AXSYS TECHNOLOGIES INC, 424B4, 1997-10-22

AXSYS TECHNOLOGIES INC
424B4, 1997-10-22
MOTORS & GENERATORS

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<PAGE>

RULE NO. 424(b)(4)
REGISTRATION NO. 333-36027

1,528,550 SHARES

AXSYS
-----
TECHNOLOGIES

COMMON STOCK

Of the 1,528,550 shares of Common Stock offered hereby, 1,064,809 shares are
being sold by Axsys Technologies, Inc. (the "Company") and 463,741 shares are
being sold by the Selling Shareholder. The Company will not receive any of the
proceeds from the sale of shares by the Selling Shareholder. See "Principal and
Selling Shareholders." The Company's Common Stock is traded on the Nasdaq
National Market under the symbol AXYS. On October 21, 1997, the last reported
sale price of the Common Stock on the Nasdaq National Market was $29.25 per
share. See "Price Range of Common Stock."

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

----------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to Proceeds to
Public Discount(1) Company(2) Selling Shareholder
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............. $27.00 $1.62 $25.38 $25.38
Total(3).............. $41,270,850 $2,476,251 $27,024,852 $11,769,747
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company, estimated at
$460,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
229,283 additional shares of Common Stock, solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $47,461,491, the Underwriting Discount will total
$2,847,689, the Proceeds to Company will total $32,844,055, and the
Proceeds to Selling Shareholder will total $11,769,747. See "Underwriting."

The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of NationsBanc Montgomery Securities, Inc. on or about October 27,
1997.

----------------

NATIONSBANC MONTGOMERY SECURITIES, INC.

FURMAN SELZ

OPPENHEIMER & CO., INC.

October 21, 1997
<PAGE>

AXSYS TECHNOLOGIES SUPPLIES HIGH-PERFORMANCE COMPONENTS AND SYSTEMS TO A BROAD
ARRAY OF TECHNOLOGY MARKETS

[COMPANY LOGO]

ELECTRONICS CAPITAL EQUIPMENT

Picture with title description: head stack assembly ("HSA") dynamic test
equipment, accompanied by the following additional language: turnkey
equipment, precision motion control components and subsystems, laser scanners,
laser autofocus

DEFENSE

Picture with title description: infrared scanner used in a night vision system
integrated into advanced turrets for light armored vehicles, accompanied by
the following additional language: high-performance motion control components
and subsystems, precision metal optics, precision machining services

HIGH-END DIGITAL IMAGING

Picture with title description: high speed airbearing scanners used in a
variety of pre-press film recorders, accompanied by the following additional
language: laser scanners and imaging systems, precision metal optics

SPACE

Picture with title description: all-beryllium, visual imaging system used on
the International Solar Terrestrial Physics Polar Satellite Visual Imaging
System, accompanied by the following additional language: high-performance
precision metal optics, motion control components and subsystems, precision
machining services

INDUSTRIAL AUTOMATION

Picture with title description: precision ball bearings and connectors,
accompanied by the following additional language: precision ball bearings,
terminal blocks and connectors

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY OVER-ALLOT OR ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
COMMON STOCK TO COVER SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. SEE
"UNDERWRITING. "

IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS, IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 UNDER
REGULATION M. SEE "UNDERWRITING."
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements and notes thereto, appearing elsewhere in this Prospectus, including
information under "Risk Factors." Unless otherwise indicated, all information
in this Prospectus assumes no exercise of the Underwriters' over-allotment
option. All references to the "Company" in this Prospectus include Axsys
Technologies, Inc. and its consolidated subsidiaries, unless otherwise
expressly stated or the context otherwise requires. All share and per share
amounts appearing in this Prospectus reflect the Company's July 25, 1996 one-
for-five reverse Common Stock split. A glossary of terms appears on page 57.

THE COMPANY

The Company designs, manufactures and sells custom precision optical and
positioning components, subsystems and systems for high-performance markets,
such as defense, space, high-end digital imaging and electronics capital
equipment. The Company also designs, manufactures and sells interconnect
devices and distributes precision ball bearings for use in a variety of
industrial, commercial and consumer applications.

Through its Precision Systems Group ("PSG"), the Company offers its
capabilities in magnetics, electronics, optics, precision machining and systems
integration to high-performance Original Equipment Manufacturers ("OEMs") and
end-users, enabling them to design and utilize systems that meet leading-edge
performance requirements. PSG designs, manufactures and sells high-end
components such as precision sensors, high-performance motors, precision metal
optics and airbearings. These products enable OEMs to improve measurement
precision, positioning performance (speed and power), inspection throughput and
manufacturing yields. PSG also designs, manufactures and sells subsystems which
integrate several of the Company's components. Subsystems include laser
autofocus systems which automatically focus microscopes used for optical
inspection, airbearing laser scanners and laser imaging systems used in the
electronic pre-press market, and direct drive motor and resolver assemblies
used in cluster tool robotics for positioning semiconductor wafers. In
addition, PSG designs, manufactures and sells systems, such as head stack
assembly (HSA) testers used to dynamically test computer disk drive magnetic
heads, electrical probers for advanced flat panel displays, and infrared
microscopes used to locate defects in microprocessors.

Through its Industrial Components Group ("ICG"), the Company designs,
manufactures and sells interconnect products. It also distributes and services
precision ball bearings used by OEMs in a variety of commercial industries. The
interconnect products include safety agency (e.g., U.L.) approved barrier
terminal blocks and power connectors which are primarily used to interface
industrial or process control computers to sensors, motors and other signal
level and power devices. The precision ball bearings distributed by the Company
are acquired from various domestic and international sources and are used in
machine tools, office automation, semiconductor manufacturing and other motion
control applications to provide for smooth and precise rotary motion.

The Company's current business reflects a strategic shift that commenced in
1995. In that year, the Company began to expand its PSG business to include not
only components for defense and military space applications, but also value-
added subsystems and systems for a broad range of industrial and commercial
markets. This shift was timed to take advantage of the increased demand for
high-performance components, subsystems and systems in these markets as
commercial manufacturers began to seek new methods to increase throughput and
yield. The Company believes that the change in these markets was the result of
several factors, including: (i) the demand on manufacturers to produce smaller,
higher-performance products with precise tolerances; (ii) pressures imposed on
manufacturers to enhance productivity and quality, which in turn required
integration of process control technology directly into the manufacturing
process; and (iii) the lowering of costs associated with electronic controls.

3
<PAGE>

In furtherance of its shift in strategy, the Company acquired various
synergistic technologies and assets. In April 1996, the Company acquired
Precision Aerotech, Inc. ("PAI"). PAI's subsidiaries, Speedring, Inc.
("Speedring") and Speedring Systems, Inc. ("Speedring Systems"), are leading
manufacturers and suppliers of high-performance laser scanners and optics, as
well as suppliers of precision-machined specialty materials, such as beryllium
and quartz, for space and other high-technology applications. In October 1996,
the Company acquired substantially all of the assets of Lockheed Martin
Beryllium Corporation ("LMBC"), a supplier of precision-machined beryllium.
Components made of beryllium are significant elements of space telescopes,
weather and direct broadcast satellites, and low-earth-orbit satellites used in
cellular communication. Most recently, in May 1997, the Company acquired
Teletrac, Inc. ("Teletrac") which designs, manufactures and sells laser-based
precision measurement systems as well as precision linear and rotary
positioning systems for use in the electronics capital equipment industry.

The Company's primary goal is to be a leading provider of components,
subsystems and systems that enhance throughput and yield to customers requiring
high-performance devices in their equipment and to end-users in their
manufacturing and quality assurance processes. The Company's strategy is to
leverage its resources and capabilities to develop higher-level subsystems and
systems, employing its precision optical and positioning technologies, while
maintaining and continuing to grow ICG. Key elements of this strategy include:
(i) integrating technologies; (ii) capitalizing on cross-selling opportunities;
(iii) increasing investment in engineering and manufacturing infrastructure;
and (iv) expanding through acquisitions.

The Company was originally incorporated in 1959 in New York under the name
Vernitron Corporation, was reincorporated in Delaware in 1968 and changed its
name to Axsys Technologies, Inc. in December 1996. The Company's principal
executive office is located at 645 Madison Avenue, New York, New York 10022,
and its telephone number is (212) 593-7900.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... 1,064,809 shares
Common Stock offered by the Selling Share-
holder...................................... 463,741 shares
Common Stock to be outstanding after the Of-
fering...................................... 4,113,190 shares(1)
Use of Proceeds.............................. Repayment of bank debt and repurchase of warrants.
See "Use of Proceeds."
Nasdaq National Market Symbol................ AXYS
</TABLE>
- --------
(1) Based on the number of outstanding shares of Common Stock as of August 15,
1997. Excludes 400,000 shares of Common Stock reserved for issuance under
the Company's Long-Term Stock Incentive Plan (as amended), under which
options to purchase 48,600 shares of Common Stock were outstanding as of
August 15, 1997, and 100,000 shares of Common Stock issuable in the future
to the minority shareholders of Teletrac (the "Teletrac Minority
Shareholders"). On October 21, 1997, the Company granted options to
purchase an additional 148,000 shares of Common Stock to a number of the
Company's employees, including executive officers, and to certain directors
under the Long-Term Stock Incentive Plan. See "Management--Stock Incentive
Plan," "Certain Transactions," "Description of Capital Stock--Warrants" and
"Shares Eligible for Future Sale."

4
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ -----------------
1992 1993 1994 1995 1996(1) 1996(1) 1997(2)
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $62,912 $58,649 $62,132 $65,213 $91,301 $ 40,545 $ 58,849
Gross profit............ 15,831 15,311 17,229 17,240 23,818 10,655 15,738
Income (loss) from con-
tinuing operations be-
fore extraordinary
item................... (1,042) (3,856) 27 884 2,855 1,202 2,366
Net income (loss)....... 102 (4,526) 3,681 884 2,682 1,029 2,366
Preferred stock divi-
dends.................. 158 375 355 574 847 405 102
Net income (loss)
applicable to common
shareholders........... (56) (4,901) 3,326 310 1,835 624 2,264
Net income (loss) per
share from continuing
operations before
extraordinary item..... $ (1.15) $ (4.08) $ (0.20) $ 0.12 $ 0.74 $ 0.31 $ 0.69
Net income (loss) per
share applicable to
common shareholders.... $ (0.05) $ (4.75) $ 1.95 $ 0.12 $ 0.68 $ 0.24 $ 0.69
Weighted average common
shares outstanding..... 1,036 1,037 1,702 2,511 2,691 2,615 3,277
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $23,180 $25,468
Total assets........................................... 74,695 74,695
Long-term debt and capital lease obligations (less cur-
rent portion)......................................... 26,056 8,656
Shareholders' equity................................... 23,594 43,282
</TABLE>
- --------
(1) In April 1996, the Company acquired the stock of PAI and, in October 1996,
purchased substantially all of the assets of LMBC. These acquisitions have
been accounted for under the purchase method of accounting and,
accordingly, the results of the continuing operations of PAI and LMBC have
been included in the Company's Consolidated Statement of Operations since
their respective dates of acquisition. See Note 3 to the Consolidated
Financial Statements.
(2) In May 1997, the Company acquired the stock of Teletrac. This acquisition
was accounted for under the purchase method of accounting and, accordingly,
the results of Teletrac's operations have been included in the Company's
Consolidated Statement of Operations since the date of acquisition. See
Note 3 to the Consolidated Financial Statements.
(3) Adjusted to reflect the sale of 1,064,809 shares of Common Stock offered by
the Company hereby at the offering price of $27.00 per share and the
anticipated application of the estimated net proceeds therefrom, including
the repurchase by the Company of warrants representing 314,809 shares of
Common Stock concurrently with the consummation of this Offering at a price
per share of Common Stock subject to the respective warrant equal to the
excess of the public offering price, less the underwriting discount set
forth on the cover page of this Prospectus, over the exercise price of such
warrant. See "Use of Proceeds," "Capitalization," "Description of Capital
Stock--Warrants" and Note 12 to the Consolidated Financial Statements.

