10-K

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K
   (mark one)
   [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 for the fiscal year ended December 31, 1994

   [   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934
                          Commission file number 1-8002

                           THERMO ELECTRON CORPORATION
             (Exact name of Registrant as specified in its charter)
   Delaware                                                         04-2209186
   (State or other jurisdiction of                            (I.R.S. Employer
   incorporation or organization)                          Identification No.)

   81 Wyman Street, P.O. Box 9046
   Waltham, Massachusetts                                           02254-9046
   (Address of principal executive offices)                         (Zip Code)
       Registrant's telephone number, including area code: (617) 622-1000

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

                                                         Name of each exchange
   Title of each class                                     on which registered
   Common Stock, $1.00 par value                       New York Stock Exchange
   Preferred Stock Purchase Rights

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

   Indicate by check mark whether the Registrant (1) has filed all reports
   required to be filed by Section 13 or 15(d) of the Securities Exchange Act
   of 1934 during the preceding 12 months, and (2) has been subject to the
   filing requirements for at least the past 90 days. Yes [ X ]   No [   ]

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

   The aggregate market value of the voting stock held by nonaffiliates of the
   Registrant as of January 27, 1995, was approximately $2,200,490,000.

   As of January 27, 1995, the Registrant had 51,000,776 shares of Common
   Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the Registrant's Annual Report to Shareholders for the year
   ended December 31, 1994, are incorporated by reference into Parts I and II.

   Portions of the Registrant's definitive Proxy Statement for the Annual
   Meeting of Shareholders to be held on May 23, 1995, are incorporated by
   reference into Part III.
PAGE

                                     PART I


   Item 1.  Business

   (a)  General Development of Business

   Thermo Electron Corporation and its subsidiaries (the Company or the
   Registrant) develop, manufacture, and market environmental monitoring and
   analysis instruments, biomedical products including heart-assist systems
   and mammography systems, paper-recycling and papermaking equipment,
   alternative-energy systems, industrial process equipment, and other
   specialized products. The Company also provides environmental and
   metallurgical services and conducts advanced technology research and
   development. The Company performs its business through its divisions and
   wholly owned subsidiaries, as well as majority-owned subsidiaries that are
   partially owned by the public or by private investors.

   The Company has developed leading market positions in many lines of
   business, including environmental monitoring and analysis instruments,
   mammography systems, biomass power plants, and paper-recycling equipment.
   The Company is currently seeking to establish leading market positions in
   the fields of left ventricular-assist systems, explosives-detection
   systems, soil-remediation services, and dedicated natural gas engines. The
   Company is developing new products in its Advanced Technologies segment, as
   well as in other segments.

   A key element in the Company's growth has been its ability to commercialize
   innovative products and services emanating from research and development
   activities conducted at the Company's various subsidiaries and divisions.
   The Company's strategy has been to identify business opportunities arising
   from social, economic, and regulatory issues and to seek a leading market
   share through the application of proprietary technology. As part of this
   strategy, the Company continues to focus on the acquisition of
   complementary businesses that can be integrated into its existing core
   businesses to leverage the Company's access to new markets.

   The Company believes that maintaining an entrepreneurial atmosphere is
   essential to its continued growth and development. In order to preserve
   this environment, the Company adopted the strategy of spinning out certain
   of its subsidiaries and having these subsidiaries sell a minority interest
   to outside investors. The Company believes that this strategy provides
   additional motivation and incentives for the management of the subsidiaries
   through the establishment of subsidiary-level stock options, as well as
   capital to support the subsidiaries' growth. The Company's wholly owned and
   majority-owned subsidiaries are provided with centralized strategic
   planning, corporate development, administrative, financial, and other
   services that would not be available to many independent companies of
   similar size. As of March 3, 1995, the Company had 13 subsidiaries that
   have sold minority equity interests, 11 of which are publicly traded.

   On February 8, 1995, the Company entered into a definitive agreement to
   acquire Coleman Research Corporation (CRC) in exchange for up to 2,669,158
   shares of Company common stock, including approximately 146,900 shares
   reserved for issuance upon exercise of stock options. CRC provides systems
   integration, systems engineering, and analytical services to government
   customers in the fields of information technology, energy and the
   environment, software engineering, launch systems, advance radar and
                                        2PAGE

   imaging, and health systems. The acquisition is subject to certain
   conditions, including the approval of CRC's shareholders, and is expected
   to be consummated on or about March 15, 1995. If completed, the acquisition
   of CRC will be accounted for using the pooling-of-interests method.

   The Company is a Delaware corporation and was incorporated in 1956. The
   Company completed its initial public offering in 1967 and was listed on the
   New York Stock Exchange in 1980. The principal executive office of the
   Company is 81 Wyman Street, Waltham, Massachusetts 02254-9046 (telephone:
   617-622-1000).

   (b)  Financial Information About Industry Segments

   The Company's products and services are divided into six segments:
   Instruments, Alternative-energy Systems, Process Equipment, Biomedical
   Products, Environmental Services, and Advanced Technologies. Products or
   services within a particular segment are provided by more than one
   subsidiary, and certain subsidiaries' products or services are included in
   more than one segment. The principal products and services offered by the
   Company in the six industry segments are described in detail below (see
   "Principal Products and Services"). Financial information concerning the
   Company's industry segments is summarized in Note 14 to Consolidated
   Financial Statements in the Registrant's 1994* Annual Report to
   Shareholders and is incorporated herein by reference.

   (c)  Description of Business

        (i)  Principal Products and Services

   Instruments

   The Company, through its Thermo Instrument Systems Inc. subsidiary, is a
   worldwide leader in the development, manufacture, and marketing of
   analytical instruments used to detect and measure air pollution, nuclear
   radioactivity, complex chemical compounds, toxic metals, and other elements
   in a wide variety of materials. Thermo Instrument also markets process
   monitoring and control instruments for the oil, gas, and petrochemical
   industries. Through Thermo Instrument's 86%-owned subsidiary, ThermoSpectra
   Corporation, the Company develops, manufactures, and markets precision
   imaging, inspection, and measurement instrumentation that employ a variety
   of energy sources, or signals, as well as high-speed data acquisition and
   digital processing technologies.

   In recent years, Thermo Instrument has completed a number of key
   acquisitions to expand and complement its existing lines of instruments,
   including: Finnigan Corporation, a leading manufacturer of mass
   spectrometers, in May 1990; Nicolet Instrument Corporation, a leading
   manufacturer of instruments for numerous analytical, chemistry,
   engineering, and other applications, in August 1992; Spectra-Physics
   Analytical, a manufacturer of high performance liquid chromatography and
   capillary electrophoresis analytical instruments, in February 1993; and
   several of the businesses within the EnviroTech Measurements & Controls
   group of Baker Hughes Incorporated, manufacturers of products used for
   process control, process measurement, and laboratory analysis, in March
   1994. In addition, on March 1, 1995, Thermo Instrument entered into an
   Asset and Stock Purchase Agreement with Fisons plc (Fisons) relating to the
   * References to 1994, 1993, and 1992 herein are for the fiscal years ended
     December 31, 1994, January 1, 1994, and January 2, 1993, respectively.
                                        3PAGE

   acquisition by Thermo Instrument of Fisons' Scientific Instruments Division
   (the Division) for a purchase price of 202 million British pounds sterling,
   subject to a post-closing adjustment. The Division is principally composed
   of Fisons operations that are involved in the research, development,
   manufacture, and sale of analytical instruments to industrial and research
   laboratories worldwide. Consummation of the acquisition is subject to
   several conditions, including approval by Fisons shareholders, regulatory
   approvals, consent of certain third parties and customary conditions to
   closing.

   Instruments manufactured and marketed by the Company employ a variety of
   advanced technologies and spectral, electroanalytical, and separation
   techniques to determine the composition, or structure, and physical
   properties of natural and synthetic substances. The Company's instruments
   can be broadly categorized by their use as analytical, monitoring, or
   process control instruments.

   Analytical Instruments

   The Company's principal analytical instrument products are atomic emission
   and absorption spectrometers, Fourier transform infrared (FT-IR) and
   FT-Raman spectrometers, mass spectrometers, high performance liquid
   chromatographs, gas chromatographs, and X-ray fluorescence instrumentation.

   Atomic emission (AE) and atomic absorption (AA) spectrometers identify and
   measure trace quantities of metals, and other elements, in a wide variety
   of materials, including environmental samples (such as soil, water, and
   wastes), foods, drugs, cosmetics, and alloys. The Company sells its
   products to a wide range of customers in manufacturing industries such as
   producers of aircraft, automobiles and trucks, computers, chemicals, food,
   pharmaceuticals, and primary metals; service industries such as waste
   management companies and commercial testing laboratories; and government
   and university laboratories.

   The Company is a leading manufacturer of sequential AE spectrometers, in
   which elements are analyzed one at a time, and simultaneous AE
   spectrometers, in which many elements can be measured at the same time. The
   Company produces AA spectrometers in single-, double-, and four-channel
   models. The Company is the only major producer of multichannel AA
   spectrometers, which provide several operational advantages over
   single-channel instruments, including speed of analysis, increased
   accuracy, reduced sample consumption, and analysis over an extended range
   of concentrations.

   The Company's FT-IR and FT-Raman spectrometers are designed to
   nondestructively determine the chemical composition and physical properties
   of materials. These instruments are used in many areas of chemical
   research, industrial quality control and process monitoring, and for
   solving a wide variety of materials analysis problems. The Company offers a
   variety of models ranging from recently introduced models designed for
   routine applications to highly advanced research-grade FT-IR spectrometers.

   The Company is a leading manufacturer of commercial mass spectrometers and
   has pioneered many of the significant developments and applications of mass
   spectrometry. The Company's mass spectrometry products identify and measure
   the components of a sample for organic chemical compounds or for inorganic
   elements. These instruments are used by customers in environmental analysis
   and pollution control; in research and the production of pharmaceuticals;
                                        4PAGE

   in biochemistry; in analysis of foods, chemicals, and petrochemicals; and
   in health and forensic science. The Company provides both stand-alone mass
   spectrometers and combined systems that use its own chromatographs or those
   purchased from other companies. These products span a range of sensitivity,
   specificity, separation technologies, data-handling capabilities, sizes,
   and prices.

   The Company sells high performance liquid chromatography, capillary
   electrophoresis, and related instruments and equipment used principally in
   the research and development and production monitoring of pharmaceuticals,
   chemicals, and personal-care products, and for environmental monitoring.
   These instruments separate the chemical components of substances for
   purposes of identification and measurement. Capillary electrophoresis is a
   relatively new separation technique that is based on a combination of
   chromatographic and electroanalytical technologies and is particularly
   useful in biochemical and pharmaceutical research.

   In 1994, with Thermo Instrument's acquisition of the Tremetrics and TN
   Technologies businesses from Baker Hughes, the Company added two analytical
   testing technologies: gas chromatography and X-ray fluorescence. Gas
   chromatographs are widely used in environmental and industrial laboratories
   as stand-alone instruments or in conjunction with mass spectrometers, where
   the gas chromatograph separates a sample into individual chemical
   components for the mass spectrometer to identify. Applications include the
   identification of organic compounds, from pesticide residues on vegetables
   to chlorinated organics in drinking water. The Company sells a wide variety
   of gas chromatography detectors that measure trace levels of pollutants in
   water, soil, and air. X-ray fluorescence instruments allow for the
   nondestructive analysis of inorganic elements. Applications include alloy
   identification, on-line process monitoring and quality control,
   characterization of toxic metals in soil, and thickness and/or composition
   of semiconductor thin films. In addition, the Company manufactures and
   markets digital oscilloscopes, multichannel transient recorders,
   high-resolution waveform analyzers, laser scanning confocal microscopes,
   and X-ray microanalysis equipment, as well as X-ray imaging systems used
   for quality assurance and failure analysis applications primarily in the
   electronics industry.

   Monitoring Instruments

   The Company also manufactures monitoring instruments for two principal
   markets: the detection and measurement of nuclear radiation, and the
   monitoring of air pollutants including toxic and combustible gases.

   The Company's nuclear radiation monitoring instruments detect and measure
   alpha, beta, gamma, neutron, and X-ray radiation emitted by natural sources
   and by radioactive materials used in nuclear power plants and certain
   governmental, industrial, and medical facilities. The Company is a leading
   manufacturer of a broad range of stand-alone and portable instruments and
   computer-integrated instrument systems used to ensure the safety of
   personnel from exposure to nuclear radiation. Nuclear power plants and U.S.
   Department of Energy facilities purchase approximately 70% of the radiation
   monitoring instruments sold by the Company.

   The Company's air-monitoring instruments measure pollutants in ambient air
   and from stationary sources such as industrial smokestacks. The principal
   pollutants measured are oxides of nitrogen, sulfur dioxide, carbon
   monoxide, ozone, and volatile organic compounds. These instruments are used
                                        5PAGE

   by utility and industrial customers to ensure compliance with environmental
   regulations, by government agencies to monitor air quality, and by research
   facilities. The Occupational Safety and Health Administration's safety
   requirements for protecting workers from toxic or explosive atmospheres in
   confined spaces are addressed with the Company's detectors, instruments,
   and systems for sensing, monitoring, and warning of such dangers. These
   worker-safety products are used in a wide range of applications, from large
   petrochemical plants, utilities, and industrial manufacturing facilities to
   commercial buildings.

   In addition, the Company manufactures equipment that provides on-line,
   real-time analysis of elements in bulk raw materials, such as coal and
   cement. These analyzers are used by utilities to determine the sulfur
   content of coal to ensure compliance with air quality standards and by the
   cement industry to test raw materials to assure product quality and
   uniformity.

   Process Control Instruments

   With the 1994 acquisition of the EnviroTech Controls business from Baker
   Hughes, the Company now addresses the process monitoring, analysis,
   gauging, and control instruments market, primarily for the oil, gas, and
   petrochemical industries.

   The Company manufactures and markets a number of process monitoring,
   analysis, and control systems including: analog and digital recorders for
   continuous process industries; process and laboratory analytical
   instruments and monitors to detect lethal gases in the oil, gas, and
   petrochemical industries; supervisory control and data acquisition software
   for process monitoring and operator interface in a variety of industrial
   processes; and turnkey, integrated systems to control networks of distant
   oil and gas wells.

   The Company also manufactures and markets process gauges and noncontacting
   and nonintrusive process control instrumentation to measure liquid levels,
   density, weight, and flows for a variety of industries. Application
   examples include measuring levels in a pharmaceutical reactor, determining
   the percentage by weight of solids contained in a mining slurry, or
   monitoring the flow of fluid into a wastewater treatment facility.

   Revenues from instrument products were $650,114,000, $516,712,000, and
   $349,261,000 in 1994, 1993, and 1992, respectively.

   Alternative-energy Systems

   The Company's Alternative-energy Systems segment includes the operation
   and, prior to 1994, the construction and sale, of independent (nonutility)
   power plants. Beginning in early 1994, the Company began operation of a
   waste-recycling facility. This segment also includes the manufacture, sale,
   and servicing of industrial refrigeration systems; natural gas and marine
   engines; packaged cooling and cogeneration systems; and steam turbines and
   compressors.

   Alternative-energy Power Plants

   Through its Thermo Ecotek Corporation (formerly Thermo Energy Systems
   Corporation) subsidiary, the Company designs, develops, owns, and operates

                                        6PAGE

   independent (nonutility) electric power generation facilities that utilize
   a range of environmentally responsible combustion technologies. The
   facilities are either owned by the Company or sold to third parties upon
   completion and operated by the Company. The Company has completed and
   operates three wood-waste power plants and four agricultural-waste power
   plants, representing a net electric generating capacity of approximately
   140 megawatts.

   The Company also has substantial capabilities in developing and operating
   fossil-fuel cogeneration systems, which generate electricity and thermal
   energy in the form of steam or hot or chilled water. The Company has built,
   on a turnkey basis, three fossil-fuel cogeneration systems that are owned
   and operated by others, and one system in Dade County, Florida, that is
   owned by a third party and operated by a joint venture of which the Company
   is a partner.

   The facilities that are leased by the Company are owned by institutional
   investors and leased on a long-term basis to the Company or to joint
   ventures or partnerships in which the Company has ownership interests. The
   Company uses internal funds for preconstruction development expenses and
   generally obtains external financing for construction. The Company has
   equity ownership interests in three operating plants. The Company may make
   additional significant equity investments in future projects. The process
   of locating, developing, financing and constructing power plants is highly
   complex, lengthy and expensive and only a small percentage of the power
   projects that the Company evaluates or pursues results in operating
   projects.

   The Company participates in the operation of the Dade County Downtown
   Government Center cogeneration plant in Miami, Florida, through a joint
   venture of the Company and Rolls-Royce, Inc. Because the demand for power
   and chilled water at the Downtown Government Center complex has been
   substantially less than anticipated since the plant's startup in 1987, the
   joint venture has experienced continuing losses. The Company is involved in
   litigation and regulatory proceedings with respect to this project (see
   Item 3, "Legal Proceedings" below). In September 1994, the joint venture
   temporarily suspended operations at the facility for an indefinite period
   of time although it will continue to be responsible for lease and other
   fixed costs.

   Revenues from the operation and construction of alternative-energy power
   plants were $134,261,000, $128,558,000, and $140,561,000 in 1994, 1993, and
   1992, respectively.

   Waste-recycling Facility

   In early 1994, the Company completed construction and commenced operation
   of a 2,100-ton-per-day municipal solid waste-recycling facility (the
   Recycling Facility) in San Diego County, California (the County). The
   Recycling Facility is the first such facility that the Company has built or
   operated. The construction of the Recycling Facility was financed by the
   issuance by the California Pollution Control Financing Authority of $133.7
   million principal amount of bonds (the CPCFA Bonds). The Company has
   entered into a 24-year agreement with the County under which the Company
   will recycle materials recovered from the County's waste stream for a
   service fee to reduce the volume of remaining waste. The service fee is
   calculated pursuant to a formula that includes a provision for debt service
   for the CPCFA Bonds, a pass-through of certain costs of operating the
   Recycling Facility, an operation and maintenance allowance, and an
   allocation of a portion of the proceeds from the resale of recovered
                                        7PAGE

   materials generated by the Recycling Facility. The Company has contracted
   the operations and maintenance of the Recycling Facility to a joint venture
   that is owned 50% by the Company. The County has guaranteed that certain
   minimum amounts of waste will be brought to the Recycling Facility and the
   Company has guaranteed that the Recycling Facility is capable of processing
   a minimum amount of waste and of yielding certain percentages of recovered
   materials from recoverable waste. Except for risks associated with the
   nonperformance by the County of its obligations, the Company bears most
   business and legal risks associated with operating the Recycling Facility.
   (See also "Management's Discussion and Analysis of Financial Condition and
   Results of Operations" incorporated by reference into Item 7 hereof.)

   Other

   The Company, through its Thermo Power Corporation subsidiary, develops,
   manufactures, markets, and services environmentally sound and economically
   efficient industrial refrigeration equipment, natural gas-fueled and
   low-emission natural gas engines for vehicular and stationary applications
   and commercial cooling and cogeneration units.

   Through its industrial refrigeration business, the Company provides
   environmentally sound solutions to the refrigeration needs of the
   food-processing, petrochemical, and pharmaceutical industries. More than
   80% of the Company's FES division's refrigeration products operate on
   ammonia, a non-ozone depleting alternative to the chlorofluorocarbon
   refrigerants gradually being phased out by government regulations. The 1994
   acquisition of NuTemp, Inc., which rents and sells new and remanufactured
   commercial cooling and industrial refrigeration equipment, provides the
   Company with the opportunity to broaden the product lines and services it
   offers.

   Many of Thermo Power's products are powered by its low-emission dedicated
   natural gas-fueled TecoDrive(R) engines. Thermo Power has supplied major
   fleet operators such as United Parcel Service and the U.S. Postal Service,
   as well as Blue Bird Corporation, a major school bus manufacturer, with
   TecoDrive engines to power their vehicles. Thermo Power's Crusader Engines
   division also manufactures natural gas engines for stationary applications,
   including irrigation equipment. Other products that operate with TecoDrive
   engines include cooling and cogeneration systems sold by Thermo Power's
   Tecogen division, and its newly introduced gas engine-driven refrigeration
   systems.

   Through its Tecogen division, the Company also conducts sponsored research
   and development on advanced systems for clean-coal combustion. The newest
   application of Thermo Power's combustion technology under development is a
   line of propane-powered lighting products, including flashlights, area
   lights or lanterns, and hazard lights.

   The Tecogen division is also developing a low-cost system for converting a
   diesel-fueled engine to operate solely on natural gas, without major
   modifications to the engine. This conversion kit will be designed to
   provide fleet managers a system for converting their diesel-powered
   vehicles to operate on natural gas, a much cleaner fuel.

   The Company's Alternative-energy Systems segment also includes its Peter
   Brotherhood Ltd. subsidiary, a U.K.-based manufacturer of steam turbines
   and compressors.

                                        8PAGE

   Process Equipment

   The Company designs, manufactures, and sells advanced, custom-engineered
   processing machinery, including paper-recycling and papermaking equipment,
   metallurgical thermal-processing systems, and electroplating systems.

   Paper-recycling and Papermaking Equipment

   Through its Thermo Fibertek Inc. subsidiary, the Company designs and
   manufactures processing machinery and accessories for the paper-recycling
   and papermaking industries. The Company's principal products in this
   business include custom-engineered systems and equipment for the
   preparation of wastepaper for conversion into recycled paper, and accessory
   equipment and related consumables important to the efficient operation of
   papermaking machines. The Company has developed technologically advanced
   equipment for the preparation of white recycled fiber (e.g. printing and
   office paper, newsprint, and tissue). The Company sells in countries
   outside the Pacific Rim technologically advanced equipment for the
   preparation of brown recycled fiber (e.g. corrugated boxes and paper bags)
   pursuant to a license from Aikawa Iron Works Co., Ltd., a leading Japanese
   manufacturer of this equipment.

   Thermo Fibertek also designs and manufactures accessories used in the
   papermaking industry, including doctor blades and showers that perform
   on-line continuous cleaning of the fabrics and rolls used in the
   papermaking process. This cleaning process is important to papermakers
   because it reduces machine breakdowns, extends the life of consumable paper
   machine fabrics, and improves paper quality. Through Thermo Fibertek's AES
   division, which was acquired in 1993, the Company also manufactures water-
   management systems used in papermaking.

   During December 1994, a wholly owned subsidiary of the Company entered into
   a $145 million contract for engineering, procurement, and construction
   services for an office wastepaper de-inking facility to be located in
   Menominee, Michigan. Construction is expected to take place over
   approximately two years. Thermo Fibertek will supply approximately $15
   million of equipment and services under the contract over a two year
   period.

   Revenues from paper-recycling and papermaking equipment were $162,625,000,
   $137,088,000, and $125,577,000 in 1994, 1993, and 1992, respectively.

   Metallurgical Thermal-processing Systems

   The Company, through the Holcroft division of its Thermo Process Systems
   Inc. subsidiary, designs, manufactures, and sells computer-controlled,
   custom-engineered thermal-processing systems used to treat primary metals
   and metal parts. Holcroft's products include controlled-atmosphere systems
   used to impart desirable metallurgical properties, such as added tensile
   strength and wear resistance, and vacuum heat-treating systems used in
   forming metals into desired shapes.

   The Company also manufactures electroplating systems, heavy metal and
   waste-treatment systems, and aqueous cleaning systems that offer an
   alternative to the use of ozone-damaging solvents in a variety of
   production processes.


                                        9PAGE

   Biomedical Products

   The Company's Biomedical Products segment comprises a number of different
   businesses, several of which have developed out of the Company's research
   related to left ventricular-assist systems, which began in 1966. In
   addition, the Company has made several acquisitions, including
   International Technidyne Corporation (ITC) in 1991, the biomedical division
   of Nicolet Instrument Corporation (Nicolet Biomedical) and Lorad
   Corporation in 1992, and CBI Laboratories, Inc. in 1993.

   The Company, through its Thermo Cardiosystems Inc. subsidiary, has
   developed two versions of an implantable left ventricular-assist system
   (LVAS): an pneumatic system that can be controlled by either a bedside
   console or portable unit, and an electric system that features an internal
   electric monitor powered by an external battery-pack worn by the patient.
   These devices are designed to perform substantially all or part of the
   pumping function of the left ventricle of the natural heart for patients
   suffering from cardiovascular disease. Unlike a total artificial heart
   system, which requires removal of the natural heart, an LVAS allows the
   natural heart to remain in place and assists the heart when it is unable to
   provide sufficient cardiac function to maintain life. In October 1994, the
   U.S. Food and Drug Administration (FDA) granted approval for commercial
   sales of the pneumatic LVAS. With this approval, the pneumatic system is
   available for sale to cardiac centers throughout the United States. In
   April 1994, the Company received the European Conformity Mark (CE Mark) for
   the commercial sale of the pneumatic LVAS in all European Community
   Nations. The electric version of the LVAS is currently being used in
   clinical trials for patients awaiting heart transplants and may not be sold
   commercially in the U.S. until it has received approval from the FDA.

   The Company's Thermedics Inc. subsidiary develops, manufactures, and
   markets enteral nutrition-delivery systems and proprietary medical-grade
   plastics marketed under the names Tecoflex(R) and Tecothane(R), which are
   thermoplastic polyurethanes used in medical disposables and industrial
   products.

   ITC is a leading manufacturer of hemostasis management products, including
   blood coagulation-monitoring instruments. ITC also manufactures and markets
   skin-incision devices that can draw minute but medically significant blood
   samples through precisely controlled, pain-free incisions.

   Nicolet Biomedical is a leading manufacturer of biomedical instruments for
   assessing muscle, nerve, sleep, hearing, and brain blood-flow disorders and
   for related work in clinical neurophysiology. These instruments are used in
   hospitals, clinics, universities, private practice medical offices, and
   medical research facilities by physicians and technologists for routine
   clinical testing and intra-operative monitoring. Nicolet Biomedical also
   manufactures systems that record and display spontaneous brain waves in the
   form of a topographic colored "map." Such maps of brain activity are used
   in conjunction with other measurements to assist in the diagnosis of
   various neurologic disorders.

   Lorad is a leading manufacturer of low-dose X-ray mammography equipment and
   minimally invasive needle-biopsy systems. In 1992, Lorad introduced a
   digital imaging mammography system designed to target only a specific area
   of the breast where a suspicious lesion has been detected, creating a
   digital image of the lesion on a video monitor within seconds of taking an
   X-ray. Digital imaging has advantages over traditional X-ray mammography
                                       10PAGE

   because once the X-ray has been digitally acquired, the radiologist can
   manipulate and enhance the image quality to scrutinize subtle differences
   that may go undetected on a film-based X-ray. Lorad is expanding the
   capabilities of its digital imaging system into a digital screening system
   capable of imaging the whole breast rather than just a specific area. The
   FDA is currently evaluating whether parties seeking clearance to market a
   full-breast digital imaging system will be required to submit a premarket
   approval application or a 510(k) application. The Company does not expect
   to submit data to the FDA seeking market clearance for its full-breast
   digital imaging system before the end of 1995.

   Lorad's needle-biopsy systems provide a less-invasive alternative to
   conventional surgical biopsies. Compared with open surgery, these needle
   techniques are less traumatic to the patient, result in less scarring,
   which can affect the accuracy of future mammograms, and are performed on an
   outpatient basis at a significantly lower cost.

   In December 1993, the Company's ThermoTrex Corporation subsidiary acquired
   CBI Laboratories, Inc., a manufacturer of skin-care, bath, and body
   products sold through salons, spas, and stores. It is anticipated that CBI
   will manufacture the proprietary lotion that is an integral part of the
   laser-based system being developed by ThermoLase Corporation for the
   long-term removal of unwanted hair. ThermoLase is a majority-owned
   subsidiary of ThermoTrex (see "Advanced Technologies").

   Thermedics also manufactures Scent Seal* fragrance samplers, which were
   developed from the Company's polymer technology. Scent Seal fragrance
   samplers are used to seal renditions of scents in perfume and food
   advertisements for magazines, and offer an alternative to commonly used
   fragrance strips.

   Environmental Services

   Through a network of facilities owned and operated by a joint venture
   between Thermo Instrument and Thermo Process, called Thermo Terra Tech, the
   Company provides comprehensive laboratory-based environmental testing,
   analysis, and related services for the detection, measurement, and
   monitoring of hazardous wastes and radioactive materials. The Company's
   services also include design and construction inspection of water supply
   and wastewater treatment facilities, surveying and site planning,
   transportation engineering services, solid waste management services, and
   building services.

   Thermo Remediation Inc., a majority-owned subsidiary of Thermo Process,
   provides soil-remediation services at a network of regional centers that
   serve customers mainly on the East and West coasts. These soil-remediation
   centers thermally treat soils to remove and destroy petroleum contamination
   caused by leaking storage tanks, spills, and other sources. Thermo
   Remediation also operates a waste fluids-recycling facility through a
   fluids-recovery company based in Arizona. A majority-owned subsidiary of
   Thermo Process, J. Amerika N.V., provides underground tank removal and
   other environmental services from its Netherlands-based operation.

   In addition, metallurgical heat-treating services are provided for
   customers in the automotive, aerospace, defense, and other industries. The
   Company also provides metallurgical fabrication services, principally on

   * Scent Seal is a trademark of Scent Seal Inc.
                                       11PAGE

   high-temperature materials, for customers in the aerospace, medical,
   electronics, and nuclear industries.

   Advanced Technologies

   The Company's ThermoTrex Corporation subsidiary conducts sponsored research
   and development and is also attempting to commercialize new products based
   on advanced technologies it has developed in its laboratories. Sponsored
   research and development conducted by this subsidiary, principally for the
   U.S. government, includes basic and applied research in electro-optic and
   electro-acoustic systems, signal processing, materials technology, lasers,
   and direct-energy conversion.

   Research and development currently in progress by ThermoTrex includes the
   development of a passive microwave camera that is intended to "see" through
   clouds and fog to enhance safety in aerial navigation, the Sonic CT(TM)
   (computed tomography) system for the early detection of breast cancer, a
   blood-flow measurement system, called the Doppler CT, for the diagnosis and
   monitoring of peripheral vascular disease, and a laser-based, long-term
   hair removal system (the ThermoLase system). In December 1994, based on
   data collected from clinical trials, the Company submitted a 510(k)
   application to the FDA seeking clearance to commercially market and sell
   services using the ThermoLase system. ThermoTrex's products are at
   different stages of development and are subject to different levels of
   regulatory approval. Because these projects are still under development, no
   assurance can be given that the necessary approvals for any of the projects
   will be obtained on a timely basis, or at all, or that any of them will
   eventually result in commercially viable products.

   Through Thermedics' Ramsey Technology subsidiary, which was acquired in
   March 1994, the Company manufactures instruments that weigh and inspect
   bulk materials for the mining and mineral processing industry, coal-fired
   electric utilities, and construction-material suppliers. Ramsey also
   manufactures weighing and metal-detection instruments for the food
   processing and other packaged goods markets, including the pharmaceutical
   industry.

   Based on technology that has been used to develop instruments sold by the
   Company for the detection of nitrogen-based compounds, the Company, through
   a subsidiary of Thermedics, developed the EGIS(R) system and the Sentor(R)
   system. The EGIS system is a highly sensitive chemical-detection instrument
   for screening people, baggage, packages, freight, and electronic equipment,
   such as personal computers, for the presence of a wide range of explosives,
   including the plastic explosives that have proven difficult to detect using
   conventional methods. The Sentor system is used by law enforcement
   officials to detect the presence of cocaine and heroin. In 1992, Thermedics
   introduced a high-speed product quality assurance system based on its
   detection technology for use in bottling lines in the carbonated beverage
   industry (the Alexus system). The Company believes that the technology
   developed from this project may have applications in a range of
   environments, particularly in the food and beverage industry, where the
   ability to screen products during high-speed production, without
   interruption, will enhance product quality and increase efficiency. In
   1994, the Company introduced a new system to the bottled water industry.

   The Company's Thermo Voltek Corp. subsidiary designs, develops, and
   manufactures electronic test instruments that test electronic and
   electrical systems and components for electromagnetic compatibility (EMC),
                                       12PAGE

   offers EMC-consulting and systems-integration services, acts as a
   distributor of a broad range of EMC-testing products, and manufactures
   power-conversion systems for use in telecommunications equipment. Thermo
   Voltek also designs, manufactures, and markets high-voltage power
   conversion systems, modulators, fast-response protection systems, and
   related high-voltage equipment for industrial, medical, and environmental
   processes, and defense and scientific research applications.

   Publicly and Privately Held Subsidiaries

   In 1983, the Company adopted a strategy of having certain subsidiaries sell
   a minority interest in a public or private offering to outside investors.
   An important goal of this strategy is to provide the entrepreneurial
   atmosphere and focused performance incentives of a separate business. As of
   March 3, 1995, the Company had 13 subsidiaries that have sold minority
   equity interests, 11 of which are publicly traded and two of which are
   privately held.

   Thermedics Inc. develops, manufactures, and markets product quality
   assurance systems, explosives- and drug-detection devices, and precision
   weighing and inspection equipment, as well as biomaterials and other
   biomedical products. Thermedics' products are included in the Company's
   Biomedical Products and Advanced Technologies segments.

        Thermo Cardiosystems Inc., a majority-owned subsidiary of Thermedics,
        develops, manufactures, markets, and sells implantable pneumatic left
        ventricular-assist systems designed to perform substantially all or
        part of the pumping function of the left ventricle of the natural
        heart for patients suffering from cardiovascular disease. Thermo
        Cardiosystems also performs research and development on other versions
        of its pneumatic system, as well as an electric version. Thermo
        Cardiosystems' products are included in the Company's Biomedical
        Products segment.

        Thermo Voltek Corp., a majority-owned subsidiary of Thermedics,
        designs, manufactures, and markets instruments that test electronic
        systems and components for electromagnetic compatibility, and provides
        related distribution and consulting services. Thermo Voltek also
        designs and manufactures high-voltage power conversion systems for
        research and commercial applications, and specialized power supplies
        for telecommunications equipment. Thermo Voltek's products are
        included in the Company's Advanced Technologies segment.

   Thermo Instrument Systems Inc. develops, manufactures, and markets
   analytical, monitoring, and process control instruments used to detect and
   measure air pollution, radioactivity, complex chemical compounds, toxic
   metals, and other elements in a broad range of liquids and solids as well
   as control and monitor various industrial processes. Thermo Instrument's
   products are included in the Company's Instruments segment.

        ThermoSpectra Corporation, a majority-owned, privately held subsidiary
        of Thermo Instrument, develops, manufactures, and markets precision
        imaging, inspection, and measurement instrumentation that employ a
        variety of energy sources or signals as well as high-speed data
        acquisition and digital processing technologies. ThermoSpectra's
        products are included in the Company's Instruments segment.


                                       13PAGE

   Thermo Process Systems Inc. provides a range of specialized environmental
   services, including the engineering design and construction management of
   water supply and wastewater treatment systems for both industry and
   municipalities. Through its Thermo Terra Tech joint venture with Thermo
   Instrument, Thermo Process provides environmental science and engineering
   services, laboratory-based testing, and nuclear health and safety services.
   Thermo Process also provides equipment and services for the automated
   heat-treating of metal parts. Thermo Process' products and services are
   included in the Company's Environmental Services and Process Equipment
   segments.

        Thermo Remediation Inc., a majority-owned subsidiary of Thermo
        Process, operates a network of soil-remediation centers and provides
        waste fluids-recycling and other specialized remediation services.
        Thermo Remediation's services are included in the Company's
        Environmental Services segment.

        J. Amerika N.V., a majority-owned, privately held subsidiary of Thermo
        Process, provides environmental services in the Netherlands, including
        testing, removal, and installation of underground storage tanks, and
        groundwater cleanup. J. Amerika's services are included in the
        Company's Environmental Services segment.

   Thermo Power Corporation manufactures, markets, and services industrial
   refrigeration equipment; natural gas engines for vehicular and stationary
   applications; natural gas-fueled cooling and cogeneration systems; and
   marine engines. Thermo Power also conducts sponsored research and
   development on advanced systems for clean-coal combustion and other
   high-efficiency gas-fueled devices. Thermo Power's products are included in
   the Company's Alternative-energy Systems segment.

   ThermoTrex Corporation manufactures and markets mammography and needle-
   biopsy systems for the early detection of breast cancer, and develops
   advanced technologies that it is incorporating into commercial products for
   the medical imaging, personal-care, and avionics industries. ThermoTrex's
   products are included in the Company's Advanced Technologies and Biomedical
   Products segments.

        ThermoLase Corporation, a majority-owned subsidiary of ThermoTrex, is
        developing a laser-based system for the long-term removal of unwanted
        hair, and manufactures skin-care and other personal-care products sold
        through salons, spas, and stores. ThermoLase's hair-removal system is
        included in the Company's Advanced Technologies segment, and its
        skin-care products are included in the Company's Biomedical Products
        segment.

   Thermo Fibertek Inc. develops, manufactures, and markets a range of
   equipment and accessory products for the domestic and international paper
   industry, including de-inking and stock-preparation equipment, and
   water-management systems for paper recycling. Thermo Fibertek's products
   are included in the Company's Process Equipment segment.

   Thermo Ecotek Corporation develops and operates independent (nonutility)
   power plants. Plants currently operated by the Company are owned by third
   parties and leased on a long-term basis to the Company, or are owned by
   subsidiaries or partnerships in which the Company has ownership interests.
   Thermo Ecotek's operations are included in the Company's Alternative-energy
   Systems segment.
                                       14PAGE

   The Company also has a number of wholly owned subsidiaries and divisions
   that develop, manufacture, and market neurophysiology monitoring
   instruments, blood-coagulation monitoring products and skin-incision
   devices, electroplating and wastewater treatment lines, and steam turbines
   and gas compressors, and provide services in metallurgical heat-treating
   and specialty metals fabrication. In addition, a division of the Company
   constructed and now operates a waste-recycling facility in San Diego
   County, California.

        (ii)  New Products

   The Company's business includes the development and introduction of new
   products and may include entry into new business segments. The Company has
   made no commitments to new products that require the investment of a
   material amount of the Company's assets, nor does it have any definitive
   plans to enter new business segments that would require such an investment
   (see Section (xi) "Research and Development").

        (iii)  Raw Materials

   Thermo Cardiosystems relies upon several custom-designed components and
   materials supplied by other companies to manufacture its LVAS. In 1992,
   several suppliers of such components and materials notified Thermo
   Cardiosystems that they intended to exit the biomedical market. While the
   Company believes that it will be able to develop new sources of, or
   alternatives to, these materials and components, no assurance can be given
   that the Company will develop such sources or alternatives in a timely
   manner, or that the FDA will approve the use of any such alternative
   materials or components.

   Except as described above, in the opinion of management, the Company has a
   readily available supply of raw materials for all of its significant
   products from various sources and does not anticipate any difficulties in
   obtaining the raw materials essential to its business.

        (iv)  Patents, Licenses, and Trademarks

   The Company considers patents to be important in the present operation of
   its business. However, the Company does not consider any patent, or related
   group of patents, to be of such importance that its expiration or
   termination would materially affect the Company's business taken as a
   whole. The Company seeks patent protection for inventions and developments
   made by its personnel and incorporated into its products or otherwise
   falling within its fields of interest. Patent rights resulting from work
   sponsored by outside parties do not always accrue exclusively to the
   Company and may be limited by agreements or contracts.

   The Company protects some of its technology as trade secrets and, where
   appropriate, uses trademarks or registers its products. It also enters into
   license agreements with others to grant and/or receive rights to patents
   and know-how.
                                      15PAGE

        (v)  Seasonal Influences

   There are no significant seasonal influences on the Company's sales of
   products and services.

        (vi)  Working Capital Requirements

   There are no special inventory requirements or credit terms extended to
   customers that would have a material adverse effect on the Company's
   working capital.

        (vii)  Dependency on a Single Customer

   No single customer accounted for more than 10% of the Company's total
   revenues in any of the past three years. The Advanced Technologies segment
   derived approximately 13% of its revenues in 1994 from contracts with
   various agencies of the U.S. government and approximately 23% of its
   revenues in 1994 from one customer for a process detection instrument. In
   connection with the development of power plants, the Company typically
   enters into long-term power supply contracts with a single customer for the
   sale of power generated by each plant. Although the Alternative-energy
   Systems segment is, therefore, dependent upon a small number of customers,
   the Company believes that the nature of its customers (typically utilities)
   and the long-term nature of these contracts significantly reduce the risk
   associated with a small customer base.

        (viii)  Backlog

   The Company's backlog of firm orders at year-end 1994 and 1993 was as
   follows:

   (In thousands)                                             1994      1993
   -------------------------------------------------------------------------
   Instruments                                            $139,600  $115,600
   Alternative-energy Systems                              404,100   395,900
   Process Equipment                                       199,000    36,200
   Biomedical Products                                      37,300    26,800
   Environmental Services                                   46,700    39,700
   Advanced Technologies                                    44,400    29,100
                                                          --------  --------
                                                          $871,100  $643,300
                                                          ========  ========

   Alternative-energy Systems segment backlog includes $295 million at
   year-end 1994 for revenues to be earned through 2017 from the operation of
   the Recycling Facility, construction of which was completed in early 1994
   (see "Alternative-energy Systems" under section (c), "Description of
   Business").

   Backlog includes the uncompleted portion of research and development
   contracts and the uncompleted portion of certain equipment contracts that
   are accounted for using the percentage-of-completion method. The Company
   believes approximately 93% of the 1994 backlog, excluding backlog relating
   to the Recycling Facility, will be filled during fiscal 1995. The Company
   believes that approximately $13 million of the backlog relating to the
   Recycling Facility will be filled in fiscal 1995.
                                        16PAGE

        (ix)  Government Contracts
   Approximately 2% of the Company's total revenues in fiscal 1994 were
   derived from contracts or subcontracts with the federal government, which
   are subject to renegotiation of profits or termination. The Company does
   not have any knowledge of threatened or pending renegotiation or
   termination of any material contract or subcontract.

        (x)  Competition

   The Company is engaged in many highly competitive industries. The nature of
   the competition in each of the Company's markets is described below:

   Instruments

   The Company's instruments business generally competes on the basis of
   technical advances that result in new products and improved price-
   performance ratios, reputation among customers as a quality leader for
   products and services, and active research and application-development
   programs. To a lesser extent, the Company competes on the basis of price.

   The Company believes it is among the principal manufacturers specializing
   in analytical instrumentation, although it faces significant competition
   from other companies, certain of which are larger than the Company, and
   technologies in most of its product lines. The Company believes it is a
   leading supplier of mass spectrometers, FT-IR spectrometers, FT-IR and
   FT-Raman microscopes, optical plasma-emission spectrometers, and a major
   supplier of atomic absorption spectrometers. In liquid chromatography, the
   Company believes its competitors include several large companies and
   numerous specialty manufacturers. In its remaining analytical instrument
   product lines, the Company believes its competitors are mainly smaller,
   specialized firms.

   The Company is a leading manufacturer of ambient air monitoring instruments
   and a major manufacturer of source monitoring and worker-safety monitoring
   instruments. Some engineering companies compete for large ambient air
   monitoring installations, but they do not manufacture the individual
   instruments that form a major part of the system, therefore, they will
   often buy these from the Company on an OEM basis.

   The Company has a relatively small presence within the large and varied
   process control marketplace, which is extremely fragmented and comprises
   several large companies and numerous smaller companies.

   Alternative-energy Systems

   The worldwide independent power market consists of numerous companies,
   ranging from small startups to multinational industrial companies. In
   addition, a number of regulated utilities have created subsidiaries that
   compete as nonutility generators. Nonutility generators often specialize in
   market "niches," such as a specific technology or fuel (for example,
   gas-fired cogeneration, refuse-to-energy, hydropower, geothermal, wind,
   solar, wood or coal) or a specific region of the country where they believe
   they have a market advantage. However, many nonutility generators,
   including the Company, seek to develop projects on a best-available-fuel
   basis. The Company competes primarily on the basis of project experience,
   technical expertise, capital resources, and power pricing.

   The Company's sale of industrial refrigeration systems is subject to
   intense competition. The industrial refrigeration market is mature, highly
                                       17PAGE

   fragmented, and extremely dependent on close customer contacts. Major
   industrial refrigeration companies, of which the Company's FES division is
   one, account for approximately one-half of worldwide sales, with the
   balance generated by many smaller companies. The Company competes
   principally on the basis of its advanced control systems and overall
   quality, reliability, service, and price. The Company believes it is a
   leader in remanufactured refrigeration equipment. NuTemp's rental services
   business has one large competitor that supplies rental equipment. The
   Company competes in this market based on price, delivery time, and
   customized equipment.

   The Company's sale of packaged cogeneration systems is subject to intense
   competition, both direct and indirect. Direct competitors consist of
   companies that sell cogeneration products resembling those sold by the
   Company. In addition, electric utilities' pricing programs provide
   competition for the Company's cogeneration products. Indirect competitors
   include manufacturers of conventional water heaters, air conditioners, and
   electric generator sets, since the economic benefits of the Company's
   cogeneration and cooling systems depend on the cost of conventional energy
   systems. The Company believes it competes in the sale of its systems on the
   basis of several factors, including product quality and reliability,
   operational savings, ease of installation, service, and price.

   As the alternative-fuel engine market becomes fully developed, the Company
   anticipates that competition, specifically in the market for natural gas
   engines for vehicles, will be intense, and potential competitors may
   include major automotive and natural gas companies and other companies that
   have substantially greater financial resources than those of the Company.

   The Company has experienced intense competition in the marine engine
   business in recent years, primarily from the vertical integration of boat
   and engine manufacturers that has led to the acquisition of some of its
   former customers by competing engine manufacturers. Competition is
   primarily on the basis of quality, reliability, and service.

   Process Equipment

   The Company faces significant competition in the markets for paper-
   recycling, water handling and papermachine accessories equipment, and
   competes in these markets primarily on the basis of quality, service,
   technical expertise, and product innovation. The Company is a leading
   supplier of accessory equipment for papermaking machines, and competes in
   this market primarily on the basis of service, technical expertise, and
   performance.

   Although the market for metallurgical processing systems is subject to
   intense competition worldwide, competition for particular projects is
   typically limited to only a few companies. The Company competes on the
   basis of several factors, including technical performance, product quality
   and reliability, timely delivery, and price.

   Biomedical Products

   Competition in the markets for most of the Company's biomedical products,
   including those manufactured by Thermo Cardiosystems, Lorad, Nicolet
   Biomedical, and ITC, is based to a large extent upon technical performance.
   CBI competes with a number of small manufacturers and divisions of larger

                                       18PAGE

   companies primarily on the basis of relative price and quality of its
   personal-care products.

   The Company is aware of one other company that has submitted a PMA
   application with the FDA for an implantable LVAS. The Company is unaware
   whether this PMA application has been accepted for filing by the FDA. Also,
   the Company is aware of one other company that has received a favorable
   recommendation by the FDA Advisory Panel on Circulatory System Devices for
   its cardiac-assist device. This is an external device that is positioned on
   the outside of the patients' chest and is intended for short-term use in
   the hospital environment. The Company is also aware that a total artificial
   heart is currently undergoing clinical trials. The requirement of obtaining
   FDA approval for commercial sale of an LVAS is a significant barrier to
   entry into the U.S. market for these devices. There can be no assurance,
   however, that FDA regulations will not change in the future, reducing the
   time and testing required for others to obtain FDA approval for commercial
   sales. In addition, other research groups and companies are developing
   cardiac-assist systems using alternative technologies or concepts, one or
   more of which might prove functionally equivalent to or more suitable than
   the Company's systems. Among products that have been approved for
   commercial sale, the Company competes primarily on the basis of
   performance, service capability, reimbursement status, and price.

   Lorad and General Electric Company each have approximately 30% of the U.S.
   X-ray mammography market. The balance of the market is divided among
   approximately 10 other companies. The Company competes in this market
   principally on the basis of technological advances and technical service
   support and, to a lesser extent, price.

   Environmental Services

   The Company competes in the market for soil-remediation services based on
   its ability to offer customers superior protection from environmental
   liabilities using a national network of cleanup facilities. However, the
   Company faces competition in local markets from landfills, other treatment
   technologies, and from companies competing with similar technologies, which
   limits the prices that can be charged by the Company. Pricing is therefore
   a major competitive factor for the Company.

   The Company's metallurgical services business competes in specialty
   machining services. Competition is based principally on services provided,
   turnaround time, and price.

   Hundreds of independent analytical testing laboratories and consulting
   firms compete for environmental services business nationwide. Many of these
   firms use equipment and processes similar to those of the Company.
   Competition is based not only on price, but also on reputation for
   accuracy, quality, and the ability to respond rapidly to customer
   requirements. In addition, many industrial companies have their own
   in-house analytical testing capabilities. The Company believes that its
   competitive strength lies in certain niche markets within which the Company
   is recognized for its expertise.

   Advanced Technologies

   In its contract research and development business, the Company not only
   competes with other companies and institutions that perform similar
   services, but must also rely on the ability of government agencies and
                                       19PAGE

   other clients to obtain allocations of research and development monies to
   fund contracts with the Company. The Company competes for its research and
   development programs principally on the basis of technical innovations. As
   government funding becomes more scarce, particularly for defense projects,
   the competition for such funding will become more intense. In addition, as
   the Company's programs move from the development stage to commercializa-
   tion, competition is expected to intensify.

   The Company believes that its Ramsey subsidiary is the world's leading
   supplier of precision weighing and inspection systems for bulk materials
   and competes with approximately 15 regional companies of significant size
   on the basis of performance, service, and price. Ramsey is also one of the
   five leading world suppliers of product quality assurance systems for
   packaged products. Ramsey's competitors in this market differ from those in
   the bulk materials market and the Company competes on the basis of
   performance, service and, to a lesser extent, price.

   The Company's product quality assurance systems compete with chemical-
   detection systems manufactured by several companies and with other
   technologies and processes for product quality assurance. Competition in
   the markets for all of the Company's detection products is based primarily
   on performance, service and price.

   There are a number of competing technologies for instruments that detect
   explosives and narcotics, including makers of other chemical-detection
   instruments as well as enhanced X-ray detectors. Since the Federal Aviation
   Administration (FAA) has not required that U.S. airports and airlines buy
   advanced explosives-detection equipment, the Company has not sold any EGIS
   systems to U.S. airlines. The Company believes that companies whose devices
   are required by the FAA will have a substantial competitive advantage in
   the United States.

   The Company is a leading supplier of pulsed electromagnetic interference
   testing equipment in the U.S., and believes that it is also among the
   leading suppliers in Europe and the Pacific Rim, other than Japan. The
   Company competes in this market primarily on the basis of performance,
   technical expertise, and reputation.

   The Company estimates that there are approximately 20 companies that
   independently manufacture and market high-voltage power supply systems of
   the general type manufactured and marketed by Thermo Voltek. Thermo Voltek
   competes for both contracts and commercial sales primarily on the basis of
   technical expertise, product performance, and reputation.

        (xi)  Research and Development

   During 1994, 1993, and 1992, the Company expended $99,777,000, $79,378,000,
   and $58,101,000, respectively, on research and development. Of these
   amounts, $20,925,000, $20,435,000, and $19,426,000 were sponsored by
   customers and $78,852,000, $58,943,000, and $38,675,000 were
   Company-sponsored. Approximately 807 professional employees were engaged
   full-time in research and development activities at December 31, 1994.
                                    20PAGE

        (xii)  Environmental Protection Regulations
                                       
   The Company believes that compliance with federal, state, and local
   environmental protection regulations will not have a material adverse
   effect on its capital expenditures, earnings, or competitive position.

        (xiii)  Number of Employees

   At December 31, 1994, the Company employed 10,234 persons.

   (d)  Financial Information about Exports by Domestic Operations and about
        Foreign Operations

   Financial information about exports by domestic operations and about
   foreign operations is summarized in Note 14 to Consolidated Financial
   Statements in the Registrant's 1994 Annual Report to Shareholders and is
   incorporated herein by reference.

   (e)  Executive Officers of the Registrant

                                      Present Title (Year First
   Name                          Age  Became Executive Officer)
   --------------------------------------------------------------------------
   George N. Hatsopoulos (1)     68   Chairman of the Board, President, Chief
                                      Executive Officer, and Director (1956)
   John N. Hatsopoulos (1)       60   Executive Vice President and Chief
                                      Financial Officer (1968)
   Robert C. Howard              64   Executive Vice President (1968)
   Peter G. Pantazelos           64   Executive Vice President (1968)
   Arvin H. Smith                65   Executive Vice President (1983)
   William A. Rainville          53   Senior Vice President (1993)
   Paul F. Kelleher              52   Vice President, Finance (1982)

   (1) George N. Hatsopoulos and John N. Hatsopoulos are brothers.

   Each executive officer serves until his successor is chosen or appointed
   and qualified or until earlier resignation, death, or removal. All
   executive officers have held comparable positions with the Company for at
   least the last five years.


   Item 2.  Properties

   The location and general character of the Company's principal properties by
   industry segment as of December 31, 1994, are as follows:

   Instruments

   The Company owns approximately 1,203,000 square feet of office,
   engineering, laboratory, and production space, principally in California,
   Colorado, Florida, New Mexico, Wisconsin, Germany, and England, and leases
   approximately 957,000 square feet of office, engineering, laboratory, and
   production space principally in California, Connecticut, Massachusetts,
   Texas, Wisconsin, Germany, and Japan, under leases expiring from 1995 to
   2017.
                                     21PAGE


   Alternative-energy Systems
   The Company owns approximately 298,000 square feet of office, engineering,
   and production space in Pennsylvania and England, and leases approximately
   397,000 square feet of office, engineering, laboratory, and production
   space principally in Illinois, Massachusetts and Michigan, under leases
   expiring from 1995 to 2017.

   The Company operates four independent power plants in California, Maine,
   and New Hampshire, under leases expiring from 2003 to 2009. The Company
   owns three independent power plants in New Hampshire and California and a
   waste-recycling facility in California.

   Process Equipment

   The Company owns approximately 1,234,000 square feet of office, laboratory,
   and production space, principally in Connecticut, Massachusetts, New York,
   Canada, England, France, and Mexico, and leases approximately 402,000
   square feet of office, engineering, and production space principally in
   Georgia, Michigan, and Wisconsin, under leases expiring from 1996 to 2004.

   Biomedical Products

   The Company owns approximately 97,000 square feet of office and production
   space in Connecticut and New Jersey, and leases approximately 484,000
   square feet of office, engineering, laboratory, and production space in
   Illinois, Massachusetts, New Jersey, and Texas, under leases expiring from
   1995 to 2009.

   Environmental Services

   The Company owns approximately 4,512,000 square feet of office, laboratory,
   and production space, principally in California, Florida, Maryland,
   Minnesota, Oregon, South Carolina, and the Netherlands, and leases
   approximately 1,487,000 square feet of office, engineering, laboratory, and
   production space principally in Arizona, California, Massachusetts, New
   Jersey, New Mexico, South Carolina, Virginia, and Washington under leases
   expiring from 1995 to 2008.

   Advanced Technologies and Corporate Headquarters

   The Company owns approximately 136,000 square feet of office space in
   Massachusetts and New York and leases approximately 489,000 square feet of
   office, engineering, and laboratory space principally in California,
   Massachusetts, Minnesota, England, Italy, and the Netherlands, under leases
   expiring from 1995 to 2003.

   The Company believes that its facilities are in good condition and are
   suitable and adequate to meet its current needs, and that suitable
   replacements are available on commercially reasonable terms for any leases
   that expire in 1995 in the event that the Company is unable to renew such
   leases on reasonable terms.


   Item 3.  Legal Proceedings

   The Company participates in the operation of the Dade County Downtown
   Government Center cogeneration facility in Miami, Florida, through a 50/50
   joint venture of subsidiaries of the Company and Rolls-Royce, Inc. This
   facility and the joint venture are involved in regulatory and other legal
                                       22PAGE

   proceedings at the Federal Energy Regulatory Commission, the Florida Public
   Service Commission and in court. See the information pertaining to this
   matter in Note 7 to Consolidated Financial Statements, and under the
   caption "Management's Discussion and Analysis of Financial Condition and
   Results of Operations," in the Registrant's 1994 Annual Report to
   Shareholders (filed as Exhibit 13 to this Annual Report on Form 10-K),
   which information is incorporated herein by reference.

   Certain subsidiaries of the Company have been notified that the U.S.
   Environmental Protection Agency (EPA) has determined that a release or a
   substantial threat of a release of a hazardous substance, as defined in the
   Comprehensive Environmental Response Compensation and Liability Act of 1980
   (CERCLA or the Superfund law), occurred at sites to which chemical or other
   wastes generated by the manufacturing operations of these companies may
   have been sent. These notifications generally also allege that these
   companies may be potentially responsible parties with respect to the
   remedial actions needed to control or clean up any such releases. Under
   CERCLA, responsible parties can include current and previous owners of the
   site, generators of hazardous substances disposed of at the site, and
   transporters of hazardous substances to the site. Each responsible party
   can be jointly and severally liable, without regard to fault or negligence,
   for all costs associated with site remediation. In each instance the
   Company believes that its subsidiary is one of several companies that
   received such notification and who may likewise be held liable for any such
   remedial costs.

   The Company is also involved in situations under state environmental laws
   with respect to certain other sites where remediation may be required. The
   Company is conducting investigative or remediation activities at these
   sites pursuant to arrangements with state environmental agencies.

   The Company evaluates its potential liability as a responsible party for
   these environmental matters on an ongoing basis subject to factors such as
   the estimated remediation costs, the nature and duration of the Company's
   involvement with the site, the financial strength of other potentially
   responsible parties, and the availability of indemnification from previous
   owners of acquired businesses. Estimated liabilities are accrued in
   accordance with Statement of Financial Accounting Standards No. 5,
   "Accounting for Contingencies." To date, the Company has not incurred any
   significant liability with respect to any of these sites and anticipates
   that future liabilities related to sites where the Company is currently a
   potentially responsible party or is otherwise conducting investigative or
   remediation activities, will not have a material adverse effect on its
   business, results of operations, or financial position.


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

   Not applicable.





                                        23PAGE

                                     PART II


   Item 5. Market for Registrant's Common Equity and Related Stockholder
           Matters

   Information concerning the market and market price for the Registrant's
   Common Stock, $1.00 par value, and related matters, is included under the
   sections labeled "Common Stock Market Information" and "Dividend Policy" in
   the Registrant's 1994 Annual Report to Shareholders and is incorporated
   herein by reference.

   Item 6.  Selected Financial Data

   The information required under this item is included under the sections
   "Ten Year Financial Summary" and "Dividend Policy" in the Registrant's 1994
   Annual Report to Shareholders and is incorporated herein by reference.

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

   The information required under this item is included under the heading
   "Management's Discussion and Analysis of Financial Condition and Results of
   Operations" in the Registrant's 1994 Annual Report to Shareholders and is
   incorporated herein by reference.


   Item 8.  Financial Statements and Supplementary Data

   The Registrant's Consolidated Financial Statements as of December 31, 1994,
   are included in the Registrant's 1994 Annual Report to Shareholders and are
   incorporated herein by reference.


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

   Not Applicable.















                                         24PAGE

                                    PART III

   Item 10.  Directors and Executive Officers of the Registrant

   The information concerning directors required under this item is
   incorporated herein by reference from the material contained under the
   caption "Election of Directors" in the Registrant's definitive proxy
   statement to be filed with the Securities and Exchange Commission pursuant
   to Regulation 14A, not later than 120 days after the close of the fiscal
   year. The information concerning delinquent filers pursuant to Item 405 of
   Regulation S-K is incorporated herein by reference from the material
   contained under the heading "Disclosure of Certain Late Filings" under the
   caption "Stock Ownership" in the Registrant's definitive proxy statement to
   be filed with the Securities and Exchange Commission pursuant to Regulation
   14A, not later than 120 days after the close of the fiscal year.

   Item 11.  Executive Compensation

   The information required under this item is incorporated herein by
   reference from the material contained under the caption "Executive
   Compensation" in the Registrant's definitive proxy statement to be filed
   with the Securities and Exchange Commission pursuant to Regulation 14A, not
   later than 120 days after the close of the fiscal year.


