Section  Headings.  This Agreement,  the Operating
Agreement,  the agreements  contemplated  thereby, and any other related written
agreement  between the parties hereto  constitute the entire Agreement among the
parties  hereto  relating to the subject  matter  hereof and supersede all prior
agreements, understandings, and arrangements, oral or written, among the parties
with  respect  to the  subject  matter  hereof.  The  Section  headings  in this
Agreement  are for  reference  purposes  only and shall be affect in any way the
meaning or interpretation of this Agreement.

     5.11  Assignment.  This  Agreement  and each and every  covenant,  term and
condition  hereof  shall be binding upon and inure to the benefit of the parties
and their  respective  successors  and  permitted  assigns.  Except as otherwise
specifically provided in this Agreement or the Operating Agreement (particularly
Section  9.2(a)  thereof),  neither this Agreement nor any rights or obligations
hereunder shall be assignable or be delegated 

                                       5
<PAGE>
directly  or  indirectly  by any party  hereto to a third  party  (other than an
Affiliate of the Member) without the prior written consent of all the parties to
this Agreement.

     5.12 Arbitration. Any dispute, controversy or claim (hereinafter "Dispute")
between the parties of any kind or nature whatsoever,  arising under or relating
to this  Agreement  whether  arising in contract,  tort or  otherwise,  shall be
resolved according to the following procedure.  If a Dispute (excluding business
decisions to be voted on by Members or Directors) arises among the Members under
this  Agreement  which is not  resolved  by good  faith  negotiation,  then such
Dispute,  upon 30 days' prior  notice from one Member to the other of its intent
to arbitrate  (an  "Arbitration  Notice"),  shall be submitted to and settled by
arbitration; provided, however, that nothing contained herein shall preclude any
party hereto from seeking or obtaining (a) injunctive  relief,  or (b) equitable
or other  judicial  relief to enforce the  provisions  hereof or to preserve the
status quo pending resolution of disputes  hereunder.  Such arbitration shall be
conducted in accordance  with the commercial  arbitration  rules of the American
Arbitration  Association  existing at the time of submission by one  arbitrator.
The Members shall attempt to agree upon an  arbitrator.  If one cannot be agreed
upon, the Member which did not give the Arbitration Notice may request the Chief
Judge of the United States  District Court for the Eastern  District of Michigan
or the Chief Judge of the United States District Court for the Western  District
of  Michigan to appoint an  arbitrator.  If he or she will not,  the  arbitrator
shall be appointed by the American Arbitration Association.  If an arbitrator so
selected  becomes  unable  to serve,  his or her  successor  shall be  similarly
selected  or  appointed.  All  arbitration  hearings  shall be  conducted  on an
expedited schedule, and all proceedings shall be confidential. Either Member may
at  its  expense  make a  stenographic  record  thereof.  The  arbitrator  shall
apportion all costs and expenses of arbitration (including the arbitrator's fees
and  expenses,  the fees and  expenses of experts,  and the fees and expenses of
counsel to the parties), between the prevailing and non-prevailing Member as the
arbitrator deems fair and reasonable. Any arbitration award shall be binding and
enforceable  against the parties  hereto and judgment may be entered  thereon in
any court of competent  jurisdiction.  The arbitration will take place at Flint,
Michigan or Grand Rapids,  Michigan at the election of the Member not giving the
Arbitration Notice.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

                                  DONNELLY CORPORATION
                                  ("Donnelly")


                                  By____________________________________________
                                     James Knister, Managing Director - Ventures

                                  DONNELLY ELECTRONICS, LLC

                                  By 
                                      David Taylor, President

::ODMA\PCDOCS\GRR\145652\6
<PAGE>
                                   SCHEDULE A


                                List of Employees


         Eugenie Uhlmann                Shahrnaz Motakef
         Wayne Bracelin                 Brent Bos
         Greg Devette                   Rob Dykhouse
         Rich Hicks                     Eric Hoekstra
         Mark Kramer                    Mark Lawson
         Lisa Naber                     Eldon Nyhof
         Sue Paas                       Tom Phee
         Bill Schaefer                  Ken Schierbeek
         Ken Schofield                  Paul Tarnow
         John VanDussen                 Mike Veiseh
         Kyle Cooper                    Howard Fitzgerald
         Marc Smeyers                   Zhanbo Sun
         Rob Blank

         *Val Garza                     *Mike Kokinis
         *Gordon Lanting                *Dan Whisman

         *Independent Contractors

<PAGE>
                                    EXHIBIT E
                                 PROMISSORY NOTE

$10,000,000.00                                                   Holly, Michigan
                                                                    July 1, 1998

     For  value  received,  the  undersigned,  DONNELLY  ELECTRONICS  L.L.C.,  a
Michigan limited  liability  company,  of 10410 N. Holly Road,  Holly,  Michigan
48442  (the  "Borrower"),  hereby  promises  to  pay to the  order  of  DONNELLY
CORPORATION,  a Michigan corporation,  at 49 W. Third Street, Holland, MI 49423,
or such other place as the holder hereof may designate by written  notice to the
Borrower,  in lawful  money of the United  States of America and in  immediately
available funds, the principal sum of Ten Million Dollars  ($10,000,000) to such
lesser sum as  advanced  from time to time and  recorded  on Schedule A attached
hereto or a copy  thereof and  initialed  by Borrower,  together  with  interest
thereon at the rate of seven  percent  (7%) per annum on the  principal  balance
from time to time outstanding.