Recent Developments

Third Quarter Charge for Discontinued Operations

In the third quarter of 1997, the Company recorded a charge to discontinued
operations of $244,000, net of taxes (approximately $0.07 per share), relating
to increases in reserves for certain environmental costs associated with a
formerly-owned property. See "Risk Factors--Environmental Regulation" and
"Business --Environmental Regulation."

Fourth Quarter Extraordinary Charge

Upon the consummation of this Offering, the Company will prepay certain
amounts outstanding under its Credit Facility (defined herein) and, as a
result, will incur an extraordinary, non-cash charge of approximately $140,000
to be recognized in the fourth quarter of 1997. See "Use of Proceeds."

5
<PAGE>

RISK FACTORS

This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
including, without limitation, statements regarding the increasing performance
demands in the defense, space, high-end digital imaging, electronics capital
equipment and other markets served by the Company, the Company's ability to
integrate its existing technologies and realign its direct sales
organizations, the Company's ability to implement its strategy to develop and
sell value-added systems, the continuation of trends favoring outsourcing of
the design and manufacturing of subsystems and systems by customers, the
receipt and shipment of orders by the Company, the Company's objective to grow
through strategic acquisitions and anticipated expenditures for environmental
remediation. Discussion containing such forward-looking statements is found in
the material set forth under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as within the Prospectus
generally. The factors discussed below could cause actual results and
developments to be materially different from those expressed in or implied in
such statements. The Company cautions the reader, however, that this list of
factors may not be exhaustive. The following risk factors should be considered
carefully in addition to the other information contained in this Prospectus
before purchasing the shares of Common Stock offered hereby.

MANAGEMENT OF EXPANDED OPERATIONS; ACQUISITIONS
In recent years, the Company has made several acquisitions of complementary
businesses which the Company is seeking to integrate. This integration
strategy includes the development and sale of value-added systems
incorporating the Company's various technological capabilities. The
development of such systems is in its early stages. There can be no assurance
that the Company will be successful in developing and selling such systems.

In addition, as part of the Company's business development strategy, the
Company plans to pursue further acquisitions in order to expand the Company's
product offerings, add to or enhance its base of technical or sales personnel,
or provide desirable customer relationships. Such growth could result in a
significant strain on the Company's managerial, financial, engineering and
other resources. The rate of the Company's future expansion, if any, in
combination with the complexity of the technologies involved in the Company's
business, may demand an unusually high level of managerial effectiveness in
anticipating, planning, coordinating and meeting the operational needs of the
Company as well as the needs of its customers. Additionally, there can be no
assurance that the Company will be able to acquire complementary businesses on
a cost-effective basis, or integrate acquired operations into its organization
effectively, retain and motivate key personnel, or retain customers of
acquired firms. The Company competes for attractive acquisition candidates
with other companies or investors, and such competition could have the effect
of increasing the cost to the Company of pursuing its acquisition strategy or
reducing the number of attractive candidates to be acquired. Although the
Company reviews and considers possible acquisitions on an on-going basis, no
specific acquisitions are being negotiated or planned as of the date of this
Prospectus. See "Business--Business Strategy."

TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT
The Company's success will continue to depend in substantial part upon its
ability to introduce new products that keep pace with technological
developments and evolving industry standards and to apply appropriate levels
of engineering, research and development resources necessary to keep pace with
such developments. In addition, the Company's success will depend on how well
the Company responds to changes in customer requirements and achieves market
acceptance for its products and capabilities. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements could have a material adverse effect on the Company's business,
financial condition or results of operations. In order to develop new products
successfully, the Company is dependent upon close relationships with its
customers and their willingness to share proprietary information about their
requirements and participate in collaborative efforts with the Company. There
can be no assurance that the Company's customers will continue to provide it
with timely access to such information or that the Company will be successful
in developing and marketing new products and services or their enhancements.
In addition, there can be no assurance that the new products and

6
<PAGE>

services or their enhancements, if any, developed by the Company will achieve
market acceptance. See "Business--Business Strategy" and "Business--
Engineering, Research and Development."

SUBSTANTIAL VARIABILITY OF QUARTERLY RESULTS OF OPERATIONS

Factors such as announcements of technological innovations or new products
by the Company or its competitors, and the cyclical nature of the industries
served by the Company could cause substantial variations in the Company's
operating results. The defense, space, high-end digital imaging, electronics
capital equipment and industrial automation markets, each of which represents
a significant market for the Company's products, have historically been
subject to substantial economic fluctuations due to changing demands for their
products and services, introduction of new products and product obsolescence.
There can be no assurance that such fluctuations will not reoccur and have an
adverse impact on the Company's business, financial condition or results of
operations. The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly and annual operating results due to
a variety of factors, including market acceptance of new and enhanced versions
of the Company's products, timing and shipment of significant orders, mix of
products sold, length of sales cycles, plant openings and closings, the timing
of acquisitions or dispositions by the Company, delays in raw materials
shipments, completion of large projects, other manufacturing delays and
disruptions, the level of backlog of orders, and cyclicality in the markets
the Company serves. To some extent, the Company's net sales and operating
results for a quarter will depend upon the Company generating orders to be
shipped in the same quarter in which the order is received. The failure to
receive anticipated orders or delays in shipments near the end of a particular
quarter, due, for example, to unanticipated reschedulings or cancellations of
shipments by customers or unexpected manufacturing difficulties, may cause net
sales in a particular quarter to fall significantly below the Company's
expectations, which would have a material adverse effect on the Company's
business, financial condition or results of operations for such quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Selected Quarterly Results of Operations" and "Business--Market
Overview."

INDUSTRY CONCENTRATION

A significant portion of the Company's business and business development
efforts are concentrated in the defense and, to a lesser extent, electronics
capital equipment industries. The Company's business depends, in significant
part, upon the U.S. Government's continued demand in the area of defense for
high-end, high-performance components and subsystems of the type manufactured
by the Company. Approximately 27.6% of net sales in 1996 and 29.5% of net
sales in the six months ended June 30, 1997 were derived directly from
contracts with the U.S. Government, or agencies or departments thereof, or
indirectly from subcontracts with U.S. Government contractors. The majority of
these Government contracts are subject to termination and renegotiation. As a
result, the Company's business, financial condition or results of operations
may be materially affected by changes in U.S. Government expenditures for
defense. Additionally, the Company currently intends to continue to develop
the portion of its business dependent upon manufacturers in the electronics
capital equipment industry which provides equipment used in the semiconductor,
mass data storage and flat panel display industries. Such business development
will depend, in part, upon capital expenditures by manufacturers of
electronics capital equipment, which in turn depend upon the current and
anticipated market demand for semiconductor, mass data storage and flat panel
display devices. The semiconductor, mass data storage and flat panel display
industries have been highly volatile and historically have experienced periods
of oversupply, resulting in significantly reduced demand for capital
equipment. There can be no assurance that this volatility will not have a
material adverse effect on the Company's business in the electronics capital
equipment industry. See "Business--Market Overview" and "Business--Customers."

COMPETITION

The markets for the Company's products are competitive. The Company competes
primarily on the basis of its ability to design and engineer its products to
meet performance specifications set by its customers, most of whom are OEMs
who purchase component parts or subsystems for inclusion in their end-
products. Product pricing and quality, customer support, experience,
reputation and financial stability are also important competitive factors.
There is a limited number of competitors in each of the markets for the
various types of

7
<PAGE>

precision optical and positioning components and subsystems and
electrical/electronic interconnect devices manufactured and sold by the
Company. These competitors, especially those in the precision optical and
positioning product lines, are typically focused on a smaller number of
product offerings than the Company, and are often well entrenched. Some of
these competitors have substantially greater resources than the Company. There
can be no assurance that the Company's competitors will not develop
enhancements to or future generations of competitive products that will offer
superior price or performance features, or that new processes or technologies
will not emerge that render the Company's products less competitive or
obsolete. In addition, as a result of the substantial investment required by a
customer to integrate capital equipment into a production line, or to
integrate components and subsystems into a product design, the Company
believes that once a customer has selected certain capital equipment or
certain components or subsystems from a particular vendor, the customer
generally relies upon that vendor to provide equipment for the specific
production line or product application and may seek to rely upon that vendor
to meet other capital equipment or component or subsystem requirements.
Accordingly, the Company may be at a competitive disadvantage with respect to
a prospective customer if that customer utilizes a competitor's manufacturing
equipment or components or subsystems. Further, there are numerous competitors
in markets to which the Company distributes precision ball bearings. These
competitors, who vary in size, include other ball bearing distributors as well
as ball bearing manufacturers. There can be no assurance that the bases of
competition in the industries in which the Company competes will not shift or
that the Company will continue to compete successfully. See "Business--
Competition."

DEPENDENCE ON KEY SUPPLIERS
A significant portion of the Company's precision machining business related
to the commercial space market depends on the adequate supply of specialty
metals, such as beryllium, at competitive prices and on reasonable terms. The
Company currently procures all of its beryllium from Brush Wellman, Inc.
("Brush Wellman"), the sole U.S. supplier, and the Company expects to continue
to rely on Brush Wellman for beryllium for the foreseeable future. Although
the Company has not experienced significant problems with this supplier in the
past, there can be no assurance that such relationship will continue or that
the Company will continue to obtain such supplies at cost levels that would
not adversely affect the Company's gross margins. The partial or complete loss
of Brush Wellman as a supplier of beryllium, or production shortfalls or
interruptions that otherwise impair the supply of beryllium to the Company,
would have a material adverse effect on the Company's business, financial
condition or results of operations. It is uncertain whether alternative
sources of supply could be developed without a material disruption in the
Company's ability to provide beryllium products to its customers.

Although the Company has not experienced significant problems with its other
suppliers in the past, there can be no assurance that such relationships will
continue or that, in the event of a termination of its relationships with such
other suppliers, it would be able to obtain alternative sources of supply
without a material disruption in the Company's ability to provide products to
its customers. In addition, the Company purchases a substantial part of the
ball bearings it distributes from a single foreign supplier. Any material
disruption in the Company's supply of products would have a material adverse
effect on the Company's business, financial condition or results of
operations. See "Business--Raw Materials; Suppliers."