   Item 12.  Security Ownership of Certain Beneficial Owners and Management

   The information required under this item is incorporated herein by
   reference from the material contained under the caption "Stock Ownership"
   in the Registrant's definitive proxy statement to be filed with the
   Securities and Exchange Commission pursuant to Regulation 14A, not later
   than 120 days after the close of the fiscal year.

   Item 13.  Certain Relationships and Related Transactions

   The information required under this item is incorporated herein by
   reference from the material contained under the caption "Relationship with
   Affiliates" in the Registrant's definitive proxy statement to be filed with
   the Securities and Exchange Commission pursuant to Regulation 14A, not
   later than 120 days after the close of the fiscal year.















                                        25PAGE

                                     PART IV

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

   (a), (d)  Financial Statements and Schedules

             (1)  The financial statements set forth in the list below are
                  filed as part of this Report.
             (2)  The financial statement schedule set forth in the list below
                  is filed as part of this Report.
             (3)  Exhibits filed herewith or incorporated herein by reference
                  are set forth in Item 14(c) below.

             List of Financial Statements and Schedules Referenced in this
             Item 14

             Information incorporated by reference from Exhibit 13 filed
             herewith:

                  Consolidated Statement of Income
                  Consolidated Balance Sheet
                  Consolidated Statement of Cash Flows
                  Consolidated Statement of Shareholders' Investment
                  Notes to Consolidated Financial Statements
                  Report of Independent Public Accountants

             Financial Schedule included herewith:

             Schedule II:  Valuation and Qualifying Accounts

             All other schedules are omitted because they are not applicable
             or not required, or because the required information is shown
             either in the financial statements or in the notes thereto.

   (b)  Reports on Form 8-K

   During the Company's fiscal quarter ended December 31, 1994, the Company
   was not required to file, and did not file, any Current Report on Form 8-K.
   On March 6, 1995, the Company filed a Current Report on Form 8-K pertaining
   to Thermo Instruments' pending acquisition of Fisons plc.

   (c)  Exhibits

          See Exhibit Index on the page immediately preceding exhibits.














                                       26PAGE

                                   SIGNATURES

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

   Date: March 7, 1995

                                           THERMO ELECTRON CORPORATION


                                           By:George N. Hatsopoulos
                                              George N. Hatsopoulos
                                              President and Chief Executive
                                              Officer

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
   report has been signed below by the following persons on behalf of the
   Registrant and in the capacities indicated, as of March 7, 1995.

      Signature                            Title

   By:George N. Hatsopoulos                President, Chief Executive Officer,
      George N. Hatsopoulos                Chairman of the Board and Director

   By:John N. Hatsopoulos                  Executive Vice President and Chief
      John N. Hatsopoulos                  Financial Officer

   By:Paul F. Kelleher                     Vice President, Finance
      Paul F. Kelleher                     (Chief Accounting officer)

   By:John M. Albertine                    Director
      John M. Albertine  

   By:                                     Director
      Peter O. Crisp

   By:Elias P. Gyftopoulos                 Director
      Elias P. Gyftopoulos

   By:Frank Jungers                        Director
      Frank Jungers

   By:Robert A. McCabe                     Director
      Robert A. McCabe

   By:Frank E. Morris                      Director
      Frank E. Morris

   By:Donald E. Noble                      Director
      Donald E. Noble

   By:Hutham S. Olayan                     Director
      Hutham S. Olayan

   By:Roger D. Wellington                  Director
      Roger D. Wellington

                                       27PAGE

                    Report of Independent Public Accountants



   To the Shareholders and Board of Directors of
   Thermo Electron Corporation:


   We have audited in accordance with generally accepted auditing standards,
   the consolidated financial statements included in Thermo Electron
   Corporation's Annual Report to Shareholders incorporated by reference in
   this Form 10-K, and have issued our report thereon dated February 10, 1995
   (except with respect to the matters discussed in Note 15 as to which the
   date is March 1, 1995). Our audits were made for the purpose of forming an
   opinion on those statements taken as a whole. The schedule listed in Item
   14 on page 26 is the responsibility of the Company's management and is
   presented for purposes of complying with the Securities and Exchange
   Commission's rules and is not part of the basic consolidated financial
   statements. This schedule has been subjected to the auditing procedures
   applied in the audits of the basic consolidated financial statements and,
   in our opinion, fairly states in all material respects the financial data
   required to be set forth therein in relation to the basic consolidated
   financial statements taken as a whole.



                                                Arthur Andersen LLP



   Boston, Massachusetts
   February 10, 1995























                                       28PAGE

   SCHEDULE II


                           Thermo Electron Corporation

                        Valuation and Qualifying Accounts
                                 (In thousands)


                          Year Ended December 31, 1994

                 Balance,   Charged
                   Begin-  to Costs            Accounts  Accounts   Balance,
                  ning of       and              Recov-   Written    End of
                     Year  Expenses  Other(a)      ered       Off      Year
   ------------------------------------------------------------------------
   Allowance for
     Doubtful
     Accounts     $14,129   $ 4,225   $ 7,646   $   268   $(4,649)  $21,619
   ========================================================================


                           Year Ended January 1, 1994

                 Balance,   Charged
                   Begin-  to Costs            Accounts  Accounts   Balance,
                  ning of       and              Recov-   Written    End of
                     Year  Expenses  Other(a)      ered       Off      Year
   ------------------------------------------------------------------------
   Allowance for
    Doubtful
    Accounts      $11,341   $ 2,675   $ 1,532   $ 1,961   $(3,380)  $14,129
   ========================================================================


                           Year Ended January 2, 1993

                 Balance,   Charged
                   Begin-  to Costs            Accounts  Accounts   Balance,
                  ning of       and              Recov-   Written    End of
                     Year  Expenses  Other(a)      ered       Off      Year
   ------------------------------------------------------------------------
   Allowance for
     Doubtful
     Accounts     $10,865   $ 2,021   $ 1,760   $   144   $(3,449)  $11,341
   ========================================================================


   (a)  Allowances of businesses acquired during the year as described in Note
        3 to Consolidated Financial Statements in the Registrant's 1994 Annual
        Report to Shareholders.




                                       29PAGE

                                  EXHIBIT INDEX


   Exhibit
    Number       Description of Exhibit                                   Page

      2.1       Asset and Stock Purchase Agreement among the
                 Registrant, Thermo Instrument Corporation and Fisons
                 plc dated March 1, 1995 (filed as Exhibit 2.3 to Thermo
                 Instrument's Annual Report on Form 10-K for the fiscal
                 year ended December 31, 1994 [File No. 1-9786] and
                 incorporated herein by reference). Pursuant to Item
                 601(b)(2) of Regulation S-K, schedules to this
                 Agreement have been omitted. The Company hereby
                 undertakes to furnish supplementally a copy of such
                 schedules to the Commission upon request.

      3.1       Restated Certificate of Incorporation of the
                 Registrant, as amended (filed as Exhibit 3(i) to the
                 Registrant's Quarterly Report on Form 10-Q for the
                 quarter ended July 2, 1994 [File No. 1-8002] and
                 incorporated herein by reference).

      3.2       By-laws of the Registrant, as amended (filed as Exhibit
                 3.2 to the Registrant's Annual Report on Form 10-K for
                 the fiscal year ended January 1, 1994 [File No. 1-8002]
                 and incorporated herein by reference).

      4.1       Fiscal Agency Agreement dated July 29, 1992 between the
                 Registrant and Chemical Bank, pertaining to the
                 Registrant's 4 5/8% Senior Convertible Debentures due
                 1997 (filed as Exhibit 19 to the Registrant's Quarterly
                 Report on Form 10-Q for the quarter ended June 27, 1992
                 [File No. 1-8002] and incorporated herein by
                 reference).

                Fiscal Agency Agreement dated as of April 15, 1994
                 between the Registrant and Chemical Bank, pertaining to
                 the Registrant's 5% Senior Convertible Debentures due
                 2001 (filed as Exhibit 4.1 to the Registrant's
                 Quarterly Report on Form 10-Q for the quarter ended
                 April 2, 1994 [File No. 1-8002] and incorporated herein
                 by reference).

                The Registrant agrees, pursuant to Item
                 601(b)(4)(iii)(A) of Regulation S-K, to furnish to the
                 Commission upon request, a copy of each instrument with
                 respect to other long-term debt of the Registrant or
                 its consolidated subsidiaries.

      4.2       Rights Agreement dated as of May 4, 1988 between the
                 Registrant and The First National Bank of Boston, which
                 includes as Exhibit A the Form of Certificate of
                 Designations, as Exhibit B the Form of Rights
                 Certificate, and as Exhibit C the Summary of Rights to
                 Purchase Preferred Stock (filed as Exhibit 1 to the
                 Registrant's Registration Statement on Form 8-A,
                 declared effective by the Commission on June 25, 1988
                 [File No. 1-8002] and incorporated herein by
                 reference).

                                       30PAGE

                                  EXHIBIT INDEX


   Exhibit
    Number       Description of Exhibit                                   Page

     10.1       Thermo Electron Corporate Charter as amended and
                 restated effective January 3, 1993 (filed as
                 Exhibit 10.1 to the Registrant's Annual Report on Form
                 10-K for the fiscal year ended January 2, 1993
                 [File No. 1-8002] and incorporated herein by
                 reference).

     10.2       Form of Severance Benefit Agreement with officers
                 (filed as Exhibit 10.15 to the Registrant's Annual
                 Report on Form 10-K for the fiscal year ended December
                 29, 1990 [File No. 1-8002] and incorporated herein by
                 reference).

     10.3       Form of Indemnification Agreement with directors and
                 officers (filed as Exhibit 10.16 to the Registrant's
                 Annual Report on Form 10-K for the fiscal year ended
                 December 29, 1990 [File No. 1-8002] and incorporated
                 herein by reference).

     10.4       Loan and Reimbursement Agreement dated as of December
                 1, 1991 among North County Resource Recovery
                 Associates; Union Bank of Switzerland; National
                 Westminster Bank PLC and Banque Paribas, New York
                 Branch, as lead managers; Credit Local de France as
                 co-lead manager; and Union Bank of Switzerland as
                 issuing bank and as agent (filed as Exhibit 10.39 to
                 the Registrant's Annual Report on Form 10-K for the
                 fiscal year ended January 2, 1993 [File No. 1-8002] and
                 incorporated herein by reference).

     10.5       Amended and Restated Reimbursement Agreement dated as
                 of December 31, 1993 among Chemical Trust Company of
                 California as Owner Trustee; Delano Energy Company
                 Inc.; ABN AMRO Bank N.V., Boston Branch, for itself and
                 as Agent; The First National Bank of Boston, as
                 Co-agent; Barclays Bank PLC, as Co-agent; Societe
                 Generale, as Co-agent; and BayBank, as Lead Manager
                 (filed as Exhibit 10.5 to the Registrant's Annual
                 Report on Form 10-K for the fiscal year ended January
                 1, 1994 [File No. 1-8002] and incorporated herein by
                 reference).

     10.6       Amended and Restated Participation Agreement dated as
                 of December 31, 1991 among Delano Energy Company Inc.;
                 Thermo Energy Systems Corporation; Chemical Trust
                 Company of California, as Owner Trustee; ABN AMRO Bank
                 N.V., Boston Branch, as Co-agent; Bank of Montreal, as
                 Co-agent; Barclays Bank PLC, as Co-agent; Society
                 Generale, as Co-agent; BayBank, as Lead Manager; and
                 ABN AMRO Bank N.V., Cayman Island Branch, and joined in
                 by the Registrant (filed as Exhibit 10.6 to the
                 Registrant's Annual Report on Form 10-K for the fiscal
                 year ended January 1, 1994 [File No. 1-8002].


                                       31PAGE

                                  EXHIBIT INDEX


   Exhibit
    Number       Description of Exhibit                                   Page

     10.7       Turnkey Engineering, Procurement, Construction and
                 Initial Operation Agreement for a deinking pulp
                 facility dated as of November 1, 1994 between the
                 Registrant, as contractor, and Great Lakes Pulp
                 Partners I, L.P., as owner. Pursuant to Item 601(b)(2)
                 of Regulation S-K, schedules to this Agreement have
                 been omitted. The Company hereby undertakes to furnish
                 supplementally a copy of such schedules to the
                 Commission upon request.

   10.8 - 10.20 Reserved.

     10.21      Incentive Stock Option Plan of the Registrant (filed as
                 Exhibit 4(d) to the Registrant's Registration Statement
                 on Form S-8 [Reg. No. 33-8993] and incorporated herein
                 by reference). (Maximum number of shares issuable in
                 the aggregate under this plan and the Registrant's
                 Nonqualified Stock Option Plan is 6,023,437 shares,
                 after adjustment to reflect share increases approved in
                 1984 and 1986, and share decrease approved in 1989, and
                 3-for-2 stock splits effected in October 1986 and
                 October 1993).

     10.22      Nonqualified Stock Option Plan of the Registrant (filed
                 as Exhibit 4(e) to the Registrant's Registration
                 Statement on Form S-8 [Reg. No. 33-8993] and
                 incorporated herein by reference). (Plan amended in
                 1984 to extend expiration date to December 14, 1994;
                 maximum number of shares issuable in the aggregate
                 under this plan and the Registrant's Incentive Stock
                 Option Plan is 6,023,437 shares, after adjustment to
                 reflect share increases approved in 1984 and 1986, and
                 share decrease approved in 1989, and 3-for-2 stock
                 splits effected in October 1986 and October 1993).

     10.23      Deferred Compensation for Directors of the Registrant
                 (filed as Exhibit 10.5 to the Registrant's Annual
                 Report on Form 10-K for the fiscal year ended January
                 3, 1987 [File No. 1-8002] and incorporated herein by
                 reference). (Maximum number of shares issuable is
                 301,875 shares, after adjustment to reflect share
                 increases approved in 1986 and 1992 and 3-for-2 stock
                 splits effected in October 1986 and October 1993).

     10.24      Equity Incentive Plan of the Registrant (filed as
                 Exhibit 10.1 to the Registrant's Quarterly Report on
                 Form 10-Q for the quarter ended July 2, 1994 [File No.
                 1-8002] and incorporated herein by reference). (Plan
                 amended in 1989 to restrict exercise price for SEC
                 reporting persons to not less than 50% of fair market
                 value or par value; maximum number of shares issuable
                 is 4,700,000 shares, after adjustment to reflect
                 3-for-2 stock split effected in October 1993 and share
                 increase approved in 1994).

                                       32PAGE

                                  EXHIBIT INDEX


   Exhibit
    Number       Description of Exhibit                                   Page

     10.25      Amended and Restated Directors' Stock Option Plan of
                 the Registrant.

     10.26      Thermo Electron Corporation - Thermedics Inc.
                 Nonqualified Stock Option Plan (filed as Exhibit 4 to a
                 Registration Statement on Form S-8 of Thermedics [Reg.
                 No. 2-93747] and incorporated herein by reference).
                 (Maximum number of shares issuable is 450,000 shares,
                 after adjustment to reflect share increase approved in
                 1988, 5-for-4 stock split effected in January 1985,
                 4-for-3 stock split effected in September 1985, and
                 3-for-2 stock splits effected in October 1986 and
                 November 1993).

     10.27      Thermo Electron Corporation - Thermo Instrument Systems
                 Inc. (formerly Thermo Environmental Corporation)
                 Nonqualified Stock Option Plan (filed as Exhibit 4(c)
                 to a Registration Statement on Form S-8 of Thermo
                 Instrument [Reg. No. 33-8034] and incorporated herein
                 by reference). (Maximum number of shares issuable is
                 225,000 shares, after adjustment to reflect 3-for-2
                 stock split effected in July 1993).

     10.28      Thermo Electron Corporation - Thermo Instrument Systems
                 Inc. Nonqualified Stock Option Plan (filed as Exhibit
                 10.12 to the Registrant's Annual Report on Form 10-K
                 for the fiscal year ended January 3, 1987 [File No.
                 1-8002] and incorporated herein by reference). (Maximum
                 number of shares issuable is 320,152 shares, after
                 adjustment to reflect share increase approved in 1988
                 and 3-for-2 stock splits effected in January 1988 and
                 July 1993).

     10.29      Thermo Electron Corporation - Thermo Process Systems
                 Inc. Nonqualified Stock Option Plan (filed as Exhibit
                 10.13 to the Registrant's Annual Report on Form 10-K
                 for the fiscal year ended January 3, 1987 [File No.
                 1-8002] and incorporated herein by reference). (Maximum
                 number of shares issuable is 108,000 shares, after
                 adjustment to reflect 6-for-5 stock splits effected in
                 July 1988 and March 1989, and 3-for-2 stock split
                 effected in September 1989).

     10.30      Thermo Electron Corporation - Thermo Power Corporation
                 (formerly Tecogen Inc.) Nonqualified Stock Option Plan
                 (filed as Exhibit 10.14 to the Registrant's Annual
                 Report on Form 10-K for the fiscal year ended January
                 3, 1987 [File No. 1-8002] and incorporated herein by
                 reference).






                                       33PAGE

                                  EXHIBIT INDEX


   Exhibit
    Number       Description of Exhibit                                   Page

     10.31      Thermo Electron Corporation - Thermo Cardiosystems Inc.
                 Nonqualified Stock Option Plan (filed as Exhibit 10.11
                 to the Registrant's Annual Report on Form 10-K for the
                 fiscal year ended December 29, 1990 [File No. 1-8002]
                 and incorporated herein by reference). (Maximum number
                 of shares issuable is 130,500 shares, after adjustment
                 to reflect share increases approved in 1990 and 1992,
                 3-for-2 stock split effected in January 1990, 5-for-4
                 stock split effected in May 1990, and 2-for-1 stock
                 split effected in November 1993).

     10.32      Thermo Electron Corporation - Thermo Ecotek Corporation
                 (formerly Thermo Energy Systems Corporation)
                 Nonqualified Stock Option Plan (filed as Exhibit 10.12
                 to the Registrant's Annual Report on Form 10-K for the
                 fiscal year ended December 29, 1990 [File No. 1-8002]
                 and incorporated herein by reference).

     10.33      Thermo Electron Corporation - ThermoTrex Corporation
                 (formerly Thermo Electron Technologies Corporation)
                 Nonqualified Stock Option Plan (filed as Exhibit 10.13
                 to the Registrant's Annual Report on Form 10-K for the
                 fiscal year ended December 29, 1990 [File No. 1-8002]
                 and incorporated herein by reference). (Maximum number
                 of shares issuable is 180,000 shares, after adjustment
                 to reflect 3-for-2 stock split effected in
                 October 1993).

     10.34      Thermo Electron Corporation - Thermo Fibertek Inc.
                 Nonqualified Stock Option Plan (filed as Exhibit 10.14
                 to the Registrant's Annual Report on Form 10-K for the
                 fiscal year ended December 28, 1991 [File No. 1-8002]
                 and incorporated herein by reference). (Maximum number
                 of shares issuable is 400,000 shares, after adjustment
                 to reflect 2-for-1 stock split effected in September
                 1992).

     10.35      Thermo Electron Corporation - Thermo Voltek Corp.
                 (formerly Universal Voltronics Corp.) Nonqualified
                 Stock Option Plan (filed as Exhibit 10.17 to the
                 Registrant's Annual Report on Form 10-K for the fiscal
                 year ended January 2, 1993 [File No. 1-8002] and
                 incorporated herein by reference). (Maximum number of
                 shares issuable is 7,500 shares, after adjustment to
                 reflect 3-for-2 stock split effected in November 1993).










                                       34PAGE

                                  EXHIBIT INDEX


   Exhibit
    Number       Description of Exhibit                                   Page

     10.36      Thermo Ecotek Corporation (formerly Thermo Energy
                 Systems Corporation) Incentive Stock Option Plan (filed
                 as Exhibit 10.18 to the Registrant's Annual Report on
                 Form 10-K for the fiscal year ended January 2, 1993
                 [File No. 1-8002] and incorporated herein by
                 reference). (Maximum number of shares issuable in the
                 aggregate under this plan and the Thermo Ecotek
                 Nonqualified Stock Option Plan is 900,000 shares, after
                 adjustment to reflect share increase approved in
                 December 1993).

     10.37      Thermo Ecotek Corporation (formerly Energy Systems
                 Corporation) Nonqualified Stock Option Plan (filed as
                 Exhibit 10.19 to the Registrant's Annual Report on
                 Form 10-K for the fiscal year ended January 2, 1993
                 [File No. 1-8002] and incorporated herein by
                 reference). (Maximum number of shares issuable in the
                 aggregate under this plan and the Thermo Ecotek
                 Incentive Stock Option Plan is 900,000 shares, after
                 adjustment to reflect share increase approved in
                 December 1993).

     10.38      Thermo Ecotek Corporation (formerly Thermo Energy
                 Systems Corporation) Equity Incentive Plan (filed as
                 Exhibit 10.39 to Thermo Instrument's Annual Report on
                 Form 10-K for the fiscal year ended December 31, 1994
                 [File No. 1-9786] and incorporated herein by
                 reference).

     10.39      Thermedics Inc. Nonqualified Stock Option Plan (filed
                 as Exhibit 10(e) to Thermedics' Registration Statement
                 on Form S-1 [Reg. No. 33-84380] and incorporated herein
                 by reference). (Maximum number of shares issuable in
                 the aggregate under this plan and the Thermedics
                 Incentive Stock Option Plan is 1,931,923 shares, after
                 adjustment to reflect share increases approved in 1986
                 and 1992, 5-for-4 stock split effected in January 1985,
                 4-for-3 stock split effected in September 1985, and
                 3-for-2 stock splits effected in October 1986 and
                 November 1993).

     10.40      Thermedics Inc. Incentive Stock Option Plan (filed as
                 Exhibit 10(d) to Thermedics' Registration Statement on
                 Form S-1 [Reg. No. 33-84380] and incorporated herein by
                 reference). (Maximum number of shares issuable in the
                 aggregate under this plan and the Thermedics
                 Nonqualified Stock Option Plan is 1,931,923 shares,
                 after adjustment to reflect share increases approved in
                 1986 and 1992, 5-for-4 stock split effected in January
                 1985, 4-for-3 stock split effected in September 1985,
                 and 3-for-2 stock splits effected in October 1986 and
                 November 1993).



                                       35PAGE

                                  EXHIBIT INDEX


   Exhibit
    Number       Description of Exhibit                                   Page

     10.41      Thermedics Inc. Equity Incentive Plan (filed as
                 Appendix A to the Proxy Statement dated May 10, 1993 of
                 Thermedics [File No. 1-9567] and incorporated herein by
                 reference). (Maximum number of shares issuable is
                 1,500,000 shares, after adjustment to reflect 3-for-2
                 stock split effected in November 1993).

     10.42      Thermedics Inc. - Thermedics Detection Inc.
                 Nonqualified Stock Option Plan (filed as Exhibit 10.20
                 to the Registrant's Annual Report on Form 10-K for the
                 fiscal year ended January 2, 1993 [File No. 1-8002] and
                 incorporated herein by reference).

     10.43      Thermo Cardiosystems Inc. Incentive Stock Option Plan
                 (filed as Exhibit 10(f) to Thermo Cardiosystems'
                 Registration Statement on Form S-1 [Reg. No. 33-25144]
                 and incorporated herein by reference). (Maximum number
                 of shares issuable in the aggregate under this plan and
                 the Thermo Cardiosystems Nonqualified Stock Option Plan
                 is 1,143,750 shares, after adjustment to reflect share
                 increase approved in 1992, 3-for-2 stock split effected
                 in January 1990, 5-for-4 stock split effected in May
                 1990, and 2-for-1 stock split effected in November
                 1993).

     10.44      Thermo Cardiosystems Inc. Nonqualified Stock Option
                 Plan (filed as Exhibit 10(g) to Thermo Cardiosystems'
                 Registration Statement on Form S-1 [Reg. No. 33-25144]
                 and incorporated herein by reference). (Maximum number
                 of shares issuable in the aggregate under this plan and
                 the Thermo Cardiosystems Incentive Stock Option Plan is
                 1,143,750 shares, after adjustment to reflect share
                 increase approved in 1992, 3-for-2 stock split effected
                 in January 1990, 5-for-4 stock split effected in May
                 1990, and 2-for-1 stock split effected in November
                 1993).

     10.45      Thermo Cardiosystems Inc. Equity Incentive Plan (filed
                 as Exhibit 10.46 to Thermo Instrument's Annual Report
                 on Form 10-K for the fiscal year ended December 31,
                 1994 [File No. 1-9786] and incorporated herein by
                 reference).

     10.46      Thermo Voltek Corp. (formerly Universal Voltronics
                 Corp.) 1985 Stock Option Plan (filed as Exhibit 10.14
                 to Thermo Voltek's Annual Report on Form 10-K for the
                 fiscal year ended June 30, 1985 [File No. 0-8245] and
                 incorporated herein by reference). (Maximum number of
                 shares issuable is 200,000 shares, after adjustment to
                 reflect 1-for-3 reverse stock split effected in
                 November 1992 and 3-for-2 stock split effected in
                 November 1993).



                                       36PAGE

                                  EXHIBIT INDEX


   Exhibit
    Number       Description of Exhibit                                   Page

     10.47      Thermo Voltek Corp. (formerly Universal Voltronics
                 Corp.) 1990 Stock Option Plan (filed as Exhibit 10.2 to
                 Thermo Voltek's Annual Report on Form 10-K for the
                 fiscal year ended June 30, 1990 [File No. 1-10574] and
                 incorporated herein by reference). (Maximum number of
                 shares issuable is 400,000 shares, after adjustment to
                 reflect share increase in 1993, 1-for-3 reverse stock
                 split effected in November 1992, 3-for-2 stock split
                 effected in November 1993, and share increase approved
                 in 1994).

     10.48      Thermo Voltek Corp. Equity Incentive Plan (filed as
                 Exhibit 10.49 to Thermo Instrument's Annual Report on
                 Form 10-K for the fiscal year ended December 31, 1994
                 [File No. 1-9786] and incorporated herein by
                 reference).

     10.49      Thermo Instrument Systems Inc. Incentive Stock Option
                 Plan (filed as Exhibit 10(c) to Thermo Instrument's
                 Registration Statement on Form S-1 [Reg. No. 33-6762]
                 and incorporated herein by reference). (Maximum number
                 of shares issuable in the aggregate under this plan and
                 the Thermo Instrument Nonqualified Stock Option Plan is
                 1,500,000 shares, after adjustment to reflect share
                 increase approved in 1990 and 3-for-2 stock splits
                 effected in January 1988 and July 1993).

     10.50      Thermo Instrument Systems Inc. Nonqualified Stock
                 Option Plan (filed as Exhibit 10(d) to Thermo
                 Instrument's Registration Statement on Form S-1 [Reg.
                 No. 33-6762] and incorporated herein by reference).
                 (Maximum number of shares issuable in the aggregate
                 under this plan and the Thermo Instrument Incentive
                 Stock Option Plan is 1,500,000 shares, after adjustment
                 to reflect share increase approved in 1990 and 3-for-2
                 stock splits effected in January 1988 and July 1993).

     10.51      Thermo Instrument Systems Inc. Equity Incentive Plan
                 (filed as Appendix A to the Proxy Statement dated April
                 27, 1993 of Thermo Instrument [File No. 1-9786] and
                 incorporated herein by reference). (Maximum number of
                 shares issuable is 2,150,000 shares, after adjustment
                 to reflect share increase approved in December 1993 and
                 3-for-2 stock split effected in July 1993).

     10.52      Thermo Instrument Systems Inc. (formerly Thermo
                 Environmental Corporation) Incentive Stock Option Plan
                 (filed as Exhibit 10(d) to Thermo Environmental's
                 Registration Statement on Form S-1 [Reg. No. 33-329]
                 and incorporated herein by reference). (Maximum number
                 of shares issuable in the aggregate under this plan and
                 the Thermo Instrument (formerly Thermo Environmental)
                 Nonqualified Stock Option Plan is 618,750 shares, after
                 adjustment to reflect share increase approved in 1987
                 and 3-for-2 stock split effected in July 1993).
                                       37PAGE

                                  EXHIBIT INDEX


   Exhibit
    Number       Description of Exhibit                                   Page

     10.53      Thermo Instrument Systems Inc. (formerly Thermo
                 Environmental Corporation) Nonqualified Stock Option
                 Plan (filed as Exhibit 10(e) to Thermo Environmental's
                 Registration Statement on Form S-1 [Reg. No. 33-329]
                 and incorporated herein by reference). (Maximum number
                 of shares issuable in the aggregate under this plan and
                 the Thermo Instrument (formerly Thermo Environmental)
                 Incentive Stock Option Plan is 618,750 shares, after
                 adjustment to reflect share increase approved in 1987
                 and 3-for-2 stock split effected in July 1993).

     10.54      Thermo Instrument Systems Inc. - ThermoSpectra Corporation
                Nonqualified Stock Option Plan (filed as Exhibit 10.51 to
                Thermo Instrument's Annual Report on Form 10-K for the fiscal
                year ended December 31, 1994 [File No. 1-9786] and
                incorporated herein by reference).

     10.55      ThermoSpectra Corporation Equity Incentive Plan (filed as
                Exhibit 10.52 to Thermo Instrument's Annual Report on Form
                10-K for the fiscal year ended December 31, 1994 [File No.
                1-9786] and incorporated herein by reference).

     10.56      ThermoTrex Corporation (formerly Thermo Electron
                 Technologies Corporation) Incentive Stock Option Plan
                 (filed as Exhibit 10(h) to ThermoTrex's Registration
                 Statement on Form S-1 [Reg. No. 33-40972] and
                 incorporated herein by reference). (Maximum number of
                 shares issuable in the aggregate under this plan and
                 the ThermoTrex Nonqualified Stock Option Plan is
                 1,945,000 shares, after adjustment to reflect share
                 increases approved in 1992 and 1993, and 3-for-2 stock
                 split effected in October 1993).

     10.57      ThermoTrex Corporation (formerly Thermo Electron
                 Technologies Corporation) Nonqualified Stock Option
                 Plan (filed as Exhibit 10(i) to ThermoTrex's
                 Registration Statement on Form S-1 [Reg. No. 33-40972]
                 and incorporated herein by reference). (Maximum number
                 of shares issuable in the aggregate under this plan and
                 the ThermoTrex Incentive Stock Option Plan is 1,945,000
                 shares, after adjustment to reflect share increases
                 approved in 1992 and 1993, and 3-for-2 stock split
                 effected in October 1993).

     10.58      ThermoTrex Corporation - ThermoLase Corporation
                 (formerly ThermoLase Inc.) Nonqualified Stock Option
                 Plan (filed as Exhibit 10.53 to ThermoTrex's Annual
                 Report on Form 10-K for the fiscal year ended
                 January 1, 1994 [File No. 1-10791] and incorporated
                 herein by reference).





                                       38PAGE

                                  EXHIBIT INDEX


   Exhibit
    Number       Description of Exhibit                                   Page

     10.59      ThermoLase Corporation (formerly ThermoLase Inc.)
                 Nonqualified Stock Option Plan (filed as Exhibit 10.54
                 to ThermoTrex Corporation's Annual Report on Form 10-K
                 for the fiscal year ended January 1, 1994 [File No.
                 1-10791] and incorporated herein by reference) (Maximum
                 number of shares issuable in the aggregate under this
                 plan and the ThermoLase Incentive Stock Option Plan is
                 1,400,000 shares, after adjustment to reflect share
                 increases approved in 1993 and 2-for-1 stock split
                 effected in March 1994).

     10.60      ThermoLase Corporation (formerly ThermoLase Inc.)
                 Incentive Stock Option Plan (filed as Exhibit 10.55 to
                 ThermoTrex's Annual Report on Form 10-K for the fiscal
                 year ended January 1, 1994 [File No. 1-10791] and
                 incorporated herein by reference). (Maximum number of
                 shares issuable in the aggregate under this plan and
                 the ThermoLase Nonqualified stock option plan is
                 1,400,000 shares, after adjustment to reflect share
                 increase approved in 1993 and 2-for-1 stock split
                 effected in March 1994).

     10.61      Thermo Fibertek Inc. Incentive Stock Option Plan (filed
                 as Exhibit 10(k) to Thermo Fibertek's Registration
                 Statement on Form S-1 [Reg. No. 33-51172] and
                 incorporated herein by reference).

     10.62      Thermo Fibertek Inc. Nonqualified Stock Option Plan
                 (filed as Exhibit 10(l) to Thermo Fibertek's
                 Registration Statement on Form S-1 [Reg. No. 33-51172]
                 and incorporated herein by reference).

     10.63      Thermo Fibertek Inc. Equity Incentive Plan (filed as
                 Exhibit 10.60 to Thermo Instrument's Annual Report on
                 Form 10-K for the fiscal year ended December 31, 1994
                 [File No. 1-9786] and incorporated herein by
                 reference).

     10.64      Thermo Power Corporation (formerly Tecogen Inc.)
                 Incentive Stock Option Plan (filed as Exhibit 10(h) to
                 Thermo Power's Registration Statement on Form S-1 [Reg.
                 No. 33-14017] and incorporated herein by reference).
                 (Maximum number of shares issuable in the aggregate
                 under this plan and the Thermo Power Nonqualified Stock
                 Option Plan is 950,000 shares, after adjustment to
                 reflect share increases approved in 1990, 1992, and
                 1993).








                                       39PAGE

                                  EXHIBIT INDEX


   Exhibit
    Number       Description of Exhibit                                   Page

     10.65      Thermo Power Corporation (formerly Tecogen Inc.)
                 Nonqualified Stock Option Plan (filed as Exhibit 10(i)
                 to Thermo Power's Registration Statement on Form S-1
                 [Reg. No. 33-14017] and incorporated herein by
                 reference). (Maximum number of shares issuable in the
                 aggregate under this plan and the Thermo Power
                 Incentive Stock Option Plan is 950,000 shares, after
                 adjustment to reflect share increases approved in 1990,
                 1992, and 1993).

     10.66      Thermo Power Corporation Equity Incentive Plan (filed
                 as Exhibit 10.63 to Thermo Instrument's Annual Report
                 on Form 10-K for the fiscal year ended December 31,
                 1994 [File No. 1-9786] and incorporated herein by
                 reference).

     10.67      Thermo Process Systems Inc. Incentive Stock Option Plan
                 (filed as Exhibit 10(h) to Thermo Process' Registration
                 Statement on Form S-1 [Reg. No. 33-6763] and
                 incorporated herein by reference). (Maximum number of
                 shares issuable in the aggregate under this plan and
                 the Thermo Process Nonqualified Stock Option Plan is
                 1,850,000 shares, after adjustment to reflect share
                 increases approved in 1987, 1989, and 1992, 6-for-5
                 stock splits effected in July 1988 and March 1989, and
                 3-for-2 stock split effected in September 1989).

     10.68      Thermo Process Systems Inc. Nonqualified Stock Option
                 Plan (filed as Exhibit 10(i) to Thermo Process'
                 Registration Statement on Form S-1 [Reg. No. 33-6763]
                 and incorporated herein by reference). (Maximum number
                 of shares issuable in the aggregate under this plan and
                 the Thermo Process Incentive Stock Option Plan is
                 1,850,000 shares, after adjustment to reflect share
                 increases approved in 1987, 1989, and 1992, 6-for-5
                 stock splits effected in July 1988 and March 1989, and
                 3-for-2 stock split effected in September 1989).

     10.69      Thermo Process Systems Inc. Equity Incentive Plan
                 (filed as Exhibit 10.63 to Thermedics' Annual Report on
                 Form 10-K for the year ended January 1, 1994 [File No.
                 1-9567] and incorporated herein by reference). (Maximum
                 number of shares issuable is 1,750,000 shares, after
                 adjustment to reflect share increased approved in
                 1994).

     10.70      Thermo Process Systems Inc. - Thermo Remediation Inc.
                 Nonqualified Stock Option Plan (filed as Exhibit 10(l)
                 to Thermo Process' Quarterly Report on Form 10-Q for
                 the fiscal quarter ended January 1, 1994 [File No.
                 1-9549] and incorporated herein by reference).




                                       40PAGE

                                  EXHIBIT INDEX


   Exhibit
    Number       Description of Exhibit                                   Page


     10.71      Thermo Remediation Inc. Equity Incentive Plan (filed as
                 Exhibit 10.7 to Thermo Remediation's Registration
                 Statement on Form S-1 [Reg. No. 33-70544] and
                 incorporated herein by reference).

     10.72       Thermedics Detection Inc. Equity Incentive Plan (filed as
                 Exhibit 10.69 to Thermo Instrument's Annual Report on Form
                 10-K for the fiscal year ended December 31, 1994 [File No.
                 1-9786] and incorporated herein by reference).

     11         Computation of earnings per share.

     13         Annual Report to Shareholders for the year ended
                 December 31, 1994 (only those portions incorporated
                 herein by reference).

     21         Subsidiaries of the Registrant.

     23         Consent of Arthur Andersen LLP.

     27         Financial Data Schedule.































                                       40

EX-10.7

                                                                  Exhibit 10.7


                                                               EXECUTION COPY








               TURNKEY ENGINEERING, PROCUREMENT, CONSTRUCTION AND
                           INITIAL OPERATION AGREEMENT


                                       FOR


                             DEINKING PULP FACILITY


                                 BY AND BETWEEN


                       GREAT LAKES PULP PARTNERS I, L.P.,

                                    AS OWNER,


                                       AND


                          THERMO ELECTRON CORPORATION,

                                  AS CONTRACTOR





                              ____________________


                          Dated as of November 1, 1994
PAGE

                                TABLE OF CONTENTS

                                                                          Page



                                    ARTICLE 1
                                   Definitions

   1.1  Definitions         ..................................................

                                    ARTICLE 2
             Contractor's Work and Other  Obligations of Contractor

   2.1  Work To Be Performed   ...............................................
        2.1.1     Scheduling   ...............................................
        2.1.2     Engineering and Design  ..................................  
                  2.1.2.1  Design   ..........................................
                  2.1.2.2  Design Documents   ................................
                  2.1.2.3  Operating Manual   ................................
        2.1.3     Procurement  .............................................  
        2.1.4     Construction  ............................................  
        2.1.5     Labor and Personnel   ......................................
        2.1.6     Project Site; Real Estate Rights  ........................  
        2.1.7     Contractor Permitting  ...................................  
        2.1.8     Royalties and License Fees  ..............................  
        2.1.9     Labor Relations  .........................................  
        2.1.10    Inspection and Expediting  ...............................  
        2.1.11    Project Site Access; Owner's Accommodations; Project Site   
                           Meetings  .......................................  
        2.1.12    Uncovering of Work   .......................................
        2.1.13    Storage and Related Matters   ..............................
        2.1.14    Utilities; Fuel  .........................................  
        2.1.15    Spare Parts   ..............................................
        2.1.16    Clean-Up and Waste Disposal   ..............................
        2.1.17    Schedule Updates; Progress Reports  ......................  
        2.1.18    Taxes     ................................................  
        2.1.19    Employee Identification  .................................  
        2.1.20    Adjoining Utilities  .....................................  
        2.1.21    Protection of Property   ...................................
        2.1.22    Coordination with Owner Contractors  .......................
        2.1.23    Contract Documents at Project Site  ......................  
        2.1.24    Commissioning   ............................................
        2.1.25    Start-Up and Initial Operation   ...........................
        2.1.26    Further Assurances  ......................................  
        2.1.27    Quality Assurance   ........................................
   2.2  Commencement of the Work  ............................................
   2.3  Standard of Performance  ...........................................  
   2.4  Compliance with Applicable Laws   ....................................
   2.5  Independent Engineer   ...............................................
   2.6  Safety Precautions and Environmental Protection   ....................

   2.7  Owner's Right to Carry Out Work   ....................................
PAGE

                                    ARTICLE 3
                                  Subcontracts

   3.1  Project Subcontractors   .............................................
   3.2  Payments to Subcontractors   .........................................
   3.3  Subcontractor Warranties   ...........................................
   3.4  No Privity            ................................................
   3.5  Review and Approval not Relief of Contractor's Liability   ...........

                                    ARTICLE 4
                                Price and Payment

   4.1  Contract Sum        ................................................  
   4.2  Payment Schedule 
        4.2.1     Request for Payment   ......................................
        4.2.2     Conditions to Scheduled Payments   .........................
        4.2.3     Deferral of Scheduled Payments   ...........................
        4.2.4     Interest on Late Payments   ................................
   4.3  Deferrable Portion of Contract Sum   .................................
   4.4  All Payments Subject to Release of Liens   ...........................
   4.5  Payment or Use Not Acceptance   ......................................
   4.6  Set-off 
   4.7  Non-Recourse Obligations   ...........................................

                                    ARTICLE 5
                               Owner's Obligations

   5.1  Representatives     
   5.2  Project Site        ..................................................
   5.3  Permits 
   5.4  Utilities           ..................................................
   5.5  Waste Paper Supply.   ................................................
   5.6  Disposition of Pulp and Waste Products   .............................
   5.7  Certain Equipment To Be Supplied by Owner   ..........................
   5.8  Protection of Property   .............................................
   5.9  K&K Leased Premises   ................................................
   5.10 Independent Engineer   ...............................................
   5.11 Limitation on Certain Amendments   ...................................
                                    ARTICLE 6
                      Completion and Acceptance of Project

   6.1  Training 
   6.2  Project Commissioning   ..............................................
   6.3  Mechanical Completion   ..............................................
        6.3.1     Demonstration of Mechanical Completion   ...................
        6.3.2     Notice of Mechanical Completion   ..........................
        6.3.3     Achievement of Mechanical Completion   .....................
   6.4  Initial Operating Period; Performance Tests.   .......................
   6.5  Completed Performance Tests   ........................................
   6.6  Interim Performance Test Success   ...................................
        6.6.1     Demonstration of Interim Performance Test Success   ........
        6.6.2     Notice and Report of Interim Performance Test Success   ....
        6.6.3     Achievement of Interim Performance Test Success   ..........
   6.7  Project Acceptance 
        6.7.1     Demonstration of Project Acceptance   ......................
        6.7.2     Notice and Report of Project Acceptance   ..................
        6.7.3     Achievement of Project Acceptance   ........................
        6.7.4     Contractor's Election of Project Acceptance   ..............
PAGE

        6.7.5     Deemed Project Acceptance   ................................
        6.7.6     Access 
   6.8  Punch List          ..................................................
   6.9  Acceptance and Approvals Not a Release of Contractor   ...............

                                    ARTICLE 7
                    Guaranteed Dates; Delay Payments; Bonuses

   7.1  Guaranteed Completion Date   .........................................
   7.2  Guaranteed IPT No. 3 Success Date   ..................................
   7.3  Guaranteed Acceptance Date   .........................................
   7.4  Delay Payments 
        7.4.1     Failure to Achieve Guaranteed Completion Date   ............
        7.4.2     Failure to Achieve Guaranteed IPT No. 3 Success   ..........
        7.4.3     Failure to Achieve Guaranteed Acceptance Date   ............
        7.4.4     Liquidated Damages Reasonable   ............................
        7.4.5     Payment of Liquidated Damages   ............................
        7.4.6     Liquidated Damages for Delay Only   ........................
   7.5  Bonus Payments 
        7.5.1     Early Mechanical Completion   ..............................
        7.5.2     Early Project Acceptance   .................................
        7.5.3     Payment of Bonuses   .......................................
   7.6  Repayment by Owner of Late Completion Payments Under Certain   .......
             Circumstances 
   7.7  Repayment by Owner of Late IPT No. 3 Success Payments Under Certain 
             Circumstances 

                                    ARTICLE 8
                             Performance Guarantees

   8.1  Performance Guarantees   .............................................
        8.1.1     IPT No. 1 Guarantee   ......................................
        8.1.2     IPT No. 2 Guarantee   ......................................
        8.1.3     IPT No. 3 Guarantee   ......................................
        8.1.4     Project Acceptance Guarantee   .............................
        8.1.5     Performance Guarantee Payments   ...........................
   8.2  Liquidated Damages Reasonable   ......................................
   8.3  Payment of Liquidated Damages   ......................................
   8.4  Repayment by Owner of Liquidated Damages Under Certain Circumstances
   8.5  Right of Contractor to Purchase   ....................................

                                    ARTICLE 9
                              Liability and Damages

   9.1  Limitations of Certain Contractor Liabilities   ......................
   9.2  Consequential Damages   ..............................................
   9.3  No Liability for Independent Engineer   ..............................
   9.4  Further Limitation of Liability   ....................................

                                   ARTICLE 10
                            Warranties and Guarantees

   10.1 General Warranty 
        10.1.1    Equipment Warranty   .......................................
        10.1.2    Workmanship Warranty   .....................................
   10.2 Breach of General Warranty   .........................................
   10.3 Design Warranty 
   10.4 Breach of Design Warranty   ..........................................
PAGE

   10.5 No Liens or Encumbrances   ...........................................
   10.6 EXCLUSIVE REMEDIES 
   10.7 DISCLAIMER 

                                   ARTICLE 11
                               Force Majeure Event

   11.1 Force Majeure Event   ................................................
   11.2 Burden of Proof 
   11.3 Excused Performance   ................................................
   11.4 Suspension Due to Force Majeure Event   ..............................

                                   ARTICLE 12
                                  Scope Changes

   12.1 Scope Change Orders   ................................................
   12.2 Scope Change by Owner   ..............................................
   12.3 Scope Change by Contractor   .........................................
   12.4 Scope Changes Due to Changes in Applicable Laws   ....................
   12.5 Performance of Scope Changes   .......................................
   12.6 Scope Changes Due to Contractor Error   ..............................
   12.7 Effect of Force Majeure Event   ......................................
   12.8 Adherence to Project Schedule   ......................................

                                   ARTICLE 13
                                 Indemnification

   13.1 General Indemnification   ............................................
        13.1.1    Contractor   ...............................................
        13.1.2    Owner 
   13.2 Additional Indemnification   .........................................
        13.2.1    Taxes.    ..................................................
        13.2.2    Environmental Matters   ....................................
   13.3 Patent and Copyright Indemnification   ...............................
        13.3.1    Contractor's Indemnity   ...................................
        13.3.2    Action in Case of Injunction   .............................
   13.4 Notice and Legal Defenses   ..........................................
        13.5 Failure to Defend Action   ......................................
        13.6 Survival

                                   ARTICLE 14
                                    Insurance

   14.1 Contractor-Provided Insurance   ......................................
   14.2 Owner-Provided Insurance   ...........................................
   14.3 Certificates        ..................................................
   14.4 Responsibility for Deductibles   .....................................
   14.5 Waivers of Subrogation   .............................................
   14.6 Failure to Procure Insurance   .......................................
   14.7 Contractor's or Rented Equipment   ...................................
   14.8 Unemployment and Other Insurance Benefits   ..........................
   14.9 Descriptions Not Limitations   .......................................
   14.10Additional Insureds, etc.   ..........................................
   14.11No Limitation of Liability   .........................................
   14.12Insurance Primary 
   14.13Certain Terms 
   14.14Owner Property Damage Waiver   .......................................
PAGE

                                   ARTICLE 15
                                   Termination

   15.1 Termination For Cause   ..............................................
   15.2 Termination by Contractor   ..........................................
   15.3 Requirements Following Termination   .................................
   15.4 Surviving Obligations   ..............................................
   15.5 Cancellation Prior to Commencement Date   ............................

                                   ARTICLE 16
                                   Assignments

   16.1 Consent Required 
   16.2 Performance in Favor of Financing Parties   ..........................
   16.3 Successors and Assigns   .............................................
   16.4 Assignment to Contractor Affiliates   ................................

                                   ARTICLE 17
                                Design Documents

   17.1 Owner Review 
   17.2 Final Drawings and Documentation   ...................................
   17.3 Ownership.          ..................................................
   17.4 Use of Documents by Contractor   .....................................

                                   ARTICLE 18
                                   Inspection

   18.1 Project Inspection 

                                   ARTICLE 19
                               Dispute Resolution

   19.1 Arbitration         ..................................................
   19.2 Continuation of Work   ...............................................

                                   ARTICLE 20
                                  Cost Records

   20.1 GAAP 
   20.2 Inspection of Contractor's Books and Records  ......................  
   20.3 Inspection of Owner's Books and Records  ...........................  

                                   ARTICLE 21
                             Independent Contractor

   21.1 Contractor as Independent Contractor   ...............................

                                   ARTICLE 22
                         Representations and Warranties

   22.1 Representations and Warranties of Contractor  ......................  
        22.1.1    Organization and Qualification   ...........................
        22.1.2    Power and Authority  .....................................  
        22.1.3    No Conflict   ..............................................
        22.1.4    Validity and Binding Effect   ..............................
        22.1.5    Litigation  ..............................................  
        22.1.6    Patents; Licenses; Franchises   ............................
PAGE

        22.1.7    Compliance with Laws   .....................................
        22.1.8    Surety Performance  ......................................  
        22.1.9    Disclosure  ..............................................  
        22.2 Representations and Warranties of Owner   .......................
        22.2.1    Organization and Qualification  ..........................  
        22.2.2    Power and Authority   ......................................
        22.2.3    No Conflict  .............................................  
        22.2.4    Validity and Binding Effect   ..............................
        22.2.5    Litigation  ..............................................  
        22.2.6    Patents; Licenses; Franchises   ............................
        22.2.7    Compliance with Laws  ....................................  
        22.2.8    Disclosure  ................................................

                                   ARTICLE 23
                                  Miscellaneous

   23.1 Confidentiality     ................................................  
   23.2 Publicity Releases; Information  ...................................  
   23.3 Estoppel Certificate  ..............................................  
   23.4 Waivers             
   23.5 Choice of Law 
   23.6 Severability        ................................................  
   23.7 Notice              ................................................  
   23.8 Headings 
   23.9 Entire Agreement    
   23.10Amendments          ................................................  
   23.11Conflicting Provisions   .............................................
   23.12No Third-Party Rights  .............................................  
   23.13Survival of Provisions   .............................................
   23.14Title to the Project  ..............................................  
   23.15Schedules           

                                    SCHEDULES


   Schedule A          Approved Testing Procedures, Pulp Quality Standards,
                       Performance Tests, Maximum Consumption Rates and
                       Assumed Costs
   Schedule 1.1A       Krygoski Contract
   Schedule 1.1B       Hayward Baker Contract
   Schedule 1.1C       Milestone Schedule
   Schedule 1.1D       Scope Document
   Schedule 1.1E       Determination of Buydown Amount
   Schedule 2.2        Form of Notice to Proceed
   Schedule 2.1.18     Exemptions from Sales and Use Taxes
   Schedule 4.2.1      Information Required for Payment Request
   Schedule 4.3A       Form of Contractor's Final
                       Waiver of Liens
   Schedule 4.3B       Form of Rust's Final
                       Waiver of Liens
   Schedule 4.4A       Form of Contractor's Partial
                       Waiver of Liens
   Schedule 4.4B       Form of Rust's Partial
                       Waiver of Liens
   Schedule 5.2        Real Estate Rights
   Schedule 5.3        Owner Permits/Contractor Permits
   Schedule 5.4        Utilities
   Schedule 5.5        Qualifying Waste Paper Specifications
PAGE

   Schedule 5.7        Owner-Supplied Equipment 
   Schedule 6.1        Scope of Training 
   Schedule 6.2        Owner's Operating Personnel
   Schedule 6.3.2      Procedure for Commissioning and 
                       Mechanical Completion
   Schedule 6.7.2      Report of Performance Test Results for 
                       Project Acceptance
   Schedule 10.2A      Fiberprep Equipment Spare Parts
   Schedule 10.2B      U.S. Filter Equipment Spare Parts
   Schedule 12.2       Form of Scope Change Order
   Schedule 14.3       Form of Insurance Certificate
   Schedule 23.1       Confidentiality Agreement
PAGE

             THIS TURNKEY ENGINEERING, PROCUREMENT, CONSTRUCTION AND INITIAL
   OPERATION AGREEMENT FOR DEINKING PULP FACILITY, dated as of November 1,
   1994, is made by and between GREAT LAKES PULP PARTNERS I, L.P., as Owner,
   and THERMO ELECTRON CORPORATION, as Contractor.

                              W I T N E S S E T H :

             WHEREAS, Contractor desires to provide and Owner desires to
   obtain turnkey engineering, procurement, construction and related services
   for the Overall Project hereinafter described, all of which shall be
   provided on a fixed-price basis and in accordance with the terms and
   conditions herein specified.

             NOW, THEREFORE, in consideration of the premises and the mutual
   covenants herein contained, the parties hereto, intending to be legally
   bound, hereby agree as follows:


   ARTICLE 1
                                   Definitions

        1.1  Definitions.  As used in this Agreement, the following terms
   shall have the meanings indicated (such meanings as necessary to be equally
   applicable to both the singular and plural forms of the terms defined and
   the word "including" to mean "including without limitation"):

             "Accrued Bond Interest" means, for any period, the aggregate
   amount of interest accrued on the Bonds outstanding during such period,
   whether paid or not paid during such period.

             "Actual Price Per BDST" means, for any period, the average price
   per BDST of Pulp sold during such period.

             "Actual Unit Cost" means, for any period, the average cost per
   unit of Significant Consumable actually purchased during such period.

             "Agreement" means this Turnkey Engineering, Procurement,
   Construction and Initial Operation Agreement for Deinking Pulp Facility,
   all written amendments, modifications and supplements hereto, and all
   schedules hereto, all of which by this reference are incorporated herein.

             "Applicable Laws" means all laws, treaties, ordinances,
   judgments, decrees, injunctions, orders of any court, arbitrator or
   governmental agency or authority, and all rules, regulations, orders,
   interpretations and Permits of any federal, state, county, municipal,
   regional, environmental or other governmental body, instrumentality,
   agency, authority, court or other body, having jurisdiction over
   construction of the Overall Project on the Project Site, performance of the
   Work, operation of the Overall Project, or the health, safety or
   environmental condition of the Overall Project or the Project Site, as the
   same may be in effect from time to time (including, without limitation, all
   laws, rules, regulations and interpretations relating to Governmental
   Impositions).

             "Applicable Permits" means all Permits required by Applicable
   Laws to be obtained or maintained in connection with construction of the
PAGE

   Overall Project, performance of the Work or initial operation of the
   Overall Project.

             "Approved Test Procedures" means the sampling and test procedures
   set forth in Sections A and B of Schedule A hereto as amended and
   supplemented from time to time in accordance herewith.

             "Assumed Labor Cost" means the Labor Costs per day set forth
   under "Assumed Labor Cost" in Schedule A hereto.

             "Assumed Price Per BDST" means the price per BDST of Pulp
   specified under "Assumed Price Per BDST" in Schedule A hereto.

             "Assumed Unit Cost" means, with respect to any Significant
   Consumable, the cost per Unit of Consumption for such Significant
   Consumable specified in Schedule A hereto.

             "Available Cash" as of any date of determination, the amount
   available in the General Debt Fund for distribution by the Trustee to
   holders of General Debt (as defined in the Indenture).

             "Bonds" means all the bonds issued from time to time under the
   Indenture and any bonds or other indebtedness issued or incurred from time
   to time to refund or refinance such bonds.

             "BDST" means bone- or oven-dry short tons.

             "Business Days" means all calendar days except Saturday, Sunday
   and other days on which banks in the State of New York or the State of
   Michigan are required or authorized to close.

             "Buydown Amount" shall be determined as set forth in Schedule E
   hereto.

             "Change Order Proposal" has the meaning set forth in Section
   hereof.

             "Commencement Date" means the date as of which all conditions set
   forth in Section  hereof have been satisfied and on which Contractor is to
   commence performance of the Work, as specified in the Notice to Proceed
   delivered to Contractor by Owner pursuant to Section  hereof.

             "Commissioning" means the systematic verification that each piece
   of equipment integrated within a definable system, and its associated
   subsystems, including structural, mechanical, electrical and
   instrumentation subsystems, have been checked for readiness to start-up.
   To "commission the Overall Project" means to provide Commissioning thereof.

             "Construction Period" means the period from the Commencement Date
   to Mechanical Completion.

             "Construction Quality Assurance Plan" is Contractor's written
   quality assurance program for the Work, including the written procedures to
   implement such program, as described in the Scope Document.
PAGE

             "Contract Documents" means, collectively, this Agreement, the
   Design Documents, all Scope Change Orders, the Construction Quality
   Assurance Plan and the Operating Manual.

             "Contract Sum" means the fixed price payable by Owner to
   Contractor in consideration of performance of the Work in accordance with
   the terms hereof, as such price may be adjusted from time to time as
   provided herein.

             "Contractor" means Thermo Electron Corporation, a Delaware
   corporation, and its successors and permitted assigns as contractor
   hereunder.

             "Contractor Indemnified Parties" has the meaning set forth in
   Section  hereof.

             "Contractor Permits" has the meaning set forth in Section
   hereof.

             "Damages" has the meaning set forth in Section  hereof.  Use of
   the defined term "Damages" shall not be construed to permit the recovery of
   special, indirect, punitive, incidental or consequential loss or damage
   where such recovery would otherwise be precluded by the terms of Section  
   hereof.

             "Days" or "days" means calendar days.

             "Deferrable Portion" has the meaning set forth in Section
   hereof.

             "Delay Payment" means, collectively, any Late Completion Payment,
   Late IPT No. 3 Success Payment or Late Acceptance Payment.

             "Design Documents" has the meaning set forth in Section  hereof.

             "Design Warranty" has the meaning set forth in Section  hereof.
             "Design Warranty Period" has the meaning set forth in Section
   hereof.

             "Discount Rate" means 11% per annum.

             "Distribution Fund" means the fund to be designated as such under
   the Indenture and upon and after the effectiveness of the Indenture, the
   fund designated as such under the Indenture.


             "Early Acceptance Bonus" has the meaning set forth in Section
   hereof.

             "Early Completion Bonus" has the meaning set forth in Section
   hereof.

             "Final Drawings and Documentation" means all drawings,
   specifications and other documentation, prepared in accordance with the
   standard of performance described in Section  hereof, which completely and
   accurately represent, in all material respects, the physical placement of
   all Project components and systems as installed and/or constructed  and as
PAGE

   they exist at the time of Project Acceptance, as such term is further
   described in Section  hereof.

             "Financial Closing" means the initial issuance of the first
   series of the Bonds.

             "Financing Parties" means any and all lenders providing the
   construction, interim or long-term financing (including any refinancing
   thereof) for the Overall Project, any trustee or agent acting on their
   behalf and the Partners.

             "Five-Day Performance Test" has the meaning set forth in Section
    hereof.

             "Force Majeure Event" has the meaning set forth in Article 11.

             "General Debt Fund" means the fund to be designated as such under
   the Indenture and upon and after the effectiveness of the Indenture, the
   fund designated as such under the Indenture.

             "General Warranty" has the meaning set forth in Section  hereof.

             "General Warranty Period" has the meaning set forth in Section
   hereof.

             "GLP&F" means Great Lakes Pulp & Fibre, Inc., a Wisconsin
   corporation.

             "Good Industry Practices" means those practices, methods and acts
   that at any particular time, in the exercise of reasonable judgment, and
   consistent with the then current industry practices in connection with
   facilities similar to the Overall Project, would accomplish the desired
   result.

             "Governmental Impositions" means any impositions by any
   governmental entity, including but not limited to sales, use and ad valorem
   taxes, duties, social welfare charges, workers compensation rates, and
   other governmental impositions, but excluding impositions on net income.

             "Grade A Criteria" means the measurements and concentrations set
   forth under the designation "Grade A" under Pulp Quality Definitions as set
   forth on Schedule A hereto.  Whether Pulp satisfies or exceeds the Grade A
   Criteria shall be determined in accordance with the Approved Test
   Procedures specified in Schedule A hereto including any testing
   requirements associated any particular Performance Guarantee with respect
   to which compliance is being determined.

             "Grade B Criteria" means the measurements and concentrations set
   forth under the designation "Grade B" under Pulp Quality Definitions as set
   forth on Schedule A hereto.  Whether Pulp satisfies or exceeds the Grade B
   Criteria shall be determined in accordance with the Approved Test
   Procedures specified in Schedule A hereto including any testing
   requirements associated any particular Performance Guarantee with respect
   to which compliance is being determined.

             "Grade C Criteria" means the measurements and concentrations set
   forth under the designation "Grade C" under Pulp Quality Definitions as set
PAGE

   forth on Schedule A hereto.  Whether Pulp satisfies or exceeds the Grade C
   Criteria shall be determined in accordance with the Approved Test
   Procedures specified in Sections A and B of Schedule A hereto including any
   testing requirements associated any particular Performance Guarantee with
   respect to which compliance is being determined.