     This  Note  shall  be paid  in  quarterly  installments  of  interest  only
commencing on September 30, 1998,  and continuing on each December 31, March 31,
June 30 and September 30 thereafter,  with the entire  principal  balance,  plus
accrued interest thereon, being due and payable in full on the later of June 30,
2001 or the closing under the "put" or "call" options set forth in  Electronics'
Amended and Restated Operating Agreement.

     This Note may be prepaid, in whole or in part, at any time and from time to
time without  premium or penalty;  provided,  however,  that all prepayments are
first applied to any accrued interest and then to the last principal  payment(s)
due hereunder.  As provided in Section 5.5(f) of Borrower's amended and Restated
Operating Agreement,  the holder hereof shall be permitted to reduce the balance
of this Note in consideration of payments due to Borrower for the purchase of an
additional Sharing ratio in Borrower.

     This Note will be  subordinate  to loans made to the borrower from any bank
which is the Borrower's principal lending bank.

     This Note is secured by a Security  Agreement  of even date (the  "Security
Agreement").

     In the event of any default in payment of principal  and/or  interest  when
due hereunder or in the event of any default or upon the occurrence of any event
of default  under the terms of the  Security  Agreement  or any other  agreement
securing  this Note,  and any such default is not cured within  twenty (20) days
after the holder  provides  written  notice  thereof to the  Borrower,  then the
entire  principal  balance plus accrued interest thereon shall, at the option of
the  holder,  become  immediately  due and payable  without any further  notice.
Notice shall be delivered by registered or certified mail to the Borrower at the
address shown above,  or at such other address as the Borrower shall  substitute
in writing to the holder,  and the notice  period shall begin to run on the date
of mailing of said notice.
<PAGE>
     No delay or omission on the part of the holder in the exercise of any right
hereunder or under any agreement securing this Note shall operate as a waiver of
such  right or any  other  right;  a waiver  on any one  occasion  shall  not be
construed as a bar to or waiver of any such right on any future occasion.

     In the event the holder hereof institutes legal proceedings to enforce this
Note or the terms of any  agreement  securing  this Note,  the  holder  shall be
entitled to collect,  in addition to the  indebtedness  and  interest  specified
therein,  all  reasonable  costs  and  expenses  of suit,  including  reasonable
attorney fees.

     The Borrower and any  guarantors and endorsers and all persons liable or to
become  liable under this Note and/or any  agreement  securing  this Note hereby
severally  waive  demand,  presentment  for payment,  and any and all notices of
protest, default, nonpayment, or dishonor of this Note and hereby consent to any
and all extensions of time for the payment or renewals hereof.

     This Note shall be governed by and construed and  interpreted in accordance
with the laws of the State of Michigan.  In the event any provision hereof is in
conflict  with  any  statute  or  rule of law in the  State  of  Michigan  or is
otherwise unenforceable for any reason whatsoever,  then such provision shall be
deemed  severable from this Note, or enforceable to the maximum extent permitted
by law,  as the case  may be,  and the  same  shall  not  invalidate  any  other
provisions of this Note.


                                   DONNELLY ELECTRONICS L.L.C.


                                   By:  ____________________________________
                                        Its: Manager


::ODMA\PCDOCS\GRR\174199\1
<PAGE>
                                   SCHEDULE A

                              Loan Extensions from
                Donnelly Corporation to Donnelly Electronics LLC



                   Amount                Total
Date              Advanced               Loan         Debtor Initials








::ODMA\PCDOCS\GRR\174199\1
<PAGE>
                                    EXHIBIT F

                               SECURITY AGREEMENT


     THIS SECURITY  AGREEMENT is made as of ___________,  1998, between DONNELLY
CORPORATION,  a Michigan corporation,  of 49 W. Third Street, Holland,  Michigan
49423 (the "Secured Party") and DONNELLY  ELECTRONICS L.L.C., a Michigan limited
liability company, of 10410 N. Holly Road, Holly, Michigan 48442 (the "Debtor").

                                    ARTICLE 1
                           GRANT OF SECURITY INTEREST

     To secure the payment of all indebtedness owing to Secured Party by Debtor,
including,  without  limitation,  a promissory  note in the  original  principal
amount of $__________ and the performance of all obligations of the Debtor under
this Agreement (collectively, the "Indebtedness"), the Debtor grants the Secured
Party a security interest in all of the following which are hereinafter referred
to collectively as the "Collateral":  all assets owned by Debtor,  including all
goods, inventories,  equipment, accounts, chattel paper and general intangibles.
This Agreement is  subordinate to any security  interest of Old Kent bank or any
other bank  which is the  Debtor's  principal  commercial  bank ("the  Bank") in
Debtor's assets.

                                    ARTICLE 2
                         REPRESENTATIONS AND WARRANTIES

     The Debtor represents and warrants to the Secured Party as follows:

     2.1 Ownership;  No Other Liens.  The Debtor is the owner of the Collateral;
except for any security  interest granted to the Bank in Debtor's assets,  there
is no other lien,  security  interest,  or encumbrance on any of the Collateral;
and except for any financing statement filed with respect to any interest of the
Bank, no financing statement is now on file in any public office covering any of
the Collateral, except in favor of the Secured Party.

     2.2  Location  of  Business  and  Collateral;  Identification  Number.  The
Debtor's  principal  place of business is located at the address set forth above
and the tangible items of Collateral covered by this Agreement are situated, and
at all times will  remain,  at that  location.  The  Debtor's  Federal  Employer
Identification Number is .

