EXCEL TECHNOLOGY INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
......................
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
....................... .................

Commission File Number 0-19306

EXCEL TECHNOLOGY, INC.
(Exact name of Registrant as specified in its Charter)

Delaware 11-2780242
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

41 Research Way (516) 273-6900
E. Setauket, NY 11733 (Registrant's Telephone Number)
(Address of Principal Executive Offices)

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share

Indicate by check mark whether the registrant (1) has filed all reports
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 this From
10-K or any amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $111,491,625 based on the average bid and ask price as
reported by NASDAQ on March 10, 1999.

The number of shares of the Registrant's common stock outstanding as of
March 10, 1999 was: 11,079,913.

DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement to be filed in connection with the
Registrant's 1998 Annual Meeting of Stockholders (incorporated by
reference under Part III.)

PART I

This Annual Report on Form 10-K (and other reports issued by the
Company and its officers from time to time) contain certain statements
concerning the Company's future results, future performance, intentions,
objectives, plans, and expectations that are or may be deemed to be
"forward-looking statements". Such statements are made in reliance upon
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The Company's actual results may differ significantly from the
results discussed in the forward looking statements. Such forward
looking statements are subject to a number of known and unknown risks and
uncertainties that, in addition to general economic and business
conditions, could cause the Company's actual results, performance, and
achievements to differ materially from those described or implied in the
forward looking statements. Factors that could cause or contribute to
such differences include, but are not limited to those discussed below
and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

ITEM 1. BUSINESS

General

Excel Technology, Inc. (the "Company") designs, develops,
manufactures and markets laser systems and electro-optical components for
industry, science, and medicine. The word laser is an acronym for "Light
Amplification by Stimulated Emission of Radiation." The essence of the
laser is the ability of a photon (light energy) to stimulate the emission
of other photons, each having the same wavelength (color) and direction
of travel. The laser beam is so concentrated and powerful that it can
produce power densities millions of times more intense than that found on
the surface of the sun, capable of cutting, welding and marking
industrial products, yet can be precisely controlled and directed,
capable of performing delicate surgery on humans.

In October 1992, the Company acquired Quantronix Corporation, a
Delaware corporation ("Quantronix"), for Common Stock and warrants of the
Company valued at approximately $9 million, in a transaction pursuant to
which Quantronix became a wholly-owned subsidiary of the Company. The
acquisition of Quantronix and its wholly-owned subsidiaries, Control
Laser Corporation, located in Orlando, Florida ("Control Laser"),
Quantronix GmbH, located in Germany ("Quantronix GmbH"), and The Optical
Corporation, located in Oxnard, California ("Optical"), provided the
Company with its industrial, scientific and semiconductor product lines,
supplemented the Company's dental products and provided the Company with
a significant revenue base as well as established manufacturing,
engineering, marketing and customer service capabilities.

On February 14, 1995, the Company acquired Cambridge Technology,
Inc. ("Cambridge"), located in Cambridge, Massachusetts. Cambridge is
engaged primarily in the manufacture of laser scanners, essential
components to moving a laser beam with precision at a specified speed.
These products have both industrial and consumer applications, such as
laser marking and etching, high density laser printing and writing,
digitized x-ray imaging and entertainment laser light shows and displays.
The acquisition allowed the Company to expand into new markets and
enhanced its market position in the industrial business. The Company
acquired all of the outstanding shares of capital stock of Cambridge in
exchange for $4.75 million, consisting of $4.5 million in cash (of which
$3.5 million was paid on February 14, 1995) and $250 thousand in shares
of Common Stock (which was paid on February 14, 1995). Of the balance
due, $600 thousand was paid in March 1996 and $400 thousand was paid in
February 1997. Pursuant to the acquisition agreement, additional
payments were made due to Cambridge meeting certain performance goals
during the first two fiscal years after the acquisition. In connection
therewith, the Company paid $731 thousand in 1995 and $323 thousand in
1996.

On October 2, 1995, the Company acquired the Photo Research Division
("The Photo Research Division") of Kollmorgen Instruments Corporation
("Kollmorgen"). The Photo Research Division is engaged primarily in the
business of developing, manufacturing and marketing photometric and
spectroradiometer instruments and systems (the "Business"). In
accordance with an Asset Purchase Agreement, the Company purchased
substantially all of the net assets and properties utilized in connection
with the Business, in consideration of $3.5 million in cash. The Company
utilized its own cash to finance the acquisition. Subsequently, the
Company obtained a $3.5 million five-year term loan, from U.S.Trust, the
proceeds of which were utilized by the Company to replenish its own cash
used in financing the acquisition.

On August 14, 1998, the Company acquired substantially all of the
assets and properties of Synrad Inc. ("Synrad"), a company engaged in the
business of developing, manufacturing and marketing sealed CO2 lasers and
related accessories. In accordance with the Asset Purchase Agreement,
Excel Purchasing Company( a wholly owned subsidiary of the Company)
purchased substantially all of Synrad's assets and properties for
consideration of approximately $21.7 million in cash, which includes
transaction costs and the repayment of certain of Synrad's outstanding
debt. In addition the Company assumed certain liabilities, including
trade payables, accrued expenses and other specified liabilities. The
Company funded the acquisition of Synrad by utilizing its own cash and by
borrowing $6.5 million on its $15 million credit facility with The Bank
of New York (the "Bank"). Excel Purchasing Company changed its name to
Synrad, Inc. after the acquisition.

Excel was organized under the laws of Delaware in 1985.

CURRENT PRODUCTS AND APPLICATIONS

Marking Systems
...............

Control Laser, the Company's subsidiary located in Orlando, Florida,
designs, manufactures and markets industrial laser systems for material
marking and engraving. Control Laser accounted for approximately 27% of
the Company's total sales in 1998. With more than 1,950 systems
installed worldwide, including 1,540 in North America, Control Laser had
over 40% of the domestic market share in 1998. Control Laser's Icon and
Insignia laser systems allow for permanent, high speed, computer -
controlled product marking for the aerospace, automotive, medical device,
electronic, tooling and consumer industries. Customers include
Honeywell, ITT, Bosch, Nissan, Ford, General Electric, General Motors and
Chrysler. Control Laser's marking systems can be used independently or
can be utilized as part of an automated assembly line system. During the
fourth quarter of 1998, the Company started delivery of its new "on the
fly marking system called the Instamark Express.

Carbon Dioxide Lasers
.....................

Synrad, the Company's subsidiary based in Mukilteo, Washington,
manufactures a range of sealed CO2 lasers for cutting, marking, drilling
or other machining applications for a variety of materials. The CO2
lasers range in power from 10W to 240W. Currently, Synrad is developing
higher power sealed CO2 lasers up to 600W. Synrad sells primarily to
OEMs and system integrators who incorporate the lasers with suitable
motion systems and optical assemblies and then sell the complete system.
Applications include desktop engraving systems found in many trophy/award
shops throughout the world, large area flatbed systems for cutting
dieboard or airbag material, and 3D prototyping using paper, sintered
metals and other materials to create 3D models and molds directly from
CAD packages. Higher power lasers also are finding uses in manufacturing
plants for trimming of flashing from injection-molded parts in the
automobile industry, cutting textiles and woven fabrics on continuous
production lines, and slitting/sealing of plastic packaging. Synrad also
manufactures a galvo marking head which when configured with a Synrad
laser, provides a fast and effective method of marking parts with lot
codes, serial number/date information and bar-codes. Synrad accounted
for approximately 15% of the Company's total 1998 sales.

Scanners
........

Cambridge, the Company's subsidiary based in Cambridge,
Massachusetts, manufactures high speed mirror positioning components and
sub-systems used to direct laser energy. Cambridge accounted for
approximately 16% to the Company's sales in 1998. These optical scanning
products are key to a variety of applications where visible or invisible
laser energy is positioned quickly and precisely. An increasingly broad
base of laser system applications are served by these products including
laser marking, machining, heat treating, welding and cutting,
semiconductor wafer inspection and processing, laser entertainment,
corporate advertising and a growing number of laser based medical
applications, which include digital radiography, skin resurfacing, eye
treatment and others. With patented designs, Cambridge is a technology
leader in galvanometer-based optical scanning and supports research and
development of new applications through a wide range of academic
institutions, private firms and government agencies.

Photomask Repair Systems
........................

Quantronix, the Company's subsidiary located in East Setauket, New
York, manufactures and markets Defect Repair Systems (DRS) which are
laser based systems for use in semiconductor production. The DRS
provides a means to repair defects on the complex photomasks used to
produce integrated circuits.

A pioneer in this field, Quantronix has provided laser mask repair
systems to the industry since 1975. Currently, the DRSII Model 840e
system has been the industry standard, with over 100 installed Quantronix
repair systems in operation.

In recognition of the demand for smaller, denser features on next
generation integrated circuits, the Company has embarked on a development
program to produce the next generation machines (DRS II Model 850 and
DRSII Model 855) that will support circuit production through the 0.35
microns, 0.25 microns and 0.18 microns design generations, promoting
product viability in the future.

The initial shipment of a DRSII 850 system took place in November of
1996. The Company is currently working on a new updated machine to be
called the DRS II Model 855 which is scheduled for completion in 1999.

The DRSII 855 is being developed in close contact with leaders
within the semiconductor industry. This Quantronix product line
accounted for approximately 4% of the Company's total sales in 1998.

Scientific and Industrial Solid State Lasers
............................................

Quantronix also manufactures and markets solid-state lasers for
science, industry and OEM uses. On a worldwide basis, scientific lasers
represent one of the most stable and long-established laser markets.
Scientific lasers are used by chemists, biologists, physicists and other
scientists and engineers. In this market, end-users are generally
familiar with the various product specifications, features and
reliability, which are the major factors in choosing between competing
products.