             "Guaranteed Acceptance Date" means the date that falls thirty-two
   (32) calendar months, plus the number of days (not exceeding ninety (90)
   days), if any, with respect to which Late Completion Payments or Late IPT
   No. 3 Success Payments shall have been made by Contractor, after the
   Commencement Date; provided, however, that for the purposes of Section  and
   Section  hereof, the Guaranteed Acceptance Date shall be the date that is
   thirty-two (32) calendar months after the Commencement Date.

             "Guaranteed Completion Date" means the date that falls nineteen
   (19) calendar months after the Commencement Date.

             "Guaranteed IPT No. 3 Success Date" means the date that is
   twenty-four (24) calendar months, plus the number of days (not exceeding
   ninety (90) days), if any, with respect to which Late Completion Payments
   shall have been made by Contractor, after the Commencement Date.
             "Hazardous Materials" means any material that by reason of its
   composition or characteristics is hazardous or toxic waste as defined in
   the Resource Conservation and Recovery Act of 1976, 42 U.S.C. 6901. et
   seq., and the regulations thereunder or is hazardous waste or a hazardous
   or toxic substance or a hazardous or toxic material as defined in or under
   any other applicable state or federal law or the regulations thereunder.

             "Indemnified Parties" has the meaning set forth in Section
   hereof.

             "Indenture" means the Trust Indenture, dated as of December 1,
   1994, between the Michigan Strategic Fund and The Chase Manhattan Bank
   (National Association), as trustee, and any amendments and supplements
   permitted thereby.

             "Independent Engineer" means Ford Bacon & Davis Engineering Co.,
   Inc. and any other engineering company or companies engaged by Owner from
   time to time under the provisions of contracts with the Financing Parties
   to act in connection with the review of the Overall Project and the Work.

             "Initial Operating Period" has the meaning set forth in Section
   hereof.

             "Internal Rate of Return" means, with respect to any Partner's
   investment in Owner, the annual discount rate at which the present value,
   as of the date such investment was made, of (i) distributions actually made
   to such Partner in respect of such investment from the date on which such
   investment was made to the date as of which Internal Rate of Return is
   being determined plus (ii) in the case of any determination made under
   Section  hereof only, any amounts held by the Owner constituting Available
   Cash (as defined in the Partnership Agreement) or Net Proceeds (as defined
   in the Partnership Agreement) and distributable to such Partner would equal
   the amount of such investment.
PAGE

             "IPT No. 1 Success" means the achievement of the performance
   milestone to be achieved by Contractor in the manner described in Section 
   hereof.

             "IPT No. 2 Success" means the achievement of the performance
   milestone to be achieved by Contractor in the manner described in Section 
   hereof.

             "IPT No. 3 Success" means the achievement of the performance
   milestone to be achieved by Contractor in the manner described in Section 
   hereof.

             "K&K Lease" means the Lease dated the date of Financial Closing
   between Owner and K&K Warehousing, a general partnership, and any
   amendments and supplements thereto.

             "K&K Leased Premises" (the "Premises") means the "Demised
   Premises" under the K&K Lease.

             "K&K Warehouse" means the K&K Warehouse, located adjacent to the
   Project Site, a 210,000 square-foot portion of which has been leased to
   Owner pursuant to the K&K Lease. 

             "Labor Costs" means compensation payable to or in respect of
   employees of Owner, including salaries, hourly and overtime compensation,
   payments and reserves for pension, retirement, health, hospitalization and
   sick leave benefits and similar expenses to be paid by Owner, to the extent
   attributable to the Overall Project.

             "Late Acceptance Payments" has the meaning set forth in Section
   hereof.

             "Late IPT No. 3 Success Payments" has the meaning set forth in
   Section  hereof.

             "Late Completion Payments" has the meaning set forth in Section
   hereof.

             "Late Payment Rate" means the Prime Rate, plus three percent (3%)
   per annum.

             "Maximum Consumption Rates for Project Acceptance" means the
   rates of consumption of the chemical and other materials as set forth in
   the tables titled "Table 3 - Process Chemicals Consumption" and "Table 4 -
   Process Consumption" in Schedule A hereto.

             "Mechanical Completion" has the meaning set forth in Section
   hereof.

             "Milestone Schedule" means the schedule of values of various
   items of Work based upon which installment payments of the Contract Sum
   will be made as set forth in Schedule C hereto, as the same may be adjusted
   pursuant to this Agreement.

             "Monthly Progress Report" means a progress report containing the
   following information: (a) a description of Contractor's and all
   Subcontractors' activities and engineering, procurement and construction
PAGE

   progress as compared with the Project Schedule (and, at the request of
   Owner, an updated Project Schedule), (b) an identification and evaluation
   of problems and deficiencies in the Work and description of any corrective
   action being taken (including but not limited to an evaluation of any
   factors that are anticipated to have a material effect on the Project
   Schedule), (c) the status of material and equipment deliveries, (d) quality
   assurance reports with respect to all procurement and construction activity
   at the Project Site and (e) all other reasonable information requested by
   Owner.  The specific reports, data and explanations that will be included
   in each Monthly Progress Report are described in the Project Execution Plan
   of the Scope Document.

             "Most Recently Completed Performance Test" shall mean (i) at any
   time after IPT No. 1 Success, the most recently completed Five-Day
   Performance Test, or if no such Performance Test has then been completed,
   the Performance Test that is the basis for IPT No. 1 Success, (ii) at any
   time after IPT No. 2 Success, the most recently completed Five-Day
   Performance Test, and (iii) at any time after IPT No. 3 Success, the most
   recently completed Ten-Day Performance Test, or if no such Performance Test
   has then been completed, the Performance Test that is the basis for IPT No.
   3 Success.

             "Net Bond Interest" has the meaning set forth in Section (d)
   hereof.

             "Notice of Interim Performance Test Success" has the meaning set
   forth in Section  hereof.

             "Notice of Mechanical Completion" has the meaning set forth in
   Section  hereof.

             "Notice of Project Acceptance" has the meaning set forth in
   Section  hereof.

             "Notice to Proceed" means the written notice to be delivered by
   Owner to Contractor pursuant to Section  hereof setting forth the
   Commencement Date.

             "Operating Manual" means the complete equipment and system
   instructions and procedures for the start-up, operation and maintenance of
   the Project.

             "Operation and Maintenance Expenses" means for any fiscal period
   all costs and expenses for the operation and maintenance of the Overall
   Project for such fiscal period determined in accordance with generally
   accepted accounting principles including, but not limited to Owner's
   expenses in respect of operation, maintenance and repairs and recurring and
   ordinary renewal, replacement and reconstruction of the Overall Project,
   including without limiting the generality of the foregoing, Labor Costs,
   costs of labor (other than Labor Costs), energy and supplies relating to
   the operation of the Overall Project; costs of management, technical and
   advisory services; costs associated with the transportation, handling and
   delivery to the Overall Project of waste paper; fees and expenses of
   obtaining and renewing government licenses and services; commissions and
   other costs of marketing pulp produced by the Overall Project; taxes,
   assessments and similar charges (but excluding income taxes); fees and
   expenses of the Independent Engineer and other engineering expenses related
PAGE

   to operation and maintenance of the Overall Project; fees and expenses of
   the Trustee; auditing expenses; and insurance premiums.  "Operation and
   Maintenance Expenses" does not include costs of extraordinary, nonrecurring
   major repairs or replacements, amounts payable as principal or interest on
   the Bonds or on Facility Parity Debt (as defined in the Indenture) or
   General Debt (as defined in the Indenture) or reserves therefor or any
   other costs that are capitalized in accordance with generally accepted
   accounting principles on the books of Owner.

             "Overall Project" means, collectively, all structures,
   facilities, appliances, lines, conductors, instruments, equipment,
   apparatus, components and other property comprising and integrating the
   entire facility described generally in the Scope Document, including any
   Owner-Supplied Equipment.

             "Owner" means Great Lake Pulp Partners I, L.P., a Delaware
   limited partnership, and its successors and permitted assigns as owner
   hereunder.

             "Owner Contractors" means contractors engaged by Owner or its
   designees to perform services or provide equipment at the Project Site,
   provided that such contractors (i) perform services or provide equipment
   within the scope described as Owner's scope of work in the Scope Document
   or (ii) perform other services that do not unreasonably interfere with
   Contractor's performance of the Work hereunder.

             "Owner's Field Representative" has the meaning set forth in
   Section  hereof.

             "Owner-Supplied Equipment" means the equipment listed on Schedule
    hereto.

             "Owner Permits" has the meaning set forth in Section  hereof.

             "Owner's Project Manager" has the meaning set forth in Section
   hereof.

             "Partner" means any Person who at the time in question is the
   general partner or a limited partner of Owner.

             "Party" or "Parties" means, respectively, a party or both parties
   to this Agreement.

             "Performance Guarantee Payments" has the meaning set forth in
   Section  hereof.

             "Performance Guarantees" has the meaning set forth in Section
   hereof.

             "Performance Test" means the operation of the Project in
   accordance with the provisions of Section  hereof and the Approved Test
   Procedures as set forth in Schedule A hereto for the purposes of
   determining the Project's level of achievement of one or more of the
   Performance Guarantees.

             "Permit" means any waiver, exemption, variance, permit,
   authorization, license or similar order of or from any federal, state,
PAGE

   county, municipal, regional, environmental or other governmental body,
   instrumentality, agency, authority, court or other body having jurisdiction
   over the matter in question.

             "Person" means any individual, corporation, partnership,
   association, joint stock company, trust, unincorporated organization, joint
   venture, government or political subdivision or agency thereof.

             "Price-Adjusted Gross Revenues" means, for any fiscal period, the
   gross revenues of Owner derived through the sale of Pulp produced by the
   Overall Project for such period, determined in accordance with generally
   accepted accounting principles and calculated by multiplying the greater of
   (i) the Actual Price Per BDST or (ii) the Assumed Price Per BDST, by the
   number of BDST of Pulp sold in such period.

             "Price-Adjusted Operation and Maintenance Expenses" means, for
   any fiscal period, Operation and Maintenance Expenses for such period,
   determined in accordance with generally accepted accounting principles;
   provided, however, that (a) in lieu of expenses in respect of each
   Significant Consumable, expenses in respect of such Significant Consumable
   for such fiscal period shall be calculated by multiplying the lower of (i)
   the Actual Unit Cost of such Significant Consumable for such fiscal period
   or (ii) the Assumed Unit Cost of such Significant Consumable times the
   actual Units of Consumption for such Significant Consumable during such
   period and (b) the expense that constitutes Labor Costs shall be the lower
   of (i) actual Labor Costs and (ii) Total Assumed Labor Costs.

             "Price-Adjusted Project Cash Flow" means for any fiscal period
   the difference between (i) Price Adjusted Gross Revenues for such period,
   minus (ii) Price-Adjusted Operation and Maintenance Expenses for such
   period, all determined in accordance with generally accepted accounting
   principles.

             "Prime Rate" means the rate of interest per annum publicly
   announced from time to time by Citibank, N.A. as its "prime rate."

             "Project" means the Overall Project, excluding any Owner-Supplied
   Equipment and excluding landscaping and permanent fencing described in the
   Scope Document.

             "Project Acceptance" means the performance milestone to be
   achieved by Contractor in the manner described in Section , Section  or
   Section  hereof.

             "Project Schedule" means the construction and design schedule for
   the engineering, procurement, construction and initial operation of the
   Project prepared from time to time by Contractor under the provisions of
   Section  hereof, which is to be consistent with the initial Project
   Schedule set forth in the Scope Document, as adjusted pursuant to this
   Agreement.

             "Project Site" means all those parcels of land in Menominee,
   Michigan owned or leased by Owner, the K&K Leased Premises and any other
   Real Estate Rights of Owner upon which the Overall Project will be located
   or from which the Project will otherwise benefit, (all as more particularly
   described in Schedule  hereto), excluding the parcel upon which Owner will
   create a landfill.
PAGE

             "Proposal Request" has the meaning set forth in Section  hereof.

             "Pulp" means pulp produced as a result of operation of the
   Overall Project.

             "Punch List" means the list prepared (and periodically revised)
   by Contractor, and submitted for review by Owner, of minor items of Work
   which may remain to be performed by Contractor to achieve Project
   Acceptance, but which items do not affect Owner's ability to operate the
   Project in accordance with Applicable Laws and the Contract Documents.

             "Qualifying Pulp" means Pulp satisfying of exceeding the Grade C
   Criteria.

             "Qualifying Waste Paper" means mixed office waste paper
   satisfying the specifications set forth in Schedule  attached hereto.

             "Real Estate Rights" means all rights in or to real estate
   (including title to or other rights to use or access the Project Site),
   leases, contracts, permits, easements, licenses, private rights of way, and
   utility and railroad crossing rights required to be obtained or maintained
   in connection with construction of the Overall Project on the Project Site,
   performance of the Work or operation of the Overall Project.

             "Rust" means Rust International Corporation (Delaware), a
   Delaware corporation.

             "Scheduled Payments" has the meaning set forth in Section
   hereof.

             "Scope Change" has the meaning set forth in Section  hereof.

             "Scope Change Order" means a written order to Contractor issued
   and signed by Owner in accordance with the provisions of Article  hereof
   after the execution and delivery of this Agreement authorizing a Scope
   Change and, if appropriate pursuant to the terms hereof, an adjustment in
   one or more of the Contract Sum, the Guaranteed Completion Date, the
   Guaranteed IPT No. 3 Success Date, the Guaranteed Acceptance Date, the
   Milestone Schedule, the Project Schedule and the Performance Guarantees or
   any other amendment of the terms and conditions of the Contract Documents.

             "Scope Document" means the description of the Project and
   services to be performed by Contractor set forth in Schedule D hereto
   entitled "Great Lakes Pulp & Fibre Inc., Scope of Work and Capital Cost
   Estimate, Rust Contract 21-6200" dated September 16, 1994, as revised
   through December 22, 1994, including all Significant Design Documents and
   other schedules, exhibits, annexes or other attachments, whether or not
   included in Schedule D hereto.

             "Security Agreement" means the Security Agreement to be dated as
   of December 1, 1994 between Owner and The Chase Manhattan Bank (National
   Association).

             "Significant Consumable" means electricity, gas, waste paper and
   the chemicals listed in Schedule A hereto.
PAGE

             "Significant Design Documents" means those documents contained in
   Sections D1.5, D3.11, D4.6 and D6.6 of the Scope Document, as such
   documents may be revised from time to time hereunder.

             "Site Preparation Contracts" means (i) the Trade Contract between
   Owner and Krygoski Construction Company dated as of October 1, 1994 and
   attached hereto as Schedule A pursuant to which Krygoski Construction
   Company has agreed to perform certain site preparation work at the Project
   Site, including, among other things, excavation and backfill and the
   installation of stone support columns and (ii) the Trade Contract between
   Owner and Hayward Baker Inc. dated as of November 23, 1994 and attached
   hereto as Schedule B pursuant to which Hayward Baker Inc. has agreed to
   perform certain site preparation work at the Project Site, including, among
   other things, vibro-compaction of replacement fill sand and sand underlying
   the Project Site.

             "Stabilization Period" has the meaning set forth in Section
   hereof.

             "Subcontract" means a contract between Contractor and a
   Subcontractor for the performance or supply of a portion of the Work by
   such Subcontractor.

             "Subcontractors" has the meaning set forth in Section  hereof.

             "Taxes" has the meaning set forth in Section  hereof.

             "Ten-Day Performance Test" has the meaning set forth in Section
   hereof.

             "Termination For Cause" means a termination of this Agreement
   pursuant to Section  hereof.

             "Three-Day Performance Test" has the meaning set forth in Section
    hereof.

             "Title Insurer" means any and all title insurance companies
   writing title insurance with respect to any portion of the Project Site,
   the Real Estate Rights, the Overall Project or any interest therein.

             "Total Assumed Labor Costs" means for any period Assumed Labor
   Cost multiplied by the number of days worked during such period.

             "Trustee" means The Chase Manhattan Bank (National Association),
   and any successor trustee under the Indenture.

             "Units of Consumption" means, with respect to any Significant
   Consumable, for any fiscal period, the amount of such Significant
   Consumable actually used during such fiscal period expressed in terms of
   the units of volume, weight or other measurement applicable to such
   Significant Consumable, as specified in the tables titled "Table 3 -
   Process Chemicals Consumption" and "Table 4 - Process Consumption" in
   Schedule A hereto.

             "Utilities" means electricity, water, telephone, sewage and waste
   disposal services and all other utilities necessary for the performance of
   the Work and the operation of the Overall Project.
PAGE

             "Work" has the meaning set forth in Section  hereof.


                                    ARTICLE 2
              Contractor's Work and Other Obligations of Contractor

        2.1  Work To Be Performed.  Except as otherwise expressly set forth in
   Article  hereof, and subject to the specific provisions of and exclusions
   set forth in the Scope Document, Contractor shall perform or cause to be
   performed any and all work and services required or appropriate in
   connection with the design, engineering, procurement, construction,
   Commissioning, start-up, testing, initial operation and completion of the
   Project and shall provide all materials, equipment, machinery, tools,
   labor, transportation, administration and other services and items required
   to complete and deliver to Owner the fully operational Project, all in
   accordance with and as specified in and subject to the Contract Documents
   (collectively, the "Work").  All Work shall be provided on a fixed price,
   turnkey basis, as set forth in Section  hereof and other allowances and
   reimbursable amounts specified in the Contract Documents.  Certain details
   of the Work are described in this Article .  Without limiting the
   foregoing, Contractor shall perform or cause to be performed the following
   as part of the Work:

             2.1.1     Scheduling.  The initial Project Schedule is set forth
   in the Scope Document.  Contractor shall revise and/or update the Project
   Schedule on a monthly basis showing in detail the progress to date and the
   then-current scheduling of all major elements of design, procurement and
   construction of the Project.  The initial Project Schedule will be revised
   and issued within sixty (60) days after the Commencement Date in Critical
   Path Method format integrating engineering, procurement and construction
   aspects of the Work.  The Project Schedule, as so revised, will be
   resource-loaded reflecting the planned units of resources required to
   accomplish each specific task on schedule. 

             2.1.2     Engineering and Design.  After the Commencement Date,
   Contractor shall be entitled to make revisions or additions to Significant
   Design Documents, subject to review and comment by Owner and Independent
   Engineer and, in the case of any revisions or additions that materially
   change the scope of the Work, acceptance by Owner and Independent Engineer.
   Where acceptance is required, Owner's and Independent Engineer's acceptance
   or rejection (specifying particular reasons therefor) shall be made within
   five (5) days following receipt of such revisions or additions from
   Contractor.  If Owner and Independent Engineer do not reject any such
   revision or addition within five (5) days, it shall be deemed accepted.
   Contractor shall cooperate with Owner in making such further revisions or
   additions to the Significant Design Documents as Owner may recommend,
   subject to the provisions of Article 12.  Prior to the Commencement Date,
   all revisions or additions to Significant Design Documents shall be subject
   to acceptance by Owner.

                  2.1.2.1   Design.  Owner has caused to be conducted certain
   soil and geotechnical tests and surveys of the Project Site, and delivered
   written reports thereof to Contractor.  Contractor acknowledges that such
   tests and surveys, and the results thereof, are acceptable to Contractor
   and adequate to allow Contractor to design, procure and construct the
   Project in accordance with this Agreement, Applicable Laws and Good
   Industry Practices; provided, however, that Contractor assumes no
PAGE

   responsibility for the accuracy or completeness of such tests and surveys.
   Subject to the provisions of Article  hereof, Contractor shall not be
   excused from any of its obligations under this Agreement for any condition
   so disclosed and affecting the Project, the Project Site or the Work.
   Contractor expressly acknowledges and agrees that while the Scope Document
   sets forth a general guide as to the requirements of the Project,
   Contractor shall have full responsibility as required by this Agreement for
   completion of the Project in accordance with all Contract Documents,
   Applicable Laws and Good Industry Practices.

                  2.1.2.2   Design Documents.  Based on the Scope Document and
   on the Significant Design Documents, Contractor shall prepare comprehensive
   drawings and specifications setting forth in detail the requirements for
   the procurement and construction of the Project.  Prior to Contractor's
   commencement of construction of any portion of the Project, Contractor
   shall submit such drawings and specifications relating to such portion to
   Owner for review and comment.  As the drawings and specifications are
   issued, they shall be clearly identified as the drawings and specifications
   for the Overall Project (all such drawings and specifications, including
   the Significant Design Documents, are herein called the "Design
   Documents").

                  2.1.2.3   Operating Manual.  Not later than four (4) months
   before the date on which Mechanical Completion is anticipated to occur,
   Contractor shall deliver a draft of the Operating Manual to Owner for
   review, and Owner shall provide comments thereon within thirty (30) days
   after receipt of such draft.  Not later than two months before the date on
   which Mechanical Completion is anticipated by Contractor to occur,
   Contractor shall prepare in individually numbered, bound volumes and
   deliver to Owner ten (10) sets of the Operating Manual, but Contractor
   shall be required to provide only five (5) sets of books, manuals and other
   documents generated by equipment manufacturers or vendors.  Subsequent to
   such delivery, Contractor shall update and revise the Operating Manual, as
   required in order to reflect changes in operating or maintenance
   procedures, or to make revisions reasonably requested by Owner until
   Project Acceptance has been achieved.  Contractor shall obtain all
   instruction manuals and special directions required for preparation of the
   Operating Manual from equipment manufacturers or vendors or shall itself
   provide any such written instructions when they are not available from such
   manufacturers or vendors.  Contractor further agrees and will cause the
   Subcontractors to agree, that adherence to the Operating Manual shall not
   impair any warranty or guarantee on equipment, materials or services
   relating to the Project.  Owner acknowledges that operation by Owner of the
   Project in a manner contrary to that set forth in the Operating Manual
   could impair or void such warranty or guarantee.

             2.1.3     Procurement.  Contractor shall procure and pay for, in
   Contractor's name as an independent contractor and not as agent for Owner,
   all materials, equipment, supplies, consumables, transportation, labor,
   supervision and other necessary services (whether on or off the Project
   Site), to complete the Project in accordance with the Contract Documents.  

             2.1.4     Construction.  Contractor shall develop and provide
   copies to Owner of a written project design, engineering, procurement and
   construction plan included in Schedule 1.1D and shall construct and install
   the Project expeditiously and in accordance with the Contract Documents.
   Contractor's  construction plan shall include procedures for environmental
   protection, Project Site security and physical protection of property
PAGE

   adjacent to the Project Site during the Construction Period in accordance
   with this Agreement.  Contractor shall, as required by Good Industry
   Practices, inspect or cause to be inspected all materials and equipment to
   be incorporated in the Project and shall reject or revise those items or
   procedures determined not to be in compliance with the Contract Documents
   or Good Industry Practices.  Contractor shall require all Subcontractors to
   perform their portions of the Work in accordance with the Contract
   Documents and, in performing the duties incident to such responsibility,
   Contractor shall issue to the Subcontractors such directives and impose
   such restrictions as may be required in the construction of the Project to
   obtain compliance by the Subcontractors with the relevant terms of the
   Contract Documents.

             2.1.5     Labor and Personnel.  Contractor shall provide all
   labor and personnel required in connection with the Work, including without
   limitation: (a) professional engineers licensed to perform engineering
   services in each state where the performance of the Work requires such
   licensing; (b) a Project engineer and lead structural, mechanical,
   electrical, instrumentation and control, civil, cost and schedule
   engineers, and procurement, construction, start-up and training
   supervisors, all of whom shall have had extensive experience in facilities
   of similar technology and magnitude to that of the Project; (c) a Project
   Manager or other representative who shall be fully acquainted with the
   Project and shall have the authority to administer this Agreement on behalf
   of Contractor; and (d) quality assurance personnel, all of which quality
   assurance personnel shall report directly to Contractor's home office
   managers and not to the Project personnel located at the Project Site.

             2.1.6     Project Site; Real Estate Rights.  Contractor
   acknowledges that the Project Site, as described in Schedule 5.2  hereto,
   is, subject to the terms of the Contract Documents, sufficient for
   Contractor to undertake and complete the Work except to the extent that
   there may exist conditions not described in the reports furnished to
   Contractor.  If Contractor at any time becomes aware of any Real Estate
   Right not possessed by Owner but required in connection with the Overall
   Project, Contractor shall immediately give notice thereof to Owner.  If
   Contractor becomes aware of any deficiency in subsurface conditions
   (including engineered fill provided by an Owner Contractor prior to the
   Commencement Date), Contractor shall immediately give notice thereof to
   Owner.  Contractor shall provide all necessary information and documents
   and use its reasonable efforts to assist Owner in obtaining all Real Estate
   Rights required to be obtained by Owner.  Owner will furnish the Project
   Site as provided in Section  hereof.  Contractor agrees to assume on the
   Commencement Date the obligations of Owner under the Site Preparation
   Contracts (other than Owner's obligations to pay for the work described in
   the Site Preparation Contracts) and to prepare the Project Site in the
   manner set forth in the Scope Document.

             2.1.7     Contractor Permitting.  Contractor acknowledges that
   Schedule  hereto lists all of the Applicable Permits known by it to be
   required for the undertaking and completion of the Work and the operation
   of the Project (without warranting that said Permits are all of the
   Applicable Permits).  Contractor shall prepare applications and apply for
   in a timely manner, diligently attempt to obtain, obtain and maintain in
   effect those Applicable Permits for the Project designated in Schedule
   hereto as "Contractor Permits" (together with any other Applicable Permits
   required to be obtained by Contractor pursuant to the fourth sentence of
   this Section , collectively, "Contractor Permits").  Contractor shall
PAGE

   cooperate with Owner in connection with Owner's efforts to obtain Owner
   Permits.  If any Applicable Permit is not listed on Schedule  hereto, if it
   is a building, construction or similar Permit (excluding building occupancy
   permits and operating permits), Contractor shall be responsible for
   obtaining such Permit at its own expense.  If Contractor at any time
   becomes aware of any Applicable Permit that is not listed on Schedule
   hereto, Contractor shall immediately give notice thereof to Owner.  Owner
   will obtain Owner Permits as provided in Section  hereof.

             2.1.8     Royalties and License Fees.  Contractor shall pay all
   required royalties and license fees and shall procure, as required, the
   appropriate proprietary rights, licenses, agreements and permissions for
   materials, methods, processes and systems incorporated into the Project.
   In performing the Work hereunder, Contractor shall not incorporate into the
   Project any materials, methods, processes or systems which involve the use
   of any confidential information, intellectual property or proprietary
   rights which, to Contractor's knowledge, Owner does not have the right to
   use.

             2.1.9     Labor Relations.  Contractor shall be responsible for
   all labor relations matters relating to the Work (other than with respect
   to Owner's employees, agents or representatives) and shall at all times use
   all reasonable efforts to maintain harmony among the unions (if any) and
   other personnel employed in connection with the Work.  Contractor shall at
   all times use all reasonable efforts and judgment as an experienced
   contractor to adopt and implement policies and practices designed to avoid
   work stoppages, slowdowns, disputes and strikes.  Nothing herein shall be
   construed to require Contractor to settle a labor dispute against its
   judgment.

             2.1.10    Inspection and Expediting.  Contractor shall perform
   all inspection, expediting, quality surveillance and traffic services as
   are required for performance of the Work on a timely basis.  Contractor's
   responsibilities under this Section  shall include, without limitation,
   inspecting all materials and equipment both on and off the Project Site
   that comprise or will comprise the Project or that are to be used in
   performance of the Work hereunder, including the start-up and testing of
   the Project.  Contractor shall perform such detailed inspection of all Work
   in progress at intervals appropriate to the stage of construction or
   fabrication off the Project Site as is necessary to ensure that such Work
   is proceeding in accordance with the Contract Documents in an effort to
   protect Owner against defects and deficiencies in such Work.  On the basis
   of such inspections, Contractor shall keep Owner periodically informed of
   the progress and quality of all Work and shall provide Owner with written
   reports of deficiencies revealed through such inspections and of measures
   proposed by Contractor to remedy such deficiencies.  Contractor shall use
   all reasonable efforts to secure for Owner or its representatives the
   option of being present at any inspections undertaken by Contractor off the
   Project Site.  In the event that the progress and quality of the Work is
   not proceeding in accordance with the Contract Documents, Owner shall be
   entitled to make recommendations to Contractor for the purpose of remedying
   such deficiencies.  No inspection performed or failed to be performed by
   Owner or its representatives or any recommendation from Owner in connection
   therewith shall be a waiver of any of Contractor's obligations hereunder or
   be construed as an approval or acceptance of any Work hereunder.
PAGE

             2.1.11    Project Site Access; Owner's Accommodations; Project
   Site Meetings.  During the Construction Period, Contractor shall control
   the Project Site.  Contractor shall provide Owner, the Independent Engineer
   and their designees reasonable access to the Project Site at all times and
   arrange for reasonable access by Owner, the Independent Engineer and their
   designees to the engineering, manufacturing and fabricating premises of all
   Subcontractors sufficient to permit Owner, the Independent Engineer and
   their designees to inspect Work being performed and to monitor compliance
   by Contractor and the Subcontractors with the terms hereof.  Contractor
   shall conduct regularly scheduled, monthly meetings at the offices of Rust
   in Birmingham, Alabama until mobilization has begun and Contractor
   determines to hold such meetings at the Project Site, and thereafter, at
   the Project Site, to discuss thoroughly the progress and status of
   engineering, procurement and construction with Owner's Field
   Representative, the Independent Engineer and any other representatives of
   Owner that Owner desires.  Such meetings shall be attended by Contractor's
   construction manager and project manager, the Independent Engineer, Owner's
   representatives and representatives of Contractor's home engineering office
   staff.  Notwithstanding the foregoing, Owner acknowledges that until
   Mechanical Completion, Contractor, at Owner's expense, is responsible for
   safety and security of and at the Project Site and agrees that Owner will,
   and will require Owner Contractors, Independent Engineer and each of their
   employees and agents, to, comply with all reasonable rules and regulations
   of Contractor regarding access to, inspection of and construction
   activities on or adjacent to the Project Site.  In addition, after
   reasonable notice from Owner, Contractor shall use all reasonable efforts
   to coordinate the scheduling of work by Owner Contractors so as not to
   delay unnecessarily or interfere with the performance of the Work by
   Contractor, subject to Article 11. 

             2.1.12    Uncovering of Work.  Contractor will notify Owner
   36 hours before Work will be covered.  Owner must inspect within such
   36 hours.  If any portion of the Work should be covered contrary to the
   written request of Owner or to requirements specifically expressed in the
   Contract Documents, such portion of the Work shall, if requested in writing
   by Owner, be uncovered for observation and shall be replaced at
   Contractor's expense and with no change in the schedule.  If any other
   portion of the Work has been covered which Owner has not specifically
   requested to observe prior to being covered, Owner may request to see such
   Work and it shall be uncovered by Contractor.  If such other portion of the
   Work is found to be in accordance with the Contract Documents, the cost of
   uncovering and replacement and costs of any delay caused by such uncovering
   and replacement shall, by appropriate Scope Change Order, be charged to
   Owner (and, if required under the circumstances, appropriate adjustments to
   the Project Schedule shall made by the Scope Change Order).  If such
   portion of the Work is found not to be in accordance with the Contract
   Documents, Contractor shall pay such costs and the Project Schedule shall
   not be changed.

             2.1.13    Storage and Related Matters. Contractor shall warehouse
   or otherwise provide appropriate storage (in accordance with manufacturers'
   recommendations) for all materials, supplies and equipment required for
   performance of Work.  Owner shall provide to Contractor, without cost, the
   procurement or disposal of, as appropriate, all sand, gravel and similar
   material required for performance of the Work hereunder.  Contractor agrees
   to store equipment and spare parts to be installed or held available for
   installation in the portion of the K&K Leased Premises made available by
   Owner pursuant to Section .  Contractor acknowledges that it has been
PAGE

   furnished a copy of the K&K Lease and agrees not to take any action that
   would constitute a default under the K&K Lease.  All materials, supplies
   and equipment that are stored at a location other than on the Project Site
   shall be (a) stored in a bonded warehouse or other appropriate location and
   (b) properly secured, tagged and identified for the Overall Project to
   establish the rights of title provided under Section  hereof, and
   segregated from other goods.  Prior to delivery at the Project Site, all
   equipment shall be labeled with permanently affixed durable nameplates that
   will include the manufacturer's name, equipment model number, equipment
   serial number, equipment tag number and all appropriate design parameters.

             2.1.14    Utilities; Fuel.  Contractor shall pay for all costs of
   Utilities and fuel consumed in the performance of the Work other than
   Utilities and fuel required for Commissioning and operation of the Overall
   Project and those expressly required to be furnished by Owner pursuant to
   Section  hereof.  Contractor shall supply all chemicals and consumables
   that are required to enable Contractor to perform the Work hereunder during
   the Construction Period, other than those expressly required to be
   furnished by Owner pursuant to Section  hereof.

             2.1.15    Spare Parts.  Owner shall pay to Contractor, in
   addition to the Contract Sum, a lump sum payment of $2,050,000 for the
   spare parts that will be required for the Project through Project
   Acceptance.  Such amount shall be payable to Contractor from time to time
   on the dates that Scheduled Payments are required to be made subject to
   compliance by Contractor with the provisions of Section  hereof (it being
   agreed by Owner and Contractor that such provisions shall also apply to
   requests for payment for spare parts).  Contractor shall procure prior to
   Mechanical Completion and maintain through Project Acceptance all start-up
   and operating spare parts required for the Project and prior to Mechanical
   Completion shall deliver to Owner and Independent Engineer a complete list
   of all such start-up and operating spare parts required for the Project,
   which list shall be subject to the review of Independent Engineer.
   Contractor and Owner agree that Owner shall not be required to spend more
   than $2,050,000 in aggregate for all spare parts required for the Project
   through Project Acceptance and that Contractor shall, without reimbursement
   by Owner, pay the cost of all spare parts required through Project
   Acceptance to the extent such cost exceeds $2,050,000.  In the event the
   cost of all spare parts required for the Project through Project Acceptance
   is less than $2,050,000, Contractor shall be entitled to retain the amount
   of the difference between $2,050,000 and the actual cost of the spare
   parts.  Contractor shall cause all such spare parts to be delivered to the
   K&K Leased Premises or other storage location on the Project Site.  All
   unused spare parts for the Overall Project shall remain with the Overall
   Project after Project Acceptance is achieved without additional cost to
   Owner.  Contractor shall store under its control all spare parts procured
   hereunder until Project Acceptance; provided, however, each such item shall
   be clearly labeled as a part designated for the Overall Project.
   Contractor may use any spare parts procured hereunder; provided, however,
   Contractor shall promptly replace and supply to Owner any spare parts
   available from vendors under applicable warranties to replace the parts
   that Contractor uses during performance of the Work hereunder.  All spare
   parts supplied by Contractor under the preceding sentence shall be new and
   properly packaged for storage.  Contractor shall have the right to purchase
   at its own expense any spare parts in addition to those shown on such list
   and, to the extent not used prior to Project Acceptance, such additional
   spare parts shall remain the property of Contractor.
PAGE

             2.1.16    Clean-Up and Waste Disposal.  Contractor shall keep the
   Project Site reasonably free from accumulation of waste materials, rubbish
   and other debris resulting from construction of the Project and other Work
   performed by or on behalf of Contractor during the Construction Period.  On
   or before Project Acceptance, Contractor shall remove to Owner's waste
   material staging area on the Project Site all waste materials (other than
   those for which Owner is responsible pursuant to Section  hereof and other
   than oil or any Hazardous Materials), rubbish and other debris and shall
   leave the Project Site in a neat, clean and usable condition and shall also
   remove from the Project Site all tools, construction equipment, machinery
   and surplus material to which Owner does not hold title.  All cleanup and
   waste disposal shall be conducted in accordance with all Applicable Laws;
   provided, however, no materials (other than excess soil excavated from the
   Project Site) shall be disposed of on the Project Site.  Contractor's
   obligations under this Section  shall include removal and disposal of all
   Hazardous Materials brought by Contractor or Subcontractors to the Project
   Site or produced by Contractor or Subcontractors on the Project Site, but
   shall not include removal or disposal of Hazardous Materials at the Project
   Site prior to the Commencement Date or brought on or generated in
   connection with the operation of the Overall Project by Owner or Owner
   Contractors at any time.

             2.1.17    Schedule Updates; Progress Reports.  Contractor shall
   keep and furnish to Owner regularly updated schedules of the Work
   supplementing the Project Schedule and Monthly Progress Reports of actual
   progress of the Work.  Contractor shall be responsible for ensuring that
   performance of the Work proceeds in accordance with the Project Schedule
   (as modified and/or updated in accordance with Section  hereof), for
   coordinating and incorporating the schedules of all Subcontractors into the
   aforementioned schedules and progress reports and for coordinating with
   Owner Contractors.  Contractor shall update the Project Schedule on a
   monthly basis as the Work progresses, including the incorporation of delay
   and acceleration analyses where appropriate.  Any delay and/or acceleration
   analysis will include a comprehensive Critical Path Method schedule
   analysis, which will be based upon the Project Schedule, including approved
   changes, in effect at the time the delay and/or acceleration analysis
   impact occurred.

             2.1.18    Taxes.  It is assumed that the purchase and
   installation of (i) items in the categories described under the heading
   "Taxable Items" in Schedule  hereto will result in Michigan sales or use
   tax liability to Contractor or, as applicable, a Subcontractor, in the
   aggregate amount of $579,143, which amount is included in the Contract Sum,
   (ii) items in the categories described under the heading "Industrial
   Processing Equipment" in Schedule  hereto will result in no Michigan sales
   or use tax liability to Owner as such property constitutes, in Owner's
   hands, property of an "industrial processor for use or consumption in
   industrial processing" within the meaning of Michigan Compiled Laws ("MCL")
   Section 205.94(g)(i) and in no Michigan sales or use tax liability to
   Contractor or, as applicable, a Subcontractor, as such property is to be
   purchased for resale within MCL Section 205.94(c) and (iii) items listed in
   Schedule  under the heading "Water Pollution Control Property", with a
   total estimated cost of $8,222,000, will result in no Michigan sales and
   use tax liability to Contractor, or as applicable, a Subcontractor, as such
   items are component parts of a "water pollution control facility" within
   the meaning of MCL Section 323.351.  Owner and Contractor shall cooperate
   with each other in securing appropriate exemptions consistent with the
PAGE

   foregoing assumptions and Contractor will use its reasonable efforts to
   minimize the amount of any applicable sales and use tax.  If,
   notwithstanding the foregoing, a Michigan sales or use tax is imposed upon
   Contractor or, as applicable, a Subcontractor, as a result of (i) a change
   in Applicable Law or (ii) a determination that any item within the
   categories described under the heading "Industrial Processing Equipment" or
   "Water Pollution Control Property" on Schedule  hereto is subject to a
   sales or uses tax, which tax results in the aggregate amount of sales and
   uses taxes exceeding $579,143, the Contract Sum shall be increased by the
   amount of such excess by means of a Scope Change pursuant to Section  
   hereof; provided, however, that no such increase in the Contract Sum shall
   be made to the extent any such excess is attributable to a failure of
   Contractor or Subcontractor to hold a sales tax license or timely or
   properly claim a resale exemption as contemplated by clause (ii) of the
   first sentence of this Section .  Contractor shall maintain all cost and
   other records necessary to distinguish taxable from nontaxable items and
   shall assist Owner in determining the appropriate amounts of sales and use
   taxes and any available exemptions therefrom based on Owner's determination
   of categories of equipment and material.  Owner shall be responsible for
   making appropriate applications for exemptions from sales and use taxes.
   Contractor shall administer and, subject to inclusion of certain sales and
   use taxes in the Contract Sum as provided above, pay all gross receipts,
   customs duty, import duty and other taxes and contributions imposed by any
   taxing authority upon the sale, purchase, use or importation of materials,
   supplies, equipment, services or labor incorporated in the Project or used
   in the Work. Contractor shall be responsible for administering and paying,
   without additional reimbursement hereunder, all taxes measured by
   Contractor's receipts hereunder or measured by wages earned by employees of
   Contractor or any Subcontractor (all of the above, together with sales and
   use taxes, the "Taxes"), and shall furnish to the appropriate taxing
   authorities all required information and reports in connection with such
   Taxes and promptly furnish copies of all such information and reports to
   Owner; provided, however, that Owner shall be solely responsible for and
   shall pay all real property taxes assessed on the Project Site, all ad
   valorem taxes or personal property taxes on the Overall Project and all
   income taxes imposed on Owner's operations.  All Subcontracts shall include
   the amount of any sales or use tax as a separate line item on the face
   thereof along with adequate supporting documentation.

             2.1.19    Employee Identification.  Contractor shall provide a
   method, which shall be subject to the reasonable review of Owner, of
   checking the employees of Contractor and its Subcontractors in and out of
   the Project Site and other areas in which the construction Work is to be
   performed.  All employees of Contractor and its Subcontractors shall be
   identified while on the Project Site by the use of a distinctive badge
   approved by Owner, which approval shall not be unreasonably withheld or
   delayed.

             2.1.20    Adjoining Utilities.  Contractor shall do all things
   reasonably necessary or expedient to protect any and all parallel,
   converging and intersecting electric lines and poles, communication lines
   and poles, highways, waterways, railroads, sewer lines, natural gas
   pipelines, drainage ditches, culverts, fences, walls, gates and any and all
   tangible property of third parties from physical damage as a result of its
   performance of the Work hereunder.  Except as otherwise agreed by any
   Person holding an interest in such property, to the extent that any such
   property is physically damaged or destroyed by Contractor or any
   Subcontractor through its intentional tort or negligence, or if Contractor
PAGE

   would be strictly liable therefor, in the course of the performance of the
   Work hereunder, Contractor shall be responsible for such damage or
   destruction, and Contractor shall at its own expense rebuild, restore or
   replace such damaged or destroyed property to a condition at least equal to
   the condition of such property before such damage or destruction occurred.

             2.1.21    Protection of Property.  Contractor shall provide and
   shall require that each Subcontractor provides proper and ample protection
   from damage or loss to the Project, the Project Site, materials,
   construction equipment and tools during its performance of the Work
   hereunder.  Where ingress and egress to and from the Project Site require
   the traverse of public or private lands, Contractor shall limit the
   movement of its crews and equipment and of Owner Contractors' crews and
   equipment and of all Subcontractors and Owner Contractors so as to cause as
   little physical damage as possible to property and shall use all reasonable
   efforts to avoid marring such lands, and shall in all respects comply with
   all obligations of and any restrictions imposed on Owner by the Real Estate
   Rights and disclosed to Contractor (including without limitation those
   contained in the K&K Lease).  All fences and walls that must be opened or
   moved during construction of the Project shall be replaced by Contractor.
   Contractor shall not be reimbursed by Owner for costs associated with loss
   of or damage to tangible property of third parties, whether on or off the
   Project Site or rights-of-way thereto, to the extent caused by Contractor.

             2.1.22    Coordination with Owner Contractors.  Contractor shall
   permit Owner Contractors to introduce and store materials and perform their
   services during the Construction Period.  Contractor shall cooperate with
   Owner and Owner Contractors to coordinate the Work with the work of Owner
   Contractors, and Owner shall require Owner Contractors to cooperate with
   Contractor and to coordinate with the Work so that the work of Owner
   Contractors does not unreasonably interfere with or delay the Work.

             2.1.23    Contract Documents at Project Site.  Contractor shall
   maintain at the Project Site, on a current basis, one record copy of all of
   the Contract Documents, in good order and marked currently to reflect
   accurately and completely all material changes, and a complete set of all
   working drawings used in performance of the Work.  These shall be available
   to Owner and the Independent Engineer.  Contractor shall advise Owner on a
   current basis of all material changes in the Work made during the
   Construction Period which affect the general arrangement of the Project,
   the electrical one-line drawings or the piping and instrumentation
   diagrams.

             2.1.24    Commissioning.  Commencing as soon as practicable prior
   to start-up operations, but in any event in accordance with the Project
   Schedule, Contractor shall commission the Project as more specifically
   provided in Section  hereof.

             2.1.25    Start-Up and Initial Operation.  The Work shall include
   the start-up of components, calibration of controls and equipment, total
   system function and verification tests, and all other start-up functions
   pertaining to the Project.  The Work shall also include monitoring the
   operation of the Project during the Initial Operation Period and
   supervising Owner's personnel during all Performance Tests, as required
   under Section  hereof.  At all times during the performance of the Work,
   Contractor shall use all reasonable efforts to minimize (consistent with
   Good Industry Practices and the terms of the Contract Documents) the use of
PAGE

   the Utilities, consumables, chemicals and fuel that are for Owner's
   account.

             2.1.26    Further Assurances.  Consistent with the other
   requirements of the Contract Documents, each of Contractor and Owner shall
   execute and deliver all further instruments and documents, and take all
   further action, including but not limited to, in the case of Contractor,
   assisting Owner in filing a notice of commencement and a notice of
   completion with the appropriate state and local lien recording offices,
   that Owner or Contractor, as the case may be, may reasonably request in
   order to enable Contractor to complete performance of the Work or to
   effectuate the purposes or intent of the Contract Documents, and any
   additional costs to Contractor in doing so shall be paid by Owner.

             2.1.27    Quality Assurance.  Contractor shall fully observe and
   implement the Construction Quality Assurance Plan until Project Acceptance.
   All tests, inspections and quality assurance procedures required by this
   Agreement, or recommended by Subcontractors, shall be in addition to, and
   not in lieu of, applicable Construction Quality Assurance Plan activity.
   Contractor shall regularly document and report to Owner Contractor's
   compliance with the Construction Quality Assurance Plan in accordance with
   the procedures contained therein.

        2.2  Commencement of the Work.  Contractor shall commence performance
   of the Work and other services hereunder on the date specified by Owner
   (the "Commencement Date") in a written notice delivered to Contractor in
   the form set forth as Schedule  hereto (the "Notice to Proceed"); provided,
   however, that the Commencement Date shall not be deemed to occur unless and
   until Financial Closing shall have occurred.

        2.3  Standard of Performance.  Without limiting any other provision of
   this Agreement, subject to the provisions of Article  hereof, (i)
   Contractor shall perform all the Work in accordance with Good Industry
   Practices, all Applicable Laws, applicable codes and standards (including
   applicable underwriters' and fire codes and standards), and the Contract
   Documents, (ii) all engineering and design services shall be provided
   utilizing Good Industry Practices and the generally accepted standard of
   care, skill and diligence as would be provided by an engineering firm
   experienced in supplying engineering services nationally to pulp producing
   entities, and (iii) the Project shall be constructed and erected in a good
   and workmanlike manner; provided, however, that Contractor shall not be
   obligated to modify the design of the Overall Project in order to satisfy
   requirements of Owner's insurance underwriters other than pursuant to a
   Scope Change Order.  All engineering work of Contractor requiring
   certification shall be certified, and all Design Documents requiring
   sealing shall be sealed, by professional engineers licensed and properly
   qualified to perform such engineering services in all appropriate
   jurisdictions.

        2.4  Compliance with Applicable Laws.  Contractor shall comply with
   and shall perform the Work, including without limitation the design,
   engineering and construction of the Project, subject to the provisions of
   Article  hereof, in compliance with all Applicable Laws as they may be in
   effect at the time of Contractor's performance hereunder.  Notwithstanding
   the foregoing, the effect of any change in Applicable Laws (excluding
   therefrom any change in Applicable Permits resulting from the acts or
PAGE

   omissions of Contractor or any Subcontractor) enacted after the date of
   this Agreement shall be determined under Article 12.

        2.5  Independent Engineer.  The documents that govern Owner's
   transactions with the Financing Parties for the Overall Project provide to
   the Independent Engineer certain rights of review and consultation with
   Owner concerning the Overall Project and the Work in order that the
   Independent Engineer may regularly and completely apprise the Financing
   Parties and Owner of the progress and other aspects of the Overall Project
   and the Work.  Contractor shall not unreasonably interfere with and shall
   use all reasonable efforts to cooperate with the Independent Engineer in
   the Independent Engineer's performance of its duties.  Any acceptance or
   comment by the Independent Engineer or the Financing Parties shall not be
   construed to impose on the Independent Engineer or the Financing Parties
   any control of any portion of the Work, or relieve Contractor of any of its
   duties, liabilities or obligations under the Contract Documents.  Owner
   shall cause Independent Engineer to exercise its rights of review and
   consultation hereunder at reasonable times and so as to minimize
   interference with the Work, and shall use all reasonable efforts to cause
   Independent Engineer not to withhold or delay unreasonably its reports to
   Owner.  Independent Engineer performs its duties solely for the benefit of
   Owner and the Financing Parties.

        2.6  Safety Precautions and Environmental Protection.   Contractor
   shall implement and administer a safety and health program for the Project
   which shall include: (i) development of a Project safety manual
   establishing Contractor and Subcontractor safety guidelines and
   requirements, (ii) conducting of regular Project safety meetings with all
   Subcontractors and to the extent deemed appropriate by Contractor, with
   Owner Contractors, (iii) development, implementation and enforcement of
   procedures for advising Subcontractors of, and correction of, safety
   violations and deficiencies, (iv) the requirement of taking of all other
   actions necessary to provide a safe work environment in accordance with
   Applicable Laws and (v) the requirement of fire protection.  Contractor
   shall incorporate in its safety and health program the safety requirements
   and procedures required by Owner's insurance underwriters pursuant to
   Section  hereof; provided, however, that Contractor shall not be obligated
   to perform additional work beyond the Scope of Work in order to satisfy
   requirements of Owner's insurance underwriters other than pursuant to a
   Scope Change Order.  Upon commencement of mobilization for construction of
   the Project, Contractor shall review its safety and health program with,
   and provide one copy of such safety and health program to, each of Owner's
   Field Representative, Owner's Project Manager and the Independent Engineer.
   Contractor shall take all reasonable precautions for the safety of, and
   shall provide all reasonable protection to prevent physical damage, injury
   or loss to: (i) all Persons employed by Contractor or Subcontractors in
   connection with the Work and all other Persons on the Project Site, (ii)
   all materials and equipment to be incorporated into the Overall Project,
   whether in storage on or off the Project Site, under the care, custody or
   control of Contractor or any Subcontractor, and (iii) other property at the
   Project Site or adjacent thereto, including but not limited to, trees,
   shrubs, lawns, walks, pavements, fences, walls, gates, roadways, structures
   and utilities not designated for removal, relocation or replacement in the
   course of construction.  During start-up, testing and initial operation of
   the Overall Project, Contractor shall require all Subcontractors, and Owner
   shall require all Owner Contractors, working on the Project Site to comply
   with all safety and environmental protection requirements in effect at all
   such times.  Contractor shall erect and maintain, as required by existing
PAGE

   conditions and the progress of the Work, all reasonable safeguards for
   safety and physical protection, including the implementation of a
   controlled key-lock system of all electrical apparatus, the furnishing of
   barricades and the posting of danger signs and other warnings against
   hazards.  Contractor shall be responsible during the Construction Period
   for the security of the Work, the Project Site and all equipment and
   materials stored at the Project Site or at any other location (in
   accordance with Section  hereof); provided, however, that the cost of
   outside security personnel shall be paid by Owner.  Gates shall be secured
   whenever Contractor's personnel are not present.  Contractor shall be
   responsible in accordance with Article 13 hereof for all Damages incurred
   by reason of failure to maintain during the Construction Period reasonable
   security at the Project Site or at the location where equipment and
   materials are stored.  Contractor shall otherwise comply with all safety,
   security and environmental protection procedures and requirements set forth
   in the Contract Documents, or otherwise required by Applicable Laws.

        2.7  Owner's Right to Carry Out Work.  If Contractor defaults or
   neglects to carry out the Work in accordance with the Contract Documents,
   and fails within fifteen (15) days after receipt of written notice from
   Owner to commence and continue correction of such default or neglect with
   diligence and promptness and if such neglect or failure shall be reasonably
   likely to result in personal injury, property damage or violation of
   Applicable Law, Owner may, without prejudice to any other remedy Owner may
   have, make good such deficiencies in the Work.  In such case, an
   appropriate Scope Change Order shall be issued by Owner deducting from the
   payments then or thereafter due Contractor the reasonable cost of
   correcting such deficiencies in the Work.  If the payments then or
   thereafter due Contractor are not sufficient to cover such amount,
   Contractor shall pay the difference to Owner within thirty (30) days after
   receipt of Owner's invoice therefor.  Notwithstanding the foregoing, Owner
   shall be entitled to act in an emergency to prevent imminent personal
   injury or serious property damage without any notice to Contractor at
   Owner's expense, subject to Article  hereof.


                                    ARTICLE 3
                                  Subcontracts

        3.1  Project Subcontractors.  Contractor shall select only those
   vendors, suppliers and materialmen as have, in the reasonable discretion of
   Contractor, attained a standard of reliability and performance comparable
   to Rust's.  All vendors, suppliers, materialmen, consultants and
   subcontractors of all tiers providing equipment, materials or services to
   Contractor in connection with the Project (excluding Owner Contractors) are
   herein referred to as "Subcontractors."  Rust is expressly approved by
   Owner as a Subcontractor.

        3.2  Payments to Subcontractors.  From and after the Commencement
   Date, Contractor shall be solely responsible for paying each Subcontractor
   and any other Person to whom any amount is due from Contractor for
   services, equipment, materials or supplies in connection with the Project.

        3.3  Subcontractor Warranties.  Contractor shall, for the protection
   of Owner, obtain from all Subcontractors the most favorable guarantees and
   warranties reasonably obtainable on all machinery, equipment, services,
   materials, supplies and other items used and installed hereunder, and such
   guarantees and warranties shall not be amended, modified or otherwise
PAGE

   discharged without the prior written consent of Owner.  Contractor shall
   provide to Owner copies of all such guarantees and warranties and shall
   enforce guarantees and warranties (other than guarantees and warranties
   provided by Fiberprep, Inc. and U.S. Filter Corporation, each of which is
   to be enforced by Owner) to the fullest extent thereof, short of
   litigation, on behalf of Owner throughout the term of this Agreement.
   Prior to the expiration of the General Warranty Period, Contractor shall
   assign to Owner all guarantees and warranties of all Subcontractors then
   remaining in effect; provided, however, (i) such assignment shall not
   relieve Contractor of its warranty obligations under the Contract Documents
   and (ii) Contractor shall have the prior right to enforce the guarantees
   and warranties of Subcontractors (other than guarantees and warranties
   provided by Fiberprep, Inc. and U.S. Filter Corporation) to the extent
   necessary to assure satisfaction of Contractor's warranty obligations to
   Owner under the Contract Documents.  Contractor shall not and shall not
   permit any Subcontractor, or any other Person under Contractor's control,
   to take any action not otherwise permitted under the Contract Documents
   that could release, void, impair or waive any warranties or guarantees on
   equipment, materials or services that it procures from others.  Owner shall
   not and shall not permit any Owner Contractor, or any other Person under
   Owner's control, to take any action that could release, void, impair or
   waive any warranties or guarantees on equipment, materials or services that
   it procures from others.

        3.4  No Privity.  Owner shall not be deemed by virtue of this
   Agreement to have any contractual obligation to or relationship with any
   Subcontractor.

        3.5  Review and Approval not Relief of Contractor's Liability.  Any
   inspection, review or approval by Owner or any other Person permitted under
   the Contract Documents of any portion of the Work or of any work in
   progress by Contractor or Subcontractors shall not relieve Contractor of
   any duties, liabilities or obligations under the Contract Documents.


                                    ARTICLE 4
                                Price and Payment

        4.1  Contract Sum.  As full consideration to Contractor for the full
   and complete performance of the Work and all costs incurred in connection
   therewith, Owner shall pay, and Contractor shall accept, the sum of
   $144,700,000 (such amount, as it may be adjusted from time to time in
   accordance with this Agreement, herein referred to as the "Contract Sum"),
   which will be paid in accordance with the provisions of Section  hereof.
    The Contract Sum shall not include the amount to be paid by Owner to
   Contractor for spare parts pursuant to Section  hereof or any amounts to be
   paid by Owner under the Site Preparation Contracts and pursuant to Section
    hereof.  In the event the Commencement Date does not occur on or before
   December 31, 1994, either Owner or Contractor may terminate this Agreement
   upon written notice to the other party, whereupon neither party will have
   any liability to the other, except to the extent Owner has expressly agreed
   to make any payments to Contractor with respect to items procured prior to
   the Commencement Date.

        4.2  Payment Schedule.  The Contract Sum shall be paid by Owner to
   Contractor in installments on the Commencement Date and, commencing after
   the Commencement Date, monthly on the dates provided in Section  hereof
PAGE

   ("Scheduled Payments") in accordance with the Milestone Schedule, as
   adjusted pursuant to the terms of this Agreement.

             4.2.1     Request for Payment.  On or prior to the Commencement
   Date and thereafter not later than the tenth (10th) calendar day of each
   month, Contractor shall submit to Owner a written request for the
   applicable Scheduled Payment based upon completion of items of Work set
   forth on the Milestone Schedule and shall certify to Owner that such
   requested payment is properly payable.  Contractor shall furnish to Owner
   with each payment request the information listed in Schedule  hereto as
   well as all cost details relating to such payment request which the Owner
   may request and which are necessary to satisfy the requirements of all
   federal, state and local tax authorities.  Such information shall be
   subject to audit in accordance with Section  hereof.  Owner and Contractor
   shall use all reasonable efforts to cooperate with each other to cause each
   request for payment to be reviewed and approved by Owner within fifteen
   (15) days after receipt of the payment request.  Contractor acknowledges
   that the provisions of Owner's contracts with the Financing Parties require
   Owner to obtain Independent Engineer's approval of each payment request.
   Contractor agrees that no information shall be submitted to Owner under
   this Section  unless at the same time such information is submitted to
   Independent Engineer for review.  Subject to the foregoing, payments for
   Milestones achieved earlier than scheduled shall be made in the month in
   which such Milestone is achieved, and payment for Milestones not completed
   in the month scheduled shall be made in the month in which such Milestone
   is achieved.

             4.2.2     Conditions to Scheduled Payments.  Subject to the terms
   of this Agreement, and provided that Owner has received Contractor's
   request for payment and the information required pursuant to Section  
   hereof, Owner shall make, or cause to be made, by wire transfer of funds to
   the account specified in writing by Contractor to Owner at least five (5)
   Business Days prior to the date of payment, or if no account is so
   specified, by check, the corresponding Scheduled Payment to Contractor with
   respect to the Work on the Commencement Date or the twenty-fifth (25th)
   calendar day of the month as applicable, provided that Owner may withhold
   all or part of any Scheduled Payment for the month in which the event
   occurs, to the extent of the occurrence of any of the following events:

                       (a)  Contractor's request for payment does not meet the
   requirements of Section  hereof or the Monthly Progress Report for the
   month for which the request for payment is made has not been prepared as
   described in Section  hereof;

                       (b)  Contractor or Rust has not supplied Owner with the
   lien waiver required under Section  hereof; 

                       (c)  one or more third parties have filed a mechanics'
   lien or similar claim of lien against Owner or the Overall Project or
   Project Site resulting from the actions or inactions of Contractor, any
   Subcontractor or any Person for whom Contractor is legally responsible, and
   Contractor has not furnished in respect thereof a bond meeting the
   requirements of the penultimate sentence of Section  hereof; or

                       (d)  Contractor has failed to pay any amounts due and
   payable to Owner under the Contract Documents.
PAGE

             4.2.3     Deferral of Scheduled Payments.  Any Scheduled Payment
   that Owner is not obligated to make under any clauses of Section  hereof
   shall be made, without interest, following the applicable payment date
   under Section  hereof, upon satisfaction of the conditions described in
   such clauses.

             4.2.4     Interest on Late Payments.  Except as set forth in
   Section  hereof with respect to the Deferrable Portion, any amount not paid
   when due shall bear interest at the Late Payment Rate from the date such
   payment is due until the date it is actually paid; provided, however, that
   the foregoing and the payment by Owner of interest shall not be deemed to
   excuse Owner from making any such payment when due.