     2.3 Continuing Security Interest. The Debtor represents that it intends and
understands that the security interest in the Collateral granted hereby shall be
a continuing  security interest to secure payment of all  Indebtedness,  whether
now existing or which may hereafter be incurred by future advances or otherwise,
and whether or not such Indebtedness is related to any transaction  described in
this Agreement,  by class or kind, or whether or not contemplated by the parties
as of the date hereof. Notice of the continuing nature of this security interest
shall not be required to be stated on the face of any document  representing any
such Indebtedness,  nor need such Indebtedness  otherwise be identified as being
secured hereby.

     2.4  Subordination.  The  Secured  Party  acknowledges  that  the  security
interest granted in the Agreement is subordinate to the security interest of the
Bank in Debtor's assets.
<PAGE>
                                    ARTICLE 3
                  COVENANTS, AGREEMENTS, AND RIGHTS OF PARTIES

     3.1 Restrictions  upon the Disposition of Collateral.  The Debtor shall not
sell,  assign, or transfer any of the Collateral,  except for inventories in the
ordinary  course of  business,  or cause or  permit  any  other  lien,  security
interest,  or encumbrance  to be placed on any of the Collateral  other than the
security interest of the Bank.

     3.2 Condition of the Collateral;  Insurance.  The Debtor shall maintain all
tangible  Collateral in good condition and repair and shall cause the same to be
continuously  insured in an amount equal to the full insurable value thereof for
the benefit of the Secured  Party and the Debtor as their  interests may appear.
Such  insurance  shall  name the  Secured  Party as loss  payee and shall not be
subject to cancellation or reduction in coverage  without thirty (30) days prior
written notice to the Secured Party. Certificates of insurance shall be provided
to the Secured Party upon request.

     3.3  Taxes;  Use.  The  Debtor  shall pay  promptly  when due all taxes and
assessments  upon the  Collateral or for its use or operation.  The Debtor shall
not use the Collateral unlawfully or improperly.

     3.4 Secured  Party's  Rights to Perform.  The Secured  Party may, but shall
have no obligation to:  discharge taxes,  liens,  security  interests,  or other
encumbrances  at any time  levied or  placed  upon the  Collateral;  pay for the
maintenance and preservation of the Collateral;  obtain and/or pay for insurance
on the Collateral; and cause to be performed for and in behalf of the Debtor any
obligations  of the Debtor  hereunder  which the Debtor has failed or refused to
perform.  The Debtor  shall  reimburse  the  Secured  Party upon  demand for all
payments made and all expenses  incurred by the Secured  Party  pursuant to this
Paragraph  3.4,  with  interest,  from the date paid or  incurred by the Secured
Party, at the highest rate permitted by law.

                                    ARTICLE 4
                                EVENTS OF DEFAULT

     Upon the occurrence of any of the following events of default,  any part or
all of the  Indebtedness  shall,  at the  option of the  Secured  Party,  become
immediately due and payable without notice or demand:

     4.1 Default on  Indebtedness.  If the Debtor  shall  default in the payment
when due, whether by acceleration or otherwise,  of any of the Indebtedness;  if
the Debtor shall default in the  performance  or observance of any obligation or
covenant  under  this  Security  Agreement;  or if Debtor  shall  default in the
performance  or  observance  of any  obligation  or covenant with respect to any
senior security interest of the Bank.

     4.2 False  Warranty or  Representation.  If any warranty or  representation
made  by the  Debtor  in  this  Agreement  or in any  other  document  given  in
connection with the Indebtedness,  or in any guaranty or other document given in
connection therewith,  shall be false or inaccurate in any material respect when
made.

                                        2
<PAGE>
     4.3 Lien on  Collateral.  If any valid lien or  encumbrance  or any writ of
attachment,  garnishment, execution, or other legal process shall at any time be
placed upon any part of the Collateral.

                                    ARTICLE 5
                              REMEDIES UPON DEFAULT

     5.1  Remedies  Generally.  Upon the  occurrence  of an event of  default as
defined in Article 4 hereof,  the  Secured  Party  shall have all the rights and
remedies of a secured party under the Michigan  Uniform  Commercial Code and any
other  applicable  laws,  together with all rights and remedies  provided for in
this Security Agreement. In addition thereto, upon the occurrence of an event of
default, the Secured Party may require the Debtor to assemble the Collateral and
any  proceeds  thereof  and deliver  same to the Secured  Party at a place to be
designated by the Secured Party which is reasonably  convenient to both parties,
and the Debtor  agrees that the Secured Party shall have the right to peacefully
retake any of the Collateral  without  judicial  hearing prior to such retaking,
including the right to enter upon the Debtor's  premises for such  purpose.  All
rights  and  remedies  of the  Secured  Party  shall  be  cumulative  and may be
exercised from time to time.

     5.2 Disposition of Collateral; Deficiency. The Secured Party may dispose of
the Collateral and proceeds in any commercially reasonable manner and the Debtor
shall be liable for any deficiency.

     5.3 Payment of Expenses.  The Debtor shall pay the Secured  Party on demand
all expenses,  including  reasonable  attorneys' fees and legal expenses paid or
incurred by the Secured  Party in  protecting  and  enforcing  the rights of and
obligations  to the  Secured  Party  under  any  provision  of  this  Agreement,
including its right to take  possession of the Collateral  and proceeds  thereof
from the custody of the Debtor or any trustee or receiver in  bankruptcy  or any
other person.  All such expenses shall become part of the Indebtedness and shall
bear interest from the date paid or incurred by the Secured Party at the highest
rate permitted by law.