RISKS OF INTERNATIONAL SALES AND PURCHASES
The Company's international sales accounted for approximately 12.0%, 11.4%
and 10.8% of the Company's net sales for 1995, 1996 and the first six months
of 1997, respectively. Also, the Company purchases a substantial portion of
its ball bearings products from a single foreign supplier and certain other
products from other foreign suppliers. The Company's international sales and
purchases are subject to a number of risks generally associated with
international operations, including import and export duties and restrictions,
currency fluctuations, changes in regulatory requirements, tariffs and other
barriers, political and economic instability and potentially adverse tax
consequences. There can be no assurance that any of these factors will not
have a material adverse effect on the Company's business, financial condition
or results of operations.

DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent on the continued
services of its key executive officers, including its Chairman of the Board
and Chief Executive Officer, and other senior management

8
<PAGE>

personnel. The loss of the services of one or more of these individuals may
have a material adverse effect on the Company's business, financial condition
or results of operations. The Company maintains, and is the beneficiary of, a
life insurance policy on the life of its Chairman of the Board and Chief
Executive Officer. The face amount of such policy is $5.0 million. The Company
does not maintain key man life insurance on its other executive officers. In
addition, since the continued success of the Company is largely dependent upon
its ability to design, manufacture and sell high-performance components and
subsystems for the high-performance technology market, the Company is
particularly dependent upon its ability to identify, attract, motivate and
retain qualified technical personnel, including engineers, with the requisite
educational background and industry experience, as well as skilled precision
machining personnel. The Company's employees may voluntarily terminate their
employment with the Company at any time, and competition for such personnel is
intense. Accordingly, there can be no assurance that the Company will be
successful in retaining its existing personnel. The loss of the services of a
significant number of the Company's technical or skilled personnel, or the
future inability to attract such personnel, could have a material adverse
effect on the Company's business, financial condition or results of
operations. See "Management--Key Man Insurance."

INTELLECTUAL PROPERTY RIGHTS
The Company's ability to compete effectively with other companies will
depend, in part, on its ability to maintain the proprietary nature of its
technology. The Company relies upon a combination of patents, trademarks and
trade secrets, non-disclosure agreements and other forms of intellectual
property protection to safeguard certain of its proprietary technology. The
Company currently holds 14 patents in the United States expiring between
October 27, 1997 and April 18, 2012, and eight international patents expiring
between April 21, 1998 and December 24, 2019, and has patent applications
pending or under evaluation in the United States and various foreign
jurisdictions. There can be no assurance as to the degree of protection
offered by these patents or as to the likelihood that patents will be issued
for pending applications. There also can be no assurance that the Company will
be able to maintain the confidentiality of its trade secrets or that its non-
disclosure agreements will provide meaningful protection of the Company's
trade secrets, know-how or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure of such trade secrets, know-
how or other proprietary information.

Competitors in the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with the
Company's ability to make and sell some of its products. Although the Company
believes that its existing products do not infringe on the patents or other
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company or that such
claims will not be successful. See "Business--Patents and Trademarks."

ENVIRONMENTAL REGULATION
The Company is subject to a variety of federal, state and local laws, rules
and regulations relating to the use, storage, discharge and disposal of
hazardous chemicals used during its engineering, research and development and
manufacturing activities. Failure to comply with applicable environmental
requirements could result in substantial liability to the Company, suspension
or cessation of the Company's operations, restrictions on the Company's
ability to expand its operations or requirements for the acquisition of
additional equipment or other significant expense, any of which could have a
material adverse effect on the Company's business, financial condition or
results of operations. In addition, there can be no assurance (i) that changes
in federal, state or local laws, regulations or regulatory policy, or the
discovery of unknown problems or conditions, will not in the future require
substantial expenditures, or (ii) as to the extent of the Company's
liabilities, if any, for past failures, if any, to comply with applicable
environmental laws, regulations and permits, any of which also could have a
material adverse effect on the Company's business, financial condition or
results of operations.

In the third quarter of 1997, the Company recorded a charge to discontinued
operations of $244,000, net of taxes (approximately $0.07 per share), relating
to increases in reserves for certain environmental costs associated with a
formerly-owned property. The reserve established assumes that certain
approvals will be received from

9
<PAGE>

state regulatory authorities. However, there can be no assurance that such
approvals will be received. If such approvals are not received, costs would
increase substantially. In addition, even if such approvals are received, the
costs actually incurred may exceed the reserves established. See "Business--
Environmental Regulation."

The Company has made and continues to make investments in protective
equipment, process controls, manufacturing procedures and training in order to
minimize the risks to employees, surrounding communities and the environment
due to the presence and handling of hazardous materials. The failure to
properly handle such materials could lead to harmful exposure to employees or
to the discharge of certain hazardous waste materials, and, since the Company
does not carry environmental impairment insurance, to a material adverse
effect on the Company's business, financial condition or results of
operations. There can be no assurance that environmental problems will not
develop in the future which would have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business--Environmental Regulation."

CONTINUED INVESTMENT REQUIRED TO MAINTAIN MANUFACTURING CAPABILITIES
The Company has invested, and intends to continue to invest, in state-of-
the-art equipment in order to increase, expand, update or relocate its
manufacturing capabilities and facilities. Changes in technology or sales
growth beyond currently established manufacturing capabilities will require
further investment. There can be no assurance that the Company will generate
sufficient funds from operations to finance any required investment or that
other sources of funding will be available on terms acceptable to the Company,
if at all. Furthermore, there can be no assurance that any further expansion
will not negatively impact the Company's business, financial condition or
results of operations. See "Business--Facilities and Manufacturing."

CONTROL OF COMPANY BY EXISTING SHAREHOLDER
Upon completion of this Offering, the Chairman of the Board and Chief
Executive Officer of the Company will own approximately 29.8% of the
outstanding Common Stock. As a result, he will have the ability to exert
significant influence with respect to the election of all of the members of
the Company's Board of Directors and other corporate actions. See "Principal
and Selling Shareholders."

POSSIBLE VOLATILITY OF SHARE PRICE
Historically, the number of shares of Common Stock available for sale in the
public market has been limited, and the price of the Common Stock has been
subject to significant fluctuations. That price volatility may be
attributable, at least in part, to the limited number of shares generally
available for sale in the public market. In addition, factors such as actual
or anticipated quarterly fluctuations in financial results, changes in
recommendations or earnings estimates by securities analysts, announcements of
technological innovations or new commercial products or services and the
timing of announcements of acquisitions or dispositions by the Company or its
competitors, as well as conditions in the Company's markets generally, may
have a significant adverse effect on the market price of the Common Stock.
Furthermore, the stock market historically has experienced volatility which
has particularly affected the market prices of securities of many technology
companies and which sometimes has been unrelated to the operating performances
of such companies. See "Price Range of Common Stock."

POTENTIAL ADVERSE IMPACT OF SHARES AVAILABLE FOR FUTURE SALE ON MARKET PRICE
FOR COMMON STOCK
The future sale of a substantial number of shares of Common Stock by
existing shareholders and by holders of outstanding options to purchase shares
of Common Stock after exercise thereof could have an adverse effect on the
market price of the Common Stock. In addition, approximately 1,268,696 shares
of Common Stock will become eligible for sale in the public market 120 days
after this Offering upon expiration of agreements with the Underwriters not to
sell such shares, subject to compliance with Rule 144 under the Securities Act
or the registration requirements of the Securities Act. See "Principal and
Selling Shareholders," "Description of Capital Stock--Registration Rights" and
"Shares Eligible for Future Sale."

EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), the Company's By-Laws (the "By-Laws") and the Delaware
General Corporation Law (the "DGCL") contain

10
<PAGE>

certain provisions which could delay or impede the removal of incumbent
directors and could make more difficult a merger, tender offer or proxy
contest involving the Company, even if such a transaction would be beneficial
to the interests of the shareholders, or could discourage a third party from
attempting to acquire control of the Company. The Company has authorized
4,000,000 shares of its preferred stock (the "Preferred Stock"), none of which
is currently outstanding, and which the Company could issue without further
shareholder approval and upon such terms and conditions, and having such
rights, privileges and preferences, as the Board of Directors may determine.
The Company has no current plans to issue any Preferred Stock. The By-Laws
include provisions establishing advance notice procedures with respect to
shareholder proposals and director nominations, and permitting the calling of
special shareholder meetings only by the written consent of three-quarters of
the Board of Directors or the Chairman of the Board. The Certificate of
Incorporation provides that in lieu of a meeting, action may be taken by
written consent of the Company's shareholders only by unanimous consent. These
provisions could have the effect of delaying, deterring or preventing a change
in control of the Company, and may adversely affect the voting and other
rights of holders of Common Stock. In addition, the Company is subject to
Section 203 of the DGCL which, subject to certain exceptions, restricts
certain transactions and business combinations between a corporation and a
shareholder owning 15% or more of the corporation's outstanding voting stock
(an "interested shareholder") for a period of three years from the date the
shareholder becomes an interested shareholder. These provisions may have the
effect of delaying or preventing a change of control of the Company without
action by the shareholders and, therefore, could adversely affect the price of
the Company's Common Stock. In the event of a change of control of the
Company, the vesting of outstanding options issued under the Stock Incentive
Plan (defined herein) may be accelerated at the discretion of the Committee or
may be required to be accelerated under certain circumstances provided for in
each incentive agreement. See "Management--Stock Incentive Plan" and
"Description of Capital Stock."

ABSENCE OF DIVIDENDS ON COMMON STOCK
The Company does not anticipate paying dividends on its Common Stock in the
foreseeable future. The Company's Credit Facility prohibits it from paying
cash dividends on its Common Stock. See "Dividend Policy."

IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
investment from the offering price. See "Capitalization," "Dilution" and
"Shares Eligible for Future Sale."

11
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,064,809 shares of
Common Stock offered hereby by the Company are estimated to be approximately
$26.6 million (approximately $32.4 million if the Underwriters' over-allotment
option is exercised in full), based on the offering price of $27.00 per share
and after deducting the underwriting discount and the estimated offering
expenses. The Company will not receive any proceeds from the sale of shares of
Common Stock by the Selling Shareholder. See "Principal and Selling
Shareholders."

The Company intends to use approximately $6.9 million of the net proceeds
that it receives from this Offering to repurchase certain warrants (see
"Description of Capital Stock--Warrants") and the remaining net proceeds
(approximately $19.7 million if the Underwriters' over-allotment option is not
exercised and approximately $25.5 million if the Underwriters' over-allotment
option is exercised in full) to repay a portion of the outstanding amount of
its indebtedness ($25.8 million at October 20, 1997) under the Company's
existing senior secured credit facility with Banque Paribas, as agent on
behalf of various banks (the "Credit Facility"). The indebtedness to be repaid
consists of a term loan and revolving line of credit maturing on April 25,
2000 and a term loan maturing on April 25, 2002. Borrowings under the Credit
Facility bear interest at a fluctuating rate per annum equal to the prime rate
received by The Chase Manhattan Bank, plus a margin ranging from 1.75% to
2.25%, or the London Interbank Offered Rate, plus a margin ranging from 3.25%
to 3.75%. At June 30, 1997, the interest rate being paid under the Credit
Facility was 9.24% per annum. Amounts outstanding under the Credit Facility
were utilized by the Company for working capital purposes and acquisitions of
complementary businesses.