        4.3  Deferrable Portion of Contract Sum.  A portion of the Contract
   Sum equal to $5,000,000 (the "Deferrable Portion") that would otherwise be
   payable as all or a portion of a Scheduled Payment shall not so be paid
   (the Deferrable Portion to be withheld to the extent required under this
   Section  from Scheduled Payments in inverse order of the due dates,
   commencing with the final Scheduled Payment), but instead Owner shall pay
   the Deferrable Portion, together with interest from the date on which the
   following conditions are satisfied to the date of payment at an interest
   rate per annum equal to (i) the Prime Rate, in the case of any portion of
   such period occurring during the calendar year following the first date all
   of the following conditions are satisfied, and (ii) twelve and one-half
   percent (12-1/2%) per annum, in the case of any portion of such period
   occurring after the first calendar year following the date on which all of
   the following conditions are satisfied.  The Deferrable Portion, plus such
   accrued interest, shall be payable only after the following conditions have
   been met: (i) Project Acceptance has been achieved pursuant to Section  
   hereof, (ii) receipt by Owner of a final waiver, in the form of Schedule A
   hereto, of all constitutional, statutory and contractual liens Contractor
   may have against Owner, the Overall Project and the Project Site,
   (iii) receipt by Owner from Contractor of final waivers of mechanics' and
   materialmen's liens in the form of Schedule B hereto from Rust, and (iv)
   all other conditions to a Scheduled Payment contained in this Agreement or
   to which Contractor has otherwise agreed, and shall be payable in one or
   more installments on the first day of each month (or if such day is not a
   Business Day, the first day thereafter that is a Business Day), commencing
   with the first such day to occur after Project Acceptance, to the extent
   that there exists Available Cash therefor determined as of the twenty-fifth
   (25th) day of the preceding month.  Owner's obligation to pay the
   Deferrable Portion will be secured pursuant to the Security Agreement.
   Contractor acknowledges and agrees that Owner's obligation to pay the
   Deferrable Portion is subordinate and junior in right of payment to certain
   other obligations of Owner, all as and to the extent provided in the
   Indenture.

        4.4  All Payments Subject to Release of Liens.  At the time of each
   Scheduled Payment hereunder, Contractor shall (a) certify to Owner that the
   Overall Project, the Project Site and any and all interests and estates
   therein, and all improvements and materials placed on the Project Site,
   are, to the extent of the most recent payment received by Contractor, free
   from any and all claims of lien, liens, security interests or encumbrances
   in the nature of mechanics', labor or materialmen's liens or other liens
   (in this Section , referred to collectively as "Liens") arising out of or
   in connection with performance by Contractor, or any Subcontractor, of the
   Work, or to the extent that any such Liens exist, that a bond or guaranty
   by Contractor satisfying the requirements of the next sentence with respect
PAGE

   to such Liens has been furnished, (b) provide a release and waiver, in the
   form of Schedule A hereto, of Contractor's constitutional, statutory and
   contractual Lien claims, to the extent of the most recent payment received
   by Contractor and (c) provide a release and waiver, in the form of Schedule
   B hereto, of Rust's Lien claims, to the extent of the most recent payment
   received by Contractor.  If any Lien is filed or notification of
   withholding money for labor or material furnished under this Agreement is
   served on Owner or any Financing Party, Owner may withhold from any
   Scheduled Payment or other amount payable to Contractor under this
   Agreement or otherwise, an amount sufficient to discharge any or all such
   Liens, unless Contractor shall furnish a bond or guaranty by Contractor in
   form, substance and amount reasonably satisfactory to Owner, the Financing
   Parties and the Title Insurer to protect Owner, the Overall Project and the
   Project Site against such Liens or claims, and, after thirty (30) days from
   the time such Lien is made, unless Contractor shall have furnished a bond
   or guaranty as described above, Owner may discharge such Lien with the
   moneys withheld, whereupon for purposes of this Agreement such moneys shall
   be deemed to have been paid to Contractor hereunder.  Nothing contained in
   this Section  hereof or elsewhere in this Article 4 shall prohibit
   Contractor from withholding any payment to a Subcontractor for cause as
   determined by Contractor.

        4.5  Payment or Use Not Acceptance.  No Scheduled Payment or other
   payment to Contractor or any use of the Overall Project by Owner shall
   alone constitute an acceptance of any of the Work or relieve Contractor of
   any of its obligations or liabilities with respect thereto.

        4.6  Set-off.  Owner may deduct and set-off against any part of the
   balance due or to become due to Contractor under this Agreement, any
   undisputed amounts due from Contractor to Owner under or in connection with
   this Agreement, including any amounts due or to become due from Contractor
   to Owner pursuant to Article  or Article  hereof.  Contractor may deduct
   and set-off against any amounts due or to become due from Contractor to
   Owner under this Agreement, excluding any amounts due or to become due
   pursuant to Article 7 or Article 8 hereof, any undisputed amounts due from
   Owner to Contractor under or in connection with this Agreement.

        4.7  Non-Recourse Obligations.  Notwithstanding any provision of this
   Agreement to the contrary, none of the officers or partners of Owner or any
   of their respective affiliates shall be personally liable for payments due
   under this Agreement or for the performance of any obligation hereunder,
   and the sole recourse of Contractor for the payment of amounts due from
   Owner or for the satisfaction of any other obligations of Owner hereunder
   shall be against amount on deposit in the Construction Fund held by the
   Trustee under the Indenture and Revenues of Owner.  For purposes of the
   foregoing, "Revenues" means moneys constituting revenues or receipts
   derived from the Overall Project or its operations, including without
   limitation, sales of deinked pulp produced by the Facility, and any other
   revenue deposited to the Revenue Fund (as defined in the Indenture) held by
   the Trustee pursuant to the Indenture and available for the payment of such
   obligations.  In the event a default by Owner occurs under this Agreement,
   no action shall be brought against any officer, employee or partner of
   Owner or any Financing Party or any of their respective affiliates for such
   breach.
PAGE

                                    ARTICLE 5
                               Owner's Obligations

        5.1  Representatives.  Owner shall designate a representative (the
   "Owner's Project Manager") to administer the Contract Documents on behalf
   of Owner.  Owner's Project Manager shall have the authority to (a) issue
   Owner's instructions and other communications to Contractor, (b) consult
   with the Independent Engineer, and (c) execute Proposal Requests and Scope
   Change Orders.  Owner's Project Manager shall be the recipient of notices
   and other written communications from Contractor under the Contract
   Documents.  In furtherance of his responsibilities described hereunder,
   Owner's Project Manager may conduct observations and inspections of the
   Overall Project throughout design, procurement and construction, provided
   that no such observations or inspections shall relieve Contractor of any of
   its obligations under the Contract Documents.  Owner shall also designate a
   representative to observe the Work on the Project Site ("Owner's Field
   Representative").  Owner's Field Representative shall have the right to be
   present at the Project Site at all times, to occupy the field office of
   Owner at the Project Site and to participate in weekly Project status
   meetings conducted by Contractor.  Owner's Field Representative shall have
   the right to observe and inspect the progress of procurement and
   construction of the Overall Project, and communicate with Contractor as to
   the conformance of the Work with the Contract Documents.  A copy of all
   written communications from Contractor to Owner shall be delivered to
   Owner's Field Representative simultaneously with delivery to Owner's
   Project Manager.  Contractor shall notify Owner's Field Representative
   before commencing any significant items of construction for the Project.
   However, Owner's Field Representative shall not have the authority to make
   decisions or give instructions binding upon Owner, except to the extent
   expressly authorized by Owner in writing.  In the event Owner employs or
   designates a different Owner's Project Manager or Owner's Field
   Representative, Owner shall give Contractor written notice of the identity
   of the new Owner's Project Manager or Owner's Field Representative.
   Owner's Project Manager or Owner's Field Representative may delegate any or
   all of his authority to one or more delegees, but no such delegation shall
   be effective unless made in a written instrument from him delivered to
   Contractor naming the delegee, his tenure and the extent of his authority.
   In addition, Owner shall have the right to retain one or more independent
   consultants to monitor and inspect the Work at the Project Site or specific
   portions of the Work.  Owner shall cause Owner's Project Manager and
   Owner's Field Representative and their delegees and any independent
   consultants and Owner Contractors to conduct all of their observations,
   communications and other activities in a manner that does not disrupt,
   delay or otherwise interfere with the Work.

        5.2  Project Site.  On or before the Commencement Date and
   continuously thereafter through Project Acceptance, Owner shall, at its own
   expense, furnish the Project Site which is described in Schedule  hereto,
   and access to the Project Site and not later than April 1, 1995 shall, at
   its own expense, purchase and install or cause to be installed the
   permanent fencing necessary to secure the Project Site.

        5.3  Permits.  Owner has secured at its own expense all Applicable
   Permits that are listed in Schedule  hereto and designated therein as
   "Owner Permits" and will secure when required any other Applicable Permit
   that is required for the operation of the Overall Project (together with
PAGE

   the Owner Permits listed on Schedule 5.3 hereof, the "Owner Permits").
   Owner shall, at its own expense, maintain all Applicable Permits.  Owner
   shall cooperate with Contractor in connection with Contractor's efforts to
   obtain Contractor Permits.

        5.4  Utilities; Consumables.  Owner shall arrange for the delivery of
   those Utilities set forth on Schedule  hereto and shall pay for the costs
   of all equipment and piping and other material required for the delivery of
   such Utilities, and the costs of installation thereof.  Owner shall pay the
   cost of all Utilities and fuel consumed in connection with the operation of
   the Overall Project during Commissioning and the Initial Operating Period.
   Owner shall supply and pay the cost of all chemicals and consumables
   required for operation of the Overall Project during the Initial Operating
   Period, and Owner shall supply vessels or other method of storage
   sufficient for the storage of chemicals and consumables required for
   operation of the Overall Project during the Initial Operating Period.
   Owner shall pay for the costs of all electricity provided by the Wisconsin
   Public Service Corporation substation to be located at the Project Site.
   Contractor shall begin use of the permanent power from such substation at
   the time the substation is ready to accept the power load.

        5.5  Waste Paper Supply.  Owner shall furnish Qualifying Waste Paper
   at the pulper feed conveyor of the Overall Project in quantities and at or
   prior to the times requested by Contractor at least one hundred twenty
   (120) days prior to the date such Qualifying Waste Paper is first required,
   for utilization during the Initial Operating Period.

        5.6  Disposition of Pulp and Waste Products.  During the Initial
   Operating Period, Owner shall, at no expense to Contractor, arrange for the
   disposition of all pulp and waste products (including sludge) resulting
   from operation of the Overall Project during the Initial Operating Period
   in such manner as Owner shall determine.  Owner shall also be responsible
   for any remediation of the Project Site required under Applicable Law to
   correct any condition existing at the Commencement Date or brought onto the
   Project Site by or created by Owner or Owner Contractors.

        5.7  Certain Equipment To Be Supplied by Owner.  Owner agrees to cause
   to be delivered to and installed at the Project Site the equipment
   identified in Schedule  hereto at the times specified therein.

        5.8  Protection of Property.  Owner shall ensure that each Owner
   Contractor provides proper and ample protection from physical damage or
   loss to the Overall Project, the Project Site, materials, construction
   equipment and tools during its performance of its work.

        5.9  K&K Leased Premises.  Owner, at its own expense, agrees to make
   available to Contractor 100,000 square feet of the K&K Leased Premises for
   use by Contractor for the storage of spare parts procured by Contractor
   pursuant Section  hereof and equipment, supplies and materials to be used
   in the construction of the Project.  The remainder of the K&K Leased
   Premises is to be used by Owner for purposes related to the Overall
   Project, including the storage of waste paper.

        5.10 Independent Engineer.  Owner acknowledges that Owner is
   responsible for paying the fees and expenses of the Independent Engineer to
   the extent agreed between the two of them, and shall indemnify Contractor
PAGE

   against any claims by the Independent Engineer for the payment of such fees
   and expenses.

        5.11 Limitation on Certain Amendments.  Unless an Event of Default (as
   defined in the Indenture) has occurred and is continuing, Owner will not
   consent to any amendments or waivers pertaining to the Bond Documents (as
   defined in the Indenture) if the effect of such amendment or waiver would
   be to adversely affect the ability of Contractor to be paid amounts owing
   under this Agreement out of the General Debt Fund.

                                    ARTICLE 6
                      Completion and Acceptance of Project

        6.1  Training.  Contractor shall provide Owner's personnel with
   classroom and on-the-job training in the operation and maintenance of the
   Project at the times and regarding the scope of items set forth in
   Schedule  hereto.  Owner shall be responsible to provide operation and
   maintenance personnel in sufficient numbers and having sufficient
   background and experience operating similar plants and who are able to
   comprehend the training required to be provided by Contractor and to
   operate the Project subsequent to receiving such training.  Contractor
   shall have the right to require that Owner replace or to hire replacement
   personnel for any personnel who do not satisfactorily perform their duties
   or for other cause.  Contractor shall coordinate all training sessions in a
   manner sufficient to provide Owner's personnel with an adequate
   understanding of the basic and principal design, and the operation and
   maintenance aspects, of each dimension of the Project as an integrated
   whole.

        6.2  Project Commissioning.  Prior to Commissioning of the Project,
   Contractor shall propose, for Owner's review, a Commissioning program for
   the Project, including a Commissioning schedule, an organization chart of
   Contractor's personnel conducting the Commissioning, and a procedure for
   the review of the Operating Manual and the application of its contents to
   Project systems .  Owner shall supply its operating and maintenance
   personnel as listed in Schedule  hereto to perform the labor necessary to
   start-up the Project and to observe and verify Commissioning tasks
   performed by Contractor.  Contractor shall proceed to commission the
   Project.  During Project Commissioning, Contractor, with the assistance of
   and observation by Owner's personnel, shall thoroughly flush and clean all
   piping and equipment within the Project in accordance with system cleaning
   procedures provided in the Operating Manual, Applicable Laws and procedures
   for environmental protection and safety.

        6.3  Mechanical Completion.

             6.3.1     Demonstration of Mechanical Completion.  "Mechanical
   Completion" shall mean that the Project has been substantially completed in
   accordance with the terms of the Contract Documents (with the exception of
   Punch List); Contractor has provided to Owner the Operating Manual in
   accordance with Section  hereof; Contractor has provided to Owner the Punch
   List; all Project control systems being provided by Contractor are
   functional; the Project is mechanically and hydraulically functional and
   free of material defects; all systems being provided by Contractor have
   been checked for readiness to start up and are functional; Contractor shall
   have flushed all applicable Project system elements with water for a period
   of twenty-four (24) hours, under operating condition pressure, without
PAGE

   process leaks or equipment failure or interruption, and Mechanical
   Completion has been either acknowledged by Owner or deemed to have been
   achieved pursuant to Section  hereof.

             6.3.2     Notice of Mechanical Completion.  When Contractor
   believes that it has achieved Mechanical Completion, it shall deliver to
   Owner and Independent Engineer a notice thereof (the "Notice of Mechanical
   Completion"), which shall include the information shown on Schedule .

             6.3.3          Achievement of Mechanical Completion.  Owner
   shall, within three (3) Business Days following receipt of the Notice of
   Mechanical Completion (including all the information shown in Section 1.2
   of Schedule 6.3.2), (a) if the requirements of Section  hereof have been
   satisfied, acknowledge that Mechanical Completion has been achieved, or (b)
   if reasonable cause exists for doing so, notify Contractor in writing that
   Mechanical Completion has not been achieved, stating in detail the reasons
   therefor.  In the event that Owner determines that Mechanical Completion
   has not been achieved, Contractor shall promptly take such reasonable
   actions, including the performance of additional Work as will achieve
   Mechanical Completion and shall issue to Owner another Notice of Mechanical
   Completion pursuant to Section  hereof.  Such procedure shall be repeated
   as necessary until Mechanical Completion has been achieved.  For all
   purposes of this Agreement, the date of achievement of Mechanical
   Completion shall be the date on which Owner receives a Notice of Mechanical
   Completion relating thereto with respect to which Owner ultimately
   acknowledges that Mechanical Completion has been achieved.  In the event
   Owner fails to provide the acknowledgment or notice required in (a) and (b)
   above within three (3) Business Days after Owner receives a Notice of
   Mechanical Completion, Mechanical Completion will be deemed to have been
   achieved on the date upon which Contractor's Notice of Mechanical
   Completion is received by Owner.

        6.4  Initial Operating Period; Performance Tests.  The "Initial
   Operating Period" shall commence upon Mechanical Completion and shall
   continue until Project Acceptance.  During the Initial Operating Period,
   Owner's personnel as listed on Schedule  hereto and such other personnel as
   Contractor and Owner may agree prior to Mechanical Completion shall operate
   the Overall Project and conduct the Performance Tests, and Contractor's
   personnel shall monitor operation of the Project and advise Owner's
   personnel regarding operation of the Project.  During any Performance Test,
   Contractor's personnel shall supervise Owner's personnel and direct their
   actions to the extent deemed necessary by Contractor to achieve optimal
   results from any Performance Test.  Owner shall cause its personnel to
   follow the directions of Contractor's personnel during any Performance
   Test, provided that such directions shall not require operation of the
   Overall Project in a manner contrary to the Contract Documents or
   Applicable Law or in violation of the terms of employment of any of Owner's
   personnel.  Contractor shall be entitled to substitute its own personnel to
   perform operations that would otherwise be performed by Owner's personnel
   during any Performance Test, if Contractor determines that any of Owner's
   personnel is not performing its duties adequately.  Contractor shall also
   be entitled to require that operations of the Overall Project be limited or
   suspended in order to permit repairs, adjustments and modifications to be
   made for the purpose of improving the Overall Project performance.
   Contractor shall give Owner and the Independent Engineer at least two (2)
   Business Days' prior written notice of the date on which Contractor intends
   any Performance Test to be commenced.  A Performance Test shall consist of
   the operation of the Project in accordance with the Contract Documents and
PAGE

   Approved Test Procedures for a period of three (3) consecutive days, five
   (5) consecutive days, or ten (10) consecutive days, (subject to the
   following sentence, a "Three-Day Performance Test," a "Five-Day Performance
   Test" and a "Ten-Day Performance Test", respectively).  Notwithstanding the
   provisions of Section  hereof, if any Performance Test is interrupted by a
   Force Majeure Event, such Performance Test may be continued at such time as
   the Force Majeure Event shall no longer be preventing the continuation of
   such Performance Test, and the days on which such Force Majeure Event
   prevented continuation of such Performance Test plus the number of days
   reasonably required to stabilize operations of the Project at production
   levels comparable to those being achieved prior to the Force Majeure Event
   (the "Stabilization Period") shall be disregarded for purposes of
   determining whether any Performance Guarantee has been satisfied, with the
   effect that the Force Majeure Event and the Stabilization Period shall not
   prevent such Performance Test from being deemed to have been conducted for
   the period of consecutive days required for satisfaction of any Performance
   Guarantee.  The days of a Performance Test of a shorter duration may, at
   Contractor's election, be included in a Performance Test of longer duration
   so long as the Performance Test of shorter duration resulted in achievement
   of the Performance Guarantee sought to be achieved during such Performance
   Test, and any notice given with respect to the Performance Test of shorter
   duration shall be deemed to be a notice with respect to the Performance
   Test of longer duration.  Any number of Performance Tests may be conducted
   until Project Acceptance is achieved.  Owner's personnel shall be
   responsible for the taking and analysis of samples of Pulp in accordance
   with the Approved Test Procedures, subject to the supervision of
   Contractor's personnel.  Contractor shall not have the right to commence
   any Performance Test if any Commissioning has not been completed or if
   Mechanical Completion has not occurred prior to the Performance Tests or if
   any aspect of the Project has not been completed sufficiently to permit the
   safe operation of all or any part of the Project during the Performance
   Test in accordance with Applicable Laws, Good Industry Practices, the
   Contract Documents and the Approved Test Procedures.

        6.5  Completed Performance Tests.  Contractor shall provide to Owner a
   written report of the results of each Performance Test attempted to achieve
   IPT No. 1 Success, IPT No. 2 Success, IPT No. 3 Success or Project
   Acceptance.  The performance results will be calculated in accordance with
   Approved Test Procedures for the Performance Tests, including any
   adjustments to reflect deviations from base conditions to be calculated as
   set forth in the Approved Test Procedures all as verified by Owner.

        6.6  Interim Performance Test Success.

             6.6.1     Demonstration of Interim Performance Test Success.  IPT
   No. 1 Success, IPT No. 2 Success and IPT No. 3 Success shall be achieved
   hereunder if the following conditions have been met:

                       (a)(i)    in the case of IPT No. 1 Success, IPT No. 2
   Success and IPT No. 3 Success, Contractor has concluded one or more
   Performance Tests in which Contractor satisfies Performance Guarantees set
   forth in Section  hereof;

                         (ii)    in the case of IPT No. 2 Success and IPT No.
   3 Success, Contractor has concluded one or more Performance Tests in which
   Contractor satisfies Performance Guarantees set forth in Section  hereof;
   and
PAGE

                         (iii)    in the case of IPT No. 3 Success, Contractor
   has concluded one or more Performance Tests in which Contractor satisfies
   Performance Guarantees set forth in Section  hereof;

                       (b)  Mechanical Completion has occurred and all
   portions of the Project are capable of being used safely in accordance with
   all Applicable Laws, Good Industry Practices and the Contract Documents;
   and

                       (c)  Owner has acknowledged that IPT No. 1 Success, IPT
   No. 2 Success or IPT No. 3 Success, as the case may be, has been achieved
   or IPT No. 1 Success, IPT No. 2 Success or IPT No. 3 Success, as the case
   may be, is deemed to have been achieved pursuant to Section  hereof.

             6.6.2     Notice and Report of Interim Performance Test Success.
   When Contractor believes that it has achieved successful completion of a
   Performance Test providing the basis for achieving IPT No. 1 Success, IPT
   No. 2 Success or IPT No. 3 Success, it shall deliver to Owner and
   Independent Engineer a notice thereof (the "Notice of Interim Performance
   Test Success").  The Notice of Interim Performance Test Success shall
   include the results of the Performance Test which Contractor believes
   satisfies the applicable clause (or clauses) of Section (a) hereof.

             6.6.3     Achievement of Interim Performance Test Success.  Owner
   shall, within ten (10) Business Days following receipt of the Notice of
   Interim Performance Test Success, (a) if the requirements of Section  
   hereof have been satisfied, acknowledge to Contractor that IPT No. 1
   Success, IPT No. 2 Success or IPT No. 3 Success, as the case may be, has
   been achieved, or (b) if reasonable cause exists for doing so, notify
   Contractor in writing that IPT No. 1 Success, IPT No. 2 Success or IPT No.
   3 Success, as the case may be, has not been achieved, stating in detail the
   reasons therefor.  In the event that Owner determines that IPT No. 1
   Success, IPT No. 2 Success or IPT No. 3 Success has not been achieved,
   Contractor shall promptly take such reasonable actions, including the
   performance of additional Work and the completion of additional Performance
   Tests, as will achieve IPT No. 1 Success, IPT No. 2 Success or IPT No. 3
   Success, as the case may be, and shall issue to Owner another Notice of
   Interim Performance Test Success pursuant to Section  hereof.  Such
   procedure shall be repeated as necessary until IPT No. 1 Success, IPT No. 2
   Success and IPT No. 3 Success have been achieved.  In the event Owner fails
   to acknowledge within ten (10) Business Days that IPT No. 1 Success, IPT
   No. 2 Success and IPT No. 3 Success has been achieved, or to notify
   Contractor to the contrary, IPT No. 1 Success, IPT No. 2 Success and IPT
   No. 3 Success, as the case may be, will be deemed to have been achieved on
   the date upon which Contractor's Notice of Interim Performance Test Success
   is received by Owner.  For all purposes of this Agreement, the date of
   achievement of IPT No. 1 Success, IPT No. 2 Success and IPT No. 3 Success
   under Section  hereof shall be the date on which Owner receives a Notice of
   IPT Success with respect to which Owner acknowledges that IPT No. 1
   Success, IPT No. 2 Success and IPT No. 3 Success, as the case may be, has
   been achieved or with respect to which IPT No. 1 Success, IPT No. 2 Success
   and IPT No. 3 Success, as the case may be, is deemed to have been achieved.

        6.7  Project Acceptance.  Project Acceptance shall be achieved
   hereunder pursuant to Section , Section  or Section  hereof.
PAGE

             6.7.1     Demonstration of Project Acceptance.  Project
   Acceptance shall be achieved hereunder if the following conditions have
   been met:

                       (a)  Contractor has concluded one or more Performance
   Tests in which Contractor satisfies each of Performance Guarantees;

                       (b)  Contractor has performed all of the Work required
   by the Contract Documents, including any remaining items listed in the
   Punch List;

                       (c)  All portions of the Project are capable of being
   used safely in accordance with all Applicable Laws, Good Industry Practices
   and the Contract Documents;

                       (d)  All equipment and facilities necessary for the
   full and safe reliable operation of the Project have been properly
   constructed, installed, insulated and protected where required for such
   operation, and correctly adjusted, all as provided in the Contract
   Documents;

                       (e)  All quality assurance documentation has been
   provided to and reviewed by Owner in accordance with the Construction
   Quality Assurance Plan and Contractor shall have otherwise complied with
   the Construction Quality Assurance Plan; and

                       (f)  Owner has acknowledged that the conditions for
   Project Acceptance set forth in clauses (a) through (e) of this Section  
   have been satisfied or Project Acceptance is deemed to be achieved pursuant
   to Section  hereof.

             6.7.2     Notice and Report of Project Acceptance.  When
   Contractor believes that it has achieved Project Acceptance, it shall
   deliver to Owner and the Independent Engineer a notice thereof (the "Notice
   of Project Acceptance").  The Notice of Project Acceptance shall include
   the results of the Performance Test(s) which Contractor believes satisfies
   Section (a) hereof and otherwise contain a report in the form set forth in
   Schedule 6.7.2 hereto.

             6.7.3     Achievement of Project Acceptance.  Owner shall, within
   ten (10) Business Days following receipt of the Notice of Project
   Acceptance, inspect the Overall Project and all Work hereunder and shall,
   (a) if the requirements of Section  hereof have been satisfied, acknowledge
   that Project Acceptance has been achieved, or (b) if reasonable cause
   exists for doing so, notify Contractor in writing that Project Acceptance
   has not been achieved, stating in detail the reasons therefor.  In the
   event Owner determines that Project Acceptance has not been achieved,
   Contractor shall promptly take such reasonable action, including the
   performance of additional Work as required herein and the completion of
   additional Performance Tests, as will achieve Project Acceptance, and shall
   issue to Owner and the Independent Engineer another Notice of Project
   Acceptance pursuant to Section  hereof.  Such procedure shall be repeated
   as necessary until Project Acceptance has been achieved.  In the event
   Owner fails to acknowledge within ten (10) Business Days after Owner has
   received a Notice of Project Acceptance that Project Acceptance has been
   achieved, or to notify Contractor to the contrary, Project Acceptance will
   be deemed to have been achieved on the date upon which Contractor's Notice
   of Project Acceptance is received by Owner.  For all purposes of this
PAGE

   Agreement, the date of achievement of Project Acceptance under Section  
   hereof shall be the date on which Owner receives a Notice of Project
   Acceptance with respect to which Owner acknowledges that Project Acceptance
   has been achieved or with respect to which Project Acceptance is deemed to
   have been achieved.

             6.7.4     Contractor's Election of Project Acceptance.  If any
   time after Mechanical Completion, Contractor has exhausted all reasonable
   repair and replacement alternatives and Contractor has determined in good
   faith that the performance of the Project cannot be improved by additional
   reasonable repair and replacements alternatives, Contractor may give to
   Owner seven (7) days' notice of its election to declare Project Acceptance.
   Contractor will be obligated to pay all Performance Guarantee Payments as
   provided in Section  hereof.  For all purposes of this Agreement, the date
   of achievement of Project Acceptance under this Section  hereof shall be
   the date specified in such notice.  If Contractor has made any plant
   modifications subsequent to such Most Recently Completed Performance Test,
   Contractor shall conduct a final (i) Three-Day Performance Test if IPT No.
   1 Success has not been achieved, (ii) Five-Day Performance Test if IPT No.
   1 Success has been achieved but IPT No. 2 Success or No. 3 Success has not
   been achieved or (iii) Ten-Day Performance Test if IPT No. 3 Success has
   been achieved but Project Acceptance has not been achieved, the results of
   which shall be used to calculate the Performance Guarantee Payments;
   provided, however, that this Section  in no way derogates from Contractor's
   obligation hereunder to cause the Project to comply with all Applicable
   Laws or to perform its other obligations hereunder following Project
   Acceptance.  

             6.7.5     Deemed Project Acceptance.  Unless Project Acceptance
   shall already have occurred pursuant to Section  or Section  hereof,
   Project Acceptance shall be deemed to occur hereunder on the first (1st)
   anniversary of the Guaranteed Acceptance Date; provided, however, that this
   Section  in no way shall derogate from Contractor's obligations hereunder
   prior to such anniversary to cause the Project to comply with all
   Applicable Laws, Good Industry Practices and the Contract Documents, to pay
   any Delay Payments and any Performance Guarantee Payments required
   hereunder and to perform its other obligations hereunder following Project
   Acceptance.

             6.7.6     Access.  Contractor shall have reasonable access to the
   Overall Project and the reasonable cooperation of Owner to perform its
   obligations pursuant to Article  hereof.  Contractor shall perform its
   obligations under Article  hereof with minimal interference to operations
   of the Overall Project, and only to the extent necessary.

        6.8  Punch List.  At any time after Mechanical Completion, Owner may
   submit to Contractor additions to the Punch List within the Scope of the
   Work, provided that Owner does not have the right to submit additions to
   the Punch List after Project Acceptance.

        6.9  Acceptance and Approvals Not a Release of Contractor.  The
   acceptance by Owner of the Design Documents, or any other part of the Work
   or the Project shall not constitute a waiver or relinquishment by Owner of
   any of its rights under this Agreement, nor exonerate or relieve Contractor
   from any obligation, warranty or liability hereunder, except to the extent
   expressly provided herein.  Each such acceptance or approval shall be given
PAGE

   by Owner in reliance upon, and subject to, the performance by Contractor of
   its obligations hereunder.


                                    ARTICLE 7
                    Guaranteed Dates; Delay Payments; Bonuses

        7.1  Guaranteed Completion Date.  Contractor guarantees that
   Mechanical Completion shall be achieved on or before the Guaranteed
   Completion Date subject to the terms of this Agreement.

        7.2  Guaranteed IPT No. 3 Success Date.  Contractor guarantees that
   IPT No. 3 Success shall be achieved on or before the Guaranteed IPT No. 3
   Success Date subject to the terms of this Agreement.

        7.3  Guaranteed Acceptance Date.  Contractor guarantees that Project
   Acceptance shall be achieved pursuant to Section  hereof on or before the
   Guaranteed Acceptance Date subject to the terms of this Agreement.

        7.4  Delay Payments.

             7.4.1     Failure to Achieve Guaranteed Completion Date.  If
   Mechanical Completion does not occur on or before the Guaranteed Completion
   Date, subject to Section  hereof, Contractor hereby agrees to pay to Owner,
   as liquidated damages and not as a penalty, from time to time as set forth
   in Section  hereof, amounts that in the aggregate shall equal Accrued Bond
   Interest for the period from the Guaranteed Completion Date to the earlier
   of Mechanical Completion or the Project Acceptance ("Late Completion
   Payments").

             7.4.2     Failure to Achieve Guaranteed IPT No. 3 Success.  If
   IPT No. 3 Success is not achieved on or before the Guaranteed IPT No. 3
   Success Date, subject to Section  hereof, Contractor hereby agrees to pay
   to Owner, as liquidated damages and not as a penalty (without duplication
   of any amounts payable pursuant to Section  hereof), from time to time as
   more particularly set forth in Section  hereof amounts ("Late IPT No. 3
   Success Payments") that in the aggregate shall equal (i) Accrued Bond
   Interest for the period from the Guaranteed IPT No. 3 Success Date, to the
   earlier to occur of IPT No. 3 Success or Project Acceptance minus (ii) any
   Price-Adjusted Project Cash Flow for such period (any positive amount not
   to exceed the amount of Accrued Bond Interest, and it being understood that
   if Price-Adjusted Project Cash Flow for such period is a loss, such amount
   shall be expressed as a negative number, and any loss for such period shall
   result in an addition to the amount in clause (i)).  In the event
   Contractor is required to make any Late IPT No. 3 Success Payments,
   Contractor may, unless and until Contractor fails to make a Late IPT No. 3
   Success Payment when due, elect, upon seven (7) Business Days' notice to
   Owner, to require Owner to shut down temporarily its operations at the
   Project.  For the period following the effective date of such shutdown
   until operations at the Project resume, 50% of Total Assumed Labor Costs
   shall be subtracted from Price Adjusted Operation and Maintenance Expenses
   in calculating Price-Adjusted Project Cash Flow.  Contractor shall give
   Owner not less than seven (7) Business Days' notice of the date on which
   operations at the Project are to resume and from and after such date, 100%
   of Total Assumed Labor Costs shall be used in calculating Price-Adjusted
   Project Cash Flow for the purpose of determining the amount of Late
   IPT No. 3 Success Payments to be paid by Contractor.
PAGE

             7.4.3     Failure to Achieve Guaranteed Acceptance Date.  If
   Project Acceptance is not achieved pursuant to Section  hereof on or before
   the Guaranteed Acceptance Date, subject to Section  hereof, Contractor
   hereby agrees to pay to Owner, as liquidated damages and not as a penalty
   (without duplication of any amounts payable pursuant to Section  or Section
    hereof), from time to time as set forth in Section  hereof, amounts ("Late
   Acceptance Payments") that in the aggregate shall equal (i) Accrued Bond
   Interest for the period from the Guaranteed Acceptance Date, to Project
   Acceptance minus (ii) any Price-Adjusted Project Cash Flow for such period
   (any positive amount not to exceed the amount of Accrued Bond Interest, and
   it being understood that if Price-Adjusted Project Cash Flow for such
   period is a loss, such amount shall be expressed as a negative number, and
   any loss for such period shall result in an addition to the amount in
   clause (i)).  In the event Contractor is required to make any Late
   Acceptance Payments, Contractor may, unless and until Contractor fails to
   make a Late Acceptance Payment when due, elect, upon seven (7) Business
   Days' prior written notice to Owner, to require Owner to shut down
   temporarily operations at the Project.  For the period following the
   effective date of such shutdown until operations at the Project resume, 50%
   of Total Assumed Labor Costs shall be subtracted from Price-Adjusted
   Operation and Maintenance Expenses in calculating Price-Adjusted Project
   Cash Flow.  Contractor shall give Owner not less than seven (7) Business
   Days' notice of the date on which operations at the Project are to resume
   and from and after such date, 100% of Total Assumed Labor Costs shall be
   used in calculating Price-Adjusted Project Cash Flow for the purpose of
   determining the amount of Late Acceptance Payments to be paid by
   Contractor.

             7.4.4     Liquidated Damages Reasonable.  Owner and Contractor
   hereby acknowledge and agree that the terms, conditions and amounts fixed
   pursuant to this Section  are reasonable, considering the reduction in
   value of the Overall Project to Owner and the actual costs that Owner will
   incur in the event of Contractor's failure to achieve Mechanical
   Completion, IPT No. 3 Success or Project Acceptance by the Guaranteed
   Completion Date, the Guaranteed IPT No. 3 Success Date or the Guaranteed
   Acceptance Date, respectively.  The amounts of these liquidated damages is
   agreed upon and fixed hereunder because of the difficulty of ascertaining
   the exact amount of costs that will be actually incurred by Owner for late
   Mechanical Completion, IPT No. 3 Success or Project Acceptance, and Owner
   and Contractor agree that the liquidated damages specified herein shall be
   applicable regardless of the amount of such costs actually incurred by
   Owner.

             7.4.5     Payment of Liquidated Damages.  Contractor shall be
   obligated to pay Delay Payments under this Section  for each day on which
   the Overall Project shall continue to fail to have achieved Mechanical
   Completion, IPT No. 3 Success or Project Acceptance after the Guaranteed
   Completion Date, the Guaranteed IPT No. 3 Success Date or the Guaranteed
   Acceptance Date, respectively.  Contractor shall pay the liquidated damages
   required under this Section  monthly in arrears on the twenty-fifth (25th)
   day of each month.  Owner's rights of set-off under Section  hereof
   expressly apply to any amounts not timely paid by Contractor hereunder.

             7.4.6     Liquidated Damages for Delay Only.  The Delay Payments
   shall be the measure of Contractor's liability only for delay in achieving
   Mechanical Completion, IPT No. 3 Success or Project Acceptance, as the case
   may be, and shall not limit Contractor's liability for defects in the Work,
   for its obligations to satisfy Performance Guarantees or make Performance
PAGE

   Guarantee Payments, or for Contractor's failure to perform its other
   obligations under and as specified in the Contract Documents.  The Delay
   Payments also (i) shall not affect Owner's right to receive the Performance
   Guarantee Payments pursuant to Article  hereof, and (ii) are in lieu of
   Owner's right to terminate this Agreement pursuant to Section  hereof or
   exercise any other remedy as a result of any schedule delay.

        7.5  Bonus Payments.

             7.5.1     Early Mechanical Completion.  In the event Mechanical
   Completion occurs on or prior to the Guaranteed Completion Date, Owner will
   pay to Contractor a bonus payment (an "Early Completion Bonus"), in an
   aggregate amount equal to $2,000,000, together with interest accrued on
   such amount (or any portion thereof remaining unpaid) at the Prime Rate
   from Mechanical Completion to the date of payment.  Any Early Completion
   Bonus, and interest thereon, will be payable in one or more installments as
   provided in Section  hereof.

             7.5.2     Early Project Acceptance.  If Project Acceptance is
   achieved pursuant to Section  hereof prior to the Guaranteed Acceptance
   Date, Owner will pay to Contractor a bonus (an "Early Acceptance Bonus"),
   determined pursuant to this Section .  The Early Acceptance Bonus shall be
   an amount equal to the sum of the following amounts:

             (i) if Project Acceptance is achieved on or prior to the
        date that is nine (9) months prior to the Guaranteed Acceptance
        Date, $1,000,000;

             (ii) if Project Acceptance is achieved on or prior to the
        date that is eight (8) months prior to the Guaranteed Acceptance
        Date, $1,000,000;

             (iii) if Project Acceptance is achieved on or prior to the date
        that is seven (7) months prior to the Guaranteed Acceptance Date,
        $1,000,000;

             (iv)  if Project Acceptance is achieved on or prior to the date
        that is six (6) months prior to the Guaranteed Acceptance Date,
        $600,000;

             (v)  if Project Acceptance is achieved on or prior to the date
        that is five (5) months prior to the Guaranteed Acceptance Date,
        $600,000;

             (vi) if Project Acceptance is achieved on or prior to the
        date that is four (4) months prior to the Guaranteed Acceptance
        Date, $600,000;

             (vii) if Project Acceptance is achieved on or prior to the
        date that is three (3) months prior to the Guaranteed Acceptance
        Date, $600,000;

             (viii) if Project Acceptance is achieved on or prior to the
        date that is two (2) months prior to the Guaranteed Acceptance
        Date, $400,000; and
PAGE

             (ix) if Project Acceptance is achieved on or prior to the
        date that is one (1) month prior to the Guaranteed Acceptance
        Date, $400,000;

   provided, however, that, in the event that Project Acceptance is achieved
   on a date that is not an integral number of months prior to the Guaranteed
   Acceptance Date, any Early Acceptance Bonus shall include an amount with
   respect to the number of days (the "Numerator") by which the date of
   Project Acceptance exceeds the next date that is an integral number of
   months prior to the Guaranteed Acceptance Date (or, if the date of Project
   Acceptance is less than one (1) month prior to the Guaranteed Acceptance
   Date, by which the date of Project Acceptance exceeds the Guaranteed
   Acceptance Date), which amount shall be determined by multiplying the
   amount that would have been included in the Early Acceptance Bonus pursuant
   to one of the foregoing clauses if Project Acceptance had been achieved on
   the date that is the next greater integral number of months prior to the
   Guaranteed Project Acceptance Date times a fraction the numerator of which
   is the Numerator and the denominator of which is the number of days in the
   period between such date and the next succeeding date that is an integral
   number of months prior to the Guaranteed Acceptance Date (or, if the date
   of Project Acceptance is less than one (1) month prior to the Guaranteed
   Acceptance Date, the Guaranteed Acceptance Date); and, provided further,
   that in no event shall the Early Acceptance Bonus exceed $5,670,000.  Any
   Early Acceptance Bonus shall bear interest at the Prime Rate from Project
   Acceptance to the date of payment for a period of one year after Project
   Acceptance, and thereafter, any unpaid amount of the Early Acceptance Bonus
   shall bear interest at twelve and one-half percent (12-1/2%) per annum.
   Any Early Acceptance Bonus, and accrued interest thereon, shall be payable
   in one or more installments as provided under Section  hereof.

             7.5.3     Payment of Bonuses.  Owner shall be obligated to pay
   any Early Completion Bonus and any Early Acceptance Bonus in one or more
   installments on the first day of each month (or if such day is not a
   Business Day, the first day thereafter that is a Business Day) to the
   extent that there exists Available Cash therefor determined as of the
   twenty-fifth (25th) day of the preceding month, (i) in the case of any
   Early Completion Bonus, and interest accrued on such amount, commencing
   with the first such date to occur after Mechanical Completion and (ii) in
   the case of any Early Acceptance Bonus, and interest accrued on such
   amount, commencing with the first such date to occur after Project
   Acceptance.  Any payment by Owner shall be applied to interest, first; and
   to the Early Acceptance Bonus or the Early Completion Bonus, second.
   Owner's obligations to pay the Early Acceptance Bonus and the Early
   Completion Bonus will be secured by the Security Agreement.  Contractor
   acknowledges and agrees that Owner's obligation to pay the Early Completion
   Bonus and the Early Acceptance Bonus is subordinate and junior in right of
   payment to certain other obligations of Owner, all as and to the extent
   provided in the Indenture.

        7.6  Repayment by Owner of Late Completion Payments Under Certain
   Circumstances.  In the event that Contractor makes any Late Completion
   Payments under Section  hereof, Project Acceptance has been achieved
   pursuant to Section  hereof and Contractor has paid any Performance
   Guarantee Payments required to be paid under Section  hereof, Owner agrees
   to pay to Contractor from time to time in accordance with the provisions of
   this Section  an amount equal to the sum of any Late Completion Payments so
   made with respect to the two-month period immediately succeeding the
   Guaranteed Completion Date (whether or not Mechanical Completion is
PAGE

   achieved during such period or after such period), together with interest
   accrued at the Prime Rate on each portion of such amount from the date of
   payment by Contractor of the Late Completion Payment to which such portion
   corresponds (treating each payment under this Section  as a repayment of
   all or a portion of the earliest Late Completion Payment that was made by
   Contractor (and not previously repaid to Contractor under this Section )
   and the related interest thereon).  On the first (1st) day of each month
   after Contractor shall have become entitled to the payment of any amount
   under this Section , until such amount has been repaid in full (and after
   the payment of the Deferrable Portion and any related interest thereon
   pursuant to Section  hereof, the payment of any bonuses and related
   interest thereon payable under Section  hereof and the payment of certain
   other amounts as set forth in Appendix C of the Indenture), Owner shall pay
   Contractor all or a portion of such amount to the extent that Available
   Cash exists therefor determined as of the twenty-fifth (25th) day of the
   preceding calendar month.  Owner's obligation to pay any amount under this
   Section  will be secured pursuant to the Security Agreement.  Contractor
   acknowledges and agrees that Owner's obligation to pay any amount under
   this Section   is subordinate and junior in right of payment to certain
   other obligations of Owner, all as and to the extent provided in the
   Indenture.

        7.7  Repayment by Owner of Late IPT No. 3 Success Payments Under
   Certain Circumstances.  In the event that Contractor makes any Late IPT No.
   3 Success Payments under Section  hereof, Project Acceptance has been
   achieved pursuant to Section  hereof and Contractor has paid any
   Performance Guarantee Payments required to be paid under Section  hereof,
   Owner agrees to pay to Contractor from time to time in accordance with the
   provisions of this Section  an amount equal to the sum of any Late IPT No.
   3 Success Payments so made with respect to the period of (a) one month plus
   (b) the lesser of two (2) months or the number of days between the
   Guaranteed Completion Date and Mechanical Completion immediately succeeding
   the Guaranteed IPT No. 3 Success Date (whether or not IPT No. 3 Success is
   achieved during such period or after such period), together with interest
   accrued at the Prime Rate on each portion of such amount from the date of
   payment by Contractor of the Late IPT No. 3 Success Payment to which such
   portion corresponds (treating each payment under this Section  as a
   repayment of all or a portion of the earliest Late IPT No. 3 Success
   Payment that was made by Contractor (and not previously repaid to
   Contractor under this Section ) and the related interest thereon).  On the
   first (1st) day of each month after Contractor shall have become entitled
   to the payment of any amount under this Section , until such amount has
   been repaid in full (and after the payment of the Deferrable Portion and
   any related interest thereon pursuant to Section  hereof, the payment of
   any bonuses and related interest thereon payable under Section  hereof and
   the payment of certain other amounts as set forth in Appendix C of the
   Indenture), Owner shall pay Contractor all or a portion of such amount to
   the extent that Available Cash exists therefor as of the twenty-fifth
   (25th) day of the preceding calendar month.    Owner's obligation to pay
   any amount under this Section  will be secured pursuant to the Security
   Agreement.  Contractor acknowledges and agrees that Owner's obligation to
   pay any amount under this Section  is subordinate and junior in right of
   payment to certain other obligations of Owner, all as and to the extent
   provided in the Indenture.
PAGE

                                    ARTICLE 8
                             Performance Guarantees

        8.1  Performance Guarantees.  Subject to the provisions of this
   Agreement, Contractor guarantees that the Project will achieve all of the
   performance specifications referred to in this Section  (the "Performance
   Guarantees") during one or more Performance Tests, including any
   adjustments to reflect deviations from base conditions to be calculated as
   set forth in the Approved Test Procedures.  Subject to Section  hereof,
   Contractor agrees to exhaust all reasonable repair and replacement
   alternatives in order that the Project might attain the Performance
   Guarantees.  If Contractor exhausts all reasonable repair and replacement
   alternatives, and the Project nevertheless fails to achieve Project
   Acceptance pursuant to Section  hereof on or prior to achieving Project
   Acceptance pursuant to either Section  hereof or Section  hereof,
   Contractor shall pay Owner as liquidated damages and not as penalties the
   amounts calculated in accordance with the provisions of this Section  (the
   "Performance Guarantee Payments").  Contractor's liability to Owner for
   failure of the Project to achieve Project Acceptance pursuant to Section  
   hereof shall be limited to the Performance Guarantee Payments, subject to
   the limitation set forth in Section  hereof; provided that such payment of
   liquidated damages shall not derogate from Contractor's other obligations
   under the Contract Documents, including its liability for defects in the
   Work and its obligation to make the Delay Payments except as otherwise
   provided in Sections  and .

             8.1.1     IPT No. 1 Guarantee.  Subject to the provisions of this
   Agreement, Contractor guarantees to Owner that the Project will, during a
   Three-Day Performance Test, produce not less than 915 BDST of Pulp
   satisfying or exceeding the Grade C Criteria.

             8.1.2     IPT No. 2 Guarantee.  Subject to the provisions of this
   Agreement, Contractor guarantees to Owner that the Project will, during a
   Five-Day Performance Test, produce not less than 1,690 BDST of Pulp
   satisfying or exceeding the Grade C Criteria, including at least 845 BDST
   of Pulp satisfying or exceeding the Grade B Criteria.

             8.1.3     IPT No. 3 Guarantee.  Subject to the provisions of this
   Agreement, Contractor guarantees to Owner that the Project will, during a
   Five-Day Performance Test, produce a total of not less than 1,690 BDST of
   Pulp satisfying or exceeding the Grade C Criteria, including not less than
   1,487 BDST of Pulp satisfying or exceeding the Grade A Criteria and 1,656
   BDST of Pulp satisfying or exceeding the Grade B Criteria.
             8.1.4     Project Acceptance Guarantee.  Subject to the
   provisions of this Agreement, Contractor guarantees to Owner that the
   Project will, during a Ten-Day Performance Test, produce a total of not
   less than 4,000 BDST of Pulp satisfying or exceeding the Grade C Criteria,
   including at least 3,520 BDST of Pulp satisfying or exceeding the Grade A
   Criteria and 3,920 BDST of Pulp satisfying or exceeding the Grade B
   Criteria, at the Maximum Consumption Rates for Project Acceptance set forth
   in Schedule A hereto.

             8.1.5     Performance Guarantee Payments.  If Mechanical
   Completion does not occur prior to Project Acceptance,  Contractor hereby
   agrees to pay to Owner, as liquidated damages and not as a penalty, an
   amount equal to one hundred (100%) of the Contract Sum (excluding the
PAGE

   Deferrable Portion).  If Mechanical Completion is achieved but IPT No. 1
   Success is not achieved prior to Project Acceptance, in addition to all
   amounts payable pursuant to Section  hereof, subject to Section  hereof,
   Contractor hereby agrees to pay to Owner, as liquidated damages and not as
   a penalty, an amount equal to fifty percent (50%) of the Contract Sum
   (excluding the Deferrable Portion).  If Mechanical Completion and IPT No. 1
   Success are achieved, but Project Acceptance is not achieved pursuant to
   Section  hereof prior to Project Acceptance, in addition to all amounts
   payable pursuant to Section  hereof, subject to Section  hereof, Contractor
   hereby agrees to pay to Owner, as liquidated damages and not as a penalty,
   an amount equal to the Buy-Down Amount.

        8.2  Liquidated Damages Reasonable.  Owner and Contractor hereby
   acknowledge and agree that the terms, conditions and amounts fixed pursuant
   to this Article  for Performance Guarantee Payments are reasonable,
   considering the actual reduction in the value of the Overall Project that
   Owner will sustain in the event of Contractor's failure to achieve the
   Performance Guarantees.  The amounts of these liquidated damages are agreed
   upon and fixed hereunder because of the difficulty of ascertaining on the
   date hereof the exact amount of such reduction in value that will actually
   be sustained by Owner in the event of any such failure by Contractor, and
   Owner and Contractor hereby agree that the liquidated damages specified
   herein shall be applicable regardless of the amount of such reduction in
   value actually sustained by Owner.  The payment of any such liquidated
   damages hereunder (i) shall not affect Owner's right to receive Delay
   Payments pursuant to Section  hereof, and (ii) is in lieu of Owner's right
   to terminate this Agreement pursuant to Section  hereof or exercise any
   other remedies as a result of any failure to meet the Performance
   Guarantees.

        8.3  Payment of Liquidated Damages.  Contractor shall pay to Owner all
   liquidated damages required under this Article  within thirty (30) days
   after Project Acceptance.  Owner's rights of set-off under Section  hereof
   expressly apply to any amounts not timely paid by Contractor hereunder.

        8.4  Repayment by Owner of Liquidated Damages Under Certain
   Circumstances.  In the event that Contractor makes any Performance
   Guarantee Payments under Section  hereof, and Contractor has not purchased
   the Partners' interests in Owner pursuant to Section  hereof, Owner agrees
   to pay to Contractor from time to time in accordance with the provisions of
   this Section  an amount equal to the amount of Performance Guarantee
   Payments so made without interest thereon.  On the fifteenth (15th) day of
   each month after the month in which all Performance Guarantee Payments have
   been made in full to the extent owed under this Agreement, if as of the
   twenty-fifth (25th) day of the preceding month (the "determination date")
   all distributions to Partners theretofore made, plus any amounts held by
   Owner constituting Available Cash (as defined in the Partnership Agreement)
   or Net Proceeds (as defined in the Partnership Agreement) and distributable
   to the Partners, in the aggregate have provided (or would provide) to each
   Partner an Internal Rate of Return of twenty-five percent (25%) per annum
   as of the determination date, Owner shall until such Performance Guarantee
   Payments have been repaid in full pay Contractor all or a portion of the
   Performance Guarantee Payments previously paid by Contractor to the extent
   that there exist funds in the Distribution Fund.  Owner agrees that if
   Contractor has paid Performance Guarantee Payments, Owner shall not make
   distributions to its Partners that in the aggregate on the date of
   determination provide to each Partner an Internal Rate of Return in excess
PAGE

    of twenty-five percent (25%) per annum until Owner shall have paid in full
   all amounts payable to Contractor under the provisions of this Section .

        Not later than the fifth (5th) day of each month (or the next Business
   Day if the first day is not a Business Day) Owner shall notify Contractor
   in writing of the amount of the balance in the Distribution Fund as of the
   determination date and of the Internal Rate of Return for each Partner as
   of such determination date.  In the event Contractor notifies Owner within
   ten (10) days that Contractor does not agree with Owner's calculation of
   the Internal Rate of Return for such month, and in the event such dispute
   is not resolved by Owner and Contractor within thirty (30) days after the
   date Owner receives Contractor's notice, Owner's calculation shall prevail
   unless Contractor notifies Owner in writing (a "Resolution Notice") that
   such dispute must be resolved by independent certified accountants and
   provides to Owner the name of an independent certified public accountant.
   Not later than fifteen (15) Business Days after Owner's receipt of such
   Resolution Notice, Owner shall either notify Contractor that Owner accepts
   Contractor's calculation of the Internal Rate of Return or provide to
   Contractor the name and address of a second independent certified public
   accountant.  The independent certified public accountants selected by
   Contractor and Owner shall attempt to resolve the dispute and shall notify
   Owner and Contractor of their determination or, if such accountants cannot
   resolve such dispute within ten (10) Business Days, shall select a third
   independent certified public accountant to determine the Internal Rate of
   Return within ten (10) Business Days.  Contractor and Owner agree that
   absent manifest error the determination by such third independent certified
   public accountant of the Internal Rate of Return shall be final and binding
   on Contractor and Owner.

        8.5  Right of Contractor to Purchase Certain Partnership Interests
   Under Certain Circumstances.  In the event that Contractor is required to
   pay Performance Guarantee Payments that in the aggregate exceed twenty
   percent (20%) of the Contract Sum and Contractor has paid such Performance
   Guarantee Payments in full to the extent owed hereunder and unless the
   holders of at least fifty-one percent (51%) in aggregate principal amount
   of Bonds and Facility Parity Debt then Outstanding under the Indenture
   (collectively, "Senior Debt") object in writing within sixty (60) days
   after the Purchase Notice described below is given by Contractor,
   Contractor or any of its subsidiaries shall have the right to purchase from
   all of the Partners their respective partnership interests in Owner.
   Contractor agrees that such right to purchase shall be a right of
   Contractor and its subsidiaries, to purchase all, but no fewer than all, of
   the Partners' partnership interests in Owner.  Contractor agrees that each
   Partner's entire partnership interest in Owner, and not a portion thereof,
   shall be purchased either by Contractor or by any one of Contractor's
   subsidiaries at a purchase price sufficient to provide to each such Partner
   an Internal Rate of Return to the date such Partner receives such purchase
   price of twelve and one-half percent (12p%) per annum; provided, however,
   that in the event the aggregate purchase price so determined is less than
   eighty-five percent (85%) of the fair market value of all of the Partners'
   interests in Owner, determined as set forth in the next paragraph,
   Contractor shall have the right to purchase all of the Partners' interests
   in Owner for an aggregate purchase price equal to the fair market value
   thereof, determined as set forth in the next paragraph, and otherwise in
   accordance with the provisions of this Section .  Contractor may elect to
   exercise its right to purchase the partnership interests by notifying
   Owner, each Partner and the Trustee of such election not more than sixty
   (60) days after Project Acceptance has occurred and by directing the
PAGE

   Trustee to give, at the expense of and in the form provided by Contractor,
   written notice (the "Purchase Notice") of such election to the holders of
   the Senior Debt.  Within thirty (30) days after receipt of any such notice,
   Owner shall deliver to Contractor a notice specifying the aggregate
   purchase price of all of the partnership interests that would provide to
   each such Partner an Internal Rate of Return to the date of purchase of
   twelve and one-half percent (12p%) per annum, including reasonably detailed
   calculations thereof, the purchase price of each partnership interest and a
   date, not later than ninety (90) days after the delivery of such notice or
   the date Owner and Contractor are notified by the Trustee that the Trustee
   has not received objections from the holders of at least fifty-one percent
   (51%) in the aggregate principal amount of Senior Debt, on which the
   purchase of such partnership interests is to be consummated.  Such notice
   shall be accompanied by all instruments and other documents required to
   convey the partnership interests to Contractor (or any subsidiary of
   Contractor, as applicable) and to provide for indemnification by the entity
   that purchases the general partner's partnership interest in the Owner, of
   each Partner for all liabilities such Partner may have under any Project
   Agreement (as defined in the Indenture).  Owner and Contractor shall
   cooperate to produce documentation reasonably satisfactory in form and
   substance to each of them.  In the event Contractor and Owner do not agree
   on the calculation of the Internal Rate of Return or on the amounts to be
   paid to any Partner pursuant to this Section , such disputes shall, at
   Contractor's expense, be resolved in the manner provided in Section 
   hereof.

        For purposes of this Section , the fair market value of the Partners'
   interests in Owner shall be determined by mutual agreement of Owner and
   Contractor within ten (10) days of delivery of notice of the purchase price
   by Owner, or if they do not so agree, shall be determined by a single
   appraiser mutually selected by Owner and Contractor.  If Owner and
   Contractor cannot agree on a single appraiser within ten (10) days after
   the expiration of the ten (10) day period described above, then such value
   shall be as specified in an appraisal prepared and mutually agreed to by
   three (3) recognized independent appraisers, one of which shall be
   appointed by Owner within fifteen (15) days after expiration of the ten
   (10) day period referred to above, one of which shall be appointed by
   Contractor within the same fifteen (15) day period, and the other of which
   shall be appointed by mutual consent of the two previously appointed
   appraisers within a further thirty (30) day period.  If any party should
   fail to appoint an appraiser within fifteen (15) days of receiving notice
   of the appointment of an appraiser by the other party, then such appraisal
   shall be made by the appraiser appointed by the party providing such
   notice.  If the two previously appointed appraisers cannot agree upon a
   mutually acceptable third appraiser within thirty (30) days after the
   appointment of the second appraiser, then either party may apply to the
   American Arbitration Association office in such location as the parties may
   select to make such appointment.  The appraisal shall be completed within
   thirty (30) days of the appointment of the last appraiser appointed.  If
   three appraisers are appointed and cannot agree on the relevant value, the
   values determined by the three appraisers shall be averaged, the
   determination which differs most from such average shall be excluded, the
   remaining two determinations shall be averaged and such average shall be
   the final determination.  The valuation made by the appraisers shall be
   binding on Owner and Contractor in the absence of fraud or manifest error.
   The costs of the appraisal shall be borne equally by Owner and Contractor
   and, if three appraisers are appointed, the party appointing its appraiser
PAGE

   shall bear its costs and the expenses of the third appraiser shall be borne
   equally by the relevant parties.