     5.4 Notice of Sale. Any notice required to be given by the Secured Party to
the Debtor with respect to the sale or other disposition of the Collateral shall
be deemed  reasonable if mailed, in the manner set forth in Paragraph 6.2 below,
at least seven (7) days before the time of such sale or other disposition.

                                    ARTICLE 6
                                  MISCELLANEOUS

     6.1 Financing  Statements.  At the request of the Secured Party, the Debtor
shall join with the Secured Party in executing one or more financing  statements
and  continuation  statements,  in form  satisfactory to the Secured Party,  and
shall pay the cost of filing the same in all public offices,  wherever filing is
deemed by the Secured Party to be necessary or desirable.

     6.2 Manner of Notice.  All notices to the Debtor or Secured  Party shall be
deemed to be effectively  given when sent by first class mail,  postage prepaid,
to the addresses set forth above,  or to such other addresses as the parties may
designate by notice as provided in this Paragraph 6.2.

                                       3
<PAGE>
     6.3 No Waiver. No delay on the part of the Secured Party in the exercise of
any right or remedy shall  operate as a waiver  thereof and no single or partial
exercise by the Secured  Party of any right or remedy  shall  preclude  other or
further exercise thereof or the exercise of any other right or remedy.

     6.4  Definitions;  Applicable Law. All terms used herein,  unless otherwise
defined or the context otherwise requires, shall have the meanings given to them
by the Michigan Uniform  Commercial Code, which,  together with other applicable
laws  of  the  state  of  Michigan,   shall  govern  this   Agreement   and  the
interpretation thereof.

     6.5  Captions.  The  captions  to the various  Paragraphs  hereof have been
inserted for convenience only and shall not be deemed a part of this Agreement.

     6.6 Binding  Effect.  This Agreement shall be binding upon and inure to the
benefit of the Debtor and the Secured Party and their respective  successors and
assigns.

     6.7  Entire  Agreement;  Amendment.  This  Agreement  sets forth the entire
agreement of the parties as to the subject  matter hereof and may not be amended
except in writing and executed by the parties hereto.

     6.8 Severability. In the event any provision hereof is in conflict with any
statute or rule of law in the State of  Michigan or is  otherwise  unenforceable
for any reason whatsoever, then such provision shall be deemed severable from or
enforceable to the maximum extent  permitted by law, as the case may be, and the
same shall not invalidate any other provisions hereof.

     IN WITNESS  WHEREOF,  the Debtor and the Secured  Party have  executed this
Security Agreement as of the day and year first above written.

                                                SECURED PARTY:

                                                DONNELLY CORPORATION

                                                By:
                                                   James A.  Knister
                                                   Managing Director, Ventures


                                                DEBTOR:

                                                DONNELLY ELECTRONICS L.L.C.

                                                By:

                                                Its: Manager



::ODMA\PCDOCS\GRR\174209\1
                                       4
<PAGE>
                                   EXHIBIT G

                                  BUSINESS PLAN

<TABLE>
All numbers in (000)                                                                          Forecast based on Model Year Estimates
                                    Price at Model Year                                                   Unit volumes in model year
SALES                      1998        1999           2000             2001             2002              1998             1999
<S>                        <C>         <C>           <C>               <C>              <C>              <C>            <C>
Compass                    $20.00      $16.00        $14.00            $ 9.50            $8.50             300              130
Mirror Display boards      $18.00      $17.00        $22.00            $21.00           $20.00              80              130
Overhead consoles          $18.50      $18.00        $17.50            $17.00           $17.00               0                0
mirror ICON's,DCA          $ 5.00       $5.00        $ 5.00            $ 5.00            $5.00               0                0
RF Products                $10.00      $10.00        $10.00            $10.00           $10.00               0                0
EC mirror boards           $ 5.00       $5.00        $ 4.50            $ 4.25            $4.25                              300
new products               $10.00      $10.00        $10.00            $10.00           $10.00              40              350

Total Sales Dollars                                                                                     $7,840           $9,290

LABOR $                    8.00%            Labor costs in 000                                            $627             $743
                                            # people production                                             31               37

                                    Material Content
Compass                    $14.00       12.00         10.00              7.00             6.75           4,200            1,560
Mirror Display boards      $14.00       12.00         13.00             12.50            11.50           1,120            1,560
Overhead consoles          $11.00       12.00         12.00             11.50            11.50               0                0
mirror ICON's,DCA           $3.00        3.00          3.00              3.00             3.00               0                0
RF Products                 $6.00        6.00          6.00              6.00             6.00               0                0
EC mirror boards            $3.00        3.00          2.50              2.50             2.50               0                0
new products                $6.50       $6.50         $6.50             $6.50            $6.50             260            2,275
                       0                                                                                     0                0
MAT'L $                                                                                                 $5,580           $6,295
Freight                     1.00%                                                                           56               63
% Matl costs                                                                                            71.89%           68.44%
COST OF GOODS SOLD, MFG                                                                                 $6,263           $7,101
GROSS PROFIT, MFG                                                                                       $1,577           $2,189
G&A Holly
Lease                                                                                                      138              138
Property Taxes                                                                                              50               60
Utilities                                                                                                   40               70
Mfg Overheads              pay                                                                              45              200
                           Other                                                                            20               20
Depreciation                                                                                               300              500
Materials                  pay                                                                             200              240
                           Other                                                                            10               10
Quality                    pay                                                                                              100
                           Other                                                                             0               50
Admin                      pay                                                                             100              200
                           Other                                                                           100              100
                                                                                                                              0
Finance                    pay                                                                              60              100
                           Other                                                                            10               20
Legal                                                                                                                       100
Personnel                  pay                                                                              50               75
                           Other                                                                             0                0
Sales                      pay                                                                             100               33
                           commission                                                                                       100
                           other                                                                             0               20
---------                  ---------                                                                   -------          -------
G&A                                                                                                     $1,223           $2,403
Operating Profit                                                                                          $354            ($214)