Quantronix's current scientific line includes the Titan and Odin
Series Ultrafast Amplifiers and the Series 527 High Power Green lasers.
Quantronix's Ultrafast Amplifiers incorporate a material called Titanium
Sapphire ("Ti:Sapphire") which has created opportunities for a greater
volume of research than previous materials. Ultrafast Amplifiers deliver
high energy short pulses on the femtosecond or picosecond time scale. (A
femtosecond is one quadrillionth of a second, a picosecond is one
trillionth of a second.) These short pulses enable the investigation of
a wide range of physical, chemical and biological phenomena.

The scientific systems utilize Nd:YLF lasers to produce high energy
pulses at a rate of 1kHz (1000 pulses per second). These pulses drive
the Ti:Sapphire Amplifier that can then pump other optical systems (also
marketed by Quantronix) which deliver tunable light from ultraviolet to
infrared regions of the spectrum. The material properties to be studied
vary over this range.

Quantronix's industrial and OEM solid state lasers offer a variety
of Nd:YAG, Ho:YAG and ER:YAG lasers in various configurations for
material processing applications. The wavelengths of these lasers vary
from 1064 nm to 263 nm.

Quantronix's scientific, industrial and solid state laser products
accounted for approximately 20% of the Company's total 1998 sales.

Optical Products
................

Optical, a subsidiary of the Company based in Oxnard, California,
specializes in the manufacture of custom precision optical flats used for
measurement in optical scanners, laser systems, professional motion
picture cameras and other industrial and scientific applications.
Optical accounted for approximately 2% of the Company's sales in 1998.

Light and Color Measurement
...........................

Photo Research, the Company's Chatsworth, California subsidiary, is
a leader in high precision, state of the art electro-optical
instrumentation and systems for light and color measurement. Photo
Research accounted for approximately 9% of the Company's total 1998
sales. The Spectra product line offers systems to a wide variety of
industries for research, quality control and on-line testing. Video
instrumentation provides high resolution CRT and flat panel inspection.
The Photo Research Optical Metrology Laboratory is a supplier of and
service provider to optical radiation standards, calibration and
measurement for major manufacturers of instruments, displays, devices and
materials.

Spare Parts
...........

Quantronix also sells spare parts and related consumable materials
used primarily in its semiconductor, industrial and scientific systems.
This operation is based in East Setauket, New York. Spare parts and
consumables include replacement optical elements, lamps and electronic
components. This Quantronix product line accounted for approximately 7%
of the Company's total sales in 1998.

Marketing and Sales

The Company's Marketing activities include the presentation of its
product lines at domestic and international trade shows and advertising.
The marketing and sales staff conduct professional meetings, conferences
and in-person and telephone sales calls. The Company also engages
independent manufacturers' representatives for the sale of its products.
Foreign sales of its products are made primarily through foreign
equipment distribution organizations and representatives, Quantronix
GmbH, its German subsidiary, and by Excel Technology Asia Sdn. Bhd., its
Malaysian subsidiary. Quantronix GmbH and Excel Technology, Asia are
engaged in the business of marketing, distributing, integrating and
servicing laser systems (for industrial, semiconductor, scientific and
dental products) manufactured at the Company's facilities in East
Setauket, New York; Orlando, Florida; and Mukilteo, Washington. The
sales territory covered by Quantronix GmbH is primarily Europe and the
sales territory for Excel Technology, Asia is primarily southeast Asia.
The staff of 23 includes 11 engineers who install and service all
products including complex semiconductor, scientific, and other
industrial systems. In addition, Quantronix GmbH provides spare parts
for its installed base.

The following table represents a breakdown between the Company's
domestic and foreign revenues for the years ended December 31, 1998, 1997
and 1996 (in thousands of dollars).

1998 1997 1996
................ ................ ................
Dollars Percent Dollars Percent Dollars Percent
....... ....... ....... ....... ....... .......
DOMESTIC $42,157 63% $42,186 64% $37,781 66%
FOREIGN 24,935 37% 23,762 36% 19,681 34%
....... .... ....... .... ....... ....

TOTAL $67,092 100% $65,948 100% $57,462 100%
....... .... ....... .... ....... ....
....... .... ....... .... ....... ....

Manufacturing

The Company assembles its products at its facilities in East
Setauket, New York; Orlando, Florida; Oxnard, California; Cambridge,
Massachusetts; Chatsworth, California; and Mukilteo, Washington. The
Company relies upon unaffiliated suppliers for the material components
and parts used to assemble its products. Most parts and components
purchased from suppliers are available from multiple sources. To date,
the Company has not experienced any significant delays in obtaining parts
and components for its products. The Company believes that it will be
able to continue to obtain most required components and parts from a
number of different suppliers, although there can be no assurance
thereof. Lack of availability of certain components could require major
redesign of the products and could result in production delays.

Warranty and Customer Services

The Company's warranty for all of its new products varies between
three months and twelve months. The Company also provides field support
services on an individual call basis and through service maintenance
contracts and provides customer support services by telephone to
customers with operational and service problems.

Research and Development

Due to the intense competition and rapid technological change in the
laser and optical industries, the Company believes that it must continue
to improve and refine its existing products and systems and develop new
applications for its technology. Research and development expenses for
the years ended December 31, 1998, 1997 and 1996 were $5.59 million,
$4.86 million and $4.41 million, respectively.

Competition

The laser industry is subject to intense competition and rapid
technological change. Several of the Company's competitors are
substantially larger and have greater financial and other resources than
the Company. Competition among laser manufacturers extends to attracting
and retaining qualified technical personnel. The overall competitive
position of the Company will depend primarily upon a number of factors,
including the price and performance of its products, the compatibility of
its products with existing laser systems and the Company's overall
reputation in the laser industry.

The Company's scientific and industrial solid state lasers face a
number of competitors including Spectra Physics and Coherent Inc., which
are two of the largest solid state laser companies.

The Company's marking systems for material marking applications
compete primarily with those manufactured by A.B. Laser, Lumonics,
Electrox and Rofin-Sinar. These products have generally been subject to
intense price competition in recent years.

In the semiconductor photomask repair market, the Company primarily
competes with NEC. The market for semiconductor products recently has
been oversaturated and has experienced rapid advances in miniaturization
of integrated circuits and computers. These factors are behind the
Company's commitment to continue developing its next generation mask
repair products.

Competition for sealed carbon dioxide lasers comes from Coherent,
Inc. and more recently DEOS, Inc. and Universal Laser Systems. Rofin-
Sinar, a large European manufacturer of industrial lasers, also is
developing competitive products.

In light and color measurement, the major competitor to the
Company's Spectra product is Minolta. Minolta has approximately a 30% to
35% worldwide market share compared with Photo Research's 20% to 25%
share. In the on-line video inspection market, the Company is a
technical leader with Microvision as its key competitor.

In the laser scanner market, General Scanning, which has an
estimated current market share of 45%, is a significant competitor of the
Company. General Scanning also was one of the Company's largest
customers for scanners in 1998 and 1997. The Company has a significant
market presence worldwide with greater than 50% of the closed-loop
optical scanners.

Backlog

As of December 31, 1998, the Company had a backlog of firm orders of
approximately $19 million as compared to a backlog of $14 million as of
December 31, 1997. The Company believes that the current backlog will be
filled during the present fiscal year. Historically, backlog is shipped
within 90 days from the order date.

Patents and Licenses

The Company has several United States patents covering a wide
variety of its products and has applications pending in the United States
patent office. There can be no assurance that any other patents will be
issued to the Company or that such patents, if and when issued, will
provide any protection or benefit to the Company. Although the Company
believes that its patents and its pending patent applications are
valuable, the Company does not consider the ownership of patents
essential to its business. The Company believes that, in general, the
best protection of proprietary technology in the laser industry will come
from market position, technical innovation and product performance.
There is no assurance that any of these advantages will be realized by
the Company.

Government Regulation

The Company is subject to the laser radiation safety regulations of
the Radiation Control for Health and Safety Act administered by the
National Center for Devices and Radiological Health of the FDA. Among
other things, these regulations require a laser manufacturer to file new
product and annual reports, to maintain quality control and sales
records, to perform product testing, to distribute appropriate operating
manuals, to incorporate certain design and operating features in lasers
sold to end-users and to certify and label each laser sold to end-users
as one of four classes (based on the level of radiation from the laser
that is accessible to users). Various warning labels must be affixed and
certain protective devices installed depending on the class of product.
The National Center for Devices and Radiological Health is empowered to
seek fines and other remedies for violations of the regulatory
requirements. The Company believes that it is currently in compliance
with these regulations.

There are two principal methods by which FDA regulated products may
be marketed in the United States. One method is an FDA pre-market
notification filing under Section 510(k) of the Food, Drug and Cosmetics
Act (a "510(k) Application"). Applicants under the 510(k) procedure must
demonstrate that the device for which approval is sought is substantially
equivalent to devices on the market prior to the Medical Device
Amendments of 1976 or devices approved thereafter pursuant to the 510(k)
procedure. The review period for a 510(k) Application is 90 days from
the date of filing the application. While applications not rejected
within the 90-day period are deemed approved, applicants typically defer
marketing until a favorable response to the 510(k) Application is
received from the FDA. In 1992, the Company's three dental products
received 510(k) approval for use in soft tissue applications.

The alternate method, where section 510(k) is not available, is to
obtain pre-market approval ("PMA") from the FDA. Under the PMA
procedure, the applicant must obtain an investigational device exemption
before beginning the substantial clinical testing required to determine
the safety, efficacy and potential hazards of the product. The
preparation of a PMA application is significantly more complex and time
consuming than the 510(k) Application. The review period under a PMA
application is 180 days from the date of filing but the application is
not automatically deemed approved if not rejected during the period and
the FDA often responds with requests for additional information or
clinical reports. The PMA approval process can take up to several years.