                                    ARTICLE 9
                              Liability and Damages

        9.1  Limitations of Certain Contractor Liabilities.  In no event shall
   Contractor's liability for Late Completion Payments under Section  hereof
   for any day exceed an amount equal to the amount of Accrued Bond Interest
   for such day.  In no event shall the sum of Contractor's liability to Owner
   under this Agreement for all Delay Payments under Section  hereof and all
   Performance Guarantee Payments under Section  hereof exceed an amount equal
   to : (a) until Mechanical Completion has occurred, (I) one hundred percent
   (100%) of the Contract Sum minus (II) the Deferrable Portion; (b) after
   Mechanical Completion and prior to IPT No. 1 Success, (I) fifty percent
   (50%) of the Contract Sum minus (II) the Deferrable Portion; (c) after IPT
   No. 1 Success and prior to IPT No. 2 Success, (I) thirty percent (30%) of
   the Contract Sum minus (II) the Deferrable Portion; (d) after IPT No. 2
   Success and prior to IPT No. 3 Success, (I) twenty percent (20%) of the
   Contract Sum minus (II) the Deferrable Portion; and (e) after IPT No. 3
   Success and prior to the achievement of Project Acceptance pursuant to
   Section  hereof, (I) ten percent (10%) of the Contract Sum minus (II) the
   Deferrable Portion.  If Project Acceptance is achieved pursuant to Section
    hereof, Contractor will have no liability for Performance Guarantee
   Payments.  Subject to the provisions of Section  hereof, in no event shall
   the sum of Contractor's liability to Owner for breach of the General
   Warranty provisions under Section  hereof exceed ten percent (10%) of the
   Contract Sum minus the Deferrable Portion to the extent unpaid.  Subject to
   the provisions of Section  hereof, in no event shall the sum of
   Contractor's liability to Owner for breach of the Design Warranty
   provisions under Section  hereof exceed ten percent (10%) of the Contract
   Sum minus the Deferrable Portion to the extent unpaid.  In addition to the
   foregoing limitations, after Project Acceptance and the payment by
   Contractor of Performance Guarantee Payments, Contractor shall not be
   liable for any breach of the General Warranty or the Design Warranty which
   was continuing during the Most Recently Completed Performance Test on which
   the Performance Guarantee Payments were based but only to the extent that
   such breach resulted in any portion of the production shortfall on which
   the Performance Guarantee Payments were based; provided, however, that
   subject to the two foregoing sentences, this sentence shall not limit the
   liability of Contractor for any breach of the General Warranty or Design
   Warranty under Section 10 hereof arising after the Most Recently Completed
   Performance Test on which the Performance Guarantee Payments were based.
   This Section  shall not be construed to limit Contractor's other
   obligations or liabilities arising under or in connection with this
   Agreement.
PAGE

        9.2  Consequential Damages.  None of Contractor, Rust, their
   respective subsidiaries, affiliates, directors, officers, employees,
   successors, assigns, agents and contractors providing equipment, materials
   or services for the Overall Project shall be liable to Owner or to any of
   its contractors or agents for special, punitive, indirect, incidental or
   consequential loss or damage of any nature, including but not limited to
   loss of use or loss of profit or revenue, loss to Owner's customers or cost
   of capital, and Owner hereby releases Contractor, Rust, their respective
   subsidiaries, affiliates, directors, officers, employees, successors,
   assigns, agents and contractors from any such liability.  None of Owner,
   its subsidiaries, affiliates, directors, officers, employees, successors,
   assigns, agents and contractors shall be liable to Contractor or Rust or
   any of their contractors or agents for special, punitive, indirect,
   incidental or consequential loss or damage of any nature, including but not
   limited to loss of use or loss of profit or revenue, loss to Contractor's
   customers or cost of capital, and Contractor hereby releases (and will
   cause Rust to release) Owner, its subsidiaries, affiliates, directors,
   officers, employees, successors, assigns, agents and contractors from any
   such liability.  The foregoing exclusions shall (i) not preclude recovery
   by Owner, where applicable, of liquidated damages pursuant to Section  or
   Section  hereof, and (ii) not be construed to limit recovery by either
   Party under any indemnity in Article  hereof in respect of third-party
   claims for damage to or destruction of property of, or death of or bodily
   injury to, any Person.

        9.3  No Liability for Independent Engineer.  Contractor acknowledges
   and agrees that the Independent Engineer shall not be liable to Contractor
   under this Agreement in connection with the rendering by Independent
   Contractor of any services to Owner.

        9.4  Further Limitation of Liability.  The limitations of liability
   and remedies and the exclusions of consequential damages set forth in this
   Agreement shall apply irrespective of whether a Party or any affiliate
   thereof, or any partner, shareholder, officer, director or employee of a
   Party or an affiliate thereof or any other Person, asserts a theory of
   liability in contract, tort, negligence, misrepresentation (including
   negligent misrepresentation), or any other theory of liability.

                                   ARTICLE 10
                            Warranties and Guarantees

        10.1      General Warranty.  Contractor warrants and guarantees to
   Owner (the "General Warranty") as follows:

             10.1.1    Equipment Warranty.  All materials, equipment and
   systems incorporated into the Project shall be free of defects in materials
   and workmanship, new, unused and undamaged when installed, in compliance
   with Good Industry Practices and the Contract Documents and otherwise in
   compliance with the standard of performance set forth in Section  hereof;
   provided, however, that such warranty shall not extend to materials,
   equipment and systems incorporated into the Overall Project (excluding any
   such items provided by Fiberprep, Inc. and U.S. Filter Corporation) with
   respect to which warranties shall not have been obtained from any
   Subcontractor by Contractor or to such items to the extent that the
   respective warranties so obtained are limited or qualified by the terms
   thereof, in each case, subject to compliance by Contractor with the
   provisions of Section  hereof.
PAGE

             10.1.2    Workmanship Warranty.  The construction, procurement
   and installation services of Contractor and Subcontractors included in the
   Work shall be performed in a good and workmanlike manner, in compliance
   with the Contract Documents, and shall otherwise comply with the standard
   of performance set forth in Section  hereof.  The completed Project shall
   be free of defects in materials and workmanship. 

        10.2 Breach of General Warranty.  If Owner notifies Contractor in
   writing during the General Warranty Period, or no later than fifteen (15)
   days after the expiration of the General Warranty Period, that a breach of
   the General Warranty has occurred during the General Warranty Period,
   Contractor shall correct the breach with due diligence and without
   additional compensation; provided, however, that except as provided in
   Section , Contractor's liability for a breach of the equipment warranty
   shall be limited to the reperformance, replacement or repair until
   correction has been achieved as provided in the warranty from the
   particular vendor.  Contractor's liability for breach of the workmanship
   warranty shall include labor, parts, transportation, testing, dismantling,
   re-erecting and re-testing, in each case, associated with the correction of
   such defects as required or appropriate to cure the breach of General
   Warranty.  The "General Warranty Period" for the Project, and each
   component thereof, shall be the period ending one (1) year after Mechanical
   Completion; provided, however, with respect to those parts provided for
   Fiberprep equipment that are listed on Schedule A hereto and not designated
   thereon as "wear parts," and with respect to those parts provided for U.S.
   Filter Corporation equipment that are listed on Schedule B hereto and not
   designated thereon as "wear parts," the "General Warranty Period" shall be
   the period ending one (1) year after the Guaranteed Acceptance Date unless
   Project Acceptance is before the Guaranteed Acceptance Date, in which case
   the General Warranty Period shall be the period ending one (1) year after
   Project Acceptance; and provided, further, with respect to those parts
   provided for U.S. Filter Corporation equipment that are designated on
   Schedule B hereto as "wear parts," the "General Warranty Period" shall be
   the period ending one (1) year after completion and startup of the
   wastewater treatment system.  The duties, liabilities and obligations of
   Contractor under this Section  do not extend to, and Contractor is not
   responsible in any way for, any repairs, adjustments, alterations,
   replacements or maintenance of materials that are required as a direct
   result of Owner's operation of the Overall Project other than in accordance
   with the Operating Manual or that are required as a result of normal
   corrosion, erosion, or wear and tear in the operation of the Overall
   Project other than as caused by the negligence of or breach of the Contract
   Documents by Contractor.

        10.3 Design Warranty.  Contractor warrants to Owner (the "Design
   Warranty") as follows:

                  (a)  The design and engineering of the Project shall be
   performed in accordance with the standard of care, skill and diligence as
   would be provided by an engineering firm experienced in supplying similar
   services nationally to pulp and paper producing entities and in compliance
   with Contract Documents, and otherwise in compliance with the standard of
   performance set forth in Section  hereof.

                  (b)  The Final Drawings and Documentation shall be accurate
   and complete, comply, in all material respects, with the description in the
PAGE

   Contract Documents, and completely and accurately reflect, in all material
   respects, the condition of the Project as of Project Acceptance.

        10.4 Breach of Design Warranty.  If Owner notifies Contractor in
   writing during the Design Warranty Period, or no later than thirty (30)
   days after expiration of the Design Warranty Period, that a breach of the
   Design Warranty has occurred within the shorter of the period ending
   eighteen months after Mechanical Completion and the period ending one (1)
   year after Project Acceptance (the "Design Warranty Period"), Contractor
   shall promptly investigate and determine the source of the deficiency or
   defect (including any inaccuracy or other deficiency in the Final Drawings
   and Documentation), promptly correct any defective design which resulted
   therefrom and promptly issue corrected Final Drawings and Documentation.
   Should the investigation determine that the Design Warranty has not been
   breached by Contractor or by any Subcontractor or other party acting for
   Contractor, then all costs associated with the investigation and correction
   shall be paid by Owner.  In no event shall Contractor have any liability
   for the replacement of equipment or materials or rework associated with the
   defective design, or for any damages incurred by Owner as a result of such
   breach.  The provisions of Section  hereof and this Section  shall not
   affect the obligations or rights of the Parties under Article  hereof nor
   shall the payment of any amounts by Contractor under this Section  as
   limited by Section  hereof affect the amounts payable under Article  
   hereof.

        10.5 No Liens or Encumbrances.  Contractor warrants and guarantees
   that title to the Project, any portion or component of the Project, and all
   Work provided hereunder, shall pass to Owner as provided under Section 
   hereof, free and clear of all liens, claims of liens, security interests
   and other encumbrances (other than inchoate liens provided by Applicable
   Laws to secure payments not yet delinquent), and that none of such work,
   materials, supplies or equipment shall be acquired by Contractor subject to
   any agreement under which a security interest or other lien or encumbrance
   is retained by any Person.  Such warranty shall become effective as title
   to Work passes to Owner under Section  hereof, subject to Owner's
   obligation to pay for such Work in accordance with the Contract Documents.

        10.6 EXCLUSIVE REMEDIES.  THE REMEDIES OF DELAY PAYMENTS, PERFORMANCE
   GUARANTEE PAYMENTS AND THE REPAIR/REPLACEMENT OBLIGATIONS SET FORTH IN
   ARTICLES 7 AND  AND THIS ARTICLE 10 ARE THE EXCLUSIVE REMEDIES OF OWNER IN
   RESPECT OF BREACH OF WARRANTIES PROVIDED BY CONTRACTOR, AND THERE ARE NO
   WARRANTIES OR REMEDIES THEREFOR, EXPRESS OR IMPLIED, OTHER THAN AS SET
   FORTH IN ARTICLES 7 AND  HEREOF AND IN THIS ARTICLE .  ALL IMPLIED
   WARRANTIES (INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS
   FOR A PARTICULAR PURPOSE) ARE HEREBY DISCLAIMED.

        10.7 DISCLAIMER.  CONTRACTOR MAKES NO WARRANTY WITH RESPECT TO:

        (i)  BREACHES OF THE WARRANTIES UNDER THIS ARTICLE 10 NOT REPORTED TO
             CONTRACTOR WITHIN FIFTEEN (15) DAYS AFTER EXPIRATION OF THE
             GENERAL WARRANTY PERIOD OR THIRTY (30) DAYS AFTER EXPIRATION OF
             THE DESIGN WARRANTY PERIOD, AS APPLICABLE;

        (ii) DEFECTS OR DAMAGE DUE TO NEGLIGENCE, CASUALTY, OR ABUSE (OTHER
             THAN THAT OF CONTRACTOR OR ITS SUBCONTRACTORS);

        (iii)     ANY EXISTING EQUIPMENT OR STRUCTURES ON THE PROJECT SITE TO
             THE EXTENT NOT MODIFIED OR ADDED TO BY CONTRACTOR; AND
PAGE

        (iv) ANY ENVIRONMENTAL CONDITION AS DEFINED IN SECTION  HEREOF
             EXISTING ON THE PROJECT SITE PRIOR TO THE COMMENCEMENT DATE OR
             CREATED BY PERSONS OTHER THAN CONTRACTOR OR ITS SUBCONTRACTORS.


                                   ARTICLE 11
                               Force Majeure Event

        11.1 Force Majeure Event.  A "Force Majeure Event" means any act or
   event that significantly adversely affects the performance by Owner or
   Contractor of its obligations under the Contract Documents or compliance
   with any other requirements of the Contract Documents if such act or event
   is beyond the reasonable control of and not the fault of the affected Party
   and such Party could not have avoided or overcome such act or event by the
   exercise of due diligence or foresight, or, without limitation, by
   following the requirements in the Contract Documents for safety precautions
   and environmental protection, including but not limited to: flood,
   lightning, earthquake, fire, explosion, epidemic, quarantine, hurricane,
   sabotage, war (declared or undeclared), strikes and other labor disputes
   (including collective bargaining disputes and lockouts, but excluding a
   Project Site labor dispute to the extent Contractor fails to take immediate
   and appropriate action to end such dispute); riot or similar civil
   disturbance, act of God (including extreme weather conditions), act of the
   public enemy, action of a court, regulatory body or other public authority
   having a direct effect on the Overall Project or the Project Site or the
   Work, unavailability of dock or rail unloading facilities, damage or
   destruction of equipment in transit, subsurface conditions not disclosed in
   writing to Contractor by Owner prior to the date of this Agreement, and as
   to a Party, any breach of an obligation under the Contract Documents by the
   other Party that prevents the first Party from performing its obligations
   under the Contract Documents (including without limitation any breach by
   the other party of its obligations to obtain Applicable Permits hereunder)
   or any other similar event or circumstances.  Late delivery of equipment or
   materials (except to the extent due to a Force Majeure Event otherwise
   excusable hereunder), economic hardship, Project Site labor disputes (to
   the extent Contractor fails to take immediate and appropriate action to end
   such dispute), late issuance of any Applicable Permit attributable to the
   failure by Owner or Contractor, as the case may be, to apply for in a
   timely manner and diligently attempt to obtain such Applicable Permit and
   reasonably foreseeable weather conditions are explicitly excluded from a
   Force Majeure Event.  The impact of changes in Applicable Laws shall be
   governed exclusively by the provisions of Section  hereof.

        11.2 Burden of Proof.  In the event that Owner and Contractor are
   unable in good faith to agree that a Force Majeure Event has occurred,
   either Party may submit the dispute to the applicable dispute resolution
   process provided for under Article  hereof, provided that the burden of
   proof as to whether a Force Majeure Event has occurred and whether the
   Force Majeure Event excuses the Party from performance under Section  below
   shall be upon the Party claiming a Force Majeure Event.

        11.3 Excused Performance.  If a Force Majeure Event occurs, the
   affected Party will be excused by Scope Change Order from whatever
   performance is significantly adversely affected by the Force Majeure Event
   to the extent so affected, provided that:

                  (a)  the affected Party gives the other Party notice
   describing the particulars of the occurrence, including an estimation of
PAGE

   its expected duration and probable impact on the performance of such
   party's obligations hereunder, and continues to furnish timely regular
   reports with respect thereto during the continuation of the Force Majeure
   Event;

                  (b)  the notice described in clause (a) above shall be given
   promptly after the occurrence of the Force Majeure Event, and in no event
   more than ten (10) days after the affected Party becomes aware of such
   occurrence and its adverse effect;

                  (c)  the suspension of performance shall be of no greater
   scope and of no longer duration than is reasonably required by the Force
   Majeure Event and may include in addition a Stabilization Period of a
   duration reasonably acceptable to both Parties;

                  (d)  no liability of either Party which arose before the
   occurrence of the Force Majeure Event causing the suspension of performance
   shall be excused as a result of the occurrence;

                  (e)  the affected party shall exercise all reasonable
   efforts to mitigate or limit damages to the other party;

                  (f)  the affected party shall use all reasonable efforts to
   continue to perform its obligations hereunder and to correct or cure the
   event or condition excusing performance; and

                  (g)  when the affected party is able to resume performance
   of the affected obligations under the Contract Documents, that party shall
   give the other party written notice to that effect, a Scope Change Order
   shall be executed by Owner and Contractor to adjust the Contract Sum,
   Milestone Schedule, the Project Schedule, the Guaranteed Completion Date,
   the Guaranteed IPT No. 3 Success Date, the Guaranteed Acceptance Date and
   any other affected provisions of the Contract Documents to account for the
   actual effect on the affected party's performance of its obligations by the
   Force Majeure Event, and the affected party shall promptly resume
   performance under the Contract Documents.  Contractor will provide
   documented proof through its project records that a cost adjustment is
   warranted.

        11.4 Suspension Due to Force Majeure Event.  If the occurrence and
   continuation of a Force Majeure Event causes Contractor to suspend
   performance entirely for a period of sixty (60) consecutive days, then
   Contractor shall have the right to demobilize.  Contractor's reasonable
   expenses of remaining on the Project Site during such 60-day period (or
   such longer period in excess of sixty (60) days if Contractor does not
   demobilize after sixty (60) days) and of re-mobilizing following a
   demobilization pursuant to the immediately preceding sentence shall be
   added to the Contract Sum by a Scope Change Order.  In the event such
   suspension continues for more than one hundred twenty (120) days,
   Contractor shall have the right to terminate this Agreement pursuant to
   Section  hereof.

                                   ARTICLE 12
                                  Scope Changes

        12.1 Scope Change Orders.  A Scope Change means a material addition
   to, deletion from, suspension of or other modification to, the quality,
   function or intent of the Project as delineated in the Scope Document, or a
PAGE

   material change to the requirements of this Agreement (including, without
   limitation, any changes requiring the approval of the Independent Engineer
   as provided below), but shall not include correction of the Work by
   Contractor from time to time.  Owner may order Scope Changes to the Work,
   subject to Contractor approval, in which event one or more of the Contract
   Sum, the Milestone Schedule, the Project Schedule, the Guaranteed
   Completion Date, the Guaranteed IPT No. 3 Success Date and the Guaranteed
   Acceptance Date shall be equitably adjusted, if necessary.  All Scope
   Changes must be authorized by a written Scope Change Order approved and
   signed by Owner's Project Manager and Contractor.  If either Owner or
   Contractor believes a Scope Change is necessary, it shall proceed as set
   forth in this Article .  However, the requirements of this Article  shall
   not excuse Contractor from acting in an emergency to prevent imminent
   personal injury or property damage.  Notwithstanding anything in this
   Article 12 to the contrary, the following Scope Changes shall also require
   the written consent of the Independent Engineer on the Scope Change Order:
   (i) any individual change increasing the Contract Sum by more than two
   hundred thousand dollars ($200,000); or (ii) any individual change which,
   when aggregated with all previous Scope Change Orders, has increased the
   Contract Sum by more than one million dollars ($1,000,000) (provided that
   if at any time the Independent Engineer approves such changes aggregating
   $1,000,000, thereafter its approval shall not be required unless further
   changes are above $200,000 individually or once again reach $1,000,000 in
   the aggregate); or (iii) any changes involving a delay in the Guaranteed
   Completion Date, the Guaranteed IPT No. 3 Success Date or the Guaranteed
   Acceptance Date or any change in the Performance Guarantees or Approved
   Test Procedures.

        12.2 Scope Change by Owner.  If the Scope Change is initiated by
   Owner, Owner shall give Contractor a written Proposal Request (herein so
   called) setting forth in detail the nature of the requested change.  Upon
   receipt of a Proposal Request, Contractor shall promptly consult with Owner
   (at no charge to Owner) concerning the estimated cost and impact on
   schedules of implementing the proposed Scope Change.  Following such
   consultation, Owner may request and Contractor shall thereupon promptly
   prepare two (2) completed copies of its written Change Order Proposal
   (herein so called) setting forth in detail, with a separate pay item
   (addition or deletion) for purchase and installation of equipment and
   materials and an otherwise suitable breakdown of costs by trades and work
   classifications, a stipulated sum proposed as an adjustment to the Contract
   Sum for the performance of the Scope Change set forth in the Proposal
   Request, together with any proposed adjustment to the Guaranteed Completion
   Date, Guaranteed IPT No. 3 Success Date, the Guaranteed Acceptance Date,
   the Project Schedule and the Milestone Schedule and any other provisions of
   the Contract Documents necessary because of such proposed Scope Change.
   The stipulated sum set forth in each Change Order Proposal shall equal the
   amount obtained by (a) calculating the difference of (i) Contractor's good
   faith estimate of the actual costs of the proposed Scope Change (including,
   if appropriate, good faith estimates of contingencies, escalation, and risk
   amounts) but including only such costs as are directly attributable to and
   necessarily incurred as part of the proposed Scope Change and are not
   included in Contractor's administrative and overhead expenses, plus amounts
   expended by Contractor in preparing the Change Order Proposal, and
   (ii) Contractor's good faith estimate of the cost savings, if any, that
   will result from the replacement or obviation of previously planned Work by
   the performance or supply of the proposed Scope Change, then (b) provided
   the difference obtained in clause (a) is a positive number, adding to such
   difference an amount to cover the total of Contractor's overhead costs and
PAGE

   Contractor's profit for services rendered as specified in Contractor's
   Change Order Proposal.  The adjustment, if any, to the Guaranteed
   Completion Date, the Guaranteed IPT No. 3 Success Date, the Guaranteed
   Acceptance Date, the Project Schedule and the Milestone Schedule specified
   in any Change Order Proposal shall be limited to the delays attributable to
   and necessarily incurred as a result of the proposed Scope Change.  Each
   Change Order Proposal shall be accompanied by appropriate data reasonably
   acceptable to Owner supporting the proposed adjustments therein, including
   but not limited to, as appropriate, bids, cost estimates, quotations from
   suppliers and wage schedules.  If Owner approves Contractor's Change Order
   Proposal, Owner will issue and Contractor will execute and accept a written
   Scope Change Order in the form attached to this Agreement as Schedule , and
   the Contract Sum, the Milestone Schedule, the Project Schedule, the
   Guaranteed Completion Date, the Guaranteed IPT No. 3 Success Date and the
   Guaranteed Acceptance Date shall be adjusted as set forth in such Scope
   Change Order.  If Owner does not approve Contractor's Change Order
   Proposal, Contractor need not perform the Scope Change Order requested by
   Owner.  If Owner decides to proceed with the proposed Scope Change,
   Contractor shall not charge Owner separately for the estimating services.
   If Owner decides not to so proceed, Contractor shall be reimbursed only for
   the reasonable labor costs for preparing such estimates, on the basis of
   actually paid hourly rate(s) times a multiplier of two hundred percent
   (200%) and documented expenses at cost.

        12.3 Scope Change by Contractor.  If Contractor desires to initiate a
   Scope Change because of a Force Majeure Event or otherwise, Contractor
   shall deliver a written preliminary estimate to Owner, and if Owner so
   requests, a Change Order Proposal to Owner, meeting the requirements
   specified in Section  hereof, together with a detailed explanation of why
   Contractor believes the proposed Scope Change is necessary.  If Owner
   approves Contractor's Change Order Proposal, Owner will issue and
   Contractor will execute and accept a written Scope Change Order in the form
   attached to this Agreement as Schedule , and the Contract Sum, the
   Milestone Schedule, the Project Schedule, the Guaranteed Completion Date,
   the Guaranteed IPT No. 3 Success Date and the Guaranteed Acceptance Date
   shall be equitably adjusted as set forth in such Scope Change Order.  Owner
   shall be entitled to decline to approve any Change Order Proposal initiated
   by Contractor in Owner's reasonable discretion except a Change Order
   Proposal evidencing Contractor's entitlement to a Scope Change Order, under
   Section  hereof due to changes in Applicable Laws or under Section  hereof
   due to a Force Majeure Event.

        12.4 Scope Changes Due to Changes in Applicable Laws.  Contractor
   shall be entitled to a Scope Change necessitated by any changes,
   modifications, interpretations by governmental authorities, repeal,
   adoption or enactment of or in Applicable Laws occurring after the date
   hereof or by the requirements of Applicable Permits issued after the date
   hereof that are more stringent than those set forth in the Scope Document
   shall be treated as a Scope Change under Section  hereof.  Owner shall be
   entitled to a deductive Scope Change to the extent it directs Contractor to
   comply with the requirements of Applicable Permits issued after the date
   hereof that are less stringent than those set forth in the Scope Document.
   For the purposes of this Section , a determination that any item listed
   under the heading "Industrial Processing Equipment" or "Water Pollution
   Control Property" on Schedule  hereto is subject to a sales or uses tax
   shall be deemed to be a change in Applicable Laws.
PAGE

        12.5 Performance of Scope Changes.  If Owner issues a Scope Change
   Order directing Contractor to perform a Scope Change and Contractor agrees
   to such Scope Change Order, Contractor shall promptly perform the
   applicable Scope Change, provided that Owner can reasonably demonstrate its
   ability to pay for such additional work.  Agreement on any Scope Change
   Order shall constitute a final settlement on all items covered therein,
   subject to performance thereof and payment therefor pursuant to the terms
   of this Agreement.

        12.6 Scope Changes Due to Contractor Error. Notwithstanding anything
   in this Article  to the contrary, no Scope Change Order shall be issued and
   no adjustment of the Contract Sum, the Guaranteed Completion Date, the
   Guaranteed IPT No. 3 Success Date, the Guaranteed Acceptance Date, the
   Milestone Schedule, the Project Schedule or the Performance Guarantees
   shall be made to the extent of any correction of errors, omissions,
   deficiencies, or improper or defective work on the part of Contractor or
   any Subcontractor in the performance of the Work hereunder, or correction
   of any improper, defective or deficient equipment supplied by Contractor or
   any Subcontractor.  As used herein the terms "errors", "omissions",
   "deficiencies", "improper" and defective shall mean failure to comply with
   the standards set forth in the Contract Documents.

        12.7 Effect of Force Majeure Event.  In the event and to the extent
   that a Force Majeure Event affects Contractor's ability to meet the
   Guaranteed Completion Date, the Guaranteed IPT No. 3 Success Date or the
   Guaranteed Acceptance Date or the cost of performing the Work, a Scope
   Change Order shall be issued in accordance with the procedures of this
   Article  and Section  to adjust appropriately one or more of the Contract
   Sum, Guaranteed Completion Date, the Guaranteed IPT No. 3 Success Date, the
   Guaranteed Acceptance Date, the Milestone Schedule and the Project
   Schedule.

        12.8 Adherence to Project Schedule.  With respect to any Scope Change
   proposed by Owner or Contractor or required hereunder, Contractor shall
   whenever reasonably possible provide Owner with the option to cause
   Contractor to perform the Scope Change without an adjustment in the
   Guaranteed Completion Date, the Guaranteed IPT No. 3 Success Date, the
   Guaranteed Acceptance Date or the Project Schedule, provided, however, that
   the Contract Sum shall be adjusted to compensate Contractor for any
   additional costs incurred in performing the Scope Change in accordance with
   such time limitation.  Owner shall have the right to elect to cause such
   Scope Change to be performed without an adjustment in the Guaranteed
   Completion Date, the Guaranteed IPT No. 3 Success Date, the Guaranteed
   Acceptance Date or the Project Schedule whenever reasonably possible, or to
   cause such Scope Change to be performed upon any other terms and conditions
   set forth in the Change Order Proposal.


                                   ARTICLE 13
                                 Indemnification

        13.1 General Indemnification.

             13.1.1    Contractor.  Subject to the provisions of Section
   hereof, Contractor shall fully indemnify, save harmless and defend Owner,
   the Financing Parties, and the Independent Engineer, each of their
   respective subsidiaries and affiliates, and the directors, officers,
PAGE

   agents, partners, employees, successors and assigns of each of them (the
   "Indemnified Parties"), from and against any and all suits, judgments,
   expenses, losses, costs, damages, injuries, liabilities, claims, demands,
   interest and causes of action, including without limitation reasonable
   attorneys' fees (collectively, the "Damages"), arising out of, resulting
   from or related to third-party claims associated with the design,
   procurement or construction of the Project, including without limitation
   any damage to or destruction of property of, or death of or bodily injury
   to, any Person (whether such Person is an employee of any Indemnified
   Party, Contractor or any Subcontractor, or is a Person unaffiliated with
   the Overall Project), to the extent caused or contributed to by
   Contractor's intentional tort, negligence or strict liability in the
   performance of the Work, or by any breach by Contractor of the Contract
   Documents if such claim or cause of action arises during the term of this
   Agreement.  Contractor's aforesaid indemnity is for the exclusive benefit
   of the Indemnified Parties and in no event shall inure to the benefit of
   any other party.

             13.1.2    Owner.  Owner shall fully indemnify, save harmless and
   defend Contractor, Rust, each of their respective subsidiaries and
   affiliates, and the directors, officers, agents, employees, successors and
   assigns of each of them, (the "Contractor Indemnified Parties"), from and
   against any and all Damages arising out of, resulting from or related to
   third-party claims associated with the performance by Owner of its
   obligations hereunder, including without limitation any damage to or
   destruction of property of, or death of or bodily injury to, any Person, to
   the extent caused by or contributed to by Owner's intentional tort,
   negligence or strict liability in the performance of Owner's obligations
   hereunder or by any breach by Owner of its obligations hereunder if such
   claim or cause of action arises during the term of this Agreement. Owner's
   aforesaid indemnity is for the exclusive benefit of the Contractor
   Indemnified Parties and in no event shall inure to the benefit of any other
   party.

        13.2 Additional Indemnification.

             13.2.1    Taxes.  Contractor shall fully indemnify, save harmless
   and defend the Indemnified Parties from and against any and all Damages in
   favor of any Person with respect to:  (a) payments of Taxes relating to
   Contractor's income or other Taxes required to be paid by Contractor
   without reimbursement hereunder, or (b) nonpayment of amounts due as a
   result of furnishing materials or services to Contractor or any
   Subcontractor which are payable by Contractor or any Subcontractor in
   connection with the Work to the extent that Owner has paid Contractor all
   amounts hereunder then due and payable from Owner to Contractor.  Owner
   shall fully indemnify, save harmless and defend the Contractor Indemnified
   Parties from and against any and all Damages in favor of any Person with
   respect to: (a) payments of Taxes relating to Owner's income or other Taxes
   required to be paid or reimbursed by Owner or (b) nonpayment of amounts
   payable by Owner or any Owner Contractor in connection with the Overall
   Project.

             13.2.2    Environmental Matters.  Owner agrees to assume and
   shall be responsible to timely perform any and all environmental
   investigations and remedial or response actions or corrective actions that
   may be required by any governmental body pursuant to any environmental
   Applicable Laws with respect to any Environmental Condition as hereinafter
   defined.  Owner further agrees that it shall indemnify, defend and hold
PAGE

   harmless the Contractor Indemnified Parties from and against all Damages
   arising out of or resulting from (i) Environmental Conditions or (ii) the
   failure (to the extent not caused by the negligence of Contractor or its
   Subcontractors) of any aboveground or belowground storage tank at the
   Project Site.  For purposes of this Section  and Section  hereof,
   "Environmental Condition" shall mean any aboveground storage tank,
   underground storage tank, subsurface structure, and associated piping,
   which is present at the Project Site on the Commencement Date; any
   petroleum products or Hazardous Materials present in soil and/or
   groundwater at the Project Site on the Commencement Date or caused to be so
   present by Owner, Owner Contractors or any other Person other than
   Contractor and Subcontractors; any release or threatened release of
   petroleum products or a Hazardous Material existing at the Project Site on
   the Commencement Date or caused by Owner or Owner Contractors or any other
   Person other than Contractor and Subcontractors; and the disposal of any
   petroleum products or Hazardous Materials on the Project Site by Owner or
   Owner Contractors or any other Person other than Contractor or
   Subcontractors.

        13.3 Patent and Copyright Indemnification.

             13.3.1    Contractor's Indemnity.  Contractor shall fully
   indemnify, save harmless and defend the Indemnified Parties from and
   against any and all Damages which the Indemnified Parties may hereafter
   suffer or pay by reason of any claims, suits or proceedings arising out of
   allegations of infringement of any domestic or foreign patent rights,
   copyrights or other intellectual property, proprietary or confidentiality
   rights, with respect to materials and information designed, procured or
   recommended by Contractor or by any Subcontractor in performing the Work or
   in carrying on operations under the Contract Documents.

             13.3.2    Action in Case of Injunction.  If, in any claim, suit
   or proceeding identified in Section  hereof, a temporary restraining order
   or preliminary injunction is granted, Contractor shall make every
   reasonable effort, by giving a satisfactory bond or otherwise, to secure
   the suspension of the injunction or restraining order.  If, in any such
   claim, suit or proceeding, the Project or any part, combination or process
   thereof is held to constitute an infringement and its use is permanently
   enjoined, Contractor shall at its own expense and without impairing
   performance requirements, either replace the infringing Work or part,
   combination or process thereof with non-infringing components or parts or
   modify the same so that they become non-infringing. If Contractor is unable
   to do so within a reasonable time, Contractor shall promptly make every
   reasonable effort to secure for Owner a license, at no cost to Owner,
   authorizing continued use of the infringing Work.

        13.4 Notice and Legal Defenses.  Promptly after receipt by an
   Indemnified Party or Contractor Indemnified Party of any claim or notice of
   the commencement of any action, administrative or legal proceeding, or
   investigation as to which the indemnity in favor of the Indemnified Parties
   or Contractor Indemnified Party provided for in Section ,  or  hereof is
   applicable, the Indemnified Party or Contractor Indemnified Party, as the
   case may be, shall notify the indemnitor thereof in writing.   The
   indemnitor shall assume on behalf of the Indemnified Party or Contractor
   Indemnified Party and conduct with due diligence and in good faith the
   defense thereof with counsel reasonably satisfactory to the Indemnified
   Party or Contractor Indemnified Party, as applicable; provided, however,
   that (a) the Indemnified Party or Contractor Indemnified Party, as the case
PAGE

   may be, shall have the right to be represented therein by advisory counsel
   of its own selection and at its own expense, and (b) if the defendants in
   any such action include both Contractor and the Indemnified Party or both
   Owner and Contractor Indemnified Party, as the case may be, and the
   Indemnified Party or the Contractor Indemnified Party, as the case may be,
   shall have reasonably concluded that there may be legal defenses available
   to it which are different from, additional to or inconsistent with those
   available to the indemnitor, the Indemnified Party or Contractor
   Indemnified Party shall have the right to select separate counsel
   reasonably acceptable to the indemnitor to participate in the defense of
   such action on its own behalf at the expense of the indemnitor (in lieu of
   any counsel required to be retained pursuant to the portion of this
   sentence preceding this proviso).

        13.5 Failure to Defend Action.  If any claim, action, proceeding or
   investigation arises as to which the indemnity in favor of the Indemnified
   Parties or Contractors Indemnified Parties provided for in Section ,  or  
   hereof may apply, and the indemnitor fails to assume the defense of such
   claim, action, proceeding or investigation, then the Indemnified Party or
   Contractor Indemnified Party, as the case may be, may at Contractor's or
   Owner's expense, as applicable, contest (or, with the prior written consent
   of Contractor or Owner, as applicable, settle) such claim; provided, that
   no such contest need be made and settlement or full payment of any such
   claim, action, proceeding or investigation may be made without Contractor's
   consent (with Contractor remaining obligated to indemnify the Indemnified
   Party under Section ,  and  hereof) or, if applicable, without Owner's
   consent (with Owner remaining so obligated to indemnify the Contractor
   Indemnified Party) if, in the written opinion of the Indemnified Party's
   counsel or Contractor Indemnified Party's counsel, as applicable, such
   claim is meritorious.

        13.6 Survival.  The provisions of this Article  shall survive Project
   Acceptance and the termination of this Agreement.


                                   ARTICLE 14
                                    Insurance

        14.1 Contractor-Provided Insurance.  From the Commencement Date,
   Contractor shall provide and maintain the following insurance with the
   indicated limits, with insurance carriers and in form reasonably
   satisfactory to Owner and the Financing Parties and, unless indicated to
   the contrary below, shall maintain such insurance in full force and effect
   until Project Acceptance; provided, however, that Contractor shall provide
   all types of liability insurance coverage required under this Article  and
   workers' compensation coverage for all periods during which Contractor or
   any of its agents or employees enters onto the Project Site; and provided,
   further, that such liability insurance coverage and workers' compensation
   coverage shall continue in full force and effect during the General
   Warranty Period and the Design Warranty Period: 

             (i)  Workers' compensation insurance in compliance with any
   applicable federal law; with statutory limits in compliance with the
   workers' compensation laws applicable in the state in which the Work is
   being performed.  Coverage will include a Broad Form All States
   Endorsement.
PAGE

            (ii)  Employers' liability insurance with a limit of $5,000,000
   per accident and $5,000,000 annual aggregate, $5,000,000 disease per
   employee and $5,000,000 disease policy limit.

           (iii)  Automobile liability insurance including, but not limited
   to, coverage for owned, non-owned and hired, leased or rented motor
   vehicles, licensed or unlicensed with a $5,000,000 combined single limit
   per accident.  All automobiles will be required to maintain Michigan No
   Fault Coverage as required by state statute.

            (iv)  Comprehensive or commercial general liability insurance
   written on an occurrence basis with a combined single limit of liability
   for bodily injury, including death, personal injury and property damage of
   $5,000,000 per occurrence and $10,000,000 in the aggregate.  Such coverage
   shall include premises/operations, explosion, blasting (if any),
   excavation, collapse and underground hazards, broad form property damage,
   blanket contractual liability, independent contractors, products/completed
   operations liability, and personal injury. 

             (v)  Excess liability insurance in connection with the employers'
   liability coverage, the automobile liability coverage, the comprehensive or
   commercial general liability coverage, and with a combined single limit of
   $10,000,000 per occurrence and $10,000,000 annual aggregate.  Such
   insurance shall drop down to provide primary coverage in the event the
   underlying policy aggregate is exhausted by payment of claims.

           (vi)    If applicable, all-risk marine transit insurance with
   "replacement value" and "warehouse to warehouse" coverage insuring the
   goods until delivered to the Project Site.  Coverage shall include delay in
   opening consistent with the terms and limits specified in Section (viii)
   hereof.  Transit risks may, with Owner's approval, be written with lesser
   limits (sub-limits) commensurate with the respective values at risk.

             (vii)      All-risk builder's risk insurance, for the benefit of
   Owner, Contractor, the Subcontractors and Owner Contractors covering
   physical loss or damage to the Project including, fire and extended perils,
   expediting expense, collapse, earthquake, flood and comprehensive boiler
   and machinery (including electrical malfunction and mechanical breakdown).
   Such insurance shall cover all property during the start-up and testing as
   well as any and all materials, equipment and machinery intended for the
   Project during offsite storage and inland transit.  Coverage shall be
   written on a replacement cost basis and the policy shall contain a valid
   agreed amount endorsement waiving any coinsurance penalty.  There shall be
   no exclusion for resultant damage caused by faulty workmanship, design or
   materials.  Flood and earthquake coverage shall be provided at maximum
   limits commercially available at a reasonable cost.  Offsite storage and
   transit risks may, with Owner's approval, be written with lesser limits
   (sub-limits) commensurate with the respective values at risk.  Deductibles
   shall not exceed $250,000.

             (viii)    Delay in opening and business interruption coverage, as
   an endorsement to the all-risk builders risk insurance policy or as a
   separate policy in an amount at least equal to the maximum amount of annual
   debt service on the Bonds.  The endorsement or policy shall include
   coverage for delays resulting from (i) damage to the Project, (ii) damage
   to equipment during inland transit or (iii) damage to equipment while in
   storage away from the Project Site, provided that in no event will
PAGE

   Contractor or Subcontractors be responsible for delays in start-up or
   business interruptions except as provided in Article  hereof (it being
   understood that nothing in the foregoing is intended to release Contractor
   from, or impose on Contractor, any liability under Article  otherwise borne
   or not borne, as the case may be, by Contractor).  The endorsement or
   policy shall have a deductible not to exceed thirty (30) days waiting
   period and shall include, but not be limited to, such items as:  operation
   and maintenance, labor, repair and maintenance, utilities, general and
   administrative, insurance, property taxes, interest expense and debt
   service.  

        14.2 Owner-Provided Insurance.  Owner shall provide and maintain the
   following insurance with the indicated limits, with insurance carriers and
   in form reasonably satisfactory to Contractor and, unless indicated to the
   contrary below, shall maintain such insurance in full force and effect from
   the Commencement Date until Project Acceptance: 
             (i)  Workers' Compensation insurance written in compliance with
   any applicable federal law; with statutory limits in compliance with
   workers' compensation laws applicable in the state in which the Work is
   being performed.  Coverage will include broad form All States endorsement.

             (ii) Employers' liability insurance with a limit of $1,000,000
   per accident and $1,000,000 annual aggregate, $1,000,000 disease per
   employee and $1,000,000 disease policy limit.

            (iii) Comprehensive or commercial general liability insurance
   written on an occurrence basis with a combined single limit of liability
   for bodily injury, including death, personal injury and property damage of
   $1,000,000 per occurrence.  Such coverage shall include
   premises/operations, explosion, blasting (if any), excavation, collapse and
   underground hazards, broad form property damage, blanket contractual
   liability, independent contractors, products/completed operations
   liability, and personal injury.  If the policy is written on a commercial
   general liability form, the general aggregate and products/completed
   operations aggregate shall be no less than $1,000,000, respectively.

             (iv) Automobile liability insurance, including, but not limited
   to, coverage for all owned, non-owned, hired, leased or rented motor
   vehicles, licensed or unlicensed.  Such insurance shall provide coverage
   having a combined single limit per accident of $1,000,000.  All automobiles
   will maintain Michigan no-fault coverage as required by State statute.

             (v)  Excess liability coverage in connection with the employers'
   liability coverage, the automobile liability coverage and the commercial
   general liability coverage, with a combined single limit of $9,000,000 per
   occurrence and in the aggregate.  Such insurance shall drop down to provide
   primary coverage in the event the underlying policy aggregates are
   exhausted by payment of claims.

        14.3 Certificates.  Contractor shall furnish to Owner, the Independent
   Engineer and the Trustee and their respective permitted assigns and
   successors, and Owner shall furnish to Contractor and to Rust, in each
   case, upon request, certificates of insurance required hereunder in the
   applicable forms set forth in Schedule  hereto, or, with respect to the
   policies of insurance required to be maintained by Contractor in Section
   (vi), (vii) and (viii), a copy of the insurance policy.  All such
   certificates or policies shall state that ninety (90) days' prior written
   notice shall be given to each such party in the event of cancellation or
PAGE

   non-renewal of or material change in the relevant policy.  In the case of
   insurance provided by Contractor, renewal certificates shall be provided to
   the Trustee and otherwise upon request.

        14.4 Responsibility for Deductibles.  Deductibles under the policies
   of insurance required to be maintained by Contractor by Section (i), (ii),
   (iii), (iv) and (v) shall be borne by Contractor.  Deductibles under the
   policies of insurance required to be maintained by Contractor by Section
   14.1 (vi), (vii) and (viii) hereof shall be for Owner's account.  In no
   event shall Contractor or Subcontractors be required to compensate Owner
   for property insurance deductibles or for loss incurred during or after the
   waiting period under the delay in opening or business interruption
   endorsements or under the policies described in Section (vi), (vii) and
   (viii) hereof, whether during the Construction Period or otherwise.

        14.5 Waivers of Subrogation.  All insurance policies supplied by
   Contractor under this Article  (except those supplied under Section (i)
   relating to workers' compensation insurance) shall include a waiver of any
   right of subrogation of the insurers thereunder against Owner, the
   Financing Parties, the Independent Engineer and, in the case of the
   insurance policies described under Section (vii) and (viii), K&K
   Warehousing, a general partnership.  All insurance policies supplied by
   Owner under this Article 14 (except those supplied under Section (i)
   relating to workers' compensation insurance) shall include a waiver of any
   right of subrogation of the insurers thereunder against Contractor and
   Subcontractors.

        14.6 Failure to Procure Insurance.  If Contractor or Owner fails to
   procure and maintain the required insurance, or any portion thereof, the
   other party or the Trustee shall have the right, but not the obligation, to
   procure and maintain the required insurance for and in the name of such
   party, and such party shall promptly pay the cost thereof and shall furnish
   all information necessary to acquire and maintain such insurance.  Neither
   party shall violate or knowingly permit any violation of any conditions or
   terms of the policies of insurance carried hereunder.

        14.7 Contractor's or Rented Equipment.  All construction equipment,
   supplies and materials belonging to Contractor or any Subcontractor and
   used by or on behalf of Contractor or any Subcontractor for its performance
   hereunder shall be brought to and kept at the Project Site at the sole
   cost, risk and expense of Contractor or such Subcontractor and Owner shall
   not be liable for loss or damage thereto, and any insurance policies
   carried by Contractor, any Subcontractor, or any third party on said
   equipment, supplies and materials shall provide for a waiver of the
   underwriters' right to subrogation against Owner and the Financing Parties.
   Contractor shall obtain adequate insurance to cover any construction tools
   and equipment leased from third parties.

        14.8 Unemployment and Other Insurance Benefits. Contractor agrees to
   and does hereby accept full and exclusive responsibility and liability for
   the withholding and payment of any and all Taxes and contributions levied
   or assessed against Contractor for Unemployment Insurance and for Old Age
   Retirement Benefits, and for pensions and annuities now imposed, or
   hereafter imposed, by the federal, state or local governments with respect
   to, assessed against or measured by wages, salaries or other remuneration
   paid to persons employed by Contractor in connection with the Work
   hereunder.  Contractor further agrees to indemnify and hold harmless the
   Indemnified Parties from any and all liability therefor.
PAGE

        14.9 Descriptions Not Limitations.  The coverages referred to in this
   Article  are set forth in full in the respective policy forms, and the
   descriptions of such policies in this Agreement are not intended to be
   complete, nor to alter or amend any provision of the actual policies and in
   matters, if any, in which the said descriptions may be conflicting with
   such instruments, the provisions of the policies of insurance shall govern;
   provided, however, that neither the content of any insurance policy or
   certificate nor Owner's approval thereof shall relieve Contractor of any of
   its obligations under the Contract Documents.

        14.10     Additional Insureds, etc..  All insurance policies furnished
   by Contractor pursuant to Section (ii), (iii), (iv) and (v) hereof shall
   name Owner, the Independent Engineer and the Trustee as additional insureds
   to the extent of Contractor's indemnity obligations in Section  hereof.
   All insurance policies furnished by Contractor pursuant to Section (vi),
   (vii) and (viii) hereof shall name Owner and the Trustee as additional
   named insureds and the Trustee as the loss payee and, in the case of the
   insurance policies described under Section  (vii) and (viii) hereof, K&K
   Warehousing, a general partnership, as an additional insured.

        14.11     No Limitation of Liability.  The required coverages referred
   to and set forth in this Article  shall in no way affect, nor are they
   intended as a limitation of, Contractor's liability with respect to its
   performance of the Work hereunder except as otherwise specifically stated.

        14.12     Insurance Primary.  All policies of insurance provided by
   Contractor pursuant to this Article  shall be written as primary policies,
   not contributing with, and not in excess of, the coverage that Owner, the
   Independent Engineer, the Financing Parties, and their respective permitted
   assigns, successors, parent companies, subsidiaries and affiliates may
   carry against the same hazards.

        14.13     Certain Terms.  Terms used in this Article  and not
   otherwise defined in this Agreement shall have the respective meanings
   generally ascribed to them in the commercial insurance industry in the
   United States.

        14.14     Owner Property Damage Waiver.  Owner waives all rights and
   any subrogation rights such as it or its insurers may have against
   Contractor and its Subcontractors for any losses or damages to the Overall
   Project or any other property in which Owner has an interest, including
   without limitation the property to be insured under this Article 14,
   resulting from any and all risks and losses, however and whenever arising,
   including without limitation the risks and losses to be insured under this
   Article 14; provided, however, that this Section  shall not relieve
   Contractor from its obligations, or affect Owner's rights, under Article 10
   or under Article 13 hereof.

                                   ARTICLE 15
                                   Termination

        15.1 Termination For Cause.  Owner, by written notice to Contractor,
   may elect, at Owner's sole option, to terminate this Agreement or the
   retention of Contractor to perform the Work if any of the following events
   shall occur: (i) Contractor makes a general assignment for the benefit of
   its creditors, is generally unable to pay its debts as they become due, or
PAGE

   becomes the subject of any voluntary or involuntary bankruptcy, insolvency,
   arrangement, reorganization or other debtor relief proceeding under any
   Applicable Law, now in existence or hereafter becoming effective, and, in
   the case of any such involuntary proceeding, it is not dismissed or stayed
   within forty-five (45) days after it is commenced; (ii) Contractor
   intentionally or negligently disregards Applicable Laws and such failure
   continues for sixty (60) days after written notice from Owner; or
   (iii) Contractor fails to perform any of its material obligations under the
   Contract Documents, unless the remedy for the breach of any such obligation
   is payment of Delay Payments or Performance Guarantee Payments or the
   performance by Contractor of its obligations under Section  and Section  
   hereof, and either (x) such failure continues for thirty (30) days after
   written notice from Owner, or (y) if such default cannot be cured after
   reasonable diligence by Contractor within such thirty (30) days, such
   failure continues for an unreasonable period of time or Contractor ceases
   to diligently attempt to cure such default.  With respect to any
   termination by Owner pursuant to this Section  (a "Termination For Cause"),
   Owner shall have any or all of the following rights and remedies, in
   addition to those rights and remedies that may be available to Owner under
   this Agreement or at law or in equity, and Contractor shall have the
   following obligations:

                  (a)  Owner, without prejudice to any of its other rights and
   remedies, and at Owner's option, may terminate this Agreement immediately
   by delivery to Contractor of a notice of termination ("Notice of
   Termination"), in which event Contractor shall be relieved from any
   obligation to complete any unfinished portion of the Work, but shall not be
   relieved from its liabilities, warranties or obligations otherwise provided
   for hereunder in respect of any portion of the Work for which the
   Contractor has been paid hereunder.  All such warranties for which
   Contractor is liable hereunder shall commence on the date, if any, on which
   the Project shall have achieved a state of completion equivalent to
   Mechanical Completion.

                  (b)  Owner, without incurring any liability to Contractor,
   shall have the right, either with the use or without the use of
   Contractor's materials, equipment, tools, and instruments, to have the Work
   completed (directly or through a new contractor) to an extent deemed
   appropriate by Owner, or to decide not to complete the Work.

                  (c)  If Owner shall decide to complete the Work, the measure
   of Damages shall be (i) the net additional cost (if any) to Owner to fully
   complete the Work to a point equivalent to Project Acceptance (i.e., the
   amount by which the sum of the cost of causing a replacement contractor to
   complete the Work plus any amounts previously paid to Contractor to perform
   the Work under this Contract exceeds the Contract Sum), including any
   additional reasonable legal, consulting and other out of pocket expenses
   incurred in connection with such Work ("Fee Expenses") plus (ii) Net Bond
   Interest (as defined below) payable as a result of any additional time
   required to complete the Work that is attributable to Contractor's default,
   less (iii) any amounts paid by Contractor for Delay Payments or Performance
   Guarantee Payments.  The amount payable hereunder shall not exceed the
   Contract Sum, and not more than twelve (12) months' Net Bond Interest shall
   be payable under this clause (c).

                  (d)  If Owner determines not to complete the Work, then
   Owner shall be entitled to all damages available at law, including the
   payment by Contractor of the cost of Accrued Bond Interest, less the
PAGE

   interest or other investment earnings, if any, earned on any such amounts
   in respect of Accrued Bond Interest in the Project Reserve Fund (as defined
   in the Indenture) and in the Capitalized Interest Account (as defined in
   the Indenture) (to the extent such investment earnings represent any excess
   in the Capitalized Interest Account over that earned under the Master
   Repurchase Agreement dated December 30, 1994 for such Account) ("Net Bond
   Interest"), but otherwise subject to Section 9.2 hereof, and in any event,
   not more than twelve (12) months' Net Bond Interest shall be payable under
   this clause (d).

                  (e)  Any amount owed by Owner to Contractor for the month
   and level of completion of the Work shall be retained by Owner until after
   completion of the Work and applied by Owner to pay any amounts and damages
   owed by Contractor pursuant to this Section  hereof or otherwise.  Any such
   amount shall be remitted to Contractor within sixty (60) days after Project
   Acceptance as defined in Section  has occurred.

        15.2 Termination by Contractor.  If (a) Owner fails to pay to
   Contractor any required payment which is not in dispute and such failure
   continues for fifteen (15) days after written notice has been given by
   Contractor to Owner or (b) as a result of the occurrence of a Force Majeure
   Event, Work has been suspended for one hundred twenty (120) days or longer,
   then Contractor may terminate this Agreement upon written notice to Owner.
   In the event of any such termination by Contractor, Contractor shall be
   entitled to recover damages from Owner to the extent allowed under law.
   Unless Contractor terminates this Agreement pursuant to the foregoing,
   Contractor shall not suspend or delay performance of the Work because of
   any default by Owner.  Contractor shall continue performance of the Work
   during any dispute over payment as provided under Section  hereof.

        15.3 Requirements Following Termination.  Upon termination of this
   Agreement by Owner, except as otherwise provided in Section  hereof, Owner
   shall be immediately released from any and all obligations to Contractor
   (except for Owner's obligation to pay any amount specified in Section  
   hereof) and upon termination of this Agreement by Contractor, except as
   otherwise provided in Section  hereof, Contractor shall be immediately
   released from any and all obligations hereunder.  In event of termination
   by Contractor or Owner, Contractor shall, except as provided in the
   penultimate sentence of this Section , immediately discontinue the Work and
   remove its personnel and construction equipment from the Project Site, and
   Owner shall be entitled to take exclusive possession of the Overall Project
   and all or any part of the equipment and materials delivered or en route to
   the Overall Project, to the extent that Owner has paid Contractor all
   undisputed amounts hereunder then due and payable from Owner to Contractor,
   and in the case of any termination by Contractor under Section , Owner
   shall also pay to Contractor Contractor's reasonable demobilization costs
   (including amounts owed to Subcontractors).  If requested by Owner,
   Contractor will make every reasonable effort to cancel any existing
   Subcontracts upon terms satisfactory to Owner.  Contractor shall also, upon
   request by Owner, (i) deliver and assign to Owner (but in no event shall
   Owner be liable for any action or default of Contractor occurring prior to
   such delivery and assignment except to the extent such action or default
   was caused by Owner, and each Subcontract shall so provide) any and all
   Subcontracts, purchase orders, bonds and options made by Contractor in
   performance of the Work, and (ii) deliver to Owner originals of all
   Contract Documents for which Owner has paid and, if the termination occurs
   at a time when the design of the Project is incomplete, originals of all
   Design Documents in process (except that Contractor may keep for its
PAGE

   records copies and, if sufficient originals exist, an original set, of the
   Agreement and other Contract Documents executed by Owner), all other
   materials relating to the Work which belong to Owner, and all papers and
   documents relating to Permits, orders placed, bills and invoices, lien
   releases and financial management under this Agreement.  All deliveries
   hereunder shall be made free and clear of any liens, security interests or
   encumbrances, except such as may be created by Owner.  Except as provided
   herein, no action taken by Owner or Contractor after the termination of
   this Agreement shall prejudice any other rights or remedies of Owner or
   Contractor provided by the Contract Documents or otherwise upon such
   termination.

        15.4 Surviving Obligations.  Termination of this Agreement (a) shall
   not relieve Contractor or Owner of any obligation hereunder that expressly
   or by implication survives termination hereof, and (b) except as otherwise
   provided in any provision of this Agreement expressly limiting the
   liability of either Party, shall not relieve either Owner or Contractor of
   any obligations or liabilities for loss or damage to the other Party
   arising out of or caused by acts or omissions of such Party prior to the
   effectiveness of such termination or arising out of such termination, and
   shall not relieve Contractor of its warranty or other obligations as to
   portions of the Work or other services hereunder already performed or of
   obligations of Contractor arising prior to the date of termination;
   provided, however, that in no event shall Contractor be liable for Delay
   Payments or Performance Guarantee Payments for which liability has not
   arisen prior to such termination.

        15.5 Cancellation Prior to Commencement Date. Notwithstanding any
   provision of this Agreement to the contrary, including without limitation
   Article  hereof, Owner may cancel this Agreement at any time prior to the
   Commencement Date without liability or obligation to Contractor other than
   to reimburse Contractor for (i) any direct, out-of-pocket charges incurred
   by Contractor to satisfy obligations of Owner to Subcontractors, which
   obligations were assumed by Contractor concurrently with the execution of
   this Agreement, (ii) any other documented costs incurred by Contractor in
   connection with performing the Work prior to the date of cancellation, plus
   Contractor's demobilization costs, if any and (iii) such other
   reimbursement or payment as Contractor and Owner may agree to from time to
   time in writing prior to the Commencement Date.  Cancellation of this
   Agreement pursuant to this Section  shall be effective upon Contractor's
   receipt of written notice thereof from Owner.


                                   ARTICLE 16
                                   Assignments

        16.1 Consent Required.  It is expressly understood and agreed that
   this Agreement is personal to Contractor and Owner, and that Contractor and
   Owner shall have no right, power or authority to assign or delegate this
   Agreement or any portion hereof, either voluntarily or involuntarily, or by
   operation of law. Notwithstanding the foregoing, Owner may assign this
   Agreement or any of its duties arising hereunder to another party, provided
   it first obtains the prior written consent of Contractor, which consent
   will not be unreasonably withheld if Owner provides evidence to Contractor
   that the assignee has the financial strength and expertise to perform
   Owner's obligations and duties to the level anticipated of Owner.  Any such
   assignment by Owner shall not release Owner from any of its obligations
   hereunder.  Notwithstanding the foregoing, Contractor hereby consents to
PAGE

   the collateral assignment of this Agreement to the Financing Parties and
   agrees to provide such acknowledgments and consents in respect of such
   collateral assignment as the Financing Parties or their counsel may from
   time to time reasonably require.  In the event of such collateral
   assignment, Contractor hereby consents to the exercise of the Financing
   Parties' rights under such collateral assignment and replacement of Owner
   with a new owner hereunder, provided, that such new owner has the financial
   strength and expertise to perform Owner's obligations and duties to the
   level anticipated of Owner.  Upon request of Owner or any permitted
   assignee, Contractor will further evidence its consent by execution of an
   assignment or other instrument reasonably acceptable to Contractor and the
   permitted assignee.

        16.2 Performance in Favor of Financing Parties.  Subject to all
   defenses and rights Contractor may have against Owner, Contractor agrees
   that in the event of a default by Owner under the terms and conditions of
   any agreement between Owner and any Financing Party, the Financing Parties
   shall be entitled to use and enforce this Agreement, as the same may be
   amended or supplemented before or after such default, all without
   additional cost to the Financing Parties.  In the event any Financing Party
   notifies Contractor in writing that Owner has defaulted under any agreement
   between Owner and the Financing Parties and requests Contractor to continue
   performance under this Agreement, Contractor shall thereafter perform
   hereunder in accordance with the terms and provisions hereof, so long as
   Contractor shall be paid in accordance with this Agreement for the Work
   performed hereunder, including payment of any sums due to Contractor for
   Work performed to and including the date of Owner's default and so long as
   such Financing Parties agree in writing to continue to pay Contractor for
   Work performed in accordance with this Agreement. 

        16.3 Successors and Assigns.  All of the rights, benefits, duties,
   liabilities and obligations of the Parties hereto shall inure to the
   benefit of and be binding upon their respective successors and permitted
   assigns.

        16.4 Assignment to Contractor Affiliates.  Notwithstanding anything to
   the contrary in this Agreement, Contractor may subcontract or assign all or
   any portion of its rights and obligations under this Agreement to an
   affiliated or associated company of Contractor but shall in all events
   remain liable for the performance of Contractor's obligations hereunder.
   If Contractor makes any such subcontract or assignment, all liability
   protections, releases, and disclaimers for the benefit of Contractor under
   this Agreement shall also be for the benefit of said affiliated or
   associated company.  Owner acknowledges and agrees that the obligations and
   liabilities of Contractor, as well as the limitations thereon, all as set
   forth in this Agreement, shall be applicable to Contractor's associated or
   affiliated companies to the same extent as if such associated or affiliated
   companies were a signatory to this Agreement.


                                   ARTICLE 17
                                Design Documents

        17.1 Owner Review.  Neither (a) the review by Owner of any information
   or calculations nor (b) Owner's certification of Mechanical Completion, IPT
   No. 1 Success, IPT No. 2 Success, IPT No. 3 Success or Project Acceptance
   nor (c) Owner's payment of the Deferrable Portion shall constitute a waiver
   of, or release Contractor from, any liability hereunder for errors or
PAGE

   omissions contained in any designs or calculations by Contractor or by any
   Subcontractor, including any errors or omissions contained in the Final
   Drawings and Documentation. Notwithstanding anything to the contrary herein
   contained, Owner shall not be liable for and makes no representation with
   respect to any designs and specifications for the Overall Project,
   including any designs and specifications prepared by Contractor and
   reviewed or accepted by Owner, and including any designs and specifications
   set forth in the Contract Documents. With respect to all aspects of Project
   design, Contractor must create designs and solutions that comply with
   Applicable Laws and the other requirements of this Agreement.  Owner's
   acceptance of the Overall Project shall not relieve Contractor of its
   obligation for such compliance.  Notwithstanding the above, Owner agrees
   that its review and approvals or rejection  shall be within the times
   specified therefor in the Contract Documents or, if no time is specified, a
   reasonable time, and if not performed within such times, the item subject
   to such review and approval or rejection shall be deemed approved.