12
<PAGE>

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has been trading on the Nasdaq National Market
under the symbol AXYS since December 11, 1996. Prior to that time, it was
traded on the Nasdaq SmallCap Market. The following table sets forth the high
and low prices per share of Common Stock as reported by the Nasdaq SmallCap
Market from January 1, 1995 to December 10, 1996, and as reported on the
Nasdaq National Market from December 11, 1996:

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
Quarter ended March 31, 1995................................. $ 5 5/8 $2 1/2
Quarter ended June 30, 1995.................................. 6 1/4 3 3/4
Quarter ended September 30, 1995............................. 9 3/8 5 5/16
Quarter ended December 31, 1995.............................. 6 7/8 5
1996
Quarter ended March 31, 1996................................. $ 5 5/8 $4 3/8
Quarter ended June 30, 1996.................................. 11 7/8 4 3/8
Quarter ended September 30, 1996............................. 11 1/4 6 1/4
Quarter ended December 31, 1996.............................. 11 1/2 9
1997
Quarter ended March 31, 1997................................. $17 1/2 $10
Quarter ended June 30, 1997.................................. 25 1/4 12
Quarter ended September 30, 1997............................. 37 22 1/4
Quarter ended December 31, 1997 (through October 21, 1997)... 35 3/8 29 1/4
</TABLE>

The prices shown above represent quotations among securities dealers, do not
include retail markups, markdowns or commissions and may not represent actual
transactions.

On October 21, 1997, the last sale price of the Common Stock as reported by
the Nasdaq National Market was $29.25 per share. The number of shareholders of
record on August 15, 1997 was 996.

DIVIDEND POLICY

The Company has applied and currently intends to continue to apply its
retained and current earnings toward the development of its business and to
finance the growth of the Company. The Company did not pay dividends on its
Common Stock during the three years ended December 31, 1996 or during the six
months ended June 30, 1997 and does not anticipate paying cash dividends in
the foreseeable future. The Company also currently is restricted by the terms
of the Credit Facility from paying cash dividends on its Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

13
<PAGE>

CAPITALIZATION

The following table sets forth as of June 30, 1997 the actual capitalization
of the Company and the capitalization of the Company as adjusted to reflect
(i) an amendment to the Company's Certificate of Incorporation, effective on
October 15, 1997, to increase the authorized number of shares of Common Stock
to 30,000,000 and (ii) the sale of 1,064,809 shares of Common Stock offered by
the Company hereby at the offering price of $27.00 per share, and the
anticipated application of the estimated net proceeds therefrom:

<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Bank debt................................................. $24,758 $ 5,070
Industrial revenue bond................................... 1,620 1,620
Capital lease obligations................................. 2,735 2,735
------- -------
Long-term debt (including current portion)............... 29,113 9,425
Less current portion.................................... (3,057) (769)
------- -------
Total long-term debt (less current portion)(1)......... 26,056 8,656
------- -------
Shareholders' equity:
Preferred Stock--$0.01 par value; authorized 4,000,000
shares, none outstanding................................. -- --
Common Stock--$0.01 par value; authorized 4,000,000
shares, 3,048,381 shares issued and outstanding, actual;
authorized 30,000,000 shares, 4,113,190 shares issued and
outstanding, as adjusted(2).............................. 30 41
Capital in excess of par.................................. 19,465 39,142
Retained earnings......................................... 4,099 4,099
------- -------
Total shareholders' equity............................... 23,594 43,282
------- -------
Total capitalization (including current portion of long-
term debt)............................................. $52,707 $52,707
======= =======
</TABLE>
- --------
(1) Bank debt at June 30, 1997 is recorded net of an unamortized original
issue discount of approximately $182,000. Upon repayment of the bank debt,
approximately $140,000 of this discount will be charged against the
Company's earnings as a non-cash, extraordinary charge.
(2) Excludes 100,000 shares of Common Stock issuable to the Teletrac Minority
Shareholders and excludes 400,000 shares of Common Stock reserved for
issuance under the Company's Long-Term Stock Incentive Plan (as amended),
under which options to purchase 48,600 shares of Common Stock were
outstanding as of August 15, 1997. On October 21, 1997, the Company
granted options to purchase an additional 148,000 shares of Common Stock
to a number of the Company's employees, including executive officers, and
to certain directors under the Long-Term Stock Incentive Plan. See
"Management--Stock Incentive Plan," "Certain Transactions," "Description
of Capital Stock--Warrants" and "Shares Eligible for Future Sale."

14
<PAGE>

DILUTION

The net tangible book value of the Company as of June 30, 1997 was
approximately $9.5 million or $3.10 per share of Common Stock. Net tangible
book value per share is determined by dividing the net tangible book value of
the Company (tangible assets less total liabilities) by the number of shares
of Common Stock outstanding. Dilution per share represents the difference
between the amount per share paid by purchasers of shares of Common Stock in
the Offering made hereby and the net tangible book value per share of Common
Stock immediately after completion of the Offering. Without taking into
account any changes in such net tangible book value after June 30, 1997, other
than to give effect to the (i) sale of 1,064,809 shares of Common Stock by the
Company in this Offering (after deducting the underwriting discounts and
commissions and estimated offering expenses) and the anticipated application
of the estimated net proceeds thereof, and (ii) effect of the extraordinary
charge of approximately $85,000, net of tax, that result from the early
repayment of amounts outstanding under the Credit Facility with the net
proceeds from this Offering as if this Offering had been consummated on June
30, 1997, the pro forma net tangible book value of the Company as of June 30,
1997 would have been $29.0 million or $7.06 per share of Common Stock. This
represents an immediate increase in net tangible book value of $3.96 per share
to existing shareholders and an immediate dilution in net tangible book value
of $19.94 per share to new investors.

The following table illustrates this dilution on a per share basis:

<TABLE>
<S> <C> <C>
Public offering price per share................................ $27.00
Tangible book value per share before this Offering........... $3.10
Increase per share attributable to new investors............. 3.96
-----
Pro forma net tangible book value per share after this Offer-
ing........................................................... 7.06
------
Dilution per share to new investors............................ $19.94
======
</TABLE>

15
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data for each of the five fiscal years
in the period ended December 31, 1996 presented below is derived from the
audited Consolidated Financial Statements of the Company as adjusted to
reflect the discontinuance of the Electronic Components Group ("ECG"). The
data for the six months ended June 30, 1996 and 1997 are derived from the
unaudited Consolidated Financial Statements of the Company. In the Company's
opinion, such unaudited Consolidated Financial Statements include all
adjustments necessary for a fair presentation of the financial position and
results of operations as of and for such periods. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements and the
Notes related thereto and the other financial data included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ------------------
1992 1993 1994 1995 1996(1) 1996(1) 1997(2)
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales:
PSG.................... $32,024 $26,648 $26,052 $24,750 $48,579 $ 18,100 $ 36,418
ICG.................... 30,888 32,001 36,080 40,463 42,722 22,445 22,431
------- ------- ------- ------- ------- -------- --------
62,912 58,649 62,132 65,213 91,301 40,545 58,849
------- ------- ------- ------- ------- -------- --------
Cost of sales:
PSG.................... 25,785 21,572 20,287 19,724 37,919 14,380 27,621
ICG.................... 21,296 21,766 24,616 28,249 29,564 15,510 15,490
------- ------- ------- ------- ------- -------- --------
47,081 43,338 44,903 47,973 67,483 29,890 43,111
------- ------- ------- ------- ------- -------- --------
Gross profit:
PSG.................... 6,239 5,076 5,765 5,026 10,660 3,720 8,797
ICG.................... 9,592 10,235 11,464 12,214 13,158 6,935 6,941
------- ------- ------- ------- ------- -------- --------
15,831 15,311 17,229 17,240 23,818 10,655 15,738
------- ------- ------- ------- ------- -------- --------
Operating expenses:
Selling, general and
administrative ex-
penses................ 14,027 12,950 13,343 13,336 16,501 7,502 10,284
Restructuring/inventory
writedown charges(3).. -- 3,500 1,315 -- -- -- --
Amortization of intan-
gible assets.......... 209 209 209 209 210 102 125
------- ------- ------- ------- ------- -------- --------
Operating income
(loss)................. 1,595 (1,348) 2,362 3,695 7,107 3,051 5,329
Interest expense....... 2,597 2,437 2,264 1,994 2,343 1,042 1,343
Other expense (in-
come)................. 13 71 54 252 18 (13) 26
------- ------- ------- ------- ------- -------- --------
Income (loss) from
continuing operations
before taxes and
extraordinary item..... (1,015) (3,856) 44 1,449 4,746 2,022 3,960
Provision for taxes.... 27 -- 17 565 1,891 820 1,594
------- ------- ------- ------- ------- -------- --------
Income (loss) from
continuing operations
before
extraordinary item..... (1,042) (3,856) 27 884 2,855 1,202 2,366
Discontinued
operations:(4)
Income (loss) from op-
erations.............. 1,144 (670) (143) -- -- -- --
Loss on disposal....... -- -- (2,059) -- -- -- --
------- ------- ------- ------- ------- -------- --------
Income (loss) before
extraordinary item..... 102 (4,526) (2,175) 884 2,855 1,202 2,366
Extraordinary gain
(charge), net of
tax(5)................ -- -- 5,856 -- (173) (173) --
------- ------- ------- ------- ------- -------- --------
Net income (loss)....... 102 (4,526) 3,681 884 2,682 1,029 2,366
Preferred stock divi-
dends(6).............. 158 375 355 574 847 405 102
------- ------- ------- ------- ------- -------- --------
Net income (loss)
applicable to common
shareholders........... $ (56) $(4,901) $ 3,326 $ 310 $ 1,835 $ 624 $ 2,264
======= ======= ======= ======= ======= ======== ========
Net income (loss) per
common share:
Continuing operations.. $ (1.15) $ (4.08) $ (0.20) $ 0.12 $ 0.74 $ 0.31 $ 0.69
Discontinued opera-
tions................. 1.10 (0.65) (1.29) -- -- -- --
Extraordinary item..... -- -- 3.44 -- (0.06) (0.07) --
------- ------- ------- ------- ------- -------- --------
Total.................. $ (0.05) $ (4.73) $ 1.95 $ 0.12 $ 0.68 $ 0.24 $ 0.69
======= ======= ======= ======= ======= ======== ========
Weighted average common
shares outstanding..... 1,036 1,037 1,702 2,511 2,691 2,615 3,277
Operating income:(7)
PSG.................... $ 644 $ 24 $ 913 $ 656 $ 3,941 $ 1,297 $ 3,936
ICG.................... 4,443 5,122 5,930 6,440 7,010 3,799 3,470
</TABLE>