The FDA also imposes various requirements on manufacturers and
sellers of products under its jurisdiction, such as labeling,
manufacturing practices, record keeping and reporting requirements. The
FDA also may require post-market testing and surveillance programs to
monitor a product's effects. There can be no assurance that the
appropriate approvals from the FDA will be granted, that the process to
obtain such approvals will not be excessively expensive or lengthy or
that the Company will have sufficient funds to pursue such approvals at
the time they are sought. The failure to receive requisite approvals for
the Company's products or processes, when and if developed, or
significant delays in obtaining such approvals, would prevent the Company
from commercializing its products as anticipated and would have a
materially adverse effect on the business of the Company.

Foreign Regulatory Requirements

Foreign sales of the Company's dental and medical laser systems are
or will be subject in each case to approval by the recipient country.
Regulatory requirements vary widely among the countries, from electrical
approvals to clinical applications similar to the PMA applications filed
with the FDA for sales in the United States. The Company has obtained
appropriate approvals for its dental products in Japan, Korea and certain
European countries including Germany.

Employees

As of December 31, 1998, the Company had 415 full-time employees,
consisting of 2 executive officers, 13 subsidiary executive officers, 116
scientists, engineering and technical personnel and 284 manufacturing,
administrative and sales support personnel. The Company believes that
its relations with its employees are satisfactory. None of the Company's
employees is represented by a union.

Financial Information About Foreign and Domestic Operations and Export
Sales

For the years ended December 31, 1998, 1997 and 1996, the Company
had net sales to customers in foreign countries amounting to
approximately $24.9 million, $23.8 million and $19.7 million,
respectively (approximately 37%, 36% and 34% of total net sales and
services, respectively). These sales included sales by Quantronix GmbH,
the Company's German subsidiary. Quantronix GmbH buys laser systems,
spare parts and related consumable materials from Quantronix and Control
Laser, the Company's New York and Florida subsidiaries, for resale to
European and other foreign customers, and also furnishes field repair
services. See Note 13 of the "Notes to Consolidated Financial
Statements."

Foreign currency translation for Quantronix GmbH, the Company's
subsidiary in Germany, is performed utilizing the current rate method
under which assets and liabilities are translated at the exchange rate on
the balance sheet date, except for property, plant and equipment which is
translated at historical rates, while revenues, costs and other expenses
are translated at the average exchange rate for the reporting period.
The resulting translation adjustment of $(53) thousand and $(256)
thousand at December 31, 1998 and 1997, respectively, is included as a
component of stockholders' equity. Currency and exchange rate
fluctuations from transaction gains and losses resulted in a net gain of
$55 thousand and net losses of $167 thousand and $178 thousand for the
years ended December 31, 1998 , 1997 and 1996, respectively. Such
amounts are based upon the accounting treatment of foreign intercompany
balances and transaction gains and losses.

ITEM 2. PROPERTIES

Excel leases approximately 2,900 square feet in New York City from
an unaffiliated landlord for its corporate offices. The lease is for a
five-year period at an average annual rent of $108,000, and expires in
November 2001.

Quantronix constructed its own building during 1997 which was
completed during 1998. The building is approximately 33,500 square feet
located in East Setauket, New York. The building is used for its
manufacturing operations and administrative offices.

Control Laser leases a 50,000 square foot building in Orlando,
Florida from an unaffiliated landlord, which it utilizes for
administrative offices and laser manufacturing operations. Annual rent
is approximately $240,000. The lease expires in December 2001.

Optical leases a 14,000 square foot building in Oxnard, California
from an unaffiliated landlord for manufacturing purposes, at an annual
rent of approximately $90,000. The lease term expired in December 1998.
Optical continues to lease the facility on a month-to-month basis while
searching for another facility.

Cambridge leases a 17,000 square foot building in Cambridge,
Massachusetts from an unaffiliated landlord for manufacturing operations
and administrative offices. The lease is for a ten-year period ending in
October 2006, at an annual rent of approximately $150,000 through October
2003 and $175,000 from November 2003 through October 2006.

Quantronix GmbH leases approximately 7,500 square feet of office
space, used for sales and service, in Darmstadt, Germany from an
unaffiliated landlord at an average annual rent of approximately
$106,000. The lease expires in June 2005.

Photo Research purchased its own building in July 1998. The
building is approximately 22,000 square feet and is located in
Chatsworth, California. The building is used for manufacturing
operations and administrative offices.

Synrad leases a 50,000 square foot building in Mukilteo, Washington
from an unaffiliated landlord, which it utilizes for manufacturing, sales
and administrative operations. Annual rent is approximately $728,000,
which includes all utilities. The lease is for a five year period and
expires in April, 2001.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company has disputes that arise in the
ordinary course of its business, none of which the Company believes
should have a material impact on its business. Currently, there are no
material pending legal proceedings to which the Company or its
subsidiaries is a party or to which any of their property is subject.

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

None.

PART II
.......

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

The Common Stock has been traded on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") under the symbol
"XLTC" since May 1991, the date of the Company's initial public offering,
and on the NASDAQ National Market System since October 2, 1992. The
following table sets forth the high and low bid quotations reported on
NASDAQ NMS for the Common Stock for the periods indicated.

Year ended: High Low
...... .......

December 31, 1998
First Quarter 11-1/4 9-5/8
Second Quarter 10-13/16 8-3/16
Third Quarter 9-1/4 6-3/8
Fourth Quarter 10-5/16 5-3/4

December 31, 1997
First Quarter 10-1/8 7-1/4
Second Quarter 9-1/4 7-1/2
Third Quarter 13-3/8 8-5/8
Fourth Quarter 15-3/8 8-3/4

The above quotations represent prices between dealers, do not
include retail mark-ups, markdowns or commissions and do not necessarily
reflect actual transactions.

As of March 10, 1999, there were approximately 858 holders of record
of Common Stock. Since many shares are registered in street name, the
number of beneficial owners is considerably higher.

The Company has never paid cash dividends on its Common Stock.
Payment of dividends to holders of the Common Stock is within the
discretion of the Company's Board of Directors and will depend, among
other factors, on earnings, capital requirements and the operating and
financial condition of the Company. In addition, under the Company's
revolving line of credit no dividends can be declared. At the present
time, the Company's anticipated capital requirements are such that it
intends to follow a policy of retaining earnings, if any, in order to
finance the development of its business.

ITEM 6. SELECTED FINANCIAL DATA

The following tables summarize certain consolidated financial data
which should be read in conjunction with the report of the Company's
independent auditor and the more detailed consolidated financial
statements and notes thereto which appear elsewhere herein.

Statement of Operations Data

Year Ended December 31,
...........................................................
1998 1997 1996 1995 1994
........... .......... .......... .......... ..........
Net sales and
services $67,091,933 65,947,896 57,462,263 43,914,222 33,550,842

Net earnings
(loss) $ 8,881,464 8,234,697 4,892,826 (1,595,835) 1,890,279

Net earnings (loss) per share
Basic $0.79 $0.77 $0.55 ($0.21) $0.22
Diluted $0.78 $0.73 $0.50 ($0.21) $0.22

Weighted average common and
common equivalent shares outstanding

Basic 11,190,197 10,686,763 8,862,217 8,281,194 7,632,230
Diluted 11,395,186 11,327,086 9,757,411 8,281,194 8,563,600

Common stock
cash dividends 0 0 0 0 0

Preferred stock
cash dividends 0 0 0 $162,137 $187,981

Balance Sheet Data
As of December 31,
.......................................................
1998 1997 1996 1995 1994
........... .......... .......... .......... ..........
Total assets $71,293,164 59,219,681 39,816,442 43,007,614 33,082,983
Total liabilities $14,141,209 8,316,574 10,800,102 20,948,036 9,727,602
Working capital $25,577,458 37,166,960 17,492,287 17,609,490 20,963,663
Stockholders'
equity $57,151,955 50,903,107 29,016,340 22,059,578 23,355,381

Long-term
liabilities $ 3,500,000 0 0 7,573,320 3,348,141

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

General
.......

The following discussion should be read in conjunction with the
consolidated financial statements of the Company and notes thereto set
forth elsewhere herein.

Summary
.......

The Company achieved revenues of approximately $67.1 million for the
year ended December 31, 1998 as compared to approximately $66 million and
$57.5 million for the years ended December 31, 1997 and 1996,
respectively. Earnings before provision for income taxes were
approximately $13.7 million, $12.6 million and $7.1 million for the years
ended December 31, 1998, 1997 and 1996, respectively. The net earnings
and earnings per share on a diluted basis were approximately $8.9 million
and $0.78 per share in 1998. Excluding the non-recurring investment gain
(after tax effect) in 1998, net earnings and earnings per share on a
diluted basis were approximately $7.8 million and $0.68 per share. The
net earnings and earnings per share on a diluted basis were approximately
$8.2 million and $0.73 per share in 1997 and $4.9 million and $0.50 per
share in 1996.

The following table presents consolidated financial data for the
years ended December 31, 1998, 1997 and 1996 (in thousands of dollars and
as a percentage of total net sales and services.)

Results of Operations
.....................

1998 1997 1996
.... .... ....
Dollars Percent Dollars Percent Dollars Percent
....... ....... ....... ....... ....... .......
Net Sales and Services $67,092 100.0% $65,948 100.0% $57,462 100.0%
Cost of Sales 34,184 51.0% 33,245 50.4% 31,004 54.0%
....... ....... ....... ....... ....... .......
Gross Margin 32,908 49.0% 32,703 49.6% 26,458 46.0%

Operating Expenses:
Selling and Marketing 9,833 14.7% 10,639 16.1% 9,743 17.0%
General and
Administrative 5,565 8.3% 4,805 7.3% 4,212 7.3%
Research and Development 5,586 8.3% 4,861 7.4% 4,406 7.7%
Amortization of Goodwill 723 1.1% 370 0.6% 508 0.9%
....... ....... ....... ....... ....... .......
Earnings from Operations 11,201 16.6% 12,028 18.2% 7,589 13.1%

Non-Operating
Expense (income) (2,482) (3.7%) (615) (1.0%) 511 0.8%
....... ....... ....... ....... ....... .......
Earnings before
provision for
Income Taxes 13,683 20.3% 12,643 19.2% 7,078 12.3%
Provision for
Income Taxes 4,802 7.1% 4,408 6.7% 2,185 3.8%
....... ....... ....... ....... ....... .......
Net Earnings $ 8,881 13.2% $ 8,235 12.5% $ 4,893 8.5%
....... ....... ....... ....... ....... .......
....... ....... ....... ....... ....... .......