        17.2 Final Drawings and Documentation.  Within ninety (90) days after
   achievement of Project Acceptance, Contractor shall furnish to Owner CAD
   disks and reproducible mylars of the Final Drawings and Documentation.
   Without limiting the requirements otherwise applicable to the Final
   Drawings and Documentation hereunder, the Final Drawings and Documentation
   shall completely and accurately, in all material respects, show and
   describe all electrical power, control and protection systems and all wired
   instrumentation and monitoring control systems within the Project.
   Contractor shall incorporate into the Final Drawings and Documentation all
   material changes or corrections to the Work made at the Project Site prior
   to Project Acceptance so as to represent the completed Project completely
   and accurately in all material respects.  Contractor shall establish such
   systems and retain such personnel as are necessary to maintain full quality
   control and quality assurance with respect to the Final Drawings and
   Documentation.

        17.3 Ownership.  Contractor agrees that all Design Documents, the
   Final Drawings and Documentation, and other documents prepared by
   Contractor and used in the performance of the Work hereunder shall be the
   sole and exclusive property of Owner and shall not be used by Contractor in
   connection with any other project without Owner's prior written consent.
   Contractor agrees that all such documents, as well as any drawings,
   tracings, specifications, calculations, memoranda, data, notes and other
   materials that are supplied by Owner and come into the possession of
   Contractor, shall be delivered to Owner at the earlier of Project
   Acceptance or termination of the Work hereunder if not previously delivered
   hereunder, except to the extent Owner shall instruct Contractor not to
   deliver such materials.  Owner may not without Contractor's prior written
   consent copy or disseminate such materials in connection with any project
   other than the Overall Project; provided that in any event Contractor shall
   have no liability for the use of such material for any project other than
   the Overall Project.

        17.4 Use of Documents by Contractor.  Contractor shall be entitled to
   retain and use solely and specifically in connection with the Work
   hereunder and for enhancement of its engineering files a reproducible set
   of all Design Documents, the Final Drawings and Documentation, and other
   documents delivered to Owner by Contractor in accordance with this Article
   .
PAGE

                                   ARTICLE 18
                                   Inspection

        18.1 Project Inspection.  Contractor acknowledges, subject to the
   provisions of Articles  and  and Sections ,  and  hereof, that prior to the
   execution of this Agreement Contractor (a) has made a complete and careful
   examination of the Project Site and the surrounding areas and the drawings
   and specifications and other information set forth in the Contract
   Documents, (b) has made a complete and careful examination to determine the
   difficulties and hazards incident to the performance of the Work hereunder,
   including without limitation (i) the location of the Project, (ii) the
   condition of the Project Site and the surrounding areas, (iii) the
   proximity of the Project to adjacent facilities and structures, (iv) the
   nature and character of the soil, terrain, and subsurface conditions of the
   Project Site, (v) the conditions of the roads, waterways and railroads in
   the vicinity of the Project Site, including the conditions affecting
   shipping and transportation, access, disposal, handling and storage of
   materials, (vi) the labor conditions in the region of the Project Site,
   (vii) Applicable Laws, Applicable Permits and the Real Estate Rights and
   (viii) the local weather conditions based upon previous weather data, and
   (c) has determined to Contractor's satisfaction the nature and extent of
   such difficulties and hazards.


                                   ARTICLE 19
                               Dispute Resolution

        19.1 Arbitration.  Any claim or controversy between Owner and
   Contractor not exceeding Five Hundred Thousand Dollars ($500,000) in
   claimed value shall be submitted to binding arbitration upon the written
   notice of either Party delivered to the other of such Party's intention to
   arbitrate, the nature of the dispute, the amount claimed and the decision
   sought.  Such arbitration shall be conducted in accordance with the
   Construction Industry Arbitration Rules of the American Arbitration
   Association and Expedited Procedures thereunder and the Federal Arbitration
   Act, 9 U.S.C. Section 1 et. seq.  The notice of intent to arbitrate also
   shall specify the name and address of an arbitrator selected by the Party
   requesting arbitration.  The other Party shall within ten (10) Business
   Days of receipt of the arbitration notice select its arbitrator; provided
   that if it fails to do so, the arbitrator appointed by the Party requesting
   arbitration shall serve as the sole arbitrator of the dispute. However, if
   both parties name an arbitrator, the two arbitrators thus selected shall
   within ten (10) Business Days of the selection of the second arbitrator
   select the third arbitrator.  All arbitrators shall be qualified,
   independent and neutral. The decision of any two of the three arbitrators
   on any issue shall be final. Unless the parties otherwise agree, all
   arbitration proceedings shall be held in Milwaukee, Wisconsin.  Owner and
   Contractor shall proceed with any arbitration expeditiously.  All
   conclusions and decisions of the arbitrators shall be made consistent with
   applicable legal principles and the arbitrators' good faith interpretation
   of the terms and provisions of this Agreement.  The award of the
   arbitrators will be final and binding on both parties and may be enforced
   in any court having jurisdiction over the Party against which enforcement
   is sought. Each Party shall bear its own expenses, including but not
   limited to counsel fees and witness fees.  If the arbitrators determine
   that the claim or defense of either Party was frivolous (i.e., without
   justifiable merit), they may require that the Party at fault pay or
   reimburse the other Party for costs of the arbitration in whole or in part,
PAGE

   except that all expenses of the arbitration shall be apportioned in the
   award of the arbitrators based upon the respective merit of the positions
   of the parties. Notwithstanding the foregoing, equitable remedies,
   including injunction and specific performance, shall be available to the
   parties by judicial proceedings at any time and, for this purpose and for
   the purpose of enforcing any arbitral award or decision, the parties hereby
   submit to the exclusive jurisdiction and venue of the federal  courts in
   Milwaukee, Wisconsin.  The parties also submit to the exclusive
   jurisdiction and venue of the federal and state courts in Milwaukee,
   Wisconsin, regarding any dispute between the parties where the claimed
   amount in controversy exceeds Five Hundred Thousand Dollars ($500,000).
   The provisions of this Section  shall survive the termination or expiration
   of this Agreement.
        Owner and Contractor agree that any arbitration or litigation between
   Owner and Contractor may include by consolidation, joinder or any other
   manner, parties other than Owner and Contractor, including but not limited
   to Rust, substantially involved in a common question of fact or law.  If
   Rust shall be brought into any such arbitration proceeding Rust shall be
   entitled to select the third arbitrator in lieu of Contractor's and Owner's
   selected arbitrators choosing the third arbitrator.

        Owner and Contractor agree that any arbitration or litigation between
   Contractor and Rust may include, by consolidation, joinder or any other
   manner, Owner, and Owner agrees to become a party to any such proceeding if
   such proceeding includes a common question of fact or law relating to Owner
   or the Work.  If Owner shall be brought into any such arbitration
   proceeding Owner shall be entitled to select the third arbitrator in lieu
   of Contractor's and Rust's selected arbitrators choosing the third
   arbitrator.

        Any party in an arbitration proceeding under this Section 19.1 may
   serve upon any other party a request for the production of documents and
   things and for entry upon land for inspection and other purposes as
   permitted by and in accordance with the procedure set forth in Rule 34 of
   the Federal Rules of Civil Procedure in effect at the time the request is
   made.  The enforcement of and objections to such request shall be made to
   the arbitrators and the arbitrators only shall issue such orders as they
   deem necessary on objections and on requests for enforcement of production
   both prior to and after the commencement of the hearing.

        In the event of any court proceeding between Owner and Contractor
   relating to the Work or this Agreement, neither party may claim the right
   to a trial by jury, and both parties waive any right they may have under
   Applicable Law or otherwise to a right to a trial by a jury.

        19.2 Continuation of Work.  Contractor shall continue its performance
   of the Work on a timely basis in accordance with the Project Schedule and
   Owner shall continue to make payments on a timely basis in accordance with
   the terms of this Agreement during any dispute which may arise between
   Owner and Contractor concerning the Overall Project.
PAGE

                                   ARTICLE 20
                                  Cost Records

        20.1 GAAP.  Owner and Contractor shall maintain their respective
   fiscal records and books of account pertaining to the Overall Project in
   accordance with generally accepted accounting principles as applied in the
   United States consistently applied.

        20.2 Inspection of Contractor's Books and Records.
   Contractor covenants and agrees to keep and maintain full, complete and
   detailed records of all of its costs and allowances pertaining to Scope
   Changes.  Contractor authorizes Owner and independent third parties
   designated by Owner to inspect and audit during business hours, all of its
   records and books of account pertaining to the Overall Project to the
   extent reasonably necessary to (i) establish or verify the amounts of
   cost-plus Scope Change Orders, (ii) assemble data required to be submitted
   to federal, state or other governmental agencies and (iii) calculate
   income, ad valorem or other taxes, prepare returns in connection therewith
   or obtain exemptions therefrom. Such records, books and accounts shall be
   preserved by Contractor for a period of three (3) years after Project
   Acceptance, at no additional cost to Owner, and subject to such Owner
   inspection and audit during such period.  All expenses of an audit by Owner
   shall be paid by Owner.

        20.3 Inspection of Owner's Books and Records.  Owner authorizes
   Contractor and independent third parties designated by Contractor to
   inspect and audit during business hours, all of its records and books of
   account pertaining to the Overall Project to the extent reasonably
   necessary to establish or verify the amounts of Price-Adjusted Project Cash
   Flow and Available Cash. Such records, books and accounts shall be
   preserved by Owner for so long as Contractor may have contingent rights to
   the payment of the Deferrable Portion pursuant to Section  hereof or any
   bonuses pursuant to Section  hereof, at no additional cost to Contractor,
   and subject to Contractor inspection and audit during such period.  All
   expenses of an audit by Contractor shall be paid by Contractor.


                                   ARTICLE 21
                             Independent Contractor

        21.1 Contractor as Independent Contractor.  Contractor shall be an
   independent contractor with respect to the Project, each part thereof, and
   the Work hereunder, and neither Contractor, nor its Subcontractors, nor the
   employees of any of them shall be deemed to be agents, representatives,
   employees or servants of Owner in the performance of the Work or any other
   services dealt with herein.  Owner shall not have the right to control the
   methods or means by which Contractor or any agent, representative,
   Subcontractor, or employee of Contractor or any Subcontractor conducts its
   independent business operations.  Owner and Contractor covenant and agree
   that in the performance of the Work by Contractor, Contractor shall not
   perform any act or make any representation to any Person to the effect that
   Contractor or any of its agents, representatives or Subcontractors is the
   agent of Owner.
PAGE

                                   ARTICLE 22
                         Representations and Warranties

        22.1 Representations and Warranties of Contractor.  Contractor
   represents and warrants to Owner that as of the date of this Agreement:

             22.1.1    Organization and Qualification.  Contractor is a
   corporation duly organized, validly existing and in good standing under the
   laws of the State of Delaware, and has the lawful power to engage in the
   business it presently conducts and contemplates conducting.  Contractor is
   duly licensed or qualified in each jurisdiction wherein the nature of the
   business transacted by them makes such licensing or qualification
   necessary.

             22.1.2    Power and Authority.  Contractor has the requisite
   power to make and carry out this Agreement and to perform its obligations
   hereunder and all such actions have been duly authorized by all necessary
   partnership action.

             22.1.3    No Conflict.  The execution, delivery and performance
   of this Agreement by Contractor (assuming issuance of Applicable Permits in
   due course upon application therefor) will not conflict with Contractor's
   governing documents, any Applicable Laws or any covenant, agreement,
   understanding, decree or order to which Contractor is a party or by which
   Contractor is bound or affected.

             22.1.4    Validity and Binding Effect.  This Agreement has been
   duly and validly executed and delivered by Contractor.  This Agreement
   constitutes a legal, valid and binding obligation of Contractor,
   enforceable in accordance with its terms.  No authorization, approval,
   exemption or consent by any governmental or public body or authority (other
   than the Applicable Permits) is required in connection with the
   authorization, execution, delivery and carrying out by Contractor of the
   terms of this Agreement.

             22.1.5    Litigation.  There are no actions, suits, proceedings
   or investigations pending or, to the knowledge of Contractor, threatened
   against Contractor at law or in equity before any court or before any
   federal, state, municipal or other governmental department, commission,
   board, agency or instrumentality, whether or not covered by insurance,
   which individually or in the aggregate are reasonably likely to have a
   materially adverse effect on the business, properties or assets or the
   condition, financial or otherwise, of Contractor or to result in any
   material impairment of Contractor's ability to perform its obligations
   under this Agreement.  Contractor has no knowledge of any violation or
   default with respect to any order, writ, injunction or decree of any court
   or any federal, state, municipal or other governmental department,
   commission, board, agency or instrumentality which is reasonably likely to
   have such a materially adverse effect or to result in such material
   impairment.

             22.1.6    Patents; Licenses; Franchises.  Subject to the
   provisions of Section  hereof, Contractor owns or possesses or intends to
   obtain necessary rights in all the patents, trademarks, service marks,
   trade names, copyrights, licenses, franchises, permits and rights with
   respect to the foregoing necessary to perform the Work.
PAGE

             22.1.7    Compliance with Laws.  Contractor has complied with all
   Applicable Laws such that Contractor is not subject to any fines,
   penalties, injunctive relief or criminal liabilities which in the aggregate
   have materially affected or are reasonably likely to have a materially
   adverse effect upon the business operations or financial condition of
   Contractor or Contractor's ability to perform the Work or other services
   hereunder.

             22.1.8    Surety Performance.  No surety of Contractor has been
   called upon to perform any Work required to be performed by Contractor. 

             22.1.9    Disclosure.  No representation or warranty by
   Contractor contained herein or in any other document furnished by
   Contractor to Owner contains or will contain any untrue statement of
   material fact or omits or will omit to state a material fact necessary to
   make such representation or warranty not misleading in light of the
   circumstances under which it was made.  All financial and other information
   furnished by Contractor to Owner is true and correct in all material
   respects.

        22.2 Representations and Warranties of Owner.  Owner represents and
   warrants to Owner that as of the date of this Agreement:

             22.2.1    Organization and Qualification. Owner is duly formed,
   validly existing and in good standing under the laws of the State of
   Delaware and has the lawful power to engage in the business it presently
   conducts and contemplates conducting.  Owner is duly licensed or qualified
   in each jurisdiction wherein the nature of the business transacted by them
   makes such licensing or qualification necessary.

             22.2.2    Power and Authority.  Owner has the partnership power
   to make and carry out this Agreement and to perform its obligations
   hereunder and all such actions have been duly authorized by all necessary
   partnership action.

             22.2.3    No Conflict.  The execution, delivery and performance
   of this Agreement by Owner (assuming issuance of Applicable Permits in due
   course upon application therefor) will not conflict with Owner's governing
   documents, any Applicable Laws or any covenant, agreement, understanding,
   decree or order to which Owner is a party or by which Owner is bound or
   affected.

             22.2.4    Validity and Binding Effect.  This Agreement has been
   duly and validly executed and delivered by Owner.  This Agreement
   constitutes a legal, valid and binding obligation of Owner, enforceable in
   accordance with its terms.  No authorization, approval, exemption or
   consent by any governmental or public body or authority (other than the
   Applicable Permits) is required in connection with the authorization,
   execution, delivery and carrying out by Owner of the terms of this
   Agreement.

             22.2.5    Litigation.  There are no actions, suits, proceedings
   or investigations pending or, to the knowledge of Owner, threatened against
   Owner at law or in equity before any court or before any federal, state,
   municipal or other governmental department, commission, board, agency or
   instrumentality, whether or not covered by insurance, which individually or
   in the aggregate are reasonably likely to have a materially adverse effect
PAGE

   on the business, properties or assets or the condition, financial or
   otherwise, of Owner or to result in any impairment of Owner's ability to
   perform its obligations under this Agreement.  Owner has no knowledge of
   any violation or default with respect to any order, writ, injunction or
   decree of any court or any federal, state, municipal or other governmental
   department, commission, board, agency or instrumentality which is
   reasonably likely to have such a materially adverse effect or to result in
   such impairment.

             22.2.6    Patents; Licenses; Franchises.  Owner owns or possesses
   all the patents, trademarks, service marks, trade names, copyrights,
   licenses, franchises, permits and rights with respect to the foregoing
   necessary to carry on its business as presently conducted and presently
   planned to be conducted without conflict with the rights of others.

             22.2.7    Compliance with Laws.  Owner has complied with all
   Applicable Laws such that Owner is not subject to any fines, penalties,
   injunctive relief or criminal liabilities which in the aggregate have
   materially affected or are reasonably likely to have a materially adverse
   effect upon the business operations or financial condition of Owner.

             22.2.8    Disclosure.  No representation or warranty by Owner
   contained herein or in any other document furnished by Owner to Contractor
   contains or will contain any untrue statement of material fact or omits or
   will omit to state a material fact necessary to make such representation or
   warranty not misleading in light of the circumstances under which it was
   made.  All financial and other information furnished by Owner to Contractor
   is true and correct in all material respects.


                                   ARTICLE 23
                                  Miscellaneous

        23.1 Confidentiality.  Prior to the execution of this Agreement,
   Contractor has executed a confidentiality agreement, substantially in the
   form attached hereto as Schedule , with Owner, providing for the
   confidentiality of information pertaining to the Overall Project (the
   "Confidentiality Agreement").  The Confidentiality Agreement shall continue
   in full force and effect in accordance with its terms, and shall survive
   any termination of this Agreement.

        23.2 Publicity Releases; Information.  Contractor shall not, and shall
   not permit any Subcontractor to, issue any press or publicity release or
   any advertisement (other than for labor for the Project), or publish,
   release or disclose any photograph concerning this Agreement or the Overall
   Project except in accordance with the Confidentiality Agreement or with the
   consent of the Owner, such consent not to be unreasonably withheld.  Other
   than information disclosed in connection with the offering and sale of the
   Bonds, other indebtedness and equity interests of Owner or delivered to any
   Financing Parties, Owner shall not issue any press or publicity release or
   any advertisement, or publish, release or disclose any photograph or other
   information, concerning this Agreement or the Overall Project except in
   accordance with the Confidentiality Agreement.  Each of Contractor and
   Owner shall give prior notice to the other of any information contained in
   documents filed with public authorities or any other public disclosure that
   could result in the dissemination of confidential information; provided,
   however, that disclosures made pursuant to any federal or state securities
PAGE

   laws or regulations or pursuant to the rules of any securities exchange may
   be made by either party without the consent of the other.

        23.3 Estoppel Certificate.  Contractor shall at any time and from time
   to time furnish promptly upon request by Owner, or any Financing Party a
   written statement in such form as may be reasonably required by the
   requesting party and reasonably acceptable to Contractor stating that this
   Agreement is a valid and binding obligation of Contractor, enforceable
   against Contractor in accordance with its terms; that this Agreement has
   not been released, subordinated or modified; and that there are no offsets
   or defenses against the enforcement of this Agreement against Contractor;
   or if any of the foregoing statements are untrue, specifying the reasons
   therefor.

        23.4 Waivers.  No failure to exercise, and no delay in exercising, any
   right, power or remedy under the Contract Documents shall impair any right,
   power or remedy that any party hereto may have, nor shall such failure or
   delay be construed to be a waiver of any such rights, powers or remedies or
   an acquiescence in any breach or default under the Contract Documents, nor
   shall any waiver of any breach or default be deemed a waiver of any default
   or breach subsequently occurring under the Contract Documents.

        23.5 Choice of Law.  THIS AGREEMENT AND THE RIGHTS AND DUTIES OF THE
   PARTIES HEREUNDER AND/OR ARISING FROM OR RELATING IN ANY WAY TO THE
   TRANSACTIONS EVIDENCED BY THE CONTRACT DOCUMENTS SHALL BE GOVERNED BY AND
   CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN, INCLUDING
   ALL MATTERS OF INTERPRETATION, VALIDITY AND PERFORMANCE, WITHOUT GIVING
   EFFECT TO ANY CHOICE OF LAW RULES THEREOF THAT MAY DIRECT THE APPLICATION
   OF THE LAWS OF ANOTHER JURISDICTION.

        23.6 Severability.  In the event that any of the provisions, or
   portions or applications thereof or of any of the Contract Documents is
   held to be unenforceable or invalid by any court of competent jurisdiction,
   Owner and Contractor shall negotiate an equitable adjustment in the
   affected provisions of the Contract Documents with a view toward effecting
   the purpose of this Agreement, and the validity and enforceability of the
   remaining provisions, or portions or applications hereof, shall not be
   affected thereby.

        23.7 Notice.  Unless otherwise expressly required or permitted by the
   Contract Documents, any notice required or permitted to be given by
   Contractor to Owner hereunder shall be in writing and shall be addressed to
   Owner c/o Great Lakes Pulp & Fibre, Inc. at:

             P.O. Box 277
             701 Fourth Avenue
             Menominee, Michigan 49858
             Attention:  Thomas Kuber/Ronald A. Beyer

             Telephone: (906) 863-8137
             Telecopy: (906) 863-7488
PAGE

   and any notice required or permitted to be given by Owner to Contractor
   hereunder shall be in writing and shall be addressed to Contractor at:

             Fiberprep, Inc.
             25 Constitution Drive
             Tauton, MA  02780
             Attention:  Ed Healy, President

             Telephone: (508) 823-3358
             Telecopy: (508) 823-4155

   with a copy to 

             Thermo Electron Corporation
             81 Wyman Street
             Waltham, MA 02254-9046
             Attention: Treasurer

             Telephone: (617) 622-1150
             Telecopy Number: (617) 622-1207


             Unless otherwise expressly required or permitted by the Contract
   Documents, all notices shall be by writing and delivered (a) in person to
   the party above mentioned, (b) via certified mail with a return receipt
   requested in a securely sealed envelope and postage prepaid, (c) by
   expedited delivery service with proof of delivery, or (d) by prepaid
   telegram, telex or telecopy.  A notice shall be deemed delivered either at
   the time of personal delivery or, in the case of delivery service or mail,
   as the date of first attempted delivery at the address provided herein, or
   in the case of telegram, telex or telecopy, upon receipt.  Each Party, by
   notice to the other Party, may designate, from time to time, another
   address or office to which notices may be given pursuant to this Agreement.

        23.8 Headings.  The Article and Section headings herein have been
   inserted for convenience of reference only and shall not in any manner
   affect the construction, meaning or effect of the provisions herein
   contained nor govern the rights and liabilities of the parties hereto.

        23.9 Entire Agreement.  The Contract Documents contain the entire
   agreement between Owner and Contractor with respect to the Overall Project,
   and supersede any and all prior and contemporaneous written and oral
   agreements, proposals, negotiations, understandings and representations
   pertaining to the Overall Project.

        23.10     Amendments.  No amendments or modifications of the Contract
   Documents shall be valid unless evidenced by a Scope Change Order or by a
   written instrument signed by a duly authorized representative of the party
   against whom enforcement is sought.

        23.11     Conflicting Provisions.  Within the Design Documents,
   large-scaled drawings shall control over smaller-scaled drawings, figured
   dimensions on the drawings shall control over scaled dimensions and noted
   materials shall control over graphic representations.  Subject to the
   provisions of Section  hereof, where an irreconcilable conflict exists
   among Applicable Laws, this Agreement, the drawings included in the Design
   Documents and the specifications in the Design Documents, the earliest item
PAGE

   mentioned in this sentence involving a conflict shall control over any
   later mentioned item or items subject to such conflict.

        23.12     No Third-Party Rights.  The Contract Documents and all
   rights thereunder are intended for the sole benefit of Owner and Contractor
   and (to the extent provided in Article  hereof) for the benefit of the
   Financing Parties and (to the extent provided in Article  hereof) the
   Indemnified Parties and Contractor Indemnified Parties and (to the extent
   provided in Section  hereof) the Partners and shall not under any
   circumstances imply or create any rights on the part of, or obligations to,
   or any undertakings of any nature whatsoever for the benefit of, any other
   Person or any other rights on the part of, or other obligations to, or any
   undertakings of any nature whatsoever for benefit of, the Financing
   Parties, the Indemnified Parties and the Contractor Indemnified Parties
   beyond the rights and obligations expressly set forth in such provisions.

        23.13     Survival of Provisions.  All provisions of the Contract
   Documents which are expressly or by implication to come into or continue in
   force and effect after the expiration or termination of this Agreement
   shall remain in effect and be enforceable following such expiration or
   termination.

        23.14     Title to the Project.  Title to all materials, supplies,
   equipment and machinery used in connection with the Work and purchased
   directly by Contractor or Subcontractors in their names which become a
   permanent part of the Project shall vest in Owner upon the earlier of (i)
   full payment therefor by Contractor and payment to Contractor of the
   Scheduled Payment related thereto, or (ii) full payment therefor by Owner.
   Title to water, soil, rock, gravel, sand, minerals, timber and any other
   resources developed or obtained in the excavation or the performance by
   Contractor of the Work and the right to use said items or dispose of the
   same is hereby expressly vested in and reserved by Owner.  Contractor shall
   not have any right, title or interest in said resources.

        23.15     Schedules.  All schedules attached to this Agreement are
   made a part hereof for all purposes.
PAGE

        IN WITNESS WHEREOF, Owner and Contractor, intending to be legally
   bound, have caused this Agreement to be executed by their duly authorized
   representatives as of the date indicated below and to be effective as of
   the day and year first above written.


                                           OWNER:

                                           GREAT LAKES PULP PARTNERS I, L.P.

                                           BY: GREAT LAKES MANAGEMENT
                                                COMPANY, LLC.
                                                its general partner


                                           BY:GREAT LAKES PULP & FIBRE, INC.
                                              its Member


                                           By: Thomas J. Kuber
                                               ---------------------------
                                               Thomas J. Kuber
                                               President


                                           CONTRACTOR:

                                           THERMO ELECTRON CORPORATION


                                           By: William A. Rainville
                                               ----------------------------
                                               Name: William A. Rainville
                                               Title: Senior Vice President
                                               

EX-10.25

                                                                 Exhibit 10.25

                           THERMO ELECTRON CORPORATION

                           DIRECTORS STOCK OPTION PLAN

            (As amended and restated effective as of January 1, 1995)


   1.   Purpose

        The purpose of this Directors Stock Option Plan (the "Plan") of Thermo
   Electron Corporation (the "Company") is to encourage ownership in the
   Company and its publicly-traded majority-owned subsidiaries by
   non-management directors of the Company whose services are considered
   essential to the Company's growth and progress and to provide them with a
   further incentive to become directors and to  continue as directors of the
   Company.  The Plan is intended to be a nonstatutory stock option plan.

   2.   Administration

        The Board of Directors, or a Committee (the "Committee") consisting of
   two or more directors of the Company appointed by the Board of Directors,
   shall supervise and administer the Plan.  Grants of stock options under the
   Plan and the amount and nature of the options to be granted shall be
   automatic in accordance with Section 5.  Within such constraint, the
   Committee shall have full power to interpret and administer the Plan, to
   prescribe, amend and rescind rules and regulations relating to the Plan or
   any stock options granted under it, determine the terms and conditions of
   stock options (including terms and conditions relating to events of merger,
   consolidation, dissolution and liquidation, change of control, vesting and
   forfeiture), any term or condition of an option, cancel an existing grant
   in whole or in part with the consent of an optionee, accelerate the vesting
   or lapse of restrictions and adopt the form of instruments evidencing
   options granted under the Plan and change such forms from time to time.
   All questions of interpretation of the Plan or of any stock options granted
   under it shall be determined by the Board of Directors or the Committee and
   such determination shall be final and binding upon all persons having an
   interest in the Plan.

   3.   Participation in the Plan

        Directors of the Company who are not employees of the Company or any
   subsidiary or parent of the Company shall be eligible to participate in the
   Plan.  Directors who receive grants of stock options in accordance with
   this Plan are sometimes referred to herein as "Optionees."

   4.   Stock Subject to the Plan

        The maximum number of shares which may be issued under the Plan shall
   be two hundred thousand (200,000) shares of the Company's $1.00 par value
   Common Stock (the "Company Common Stock"), and one hundred thousand
   (100,000) shares of each of the Corporation's majority-owned subsidiaries,
   whether presently existing or formed in the future ("Subsidiary Common
   Stock"; Company Common Stock and Subsidiary Common Stock (are collectively
   referred to herein as "Common Stock") subject to adjustment as provided in
   Section 9 of the Plan.  Shares of Company Common Stock to be issued upon
   the exercise of options granted under the Plan may be either authorized but
   unissued shares or shares held by the Company in its treasury.  Shares of
PAGE

   Subsidiary Common Stock to be issued upon the exercise of options granted
   under the Plan shall be shares beneficially owned by the Company.  If any
   option expires or terminates for any reason without having been exercised
   in full, the unpurchased shares subject thereto shall again be available
   for options thereafter to be granted.

   5.   Terms and Conditions

        A.   Company Stock Option Grants

        Each Director of the Company who meets the requirements of Section 3
   and who is holding office immediately following the Annual Meeting of
   Stockholders shall be granted an option to purchase 1,000 shares of Company
   Common Stock at the close of business on the date of such Annual Meeting.
   Options granted under this Subsection A shall be exercisable as to 100% of
   the shares subject to the option as set forth in Section 5(C), but shares
   acquired upon exercise are subject to repurchase by the Company at the
   exercise price if the Director ceases to serve as a Director of the Company
   or any of its majority-owned subsidiaries prior to the first anniversary of
   the grant date, for any reason other than death.

        B.   Subsidiary Stock Option Grants

             Each Director of the Company who meets the requirements of
   Section 3 and who is holding office immediately following the Annual
   Meeting of Stockholders shall be granted an option to purchase that number
   of shares of the Common Stock of each majority-owned subsidiary of the
   Corporation, the common stock of which shall have become publicly traded or
   a portion of which shall have been sold primarily to third parties in a
   private placement or other arms-length transaction (such transaction being
   referred to herein as a "Spinout Transaction", and such subsidiary being
   referred to herein as a "Spinout Subsidiary") set forth below in accordance
   with the following schedule at the close of business on the date of the
   Annual Meeting occurring in the following years:

   Year of Annual Meeting                  Subsidiary in which options granted

   1993 and 1998                           Thermo Fibertek Inc.
                                           ThermoTrex Corporation

   1994 and 1999                           Thermedics Inc.
                                           Thermo Power Corporation
                                           Thermo Remediation Inc.
   1995 and 2000                           Thermo Instrument Systems Inc.
                                           Thermo Voltek Corp.
                                           ThermoLase Corporation
                                           Thermo Ecotek Corporation

   1996 and 2001                           Thermo Process Systems Inc.

   1997 and 2002                           Thermo Cardiosystems Inc.

        In the event a majority-owned subsidiary of the Corporation shall
   become a "Spinout Subsidiary" following the adoption of this Plan, then the
   subsidiary shall be added to the foregoing schedule and options to purchase
   its common stock shall be granted at the first Annual Meeting of
   Stockholders of the Company next following the date of such subsidiary's
   "Spinout Transaction".
PAGE

        The number of shares to be granted under this subsection B shall be
   determined in accordance with the following formula:  (a) if the Spinout
   Subsidiary is a majority-owned subsidiary of Thermo Electron directly or
   through a wholly-owned subsidiary, then the number of shares to be granted
   subject to option shall be 1,500 shares; and (b) if the Spinout Subsidiary
   is a majority-owned subsidiary of Thermo Electron indirectly through one or
   more majority-owned subsidiaries, then the number of shares to be granted
   subject to option shall be 1,000 shares.

        Options granted under this Section 5(B) shall vest and be exercisable
   as to 100% of the shares of common stock subject to the option on the
   fourth anniversary of the grant date of the option, unless, prior to such
   anniversary, the underlying common stock shall have been registered under
   Section 12 of the Securities and Exchange Act of 1934, as amended (referred
   to herein as "Section 12 Registration").  From and after 90 days after the
   effective date of Section 12 Registration, options granted hereunder shall
   be immediately exercisable as to 100% of the shares subject to the option,
   subject to the right of the Company to repurchase the shares at the
   exercise price in the event the Optionee ceases to serve as a director of
   the Company, or any subsidiary of the Company or Thermo Election during the
   option term.  The right of the Company to so repurchase the shares shall
   lapse as to one-fourth of the shares granted on each of the first, second,
   third and fourth anniversaries of the grant date of the option, provided
   the Optionee has remained continuously a director of the Company, Thermo
   Electron or any subsidiary of Thermo Electron since the grant date.  In all
   other respects, the option shall be subject to the general terms and
   conditions applicable to all option grants as set forth below in Section
   5(C), including the determination of the exercise price of such option.

        No Director, who is otherwise eligible under Section 3, shall be
   eligible under this subsection B to receive grants of stock options in
   subsidiaries on which he or she is then serving as a Director.

        C.   General Terms and Conditions Applicable to All Grants

        1.   The option shall be exercisable at any time from and after the
             later of the date that is the six-month anniversary of the grant
             date and prior to the date which is the earliest of:

             (a) three years after the grant date for options granted under
             Section 5(A) and five years after the grant date for options
             granted under Section 5(B), (b) three months after the date the
             Optionee ceases to be a Director of the Company or any subsidiary
             or parent corporation of the Company (six months in the event the
             Optionee ceases to meet these requirements by reason of his
             death), or (c) the date of dissolution or liquidation of the
             Company.

        2.   The exercise price at which Options are granted hereunder shall
             be the average of the closing prices reported by the national
             securities exchange on which the Common Stock subject to option
             is principally traded for the five trading days immediately
             preceding and including the date the option is granted or, if
             such security is not traded on an exchange, the average last
             reported sale price for the five-day period on the NASDAQ
             National Market List, or the average of the closing bid prices
             for the five-day period last quoted by an established quotation
             service for over-the-counter securities, or if none of the above
PAGE

             shall apply, the last price paid for shares of the common stock
             by independent investors in a private placement; provided,
             however, that such exercise price per share shall not be lower
             than the par value per share or less than 50% of the fair market
             value of the Common Stock until such time as the Company elects
             to be subject to Rule 16b-3 as amended by SEC Rel. No. 33-28869.

        3.   All options shall be evidenced by a written agreement
             substantially in such form as shall be approved by the Board of
             Directors or Committee, containing terms and conditions
             consistent with the provisions of this Plan.

   6.   Exercise of Options

        A.   Exercise/Consideration

             An option may be exercised in accordance with its terms by
   written notice of intent to exercise the option, specifying the number of
   shares of Common Stock with respect to which the option is then being
   exercised.  The notice shall be accompanied by payment in the form of cash
   or shares of the applicable Common Stock (the "Tendered Shares") with a
   then current market value equal to the exercise price of the shares to be
   purchased; provided, however, that such Tendered Shares shall have been
   acquired by the Optionee more than six months prior to the date of exercise
   (unless such requirement is waived in writing by the Company).  Against
   such payment the Company shall deliver or cause to be delivered to the
   Optionee a certificate for the number of shares then being purchased,
   registered in the name of the Optionee or other person exercising the
   option.  If any law or applicable regulation of the Securities and Exchange
   Commission or other body having jurisdiction in the premises shall require
   the Company or the Director to take any action in connection with shares
   being purchased upon exercise of the option, exercise of the option and
   delivery of the certificate or certificates for such shares shall be
   postponed until completion of the necessary action, which shall be taken at
   the Company's expense.

        B.   Tax Withholding

        The Company shall have the right to deduct from payments of any kind
   otherwise due to the Optionee any federal, state or local taxes of any kind
   required by law to be withheld with respect to any shares issued upon
   exercise of options under the Plan.  Subject to the prior approval of the
   Company, which may be withheld by the Company in its sole discretion, the
   Optionee may elect to satisfy such obligations, in whole or in part, (i) by
   causing the Company to withhold shares of Common Stock otherwise issuable
   pursuant to the exercise of an option or (ii) by delivering to the Company
   shares of Common Stock already owned by the Optionee.  The shares so
   delivered or withheld shall have a fair market value equal to such
   withholding obligation.  The fair market value of the shares used to
   satisfy such withholding obligation shall be determined by the Company as
   of the date that the amount of tax to be withheld is to be determined.
   Notwithstanding the foregoing, no election to use shares for the payment of
   withholding taxes shall be effective unless made in compliance with any
   applicable requirements of Rule 16b-3.
PAGE

   7.   Transferability

        Options shall not be transferable, otherwise than by will or the laws
   of descent and distribution or pursuant to a qualified domestic relations
   order as defined in the Internal Revenue Code or Title I of the Employee
   Retirement Income Security Act, or the rules thereunder (a "Qualified
   Domestic Relations Order").  Options may be exercised during the life of
   the Optionee only by the Optionee or a transferee pursuant to a Qualified
   Domestic Relations Order.

   8.   Limitation of Rights to Continue as a Director

        Neither the Plan, nor the quantity of shares subject to options
   granted under the Plan, nor any other action taken pursuant to the Plan,
   shall constitute or be evidence of any agreement or understanding, express
   or implied, that the Company or any subsidiary or parent of the Company
   will retain a Director for any period of time, or at any particular rate of
   compensation.

   9.   Changes in Common Stock

        If the outstanding shares of Common Stock subject to an option are
   increased, decreased or exchanged for a different number or kind of shares
   or other securities, or if additional shares or new or different shares or
   other securities are distributed with respect to such shares of Common
   Stock or other securities, through merger, consolidation, sale of all or
   substantially all of the assets of the Company or applicable subsidiary,
   reorganization, recapitalization, reclassification, stock dividend, stock
   split, reverse stock split or other distribution with respect to such
   shares of Common Stock, or other securities, an appropriate proportionate
   adjustment shall be made (i) in the maximum number or kind of shares
   reserved for issuance under the Plan and (ii) in the number and kind of
   shares or securities subject to options then outstanding or subsequently
   granted, and in any exercise price relating to outstanding options.  No
   fractional shares will be issued under the Plan on account of any such
   adjustments.

   10.  Limitation of Rights in Option Stock

        The Optionees shall have no rights as stockholders in respect of
   shares as to which their options shall not have been exercised,
   certificates issued and delivered and payment as herein provided made in
   full, and shall have no rights with respect to such shares not expressly
   conferred by this Plan or the written agreement evidencing options granted
   hereunder.

   11.  Stock Reserved

        The Company shall at all times during the term of the options reserve
   and keep available such number of shares of Common Stock as will be
   sufficient to permit the exercise in full of all options granted under this
   Plan and shall pay all other fees and expenses necessarily incurred by the
   Company in connection therewith.
PAGE

   12.  Securities Laws Restrictions

        A.   Investment Representations

        The Company may require any person to whom an option is granted, as a
   condition of exercising such option, to give written assurances in
   substance and form satisfactory to the Company to the effect that such
   person is acquiring the common stock subject to the option for his or her
   own account for investment and not with any present intention of selling or
   otherwise distributing the same, and to such other effects as the Company
   deems necessary or appropriate in order to comply with federal and
   applicable state securities laws.

        B.   Compliance With Securities Laws

        Each option shall be subject to the requirement that if, at any time,
   counsel to the Company shall determine that the listing, registration or
   qualification of the shares subject to such option upon any securities
   exchange or under any state or federal law, or the consent or approval of
   any governmental or regulatory body, or that the disclosure of non-public
   information or the satisfaction of any other condition is necessary as a
   condition of, or in connection with, the issuance or purchase of shares
   thereunder, such option may not be exercised, in whole or in part, unless
   such listing, registration, qualification, consent or approval, or
   satisfaction of such condition shall have been effected or obtained on
   conditions acceptable to the Board of Directors.  Nothing herein shall be
   deemed to require the Company to apply for or to obtain such listing,
   registration or qualification, or to satisfy such condition.

   13.  Change in Control

        13.1 Impact of Event

        In the event of a "Change in Control" as defined in Section 13.2, the
   following provisions shall apply, unless the agreement evidencing the Award
   otherwise provides:

        (a) Any stock options awarded under the Plan that were not previously
        exercisable and vested shall become fully exercisable and vested.

        (b) Shares purchased upon the exercise of options subject to
        restrictions and to the extent not fully vested, shall become fully
        vested and all such restrictions shall lapse so that shares issued
        pursuant to such options shall be free of restrictions.

        13.2 Definition of "Change in Control"

        "Change in Control" means any one of the following events:  (i) when,
   any Person is or becomes the beneficial owner (as defined in Section 13(d)
   of the Exchange Act and the Rules and Regulations thereunder), together
   with all Affiliates and Associates (as such terms are used in Rule 12b-2 of
   the General Rules and Regulations of the Exchange Act) of such Person,
   directly or indirectly, of 25% or more of the outstanding Common Stock of
   the Company without the prior approval of the Prior Directors of the
   Company, (ii) the failure of the Prior Directors to constitute a majority
   of the Board of the Company at any time within two years following any
   Electoral Event, or (iii) any other event that the Prior Directors shall
   determine constitutes an effective change in the control of the Company.
PAGE

   As used in the preceding sentence, the following capitalized terms shall
   have the respective meanings set forth below:

        (a) "Person" shall include any natural person, any entity, any
        "affiliate" of any such natural person or entity as such term is
        defined in Rule 405 under the Securities Act of 1933 and any "group"
        (within the meaning of such term in Rule 13d-5 under the Exchange
        Act);

        (b) "Prior Directors" shall mean the persons sitting on the Company's
        Board of Directors immediately prior to any Electoral Event (or, if
        there has been no Electoral Event, those persons sitting on the
        applicable Board of Directors on the date of this Agreement) and any
        future director of the Company who has been nominated or elected by a
        majority of the Prior Directors who are then members of the Board of
        Directors of the Company; and 

        (c) "Electoral Event" shall mean any contested election of Directors,
        or any tender or exchange offer for the Company's Common Stock, not
        approved by the Prior Directors, by any Person other than the Company
        or a subsidiary of  the Company.

   14.  Amendment of the Plan

        The provisions of Sections 3 and 5 of the Plan shall not be amended
   more than once every six months, other than to comport with changes in the
   Code, the Employee Retirement Income Security Act of 1974, or the rules
   thereunder.  Subject to the foregoing, the Board of Directors may at any
   time, and from time to time, modify or amend the Plan in any respect,
   except that if at any time the approval of the Stockholders of the Company
   is required as to such modification or amendment under Rule 16b-3, the
   Board of Directors may not effect such modification or amendment without
   such approval.

        The termination or any modification or amendment of the Plan shall
   not, without the consent of an Optionee, affect his or her rights under an
   option previously granted to him or her.  With the consent of the Optionees
   affected, the Board of Directors may amend outstanding option agreements in
   a manner not inconsistent with the Plan.  The Board of Directors shall have
   the right to amend or modify the terms and provisions of the Plan and of
   any outstanding option to the extent necessary to ensure the qualification
   of the Plan under Rule 16b-3.

   15.  Effective Date of the Plan

        The Plan shall become effective when adopted by the Board of Directors
   and the stockholders of the Company, but no option granted under the Plan
   shall become exercisable until six months after the Plan is approved by the
   Stockholders of the Company.

   16.  Notice

        Any written notice to the Company required by any of the provisions of
   the Plan shall be addressed to the Secretary of the Company and shall
   become effective when it is received.
PAGE

   17.  Governing Law

        The Plan and all determinations made and actions taken pursuant hereto
   shall be governed by the laws of the State of Delaware.

EX-11

                                                                    Exhibit 11

                           Thermo Electron Corporation
                        Computation of Earnings per Share


                                            1994           1993           1992
                                    ------------    -----------    -----------
   Computation of Fully Diluted
   Earnings per Share Before
   Cumulative Effect of Change
   in Accounting Principle:

   Income:
     Income per primary computation $103,410,000   $ 76,633,000   $ 60,594,000

     Add: Convertible debt
       interest, net of tax           15,934,000     10,273,000      6,010,000
                                    ------------   ------------   ------------
     Income applicable to common
       stock assuming full
       dilution (a)                 $119,344,000   $ 86,906,000   $ 66,604,000
                                    ------------   ------------   ------------
   Shares:
     Weighted average shares
     outstanding                      49,245,072     43,779,422     40,049,444

     Add: Shares issuable from
          assumed conversion of
          convertible debentures      14,912,570     11,256,368      6,483,917

          Shares issuable from
          assumed exercise of
          options (as determined
          by the application of
          the treasury stock
          method)                        522,364        483,718        629,911
                                    ------------   ------------   ------------
     Weighted average shares
       outstanding, as
       adjusted (b)                   64,680,006     55,519,508     47,163,272
                                    ------------   ------------   ------------
   Fully Diluted Earnings Per
   Share Before Cumulative Effect
   of Change in Accounting
   Principle (a) / (b)              $       1.85   $       1.57   $       1.41
                                    ============   ============   ============
PAGE

                                                                    Exhibit 11
                           Thermo Electron Corporation
                  Computation of Earnings per Share (continued)

                                           1994           1993           1992
                                   ------------    -----------    -----------
   Computation of Fully Diluted
   Earnings per Share:

   Income:
     Income per primary computation $103,410,000   $ 76,633,000   $ 59,156,000

     Add: Convertible debt
          interest, net of tax        15,934,000     10,273,000      6,010,000
                                    ------------   ------------   ------------
     Income applicable to common
     stock assuming full
     dilution (c)                   $119,344,000   $ 86,906,000   $ 65,166,000
                                    ------------   ------------   ------------
   Shares:
     Weighted average shares
     outstanding                      49,245,072     43,779,422     40,049,444

     Add: Shares issuable from
          assumed conversion of
          convertible debentures      14,912,570     11,256,368      6,483,917

          Shares issuable from
          assumed exercise of
          options (as determined
          by the application of the
          treasury stock method)         522,364        483,718        629,911
                                    ------------   ------------   ------------
     Weighted average shares
     outstanding, as
     adjusted (d)                     64,680,006     55,519,508     47,163,272
                                    ------------   ------------   ------------
   Fully Diluted Earnings Per
   Share (c) / (d)                  $       1.85   $       1.57   $       1.38
                                    ============   ============   ============

EX-13

                                                                    Exhibit 13











                           THERMO ELECTRON CORPORATION


                            1994 Financial Statements
PAGE

  Thermo Electron Corporation
  Consolidated Statement of Income

  (In thousands except per
  share amounts)                                1994        1993        1992
  --------------------------------------------------------------------------
  Revenues:
   Product revenues                        $1,418,306 $1,103,558  $  808,928
   Service revenues                           141,438    121,987     114,268
   Research and development contract
    revenues                                   25,604     24,173      25,776
                                           ---------- ----------  ----------
                                            1,585,348  1,249,718     948,972
                                           ---------- ----------  ----------
  Costs and Expenses:
   Cost of products                           824,845    664,201     521,668
   Cost of services                           103,800     91,292      87,307
   Expenses for research and development
    and new lines of business (a)             103,676     87,027      62,343
   Selling, general and administrative
    expenses                                  373,247    281,849     207,660
   Costs associated with divisional and
    product restructuring (Note 12)               650      6,616           -
                                           ---------- ----------  ----------
                                            1,406,218  1,130,985     878,978
                                           ---------- ----------  ----------
  Operating Income                            179,130     118,733     69,994
  Gain on Issuance of Stock by
   Subsidiaries (Note 10)                      25,283     39,863      30,212
  Other Income (Expense), Net (Note 11)          (810)   (27,477)      1,764
                                           ---------- ----------- ----------
  Income Before Income Taxes, Minority
   Interest, and Cumulative Effect of
   Change in Accounting Principle             203,603    131,119     101,970
  Provision for Income Taxes (Note 9)          69,231     33,400      27,474
  Minority Interest Expense                    30,962     21,086      13,902
                                           ---------- ----------  ----------
  Income Before Cumulative Effect of
   Change in Accounting Principle             103,410     76,633      60,594
  Cumulative Effect of Change in
   Accounting Principle, Net of
   Tax (Note 8)                                     -          -       1,438
                                           ---------- ----------  ----------
  Net Income                               $  103,410 $   76,633  $   59,156
                                           ========== ==========  ==========
  Before Cumulative Effect of Change in
   Accounting Principle:
    Primary earnings per share             $     2.10 $     1.75  $     1.51
                                           ========== ==========  ==========
    Fully diluted earnings per share       $     1.85 $     1.57  $     1.41
                                           ========== ==========  ==========
  Primary Earnings per Share               $     2.10 $     1.75  $     1.48
                                           ========== ==========  ==========
  Fully Diluted Earnings per Share         $     1.85 $     1.57  $     1.38
                                           ========== ==========  ==========
  Primary Weighted Average Shares              49,245     43,779      40,049
                                           ========== ==========  ==========
  Fully Diluted Weighted Average Shares        64,680     55,520      47,163
                                           ========== ==========  ==========

                                       2PAGE

  Thermo Electron Corporation
  Consolidated Statement of Income (continued)


  (In thousands)                                1994        1993        1992
  --------------------------------------------------------------------------
  (a) Includes costs of:
       Research and development contracts  $   20,925 $   20,435  $   19,426
       Internally funded research and
        development                            78,852     58,943      38,675
       Other expenses for new lines of
        business                                3,899      7,649       4,242
                                           ---------- ----------  ----------
                                           $  103,676 $   87,027  $   62,343
                                           ========== ==========  ==========

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







































                                       3PAGE

  Thermo Electron Corporation
  Consolidated Balance Sheet

  (In thousands)                                          1994        1993
  ------------------------------------------------------------------------
  Assets
  Current Assets:
   Cash and cash equivalents                        $  382,797  $  325,744
   Short-term available-for-sale investments,
    at quoted market value (amortized cost
    of $617,837) (Note 2)                              614,915           -
   Short-term investments, at cost (quoted
    market value of $377,183)                                -     374,450
   Accounts receivable, less allowances
    of $21,619 and $14,129                             332,668     267,377
   Unbilled contract costs and fees                     42,113      32,574
   Inventories:
    Raw materials and supplies                         128,876     110,437
    Work in process                                     44,711      38,055
    Finished goods                                      59,795      44,330
   Prepaid income taxes (Note 9)                        62,488      39,258
   Prepaid expenses                                     14,321      12,318
                                                    ----------  ----------
                                                     1,682,684   1,244,543
                                                    ----------  ----------
  Assets Related to Projects Under Construction:
   Restricted funds, at quoted market value                  -      34,100
   Facilities under construction                             -     128,040
                                                    ----------  ----------
                                                             -     162,140
                                                    ----------  ----------
  Property, Plant and Equipment, at Cost:
   Land                                                 43,990      40,570
   Buildings                                           143,727     116,895
   Alternative-energy and waste-recycling
    facilities                                         335,064     199,800
   Machinery, equipment and leasehold improvements     270,386     224,629
                                                    ----------  ----------
                                                       793,167     581,894
   Less: Accumulated depreciation and amortization     179,215     134,423
                                                    ----------  ----------
                                                       613,952     447,471
                                                    ----------  ----------
  Long-term Available-for-sale Investments, at 
   Quoted Market Value (amortized cost of $65,218)
   (Note 2)                                             62,451           -
                                                    ----------  ----------
  Long-term Marketable Securities, at Cost
   (quoted market value of $45,125)                          -      43,630
                                                    ----------  ----------
  Other Assets                                          85,338     102,347
                                                    ----------  ----------
  Cost in Excess of Net Assets of Acquired
   Companies (Note 3)                                  575,524     473,579
                                                    ----------  ----------
                                                    $3,019,949  $2,473,710
                                                    ==========  ==========

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

                                       4PAGE

  Consolidated Balance Sheet (continued)
  Thermo Electron Corporation

  (In thousands except share amounts)                     1994        1993
  ------------------------------------------------------------------------
  Liabilities and Shareholders' Investment
  Current Liabilities:
   Notes payable and current maturities of
    long-term obligations (Note 6)                  $   82,997  $   64,686
   Accounts payable                                    112,245      85,278
   Accrued payroll and employee benefits                71,835      49,029
   Accrued income taxes                                 35,845       7,713
   Accrued installation and warranty costs              33,442      26,049
   Other accrued expenses (Note 3)                     200,136     183,491
                                                    ----------  ----------
                                                       536,500     416,246
                                                    ----------  ----------
  Deferred Income Taxes (Note 9)                        57,899      48,387
                                                    ----------  ----------
  Other Deferred Items                                  57,723      58,152
                                                    ----------  ----------

  Liabilities Related to Projects Under
   Construction (Note 6):
    Payables and accrued expenses                            -      10,680
    Tax-exempt obligations                                   -     142,069
                                                    ----------  ----------
                                                             -     152,749
                                                    ----------  ----------

  Long-term Obligations (Note 6):
   Senior convertible obligations                      620,000     275,000
   Subordinated convertible obligations                186,661     238,386
   Tax-exempt obligations                              130,985           -
   Nonrecourse tax-exempt obligations                   95,300     108,800
   Other                                                16,807      25,275
                                                    ----------  ----------
                                                     1,049,753     647,461
                                                    ----------  ----------
  Minority Interest                                    327,734     277,681
                                                    ----------  ----------
  Commitments and Contingencies (Note 7)
  Common Stock of Subsidiary Subject to
   Redemption ($15,390 redemption value)                     -      14,511
                                                    ----------  ----------
  Shareholders' Investment (Notes 4 and 5):
   Preferred stock, $100 par value, 50,000
    shares authorized; none issued
   Common stock, $1 par value, 175,000,000
    shares authorized; 51,025,340 and
    47,950,580 shares issued                            51,025      47,951
   Capital in excess of par value                      485,293     467,076
   Retained earnings                                   465,548     362,138
   Treasury stock at cost, 38,318 and 31,898
    shares                                              (1,631)     (1,212)
   Cumulative translation adjustment                    (3,557)    (13,591)
   Deferred compensation (Note 8)                       (2,657)     (3,839)



                                       5PAGE

  Thermo Electron Corporation
  Consolidated Balance Sheet (continued)

  (In thousands except share amounts)                     1994        1993
  ------------------------------------------------------------------------
   Net unrealized loss on available-for-sale
    investments (Note 2)                                (3,681)          -
                                                    ----------  ----------
                                                       990,340     858,523
                                                    ----------  ----------
                                                    $3,019,949  $2,473,710
                                                    ==========  ==========

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










































                                       6PAGE

  Thermo Electron Corporation
  Consolidated Statement of Cash Flows

  (In thousands)                                1994        1993       1992
  -------------------------------------------------------------------------
  Operating Activities:
   Net income                              $ 103,410  $  76,633   $  59,156
   Adjustments to reconcile net income
    to net cash provided by operating
    activities:
     Cumulative effect of change in
      accounting principle (Note 8)                -          -       1,438
     Depreciation and amortization            62,322     42,356      29,228
     Costs associated with divisional
      and product restructuring
      (Note 12)                                  650      6,616           -
     Equity in losses of unconsolidated
      subsidiaries                             4,019     22,721       3,948
     Provision for losses on accounts
      receivable                               4,255      2,675       2,021
     Increase in deferred income taxes         9,403     13,888      12,273
     Gain on sale of property, plant
      and equipment                          (15,025)      (198)       (175)
     Gain on sale of investments              (4,851)    (2,469)     (4,968)
     Gain on issuance of stock by
      subsidiaries (Note 10)                 (25,283)   (39,863)    (30,212)
     Minority interest expense                30,962     21,086      13,902
     Other noncash expenses                    9,809      7,850      11,549
     Changes in current accounts,
      excluding the effects of
      acquisitions:
       Accounts receivable                    (7,626)   (43,171)    (10,763)
       Inventories                            10,017     (6,525)     (4,753)
       Other current assets                   (5,415)      (230)     (9,860)
       Accounts payable                        1,155     10,014      (2,479)
       Other current liabilities              26,443     15,355     (15,363)
                                           ---------  ---------   ---------
        Net cash provided by operating
         activities                          204,245    126,738      54,942
                                           ---------  ---------   ---------
  Investing Activities:
   Acquisitions, net of cash acquired
    (Note 3)                                (173,764)  (142,962)   (251,738)
   Purchases of available-for-sale
    investments                             (748,879)         -           -
   Proceeds from sale and maturities of
    available-for-sale investments           495,361          -           -
   Purchases of property, plant and
    equipment                                (60,156)   (56,580)    (60,007)
   Proceeds from sale of property,
    plant and equipment                       21,371      5,224       1,575
   Purchases of long-term investments              -    (20,573)    (70,340)
   Proceeds from sale of long-term
    investments                                    -     16,651      35,899
   (Increase) decrease in short-term
    investments                                    -   (193,894)     68,260
   Increase in assets related to
    construction projects                          -     (3,781)   (132,971)

                                       7PAGE

  Thermo Electron Corporation
  Consolidated Statement of Cash Flows (continued)

  (In thousands)                                1994        1993       1992
  -------------------------------------------------------------------------
   Decrease in net restricted funds           23,420          -           -
   Other                                      (7,397)    (3,376)     (1,262)
                                           ---------  ---------   ---------
        Net cash used in investing
         activities                         (450,044)  (399,291)   (410,584)
                                           ---------  ---------   ---------
  Financing Activities:
   Proceeds from issuance of long-term
    obligations                              368,592    102,151     389,230
   Repayment and repurchase of long-term
    obligations                              (27,114)   (11,732)    (27,415)
   Proceeds from issuance of Company
    and subsidiary common stock               60,601    378,790     100,749
   Purchases of Company and subsidiary
    common stock                            (101,481)   (57,198)    (45,334)
   Other                                         339       (941)        485
                                           ---------  ---------   ---------
        Net cash provided by financing
         activities                          300,937    411,070     417,715
                                           ---------  ---------   ---------

  Exchange Rate Effect on Cash                 1,915     (3,374)     (2,424)
                                           ---------  ---------   ---------
  Increase in Cash and Cash Equivalents       57,053    135,143      59,649
  Cash and Cash Equivalents at
   Beginning of Year                         325,744    190,601     130,952
                                           ---------  ---------   ---------
  Cash and Cash Equivalents at End
   of Year                                 $ 382,797  $ 325,744   $ 190,601
                                           =========  =========   =========

  See Note 13 for supplemental cash flow information.