16
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31, JUNE
--------------------------------------- 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.......................... $ 116 $ 103 $ 27 $ 91 $ 2,691 $ 415
Working capital............... 18,715 15,473 11,538 14,334 24,794 23,180
Total assets.................. 52,247 47,261 42,197 40,485 62,171 74,695
Long-term debt and capital
lease obligations (less
current portion)............. 25,920 25,270 11,921 11,047 23,324 26,056
Shareholders' equity.......... 9,603 5,076 13,269 14,745 19,165 23,594
</TABLE>
- --------
(1) In April 1996, the Company acquired the stock of PAI and, in October 1996,
purchased substantially all of the assets of LMBC. These acquisitions have
been accounted for under the purchase method of accounting and,
accordingly, the results of the continuing operations of PAI and LMBC have
been included in the Company's Consolidated Statement of Operations since
their respective dates of acquisition. See Note 3 to the Consolidated
Financial Statements.
(2) In May 1997, the Company acquired the stock of Teletrac. This acquisition
was accounted for under the purchase method of accounting and,
accordingly, the results of Teletrac's operations have been included in
the Company's Consolidated Statement of Operations since the date of
acquisition. See Note 3 to the Consolidated Financial Statements.
(3) During 1993, in response to declining demand by agencies of the U.S.
Department of Defense for products related to the defense industry, the
Company decided to restructure PSG. In connection with the restructuring,
the Company recorded a $3,500 charge of which $2,300 was for the write-
down of slow moving and excess inventory and $1,200 was for severance,
early retirement, other employee-related benefits and other related
charges. During 1994, the Company recorded an additional $1,315 charge
related to this restructuring, $1,015 of which was to provide additional
inventory reserves to reflect slower turnover of inventory than was
anticipated in the 1993 charge, and $300 to adjust the carrying amount of
other assets held for disposal in connection with the restructuring to
reflect current market values. See Note 10 to the Consolidated Financial
Statements.
(4) Effective September 30, 1994, the Company adopted a plan to dispose of all
of ECG. The disposal was accounted for as a discontinued operation and,
accordingly, ECG's net assets and operating results were reported
separately from continuing operations. In addition, the Company's prior
years Statements of Operations have been restated to reflect continuing
operations. See Note 2 to the Consolidated Financial Statements.
(5) In 1994 and 1996, the Company recorded a gain and a loss on the early
extinguishment of debt, respectively. See Note 5 to the Consolidated
Financial Statements.
(6) In February 1997, the Company commenced an offer to exchange 0.75 shares
of its Common Stock for each outstanding share of its Preferred Stock.
Approximately 538,000 shares of Preferred Stock were exchanged for
approximately 403,500 shares of Common Stock. In June 1997, the Company
redeemed all the remaining approximately 200,900 outstanding shares of
Preferred Stock. See Note 4 to the Consolidated Financial Statements.
(7) Operating income prior to allocation of corporate overhead, amortization
of intangible assets and restructuring/inventory write down charges. See
footnote 3 above.

17
<PAGE>

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

OVERVIEW

The Company designs, manufactures and sells custom precision optical and
positioning components, subsystems and systems for high-performance markets,
such as defense, space, high-end digital imaging and electronics capital
equipment through PSG. The Company also designs, manufactures and markets
interconnect devices and distributes precision ball bearings for use in a
variety of industrial, commercial and consumer applications through ICG.

Historically, the Company has generated a significant portion of its net
sales as a supplier of components for defense applications. During the early
1990's, as U.S. Government defense-related spending declined, the Company's
sales of components for military applications also declined. In 1993, net
sales from contracts directly with the U.S. Government and subcontractors to
the U.S. Government declined by approximately 35.0% compared to 1992. In
response to this declining demand, the Company commenced a restructuring of
PSG and ECG in 1993. As part of the restructuring, the Company reduced fixed
costs of production by, among other things, closing its manufacturing facility
in Deer Park, New York and consolidating certain product lines into other
facilities. In 1994, the Company disposed of ECG which, as a result of
declining demand from the defense market, was incurring operating losses. The
sale of the assets of this business generated approximately $2.1 million which
was used to reduce outstanding borrowings and enabled the Company to focus on
its more technologically advanced product lines within PSG. Also, in 1994, the
Company obtained a $15.0 million, four-year, senior secured credit facility,
and completed a rights offering of Common Stock which provided $2.3 million of
proceeds, net of expenses. The proceeds of the new credit facility, along with
the net proceeds from the rights offering, were used to repurchase the
Company's then existing bank indebtedness at a discount, resulting in a pretax
gain to the Company of approximately $9.6 million.

Beginning in 1995, the Company's planning process identified an increased
demand for high-performance components, subsystems and systems in commercial
and industrial markets. The Company believes that such increased demand
resulted from (i) the demand on manufacturers to produce smaller, higher-
performance products with precise tolerances, (ii) pressures imposed on
manufacturers to enhance productivity and quality, which in turn required
integration of process control technology directly into the manufacturing
process, and (iii) the lowering of costs associated with electronic controls.
In response to this perceived increased demand, the Company commenced a
program to identify opportunities for the expansion of its businesses in the
commercial and industrial markets. In April 1996, the Company acquired PAI,
whose subsidiaries include Speedring and Speedring Systems, for approximately
$16.7 million, including the repayment of $12.0 million of borrowings under
PAI's term loans. The Company sold L&S Machine Company, Inc. ("L&S"), a non-
strategic subsidiary of PAI, in November 1996 for approximately $13.0 million
which provided additional financing capacity to facilitate the Company's
strategy of expansion through acquisitions. In October 1996, the Company
acquired substantially all of the assets of LMBC for approximately $2.9
million, and in May 1997, acquired Teletrac for $9.9 million, including the
issuance of 153,000 shares of Common Stock, of which 53,000 shares were issued
upon consummation of the transaction and 100,000 shares are issuable in the
future. As a result of these acquisitions, the 1996 and 1997 results of
operations and financial statements of the Company are not comparable with one
another or with prior periods.

In February 1997, the Company commenced an offer to exchange 0.75 shares of
Common Stock for each outstanding share of Preferred Stock. Approximately
538,000 shares of Preferred Stock were exchanged for approximately 403,500
shares of Common Stock. In June 1997, the Company redeemed all the remaining
approximately 200,900 outstanding shares of Preferred Stock.

The Company's business strategies include, among others, the expansion of
its direct sales force, increased investments in engineering, manufacturing
infrastructure and customer driven product development, as well as expansion
through acquisitions. It is the nature of the Company's business that the
benefit of such investments in terms of increased net sales and operating
income may not be realized until periods subsequent to when they

18
<PAGE>

are recorded as expenses in the Company's operating results. The Company's
strategy of integrating its existing businesses and their respective
technologies, principally through the Teletrac acquisition, is intended to
increase the sales of electro-optical and electro-mechanical systems.
Implementation of this strategy, however, is in its early stages. Teletrac,
the Company's primary source of systems integration capabilities, was acquired
on May 30, 1997. As a result, during the six months ended June 30, 1997, only
one percent of the Company's net sales were generated from sales of systems.
Prior to 1997, the Company did not generate any sales from systems. There can
be no assurance that these efforts will be successful and lead to increases in
the Company's sales or operating income or that the Company will recover its
additional costs in implementing these strategies. See "Business--Business
Strategy."

RESULTS OF OPERATIONS

The following table sets forth certain financial data as a percentage of net
sales for each of the past three years in the period ended December 31, 1996
and for the six months ended June 30, 1996 and 1997.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales:
PSG........................... 41.9% 38.0% 53.2% 44.6% 61.9%
ICG........................... 58.1 62.0 46.8 55.4 38.1
------- ------- ------- -------- --------
100.0 100.0 100.0 100.0 100.0
Cost of sales.................. 72.3 73.6 73.9 73.7 73.3
------- ------- ------- -------- --------
Gross profit................... 27.7 26.4 26.1 26.3 26.7
------- ------- ------- -------- --------
Operating expenses:
Selling, general and adminis-
trative expenses............. 21.5 20.4 18.1 18.5 17.4
Restructuring/inventory
writedown charges............ 2.1 -- -- -- --
Amortization of intangible as-
sets......................... 0.3 0.3 0.2 0.3 0.2
------- ------- ------- -------- --------
23.9 20.7 18.3 18.8 17.6
------- ------- ------- -------- --------
Operating income............... 3.8 5.7 7.8 7.5 9.1
Interest expense.............. 3.6 3.1 2.6 2.5 2.3
Other expense (income)........ 0.1 0.4 -- -- 0.1
------- ------- ------- -------- --------
Income from continuing
operations before taxes and
extraordinary item............ 0.1 2.2 5.2 5.0 6.7
Provision for taxes........... -- 0.8 2.1 2.0 2.7
------- ------- ------- -------- --------
Income from continuing
operations before
extraordinary item............ 0.1 1.4 3.1 3.0 4.0
Discontinued operations:
Loss from operations.......... (0.3) -- -- -- --
Loss on disposal.............. (3.3) -- -- -- --
------- ------- ------- -------- --------
Income (loss) before extraordi-
nary item..................... (3.5) 1.4 3.1 3.0 4.0
Extraordinary gain (charge),
net of tax................... 9.4 -- (0.2) (0.5) --
------- ------- ------- -------- --------
Net income..................... 5.9% 1.4% 2.9% 2.5% 4.0%
======= ======= ======= ======== ========
Gross profit (as a percentage
of related net sales):
PSG........................... 22.1% 20.3% 21.9% 20.5% 24.2%
ICG........................... 31.8 30.2 30.8 30.9 30.9
</TABLE>

19
<PAGE>

Comparison of the Six Months Ended June 30, 1997 and June 30, 1996

Net sales. Net sales increased by 45.2%, or $18.3 million, from $40.5
million in the first six months of 1996 to $58.8 million in the first six
months of 1997. PSG's sales increased by 101.1%, or $18.3 million, from $18.1
million in the first six months of 1996 to $36.4 million in the first six
months of 1997. This increase was primarily due to the acquisitions of
Teletrac, PAI and LMBC and increased business in the space market. ICG's sales
of $22.4 million were the same in both the first six months of 1996 and 1997.
During the six months ended June 30, 1997, modest increased sales by ICG of
interconnect devices, generated primarily from new product introductions, were
offset by lower sales of precision ball bearings.

Gross profit. The Company's cost of sales includes materials, labor and
overhead. Overhead includes engineering and research and development expenses.
The Company's gross profit increased by 48.1%, or $5.1 million, from $10.6
million in the first six months of 1996 to $15.7 million in the first six
months of 1997. Gross profit margin increased from 26.3% of net sales in the
first six months of 1996 to 26.7% in the first six months of 1997. Gross
profit margin attributable to PSG increased from 20.5% of net sales in the
first six months of 1996 to 24.2% in the first six months of 1997. The
increase in PSG's gross profit margin was primarily due to the increase in
sales resulting from the acquisitions of PAI and Teletrac and operating
efficiencies related to higher sales volume, partially offset by increased
engineering and other fixed overhead spending. Gross profit margin
attributable to ICG of 30.9% was the same in both the first six months of 1996
and 1997.