Product Eng, Holly         Sales                                                                          $200             $200
                           Matl                                                                             50               50
                           Pay                                                                            $600           $1,000
                           other                                                                            20               50
                           Profit                                                                        ($470)           ($900)

Product Eng, Holland       Sales                                                                                            680
                           supplies                                                                                         310
                           Pay                                                                                             2204
                           bonus                                                                                             56
                           travel                                                                                           120
                           depreciation                                                                                     157
                           other                                                                                             28
                           Corporate                                                                                       62.5
                           Rent                                                                                           217.8
                           Profit                                                                        -1070          -2475.3

Advanced Dev, Tucson       Sales                                                                                              0
                           supplies                                                                                          30
                           Pay                                                                                              316
                           bonus                                                                                             10
                           travel                                                                                            70
                           other                                                                                             16
                           Corporate                                                                                        1.5
                           Rent                                                                                              42
                           Profit                                                                                          -486

Net Profit, BT & Interest                                                                               (1,186)          (4,075)

Income taxes               40.00%                                                                            0                0
Net Income after taxes before Int                                                                        (1186)           (4075)

Receivables                                                                                                653              774
Equipment Purchases (building not included)                                                               1500              650

Cash Required (assuming operating cash = 20% sales growth, before interest + depreciation)                2386             4682
Cum Cash Required (before current year interest)                                                          2386             7068

Interest                   7.00%                                                                           167              495
Total Cash Required (Cum, with interest)                                                                                   7563
Net Income after taxes and interest                                                                     (1353)            (4570)


Assumptions:               1        Operating capital requirement assumed to be 20% of sales increase
                           2        Interest to Donnelly at 7%
                           3        Corporate rent at $18,150 per month fixed
                           4        Building expansion and/or purchase not included in projection
                           5        Donnelly or bank funds operating capital requirements
                           6        Lost compass business at Ford Truck for 99MY
                           7        Pick up Gulf States Toyota comp/temp for 99MY
                           8        Retain compass at Wixom for 99MY
                           9        In 2000MY go to MiniPod compass integrated into mirror
                          10        No cost included for CEL acquisition or overhead
                          11        No cost included for European engineering
                          12        $1,000,000 invoice received from Donnelly included in 1998
                          13        1998 does not reflect the short fiscal year as DE adopts the Donnelly fiscal year
</TABLE>
<PAGE>
<TABLE>
All numbers in (000)              Forecast based on Model Year Estimates
                                                         Unit volumes in model year
SALES                        2000           2001            2002            2003          2004           2005             2006
<S>                          <C>         <C>             <C>             <C>            <C>           <C>              <C>
Compass                       300           400             600             800           1000           1000             1000
Mirror Display boards         200           400             300             500            750            750              800
Overhead consoles              75           200             300             500            750            750              750
mirror ICON's,DCA               0           200             200             200            200            200              200
RF Products                     0           200             300             500            500            500              500
EC mirror boards              500           600            8800             800           1000           1000             1000
new products                  500          1500            2500            3500           4000           4500             5000

Total Sales Dollars       $17,163       $36,150         $48,600         $69,700        $86,500        $91,500          $97,500

LABOR $
Labor costs in 000         $1,373        $2,892          $3,888          $5,576         $6,920         $7,320           $7,800
# people production            69           145             194             279            346            366              390

Compass                     3,000         2,800           4,050           5,400          6,750          6,750            6,750
Mirror Display boards       2,600         5,000           3,450           6,250          9,375          9,375           10,000
Overhead consoles             900         2,300           3,450           5,750          8,625          8,625            8,625
mirror ICON's,DCA               0           600             600             600            600            600              600
RF Products                     0         1,200           1,800           3,000          3,000          3,000            3,000
EC mirror boards            1,250         1,500           2,000           2,000          2,500          2,500            2,500
new products                3,250         9,750          16,250          22,750         26,000         29,250           32,500
                  0             0             0               0               0              0              0                0
MAT'L $                   $11,000       $23,150         $31,600         $45,750        $56,850        $60,100          $63,975
Freight                       110           232             316             458            569            601              640
% Matl costs                64.73%        64.68%          65.67%          66.29%         66.38%         66.34%           66.27%

COST OF GOODS
   SOLD, MFG              $12,483       $26,274         $35,804         $51,784        $64,339        $68,021          $72,415
GROSS PROFIT, MFG          $4,680        $9,877         $12,796         $17,917        $22,162        $23,479          $25,085
G&A Holly
Lease                         138           138             138             145            145            145              145
Property Taxes                 66            73              80              88             97            106              117
Utilities                      80            90              90              90             90            100              100
Mfg Overheads
                  pay         250           300             300             300            300            300              300
                  other        20            20              20              20             20             20               20
Depreciation                  700           900            1200            1300           1300           1500             1500
Materials
                  pay         240           280             280             350            350            350              350
                  other        10            10              10              10             10             10               10
Quality
                  pay         200           200             400             500            600            600              600
                  other        50            50              50              50             50             50               50
Admin
                  pay         300           500             500             750           1000           1000             1000
                  other       200           200             300             300            300            300              300
                                0             0               0               0              0              0                0
Finance           pay         150           150             200             200            250            250              250
                  other        20            20              20              20             20             20               20
Legal                         100           100             100             100            100            100              100
Personnel
                  pay         100           150             150             150            150            150              150
                  other         0             0               0               0              0              0                0
Sales
                  pay         300           400             400             400            500            500              500
                  commission  300           300             400             600            600            600              600
                  other        30            40              40              40             40             40               40