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




















                                       8PAGE



   Thermo Electron Corporation
   Consolidated Statement of Shareholders' Investment

                                                Common    Capital
                                                Stock,  in Excess
                                                $1 Par     of Par   Retained
   (In thousands)                                Value      Value   Earnings
   -------------------------------------------------------------------------
   Balance December 28, 1991                 $ 25,858   $230,251    $226,349
   Net income                                       -          -      59,156
   Purchases of Company common
    stock                                           -          -           -
   Private placement of Company
    common stock                                  800     33,455           -
   Issuance of stock under
    employees' and directors'
    stock plans                                   358      4,241           -
   Tax benefit related to
    employees' and directors'
    stock plans                                     -      4,773           -
   Conversion of convertible
    obligations                                    84      2,894           -
   Effect of majority-owned
    subsidiaries' equity
    transactions                                    -    (18,509)          -
   Cumulative translation
    adjustment                                      -          -           -
   Amortization of deferred
    compensation                                    -          -           -
                                             ---------  ---------   --------
   Balance January 2, 1993                     27,100    257,105     285,505
   Net income                                       -          -      76,633
   Public offering of Company
    common stock (Note 4)                       4,500    241,505           -
   Issuance of stock under
    employees' and directors'
    stock plans                                   216        763           -
   Conversion of convertible
    obligations                                   285      6,619           -
   Effect of majority-owned
    subsidiaries' equity
    transactions                                    -    (23,066)          -
   Effect of three-for-two
    stock split                                15,850    (15,850)          -
   Cumulative translation
    adjustment                                      -          -           -
   Amortization of deferred
    compensation                                    -          -           -
                                             --------   --------    --------
   Balance January 1, 1994                     47,951    467,076     362,138
   Net income                                       -          -     103,410
   Issuance of stock under
    employees' and directors'
    stock plans                                   153      2,429           -
   Conversion of convertible
    obligations                                 2,921     63,013           -


                                        9PAGE

   Thermo Electron Corporation
   Consolidated Statement of Shareholders' Investment (continued)

                                                Common    Capital
                                                Stock,  in Excess
                                                $1 Par     of Par   Retained
   (In thousands)                                Value      Value   Earnings
   -------------------------------------------------------------------------
   Effect of majority-owned
    subsidiaries' equity
    transactions                                    -    (47,225)          -
   Cumulative translation
    adjustment                                      -          -           -
   Amortization of deferred
    compensation                                    -          -           -
   Effect of change in accounting
    principle (Note 2)                              -          -           -
   Change in net unrealized loss
    on available-for-sale
    investments (Note 2)                            -          -           -
                                             --------   --------    --------
   Balance December 31, 1994                 $ 51,025   $485,293    $465,548
                                             ========   ========    ========

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































                                       10PAGE

  Thermo Electron Corporation
  Consolidated Statement of Shareholders' Investment (continued)

                                                                      Net Un-
                                           Cumulative                realized
                                             Transla-                 Loss on
                                                 tion   Deferred   Available-
                                   Treasury   Adjust-  Compensa-     for-sale
  (In thousands)                      Stock      ment       tion  Investments
  ---------------------------------------------------------------------------
  Balance December 28, 1991       $ (1,038)  $  5,532   $ (6,010)   $      -
  Net income                             -          -          -           -
  Purchases of Company common
   stock                            (6,214)         -          -           -
  Private placement of Company
   common stock                          -          -          -           -
  Issuance of stock under
   employees' and directors'
   stock plans                       3,442          -          -           -
  Tax benefit related to
   employees' and directors'
   stock plans                           -          -          -           -
  Conversion of convertible
   obligations                           -          -          -           -
  Effect of majority-owned
   subsidiaries' equity
   transactions                          -          -          -           -
  Cumulative translation
   adjustment                            -    (13,481)         -           -
  Amortization of deferred
   compensation                          -          -        960           -
                                  --------   --------   --------    --------
  Balance January 2, 1993           (3,810)    (7,949)    (5,050)          -
  Net income                             -          -          -           -
  Public offering of Company
   common stock (Note 4)                 -          -          -           -
  Issuance of stock under
   employees' and directors'
   stock plans                       2,598          -          -           -
  Conversion of convertible
   obligations                           -          -          -           -
  Effect of majority-owned
   subsidiaries' equity
   transactions                          -          -          -           -
  Effect of three-for-two
   stock split                           -          -          -           -
  Cumulative translation
   adjustment                            -     (5,642)         -           -
  Amortization of deferred
   compensation                          -          -      1,211           -
                                  --------   --------   --------    --------
  Balance January 1, 1994           (1,212)   (13,591)    (3,839)          -
  Net income                             -          -          -           -
  Issuance of stock under
   employees' and directors'
   stock plans                        (419)         -          -           -
  Conversion of convertible
   obligations                           -          -          -           -

                                      11PAGE

  Thermo Electron Corporation
  Consolidated Statement of Shareholders' Investment (continued)

                                                                      Net Un-
                                           Cumulative                realized
                                             Transla-                 Loss on
                                                 tion   Deferred   Available-
                                Treasury      Adjust-  Compensa-     for-sale
  (In thousands)                   Stock         ment       tion  Investments
  ---------------------------------------------------------------------------
  Effect of majority-owned
   subsidiaries' equity
   transactions                          -          -          -           -
  Cumulative translation
   adjustment                            -     10,034          -           -
  Amortization of deferred
   compensation                          -          -      1,182           -
  Effect of change in accounting
   principle (Note 2)                    -          -          -       2,868
  Change in net unrealized loss
   on available-for-sale
   investments (Note 2)                  -          -          -      (6,549)
                                  --------   --------   --------    --------
  Balance December 31, 1994       $ (1,631)  $ (3,557)  $ (2,657)   $ (3,681)
                                  ========   ========   ========    ========

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






























                                       12PAGE

  Thermo Electron Corporation

  Notes to Consolidated Financial Statements

  1.  Significant Accounting Policies
  --------------------------------------------------------------------------
  Principles of Consolidation
  The accompanying consolidated financial statements include the accounts of
  Thermo Electron Corporation and its majority- and wholly owned subsidiaries
  (the Company). All material intercompany accounts and transactions have
  been eliminated. Majority-owned public subsidiaries include Thermedics
  Inc., Thermo Instrument Systems Inc., Thermo Process Systems Inc., Thermo
  Power Corporation, ThermoTrex Corporation, Thermo Fibertek Inc., and Thermo
  Ecotek Corporation (formerly Thermo Energy Systems Corporation) (Note 15).
  Thermo Cardiosystems Inc. and Thermo Voltek Corp. are majority-owned public
  subsidiaries of Thermedics. Thermo Remediation Inc. is a majority-owned
  public subsidiary of Thermo Process. ThermoLase Corporation is a
  majority-owned public subsidiary of ThermoTrex.  ThermoSpectra Corporation
  is a majority-owned, privately held subsidiary of Thermo Instrument. The
  Company accounts for investments in businesses in which it owns between 20%
  and 50% using the equity method.

  Fiscal Year
  The Company has adopted a fiscal year ending the Saturday nearest December
  31. References to 1994, 1993, and 1992 are for the fiscal years ended
  December 31, 1994, January 1, 1994, and January 2, 1993, respectively.
  Fiscal years 1994 and 1993 each included 52 weeks; 1992 included 53 weeks.

  Revenue Recognition
  For the majority of its operations, the Company recognizes revenues upon
  shipment of its products or upon completion of services it renders. The
  Company provides a reserve for its estimate of warranty and installation
  costs at the time of shipment. Revenues and profits on substantially all
  contracts are recognized using the percentage-of-completion method.
  Revenues recorded under the percentage-of-completion method were
  $175,926,000 in 1994, $176,627,000 in 1993, and $186,407,000 in 1992. The
  percentage of completion is determined by relating either the actual costs
  or actual labor incurred to date to management's estimate of total costs or
  total labor, respectively, to be incurred on each contract. If a loss is
  indicated on any contract in process, a provision is made currently for the
  entire loss. The Company's contracts generally provide for billing of
  customers upon the attainment of certain milestones specified in each
  contract. Revenues earned on contracts in process in excess of billings are
  classified as "Unbilled contract costs and fees" in the accompanying
  balance sheet. There are no significant amounts included in the
  accompanying balance sheet that are not expected to be recovered from
  existing contracts at current contract values, or that are not expected to
  be collected within one year, including amounts that are billed but not
  paid under retainage provisions.
       In August 1993, the Company agreed, in exchange for a cash settlement,
  to terminate a power sales agreement between a subsidiary of the Company
  and a utility. The power sales agreement required the utility to purchase
  output of a cogeneration facility that had been under development. Under
  the termination agreement, the Company received $12.6 million through 1994,
  with subsequent payments of $5.4 million to be made through 1997. The
  Company will be obligated to return $8.2 million of this settlement if the
  Company elects to proceed with the facility and it achieves commercial
  operation before January 1, 2000. Accordingly, the Company has deferred
  recognition of $8.2 million of revenues, pending final determination of the
  project's status. During 1993, the Company recorded revenues of $9.8

                                      13PAGE

  Thermo Electron Corporation


  million and segment income of $5.4 million from the termination of the
  power sales agreement.

  Gain on Issuance of Stock by Subsidiaries
  At the time a subsidiary sells its stock to unrelated parties at a price in
  excess of its book value, the Company's net investment in that subsidiary
  increases. If at that time the subsidiary is an operating entity and not
  engaged principally in research and development, the Company records the
  increase as a gain.
       If gains have been recognized on issuances of a subsidiary's stock and
  shares of the subsidiary are subsequently repurchased by the subsidiary or
  by the Company, gain recognition does not occur on issuances subsequent to
  the date of a repurchase until such time as shares have been issued in an
  amount equivalent to the number of repurchased shares. Such transactions
  are reflected as equity transactions and the net effect of these
  transactions is reflected in the accompanying statement of shareholders'
  investment as "Effect of majority-owned subsidiaries' equity transactions."

  Income Taxes
  In accordance with Statement of Financial Accounting Standards (SFAS) No.
  109, "Accounting for Income Taxes," the Company recognizes deferred income
  taxes based on the expected future tax consequences of differences between
  the financial statement basis and the tax basis of assets and liabilities,
  calculated using enacted tax rates in effect for the year in which the
  differences are expected to be reflected in the tax return.

  Earnings per Share
  Primary earnings per share have been computed based on the weighted average
  number of common shares outstanding during the year. Because the effect of
  common stock equivalents was not material, they have been excluded from the
  primary earnings per share calculation. Fully diluted earnings per share
  assumes the exercise of stock options and the conversion of the Company's
  dilutive convertible obligations and elimination of the related interest
  expense.

  Stock Split
  All share and per share information was restated in 1993 to reflect a
  three-for-two stock split, effected in the form of a 50% stock dividend,
  that was distributed in October 1993.

  Cash and Cash Equivalents
  Cash equivalents consist principally of U.S. government agency securities,
  bank time deposits, and commercial paper purchased with an original
  maturity of three months or less. These investments are carried at cost,
  which approximates market value.

  Available-for-sale Investments
  Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
  Equity Securities," the Company's short- and long-term debt and marketable
  equity securities are accounted for at market value (Note 2). Prior to
  1994, these investments were carried at the lower of cost or market value.
  The fair market value of short- and long-term investments is determined
  based on quoted market prices for those investments.

  Inventories
  Inventories are stated at the lower of cost (on a first-in, first-out or
  weighted average basis) or market value and include materials, labor, and
  manufacturing overhead.

                                      14PAGE

  Thermo Electron Corporation


  Property, Plant and Equipment
  The costs of additions and improvements are capitalized, while maintenance
  and repairs are charged to expense as incurred. The Company provides for
  depreciation and amortization using the straight-line method over the
  estimated useful lives of the property as follows: buildings and
  improvements -- 5 to 40 years, alternative-energy and waste-recycling
  facilities -- 24 to 25 years, machinery and equipment -- 3 to 20 years, and
  leasehold improvements -- the shorter of the term of the lease or the life
  of the asset.

  Assets Related to Projects Under Construction
  "Facilities under construction" in the accompanying 1993 balance sheet
  included a waste-recycling facility that was under construction in San
  Diego County, California. Construction costs for this facility were
  capitalized as incurred. Construction was completed in early 1994. This
  facility is included in "Alternative-energy and waste-recycling facilities"
  in the accompanying 1994 balance sheet.
       "Restricted funds" in the accompanying 1993 balance sheet represented
  unexpended proceeds from the issuance of tax-exempt obligations (Note 6),
  which were invested principally in U.S. government agency securities and
  municipal tax-exempt obligations. These investments were carried at cost,
  which equaled market value at year-end 1993.

  Other Assets
  "Other assets" in the accompanying balance sheet includes the cost of
  acquired trademarks, patents, and other specifically identifiable
  intangible assets, as well as capitalized costs associated with the
  Company's operation of certain alternative-energy facilities. These assets
  are being amortized using the straight-line method over their estimated
  useful lives, which range from 5 to 20 years. These assets were $39,731,000
  and $41,252,000, net of accumulated amortization of $21,741,000 and
  $16,699,000, at year-end 1994 and 1993, respectively.

  Cost in Excess of Net Assets of Acquired Companies
  The excess of cost over the fair value of net assets of acquired businesses
  is amortized using the straight-line method principally over 40 years.
  Accumulated amortization was $46,668,000 and $32,439,000 at year-end 1994
  and 1993, respectively. The Company assesses the future useful life of this
  asset whenever events or changes in circumstances indicate that the current
  useful life has diminished. The Company considers the future undiscounted
  cash flows of the acquired businesses in assessing the recoverability of
  this asset.

  Common Stock of Subsidiary Subject to Redemption
  In March 1993, ThermoLase sold 3,078,000 units at $5.00 per unit, each unit
  consisting of one share of ThermoLase common stock and one redemption
  right. In accordance with their terms, the redemption rights expired in
  November 1994 and, as a result, the Company transferred $14,765,000 of
  "Common stock of subsidiary subject to redemption" to "Minority interest"
  and "Capital in excess of par value."

  Foreign Currency
  All assets and liabilities of the Company's foreign subsidiaries are
  translated at year-end exchange rates, and revenues and expenses are
  translated at average exchange rates for the year in accordance with SFAS
  No. 52, "Foreign Currency Translation." Resulting translation adjustments
  are reflected as a separate component of shareholders' investment titled
  "Cumulative translation adjustment." Foreign currency transaction gains and

                                      15PAGE

  Thermo Electron Corporation


  losses are included in the accompanying statement of income and are not
  material for the three years presented.

  Presentation
  Certain amounts in 1993 and 1992 have been reclassified to conform to the
  1994 financial statement presentation.


  2.  Available-for-sale Investments
  --------------------------------------------------------------------------
  Effective January 2, 1994, the Company adopted SFAS No. 115, "Accounting
  for Certain Investments in Debt and Equity Securities." In accordance with
  SFAS No. 115, the Company's debt and marketable equity securities are
  considered "Available-for-sale investments" in the accompanying balance
  sheet and are carried at market value, with the difference between cost and
  market value, net of related tax effects, recorded currently as a component
  of shareholders' investment titled "Net unrealized loss on available-for-
  sale investments." "Effect of change in accounting principle" in the
  accompanying statement of shareholders' investment represents the
  unrealized gain, net of related tax effects, pertaining to available-for-
  sale investments held by the Company on January 2, 1994.
       The aggregate market value, cost basis, and gross unrealized gains and
  losses of short- and long-term available-for-sale investments by major
  security type, as of December 31, 1994, are as follows:

                                                            Gross      Gross
                                     Market       Cost Unrealized  Unrealized
  (In thousands)                      Value      Basis       Gains     Losses
  ---------------------------------------------------------------------------
  Government agency securities     $287,418   $291,342    $      -   $  3,924
  Corporate bonds                   298,799    301,103          74      2,378
  Tax-exempt securities              33,588     33,882           -        294
  Other                              57,561     56,728       2,783      1,950
                                   --------   --------    --------   --------
                                   $677,366   $683,055    $  2,857   $  8,546
                                   ========   ========    ========   ========

       Short- and long-term available-for-sale investments in the
  accompanying 1994 balance sheet include $348,613,000 with contractual
  maturities of one year or less, $289,293,000 with contractual maturities of
  more than one year through five years, and $39,460,000 with contractual
  maturities of more than five years. Actual maturities may differ from
  contractual maturities as a result of the Company's intent to sell these
  securities prior to maturity and as a result of put and call options that
  enable either the Company and/or the issuer to redeem these securities at
  an earlier date.
       The cost of available-for-sale investments that were sold was based on
  specific identification in determining realized gains and losses recorded
  in the accompanying statement of income. Gain on sale of investments in
  1994 resulted from gross realized gains of $6,666,000 and gross realized
  losses of $1,815,000 relating to the sale of available-for-sale
  investments.






                                      16PAGE

  Thermo Electron Corporation


  3.  Acquisitions
  --------------------------------------------------------------------------
  In 1994, the Company's majority-owned subsidiaries made several
  acquisitions for $174.3 million in cash. In 1993, the Company's majority-
  owned subsidiaries made several acquisitions for $143.8 million in cash.
       These acquisitions have been accounted for using the purchase method
  of accounting, and the acquired companies' results of operations have been
  included in the accompanying financial statements from their respective
  dates of acquisition. The aggregate cost of these acquisitions exceeded the
  estimated fair value of the acquired net assets by $232 million, which is
  being amortized principally over 40 years. Allocation of the purchase price
  for these acquisitions was based on estimates of the fair value of the net
  assets acquired and, for acquisitions completed in fiscal 1994, is subject
  to adjustment. Pro forma data is not presented since the acquisitions were
  not material to the Company's results of operations.
       "Other accrued expenses" in the accompanying balance sheet includes
  approximately $26 million and $41 million at year-end 1994 and 1993,
  respectively, for estimated severance, relocation, and other reserves
  associated with acquisitions.


  4.  Common Stock
  --------------------------------------------------------------------------
  In 1993, the Company sold 6,750,000 shares of its common stock in a public
  offering for net proceeds of $246.0 million.
       At December 31, 1994, the Company had reserved 23,454,166 unissued
  shares of its common stock for possible issuance under stock-based
  compensation plans, for possible conversion of the Company's convertible
  debentures, and for possible exchange of subsidiaries' convertible
  obligations into common stock of the Company. The subsidiaries' obligations
  are convertible into common stock of the Company in the event of a change
  in control, as defined in the related fiscal agency agreement, that has not
  been approved by the Company's Board of Directors (Note 6). The conversion
  price would be equal to 50% of the price of the Company's common stock
  prior to the change in control.


  5.  Stock-based Compensation Plans
  --------------------------------------------------------------------------
  The Company has several stock-based compensation plans for its key
  employees, directors, and others, which permit the award of stock-based
  incentives in the stock of the Company and its majority-owned subsidiaries.
  The Company has a nonqualified stock option plan, adopted in 1974, and an
  incentive stock option plan, adopted in 1981, which permit the award of
  stock options to key employees. The incentive stock option plan expired in
  1991 and no grants were made after that date. An equity incentive plan,
  adopted in 1989, permits the grant of a variety of stock and stock-based
  awards as determined by the human resources committee of the Company's
  Board of Directors (the Board Committee), including restricted stock, stock
  options, stock bonus shares or performance-based shares. To date, only
  nonqualified stock options have been awarded under this plan. The option
  recipients and the terms of options granted under these plans are
  determined by the Board Committee. Generally, options presently outstanding
  under these plans are exercisable immediately, but are subject to certain
  transfer restrictions and the right of the Company to repurchase shares
  issued upon exercise of the options at the exercise price, upon certain
  events. The restrictions and repurchase rights generally lapse ratably over
  periods ranging from three to ten years after the first anniversary of the

                                      17PAGE

  Thermo Electron Corporation


  grant date, depending on the term of the option, which may range from five
  to twelve years. In addition, under certain options, shares acquired upon
  exercise are restricted from resale until retirement or other events.
  Nonqualified options may be granted at any price determined by the Board
  Committee, while incentive stock options must be granted at not less than
  fair market value of the Company's stock on the date of grant. Generally,
  stock options have been granted at fair market value. The Company also has
  a directors' stock option plan, adopted in 1993, that provides for the
  annual grant of stock options of the Company and its majority-owned
  subsidiaries to nonemployee directors pursuant to a formula approved by the
  Company's shareholders. Options awarded under this plan are exercisable six
  months after the date of grant and expire three or seven years after the
  date of grant. In addition to the Company's stock-based compensation plans,
  certain officers and key employees may also participate in stock-based
  compensation plans of the Company's majority-owned subsidiaries.

       No accounting recognition is given to options granted at fair market
  value until they are exercised. Upon exercise, net proceeds, including tax
  benefits realized, are credited to equity.

       A summary of the Company's stock option information is as follows:

                                1994             1993              1992
                          ---------------- ----------------  ---------------
                                    Range             Range            Range
                                       of                of               of
                                   Option            Option           Option
                          Number   Prices  Number    Prices  Number   Prices
  (In thousands except        of      per      of       per      of      per
  per share amounts)      Shares    Share  Shares     Share  Shares    Share
  --------------------------------------------------------------------------
  Options outstanding,            $ 7.27-           $ 7.27-          $ 7.27-
   beginning of year      2,961   $42.32   2,074    $31.30   1,965   $29.02

                                   38.68-            39.23-           
    Granted                 729    45.10   1,225     42.32     634    31.30

                                    9.22-             7.27-            7.27-
    Exercised              (140)   31.30    (317)    29.02    (480)   25.75

                                   11.53-            10.73-           10.73-
    Lapsed or canceled      (49)   41.38     (21)    37.07     (45)   31.30
                          -----            -----             -----
  Options outstanding,            $ 7.27-           $ 7.27-          $ 7.27-
   end of year            3,501   $45.10   2,961    $42.32   2,074   $31.30
                          =====            =====             =====    
                                  $ 7.27-           $ 7.27-          $ 7.27-
  Options exercisable     3,501   $45.10   2,961    $42.32   2,067   $31.30
                          =====            =====             =====    
  Options available
   for grant              1,612              292             1,195
                          =====            =====             =====






                                      18PAGE

  Thermo Electron Corporation


  6.  Long-term Obligations and Other Financing Arrangements
  --------------------------------------------------------------------------
  Long-term obligations of the Company are as follows:

  (In thousands except per share amounts)                 1994         1993
  -------------------------------------------------------------------------
  5% Senior convertible debentures,
   due 2001, convertible at $47.25 per share        $  345,000  $        -
  4 5/8% Senior convertible debentures,
   due 1997, convertible at $32.25 per share           205,000     205,000
  4 7/8% Subordinated convertible debentures,
   due 1997, convertible at $32.25 per share            55,000      55,000
  6 3/4% Subordinated convertible debentures,
   due 2001, convertible at $23.00 per share                 -      67,173
  3 3/4% Senior convertible debentures,
   due 2000, convertible into shares of
   Thermo Instrument at $31.75 per share                70,000      70,000
  6 5/8% Subordinated convertible debentures,
   due 2001, convertible into shares of
   Thermo Instrument at $17.58 per share                36,862      49,569
  6 1/2% Subordinated convertible debentures,
   due 1998, convertible into shares of
   Thermedics at $10.42 per share                       10,252      12,997
  6 1/2% Subordinated convertible debentures,
   due 1997, convertible into shares of
   Thermo Process at $10.33 per share                   16,597      18,547
  Noninterest-bearing subordinated convertible
   debentures, due 1997, convertible into shares
   of Thermo Cardiosystems at $21.74 per share          33,000           -
  5 1/2% Subordinated convertible notes,
   due 2002, convertible into shares of
   Thermo Cardiosystems at $9.88 per share                 450         600
  3 3/4% Subordinated convertible debentures,
   due 2000, convertible into shares of Thermo
   Voltek at $11.75 per share                           34,500      34,500
  8.1% Nonrecourse tax-exempt obligation, payable
   in semi-annual installments commencing 1995,
   with final payment in 2000                           62,500      62,500
  6.0% Nonrecourse tax-exempt obligation, payable
   in semi-annual installments, with final
   payment in 2000                                      49,700      57,500
  Tax-exempt obligations, payable in semi-annual
   installments commencing 1995, with final 
   payment in 2017                                     133,670           -
  10.23% Mortgage loan secured by property with a
   net book value of $16,564, payable in monthly
   installments, with a final payment in 2004           10,855      11,535
  Other                                                  8,338      21,375
                                                    ----------  ----------
                                                     1,071,724     666,296
  Less: Current maturities of long-term
   obligations                                          21,971      18,835
                                                    ----------  ----------
                                                    $1,049,753  $  647,461
                                                    ==========  ==========




                                      19PAGE

  Thermo Electron Corporation


       The debentures that are convertible into subsidiary common stock have
  been issued by the respective subsidiaries and are guaranteed by the
  Company.
        In the event of a change in control of the Company, as defined in the
  related fiscal agency agreement, that has not been approved by the
  Company's Board of Directors, each holder of the 5%, 4 5/8%, and 4 7/8%
  convertible debentures issued by the Company will have the right to require
  the Company to buy all or part of the holders' debentures, at par value
  plus accrued interest, within 50 calendar days after the date of expiration
  of a specified approval period. In addition, the obligations convertible
  into subsidiary common stock become convertible into common stock of the
  Company at a conversion price equal to 50% of the price of the Company's
  common stock prior to the change in control.
       "Nonrecourse tax-exempt obligations" represent obligations issued by
  the California Pollution Control Financing Authority (CPCFA), the proceeds
  of which were used to finance two alternative-energy facilities (Delano I
  and Delano II) located in Delano, California. Delano I was previously
  leased to a subsidiary of Thermo Ecotek by a third-party owner/lessor and
  was purchased by Thermo Ecotek in 1993. Construction of Delano II was
  completed in 1993. The obligations are payable only by a subsidiary of
  Thermo Ecotek and are not guaranteed by the Company, except under limited
  circumstances. As required by the financing bank group, Thermo Ecotek
  entered into interest rate swap agreements that effectively convert these
  obligations from floating rates to the fixed rates described above. These
  swaps have terms expiring in 2000, commensurate with the final maturity of
  the debt. The interest rate swap agreements are with a different
  counterparty than the holders of the underlying debt. The Company believes,
  however, that the credit risks associated with these swaps are minimal
  since the agreements are with a large, reputable bank. The notional amount
  of debt subject to the swap agreements is $110.0 million at December 31,
  1994.
       "Tax-exempt obligations" represent obligations issued by the CPCFA in
  January 1992, the proceeds of which were loaned to the Company to finance
  the construction of a waste-recycling facility in San Diego County,
  California. Construction of this facility was completed in 1994 and the
  debt was reclassified from "Liabilities related to projects under
  construction" to "Long-term obligations" in the accompanying balance sheet.
  Of these tax-exempt obligations, $95 million carry fixed rates of interest
  ranging from 6.75% to 8.2%, and $39 million carry a floating rate of
  interest, which varies weekly based on short-term, tax-exempt markets. The
  interest rate ranged from 3.1% to 7.2% in 1994 and 4.25% to 6.85% in 1993.
       "Tax-exempt obligations" in the accompanying 1993 balance sheet also  
  includes $8.5 million of tax-exempt obligations issued by the CPCFA in
  October 1991, the proceeds of which were loaned to the Company to finance
  the construction of the Delano II alternative-energy facility. These
  tax-exempt obligations were repaid in February 1994. Prior to the
  repayment, these obligations carried a floating rate of interest, which
  varied daily based on short-term, tax-exempt markets. The interest rate
  ranged from 2.45% to 5.55% in 1994 and 2.5% to 6.1% in 1993.  
       The Company capitalized interest expense, net of interest income,
  incurred in connection with the construction of the Delano II and San Diego
  County facilities discussed above. These amounts were $2.1 million and $8.4
  million in 1994 and 1993, respectively.






                                      20PAGE

  Thermo Electron Corporation


       The annual requirements for long-term obligations are as follows:

  (In thousands)
  --------------------------------------------------------
  1995                                          $   21,971
  1996                                              21,713
  1997                                             333,165
  1998                                              36,599
  1999                                              26,597
  2000 and thereafter                              631,679
                                                ----------
                                                $1,071,724
                                                ==========

       Certain of the Company's obligations include requirements to maintain
  predetermined financial ratios. At December 31, 1994, the Company was in
  compliance with these requirements.
       Based on quoted market prices and on borrowing rates currently
  available to the Company for debt of the same remaining maturities, the
  fair market value of the Company's long-term obligations, excluding
  interest rate swap agreements, was approximately $1.24 billion and $1.03
  billion at December 31, 1994 and January 1, 1994, respectively. The fair
  market value of interest rate swap agreements entered into in connection
  with the nonrecourse tax-exempt obligations was a net receivable of
  approximately $2.1 million and a net payable of approximately $6.1 million
  at December 31, 1994 and January 1, 1994, respectively. During 1994, the
  average variable rate received under the interest rate swap agreements was
  4.9%.
       "Notes payable and current maturities of long-term obligations" in the
  accompanying balance sheet include $61.0 million and $45.9 million in 1994
  and 1993, respectively, of short-term bank borrowings at several of the
  Company's foreign subsidiaries. The weighted average interest rates for
  these borrowings were 6.2% at both year-end 1994 and 1993.


  7.  Commitments and Contingencies
  --------------------------------------------------------------------------
  Litigation

  The Company participates in the operation of the Dade County Downtown
  Government Center cogeneration facility in Miami, Florida, through a 50/50
  joint venture of subsidiaries of the Company and Rolls-Royce, Inc. Because
  the demand for power and chilled water at the Dade County Downtown
  Government Center complex has been substantially less than anticipated
  since the plant's startup in 1987, and because the plant has had difficulty
  disposing of the rest of its output, the joint venture has experienced
  continuing losses.
      The joint venture sells electricity to Dade County pursuant to an
  energy purchase contract signed in 1983. The joint venture historically has
  sold more than half of its actual output to Dade County and the balance to
  Florida Power and Light (FPL), the local utility. In 1992, the joint
  venture sued Dade County in Florida state court, alleging that Dade County
  was in breach of the energy purchase contract and had misrepresented its
  demand for electrical power. Dade County asserted counterclaims against the
  joint venture, the Company, and Rolls-Royce, alleging, among other things,
  failure to properly maintain and operate the facility and to use its best
  efforts to maximize use of the facility's output. In May 1993, Dade County
  filed a petition with the Florida Public Service Commission (FPSC),

                                      21PAGE

  Thermo Electron Corporation


  asserting that the joint venture was engaged in the retail sale of
  electricity without complying with rules governing public utilities. If
  FPSC determines that the joint venture was engaged in illegal retail sales
  of electricity, it could impose refund or other liabilities on the joint
  venture and/or enjoin future sales.
      In May 1993, Dade County also brought a parallel proceeding before the
  Federal Energy Regulatory Commission (FERC) seeking to terminate the
  project's qualifying facility status under the Public Utility Regulatory
  Policies Act of 1978 (PURPA) for failure to meet certain required
  efficiency standards at various times from 1987 to the present. (PURPA
  generally obligates utilities, such as FPL, to purchase electricity from
  qualifying facilities at the utilities' avoided cost and exempts qualifying
  facilities from various federal and state regulations, such as the Federal
  Power Act (FPA).) The Company believes the project currently meets the
  efficiency standards and therefore currently has qualifying facility
  status. However, on October 21, 1993, FERC issued an order finding that,
  although the project met the efficiency standards for 1992, the project did
  not meet such standards from 1987 through 1991. FERC denied the joint
  venture's request for a waiver of the efficiency standards for that period
  and also directed the joint venture to show cause why FERC should not find
  that the joint venture was a public utility for FPA purposes during that
  period. If the joint venture is retroactively deemed a public utility under
  FPA, FERC could impose refund liabilities and other penalties to the extent
  FERC does not find either that the joint venture complied with relevant
  FERC regulations or that the regulations should be waived. The joint
  venture has been granted a rehearing of the FERC decision and has asserted
  various grounds for reversal. The joint venture is also entitled to appeal
  FERC's final decision, if necessary. In the rehearing, the County and FPL
  have argued before FERC that the project did not meet the efficiency
  standards for 1992.
      In 1994, the joint venture's lawsuit against Dade County, including
  counterclaims by Dade County, was dismissed with prejudice by agreement of
  the parties. The terms of the dismissal included: (a) payment by Dade
  County, net of amounts paid by the joint venture, of $1,500,000, (b) a
  joint request that FERC terminate its proceedings and vacate its previous
  order, and (c) a joint request that FPSC dismiss the petition brought
  before it by Dade County. FERC has not acted upon the request made to it by
  the joint venture. FPSC granted the request for dismissal. Since the
  settlement with the County, FPL has filed (a) a motion at FERC opposing the
  request made to FERC by the joint venture, and (b) a motion at FPSC,
  similar to one previously filed at FPSC by Dade County, seeking a
  declaration that the joint venture was engaged in the retail sale of
  electricity without complying with the rules governing public utilities.
  The joint venture also is pursuing an antitrust lawsuit against FPL.
      The joint venture leases its generating equipment from Florida Energy
  Partners Limited Partnership (FEP). If the energy purchase contract were to
  be held illegal, FEP could declare a default by the joint venture under the
  lease with FEP, and Dade County could be released from its obligation to
  buy electricity from the joint venture. In the lease, the joint venture
  also covenanted that the project would maintain PURPA qualifying facility
  status. If the joint venture is deemed to have breached this covenant, FEP
  could declare a default under the lease. In the event of a default, among
  other things, FEP could seek to sell or re-lease the equipment and the
  Company generally would be liable for one-half of any deficiency between
  (a) in the event of a sale, approximately $45 million and the amount
  realized from the sale or (b) in the case of re-lease, the present value of
  future rentals and prepayment penalty under the lease (approximately $31


                                      22PAGE

  Thermo Electron Corporation


  million) and the present value of a fair rental value to be collected from
  a new tenant.
      The joint venture's revenues for the year ended December 31, 1994 and
  the cumulative period from 1987 through 1991 were $3.4 million and $26.3
  million, respectively. The Company reports its interest in the joint
  venture's results of operations using the equity method of accounting.
  Under this method, the Company records 50% of the joint venture's loss, but
  does not report as revenues any of the joint venture's revenues.
      The Company is contingently liable with respect to other lawsuits and
  matters. In the opinion of management, these contingencies will not have a
  material adverse effect on the financial condition of the Company.

  Operating Leases
  The Company leases portions of its office and operating facilities under
  various noncancelable operating lease arrangements. The accompanying
  statement of income includes expenses from operating leases of $19,615,000
  in 1994, $14,718,000 in 1993, and $11,231,000 in 1992. Minimum rental
  commitments under noncancelable operating leases at December 31, 1994, are
  as follows:

  (In thousands)
  -----------------------------------------------------
  1995                                          $17,197
  1996                                           13,717
  1997                                           10,406
  1998                                            7,076
  1999                                            4,520
  2000 and thereafter                            16,695
                                                -------
                                                $69,611
                                                =======


  8.  Employee Benefit Plans
  --------------------------------------------------------------------------
  401(k) Savings Plan
  The Company's 401(k) savings plan covers the majority of the Company's
  eligible full-time U.S. employees. Contributions to the plan are made by
  both the employee and the Company. Company contributions are based on the
  level of employee contributions. For this plan, the Company contributed and
  charged to expense $6,450,000, $4,517,000, and $3,460,000 in 1994, 1993,
  and 1992, respectively.

  Employee Stock Ownership Plan
  The Company's Employee Stock Ownership Plan (ESOP) covers eligible
  full-time U.S. employees. The Company borrowed funds from a financial
  institution and then loaned these funds to the ESOP to purchase shares of
  common stock of the Company and its majority-owned subsidiaries. The loan
  balance between the Company and the financial institution was paid off in
  1992. The loan between the Company and the ESOP is still outstanding. The
  shares purchased are reported as "Deferred compensation" in the
  accompanying balance sheet. The Company makes annual contributions to the
  ESOP and shares are allocated to plan participants based on employee
  compensation. For this plan, the Company charged to expense $1,123,000,
  $1,125,000, and $1,103,000 in 1994, 1993, and 1992, respectively. The 1992
  amount includes interest expense of $228,000.



                                      23PAGE

  Thermo Electron Corporation


  Employee Stock Purchase Plan
  Substantially all of the Company's full-time U.S. employees are eligible to
  participate in employee stock purchase plans sponsored by the Company or by
  the Company's majority-owned public subsidiaries. Under these plans, shares
  of the Company's common stock may be purchased at the end of a 12-month
  plan year at 85% of the fair market value at the beginning of the plan
  year, and the shares purchased are subject to a one-year resale
  restriction. Shares are purchased through payroll deductions of up to 10%
  of each participating employee's gross wages. Participants of employee
  stock purchase plans sponsored by the Company's majority-owned public
  subsidiaries may also elect to purchase shares of the common stock of the
  subsidiary by which they are employed. During 1994, 1993, and 1992, the
  Company issued 97,224 shares, 125,268 shares, and 85,300 shares of its
  common stock, respectively, under these plans.

  Postretirement Benefits
  Two of the Company's subsidiaries provide postretirement medical benefits
  for employees who meet certain age and length-of-service requirements. As
  of the beginning of fiscal 1992, the Company adopted SFAS No. 106,
  "Accounting for Postretirement Benefits Other Than Pensions," which
  required the Company to change to the accrual method of accounting for
  postretirement medical benefits. 
       The Company elected to recognize the cumulative effect of its
  accumulated postretirement benefit obligation in 1992, which resulted in a
  charge of $1,438,000, net of tax benefits of $844,000. The annual expense
  incurred under SFAS No. 106 and the related obligations required under this
  statement are not material to the Company's financial statements.

  Postemployment Benefits
  The Company provides certain postemployment benefits to former and inactive
  employees. Effective January 2, 1994, the Company adopted SFAS No. 112,
  "Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires
  the recognition of the cost of postemployment benefits if certain criteria
  are met and the amount of benefits can be reasonably estimated. The
  adoption of this statement did not have a material impact on the Company's
  financial statements.


  9.  Income Taxes
  --------------------------------------------------------------------------
  The components of income before income taxes, minority interest, and
  cumulative effect of change in accounting principle are as follows:

  (In thousands)                                   1994      1993      1992
  -------------------------------------------------------------------------
  Domestic                                      $162,988  $113,152  $ 83,943
  Foreign                                         40,615    17,967    18,027
                                                --------  --------  --------
                                                $203,603  $131,119  $101,970
                                                ========  ========  ========









                                      24PAGE

  Thermo Electron Corporation


       The components of the provision for income taxes are as follows:

  (In thousands)                                   1994      1993      1992
  -------------------------------------------------------------------------
  Currently payable:
   Federal                                      $ 30,089  $ 10,270  $ 12,280
   Foreign                                        16,343     8,643     7,058
   State                                           9,672     5,320     3,923
                                                --------  --------  --------
                                                  56,104    24,233    23,261
                                                --------  --------  --------
  Deferred (prepaid), net:
   Federal                                        10,096     6,821     4,018
   Foreign                                          (243)      931     1,010
   State                                           3,274     1,415      (815)
                                                --------  --------  --------
                                                  13,127     9,167     4,213
                                                --------  --------  --------
                                                $ 69,231  $ 33,400  $ 27,474
                                                ========  ========  ========

       The provision for income taxes that is currently payable does not
  reflect $3,531,000, $3,354,000, and $7,579,000 of tax benefits of the
  Company and its public subsidiaries allocated to "Capital in excess of par
  value" or $112,000, $2,280,000, and $3,137,000 of tax benefits used to
  reduce "Cost in excess of net assets of acquired companies" in 1994, 1993,
  and 1992, respectively.
       The provision for income taxes in the accompanying statement of income
  differs from the provision calculated by applying the statutory federal
  income tax rate of 35% in 1994 and 1993 and 34% in 1992 to income before
  income taxes, minority interest, and cumulative effect of change in
  accounting principle due to the following:

  (In thousands)                                   1994       1993      1992
  --------------------------------------------------------------------------
  Provision for income taxes at statutory rate $ 71,261   $ 45,892  $ 34,670
  Increases (decreases) resulting from:
    Gain on issuance of stock by
     subsidiaries                                (8,849)   (13,770)  (10,272)
    State income taxes, net of federal tax        8,178      4,299     2,051
    Tax-exempt and tax-preferred investment
     income                                        (465)    (1,207)     (251)
    Investment and research and development
     tax credits                                 (2,786)    (6,625)        -
    Foreign tax rate and tax law differential     1,422      3,969     1,916
    Tax benefit of foreign sales corporation     (2,411)    (1,366)     (989)
    Minority interest in partnership losses      (1,454)    (1,057)   (1,157)
    Amortization of cost in excess of net
     assets of acquired companies                 3,450      3,400     1,674
    Nondeductible expenses                          907      1,008       198
    Other, net                                      (22)    (1,143)     (366)
                                               --------   --------  --------
                                               $ 69,231   $ 33,400  $ 27,474
                                               ========   ========  ========





                                      25PAGE

  Thermo Electron Corporation


       Deferred and short- and long-term prepaid income taxes in the
  accompanying balance sheet consist of the following:

  (In thousands)                                   1994       1993
  ----------------------------------------------------------------
  Deferred income taxes:
   Depreciation                                $ 48,962   $ 38,108
   Intangible assets                              7,373      8,214
   Other                                          1,564      2,065
                                               --------   --------
                                               $ 57,899   $ 48,387
                                               ========   ========
  Prepaid income taxes:
   Other reserves and accruals                 $ 36,033   $ 29,855
   Inventory basis difference                    16,756     10,801
   Capitalized costs and joint venture equity     3,727      7,071
   Accrued compensation                           8,599      7,653
   Allowance for doubtful accounts                5,470      4,108
   Net operating loss carryforwards               6,182      5,200
   Federal tax credit carryforwards               7,869      3,193
   Available-for-sale investments                 1,025          -
   Other, net                                     6,185      7,270
                                               --------   --------
                                                 91,846     75,151
   Less: Valuation allowance                     29,358     20,402
                                               --------   --------
                                               $ 62,488   $ 54,749
                                               ========   ========

       The valuation allowance relates to the uncertainty surrounding the
  realization of tax loss and credit carryforwards and the realization of tax
  benefits attributable to purchase accounting reserves and certain other tax
  assets of the Company and certain subsidiaries. Of the year-end 1994
  valuation allowance, $8.6 million will be used to reduce "Cost in excess of
  net assets of acquired companies" when any portion of the related deferred
  tax asset is recognized and $7.5 million will increase "Capital in excess
  of par value" when previously unrealized stock option benefits are
  recognized.
       The increase in the valuation allowance is primarily attributable to
  the establishment of valuation allowances for tax loss and credit
  carryforwards, net of utilization of previously unbenefited tax attributes.
       The Company has not recognized a deferred tax liability for the
  undistributed earnings of its domestic subsidiaries because the Company
  does not expect these earnings to be remitted and become subject to tax.
  The Company believes it can implement certain tax strategies to recover its
  share of all undistributed earnings of its domestic subsidiaries tax-free.
        A provision has not been made for U.S. or additional foreign taxes on
  $109 million of undistributed earnings of foreign subsidiaries that could
  be subject to taxation if remitted to the U.S. because the Company plans to
  keep these amounts permanently reinvested overseas. The Company believes
  that any additional U.S. tax liability due upon remittance of such earnings
  would be immaterial due to available U.S. foreign tax credits.







                                      26PAGE


  Thermo Electron Corporation


  10.  Transactions in Stock of Subsidiaries
  --------------------------------------------------------------------------
  "Gain on issuance of stock by subsidiaries" in the accompanying statement
  of income results primarily from the following transactions:

  1994
  ----
       Public offering of 1,610,000 shares of ThermoTrex common stock at
  $15.375 per share for net proceeds of $23,034,000 resulted in a gain of
  $7,906,000.
       Initial public offering of 2,674,786 shares of ThermoLase common stock
  at $6.00 per share for net proceeds of $14,784,000 resulted in a gain of
  $8,609,000.
       Private placements of 1,505,000 shares of ThermoSpectra common stock
  at $10.00 per share for net proceeds of $13,993,000 resulted in a gain of
  $6,469,000.
       Conversion of $3,725,000 of Thermedics 6 1/2% subordinated convertible
  debentures convertible at $10.42 per share into 357,597 shares of
  Thermedics common stock resulted in a gain of $992,000.

  1993
  ----
       Public offering of 3,225,000 shares of Thermedics common stock at
  $10.00 per share for net proceeds of $29,980,000 resulted in a gain of
  $10,707,000.
       Public offering of 4,312,500 shares of Thermo Power common stock at
  $9.00 per share for net proceeds of $35,998,000 resulted in a gain of
  $10,578,000.
       Private placements of 2,062,500 shares of ThermoTrex common stock at
  $11.17 and $14.50 per share for net proceeds of $27,463,000 resulted in a
  gain of $11,400,000.
       Private placement of 200,000 shares and initial public offering of
  1,100,000 shares of Thermo Remediation common stock at $9.89 and $12.50 per
  share, respectively, for net proceeds of $14,554,000 resulted in a gain of
  $4,239,000.
       Conversion of $7,270,000 of Thermedics 6 1/2% subordinated convertible
  debentures convertible at $10.42 per share into 697,919 shares of
  Thermedics common stock resulted in a gain of $2,506,000.

  1992
  ----
       Private placement of 2,709,356 shares and initial public offering of
  3,000,000 shares of Thermo Fibertek common stock at $6.70 to $8.00 per
  share for net proceeds of $39,748,000 resulted in a gain of $23,303,000.
       Issuance of 1,566,480 restricted shares of ThermoTrex common stock
  valued at $6.17 per share, or $9,673,000, to acquire Lorad Corporation
  resulted in a gain of $3,081,000.
       Private placement of 375,000 shares of ThermoTrex common stock at
  $10.67 per share for net proceeds of $3,556,000 resulted in a gain of
  $1,745,000.

       The Company's ownership percentage in these subsidiaries changed
  primarily as a result of the transactions listed above, as well as the
  Company's purchases of shares of its majority-owned subsidiaries' stock,
  the subsidiaries' purchases of their own stock, the issuance of
  subsidiaries' stock by the Company or by the subsidiaries under stock-based
  compensation plans or in other transactions, and the conversion of


                                      27PAGE

  Thermo Electron Corporation


  convertible obligations held by the Company, its subsidiaries, or by third
  parties.

       The Company's ownership percentages at year-end were as follows:

                                     1994        1993         1992
                                     ----        ----         ----
  Thermo Instrument                  83%          81%          81%
  Thermo Fibertek                    81%          80%          80%
  Thermedics                         51%          52%          59%
  Thermo Ecotek (Note 15)            97%          88%          87%
  Thermo Power                       60%          52%          81%
  ThermoTrex                         50%          55%          62%
  Thermo Process                     80%          72%          71%
  Thermo Cardiosystems (a)           58%          57%          58%
  Thermo Voltek (a)                  71%          67%          57%
  Thermo Remediation (b)             65%          67%          85%
  ThermoLase (c)                     69%          81%         100%
  ThermoSpectra (d)                  86%         100%         100%

  (a) Reflects combined ownership by Thermo Electron and Thermedics.
  (b) Reflects ownership by Thermo Process.
  (c) Reflects ownership by ThermoTrex.
  (d) Reflects ownership by Thermo Instrument.


  11.  Other Income (Expense), Net
  --------------------------------------------------------------------------
  The components of "Other income (expense), net" in the accompanying
  statement of income are as follows:

  (In thousands)                               1994        1993        1992
  -------------------------------------------------------------------------
  Interest income                          $ 43,165    $ 23,883    $ 24,624
  Interest expense                          (59,550)    (31,643)    (24,296)
  Equity in losses of unconsolidated
   subsidiaries                              (4,019)    (22,721)     (3,948)
  Gain on sale of investments                 4,851       2,469       4,968
  Other income, net                          14,743         535         416
                                           --------    --------    --------
                                           $   (810)   $(27,477)   $  1,764
                                           ========    ========    ========


  12.  Costs Associated with Divisional and Product Restructuring
  --------------------------------------------------------------------------
  "Costs associated with divisional and product restructuring" in the
  accompanying 1994 statement of income represents severance costs and, to a
  lesser extent, the costs to write-off leasehold improvements at
  ThermoTrex's East Coast division.
       The 1993 amount primarily represents a $1,900,000 reserve for the
  write-off of machinery and equipment and costs to phase out a product line
  in the Company's metal-fabrication services business, a $1,200,000 reserve
  for restructuring at the Company's steam turbines and compressors business,
  and $2,660,000 for the write-off of mobile soil-remediation assets and
  other related expenses.



                                      28PAGE

  Thermo Electron Corporation


  13.  Supplemental Cash Flow Information
  --------------------------------------------------------------------------
  Supplemental cash flow information is as follows:

  (In thousands)                                1994        1993        1992
  --------------------------------------------------------------------------
  Cash Paid For:
   Interest                                $  47,451   $  29,438   $  18,287
   Income taxes                            $  27,135   $   9,699   $  16,593

  Noncash Activities:
   Conversions of convertible obligations  $  89,625   $  50,403   $  13,863
   Purchase of alternative-energy
    facility through assumption of debt    $       -   $  66,900   $       -

   Fair value of assets of acquired
    companies                              $ 250,404   $ 208,193   $ 429,113
   Cash paid for acquired companies         (174,330)   (143,790)   (255,340)
   Issuance of subsidiary common stock
    for acquired business                          -           -      (9,673)
                                           ---------   ---------   ---------
     Liabilities assumed of acquired
      companies                            $  76,074   $  64,403   $ 164,100
                                           =========   =========   =========


  14.  Business Segment and Geographical Information
  --------------------------------------------------------------------------
  The Company's business segments include the following:
    Instruments: environmental-monitoring, analytical, and process-control
    instruments
    Alternative-energy Systems: alternative-energy power plants,
    waste-recycling facility, industrial refrigeration systems, natural gas
    engines, cooling and cogeneration units, turbines and compressors
    Process Equipment: paper-recycling equipment, papermaking systems and
    accessories, metallurgical processing systems, electroplating equipment
    Biomedical Products: biomedical materials, mammography and needle-biopsy
    systems, skin-incision devices, blood coagulation-monitoring equipment,
    left ventricular-assist systems, neurophysiology monitoring instruments,
    personal-care products
    Environmental Services: thermal soil-remediation, industrial-fluids
    recycling, metallurgical heat treating and fabrication, laboratory
    analysis, environmental sciences
    Advanced Technologies: process detection systems, security instruments,
    electronic test equipment, power-conversion instruments, long-term hair
    removal system, development of avionics products and medical systems













                                      29PAGE

  Thermo Electron Corporation


  (In thousands)                             1994          1993         1992
  --------------------------------------------------------------------------
  Revenues:
   Instruments                         $  650,114    $  516,712   $  349,261
   Alternative-energy Systems             285,410       242,662      221,877
   Process Equipment                      189,862       167,524      160,459
   Biomedical Products                    180,318       127,533       58,167
   Environmental Services                 141,793       121,987      114,268
   Advanced Technologies                  142,680        76,304       46,075
   Intersegment Sales Elimination (a)      (4,829)       (3,004)      (1,135)
                                       ----------    ----------   ----------
                                       $1,585,348    $1,249,718   $  948,972
                                       ==========    ==========   ==========
  Segment Income (b):
   Instruments                         $  105,440    $   91,412   $   59,758
   Alternative-energy Systems              34,451        14,434        1,767
   Process Equipment                       20,730        13,924       13,891
   Biomedical Products                     17,601         5,758        1,252
   Environmental Services                  14,853         9,263        8,411
   Advanced Technologies                   10,261         7,841        1,989
                                       ----------    ----------   ----------
    Total Segment Income                  203,336       142,632       87,068
   Equity in Losses of Unconsolidated
    Subsidiaries                           (4,019)      (22,721)      (3,948)
   Corporate (c)                            4,286        11,208       18,850
                                       ----------    ----------   ----------
   Income Before Income Taxes,
    Minority Interest, and Cumulative
    Effect of Change in Accounting
    Principle                          $  203,603    $  131,119   $  101,970
                                       ==========    ==========   ==========
  Identifiable Assets:
   Instruments                         $1,011,916    $  850,688   $  531,320
   Alternative-energy Systems             577,781       593,247      406,515
   Process Equipment                      191,846       179,251      172,984
   Biomedical Products                    348,199       285,715      228,781
   Environmental Services                 192,523       146,658      129,656
   Advanced Technologies                  194,557       169,488       81,409
   Corporate (d)                          503,127       248,663      267,600
                                       ----------    ----------   ----------
                                       $3,019,949    $2,473,710   $1,818,265
                                       ==========    ==========   ==========
















                                      30PAGE

  Thermo Electron Corporation


  (In thousands)                             1994          1993         1992
  --------------------------------------------------------------------------
  Depreciation and Amortization:
   Instruments                         $   22,070    $   18,059   $   10,786
   Alternative-energy Systems              16,078         4,982        3,511
   Process Equipment                        4,780         4,277        3,792
   Biomedical Products                      6,292         5,328        2,922
   Environmental Services                   8,382         6,641        5,845
   Advanced Technologies                    3,487         1,843        1,277
   Corporate                                1,233         1,226        1,095
                                       ----------    ----------   ----------
                                       $   62,322    $   42,356   $   29,228
                                       ==========    ==========   ==========
  Capital Expenditures:
   Instruments                         $    7,574    $    6,347   $    4,650
   Alternative-energy Systems (e)          31,717        92,862       38,097
   Process Equipment                        3,231         2,631        3,721
   Biomedical Products                      7,284         9,042        2,245
   Environmental Services                   7,559         7,583        8,550
   Advanced Technologies                    2,650         2,774        1,681
   Corporate                                  141         2,241        1,063
                                       ----------    ----------   ----------
                                       $   60,156    $  123,480   $   60,007
                                       ==========    ==========   ==========
  Export Sales Included Above (f)      $  262,436    $  219,631   $  131,755
                                       ==========    ==========   ==========
  Foreign Operations Included Above:
    Revenues:
      Europe                           $  295,203    $  223,707   $  198,066
      Other                                61,586        32,835       22,941
                                       ----------    ----------   ----------
                                       $  356,789    $  256,542   $  221,007
                                       ==========    ==========   ==========
    Income Before Income Taxes,
     Minority Interest, and Cumulative
     Effect of Change in Accounting
     Principle:
      Europe                           $   30,490    $   11,305   $   17,627
      Other                                10,125         6,662          400
                                       ----------    ----------   ----------
                                       $   40,615    $   17,967   $   18,027
                                       ==========    ==========   ==========
    Identifiable Assets:
      Europe                           $  386,645    $  299,091   $  239,431
      Other                                60,697        41,068       36,877
                                       ----------    ----------   ----------
                                       $  447,342    $  340,159   $  276,308
                                       ==========    ==========   ==========

  (a)  Intersegment sales are accounted for at prices that are representative
       of transactions with unaffiliated parties.
  (b)  Segment income is income before corporate general and administrative
       expenses, costs associated with divisional and product restructuring,
       other income and expense, minority interest expense, and income taxes.
  (c)  Includes corporate general and administrative expenses, costs
       associated with divisional and product restructuring, other income and
       expense, and gain on issuance of stock by subsidiaries.


                                      31PAGE

  Thermo Electron Corporation


  (d)  Primarily cash and cash equivalents, short- and long-term investments,
       and property and equipment at the Company's Waltham, Massachusetts,
       headquarters.
  (e)  Includes $88.4 million in 1993 for the purchase of an alternative-
       energy facility in Delano, California, and $30.5 million in 1992 for
       the purchase of an alternative-energy facility in Whitefield, New
       Hampshire.
  (f)  In general, export revenues are denominated in U.S. dollars.


  15.  Subsequent Events
  --------------------------------------------------------------------------
  Transaction in Stock of Subsidiary
  On February 21, 1995, Thermo Ecotek issued 2,333,556 shares of its common
  stock in an initial public offering pursuant to a rights offering for net
  proceeds of approximately $27.7 million. Following the initial public
  offering, the Company owned 83% of Thermo Ecotek's common stock
  outstanding.

  Acquisitions
  On February 8, 1995, the Company entered into a definitive agreement to
  acquire Coleman Research Corporation (CRC) in exchange for up to 2,669,158
  shares of Company common stock, including approximately 146,900 shares
  reserved for issuance upon exercise of stock options. CRC provides systems
  integration, systems engineering, and analytical services to government
  customers in the fields of information technology, energy and the
  environment, software engineering, launch systems, advance radar and
  imaging, and health systems. The acquisition is subject to certain
  conditions, including the approval of CRC's shareholders, and is expected
  to be consummated on or about March 15, 1995. If completed, the acquisition
  of CRC will be accounted for using the pooling-of-interests method.
       On March 1, 1995, the Company's Thermo Instrument subsidiary entered
  into an Asset and Stock Purchase Agreement (the Agreement) with Fisons plc
  (Fisons) under which Thermo Instrument agreed to acquire the Scientific
  Instruments Division (the Division) of Fisons for 202 million British
  pounds sterling. The Division is principally composed of operations that
  are involved in the research, development, manufacture, and sale of
  analytical instruments to industrial and research laboratories worldwide.
  For the fiscal year ended December 31, 1994, the Division had unaudited
  revenues of approximately 262 million British pounds sterling and an
  unaudited net loss of approximately 19 million British pounds sterling.
  Consummation of the acquisition is subject to several conditions, including
  the approval of Fisons shareholders, regulatory approvals, consent of
  certain third parties, and customary conditions to closing. The purchase
  price is subject to a post-closing adjustment based on the net asset value
  of the Division as of the closing date.













                                      32PAGE





   Report of Independent Public Accountants
   ---------------------------------------------------------------------------

   To the Shareholders and Board of Directors
   of Thermo Electron Corporation:

        We have audited the accompanying consolidated balance sheet of Thermo
   Electron Corporation (a Delaware corporation) and subsidiaries as of
   December 31, 1994 and January 1, 1994, and the related consolidated
   statements of income, shareholders' investment, and cash flows for each of
   the three years in the period ended December 31, 1994. 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
   Thermo Electron Corporation and subsidiaries as of December 31, 1994 and
   January 1, 1994, and the results of their operations and their cash flows
   for each of the three years in the period ended December 31, 1994, in
   conformity with generally accepted accounting principles.
        As discussed in Note 8 to the consolidated financial statements,
   effective December 29, 1991, the Company changed its method of accounting
   for postretirement benefits other than pensions. Also, as discussed in Note
   2 to the consolidated financial statements, effective January 2, 1994, the
   Company changed its method of accounting for investments in debt and
   marketable equity securities.



                                                Arthur Andersen LLP



   Boston, Massachusetts
   February 10, 1995
   (Except with respect to the matters
   discussed in Note 15 as to which the
   date is March 1, 1995)











                                       33PAGE

   Thermo Electron Corporation


   Management's Discussion and Analysis of Financial Condition and Results of
   Operations

   Overview

   The Company develops and manufactures a broad range of products that are
   sold worldwide. The Company expands the product lines and services it
   offers by developing and commercializing its own core technologies and by
   making strategic acquisitions of complementary businesses. The majority of
   the Company's businesses fall into four broad markets: environmental,
   energy, process control, and selected health and safety instrumentation.
        An important component of the Company's strategy is to establish
   leading positions in its markets through the application of proprietary
   technology, whether developed internally or acquired. A key contribution to
   the growth of the Company's segment income (as defined in the results of
   operations below), particularly over the last three years, has been the
   ability to identify attractive acquisition opportunities, complete those
   acquisitions, and derive a growing income contribution from the newly
   acquired businesses as they are integrated into the Company's business
   segments.
        The Company seeks to minimize its dependence on any specific product
   or market by maintaining and diversifying its portfolio of businesses and
   technologies. Similarly, the Company's goal is to maintain a balance in its
   businesses between those affected by various regulatory cycles and those
   more dependent on the general level of economic activity. Although the
   Company is diversified in terms of technology, product offerings, and
   geographic markets served, the future financial performance of the Company
   as a whole is largely affected by the strength of worldwide economies and
   the continued adoption and diligent enforcement of environmental
   regulations, among other factors.
        The Company believes that maintaining an entrepreneurial atmosphere is
   essential to its continued growth and development. In order to preserve
   this atmosphere, the Company has adopted a strategy of spinning out certain
   of its businesses into separate subsidiaries and having these subsidiaries
   sell a minority interest to outside investors. The Company believes that
   this strategy provides additional motivation and incentives for the
   management of the subsidiaries through the establishment of subsidiary-
   level stock option incentive programs, as well as capital to support the
   subsidiaries' growth. As a result of the sale of stock by subsidiaries, the
   issuance of stock by subsidiaries upon conversion of convertible
   debentures, and similar transactions, the Company records gains that
   represent the increase in the Company's net investment in the subsidiaries
   and are classified as "Gain on issuance of stock by subsidiaries" in the
   accompanying statement of income. These gains have represented a
   substantial portion of the net income reported by the Company in recent
   years. Although the Company expects to continue this strategy in the
   future, its goal is to continue increasing segment income over the next few
   years so that gains generated by the sale of stock by its subsidiaries will
   represent a decreasing portion of total net income. The size and timing of
   these transactions are dependent on market and other conditions that are
   beyond the Company's control. Accordingly, there can be no assurance that
   the Company will be able to generate gains from such transactions in the
   future.