Selling, general and administrative expenses. The Company's selling, general
and administrative ("SG&A") expenses consist primarily of personnel costs,
including salaries and bonuses earned by Company employees, as well as
occupancy costs for its sales, finance, administrative and executive
personnel. In addition, it includes sales commissions earned by manufacturing
representatives. SG&A expenses increased by 37.3%, or $2.8 million, from $7.5
million in the first six months of 1996 to $10.3 million in the first six
months of 1997, but decreased from 18.5% to 17.4% of net sales, respectively.
The increase in SG&A expenses in absolute dollars was primarily due to the
acquisitions of Teletrac, PAI and LMBC, as well as increased employment and
other selling expenses. The decrease in SG&A expenses as a percentage of net
sales was attributable, in part, to the spreading of corporate overhead over a
larger sales base.

Interest expense. Interest expense increased by 28.9%, or $301,000, from
$1.0 million in the first six months of 1996 to $1.3 million in the first six
months of 1997. The increase in interest expense was primarily the result of
higher average borrowings due to the acquisitions of Teletrac, PAI and LMBC.

Preferred stock dividends. Preferred Stock dividends decreased by 74.8%, or
$303,000, from $405,000 in the first six months of 1996 to $102,000 in the
first six months of 1997. The decrease in Preferred Stock dividends was due to
the Company's exchange of Preferred Stock for Common Stock and subsequent
redemption of remaining Preferred Stock. See Note 4 to the Consolidated
Financial Statements. As a result of such redemption, there is no Preferred
Stock outstanding and there are no accrued and unpaid dividends.

Comparison of Years Ended December 31, 1996 and December 31, 1995

Net sales. Net sales increased by 40.0%, or $26.1 million, from $65.2
million in 1995 to $91.3 million in 1996. PSG's sales increased by 96.0%, or
$23.8 million, from $24.8 million in 1995 to $48.6 million in 1996. The
acquisition of PAI accounted for $23.1 million of the increase in PSG's sales.
ICG's sales increased by 5.7%, or $2.3 million, from $40.4 million in 1995 to
$42.7 million in 1996. In 1996, sales of precision ball bearings increased by
9.0% due to increased sales to both OEMs and distributors for use in a variety
of industries.

Gross profit. The Company's gross profit increased by 38.4%, or $6.6
million, from $17.2 million in 1995 to $23.8 million in 1996. Gross profit
margin decreased from 26.4% of net sales in 1995 to 26.1% in 1996. This
decrease was primarily due to the increase in sales by PSG. Historically,
sales by PSG have resulted in lower margins than sales by ICG. PSG's sales
increased primarily as a result of the Company's 1996 acquisition of PAI.
Gross profit margin attributable to PSG increased from 20.3% in 1995 to 21.9%
in 1996. The increase in PSG's gross profit margin was primarily due to the
increase in sales resulting from the acquisition of PAI. The gross profit
margin on the PAI sales, while lower than the consolidated gross profit
margin, was higher

20
<PAGE>

than the gross profit margin on PSG sales prior to the PAI acquisition. Gross
profit margin attributable to ICG increased from 30.2% in 1995 to 30.8% in
1996. The increase in ICG's gross profit margin was primarily due to favorable
overhead spending and material purchase price variances partially offset by an
unfavorable sales mix of lower margin products.

Selling, general and administrative expenses. SG&A expenses increased by
24.1%, or $3.2 million, from $13.3 million in 1995 to $16.5 million in 1996,
but decreased from 20.4% to 18.1% of net sales, respectively. The increase in
SG&A expenses in absolute dollars was primarily due to the acquisitions of PAI
and LMBC. The decrease in SG&A expenses as a percentage of net sales was
attributable, in part, to the spreading of corporate overhead over a larger
sales base.

Interest expense. Interest expense increased by 17.5%, or $349,000, from
$2.0 million in 1995 to $2.3 million in 1996. The increase in interest expense
was primarily due to higher average borrowings resulting from the acquisitions
of PAI and LMBC, substantially offset by the reduction of interest expense
attributable to net assets held for disposal, see Note 3 to the Consolidated
Financial Statements, and the offset of lower interest rates resulting from a
lower prime rate and more favorable terms under the Credit Facility. See Note
5 of the Consolidated Financial Statements.

Preferred stock dividends. Preferred Stock dividends increased by 47.6%, or
$273,000, from $574,000 in 1995 to $847,000 in 1996. The increase in Preferred
Stock dividends was primarily due to the expiration, on February 22, 1996, of
the period during which the Company paid dividends in additional shares of
Preferred Stock at an annual rate of 15% of the average bid and ask price of
the Preferred Stock. Subsequent to that date, the Company accrued dividends at
$1.20 per share. See Note 3 to the Consolidated Financial Statements. The per
share amounts of dividends, including the accumulated but unpaid cash portion,
were $0.79 and $1.11 per share of Preferred Stock in 1995 and 1996,
respectively.

Comparison of Years Ended December 31, 1995 and December 31, 1994

Net sales. Net sales increased by 5.0%, or $3.1 million, from $62.1 million
in 1994 to $65.2 million in 1995. PSG's sales decreased by 5.0%, or $1.3
million, from $26.1 million in 1994 to $24.8 million in 1995. The decrease in
PSG's sales was primarily a result of lower shipments of synchros due to
reduced U.S. Government spending on spare parts. ICG's sales increased by
12.2%, or $4.4 million, from $36.1 million in 1994 to $40.5 million in 1995.
The increase in ICG's sales was primarily due to new and increased activity
with OEMs and the growing acceptance of new and/or enhanced interconnect
products.

Gross profit. The Company's gross profit in 1995 of $17.2 million remained
substantially the same as in 1994. Gross profit margins decreased from 27.7%
of net sales in 1994 to 26.4% in 1995. Gross profit margins attributable to
PSG decreased from 22.1% of net sales in 1994 to 20.3% in 1995. The decrease
in PSG gross profit margin was due to operating inefficiencies related to the
lower sales volume and an unfavorable sales mix of lower margin products,
partially offset by cost reductions resulting from restructuring actions
completed during 1994. Gross profit margins attributable to ICG decreased from
31.8% of net sales in 1994 to 30.2% in 1995. The decrease in ICG's gross
profit margins was primarily due to an unfavorable sales mix of lower margin
products and higher material costs.

Selling, general and administrative expenses. SG&A expenses in 1995 of $13.3
million were substantially the same as in 1994.

Interest expense. Interest expense decreased by 11.9%, or $270,000, from
$2.3 million in 1994 to $2.0 million in 1995. The decrease in interest expense
was primarily due to the repurchase of the Company's bank indebtedness at a
discount, partially offset by higher interest rates. See Note 5 to the
Consolidated Financial Statements.

Preferred stock dividends. Preferred Stock dividends increased by 61.7%, or
$219,000, from $355,000 in 1994 to $574,000 in 1995. The increase in Preferred
Stock dividends was primarily due to the increase in the average bid and ask
price on which the annual dividend rate was based. Such increase was also the
result of the Company's payment of dividends in additional shares of Preferred
Stock, thereby increasing the aggregate annual amount of dividends to be paid.
The per share amounts of dividends, including the accumulated but unpaid cash
portion, were $0.57 and $0.79 per share of Preferred Stock in 1994 and 1995,
respectively.

21
<PAGE>

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table presents certain unaudited quarterly financial
information for each of the ten most recent quarters in the period ended June
30, 1997. This information is derived from unaudited Consolidated Financial
Statements of the Company that include, in the Company's opinion, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of results of operations for such periods when read in
conjunction with the audited Consolidated Financial Statements of the Company
and notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of results for any
future period.

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
PSG...................... $ 6,640 $ 6,407 $ 5,634 $ 6,069 $ 5,775 $12,325 $13,998 $16,481 $16,618 $19,800
ICG...................... 10,256 10,447 9,999 9,761 11,256 11,189 10,235 10,042 10,984 11,447
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
16,896 16,854 15,633 15,830 17,031 23,514 24,233 26,523 27,602 31,247
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cost of sales:
PSG...................... 5,069 4,880 4,857 4,918 4,825 9,555 10,900 12,639 12,875 14,746
ICG...................... 7,145 7,330 6,949 6,825 7,778 7,732 7,221 6,833 7,527 7,963
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
12,214 12,210 11,806 11,743 12,603 17,287 18,121 19,472 20,402 22,709
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit:
PSG...................... 1,571 1,527 777 1,151 950 2,770 3,098 3,842 3,743 5,054
ICG...................... 3,111 3,117 3,050 2,936 3,478 3,457 3,014 3,209 3,457 3,484
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
4,682 4,644 3,827 4,087 4,428 6,227 6,112 7,051 7,200 8,538
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative expenses.. 3,628 3,497 2,848 3,363 3,265 4,237 4,430 4,569 4,899 5,385
Amortization of
intangible assets....... 52 52 53 52 52 50 55 53 52 73
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income.......... 1,002 1,095 926 672 1,111 1,940 1,627 2,429 2,249 3,080
Interest expense......... 496 541 497 460 444 598 615 686 655 688
Other expense (income)... 8 7 234 3 (7) (6) 9 22 11 15
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before taxes and
extraordinary item....... 498 547 195 209 674 1,348 1,003 1,721 1,583 2,377
Provision for taxes...... 194 214 76 81 284 536 396 675 638 956
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before
extraordinary item....... 304 333 119 128 390 812 607 1,046 945 1,421
Extraordinary (charge),
net of tax.............. -- -- -- -- -- (173) -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income................ 304 333 119 128 390 639 607 1,046 945 1,421
Preferred stock
dividends............... 121 137 159 157 184 221 221 221 60 42
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)
applicable to common
shareholders............. $ 183 $ 196 $ (40) $ (29) $ 206 $ 418 $ 386 $ 825 $ 885 $ 1,379
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
common share:
Continuing operations.... $ 0.07 $ 0.08 $ (0.02) $ (0.01) $ 0.08 $ 0.21 $ 0.14 $ 0.31 $ 0.27 $ 0.41
Extraordinary item....... -- -- -- -- -- (0.06) -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total.................... $ 0.07 $ 0.08 $ (0.02) $ (0.01) $ 0.08 $ 0.15 $ 0.14 $ 0.31 $ 0.27 $ 0.41
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding....... 2,508 2,508 2,508 2,521 2,529 2,701 2,758 2,770 3,230 3,323
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