---------                 -------        ------         -------          ------        -------        -------           ------
G&A                        $3,254        $3,921          $4,678          $5,413         $5,922         $6,141           $6,152
Operating Profit           $1,426        $5,956          $8,118         $12,504        $16,240        $17,338          $18,933

Product Eng, Holly
         Sales               $200          $200            $200            $200           $200           $200             $200
         Matl                  50            50              50              50             50             50               50
         Pay               $1,100        $1,200          $1,300          $1,400         $1,600         $1,600           $1,800
         other                100           100             250             250            250            250              250
         Profit           ($1,050)      ($1,150)        ($1,400)        ($1,500)       ($1,700)       ($1,700)         ($1,900)

Product Eng, Holland
         Sales                0.0           0.0             0.0             0.0            0.0            0.0              0.0
         supplies           325.5         341.8           358.9           376.8          395.6          415.4            436.2
         Pay               2534.6        2914.8          3352.0          3854.8         4433.0         5098.0           5862.7
         bonus               64.4          74.1            85.2            97.9          112.6          129.5            149.0
         travel             132.0         145.2           159.7           175.7          193.3          212.6            233.8
         depreciation       172.7         190.0           209.0           229.9          252.9          278.1            305.9
         other               30.8          33.9            37.3            41.0           45.1           49.6             54.6
         Corporate           65.6          68.9            72.4            76.0           79.8           83.8             87.9
         Rent               217.8         217.8           217.8           217.8          217.8          217.8            217.8
         Profit           -3543.4       -3986.4         -4492.1         -5069.9        -5730.1        -6484.8          -7347.9

Advanced Dev, Tucson
         Sales
         supplies            31.5          33.1            34.7            36.5           38.3           40.2             42.2
         Pay                347.6         382.4           420.6           462.7          508.9          559.8            615.8
         bonus               11.0          12.1            13.3            14.6           16.1           17.7             19.5
         travel              77.0          84.7            93.2           102.5          112.7          124.0            136.4
         other               17.6          19.4            21.3            23.4           25.8           28.3             31.2
         Corporate            1.6           1.7             1.7             1.8            1.9            2.0              2.1
         Rent                42.0          42.0            42.0            42.0           42.0           42.0             42.0
         Profit              -528          -575            -627            -683           -746           -814             -889

Net Profit,
  BT & Interest            (3,696)          244           1,599           5,250          8,064          8,339            8,796

Income taxes
            40.00%              0            98             640            2100           3226           3336             3518
Net Income after
  taxes before Int.         (3696)          147             959            3150           4838           5003             5278

Receivables                  1430          3013            4050            5808           7208           7625             8125
Equipment Purchases
(building not included)       100          1500            1500            1500           1200           1000             1000

Cash Required 
 (assuming operating
 cash = 20% sales growth,
 before interest +
 depreciation)               5165          5107            3044            2697             37          -2885            -3161
Cum Cash Required
(before current year
interest)                   12233         17341           20385           23082          23119          20234            17073

Interest       7.00%          856          1214            1427            1616           1618           1416             1195
Total Cash Required
 (Cum, with interest)       13090         18555           21812           24698          24737          21651            18268
Net Income after
  taxes and interest        (4553)        (1067)           (467)           1534           3220           3587             4083


Assumptions:               1        Operating capital requirement assumed to be 20% of sales increase
                           2        Interest to Donnelly at 7%
                           3        Corporate rent at $18,150 per month fixed
                           4        Building expansion and/or purchase not included in projection
                           5        Donnelly or bank funds operating capital requirements
                           6        Lost compass business at Ford Truck for 99MY
                           7        Pick up Gulf States Toyota comp/temp for 99MY
                           8        Retain compass at Wixom for 99MY
                           9        In 2000MY go to MiniPod compass integrated into mirror
                          10        No cost included for CEL acquisition or overhead
                          11        No cost included for European engineering
                          12        $1,000,000 invoice received from Donnelly included in 1998
                          13        1998 does not reflect the short fiscal year as DE adopts the Donnelly fiscal year
</TABLE>
<PAGE>
EXHIBIT 10.23

August 17, 1998



Mr. Scott Reed
2962 Eagle Dr.
Rochester Hills, Mi. 48309

Dear Scott,

I am very  pleased  that you have  agreed to accept the  position of Senior Vice
President,   Chief  Financial  Officer  for  Donnelly   Corporation   (Donnelly)
consistent  with the terms we  verbally  agreed  to, as  summarized  below,  and
contingent  upon  Board  support  on  August  21,  1998.  We  believe  you bring
outstanding  skills to our company and that you will find  Donnelly an excellent
environment in which to invest your career. We look forward to working with you.