Net Sales and Services
......................

Net sales and services for the year ended December 31, 1998
increased to $67.1 million from $65.9 million in 1997 and from $57.5
million in 1996. The increase from 1997 to 1998 of $1.2 million or 1.8
percent was attributable to the acquisition of Synrad, which was
partially offset by a decrease in sales for all products. The increase
of $8.4 million or 14.6 percent from 1996 to 1997 was attributable to
increased sales of all products with the exception of dental.

Gross Margins and Cost of Sales
...............................

Gross margins as a percentage of sales were 49.0 percent compared to
49.6 percent in 1997 and 46.0 percent in 1996. Cost of sales and
services increased to $34.2 million from $33.2 million in 1997 and $31.0
million in 1996. The decrease in gross margins as a percentage of sales
was primarily due to the product mix sold during the year and the
decrease in sales volume. The increase from 1996 to 1997 was primarily
due to improved efficiencies in manufacturing and product mix.

Operating Expenses
..................

Selling and Marketing

Selling and marketing expenses were $9.8 million compared to $10.6
million in 1997 and $9.7 million in 1996. The decrease of $800 thousand
or 7.5 percent was primarily attributable to lower commission expenses
during the year. Selling and marketing expenses as a percentage of sales
decreased to 14.7 percent in 1998 from 16.1 percent in 1997 and 17.0
percent in 1996.

General and Administrative

General and administrative expenses increased to $5.6 million in
1998 from $4.8 million in 1997 and $4.2 million in 1996. The increase of
$760 thousand or 15.8 percent in 1998 was primarily due to the start-up
of our Asian operations in Malaysia and the additional general and
administrative costs of Synrad. General and administrative expenses as a
percentage of sales increased to 8.3 percent as compared to 7.3 percent
in 1996 and 1997.

Research and Development

Research and development costs for the year ended December 31, 1998
were $5.6 million as compared to $4.9 million and $4.4 million for the
years ended December 31, 1997 and 1996, respectively. The increase from
1997 to 1998 was primarily attributable to increased research and
development projects and the acquisition of Synrad. The increase of $500
thousand from 1996 to 1997 was attributable to increased research and
development activity in all products with the exception of dental.

Amortization of Goodwill

The amortization of the excess of cost over fair value of the net
assets of businesses acquired of $723 thousand, $370 thousand and $508
thousand for the years ended December 31, 1998, 1997 and 1996,
respectively, was a result of the acquisition of Quantronix in October
1992, Cambridge in February 1995, Photo Research in October 1995, and
Synrad in August 1998. The increase in 1998 was primarily due to the
acquisition of Synrad. The decrease in 1997 was primarily a result of a
reduction in goodwill due to the establishment of a deferred tax asset in
1996.

Other Income/Expense

Interest expense was $174 thousand, $160 thousand and $608 thousand
for the years ended December 31, 1998, 1997 and 1996, respectively.
Interest expense increased $14 thousand or 8.8 percent from 1997 to 1998
due to the borrowings associated with the acquisition of Synrad.
Interest expense decreased $448 thousand or 74 percent from 1996 to 1997
due to the Company's prepayment of all its term loans with U.S. Trust and
repayment of other long-term debt and notes payable.

The decrease in interest income of $104 thousand from $872 thousand
in 1997 to $768 thousand in 1998 was due to a decrease in the average
investment balances resulting from the utilization of cash and
investments for the acquisition of Synrad. The increase in interest
income of $578 thousand from $294 thousand in 1996 to $872 thousand in
1997 was due to increased average investments.

Other income/expense for the year ended December 31, 1998 was $1.89
million of income compared to $97 thousand of expense in 1997. The
income in 1998 was due primarily to the $1.9 million gain on sale of an
investment and foreign exchange gains.

Liquidity and Capital Resources
...............................

Working capital at December 31, 1998 and 1997 was $25.6 and $37.2
million, respectively. Cash, cash equivalents and investments decreased
by approximately $14.7 million from December 31, 1997 to December 31,
1998. Such decrease was primarily attributable to the cash utilized in
the acquisition of Synrad of $15.2 million, capital expenditures of $5.4
million, the purchase of Treasury Stock of $3.2 million and the repayment
of debt associated with the acquisition of Synrad of $3 million offset by
the net cash provided by operating activities of approximately $10
million and the proceeds from the gain on sale of an investment of $1.9
million. The increase in the balances of accounts receivable and
inventory in 1998 was a result of the acquisition of Synrad.

The Company had capital expenditures of approximately $5.4 million
for the year ended December 31, 1998 which included the purchase of two
new buildings. The Company had capital expenditures of $3.9 million in
1997. The Company anticipates spending approximately $3.5 million for
capital expenditures in 1999.

On August 14, 1998, the Company acquired substantially all of the
assets and properties of Synrad, a company engaged in the business of
developing, manufacturing and marketing sealed CO2 lasers and related
accessories. In accordance with the Asset Purchase Agreement, Excel
Purchasing Company (name changed to Synrad, Inc.) purchased substantially
all of the net assets and properties of Synrad for consideration of
approximately $21.7 million in cash, which includes transaction costs and
the repayment of certain of Synrad's outstanding debt. In addition, the
Company assumed certain liabilities, including trade payables, accrued
expenses and other specified liabilities. The Company funded the
acquisition of Synrad by utilizing its own cash and by borrowing $6.5
million on its credit facility with The Bank of New York.

On July 23, 1998, the Company entered into a $15 million revolving
line of credit with The Bank of New York (the "Bank") for acquisition or
working capital requirements, which matures on July 22, 2003. The
Company borrowed $6.5 million under the line of credit to fund the
acquisition of Synrad. The Company repaid $3 million in December 1998.
At December 31, 1998, the Company had approximately $11.5 million
available for borrowing under the line of credit. Subsequently, on
January 15, 1999 the Company repaid another $1.25 million of this debt.
(See Note 8.)

On January 23, 1998 the Board of Directors authorized the Company to
repurchase up to 2,000,000 of its common shares in the open market at
prevailing market prices. In 1998, the Company purchased 382,763 shares
of its common shares as treasury stock as compared to 375,000 shares
purchased in 1997.

The Company estimates that its current resources and anticipated
cash to be generated from operations will be sufficient to meet its cash
requirements for at least the next 12 months.
Year 2000 Compliance

In 1997, the Company commenced a Year 2000 date conversion project
to address necessary changes, testing and implementation with respect to
its internal computer systems. Project completion is scheduled for June
1999. To date, the cost of this project has not been material to the
Company's results of operations and liquidity and the Company does not
anticipate that the cost of completing the project will be material to
its results of operations or liquidity in 1999. Management anticipates
that the Company's Year 2000 date conversion project as it relates to the
Company's internal systems will be completed on a timely basis.

The Company's applicable products are Year 2000 compliant.

The Company is currently seeking information regarding Year 2000
compliance from vendors, customers and manufacturers associated with the
Company. Project completion for this phase is planned for the middle of
1999. However, given the reliance on third-party information as it
relates to their compliance programs and the difficulty of determining
potential errors on the part of the external service suppliers, no
assurance can be given that the Company's information systems or
operations will not be affected by mistakes, if any, of third parties or
third-party failures to complete the Year 2000 project on a timely basis.
There can be no assurance that the systems of other companies on which
the Company's systems rely will be timely converted or that any such
failure to convert by another company would not have an adverse effect on
the Company's systems.

The cost of the Company's Year 2000 project and the date on which
the Company believes it will complete the necessary modifications are
based on the Company's estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of
resources, third party modification plans and other factors. The Company
presently believes that the Year 2000 issue will not pose significant
operational problems for its internal information systems and products.
However, if the anticipated modifications and conversions are not
completed on a timely basis, or if the systems of other companies on
which the Company's systems and operations rely are not converted on a
timely basis, the Year 2000 issue could have an adverse effect on the
Company's operations.

The Company does not currently have any contingency plans in place
to address the failure of timely conversion of its and /or third-party
systems with respect to the Year 2000 issue.

Euro Conversion

The January 1, 1999 adoption of the Euro created a single-currency
market in much of Europe. For a transition period from January 1, 1999
through January 1, 2002, the existing local currencies are anticipated to
remain legal tender as denominations of the Euro. The Company does not
anticipate that its operations will be materially adversely affected by
the conversion to the Euro. The Company has analyzed the impact of
conversion to the Euro on its existing systems and operations and
implemented modifications to its systems to enable the Company to handle
Euro invoicing for transactions commencing in 1999. The Company
anticipates that the cost of such modifications should not have a
material adverse effect on its results of operations or liquidity.

New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards, No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities". This
statement is effective for all fiscal quarters and fiscal years beginning
after June 15, 1999. The adoption of this statement is expected to have
no impact on the Company's results of operations or financial position.

Inflation

In the opinion of management, inflation has not had a material
effect on the operations of the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Follow on next page.

EXCEL TECHNOLOGY, INC.

Index to Consolidated Financial Statements and
Financial Statement Schedule filed with the Annual
Report of the Company on Form 10-K
For the Year ended December 31, 1998.

Page
....