22
<PAGE>

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE
OF NET SALES:
Net sales:
PSG...................... 39.3% 38.0% 36.0% 38.3% 33.9% 52.4% 57.8% 62.1% 60.2% 63.4%
ICG...................... 60.7 62.0 64.0 61.7 66.1 47.6 42.2 37.9 39.8 36.6
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Cost of sales............. 72.3 72.4 75.5 74.2 74.0 73.5 74.8 73.4 73.9 72.7
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit.............. 27.7 27.6 24.5 25.8 26.0 26.5 25.2 26.6 26.1 27.3
Operating expenses:
Selling, general and
administrative expenses.. 21.5 20.8 18.2 21.3 19.2 18.0 18.3 17.2 17.8 17.3
Amortization of
intangible assets....... 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
21.8 21.1 18.5 21.6 19.5 18.2 18.5 17.4 18.0 17.5
Operating income.......... 5.9 6.5 6.0 4.2 6.5 8.3 6.7 9.2 8.1 9.8
Interest expense......... 2.9 3.2 3.2 2.9 2.6 2.6 2.5 2.6 2.4 2.2
Other expense (income)... -- -- 1.5 -- -- -- -- 0.1 -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income before taxes and
extraordinary item....... 3.0 3.3 1.3 1.3 3.9 5.7 4.2 6.5 5.7 7.6
Provision for taxes...... 1.2 1.3 0.5 0.5 1.6 2.3 1.7 2.6 2.3 3.1
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income before
extraordinary item....... 1.8 2.0 0.8 0.8 2.3 3.4 2.5 3.9 3.4 4.5
Extraordinary (charge),
net of tax.............. -- -- -- -- -- (0.7) -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income................ 1.8% 2.0% 0.8% 0.8% 2.3% 2.7% 2.5% 3.9% 3.4% 4.5%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Gross profit (as a percentage
of related net sales):
PSG...................... 23.7% 23.8% 13.8% 19.0% 16.5% 22.5% 22.1% 23.3% 22.5% 25.5%
ICG...................... 30.3 29.8 30.5 30.1 30.9 30.9 29.4 32.0 31.5 30.4
</TABLE>

Factors such as announcements of technological innovations or new products
by the Company or its competitors, and the cyclical nature of the industries
served by the Company could cause substantial variations in the Company's
operating results. The defense, space, high-end digital imaging, electronics
capital equipment and industrial automation markets, each of which represents
a significant market for the Company's products, have historically been
subject to substantial economic fluctuations due to changing demands for their
products and services, introduction of new products and product obsolescence.
There can be no assurance that such fluctuations will not reoccur and have an
adverse impact on the Company's business, financial condition or results of
operations. The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly and annual operating results due to
a variety of factors, including market acceptance of new and enhanced versions
of the Company's products, timing and shipment of significant orders, mix of
products sold, length of sales cycles, plant openings and closings, the timing
of acquisitions or dispositions by the Company, delays in raw materials
shipments, completion of large projects, other manufacturing delays and
disruptions, the level or backlog of orders, and cyclicality in the markets
the Company serves. To some extent, the Company's net sales and operating
results for a quarter will depend upon the Company generating orders to be
shipped in the same quarter in which the order is received. The failure to
receive anticipated orders or delays in shipments near the end of a particular
quarter, due, for example, to unanticipated reschedulings or cancellations of
shipments by customers or unexpected manufacturing difficulties, may cause net
sales in a particular quarter to fall significantly below the Company's
expectations, which would have a material adverse effect on the Company's
operating results for such quarter.

23
<PAGE>

BACKLOG

A substantial portion of the Company's business is of a build-to-order
nature requiring various engineering, manufacturing, testing and other
processes to be performed prior to shipment. In addition, many of the
Company's orders require multiple deliveries over a period of time. As a
result, the Company generally has a significant backlog of orders to be
shipped.

As of June 30, 1997 and December 31, 1996, the Company had a backlog of
orders of $62.3 million and $56.4 million, respectively, an increase of 10.5%,
or $5.9 million. The increase in backlog is primarily attributable to the
acquisition of Teletrac and increased orders from the high-end digital imaging
market.

The Company believes that a substantial portion of the backlog of orders at
June 30, 1997 will be shipped over the next twelve months.

RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" was issued in February 1997 and replaces Accounting Principles Board
("APB") Opinion No. 15. The new statement simplifies the computations of
earnings per share ("EPS") by replacing the presentation of primary EPS with
basic EPS, which is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS under the new statement is computed similarly to fully
diluted EPS pursuant to APB Opinion 15. SFAS No. 128 is effective for
financial statements for both interim and annual periods ending after December
15, 1997. Early application is prohibited. For thesix-month period ended June
30, 1997, the effect of adopting SFAS No. 128 on the Company's reported EPS
would be immaterial.

SFAS No. 123, "Accounting for Stock-Based Compensation" was issued in 1995.
This statement requires companies to measure stock compensation plans based on
the fair value method of accounting or to continue to apply APB Opinion 25,
"Accounting for Stock Issued to Employees" and provide pro forma footnote
disclosure under the fair value method. Effective January 1, 1996, the Company
adopted the disclosure-only provisions of SFAS No. 123 and continues to follow
APB Opinion 25 and related interpretations to account for the Company's stock
compensation plans. In 1996 and 1995, the Company did not issue any stock
options to its employees and, as such, no disclosure related to this
pronouncement was required.

LIQUIDITY AND CAPITAL RESOURCES

The Company funds its operations primarily from cash flow generated by
operations and, to a lesser extent, from borrowings under the Credit Facility
and through capital lease transactions.

Net cash provided by (used in) operations for the six months ended June 30,
1997 and 1996 was $5.7 million and $(666,000), respectively. This improvement
was primarily due to higher cash earnings and lower working capital
requirements. Net cash provided by (used in) operations for the years ended
1996, 1995 and 1994 was $2.0 million, $(1.0) million and $1.4 million,
respectively. The increase in cash provided by operations in 1996, as compared
to 1995, was primarily due to higher income partially offset by reductions in
accounts payable, accrued expenses and other long-term liabilities. At
December 31, 1996, the Company had approximately $10.0 million of net
operating loss carry forwards available to reduce future taxable income.

The Company's working capital was $23.2 million, $24.8 million, $14.3
million and $11.5 million on June 30, 1997 and on December 31, 1996, 1995 and
1994, respectively.

Net cash used in investing activities for the six months ended June 30, 1997
and 1996 was $8.2 million and $5.3 million, respectively, due to an increase
in the use of cash for business acquisitions. During the second quarter of
1997, the Company acquired the stock of Teletrac. The cash portion of the
total purchase price for Teletrac was $7.3 million. During the second quarter
of 1996, the Company acquired all the outstanding shares of PAI for
approximately $4.7 million. See Note 3 of the Consolidated Financial
Statements. Net cash provided by (used in) investing activities for the years
ended 1996, 1995 and 1994 was $2.0 million, $1.9 million and $(192,000),
respectively. The cash provided by investing activities in 1996 was generated
primarily from the sale of L&S, a subsidiary of PAI, for cash consideration of
$11.3 million, partially offset by the acquisitions of PAI and LMBC. See Note
3 to the Consolidated Financial Statements.

24
<PAGE>

The Company had no material commitments for capital expenditures as of
December 31, 1996 or June 30, 1997. It is anticipated that capital
expenditures in 1997 could range from $4.0 million to $4.5 million as compared
to the $2.7 million expended in 1996, including assets acquired under capital
leases of $786,000. The Company also anticipates that it will continue to
finance a substantial portion of these capital expenditures through capital
leases. In June 1997, the Company redeemed approximately 200,900 shares of
Preferred Stock at an aggregate cost of $1.5 million.

As discussed in Note 5 to the Consolidated Financial Statements, the Company
entered into the Credit Facility in connection with its acquisition of PAI. As
of June 30, 1997, the available credit under this facility was $31.7 million
comprised of a $6.8 million term loan payable in installments and maturing in
April 2000, a $6.9 million term loan payable in installments and maturing in
April 2002 and a $18.0 million revolving credit facility expiring in April
2000. Upon the consummation of this Offering, the Company will prepay
approximately $19.7 million of indebtedness outstanding under the Credit
Facility (assuming that the Underwriters' over-allotment option is not
exercised). See "Use of Proceeds." After giving effect to such prepayment, the
Company expects that the only credit available under the Credit Facility will
amount to approximately $12.0 million (which amount, if the Underwriters'
over-allotment option is exercised, would be reduced, on a dollar-for-dollar
basis, to the extent of the net proceeds received upon such exercise) of
revolving loans. After the consummation of this Offering, the Company intends
to renegotiate the Credit Facility or enter into alternate borrowing
arrangements with other lenders. There can be no assurance that the Company
will be able to renegotiate the Credit Facility or enter into alternate
borrowing arrangements on terms acceptable to the Company, if at all. The
Company believes that cash expected to be generated from operations and credit
facilities expected to be available to the Company following the consummation
of this Offering will be sufficient to meet the Company's capital expenditure
and working capital requirements for at least the next 12 months.

Borrowings under the Credit Facility are secured by substantially all of the
assets of the Company and its subsidiaries. The Credit Facility contains
restrictive covenants which, among other things, impose limitations with
respect to the incurrence of additional liens and indebtedness, payment of
dividends in cash, mergers, consolidations and specified sale of assets,
transactions with affiliates, creation of subsidiaries and issuance of capital
stock. In addition, other covenants require the Company to meet certain
financial tests including minimum levels of earnings and net worth and various
other financial ratios. The Credit Facility further provides that upon the
occurrence of any Event of Default (as defined), the commitments of the
lenders may be terminated and all outstanding loans may be declared due and
payable. The definition of Event of Default includes various customary events,
such as nonpayment, certain defaults in the performance of covenants,
bankruptcy and related events, as well as the occurrence of a Change of
Control (as defined). The definition of Change of Control includes, among
other things, (i) a person or group acquiring beneficial ownership of 20% or
more of the outstanding Common Stock, (ii) Mr. Bershad failing to control at
least 25% of the then outstanding voting securities and (iii) the Board of
Directors not consisting of a majority of Continuing Directors (as defined).

DOMESTIC AND FOREIGN SALES

The following table sets forth information concerning the Company's domestic
and foreign net sales and operating income from continuing operations and
identifiable assets, for each of the last three years in the period ended
December 31, 1996 and for the six months ended June 30, 1997 (all foreign
sales are denominated in U.S. dollars):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------- JUNE 30,
1994 1995 1996 1997
-------- -------- -------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales:
USA........................... $ 57,752 $ 57,402 $ 80,898 $52,473
Foreign....................... 4,380 7,811 10,403 6,376
-------- -------- -------- -------
$ 62,132 $ 65,213 $ 91,301 $58,849
======== ======== ======== =======
Export sales as a percent of
total net sales................ 7.0% 12.0% 11.4% 10.8%
Operating income:
USA........................... $ 3,363 $ 3,155 $ 6,603 $ 4,775
Foreign....................... 314 540 504 554
Restructuring/inventory
writedown charges (USA)...... (1,315) -- -- --
-------- -------- -------- -------
$ 2,362 $ 3,695 $ 7,107 $ 5,329
======== ======== ======== =======
Identifiable assets:
USA........................... $ 42,197 $ 40,485 $ 62,171 $74,695
</TABLE>

25
<PAGE>

OPERATING RESULTS FOR THE THIRD QUARTER AND THE NINE MONTHS ENDED SEPTEMBER
30, 1997

The Company issued a press release on October 16, 1997 announcing unaudited
operating results for the third quarter and the nine months ended September
30, 1997. Net sales for the third quarter ended September 30, 1997 were $31.7
million, compared to $24.2 million for the same period in 1996, an increase of
31.0%. For the quarter, PSG's net sales were $20.7 million, an increase of
47.7% compared with the same period in 1996, and ICG's net sales were $11.0
million, an increase of 7.4% compared with the same period in 1996. The
increase in PSG's sales was primarily due to business acquisitions and higher
shipments in the defense, space, high-end digital imaging and electronics
capital equipment markets. Net income from continuing operations was $1.5
million for the quarter, compared with $607,000 for the same period in 1996.
Net income from continuing operations applicable to common shareholders was
$1.5 million for the quarter, or $0.42 per share, compared with $386,000, or
$0.14 per share, for the same period in 1996. The Company recorded a loss on
discontinued operations of $244,000, net of taxes (approximately $0.07 per
share), in the quarter. This loss was incurred to increase the Company's
reserve for environmental costs associated with a formerly-owned property. See
"Business--Environmental Regulation." After giving effect to this loss, net
income applicable to common shareholders was $1.2 million for the quarter, or
$0.35 per share, compared with $386,000, or $0.14 per share, for the same
period in 1996.