You will  report to the CEO of Donnelly  and will be an officer of the  company.
You will work from our home office  located in Holland,  Michigan a minimum of 4
days per week, with 1 day a week in East Michigan. The details of your offer are
as follows:

     A base salary of $22,916.66 per month.  This equates to an annual salary of
     $275,000.  This base  compensation  was  determined by evaluating  the base
     salary of the top financial  executives in $1billion  organizations  and as
     such represents our strong interest for you to join Donnelly. Our policy is
     to review salaries for all officers  annually after the close of our fiscal
     year.  You will be  eligible  for review in August  1999.  The Board  takes
     action regarding officers salaries in August of each year.

     An  annual  bonus  incentive  will  be  provided  which  is  linked  to the
     achievement  of specific  business and  individual  goals.  Achieving  plan
     performance  would result in a bonus of  approximately  40% of base salary.
     Exceptional  performance  over plan  goals can earn a bonus of up to 50% of
     base  salary.  I will meet with you  shortly  after you start to  establish
     goals for the  fiscal  year  98/99 to allow  you to earn up to the  maximum
     bonus  potential  for  this  fiscal  year.  Since  you were not part of the
     planning process for fiscal year 98/99, and you will not have the full year
     to influence performance, you will be paid a one time, guaranteed,  minimum
     incentive bonus of $ 75,000 paid in August 1999.
<PAGE>
Scott Reed
August 17, 1998
Page 2

     To demonstrate  our interest in you joining  Donnelly,  you will be given a
     lump sum gross  signing  bonus of $125,000  payable  within 30 days of your
     start of employment at Donnelly.

     It is  customary  for  Donnelly to consider  stock  options for  executives
     annually,  based  on  competitive  market  comparisons  and  on  individual
     contributions made to the business. The initial stock option grants will be
     priced at the date of the start of your employment.  Subsequent grants will
     be priced as of the date granted.  Stock options are to be exercised  after
     one year of receiving them and no later than ten years of receiving them.

     A special one time  consideration  is being offered to you to recognize the
     adjustments that will be required in making a transition to Donnelly.  This
     one-time  consideration  will include an initial  stock  offering of 15,000
     shares upon your start at Donnelly. These shares are subject to approval by
     the Donnelly  Stock Option  Committee  and will be governed by the terms of
     the Donnelly plans for these programs.

     You will  receive  a  company  car  valued at  approximately  $40,000.  Car
     expenses  will be covered for  insurance,  maintenance,  and business  fuel
     expenses.  You will be responsible for the tax consequences of the personal
     use portion of the car.

     Donnelly  offers a very  comprehensive  package of group health  insurance,
     group life insurance,  401K, employee stock purchase, and retirement plans.
     Vacation is six weeks. You will be provided with  descriptions of all plans
     and I believe you will find our  flexible  benefit  options  very strong in
     protecting you and your dependents.

     If you decide to relocate to West  Michigan  our  relocation  package  will
     include:

          Temporary  living  expenses  to  cover  the  cost of an  apartment  or
          equivalent  temporary  condo/townhouse  for up to six  months  in West
          Michigan.  You will be eligible  for this benefit at the start of your
          employment. These costs will be "grossed-up" for taxes.

          Closing  costs on a new home in West  Michigan  . These  costs will be
          "grossed up" for tax purposes.
<PAGE>
Scott Reed
August 17, 1998
Page 3


          Moving  of  your  household  goods  to  West  Michigan.  Donnelly  has
          contracts  with two  national  carriers and can select the carrier for
          you.  These  reimbursements  are not reported as taxable income to the
          IRS

          Full buyout option via a third-party  relocation  company for the sale
          of your  home in East  Michigan.  The  buyout  price  is  based on the
          average  value of two  independent  appraisals.  Once you  receive the
          buyout price you will have 60 days to get a bonafide  offer  exceeding
          the buyout price or accept the buyout price.  The tax  consequences of
          selling the home are covered in the buyout option.

     In the event you are  separated  from  Donnelly  for any reason  other than
     cause,  we will  provide a severance  plan that  provides 12 months of base
     salary and benefits subject to a non-compete agreement in our specific area
     of business and closure on a separation agreement.

     In the  event  that you  choose to leave  Donnelly,  you will  receive  all
     benefits  for which you are  vested  per plan  descriptions.  Also,  if you
     choose to leave Donnelly within the first two years of your start date, you
     agree to reimburse  Donnelly,  on a prorated  basis,  the signing  bonus of
     $125,000,  and  any  relocation  costs  paid to you or on  your  behalf  by
     Donnelly (i.e. if you elect to leave Donnelly employment after one year you
     would reimburse Donnelly one half of these costs).

     In the event that there is a change in control  regarding  ownership of the
     company,  all  stock  options  will be  vested  consistent  with  the  plan
     description.

     It is  important  that you meet the Board of  Directors  on August 21, 1998
     before  everything is finalized.  I do not anticipate any issues and expect
     that both you and the Board will feel positive about moving forward.
<PAGE>
Scott Reed
August 17, 1998
Page 4

As the company  continues to grow and develop,  part of our corporate mission is
to double in  shareholder  value  every five years,  and our  current  five-year
outlook is consistent  with  achieving this level of  performance.  Donnelly has
grown at a compounded  annual rate in excess of 15% during the past 15 years and
we believe the company is positioned for strong growth in the future.  With your
proven skills to shape strong financial  performance and improved earnings,  the
prospects for the growth of your estat  through stock options  should be strong.
Our program for deferred compensation should also prove to be an attractive tool
for enhancing your long-term financial position.