Independent Auditors' Report 20

Consolidated Financial Statements:

Balance Sheets as of December 31, 1998 and 1997 21

Statements of Earnings for each of the three years in the
period ended December 31, 1998. 22

Statements of Stockholders' Equity for each of the three years
in the period ended December 31, 1998. 23

Statements of Cash Flows for each of the three years
in the period ended December 31, 1998. 24

Notes to Consolidated Financial Statements. 25

Additional Financial Information Pursuant
to the Requirements of Form 10-K:

Schedule II - Valuation and Qualifying Accounts and Reserves 40

.............

Schedules not listed above have been omitted because they are either not
applicable or the required information has been given elsewhere in the
consolidated financial statements or notes thereto.

Independent Auditors' Report
............................

Board of Directors and Stockholders
Excel Technology, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of
Excel Technology, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of earnings, stockholder's equity
and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Excel Technology, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity
with generally accepted accounting principles.

KPMG LLP

Melville, New York
January 20, 1999

EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997

Assets 1998 1997
.... ....
Current assets:
Cash and cash equivalents $ 5,839,339 6,331,159
Investments 0 14,209,854
Accounts receivable, less allowance
for doubtful accounts of $426,000 in 1998
and $254,000 in 1997 13,383,865 11,522,041
Inventories 15,672,576 12,143,140
Deferred income taxes 873,100 692,500
Other current assets 449,787 584,840
............ ...........

Total current assets 36,218,667 45,483,534
............ ...........
Property, plant and equipment, net 10,874,881 5,392,955
Other assets 497,664 545,725
Deferred income taxes 1,371,000 1,674,600
Excess of cost over fair value of net assets
of businesses acquired, net of accumulated
amortization of $ 2,572,637 and $1,849,332 22,330,952 6,122,867

$ 71,293,164 59,219,681
............ ...........
............ ...........

Liabilities and Stockholders' Equity

Current liabilities:
Notes payable $ 105,304 182,888
Accounts payable 3,612,934 2,235,109
Accrued expenses and other
current liabilities 6,922,971 5,898,577
............ ...........

Total current liabilities 10,641,209 8,316,574
............ ...........

Long-term debt 3,500,000 0

Stockholders' equity:
Preferred stock, par value $.001 per share,
2,000,000 shares authorized, none issued 0 0
Common stock, par value $.001 per share:
20,000,000 shares authorized, 11,810,349
and 11,714,471 shares issued
in 1998 and 1997 11,810 11,714
Additional paid-in capital 49,116,700 48,726,078
Retained earnings 14,641,834 5,760,370
Treasury stock, 757,763 shares in 1998 and
375,000 shares in 1997 (6,565,794) (3,339,375)
Accumulated other comprehensive income (52,595) (255,680)
............ ...........
57,151,955 50,903,107
............ ...........
$ 71,293,164 59,219,681
............ ...........
............ ...........

See accompanying Notes to Consolidated Financial Statements.

EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31, 1998, 1997 and 1996

1998
1997 1996
...........
.......... ..........

Net sales and services
$67,091,933 65,947,896 57,462,263
Cost of sales and services
34,184,072 33,245,432 31,004,440

........... .......... ..........

Gross profit
32,907,861 32,702,464 26,457,823

........... .......... ..........

Operating expenses:
Selling and marketing
9,832,757 10,639,570 9,742,409
General and administrative
5,565,365 4,805,284 4,212,261
Research and development
5,586,127 4,860,903 4,406,364
Amortization of excess cost over fair value
of net assets of businesses acquired
723,305 369,704 508,124

........... .......... ..........

21,707,554 20,675,461 18,869,158

........... .......... ..........

Earnings from operations
11,200,307 12,027,003 7,588,665

........... .......... ..........
Non operating expenses (income):
Interest expense
174,358 159,888 608,349
Interest income
(767,576) (872,481) (294,114)
Other (income) expense, net
(1,889,716) 96,814 196,902

Earnings before provision for income taxes
13,683,241 12,642,782 7,077,528
Provision for income taxes
4,801,777 4,408,085 2,184,702

........... .......... ..........

Net earnings
8,881,464 8,234,697 4,892,826
Preferred stock dividends
0 0 54,273

........... .......... ..........

Net earnings available to common shareholders $
8,881,464 8,234,697 4,838,553

........... .......... ..........

........... .......... ..........

Basic earnings per common share $
0.79 0.77 0.55

........... .......... ..........

........... .......... ..........

Weighted average common shares outstanding
11,190,197 10,686,763 8,862,217

........... .......... ..........

........... .......... ..........

Diluted earnings per common share $
0.78 0.73 0.50

........... .......... ..........

........... .......... ..........

Weighted average common shares and common equivalents
11,395,186 11,327,086 9,757,411

........... .......... ..........

........... .......... ..........

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of
Stockholders' Equity
Years Ended December 31, 1998,
1997 and 1996

Retained Accumulated

Additional Earnings Other Com- Compre-
Preferred Stock Common Stock Treasury
Paid-In (Accumulated prehensive hensive
Shares Amounts Shares Amounts Stock
Capital Deficit) Income Total Income
....... ....... ........ ....... ..........
........... ........... ......... ............ .........

Balance at
December 31, 1995 405,342 $ 405 8,347,453 $ 8,347 0
$29,360,278 $(7,367,153) $ 57,701 $22,059,578 0
Exercise of common
stock options and
warrants 0 0 436,470 437 0
2,198,785 0 0 2,199,222 0
Conversion of
preferred stock (405,342) (405) 405,342 405 0
0 0 0 0 0
Net earnings for
the year 0 0 0 0 0
0 4,892,826 0 4,892,826 4,892,826
Foreign currency trans-
lation adjustment 0 0 0 0 0
0 0 (135,286) (135,286) (135,286)
Comprehensive income,
net of tax 0 0 0 0 0
0 0 0 0 4,757,540
....... ...... .......... ....... ............
........... ............ ......... ............ .........
Balance at
December 31, 1996 0 0 9,189,265 9,189 0
31,559,063 (2,474,327) (77,585) 29,016,340 0
Exercise of common
stock options and
warrants 0 0 2,525,206 2,525 0
17,167,015 0 0 17,169,540 0
Acquisition of
treasury stock 0 0 0 0 (3,339,375)
0 0 0 (3,339,375) 0
Net earnings for
the year 0 0 0 0 0
0 8,234,697 0 8,234,697 8,234,697
Foreign currency trans-
lation adjustment 0 0 0 0 0
0 0 (178,095) (178,095) (178,095)
Comprehensive income,
net of tax 0 0 0 0 0
0 0 0 0 8,056,602
....... ...... .......... ....... ............
........... ............ ......... ............ .........
Balance at
December 31, 1997 0 0 11,714,471 11,714 (3,339,375)
48,726,078 5,760,370 (255,680) 50,903,107 0
Exercise of common
stock options and
warrants 0 0 95,878 96 0
390,622 0 0 390,718 0
Acquisition of
treasury stock 0 0 0 0 (3,226,419)
0 0 0 (3,226,419) 0
Net earnings
for the year 0 0 0 0 0
0 8,881,464 0 8,881,464 8,881,464
Foreign currency trans-
lation adjustment 0 0 0 0 0
0 0 203,085 203,085 203,085
Comprehensive income,
net of tax 0 0 0 0 0
0 0 0 0 9,084,549
....... ...... .......... ....... ............
........... ............ .......... ........... .........
Balance at
December 31, 1998 0 $ 0 11,810,349 $11,810 $(6,565,794)
$49,116,700 $14,641,834 $(52,595) $57,151,955 0
....... ...... .......... ....... ............
........... ............ ......... ............ .........
....... ...... .......... ....... ............
........... ............ ......... ............ .........

See accompanying Notes to Consolidated Financial Statements.

EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996

1998
1997 1996
.............
............ ...........

Cash flows from operating activities:
Net earnings $ 8,881,464
8,234,697 4,892,826
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,238,350
1,479,499 1,371,942
Provision for bad debts 110,337
71,722 82,743
Deferred income taxes 123,000
139,000 735,000
Gain on sale of investment (1,875,537)
0 0
Changes in operating assets and liabilities, net of
effects from acquisitions:
Decrease (increase) in accounts receivable 1,121,402
(2,448,303) (1,874,724)
(Increase) decrease in inventories (154,313)
(1,165,733) 2,313,322
Decrease (increase) in other current assets 226,350
(52,545) 157,486
(Increase) decrease in other assets (14,927)
29,239 92,622
Increase (decrease) in accounts payable 21,758
73,369 (890,803)
(Decrease) increase in accrued expenses and
other current liabilities (701,456)
471,521 (1,043,627)
.............
........... ...........
Net cash provided by operating activities 9,976,428
6,832,466 5,836,787
.............
........... ...........

Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired (15,242,943)
(723,150) (1,331,237)
Purchases of property, plant and equipment (5,379,850)
(3,902,132) (1,561,487)
Redemption (purchase) of investments, net 14,209,854
(10,133,809) 1,811,648
Proceeds from sale of investment 1,875,537
0 522,178
.............
........... ...........

Net cash used in investing activities (4,537,402)
(14,759,091) (558,898)
.............
........... ...........
Cash flows from financing activities:
Proceeds from exercise of common stock options and warrants 390,718
17,169,540 2,199,222
Purchase of treasury stock (3,226,419)
(3,339,375) 0
Payment of preferred stock dividend 0
0 (162,137)
Payments of notes payable (298,230)
(382,244) (268,501)
Payments of borrowings on long term debt
and revolving credit line, net (3,000,000)
(1,923,024) (6,327,137)
.............
........... ...........

Net cash (used in) provided by
financing activities (6,133,931)
11,524,897 (4,558,553)
.............
........... ...........

Effect of exchange rate changes on cash and cash equivalents 11,605
(2,797) (6,721)
Effect of exchange rate changes on assets and liabilities 191,480
(175,298) (128,565)
.............
........... ...........
Net (decrease) increase in cash and cash equivalents (491,820)
3,420,177 584,050
Cash and cash equivalents - beginning of year 6,331,159
2,910,982 2,326,932
.............
........... ...........
Cash and cash equivalents - end of year $ 5,839,339
6,331,159 2,910,982
.............
........... ...........
.............
........... ...........