                                       34PAGE

   Thermo Electron Corporation


   Results of Operations

   1994 Compared With 1993

        Sales in 1994 were $1,585.3 million, an increase of $335.6 million, or
   27%, over 1993. Segment income was $203.3 million, compared with $142.6
   million in 1993, an increase of 43%. (Segment income is income before
   corporate general and administrative expenses, costs associated with
   divisional and product restructuring, other income and expense, minority
   interest expense, and income taxes.) Operating income was $179.1 million,
   compared with $118.7 million in 1993, an increase of 51%.
        Sales from the Instruments segment were $650.1 million in 1994, an
   increase of $133.4 million, or 26%, over 1993. Sales increased due to
   acquisitions made by Thermo Instrument during 1993 and its acquisition of
   several businesses within the EnviroTech Measurements & Controls group of
   Baker Hughes Incorporated in March 1994. Segment income margin (segment
   income margin is segment income as a percentage of sales) was 16.2%,
   compared with 17.7% in 1993. Segment income margin declined principally due
   to lower margins at the acquired businesses within the EnviroTech
   Measurements & Controls group.
        Sales from the Alternative-energy Systems segment were $285.4 million,
   an increase of $42.7 million, or 18%, over 1993. Within this segment,
   revenues from Thermo Ecotek (formerly Thermo Energy Systems), which consist
   of revenues from alternative-energy power plant operations, were $134.3
   million, compared with $117.7 million in 1993. This increase results from
   an additional plant in operation in 1994 and, to a lesser extent, the
   absence of utility-imposed curtailments of power output as well as improved
   performance at two California plants and annual contractual energy rate
   increases under certain power sales contracts.  The 1993 period included
   $9.8 million of revenues recorded as a result of the termination of a power
   sales contract, and $3.1 million from the one-time sale of gas pipeline
   rights. Sales from the Company's wholly owned Energy Systems division
   increased $10.7 million as a result of a waste-recycling facility in San
   Diego County that commenced operations in the first quarter of 1994.  Sales
   from Thermo Power increased 19%, to $91.9 million, as a result of the
   inclusion of $8.4 million in sales from its NuTemp, Inc. subsidiary, which
   was acquired in May 1994, and due to increased demand for refrigeration
   packages at its FES division.
        Segment income from the Alternative-energy Systems segment was $34.5
   million, compared with $14.4 million in 1993. Thermo Ecotek had segment
   income of $26.9 million, compared with $13.2 million in 1993. This
   improvement results from an additional power plant in operation during
   1994, the absence of utility-imposed curtailments of power output and
   improved performance at two California plants, and annual contractual
   energy rate increases under certain power sales contracts. The utility that
   purchases the output of two of the Company's California plants has the
   right to curtail the plants' power output up to 1,000 hours per year during
   periods of low demand. The utility commonly experiences low demand
   following periods of heavy rain or snow, when hydroelectric power is
   available. Due to abnormally heavy rainfall during January 1995, utility
   curtailment of two of the Company's California plants is likely to reach
   the contractually allowable maximum of 1000 hours at each of the plants in
   1995. Thermo Ecotek's segment income also improved as a result of lower
   lease expense, offset in part by depreciation expense, resulting from the
   December 1993 purchase of the Delano I facility in California. The 1993
   period included $8.6 million of income from the termination of a power
   sales contract and the one-time sale of gas pipeline rights. Segment income
   from the Company's Energy Systems division increased $3.4 million as a

                                       35PAGE


   Thermo Electron Corporation


   result of the waste-recycling facility that commenced operation in the
   first quarter of 1994. Segment income increased at Thermo Power by $2.6
   million as a result of increased sales, as well as lower expenses at its
   Crusader Engines division.
        Certain of Thermo Ecotek's plants have power sales agreements with
   utilities under which the rates paid for power will convert from fixed
   rates to "avoided cost" rates in the year 2000. Avoided cost rates are
   currently substantially less than the fixed rates. Two of these plants have
   conditions in their nonrecourse lease agreements that require funding of
   "power reserves" in years prior to 2000, based on projections of operating
   cash flow shortfalls in the year 2000 and thereafter. The power reserves
   represent funds available to make lease payments in the event that revenues
   are not sufficient after the plants convert to avoided cost rates. Without
   sufficient increases in avoided cost rates or reductions in fuel costs and
   other operating expenses by the year 2000, Thermo Ecotek expects to either
   renegotiate its nonrecourse lease agreements or forfeit its interests in
   the plants. Beginning in 1996, if projected avoided cost rates remain at
   current levels, Thermo Ecotek will expense the funding of reserves required
   under the nonrecourse lease agreements. As a result, the income from the
   two plants is expected to be reduced to approximately breakeven beginning
   in 1996. The plants contributed $9.6 million of segment income in 1994.
        Sales in the Process Equipment segment were $189.9 million, compared
   with $167.5 million in 1993. Within this segment, sales from Thermo
   Fibertek increased to $162.6 million from $137.1 million in 1993 due to an
   increase of $17.6 million in sales as a result of the acquisition of AES
   Engineered Systems in June 1993, an increase of $7.9 million in sales from
   the Company's paper-recycling equipment business as a result of three large
   contracts received earlier in the year, and an increase of $4.1 million in
   sales from the Company's U.S. accessories business due to greater demand.
   These increases were offset in part by a decline of $4.4 million in sales
   of environmental process systems sold by the Company's U.K. subsidiary, to
   $1.3 million in 1994, as a result of changes in U.K. environmental
   regulations that required modifications to that subsidiary's equipment.
   Thermo Fibertek intends to exit this business during 1995. In December
   1994, a wholly owned subsidiary of the Company entered into a $145 million
   contract for engineering, procurement, and construction services for an
   office wastepaper de-inking facility to be located in Menominee, Michigan.
   Construction is expected to take place over approximately two years. Thermo
   Fibertek will supply approximately $15 million of equipment and services
   for this project over the next two years. Sales of Holcroft heat-treating
   systems, which remain depressed, declined $1.5 million in 1994, and sales
   of automated electroplating equipment from the Company's wholly owned
   Napco, Inc. subsidiary declined $1.5 million due to weak demand. The
   Process Equipment segment income margin was 10.9%, compared with 8.3% in
   1993. Thermo Fibertek's segment income margin improved to 12.9% from 11.6%
   in 1993, primarily due to increased sales and an improved sales mix.
   Holcroft operations were just above the breakeven level while Napco
   operations resulted in a segment loss of $0.3 million due to lower sales
   levels.
        Sales in the Biomedical Products segment were $180.3 million, an
   increase of $52.8 million, or 41%, over 1993. Sales increased $18.1 million
   due to the inclusion for a full year of sales from CBI Laboratories, Inc.,
   which was acquired by the Company's ThermoLase subsidiary in December 1993.
   Sales of a number of the Company's biomedical products also contributed to
   the increase, including ThermoTrex's mammography and needle-biopsy systems,
   which increased 45% to $54.4 million; Thermo Cardiosystems' implantable
   left ventricular-assist systems, which increased $6.9 million; blood
   coagulation-monitoring products and skin incision devices sold by the

                                       36PAGE

   Thermo Electron Corporation


   Company's wholly owned International Technidyne Corporation subsidiary,
   which increased 18% to $28.6 million; and Thermedics' Scent Seal fragrance
   samplers, which increased $3.0 million, due primarily to increased demand.
   Segment income margin improved to 9.8% from 4.5% in 1993 as a result of
   increased sales and efforts to reduce costs.
        Sales in the Environmental Services segment were $141.8 million,
   compared with $122.0 million in 1993. Within this segment, sales from
   Thermo Remediation increased $8.6 million, to $29.7 million, primarily due
   to an increase in the volume of soil processed at its soil-remediation
   centers and, to a lesser extent, the inclusion of revenues from businesses
   acquired during 1994 and late 1993. Sales of analytical laboratory and
   environmental consulting services increased 10.9% to $61.2 million, due to
   the inclusion of sales from businesses acquired during 1994 and, to a
   lesser extent, the addition of a long-term environmental restoration
   contract for the U.S. Department of Energy's Hanford, Washington site.
   Sales of metallurgical services increased 9.1%, to $44.8 million, due to
   increased demand. Segment income margin improved to 10.5% from 7.6% in
   1993, due to increased sales and efforts to reduce costs.
        Sales from the Advanced Technologies segment were $142.7 million,
   compared with $76.3 million in 1993. Sales increased $54.7 million due to
   the inclusion of sales from Ramsey Technology Inc., which was acquired by
   Thermedics in March 1994, and Comtest, which was acquired by Thermo Voltek
   in August 1993. Sales of Thermedics' EGIS explosives- detection systems
   increased $4.1 million, and sales of Thermedics' process detection
   instruments, principally to one customer, increased $3.6 million. Revenues
   from ThermoTrex's government-sponsored research and development contracts
   increased $1.8 million. Segment income margin declined to 7.2% from 10.3%
   in 1993 as a result of increased research and development expenses at
   ThermoTrex to develop and commercialize new products and, to a lesser
   extent, lower margins at newly acquired businesses.
        The Company's wholly owned Napco subsidiary is challenging a jury
   verdict rendered against it during the third quarter of 1994 for $12.2
   million plus prejudgement interest in a contract dispute arising out of an
   allegedly defective waste-treatment system installed by Napco in 1984. The
   Company believes the verdict is in error and is vigorously pursuing all
   available post-trial remedies. These remedies include seeking to have the
   verdict set aside or substantially reduced and, if necessary, taking an
   appeal. In the third quarter of 1994, the Company increased its reserve for
   potential losses from pending litigation by approximately $4.0 million,
   which is reflected in Corporate general and administrative expenses.
        As a result of the sale of stock by subsidiaries, the issuance of
   stock by subsidiaries upon conversion of indebtedness, and similar
   transactions, the Company recorded gains of $25.3 million in 1994 and $39.9
   million in 1993. Such gains represent the increase in the Company's
   proportionate share of the subsidiaries' equity and are classified as "Gain
   on issuance of stock by subsidiaries" in the accompanying statement of
   income. See Notes 1 and 10 to Consolidated Financial Statements for a more
   complete description of these transactions. Minority interest expense
   increased to $31.0 million in 1994 from $21.1 million in 1993. Minority
   interest expense includes $5.6 million in 1994 and $1.3 million in 1993
   relating to gains recorded by the Company's majority-owned subsidiaries as
   a result of the sale of stock by their subsidiaries.
        "Other income (expense), net" in the accompanying statement of income
   includes a gain of $14.7 million resulting from the sale of the Peter
   Brotherhood Ltd. facility in the United Kingdom. Peter Brotherhood was
   relocated to a new and more efficient facility. Also included is equity in
   losses of unconsolidated subsidiaries, which represents the Company's
   portion of results from entities in which the Company's ownership is 50% or

                                       37PAGE

   Thermo Electron Corporation


   less, primarily the operation of the Dade County cogeneration facility,
   and, beginning in 1994, the Company's share of the profit from a 50%-owned
   joint venture that is responsible for the operation and maintenance of the
   Company's waste-recycling facility in San Diego. The loss associated with
   the Dade County facility was $5.2 million in 1994, compared with a loss of
   $5.7 million in 1993, excluding the $15.0 million provision recorded in
   1993.
        Because the demand for power and chilled water at the Dade County
   Downtown Government Center complex has been substantially less than
   anticipated since the plant's startup in 1987, and because the plant has
   had difficulty disposing of the remainder of its output, the joint venture
   continues to experience losses. Although the joint venture pursues
   alternatives to improve the profitability of this plant, such actions to
   date have not been effective, and there is no assurance that this situation
   will improve. In September 1994, the joint venture temporarily suspended
   operation of this plant for an indefinite period of time although it will
   continue to be responsible for lease and other fixed costs. The $15.0
   million reserve established in 1993 represents management's estimate,
   discounted to present value, of the Company's share of estimated future
   negative cash flows of the joint venture. The Company is involved in
   regulatory proceedings that could require additional reserves, if the
   outcome of one or more of these matters is adverse to the Company (see Note
   7 to Consolidated Financial Statements).
        A wholly owned subsidiary of the Company owns a waste-recycling
   facility in southern California that processes waste for San Diego County
   (the County). The subsidiary has contracted the operation and maintenance
   of the facility to a 50%-owned joint venture. In February 1995, the
   subsidiary was notified by the lead financing bank that the County was not
   in compliance with a covenant contained in the financing arrangements for
   the tax-exempt obligations issued in connection with construction of the
   facility. The financing arrangements are nonrecourse to the Company for
   issues relating to County defaults. Were the County to remain out of
   compliance, the bank group could declare a default on the tax-exempt
   obligations and foreclose on the facility. Such a default would result in
   the bank group and the subsidiary having claims against the County for
   damages, however, the County's responsibility to pay these damages could be
   limited to the funds it has available from the day-to-day operation of the
   County's solid waste-disposal system. Accordingly, the ultimate outcome of
   this matter could result in an impairment of the subsidiary's investment in
   the facility. The subsidiary's investment in the facility, including
   unfunded equity commitments of $5.5 million, was approximately $16.5
   million at December 31, 1994.
        In a lawsuit relating to the waste-recycling facility discussed above,
   a third party from whom the Company's subsidiary acquired certain
   development rights alleges that fees totaling $7.9 million plus interest
   and legal costs are due and payable from the subsidiary in connection with
   construction of the facility. The Company contends that no additional fees
   are payable because the facility actually built was substantially different
   from the one contemplated in the agreement with the third party developer.
   A jury trial is expected to commence in 1995. There can be no assurance as
   to the outcome of this matter.

   1993 Compared With 1992
   -----------------------

   Sales in 1993 were $1,249.7 million, an increase of $300.7 million, or 32%,
   over 1992. Segment income was $142.6 million, compared with $87.1 million
   in 1992, an increase of 64%. Operating income was $118.7 million, compared
   with $70.0 million in 1993, an increase of 70%.

                                       38PAGE

   Thermo Electron Corporation


        Sales from the Instruments segment were $516.7 million, an increase of
   $167.5 million, or 48%, over 1992. Sales increased approximately $153
   million due to additional revenues from acquired businesses, including
   Nicolet Instrument Corporation in August 1992, Gamma-Metrics in January
   1993, Spectra-Physics Analytical in February 1993, and divisions of FAG
   Kugelfischer Georg Shafer AG in October 1993. The remainder of the increase
   was due to increased demand for products from existing businesses. Segment
   income margin was 17.7%, compared with 17.1% in 1992. Segment income margin
   improved principally due to changes in product mix and continuing efforts
   to reduce costs.
        Sales from the Alternative-energy Systems segment were $242.7 million,
   an increase of $20.8 million, or 9%, over 1992. Sales from Thermo Ecotek
   were $117.7 million, compared with $104.8 million in 1992. Included in
   Thermo Ecotek's 1993 sales was $9.8 million recorded as a result of the
   termination of a power sales contract, and $3.1 million from the one-time
   sale of gas pipeline rights. The 1992 period included $2.0 million received
   in settlement of a dispute over lost development fees. Excluding the
   nonrecurring items from both years, revenues from plant operations
   increased 2% as a result of annual contractual energy rate increases under
   certain power sales contracts, offset in part by increased utility-imposed
   curtailments of power output at two California plants. Construction
   revenues from an alternative-energy facility, which was completed in 1993,
   were $10.9 million, compared with $35.8 million in 1992. Sales from Thermo
   Power were $77.4 million, compared with $43.9 million in 1992. This
   increase results principally from the acquisition of FES by Thermo Power in
   October 1992, offset in part by slight declines in revenues from its
   Crusader Engines and Tecogen divisions. Sales of Peter Brotherhood steam
   turbines and compressors were slightly below 1992 levels.
        Segment income from the Alternative-energy Systems segment was $14.4
   million, compared with $1.8 million in 1992. Thermo Ecotek segment income
   was $13.2 million, compared with $5.7 million in 1992. The 1993 period
   included $8.6 million of income from the termination of a power sales
   contract and the one-time sale of gas pipeline rights. The 1992 period
   included $2.0 million received in settlement of a dispute over lost
   development fees. Excluding the nonrecurring items in both years, segment
   income from Thermo Ecotek was $4.6 million in 1993 and $3.7 million in
   1992. This improvement resulted from lower lease expense, offset in part by
   depreciation expense, resulting from the September 1992 purchase of the
   Whitefield, New Hampshire plant and the December 1993 purchase of the
   Delano I facility. In addition, segment income from Thermo Ecotek was
   favorably affected by contractual energy rate increases. These improvements
   were partially offset by utility-imposed curtailments of power output at
   two California plants, and higher maintenance costs in 1993 to implement
   equipment modifications at one California plant. Total curtailments of
   power output in 1993 were approximately 90% of the maximum allowable
   curtailments under the Company's agreements with the utility, compared with
   less than 10% in 1992.  In 1992, Alternative-energy Systems segment income
   reflected the establishment of a reserve of $5.0 million for probable cost
   overruns on projects under construction. Segment income at Thermo Power
   improved principally as a result of increased revenues at FES and efforts
   to reduce costs, offset by a decline at Peter Brotherhood due to lower
   sales and increased price competition.
        Sales in the Process Equipment segment were $167.5 million, compared
   with $160.5 million in 1992. Within this segment, sales from Thermo
   Fibertek were $137.1 million, compared with $125.6 million in 1992. Sales
   at Thermo Fibertek increased by $18.6 million as a result of the
   acquisition of AES in June 1993, by $9.7 million due to the inclusion for a
   full year of Vickerys Holdings Limited, which was acquired in September

                                       39PAGE

   Thermo Electron Corporation


   1992, and by $4.5 million from the North American accessories,
   flotation-dryer, and pollution-control equipment businesses. These
   increases were partially offset by a decline in sales of $14.6 million in
   Thermo Fibertek's paper-recycling equipment business, which was affected by
   the poor financial condition of the paper industry, particularly in Europe,
   and by the unfavorable effects of a stronger U.S. dollar upon currency
   translation, which decreased sales by approximately $3.7 million. Sales of
   Holcroft heat-treating systems, which remain depressed, were $16.1 million,
   compared with $15.4 million in 1992. Sales of automated electroplating
   equipment from Napco declined to $14.3 million from $19.5 million in 1993,
   due to continuing weak demand. The Process Equipment segment income margin
   was 8.3%, compared with 8.7% in 1992. Thermo Fibertek's segment income
   margin was 11.6%, compared with 12.5% in 1992. This decline was primarily
   due to lower sales of paper-recycling equipment and, to a lesser extent,
   competitive pricing pressure experienced by foreign paper-recycling
   operations. Segment income improved at Holcroft, resulting from reduced
   costs, offset by a decline at Napco. Napco incurred a segment loss of $1.5
   million, compared with income of $0.6 million in 1992, as a result of lower
   sales, pricing pressure, and increased costs to complete jobs.
        Sales in the Biomedical Products segment were $127.5 million, compared
   with $58.2 million in 1992. Sales increased $59.1 million due to the
   inclusion of sales for a full year from Lorad Corporation, a manufacturer
   of mammography and needle-biopsy systems acquired by the Company's
   ThermoTrex subsidiary in November 1992, and from the acquisition of
   Nicolet's biomedical products business as part of the acquisition of
   Nicolet in August 1992. Sales also increased $4.2 million from the
   introduction of Thermedics' Scent Seal fragrance samplers, which were
   developed from the Company's polymer technology, with the balance of the
   increase primarily from higher demand for blood coagulation-monitoring
   products at International Technidyne. Segment income improved to $5.8
   million from $1.3 million in 1992, principally as a result of increased
   sales.
        Sales in the Environmental Services segment were $122.0 million,
   compared with $114.3 million in 1992. Within this segment, sales from
   Thermo Remediation increased by $8.9 million, primarily as a result of
   higher production at soil-remediation centers. Sales of metallurgical
   services declined by $1.3 million due to continuing weakness in aerospace
   and defense-related businesses. Sales from analytical laboratory and
   environmental consulting services were about the same level as in 1992.
   Segment income margin improved to 7.6%, compared with 7.4% in 1992, due to
   an improved sales mix and efforts to reduce costs.
        Sales from the Advanced Technologies segment were $76.3 million,
   compared with $46.1 million in 1992. Sales increased $24.4 million due to
   increased demand, principally from one customer, for Thermedics' process
   detection instruments. Sales also increased $7.2 million at Thermo Voltek,
   due to the inclusion, for a full year, of revenues from KeyTek Instrument,
   which was acquired in June 1992, and the inclusion of revenues from
   Comtest, which was acquired in August 1993. These increases were offset in
   part by a decline in sales from a specific contract at Thermo Voltek's
   Universal Voltronics division, which was essentially complete in 1993.
   Segment income was $7.8 million, compared with $2.0 million in 1992,
   resulting primarily from increased sales.
        In 1993, the Company recorded $6.6 million of "Costs associated with
   divisional and product restructuring," which is described in Note 12 to
   Consolidated Financial Statements. Of the $6.6 million, the Alternative-
   energy Systems segment recorded $1.5 million, the Process Equipment segment
   recorded $0.5 million, and the Environmental Services segment recorded $4.6


                                       40PAGE

   Thermo Electron Corporation


   million. There were no such costs recorded in 1992. Such amounts were not
   included in segment income discussed above.
        As a result of the sale of stock by subsidiaries, the issuance of
   stock by subsidiaries upon conversion of indebtedness, and similar
   transactions, the Company recorded gains of $39.9 million in 1993 and $30.2
   million in 1992. See Notes 1 and 10 to Consolidated Financial Statements
   for a more complete description of these transactions.
        "Other income (expense), net" in the accompanying statement of income
   includes equity in losses of unconsolidated subsidiaries, which represents
   the Company's portion of results from entities in which the Company's
   ownership is 50% or less, primarily the operation of the Dade County
   cogeneration facility. The loss in 1993 was $22.7 million, compared with a
   loss of $3.9 million in 1992, with the Dade County cogeneration facility
   accounting for $20.7 million and $3.4 million of these losses,
   respectively. The Dade County loss for 1993 includes a provision of $15.0
   million which is discussed above in the 1994 results of operations. The
   remaining increase resulted from higher fuel costs and legal expenses
   pertaining to the legal actions described in Note 7 to Consolidated
   Financial Statements.


   Financial Condition

   Liquidity and Capital Resources

   Consolidated working capital was $1,146.2 million at December 31, 1994,
   compared with $828.3 million at January 1, 1994. Included in working
   capital were cash and short-term investments of $997.7 million at December
   31, 1994, compared with $700.2 million at January 1, 1994. In addition, at
   December 31, 1994, the Company had $62.5 million of long-term marketable
   securities, compared with $43.6 million at January 1, 1994. In April 1994,
   the Company issued $345.0 million principal amount of 5% senior convertible
   debentures due 2001.
        In 1994, the Company expended $174.3 million for acquisitions and
   $60.2 million for purchases of property, plant and equipment. The Company
   has no material commitments for purchases of property, plant and equipment
   and expects that, for 1995, such expenditures will approximate the 1994
   level. On March 1, 1995, the Company's Thermo Instrument subsidiary entered
   into an agreement to acquire the Scientific Instruments Division of Fisons
   plc for 202 million British pounds sterling, subject to the satisfaction of
   certain conditions to closing (see Note 15 to Consolidated Financial
   Statements).
        A substantial percentage of the Company's consolidated cash and
   short-term investments is held by subsidiaries that are not wholly owned by
   the Company. This percentage may vary significantly over time. Pursuant to
   the Thermo Electron Corporate Charter (the Charter), to which each of the
   majority-owned subsidiaries of the Company is a party, the combined
   financial resources of Thermo Electron Corporation and its subsidiaries
   allow the Company to provide banking, credit, and other financial services
   to its subsidiaries so that each member of the Thermo Electron group of
   companies may benefit from the financial strength of the entire
   organization. Toward that end, the Charter states that each member of the
   group may be required to provide certain credit support to the consolidated
   entity. Nonetheless, the Company's ability to access assets held by its
   majority-owned subsidiaries through dividends, loans, or other transactions
   is subject in each instance to a fiduciary duty owed to the minority
   shareholders of the relevant subsidiary. In addition, dividends received by
   Thermo Electron from a subsidiary that does not consolidate with Thermo

                                       41PAGE

   Thermo Electron Corporation


   Electron for tax purposes are subject to tax. Therefore, under certain
   circumstances, a portion of the Company's consolidated cash and short-term
   investments may not be readily available to Thermo Electron or certain of
   its subsidiaries.
        The Company intends for the foreseeable future to maintain at least
   80% ownership of its Thermo Instrument, Thermo Fibertek, and Thermo Ecotek
   subsidiaries, which is required in order to continue to file a consolidated
   federal income tax return with these subsidiaries. In addition, the Company
   intends to maintain greater than 50% ownership of its other majority-owned
   subsidiaries so that the Company may continue to consolidate these
   subsidiaries for financial reporting purposes. This may require the
   purchase by the Company of additional shares or convertible debentures of
   these companies from time to time as the number of outstanding shares
   issued by these companies increases, either in the open market or directly
   from the subsidiaries. See Note 6 to Consolidated Financial Statements for
   a description of outstanding convertible debentures issued by Thermo
   Instrument. In addition, at December 31, 1994, Thermo Instrument, Thermo
   Fibertek, and Thermo Ecotek had outstanding stock options of 2,026,000
   shares, 1,681,000 shares, and 1,026,000 shares, respectively, exercisable
   at various prices and subject to certain vesting schedules. The Company's
   other majority-owned subsidiaries also have outstanding stock options
   and/or convertible debentures. If the Company were to lose its ability to
   consolidate for tax purposes with Thermo Instrument, the Company would
   incur an additional tax liability, which could be substantial.
        During 1994, the Company and its majority-owned subsidiaries expended
   $101.5 million to purchase common stock of the Company's subsidiaries. The
   Company expects that these purchases will continue in 1995.
































                                       42PAGE

   Thermo Electron Corporation


   Information as to Publicly Owned Businesses (Unaudited)

   (In thousands)                           1994         1993        1992
   ----------------------------------------------------------------------
   Revenues:
    Thermo Instrument Systems Inc.    $  662,187  $  584,176   $  423,199
    Thermo Fibertek Inc.                 162,625     137,088      125,577
    Thermedics Inc. (a)                  155,111      80,220       45,778
    Thermo Ecotek Corporation            134,261     117,691      104,785
    Thermo Process Systems Inc. (b)      111,268      53,839       47,082
    Thermo Power Corporation              91,873      77,360       43,904
    ThermoTrex Corporation (c)            91,052      54,329       19,843
                                      ----------  ----------   ----------
                                       1,408,377   1,104,703      810,168
   Wholly owned nonpublic companies      176,971     145,015      138,804
                                      ----------  ----------   ----------
                                      $1,585,348  $1,249,718   $  948,972
                                      ==========  ==========   ==========
   Segment Income (d):
    Thermo Instrument Systems Inc.    $  106,241  $   96,786   $   63,373
    Thermo Fibertek Inc.                  20,948      15,902       15,716
    Thermedics Inc. (a)                   16,909       8,292          841
    Thermo Ecotek Corporation             26,928      13,184        5,735
    Thermo Process Systems Inc. (b)        9,219       1,338          371
    Thermo Power Corporation               5,263       2,707          715
    ThermoTrex Corporation (c)             1,467         485       (1,185)
                                      ----------  ----------   ----------
                                         186,975     138,694       85,566
   Wholly owned nonpublic companies       16,361       3,938        1,502
                                      ----------  ----------   ----------
                                         203,336     142,632       87,068
   Equity in Losses of
    Unconsolidated Subsidiaries           (4,019)    (22,721)      (3,948)
   Corporate                               4,286      11,208       18,850
                                      ----------  ----------   ----------
   Income Before Income Taxes,
    Minority Interest, and
    Cumulative Effect of Change
    in Accounting Principle           $  203,603  $  131,119   $  101,970
                                      ==========  ==========   ==========

   (a)  Includes Thermo Cardiosystems Inc. and Thermo Voltek Corp.
   (b)  Includes Thermo Remediation Inc.
   (c)  Includes ThermoLase Corporation.
   (d)  Segment income is income before corporate general and administrative
        expenses, costs associated with divisional and product restructuring,
        other income and expense, minority interest expense, and income taxes.











                                       43PAGE

   Thermo Electron Corporation


   Quarterly Information (Unaudited)

   (In thousands except per share amounts)

   1994(a)                               First    Second     Third    Fourth
   -------------------------------------------------------------------------
   Revenues                           $350,476  $394,966  $406,454  $433,452
   Gross profit                        136,870   156,728   166,575   175,605
   Net income                           22,541    24,150    27,744    28,975
   Earnings per share:
    Primary                                .47       .50       .56       .57
    Fully diluted                          .42       .44       .48       .50



   1993(b)                               First    Second     Third    Fourth
   -------------------------------------------------------------------------
   Revenues                           $292,763  $300,449  $318,380  $338,126
   Gross profit                        104,781   110,071   124,832   134,106
   Net income                           15,448    17,606    20,923    22,656
   Earnings per share:
    Primary                                .38       .43       .45       .48
    Fully diluted                          .34       .39       .40       .43

   (a)  Results include nontaxable gains of $8,494,000, $229,000, $12,561,000,
        and $3,999,000 in the first, second, third, and fourth quarters,
        respectively, from the issuance of stock by subsidiaries.
   (b)  Results include nontaxable gains of $11,101,000, $10,617,000,
        $3,461,000, and $14,684,000 in the first, second, third, and fourth
        quarters, respectively, from the issuance of stock by subsidiaries.


   Common Stock Market Information
   --------------------------------------------------------------------------
   The following table shows the market range for the Company's common stock
   based on reported sales prices on the New York Stock Exchange (symbol TMO)
   for 1994 and 1993. Prices were restated in 1993 to reflect a three-for-two
   stock split distributed in October 1993.

                                             1994                1993
                                      ----------------    ----------------
   Quarter                             High       Low      High      Low
   -----------------------------------------------------------------------
   First                              $44 3/8   $38       $38       $31 1/3
   Second                              41 3/8    36        41 1/6    36 1/3
   Third                               45 7/8    37 7/8    43 1/4    37 1/4
   Fourth                              47 7/8    40 3/4    43        38 1/8

        The closing market price on the New York Stock Exchange for the
   Company's common stock on January 27, 1995 was $44 3/8 per share.
        As of January 27, 1995, the Company had 6,666 holders of record of its
   common stock. This does not include holdings in street or nominee names.








                                       44PAGE

   Thermo Electron Corporation


        Common stock of the following majority-owned public subsidiaries is
   traded on the American Stock Exchange: Thermedics Inc. (TMD), Thermo
   Instrument Systems Inc. (THI), Thermo Process Systems Inc. (TPI), Thermo
   Power Corporation (THP), ThermoTrex Corporation (TKN), Thermo Fibertek Inc.
   (TFT), Thermo Ecotek Corporation (TCK), Thermo Cardiosystems Inc. (TCA),
   Thermo Voltek Corp. (TVL), Thermo Remediation Inc. (THN), and ThermoLase
   Corporation (TLZ).


   Transfer Agent and Common Stock Registrar
   --------------------------------------------------------------------------
   The Bank of Boston is the stock transfer agent and maintains shareholder
   activity records. The agent will respond to questions on issuances of stock
   certificates, changes of ownership, lost stock certificates, and changes of
   address. For these and similar matters, please direct inquiries to:

               The Bank of Boston
               Post Office Box 644
               Mail Stop: 45-02-09
               Boston, Massachusetts 02102-0644
               (617) 575-3120


   Shareholder Services
   --------------------------------------------------------------------------
   Shareholders of Thermo Electron Corporation who desire information about
   the Company are invited to contact John N. Hatsopoulos, Chief Financial
   Officer, Thermo Electron Corporation, 81 Wyman Street, P.O. Box 9046,
   Waltham, Massachusetts 02254-9046, by letter or telephone at 
   (617) 622-1111.
        A mailing list is maintained to enable shareholders whose stock is
   held in street name, and other interested individuals, to receive quarterly
   and annual reports as quickly as possible. If you would like your name
   added to the list, please notify this office.


   Dividend Policy
   --------------------------------------------------------------------------
   The Company has never paid cash dividends and does not expect to pay cash
   dividends in the foreseeable future because its policy has been to use
   earnings to finance expansion and growth. Payment of dividends will rest
   within the discretion of the Board of Directors and will depend upon, among
   other factors, the Company's earnings, capital requirements, and financial
   condition.


   Annual Meeting
   --------------------------------------------------------------------------
   The annual meeting of shareholders will be held on Tuesday, May 23, 1995 at
   5:00 p.m. at the Hyatt Regency Hotel, Hilton Head, South Carolina.









                                       45PAGE

   Thermo Electron Corporation


   Form 10-K Report
   --------------------------------------------------------------------------
   A copy of the Annual Report on Form 10-K for the fiscal year ended December
   31, 1994, as filed with the Securities and Exchange Commission, may be
   obtained at no charge by writing to John N. Hatsopoulos, Chief Financial
   Officer, Thermo Electron Corporation, 81 Wyman Street, P.O. Box 9046,
   Waltham, Massachusetts 02254-9046.


   Corporate Office
   --------------------------------------------------------------------------
               Thermo Electron Corporation
               81 Wyman Street
               Post Office Box 9046
               Waltham, Massachusetts 02254-9046










































                                       46PAGE


Thermo Electron Corporation
Ten Year Financial Summary
(In millions except per share amounts)

                   1994(a)   1993(b)  1992(c)  1991(d)  1990(e)   1989    1988    1987     1986     1985
                 --------  --------  -------  ------- -------  ------- ------- -------  -------  -------
                                                                   
Revenues         $1,585.3  $1,249.7  $ 949.0  $ 805.5  $720.7  $ 623.0 $ 540.7 $ 419.9  $ 359.1  $ 286.2
                 --------  --------  -------  -------  ------  ------- ------- -------  -------  -------
Costs and Expenses:
 Cost of revenues   928.6     755.5    609.0    532.9   465.1    424.2   359.6   280.3    244.8    194.9
 Expenses for R&D                                                                
  and new lines of
  business          103.7      87.0     62.3     52.6    54.0     46.5    43.2    31.4     26.5     21.5
 Selling, general                                                                 
  and administra-
  tive expenses     373.2     281.9    207.7    175.0   161.1    127.7   112.0    89.6     71.0     55.7
 Costs associated                                                                 
  with divisional  
  and product
  restructuring        .7       6.6        -      3.7     1.0      2.2     0.9     3.5      7.1      4.3
                  -------  --------  -------  ------- -------  ------- ------- -------  -------  -------
                  1,406.2   1,131.0    879.0    764.2   681.2    600.6   515.7   404.8    349.4    276.4
                  -------  --------  -------  ------- -------  ------- ------- -------  -------  -------
Operating Income    179.1     118.7     70.0     41.3    39.5     22.4    25.0    15.1      9.7      9.8

Gain on Issuance 
 of Stock by
 Subsidiaries        25.3      39.9     30.2     27.4    20.3     16.8     6.0    16.1     15.9      9.1
Other Income                                                                      
 (Expense), Net       (.8)    (27.5)     1.8     10.5      .1      1.1     2.8    (2.5)    (5.0)    (5.9)
                  -------  --------  -------  ------- -------  ------- ------- -------  -------  -------
Income Before                                                                         
 Income Taxes,
 Minority Interest,
 and Cumulative
 Effect of Change
 in Accounting
 Principle          203.6     131.1    102.0     79.2    59.9     40.3    33.8    28.7     20.6     13.0
Provision for                                                                                   
 Income Taxes        69.2      33.4     27.5     24.8    17.8     10.4     9.0     6.0      4.0      2.5
Minority Interest                                                                           
 Expense             31.0      21.1     13.9      7.3     7.1      3.3     2.0     1.9      0.5     (0.1)
                  -------  --------  -------  ------- -------  ------- ------- -------  -------  -------
                                                    47PAGE

Thermo Electron Corporation
Ten Year Financial Summary (continued)
(In millions except per share amounts)


                   1994(a)   1993(b)  1992(c)  1991(d)  1990(e)   1989    1988    1987     1986     1985
                 --------  --------  -------  ------- -------  ------- ------- -------  -------  -------
Income Before 
 Cumulative Effect  
 of Change in
 Accounting
 Principle          103.4      76.6     60.6     47.1    35.0     26.6    22.8    20.8     16.1     10.6
Cumulative Effect                                                                  
 of Change in 
 Accounting Prin-
 ciple, Net of
 Tax (f)               -         -       1.4       -        -        -       -       -        -        -
                 --------  --------  -------  ------- -------  ------- ------- -------  -------  -------
 Net Income      $  103.4  $   76.6  $  59.2  $  47.1 $  35.0  $  26.6 $  22.8 $  20.8  $  16.1  $  10.6
                 ========  ========  =======  ======= =======  ======= ======= =======  =======  =======
Earnings per                                                                   
 Share Before
 Cumulative
 Effect of
 Change in
 Accounting
 Principle:
  Primary        $   2.10  $   1.75  $  1.51  $  1.31 $  1.09  $   .86 $   .77 $   .68  $   .55  $   .42
  Fully                                                                        
   diluted       $   1.85  $   1.57  $  1.41  $  1.23 $  1.03  $   .84 $   .75 $   .67  $   .54  $   .41

Earnings per
 Share:
  Primary        $   2.10  $   1.75  $  1.48  $  1.31 $  1.09  $   .86 $   .77 $   .68  $   .55  $   .42
  Fully                                                                                
   diluted       $   1.85  $   1.57  $  1.38  $  1.23 $  1.03  $   .84 $   .75 $   .67  $   .54  $   .41

                                                    48PAGE

Thermo Electron Corporation
Ten Year Financial Summary (continued)
(In millions except per share amounts)


                   1994(a)   1993(b)  1992(c)  1991(d)  1990(e)   1989    1988    1987     1986     1985
                 --------  --------  -------  ------- -------  ------- ------- -------  -------  -------
Balance Sheet
 Data:
  Working
   capital       $1,146.2  $  828.3 $  503.4 $  463.5 $ 241.4 $  276.0 $ 218.8 $ 210.9  $ 124.3  $  79.1
  Total assets    3,019.9   2,473.7  1,818.3  1,199.5   904.4    664.1   524.4   460.8    332.6    240.9
  Net assets                                                                              
   related to
   construc-
   tion
   projects             -       9.4     23.8     29.4       -        -       -       -        -        -
  Long-term                                                                                           
   obligations    1,049.8     647.5    494.2    255.0   210.0    176.9   152.7   135.7     61.4     49.1
  Minority                                                                                           
   interest         328.0     277.7    164.3    122.5    83.9     51.8    22.6    25.8     20.1      6.6
  Common stock                                                                                      
   of subsid-
   iaries
   subject to
   redemption           -      14.5      5.5      5.5     8.7     13.1       -       -        -        -
  Shareholders'                                                                                           
   investment       990.3     858.5    552.9    480.9   310.2    226.4   194.3   173.5    153.1    106.7

(a)  Reflects the issuance of $345.0 million principal amount of convertible debentures.
(b)  Reflects the Company's 1993 public offering of common stock for net proceeds of $246.0 million.
(c)  Reflects the August 1992 acquisition of Nicolet Instrument Corporation and the issuance of $260.0
     million principal amount of convertible debentures.
(d)  Reflects the issuance of $164.0 million principal amount of convertible debentures.
(e)  Reflects the May 1990 acquisition of Finnigan Corporation.
(f)  Reflects the adoption in fiscal 1992 of Statement of Financial Accounting Standards No. 106,
     "Accounting for Post-retirement Benefits Other Than Pensions".

                                                    49

EX-21

                                                                    Exhibit 21
Thermo Electron Corporation - Subsidiaries of  the Registrant
At March 3, 1995, Thermo Electron Corporation owned the following companies:

                                                         STATE OR
                                                       JURISDICTION  
                                                            OF       PERCENT OF
                         NAME                          INCORPORATION  OWNERSHIP
- -------------------------------------------------------------------------------
 CRC Acquisition Corp.                                Delaware           100
 Nicolet Biomedical Inc.                              California         100
   Eden Medical Electronics, Inc.                     Delaware           100
   Eden Medizinische Elektronik GmbH                  Germany            100
   Neuroscience Limited                               United Kingdom     100
   Nicolet Biomedical S.A.R.L.                        France             100
 Peter Brotherhood Holdings Ltd.                      United Kingdom     100
   Peter Brotherhood Limited                          United Kingdom     100
      D.S.T. Pattern & Engineering Co. Ltd.           United Kingdom     100
      FES International Limited                       United Kingdom     100
      Link Control Technology Ltd.                    United Kingdom     100
      Machtech Ltd.                                   United Kingdom     100
      Peter Brotherhood Pension Fund Trustees Ltd.    United Kingdom     100
      Sensonics Ltd.                                  United Kingdom     100
      Thermo Electron Realty Limited                  United Kingdom     100
      Turboflex Limited                               United Kingdom     100
        T & A Nash (Penn) Limited                     United Kingdom     100
        Torsiflex Limited                             United Kingdom     100
        (50% of which shares are owned directly
         by Peter Brotherhood Limited)
   Thermo Holdings Limited                            United Kingdom     100
      Brotherhood Environmental Engineering Services  United Kingdom     100 
       Limited                                     
 Termo Electron, S.A. de C.V.                         Mexico             100
 The Thermo Electron Companies Inc.                   Wisconsin          100
   Bay State Wood Energy Company, Inc.                Massachusetts      100
   Gulf Precision, Inc.                               Arizona            100
      Seeley Enterprises, Inc.                        New Mexico         100
   International Technidyne Corporation               Delaware           100
   Loftus Furnace Company                             Pennsylvania       100
   Medway Recycling Company, Inc.                     Massachusetts      100
   Metal Treating Inc.                                Wisconsin          100
   Methuen Steam Company, Inc.                        Massachusetts      100
   Met-Therm, Inc.                                    Ohio               100
   NAPCO, Inc.                                        Connecticut        100
   New Hampshire Wood Energy Co., Inc.                New Hampshire      100
   Nicolet Biomedical of California Inc.              California         100
   North Carbondale Minerals, Inc.                    California         100
   North County Recycling, Inc.                       California         100
   Overly, Inc.                                       Wisconsin          100
   PB Acquisition Corp.                               Delaware           100
   Perfection Heat Treating Company                   Michigan           100
   Salem Steam Company, Inc.                          Massachusetts      100
   San Marcos Resource Recovery, Inc.                 California         100
   Seminole Energy Company                            Florida            100
   Southern Ocean County Resource Recovery, Inc.      New Jersey         100
   Staten Island Cogeneration Corporation             New York           100


                                                                Page 1PAGE

Thermo Electron Corporation - Subsidiaries of  the Registrant
At March 3, 1995, Thermo Electron Corporation owned the following companies:

                                                         STATE OR
                                                       JURISDICTION  
                                                            OF       PERCENT OF
                         NAME                          INCORPORATION  OWNERSHIP
- -------------------------------------------------------------------------------
   TE Energy Systems, Inc.                            Massachusetts      100
   TE Great Lakes Inc.                                Michigan           100
   TEC Cogeneration Inc.                              Florida            100
      South Florida Cogeneration Associates           Florida             50*
   TEC Energy Corporation                             California         100
      North County Resource Recovery  Associates      California         100*
      (50% of which is owned directly by
       San Marcos Resource Recovery, Inc.)
   Tecomet Inc.                                       Massachusetts      100
   Thermedics Inc.                                    Massachusetts    50.58**
      Corpak Inc.                                     Massachusetts      100
        Walpak Company                                Illinois           100
      Ramsey France S.A.R.L.                          France             100
      Ramsey Ingenieros S.A.                          Spain              100
      Ramsey Italia S.R.L.                            Italy              100
        Tecno Europa Elettromeccanica S.R.L.          Italy              100
      Ramsey Technology Inc.                          Massachusetts      100
      Thermedics Australia Pty. Ltd.                  Australia          100
      Thermedics B.V.                                 Netherlands        100
      Thermedics Canada Inc.                          Canada             100
      Thermedics Detection Inc.                       Massachusetts      100
        ThermedeTec Corporation                       Delaware           100
           Thermedics Detection de Argentina S.A.     Argentina          100
           Thermedics Detection de Mexico, S.A. de    Mexico             100
             de C.V.
           Thermedics Detection GmbH                  Germany            100
           Thermedics Detection Limited               United Kingdom     100
           Thermedics Detection Scandinavia AS        Norway             100
      Thermedics F. S. C. Inc.                        U. S. Virgin       100
                                                      Islands
      Thermedics GmbH                                 Germany            100
      Thermedics Limited                              United Kingdom     100
      Thermedics (South Africa) Pty. Ltd.             South Africa       100
      TMD Securities Corporation                      Massachusetts      100
        Thermo Cardiosystems Inc.                     Massachusetts    54.96**
           TCA Securities Corporation                 Massachusetts      100
        Thermo Voltek Corp.                           Delaware         60.05**
           Comtest Europe B.V.                        Netherlands        100
             Comtest Instrumentation, B.V.            Netherlands        100
             Comtest Limited                          United Kingdom     100
           KeyTek FSC, Ltd.                           U.S. Virgin        100
                                                      Islands
           UVC Realty Corp.                           New York           100
   Thermo Administrative Services Corporation         Delaware           100
   Thermo Ecotek Corporation                          Delaware         97.47**
      Caribbean Cogeneration Company, Inc.            Massachusetts      100
      Coos Biomass Corporation                        California         100


                                                            Page 2PAGE

Thermo Electron Corporation - Subsidiaries of  the Registrant
At March 3, 1995, Thermo Electron Corporation owned the following companies:

                                                         STATE OR
                                                       JURISDICTION  
                                                            OF       PERCENT OF
                         NAME                          INCORPORATION  OWNERSHIP
- -------------------------------------------------------------------------------
      Delano Energy Company Inc.                      Delaware           100
      Delano Operations Company, Inc.                 California         100
      Gatepeak Corporation                            Delaware           100
      SFS Corporation                                 New Hampshire      100
      Tenpeak Corporation                             Nevada             100
      TES Securities Corporation                      Delaware           100
      Thermendota, Inc.                               California         100
        Mendota Biomass Power, Ltd.                   California         60*
           California Agriwaste Corporation           California         100
             Golden Fuel Company                      California         50*
           MBPL Agriwaste Corporation                 California         100
      Thermo Electron of Maine, Inc.                  Maine              100
        Gorbell/Thermo Electron Power Company         Maine              80*
      Thermo Electron of New Hampshire, Inc.          New Hampshire      100
        Hemphill Power and Light Company              New Hampshire      66*
      Thermo Electron of Whitefield, Inc.             New Hampshire      100
        Whitefield Power and Light Company            New Hampshire      100*
        (39% of which is owned
         directly by SFS Corporation)
      Thermo Fuels Company, Inc.                      California         100
      Woodland Biomass Power, Inc.                    California         100
        Woodland Biomass Power, Ltd.                  California          99*
   Thermo Electron of Conway, Inc.                    New Hampshire      100
   Thermo Electron Foundation, Inc.                   Massachusetts      100
   Thermo Electron Metallurgical Services, Inc.       Texas              100
   Thermo Fibertek Inc.                               Delaware         80.51**
      AES Equipos y Sistemas S.A. de C.V.             Mexico             100
      Thermo AES Canada Inc.                          Canada             100
      Thermo Electron Web Systems, Inc.               Massachusetts      100
        Fiberprep Inc.                                Delaware           95
        (31.05% of which shares are owned
         directly by E. & M. Lamort, S.A.)
           Fiberprep Securities Corporation           Delaware           100
        Thermo Electron Wisconsin, Inc.               Wisconsin          100
      Thermo Fibertek U.K. Limited                    United Kingdom     100
        Vickerys Holdings Limited                     United Kingdom     100
           Vickerys Limited                           United Kingdom     100
             Paperliners Limited                      New Zealand        100
             Vickerys Projects Limited                United Kingdom     100
             Winterburn Limited                       United Kingdom     100
      TMO Lamort Holdings Inc.                        Delaware           100
        E. & M. Lamort, S.A.                          France             100
           Lamort GmbH                                Germany            100
           Lamort Italia S.R.L.                       Italy              100
           Lamort Paper Services Ltd.                 United Kingdom     100
           Nordiska Lamort Lodding A.B.               Sweden             100
   Thermo Instrument Systems Inc.                     Delaware         83.49**



                                                              Page 3PAGE

Thermo Electron Corporation - Subsidiaries of  the Registrant
At March 3, 1995, Thermo Electron Corporation owned the following companies:

                                                         STATE OR
                                                       JURISDICTION  
                                                            OF       PERCENT OF
                         NAME                         INCORPORATION  OWNERSHIP
- -------------------------------------------------------------------------------
      Analytical Instrument Development, Inc.         Pennsylvania       100
      Bettigole Andrews & Clark, Inc.                 New York           100
        N. H. Bettigole Co., Inc.                     Delaware           100
        N. H. Bettigole, P.A.                         New Jersey         100
        N. H. Bettigole, P.C.                         New York           100
      CIDTEC Acquisition Corp.                        New York           100
      Eberline Analytical Corporation                 New Mexico         100
      Eberline Instrument Company Limited             United Kingdom     100
      Eberline Instrument Corporation                 New Mexico         100
      Epsilon Industrial Inc.                         Texas              100
      Fellows, Read & Associates, Inc.                New Jersey         100
      Finnigan Corporation                            Virginia           100
        Finnigan Instruments, Inc.                    New York           100
        Finnigan International Sales, Inc.            California         100
        Finnigan MAT China, Inc.                      California         100
        Finnigan MAT (Delaware), Inc.                 Delaware           100
        Finnigan MAT Instruments, Inc.                Nevada             100
        Finnigan MAT International Sales, Inc.        California         100
        Finnigan MAT (Nevada), Inc.                   Nevada             100
           Finnigan MAT AG                            Switzerland        100
           Finnigan MAT Canada, Ltd.                  Canada             100
           Finnigan MAT GmbH                          Germany            100
           Finnigan MAT Ltd.                          United Kingdom     100
             Finnigan MAT AB                          Sweden             100
           Finnigan MAT S.A.R.L.                      France             100
           Finnigan MAT S.R.L.                        Italy              100
             Thermo Separation Products S.R.L.        Italy              100
           Thermo Instruments Australia Pty. Limited  Australia          100
        Finnigan Properties, Inc.                     California         100
      Gamma-Metrics                                   California         100
        Gamma-Metrics International F.S.C. Inc.       Guam               100
      Gas Tech Inc.                                   California         100
        Gas Tech Australia, Pty. Ltd.                 Australia           50
        Gas Tech Partnership                          California          50*
        Gastech Instruments Canada Ltd.               Canada             100
      Houston Atlas Inc.                              Texas              100
      National Nuclear Corporation                    California         100
      Nicolet Instrument Corporation                  Wisconsin          100
        Nicolet Instrument Canada, Inc.               Canada             100
        Nicolet Instrument Limited                    United Kingdom     100
        Nicolet Instrument S.A.R.L.                   France             100
        Nicolet Japan K.K.                            Japan              100
        Project Phoenix of Madison, Inc.              Wisconsin          100
        Spectra-Tech, Europe Limited                  United Kingdom     100
        Spectra-Tech, Inc.                            Wisconsin          100
        ThermoSpectra Corporation                     Delaware         85.67**
           Beleggingsmaatschappij Zeis B.V.           Netherlands        100


                                                             Page 4PAGE

Thermo Electron Corporation - Subsidiaries of  the Registrant
At March 3, 1995, Thermo Electron Corporation owned the following companies:

                                                         STATE OR
                                                       JURISDICTION  
                                                            OF       PERCENT OF
                         NAME                          INCORPORATION  OWNERSHIP
- -------------------------------------------------------------------------------
             Bakker Electronics Dongen B.V.           Netherlands        100
                Bakker Electronics Limited            United Kingdom     100
           Nicolet Instrument Technologies Inc.       Wisconsin          100
           NORAN Instruments Inc.                     Wisconsin          100
      Normandeau Associates, Inc.                     New Hampshire      100
      Skinner & Sherman, Inc.                         Massachusetts      100
        Skinner & Sherman Laboratories, Inc.          Massachusetts      100
        Skinner & Sherman Technology, Inc.            Massachusetts      100
      Spectrace Instruments Inc.                      California         100
      TEV Administrative Services Corporation         Delaware           100
      Thermo BioAnalysis Corporation`                 Delaware           100
      Thermo Consulting Engineers Inc.                Delaware           100
        George A. Schock &  Associates, Inc.          New Jersey         100
        Jennison Engineering, Inc.                    Vermont            100
      Thermo Environmental Instruments Inc.           California         100
        MIE Acquisition, Inc.                         Massachusetts      100
      Thermo Instrument Controls Inc.                 Delaware           100
      Thermo Instrument Systems Japan Holdings, Inc.  Delaware           100
        Nippon Jarrell-Ash Company, Ltd.              Japan              100
      Thermo Instruments do Brasil Ltda.              Brazil             100
      Thermo Instruments F.S.C. Inc.                  U.S. Virgin        100
                                                      Islands
      Thermo Jarrell Ash Corporation                  Massachusetts      100
        Baird Analytical Instrr Tech Co.              China              100
          Beijing Ltd.
        Baird DD Brazil Representacoes Ltda.          Brazil             100
        Scientific Measurement Systems Inc.           Colorado           100
        Thermo Instrument Systems (F.E.) Limited      China              100
        Thermo Instruments (Canada) Inc.              Canada             100
           Eberline Instruments (Canada) Ltd.         Canada             100
      Thermo Separation Products AG                   Switzerland        100
      Thermo Separation Products Inc.                 Delaware           100
        Thermo Instrument Systems (France) S.A.       France             100
           Thermo Separation Products S.A.            France             100
        Thermo Separation Products K.K.               Japan              100
      TMA/Hanford, Inc.                               Washington         100
      TMA/NORCAL Inc.                                 California         100
      TN Technologies Inc.                            Texas              100
      Van Hengel Holding B.V.                         Netherlands        100
        Baird Europe B.V.                             Netherlands        100
        Baird France S.A.R.L.                         France             100
        Thermo Electron Limited                       United Kingdom     100
           Planweld Limited                           United Kingdom     100
             Hilger Analytical Limited                United Kingdom     100
        Thermo Instrument Systems B.V.                Netherlands        100
           Hilkomij B.V.                              Netherlands        100
           NORAN Instruments B.V.                     Netherlands        100



                                                                Page 5PAGE

Thermo Electron Corporation - Subsidiaries of  the Registrant
At March 3, 1995, Thermo Electron Corporation owned the following companies:

                                                         STATE OR
                                                       JURISDICTION  
                                                            OF       PERCENT OF
                         NAME                          INCORPORATION  OWNERSHIP
- -------------------------------------------------------------------------------
           Thermo Automation Services  (ThAS) B.V.    Netherlands        100
           Van Oortmerssen B.V.                       Netherlands        100
        Thermo Instrument Systems GmbH                Germany            100
           Eberline Instruments GmbH                  Germany            100
           Nicolet Instrument GmbH                    Germany            100
           NORAN Instruments GmbH                     Germany            100
           Thermo Instruments GmbH                    Germany            100
           Thermo Separation Products GmbH            Germany            100
        Thermo Jarrell Ash (Europe) B.V.              Netherlands        100
        Thermo Jarrell Ash, S.A.                      Spain              100
        Thermo Separation Products B.V.               Netherlands        100
           Thermo Separation Products B.V. B.A.       Belgium            100
      Westronics Inc.                                 Texas              100
   Thermo Power Corporation                           Massachusetts    59.83**
      NuTemp, Inc.                                    Illinois           100
      Takepine Limited                                United Kingdom     100
      Tecogen Securities Corporation                  Massachusetts      100
      ThermoLyte Corporation                          Delaware           100
   Thermo Process Systems Inc.                        Delaware         80.47**
      Beheersmaatschappij J. Amerika N.V.             Netherlands      64.50**
        Amerika Tankinstallaties B.V.                 Netherlands        100
        High-Tech Trouble-Shooters B.V.               Netherlands        100
        Jac. Amerika en Zonen B.V.                    Netherlands        100
      Engineering Technology and Knowledge            Delaware           100
       Corporation
        Elson T. Killam Associates, Inc.              New Jersey         100
           Duncan, Lagnese and Associates,            Pennsylvania       100
            Incorporated
           E3-Killam, Inc.                            New York           100
           Killam Associates, Inc.                    Ohio               100
           Killam Management and Operational          New Jersey         100
 Services, Inc.
      Holcroft (Canada) Limited                       Canada             100
      Holcroft Corporation                            Delaware           100
        Holcroft GmbH                                 Germany            100
      Terra Tech Labs, Inc.                           Delaware           100
        Thermo Terra Tech                             Massachusetts      100*
        (49% of which is owned indirectly
          by Thermo Instrument Systems Inc.)
      Thermo Incineration Inc.                        Michigan           100
      Thermo Process Services Inc.                    Delaware           100
        Cal-Doran Metallurgical Services, Inc.        California         100
      Thermo Process Services Midwest Inc.            Delaware           100
        Metallurgical, Inc.                           Minnesota          100
      Thermo Remediation Inc.                         Delaware         65.32**
        Thermo Fluids Inc.                            Delaware           100
        TPS Technologies Inc.                         Florida            100


                                                              Page 6PAGE

Thermo Electron Corporation - Subsidiaries of  the Registrant
At March 3, 1995, Thermo Electron Corporation owned the following companies:

                                                         STATE OR
                                                       JURISDICTION  
                                                            OF       PERCENT OF
                         NAME                          INCORPORATION  OWNERSHIP
- -------------------------------------------------------------------------------
           TPST Soil Recyclers of California Inc.     California         100
           TPST Soil Recyclers of Maryland Inc.       Maryland           100
             Todds Lane Limited Partnership           Maryland           100*
           TPST Soil Recyclers of New York Inc.       New York           100
           TPST Soil Recyclers of Oregon Inc.         Oregon             100
           TPST Soil Recyclers of South Carolina Inc. Delaware           100
           TPST Soil Recyclers of Virginia Inc.       Delaware           100
           TPST Soil Recyclers of Washington Inc.     Washington         100
   Thermo Securities Corporation                      Delaware           100
   Thermo Soil Recyclers Inc.                         Massachusetts      100
   Thermo Technology Ventures Inc.                    Idaho              100
      Plasma Quench Investment Limited Partnership    Delaware            60*
   ThermoTrex Corporation                             Delaware         50.00**
      ThermoLase Corporation                          Delaware         69.32**
        CBI Laboratories, Inc.                        Texas              100
      ThermoTrex East Inc.                            Massachusetts      100
   TMO, Inc.                                          Massachusetts      100
   TMOI Inc.                                          Delaware           100
 Thermo Electron F. S. C. Inc.                        U. S. Virgin       100
                                                      Islands
 Thermo Electron (London) Ltd.                        United Kingdom      50
 Thermo Finance (UK) Ltd.                             United Kingdom     100


 * Joint Venture/Partnership                      ** As of 12/31/94
                                                             Page 7PAGE

EX-23

                                                                    Exhibit 23



                    Consent of Independent Public Accountants


   As independent public accountants, we hereby consent to the incorporation
   by reference of our reports dated February 10, 1995 (except with respect to
   the matters discussed in Note 15 as to which the date is March 1, 1995)
   included in or incorporated by reference into Thermo Electron Corporation's
   Annual Report on Form 10-K for the year ended December 31, 1994 into the
   Company's previously filed Registration Statement No. 33-00182 on Form S-8,
   Registration Statement No. 33-8993 on Form S-8, Registration Statement
   No. 33-8973 on Form S-8, Registration Statement No. 33-16460 on Form S-8,
   Registration Statement No. 33-16466 on Form S-8, Registration Statement
   No. 33-25052 on Form S-8, Registration Statement No. 33-37865 on Form S-8,
   Registration Statement No. 33-37867 on Form S-8, Registration Statement
   No. 33-36223 on Form S-8, Registration Statement No. 33-52826 on Form S-8,
   Registration Statement No. 33-52804 on Form S-8, Registration Statement
   No. 33-52806 on Form S-8, Registration Statement No. 33-52800 on Form S-8,
   Registration Statement No. 33-37868 on Form S-3, Registration Statement
   No. 33-35657 on Form S-3, Registration Statement No. 33-34752 on Form S-3,
   Registration Statement No. 33-39434 on Form S-3, Registration Statement
   No. 33-12748 on Form S-3, Registration Statement No. 33-39773 on Form S-3,
   Registration Statement No. 33-40669 on Form S-3, Registration Statement
   No. 33-41256 on Form S-3, Registration Statement No. 33-42694 on Form S-3,
   Registration Statement No. 33-43706 on Form S-3, Registration Statement
   No. 33-45401 on Form S-3, Registration Statement No. 33-45603 on Form S-3,
   Registration Statement No. 33-50924 on Form S-3, Registration Statement No.
   33-51187 on Form S-8, Registration Statement No. 33-51189 on Form S-8,
   Registration Statement No. 33-54185 on Form S-3, Registration Statement No.
   33-54347 on Form S-8, Registration Statement No. 33-54453 on Form S-8,
   Registration Statement No. 33-57129 on Form S-4, and Registration Statement
   No. 33-59544 on Form S-3.



                                               Arthur Andersen LLP



   Boston, Massachusetts
   March 7, 1995