All  matters  not  specified  here will be handled in  accordance  with  company
policy. We will provide you with all appropriate  policies and plan descriptions
forthrightly.  I believe  that you will find all of them  very  competitive  and
supportive.

Please  review this letter and let me know as quickly as possible if it reflects
what we discussed.  If you are in agreement to the terms, please sign and return
this  letter by August 20,  1998,  to complete  the formal  hiring  process.  As
discussed  this offer is contingent  upon the approval of the Donnelly  Board of
Directors and upon you successfully  passing a pre-employment  physical and drug
screen. Your start date will be September 1, 1998.

On behalf of myself,  the Board of Directors,  the senior  management  team, and
others at Donnelly you met, we look forward to having you join our company. I am
convinced  that you will help us make  this an even  stronger  company  and I am
personally looking forward to working with you.



Sincerely,

DONNELLY CORPORATION



Dwane Baumgardner
Chairman of the Board
                                               Scott Reed                Date
<PAGE>
EXHIBIT 21


                             SCHEDULE OF AFFILIATES

AS OF JUNE 27, 1998
<TABLE>
                                                                                                                     PERCENTAGE OF
               AFFILIATE                                                  INCORPORATION                               OWNERSHIP
<S>                                                                       <C>                                            <C>
DONNELLY MIRRORS LIMITED                                                  ORGANIZED UNDER THE                            100%
                                                                          LAWS OF THE REPUBLIC
                                                                          OF IRELAND

DONNELLY VISION SYSTEMS                                                   ORGANIZED UNDER THE                            100%
EUROPE LIMITED                                                            LAWS OF THE REPUBLIC
                                                                          OF IRELAND

DONNELLY DE MEXICO, S.A. DE C.V.                                          ORGANIZED UNDER THE                            100%
                                                                          LAWS OF MEXICO

DONNELLY EUROGLAS SYSTEMS,                                                ORGANIZED UNDER THE                            100%
S.A.R.L.                                                                  LAWS OF FRANCE

DONNELLY HOLDING GmbH                                                     ORGANIZED UNDER THE                            100%
                                                                          LAWS OF GERMANY

DONNELLY INTERNATIONAL, INC.                                              MICHIGAN                                       100%

DONNELLY TECHNOLOGY, INC.                                                 MICHIGAN                                       100%

DONN-TECH INC.                                                            MICHIGAN                                       100%

DONNELLY RECEIVABLES CORPORATION                                          MICHIGAN                                       100%

DONNELLY OPTICS CORPORATION                                               MICHIGAN                                       100%

INFORMATION PRODUCTS, INC.                                                MICHIGAN                                       100%

DONNELLY SCANDINAVIA A.B.                                                 ORGANIZED UNDER THE                            100%
                                                                          LAWS OF SWEDEN

VARITRONIX EC MIRRORS, LTD.                                               MICHIGAN                                       100%

DONNELLY HOHE VERWALTUUNGS GmbH                                           ORGANIZED UNDER THE                             74%
                                                                          LAWS OF GERMANY

DONNELLY HOHE ESPANA, S.A.                                                ORGANIZED UNDER THE                          68.59%*
                                                                          LAWS OF SPAIN

DONNELLY HOHE GmbH & CO. KG                                               ORGANIZED UNDER THE                          66.7%
                                                                          LAWS OF GERMANY

SHANGHAI DONNELLY FU HUA WINDOW                                           ORGANIZED UNDER THE                             50%
SYSTEMS COMPANY, LTD.                                                     LAWS OF CHINA

SHUNDE DONNELLY ZHEN HUA                                                  ORGANIZED UNDER THE                             50%
AUTOMOTIVE SYSTEMS CO. LTD.                                               LAWS OF CHINA

DONNELLY YANTAI ELECTRONICS CO. LTD.                                      ORGANIZED UNDER THE                             50%
                                                                          LAWS OF THE PEOPLES
                                                                          REPUBLIC OF CHINA

VARITRONIX EC (MALAYSIA) SDN. BHD.                                        MICHIGAN                                        50%

LEAR DONNELLY OVERHEAD SYSTEMS, L.L.C.                                    MICHIGAN                                        50%

DONNELLY/ARTEB, LTDA                                                      ORGANIZED UNDER THE                             50%
                                                                          LAWS OF BRAZIL

VISION GROUP, PLC                                                         ORGANIZED UNDER THE                           25.6%
                                                                          LAWS OF SCOTLAND

DONNELLY ELECTRONICS, L.L.C.                                              MICHIGAN                                        19%

KAM TRUCK COMPONENTS, INC.                                                MICHIGAN                                        19%

</TABLE>
* 21.8% OWNED  DIRECTLY BY DONNELLY AND 70.2% OWNED BY DONNELLY  HOHE GmbH & CO.
KG (66.7% OF THE EQUITY OF WHICH IS OWNED BY DONNELLY)
<PAGE>
Exhibit 23

Consent of Independent Certified Public Accountants


We hereby consent to the  incorporation by reference of our reports dated August
6, 1998, relating to the combined consolidated financial statements and schedule
of Donnelly  Corporation  appearing in the  corporation's  annual report on Form
10-K for the year ended June 27, 1998, in that  corporation's  previously  filed
Form S-8 Registration  Statements for that  corporation's 1987 Stock Option Plan
(Registration No. 33-26555),  1987 Employees' Stock Purchase Plan  (Registration
No. 33-34746) and Non- Employee  Directors' Stock Option Plan  (Registration No.
33-55499).




/s/ BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
September 11, 1998