Supplemental disclosure of cash flow information
Cash paid for:
Interest $ 166,176
159,888 606,801
.............
........... ...........
.............
........... ...........
Income taxes $ 4,021,809
3,989,709 1,577,756
.............
........... ...........
.............
........... ...........

EXCEL TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997

(1) Summary of Significant Accounting Policies
..........................................

(a) Principles of Consolidation
...........................

The consolidated financial statements include the accounts of Excel
Technology, Inc. (Excel), its wholly-owned subsidiaries, Synrad, Inc.
(Synrad), Photo Research, Inc. (Photo Research), Cambridge Technology,
Inc. (Cambridge), Control Laser Corporation and Quantronix Corporation
(Quantronix), and Quantronix's wholly-owned subsidiaries, The Optical
Corp., Quantronix International Corporation (a FSC) and Quantronix GmbH
(collectively referred to as the Company). All material intercompany
transactions and balances have been eliminated in consolidation.

(b) Nature of Business
..................

Excel designs, develops, manufactures and markets laser systems and
electro-optical components, primarily for the electronic, semiconductor,
dental, scientific and other industrial markets.

(c) Revenue Recognition
...................

Net sales and services are recognized when the earnings process is
complete, generally upon shipment of products or performance of services.

(d) Investments and Cash Equivalents
................................

The Company records debt and equity securities that have readily
determinable fair values at fair value unless they are classified as held
to maturity. Investments are classified as held to maturity and carried
at amortized cost only if the Company has a positive intent and ability
to hold those securities to maturity. If not classified as held to
maturity, investments are classified as trading securities or securities
available for sale. Unrealized gains or losses for securities available
for sale are excluded from earnings and reported as a net amount as a
separate component of stockholders' equity. Unrealized holding gains and
losses for trading securities are included in earnings. Investments,
which consist primarily of commercial paper, are recorded at fair value.
The Company has classified its investments as trading securities as of
December 31, 1997. The cost of the investments approximated fair value.
Investments with original maturities of three months or less at the time
of purchase are considered cash equivalents. Cash and cash equivalents
of $5.8 million and $6.3 million at December 31, 1998 and 1997,
respectively, consist primarily of money market funds.

(e) Inventories
...........

Inventories consist of material, labor and overhead and are stated
at the lower of average cost or market. Average cost approximates actual
cost on a first-in, first-out basis.

(f) Depreciation and Amortization
.............................

The Company's property, plant and equipment, recorded at cost, are
depreciated or amortized over their estimated useful lives under the
straight-line method. Leasehold improvements are amortized over the life
of the lease or the estimated life of the asset, whichever is less.

Patents are amortized over their estimated useful lives, not
exceeding 17 years, using the straight-line method.

The excess of cost over fair value of net assets of businesses
acquired ("goodwill") is amortized on a straight-line basis over twenty
years. The Company assesses the recoverability of unamortized goodwill
based on the undiscounted projected future cash flows of the related
businesses.

(g) Capitalized Software Development Costs
......................................

The Company has capitalized certain computer software development
costs relating to the development of the Company's third generation
Defect Mask Repair System (DRS III) in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed."

Capitalization of computer software development costs begins upon
the establishment of technological feasibility. Technological
feasibility for the Company's computer software products is generally
based upon achievement of a detail program design free of high risk
development issues. The establishment of technological feasibility and
the ongoing assessment of recoverability of capitalized computer software
development costs requires considerable judgment by management with
respect to certain external factors, including, but not limited to,
technological feasibility, anticipated future gross revenues, estimated
economic life and changes in software and hardware technology.

Amortization of capitalized computer software costs is provided on a
product-by-product basis at the greater of the amount computed using the
ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or the straight-line method over the
remaining estimated economic life of the product. An original estimated
economic life of no more than five years is assigned to capitalized
computer software development costs. Approximately $334,000 and $367,000
of software development costs, included in other long-term assets, were
capitalized as of December 31, 1998 and 1997, respectively. During 1998
and 1997, approximately $33,000 and $92,000, respectively, of these costs
were amortized.

(h) Income Taxes
............

The Company recognizes deferred tax assets and liabilities for the
future tax consequences attributable to temporary differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities at enacted rates expected to be in effect when such amounts
are realized or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

(i) Foreign Currency Translation
............................

Foreign currency translation for the Company's German subsidiary,
Quantronix GmbH, is performed utilizing the current rate method under
which assets and liabilities are translated at the exchange rate on the
balance sheet date, except for property, plant and equipment which is
translated at historical rates, while revenues, costs, and expenses are
translated at the average exchange rate for the reporting period. The
resulting translation adjustment of $(52,595) and $(255,680) at December
31, 1998 and 1997 is included as a component of stockholders' equity. In
addition, there were transaction gains and losses and intercompany
balances not deemed long-term in nature at the balance sheet date that
resulted in a net gain of $55,478, a net loss of $166,906, and a net loss
of $177,506 for the years ended December 31, 1998, 1997 and 1996,
respectively, which is reflected in other (income) expense in the
consolidated statements of earnings.

(j) Net Earnings Per Share
......................

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings
per Share," which the Company adopted during 1997. Under SFAS 128, the
Company presents two earnings per share (EPS) amounts. Basic EPS is
calculated based on income available to common shareholders and the
weighted average number of common shares outstanding during the reported
period. Diluted EPS includes additional dilution from potential common
stock including stock issuable pursuant to the exercise of dilutive stock
options and warrants outstanding and the effect of assuming the
conversion of convertible preferred stock. Prior year earnings per share
data have been restated in accordance with the provisions of SFAS 128.

(k) Fair Value of Financial Instruments
...................................

Cash and cash equivalents, investments, accounts receivable, notes
payable, accounts payable and accrued expenses are reflected in the
financial statements at fair value because of the short-term maturity of
these financial instruments. The carrying value of the outstanding
balance on the Company's revolving line of credit approximates its fair
value since the interest rate fluctuates with changes in market
conditions (See Note 8).

(l) Use of Estimates
................

Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
discl9osure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.

(m) Accounting for Stock-Based Compensation
.......................................

The Company records compensation expense for employee stock options
and warrants only if the market price of the underlying stock exceeds the
exercise price on the date of the grant. On January 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 123, (SFAS 123)
"Accounting for Stock-Based Compensation". The Company has elected not
to implement the fair value based accounting method for employee and
directors' stock options and warrants, but has elected to disclose the
pro forma net earnings and pro forma earnings per share to account for
employee and directors' stock option and warrant grants beginning in 1995
as if such method had been used to account for such stock-based
compensation cost.

(n) Comprehensive Income
....................

In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income", which the Company implemented during
the first quarter of 1998. This statement establishes standards for
reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. The components of
comprehensive income are net earnings and foreign currency translation
adjustments.

(o) New Accounting Standards
........................

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (SFAS 133)
"Accounting for Derivative Instruments and Hedging Activities". This
statement is effective for all fiscal quarters and fiscal years beginning
after June 15, 1999. The adoption of this statement is expected to have
no impact on the Company's results of operations or financial position.

(2) Acquisitions
............

On February 14, 1995, the Company acquired Cambridge Technology,
Inc. which is engaged primarily in the manufacture of laser scanners,
essential components to moving a laser beam with precision at a specified
speed. These products have both industrial and consumer applications,
such as laser marking and etching, high density laser printing and
writing, digitized x-ray imaging and entertainment laser light shows and
displays. The Company acquired all of the outstanding shares of capital
stock of Cambridge in exchange for $4.75 million, consisting of $4.5
million in cash and $250,000 in shares of Common Stock. Pursuant to the
acquisition agreement, additional payments were made due to Cambridge
meeting certain performance goals during the first two fiscal years after
the acquisition. In connection therewith, the Company paid $731,000 for
1995 and $323,150 for 1996. The amount owed at December 31, 1996 of
$723,150 was paid in 1997. The acquisition was accounted for as a
purchase and the operating results of Cambridge were included in the
consolidated financial statements commencing February 1, 1995. The
excess of the cost of the acquisition over the fair value of the net
assets acquired, amounting to $4,830,000, is being amortized over twenty
years. During 1996 goodwill was reduced by $522,000 as a result of the
sale of Cambridge's medical product line. The sales price, net of
expenses, approximated the net book value of the assets sold.

On August 14, 1998, the Company acquired substantially all of the
assets and properties of Synrad Inc. ("Synrad"), a company engaged in the
business of developing, manufacturing and marketing sealed CO2 lasers and
related accessories, for $21.7 million in cash, which includes
transaction costs, and the repayment of certain of Synrad's outstanding
debt. In addition, the Company assumed certain liabilities including
trade payables, accrued expenses and other specified liabilities. The
Company funded the acquisition of Synrad by utilizing its own cash and by
borrowing $6.5 million on its credit facility of which $3 million was
repaid during 1998 (see Note 8). The acquisition was accounted for as a
purchase. Accordingly, results of Synrad are included in the
consolidated statement of earnings from August 3, 1998 and acquired
assets and liabilities have been recorded at their estimated fair values
at the date of acquisition. The total cost of the acquisition was $21.7
million of which $4.8 million was allocated to identifiable net tangible
assets. The remaining balance of $16.9 million represents the excess of
the purchase price over the fair value of the net assets acquired, which
is being amortized on a straight line basis over 20 years.

Proforma results of operations, assuming the acquisition of Synrad
had been made at the beginning of each period, is as follows, and include
adjustments to interest expense, interest income, amortization expense
and income tax expense.

Year ended December 31,
1998 1997
.......................
Net sales and services $ 83,180,660 $ 93,458,696
Net earnings 8,399,083 8,397,243
Basic earnings per common share $0.75 $0.79
Diluted earnings per common share $0.74 $0.74

The pro forma results of operations are not necessarily indicative
of the actual results of operations that would have occurred had the
purchase been made at the beginning of the periods, or the results which
may occur in the future.

(3) Investments
...........

The Company had an investment in the common stock of a private
company which was carried at a nominal value. In the fourth quarter of
1998, this private company was acquired. As a result, the Company
realized a gain of approximately $1.9 million, net of related expenses,
on the sale of the common stock which is included in other income in the
consolidated statement of earnings.

(4) Inventories
...........

Inventories consist of the following:
December 31,
............
1998 1997
........... ............
Raw materials $ 7,555,877 $ 5,792,455
Work-in-process 6,294,045 5,013,691
Finished goods 1,260,475 619,316
Consigned inventory 562,179 717,678
........... ...........
$15,672,576 $12,143,140
........... ...........
........... ...........

(5) Property, Plant and Equipment
.............................

Property, plant and equipment consists of the following:

December 31,
............
Useful life 1998 1997
........... ........... ...........
Land 0 $ 840,408 $ 440,408
Buildings 30 years 4,989,542 1,617,940
Leasehold improvement Lease term 706,129 686,014
Fixtures and computer
equipment 3-8 years 2,543,376 1,545,797
Machinery and equipment 4-8 years 5,378,219 3,960,658
Laboratory equipment 4-8 years 1,257,158 928,684
........... ...........
15,714,832 9,179,501

Less accumulated depreciation
and amortization (4,839,951) (3,786,546)
........... ...........
$10,874,881 $ 5,392,955
........... ...........
........... ...........

Quantronix acquired land and constructed a building for its
manufacturing operations and administrative offices during 1997, which
was completed during 1998. The building is approximately 33,500 square
feet located in East Setauket, New York. Photo Research also acquired
land and a building for manufacturing operations and administrative
offices during 1998. The building is approximately 22,000 square feet
located in Chatsworth, California.

Depreciation and amortization expense aggregated approximately
$1,442,000, $985,000 and $863,000 for the years ended December 31, 1998,
1997 and 1996, respectively.

(6) Income Taxes
............

Pre-tax income for the years ended December 31, 1998, 1997 and 1996
was comprised of domestic income of $13,660,166, $12,833,403 and
$7,416,546, respectively, and foreign income (loss) of $23,075,
$(190,621) and $(339,018), respectively.

The provision for income taxes consists of:

Year ended December 31,
.......................
1998 1997 1996
........... ......... .........
Current:
Federal $ 4,128,777 3,477,085 1,202,702
State and local 550,000 792,000 280,000
Foreign 0 0 (33,000)
........... ......... .........
$ 4,678,777 4,269,085 1,449,702

Deferred:
Federal $ 123,000 139,000 735,000
State and local 0 0 0
Foreign 0 0 0
........... ......... .........
123,000 139,000 735,000
........... ......... .........
$ 4,801,777 4,408,085 2,184,702
........... ......... .........
........... ......... .........

The current provision for income taxes includes a tax benefit of
$281,000 for 1998, 1997 and 1996 from utilizing Federal net operating
loss carryforwards. The deferred tax provision for 1996 was increased by
$190,000 due to allocating acquired tax benefits to goodwill.

The effective income tax rate differed from the statutory Federal
income tax rate for the following reasons:

Year ended December 31,
.......................
1998 1997 1996
........... ......... .........

Taxes at statutory Federal
income tax rate $ 4,652,300 4,298,600 2,406,400
Amortization of excess of
cost over fair value of net
assets of businesses acquired 96,400 96,400 142,800

Foreign Sales Corporation
(FSC) benefit (349,000) (343,700) (110,500)
Reduction of valuation
allowance (142,000) (411,100) (360,000)
State income taxes, net of
Federal benefit 362,800 523,000 184,500
Other 180,677 244,885 (78,500)
........... ......... .........

$ 4,801,777 4,408,085 2,184,700
........... ......... .........
........... ......... .........

The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
December 31, 1998 and 1997 are presented below:
December 31
.....................
1998 1997
.......... .........
Deferred tax assets:
Excess of tax over financial
statement basis of inventory $ 448,000 411,000
Allowance for doubtful accounts 49,000 50,000
Accrued warranty reserve 118,000 98,000
Other accrued expenses 258,000 134,000
Benefits of U.S. net operating loss
carryforwards 2,148,000 2,428,000
Benefits of foreign net operating loss
carryforwards 110,000 120,000
Capital loss carryforward 0 43,000
Plant and equipment depreciation 11,000 77,000
Other 0 8,000
.......... .........
Total deferred tax assets 3,142,000 3,369,000
Less valuation allowance (734,900) (876,900)
.......... .........
Net deferred tax assets 2,407,100 2,492,100
.......... .........

Deferred tax liabilities:
Capitalized software development costs (113,000) (125,000)
Goodwill amortization (50,000) 0
.......... .........
Total deferred tax liabilities (163,000) (125,000)
.......... .........

Net deferred tax asset $2,244,100 2,367,100
.......... .........
.......... .........

At December 31, 1998, Excel has available net operating loss
carryforwards (NOL's), expiring in 2005 through 2007, of approximately
$1.8 million for income tax purposes. The utilization of NOL's by Excel
for income tax purposes is subject to annual limitations imposed by
Internal Revenue Code Section 382 due to various equity transactions from
1991 to 1993 and alternative minimum tax limitations. If the full amount
of that limitation is not used in any year, the amount not used increases
the allowable limit in the following year.

At December 31, 1998, Quantronix and its subsidiaries have available
for tax purposes utilizable NOL's of approximately $4.5 million expiring
in 2005 through 2007. Such NOL's can only be utilized to offset
Quantronix's future taxable income and are limited, in a similar fashion
to Excel's NOL's, in each year to approximately $560,000 as a result of
the change in ownership from the merger with Excel. During 1996, the
Company reduced goodwill by $1,923,000 for the establishment of deferred
tax assets and the utilization of Quantronix's preacquisition deductible
temporary differences and net operating loss carryforwards.

While management believes that the Company's deferred tax asset will
be realized based on its generation of taxable income in recent years and
its future projected taxable income, the substantial restrictions on and
time periods required to realize certain of the Company's NOL's makes it
appropriate to record a valuation allowance against a portion of those
NOL's. In addition, a valuation allowance has been provided against all
of the Company's foreign net operating loss carryforwards. Accordingly,
Excel has provided a total valuation allowance of $734,900, as of
December 31, 1998. There can be no assurance that the Company will
generate sufficient taxable earnings in future years to fully realize
recorded tax benefits.

(7) Accrued Expenses and Other Current Liabilities
..............................................

Accrued expenses and other current liabilities consist of the
following:

December 31
.....................
1998 1997
.......... .........
Salaries, wages, commissions and bonuses $1,859,080 1,690,700
Accrued accounts payable 39,158 228,427
Customer deposits 329,157 869,490
Accrued royalties payable 144,745 13,037
Warranty reserve 407,086 415,912
Unearned service contract revenue 309,231 153,315
Professional fees payable 193,399 111,918
Income taxes payable 1,628,631 931,127
Other 2,012,484 1,484,651
.......... .........
$6,922,971 5,898,577
.......... .........
.......... .........

(8) Long-Term Debt
..............

Long-term debt consists of the following:
December 31
.....................
1998 1997
.......... .........
Revolving line of credit $3,500,000 0
Less current installments 0 0
.......... .........
$3,500,000 0
.......... .........
.......... .........

On July 23, 1998, the Company entered into a credit facility with
The Bank of New York (the "Bank") that provides the Company with a $15
million revolving line of credit for acquisition or working capital
requirements. The term of this agreement is for five years, maturing on
July 22, 2003. This credit facility allows for interest to be calculated
utilizing an Alternative Base Rate ("ABR") or a LIBOR rate plus a premium
ranging from 0.50% to 2.25%. The ABR is the higher rate of either the
prime rate or the Federal Funds Rate plus 0.50%. The Company has
currently chosen the LIBOR rate plus the premium, as its interest rate,
which was 7.0625% at December 31, 1998. This credit facility contains
certain financial covenants, including a minimum tangible net worth
requirement of at least $15 million, prohibits the payment of dividends
and requires payment of interest on a quarterly basis. The terms provide
for the repayment of the debt in full on its maturity date. The Company
may make voluntary prepayments with a minimum of $100,000 and in $25,000
increments in excess thereof. Borrowings can be made in a minimum of
$500,000 and in increased multiples of $50,000 for borrowings in excess
thereof. On August 14, 1998 the Company borrowed $6.5 million for the
acquisition of Synrad (See Note 2). On December 16, 1998 the Company
reduced the outstanding balance by $3 million thereby leaving $3.5
million outstanding at December 31, 1998. As of December 31, 1998 , the
Company had $11.5 million available on its revolving line of credit.

(9) Stockholders' Equity
....................

(a) Preferred Stock
...............

During the year ended December 31, 1996, all 405,342 shares of
preferred stock then outstanding were converted to common stock. While
outstanding, the Company paid a dividend of $0.40 per share for each year
the preferred stock was not converted or redeemed.

(b) Stock Option Plan
.................

In 1990, Excel adopted a stock option plan (the Plan) which provides
for the granting of incentive stock options and nonincentive stock
options to certain key employees, including officers and directors of
Excel, to purchase an aggregate of 2,000,000 shares of common stock, as
amended, at prices and terms determined by the Board of Directors. The
option price per share of incentive stock options must be at least 100%
of the fair market value of the stock on the date of grant, except in the
case of shareholders owning more than 10% of the outstanding shares of
common stock, the option price must be at least 110% of the fair market
value on the date of grant, and for nonincentive stock options such price
may be less than 100% of the fair market value of the stock on the date
of grant. Options granted under the Plan, which terminates on July 30,
2000, may be exercisable for a period of up to ten years. Through
December 31, 1998, all options granted under the Plan have exercise
prices equal to the market value of the stock on the date of grant, vest
ratably over three or five years and expire either five or ten years from
date of grant.

The Plan was amended in August 1993 to provide for the automatic
grant to each member of the Board of Directors, on the date of each
annual meeting of stockholders, non-incentive options to purchase 10,000
shares of common stock at the fair market value of the common stock on
such date.

In 1998, the Company adopted a stock option plan (the 1998 Plan)
which provides for the granting of incentive stock options and
nonincentive stock options to certain key employees, including officers
and directors of the Company and consultants to purchase an aggregate of
1,000,000 shares of common stock at prices and terms determined by the
Board of Directors. The option price per share of incentive stock
options must be at least 100% of the fair market value of the stock on
the date of the grant, except in the case of shareholders owning more
than 10% of the outstanding shares of common stock, it must be at least
110% of the fair market value on the date of the grant, and for
nonincentive stock options such price may be less than 100% of the fair
market value of the stock on the date of grant. Options granted under
the 1998 Plan, which terminates on April 8, 2008, may be exercisable for
a period up to ten years. Through December 31, 1998, all options granted
under the 1998 Plan have exercise prices equal to the market value of the
stock on the date of grant, vest ratably over three or five years and
expire either five or ten years from the date of grant.

On October 19, 1998, the Company elected to reduce the exercise
price of the outstanding stock options to purchase 503,192 shares of
common stock at prices ranging from $7.875 to $12.375 per share (the
average price of which is $9.518 per share) to $7.00 per share, which was
greater than the fair market value of the common stock on the date of the
reduction.

A summary of activity related to the Company's stock option plans is
as follows:

Weighted
average
Number exercise
of shares price
.......... .........

Outstanding at December 31, 1995 1,097,323 $5.12

Granted 695,600 7.50
Exercised (218,215) 5.58
Canceled (146,881) 6.03
..........

Outstanding at December 31, 1996 1,427,827 6.17

Granted 307,850 8.73
Exercised (643,804) 3.28
Canceled (77,115) 4.77
..........

Outstanding at December 31, 1997 1,014,758 7.87

Granted 211,500 8.07
Exercised (66,145) 4.95
Canceled (40,593) 6.78
..........

Outstanding at December 31, 1998 1,119,520 $6.88
..........
..........

At December 31, 1998, a total of 561,677 options were exercisable at
a weighted average exercise price of $6.76, and options for the purchase
of 899,381 common shares were available for future grant under the plans.

The options outstanding as of December 31, 1998 are summarized in
ranges as follows:

Weighted Number of Weighted
Range of average options average
exercise price exercise price outstanding remaining life
.............. .............. ........... ..............
$3.26 - $6.00 $4.74 61,765 1.49 years
$6.01 - $7.00 $7.00 1,057,755 5.53 years
...........
1,119,520
...........
...........

(c) Other
.....

In February 1997, Class B Warrants to purchase 1,191,856 shares of
common stock at $8.00 per share were exercised, and resulted in net
proceeds of approximately $9.5 million to the Company. The remaining
394,369 Class B Warrants were redeemed by the Company at $.05 per warrant
in accordance with their terms. An underwriter's warrant was also
exercised in 1997 that resulted in net proceeds to the Company of
approximately $2.2 million for the issuance of 280,500 shares of common
stock.

In addition, at December 31, 1998, 37,000 warrants were outstanding
that expire between 1999 and 2000 with exercise prices ranging from $4.00
to $6.375. During 1998 and 1997, 11,000 and 383,100, respectively, of
these warrants were exercised and during 1998 3,000 warrants were
canceled.

In 1998, the Company issued 18,733 shares of common stock in
exchange for Quantronix shares that remained outstanding.

(d) Shares Reserved for Issuance
............................

At December 31, 1998 the Company had reserved, authorized and
unissued common shares for the following purposes:
Shares

1990 Stock option plan 1,018,901
1998 Stock option plan 1,000,000
Stock purchase warrants 37,000
.........
2,055,901
.........
.........

(e) Stock-Based Compensation
........................

The per share weighted-average fair value of stock options and
warrants granted during 1998, 1997 and 1996 was $1.36, $2.53 and $3.76,
respectively, on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: 1998- expected
dividend yield of 0%, risk free interest rate of 5.0%, expected stock
volatility of 20% and an expected option and warrant life of 2.5 years;
1997 - expected dividend yield of 0%, risk free interest rate of 5.5%,
expected stock volatility of 31%, and an expected option and warrant life
of 2.5 years; 1996 - expected dividend yield of 0%, risk free interest
rate of 6%, expected stock volatility of 50%, and an expected option and
warrant life of 5 years.

The Company applies APB Opinion No. 25 in accounting for its stock
option plans and, accordingly, no compensation cost has been recognized
in the consolidated financial statements for its stock options and
warrants which have an exercise price equal to or greater than the fair
value of the stock on the date of the grant. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS 123, the Company's net earnings would have been
reduced to the pro forma amounts indicated below:

1998 1997 1996
........... .......... ..........
Net earnings:
As reported $8,881,464 $8,234,697 $4,892,826
Pro forma $7,946,464 $7,423,697 $4,305,826

Net earnings available to
common shareholders:
As reported $8,881,464 $8,234,697 $4,838,553
Pro forma $7,946,464 $7,423,697 $4,251,553

Basic earnings per common share:
As reported $0.79 $0.77 $0.55
Pro forma $0.71 $0.69 $0.48

Diluted earnings per common share:
As reported $0.78 $0.73 $0.50
Pro forma $0.70 $0.66 $0.44

Pro forma net earnings reflects only options and warrants granted
commencing in 1995. Therefore, the full impact of calculating
compensation cost for stock options and warrants under SFAS 123 is not
reflected in the pro forma net earnings amounts presented above because
compensation cost is reflected over the options' vesting period and
compensation cost for options granted prior to January 1, 1995 was not
considered.

(10) Earnings Per Share
..................

The following is a reconciliation of the numerators and denominators
of the basic and diluted EPS computations:

1998
....
Earnings Shares Per-Share
(Numerator) (Denominator) Amount
........... ........... ..........
Basic EPS $8,881,464 11,190,197 $0.79

Effect of Dilutive Securities:
Options and Warrants 204,989
............
Diluted EPS $8,881,464 11,395,186 $0.78
........... ........... ..........
........... ........... ..........

1997
....
Earnings Shares Per-Share
(Numerator) (Denominator) Amount
........... ........... ..........
Basic EPS $8,234,697 10,686,763 $0.77

Effect of Dilutive Securities:
Options and Warrants 640,323
..........

Diluted EPS $8,234,697 11,327,086 $0.73
........... ........... ..........
........... ........... ..........

1996
....
Earnings Shares Per-Share
(Numerator) (Denominator) Amount
........... ........... ..........

Net Earnings $4,892,826
Less: Preferred Stock Dividends (54,273)
..........

Basic EPS:
Net earnings available to
common shareholders $4,838,553 8,862,217 $0.55

Effect of Dilutive Securities:
Options and Warrants 756,244
Convertible Preferred Stock 54,273 138,950
........... ..........

Diluted EPS:
Net Earnings available to
common shareholders and
assumed conversions $4,892,826 9,757,411 $0.50
........... ........... ..........
........... ........... ..........

(11) Treasury Stock
..............

The Board of Directors of the Company authorized the purchase of up
to 2,000,000 shares of common stock in the open market at prevailing
market prices. As part of this program, the Company acquired 382,763 and
375,000 shares as treasury stock in 1998 and 1997 for $3,226,419 and
$3,339,375, respectively.

(12) Employee Benefit Plan
.....................

The Company has a voluntary contribution pension plan which complies
with Section 401(k) of the Internal Revenue Code, as amended. The plan
permits employees to make a voluntary contribution of pretax dollars to a
pension trust, with a matching contribution by the Company equal to 50%
of an employee's basic contribution to the plan up to a maximum of 3% of
their salaries. Company contributions to the plan were approximately
$319,000, $303,000 and $235,000 in 1998, 1997 and 1996, respectively.

(13) Commitments and Contingencies
.............................

(a) Operating Leases
................

The Company and its subsidiaries lease certain buildings, vehicles
and equipment under noncancellable operating leases. At December 31,
1998, the future minimum lease payments under operating leases are as
follows:

1999 1,523,267
2000 1,398,320
2001 904,729
2002 275,056
2003 275,056
Thereafter 702,413
..........

$5,078,841
..........
..........

Rent expense approximated $1.63 million, $1.34 million and $1.29
million for the years ended December 31, 1998, 1997 and 1996,
respectively.

(b) Employment and Consulting Agreements
....................................

Excel has entered into employment agreements with certain key
executives that provide for severance upon termination without cause,
aggregating approximately $1 million.

(14) Foreign and Domestic Operations and Export Sales
................................................

Information concerning foreign and domestic operations and export
sales is as follows:

As of or the year ended
December 31,
1998 1997 1996
Net sales and services to
unaffiliated customers:
United States $61,565,506 58,468,251 50,023,979
Germany 5,526,427 7,479,645 7,438,284
........... .......... ..........
$67,091,933 65,947,896 57,462,263
........... .......... ..........
........... .......... ..........
Operating earnings (loss):
United States $11,258,544 12,088,227 7,695,932
Germany (58,237) (61,224) (107,267)
........... .......... ..........
$11,200,307 12,027,003 7,588,665
........... .......... ..........
........... .......... ..........
Identifiable assets:
United States $68,883,025 54,508,949 35,466,426
Germany 2,410,139 4,710,732 4,350,016
........... .......... ..........
$71,293,164 59,219,681 39,816,442
........... .......... ..........
........... .......... ..........

In determining operating earnings (loss) for each geographic area,
sales and purchases between areas have been accounted for on the basis of
internal transfer prices set by the Company.

Identifiable assets are those tangible and intangible assets used in
operations in each geographic area.

During the years ended