Net sales for the nine months ended September 30, 1997 were $90.5 million,
compared to $64.8 million for the same period in 1996, an increase of 39.7%.
For the nine month period, PSG's net sales were $57.1 million, an increase of
77.9% over the same period in 1996, and ICG's net sales were $33.4 million, an
increase of 2.3% over the same period in 1996. Net income from continuing
operations was $3.8 million for the nine month period, compared with $1.8
million for the same period in 1996. Net income from continuing operations
applicable to common shareholders was $3.7 million for the nine month period,
or $1.11 per share, compared with $1.2 million, or $0.44 per share, for the
same period in 1996, before extraordinary items. After giving effect to the
loss on discontinued operations recorded in the third quarter of 1997 and the
extraordinary loss on early extinguishment of debt in 1996, net income
applicable to common shareholders was $3.5 million for the nine month period,
or $1.04 per share, compared with $1.0 million, or $0.38 per share, for the
same period in 1996.

26
<PAGE>

BUSINESS

Through PSG, the Company offers its capabilities in magnetics, electronics,
optics, precision machining and systems integration to high-performance OEMs
and end-users, enabling them to design and utilize systems that meet leading-
edge performance requirements. PSG designs, manufactures and sells high-end
components such as precision sensors, high-performance motors, precision metal
optics and airbearings. These products enable OEMs to improve measurement
precision, positioning performance (speed and power), inspection throughput
and manufacturing yields. PSG also designs, manufactures and sells subsystems
which integrate several of the Company's components. For example, a rotary
positioning actuator, which is comprised of a direct drive motor and a
resolver, is a subsystem used in cluster tool robotics for positioning
semiconductor wafers. In addition, PSG designs, manufactures and sells
systems, such as HSA testers used to dynamically test computer disk drive
magnetic heads.

Through ICG, the Company designs, manufactures and sells interconnect
products. It also distributes and services precision ball bearings used by
OEMs in a variety of commercial industries. The interconnect products include
safety agency (e.g., U.L.) approved barrier terminal blocks and power
connectors which are primarily used to interface industrial or process control
computers to sensors, motors and other signal level and power devices. The
precision ball bearings distributed by the Company are acquired from various
domestic and international sources and are used in machine tools, office
automation, semiconductor manufacturing and other motion control applications
to provide for smooth and precise rotary motion.

In furtherance of its shift in strategy, the Company acquired various
synergistic technologies and assets. In April 1996, the Company acquired PAI.
PAI's subsidiaries, Speedring and Speedring Systems, are leading manufacturers
and suppliers of high-performance laser scanners and optics as well as
suppliers of precision-machined specialty materials, such as beryllium and
quartz, for space and other high-technology applications. In October 1996, the
Company acquired substantially all of the assets of LMBC, a supplier of
precision-machined beryllium. Components made of beryllium are significant
elements of space telescopes, weather and direct broadcast satellites, and
low-earth-orbit satellites used in cellular communication. Most recently, in
May 1997, the Company acquired Teletrac which designs, manufactures and sells
laser-based precision measurement systems as well as precision linear and
rotary positioning systems for use in the electronics capital equipment
industry.

MARKET OVERVIEW

Historically, the principal markets for precision optical and positioning
components were the defense and military space industries whose performance
requirements justified the high cost of components and associated electronic
controls. In recent years, however, the Company believes that commercial
manufacturers began to increase their requirements for throughput and yield as
a result of (i) the demand on manufacturers to produce smaller, higher-
performance products with precise tolerances, (ii) pressures imposed on
manufacturers to enhance productivity and quality, which in turn required
integration of process control technology directly into the manufacturing
process, and (iii) the lowering of costs associated with electronic controls.
Concurrently, OEMs increasingly began to rely on specialized manufacturers for
fully integrated subsystems and systems. The Company believes that such
reliance was caused by the general desire of OEMs to concentrate on their core
competencies, coupled with the increased complexity of manufacturing processes
and the desire of OEMs and end-users to reduce the number of vendors upon
which they rely.

27
<PAGE>

Today, the Company addresses the following five markets:

Defense. The defense industry has historically been a large consumer of
high-performance components. Over the last several years, cutbacks in defense
spending by the U.S. Government have resulted in reductions in both troop
levels and production of new weapons systems platforms. At the same time,
however, spending has increased and the market has grown for the upgrading of
existing platforms, including the development of "smart" weapons. These
upgrades include state-of-the-art electronics, enhanced night vision systems,
radar and guidance systems, and missile seeker technologies, all of which
incorporate high-performance components such as precision metal optics, high-
performance motors and sensors and precision-machined structures.

Space. As a result of the deployment of communications and navigational
satellite constellations, as well as the increased demand for weather and
scientific monitoring, the commercial space market has exhibited significant
growth in recent years. With that growth, there has been increased demand for
light weight and high-performance components, such as precision metal optics,
high-performance motors, sensors, actuation devices, inertial stabilization
components and beryllium components. These high-performance components are
capable of functioning within the extreme operating environment of space. In
particular, beryllium, the lightest metal, is highly effective at dissipating
heat and is able to maintain its structural stability over wide temperature
ranges.

High-End Digital Imaging. The high-end digital imaging market consists of
film recording systems, including pre-press, medical imaging and printed
circuit board layout film recorders, as well as laser projection systems. In
these products, laser light is modulated (pulsed), reflected off a mirror on a
rotating opto-mechanical scanner, and swept across a media such as film, to
create an image. In recent years, there has been a demand for increased
resolution and throughput capabilities in these high-end systems, requiring
the use of improved optics, higher speed motors, airbearings and more
sophisticated electronic controls. In 1994, the highest speed scanners used in
the high-end digital imaging market were rotating at approximately 20,000
revolutions per minute (RPM) with speed regulation to 10 parts per million
(ppm). Today, speeds approach 60,000 RPM and must be regulated to 2 ppm.
Scanners which operate at these high rotational speeds must be highly
engineered so as to manage the heat generated by the airbearing, minimize
turbulence through the design of an aerodynamic optical deflector, control
optical deformation, and provide a highly efficient electronic speed
controller.

Electronics Capital Equipment. The electronics capital equipment market
consists of equipment used to produce and test semiconductors, mass data
storage drives and flat panel displays. The market has expanded as a result of
growth in the sales of these products, as well as the rapid technological
advances relating to their manufacturing and testing. The Company believes
that increased demand for high-performance components and systems in this
market has resulted from (i) the miniaturization of products, creating the
need for smaller components and precise tolerances, (ii) faster production
cycles to meet product demand, (iii) the need for higher production yields and
(iv) increased outsourcing of the design and manufacture of electro-mechanical
and electro-optical subsystems and systems. High-performance components and
systems provide electronics capital equipment manufacturers with more precise
testing and process control devices which are designed to detect minute
manufacturing deviations, to reduce manufacturing costs, and to increase
throughput and yield in the manufacturing process.

Industrial Automation. The industrial automation market consists of a wide
range of industrial and commercial products, including machine tools, process
controls and heating, ventilation and air conditioning (HVAC) systems, which
the Company primarily serves through ICG. OEMs in these markets typically
purchase commodity-type and standardized products which must be delivered on a
short lead-time basis.

28
<PAGE>

BUSINESS STRATEGY

The Company's primary goal is to be a leading provider of components,
subsystems and systems that enhance throughput and yield to customers
requiring high-performance devices in their equipment and to end-users in
their manufacturing and quality assurance processes. The Company's strategy is
to leverage its resources and capabilities to develop higher-level subsystems
and systems, employing its precision optical and positioning technologies,
while maintaining and continuing to grow ICG. Key elements of this strategy
include:

Integrating Technologies. The Company intends to integrate PSG's recently
acquired technologies to develop new subsystems and systems. While PSG's sales
at the present time consist principally of components and subsystems, the
Company intends to increase the level of product integration it offers,
through the development and sale of electro-optical and electro-mechanical
systems. The Company believes that development of these systems, which build
on the Company's core component technologies, will, if successful, provide
customers with high-performance systems at competitive prices and enhance the
Company's sales opportunities. For example, Teletrac and Speedring Systems
have developed a low-cost HSA tester for the mass data storage industry which
will use Teletrac's X-Y positioning and systems integration capabilities and
Speedring Systems' airbearing technology. In addition, the Company is seeking
to develop a product which integrates the scanning technology of Speedring
Systems with the linear positioning capabilities of Teletrac for use in high-
end digital imaging applications.

Capitalizing on Cross-Selling Opportunities. Historically, PSG has organized
its sales force along product lines, through four product-specific direct
sales organizations as well as through manufacturers' representatives. To
capitalize on existing relationships within these sales organizations, the
Company has begun training its personnel within each sales organization to
identify opportunities to sell all of PSG's products and capabilities in their
respective core markets. The Company believes it can generate additional net
sales by cross-selling existing PSG products to existing customers and has
already identified a number of opportunities to cross-sell among the Company's
target customer base. For example, the direct drive motion control
technologies that the Company has been selling to the defense market are now
also being sold to customers in the electronics capital equipment industry for
use in cluster tool robotics. In addition, Speedring Systems is seeking to
adapt its airbearing technology, which has been used to serve the high-end
digital imaging market, to develop products for the mass data storage segment
of the electronics capital equipment market. The Company anticipates that this
cross-selling effort will result in increased customer awareness of the
Company's capabilities and an increased ability to sell systems integration.
In addition, over the long term, the Company, through use of the "Axsys" name,
intends to develop a corporate identity for its products, as opposed to
stressing the individual identity of the separate corporate entities, thereby
seeking to capitalize on the trend to reduce the number of vendors and
becoming a recognized supplier of subsystems and systems in a wide range of
applications.

Increasing Investment in Engineering and Manufacturing Infrastructure. The
Company offers a set of technologies and capabilities which include precision
metal optics, precision machining, magnetics, electronics and electro-
mechanical and electro-optical systems integration. To maintain and expand on
these technologies and capabilities, the Company invests in optical, magnetic,
mechanical, electronic and software engineering resources. In addition, the
Company continues to invest in sophisticated test equipment and state-of-the-
art manufacturing equipment, such as computer numerically controlled (CNC)
mills and lathes, electrical discharge machines, diamond turning and lapping
machines.

Expanding through Acquisitions. To expand and develop its product offerings,
technologies, sales channels and market presence, and to produce integrated
systems, the Company plans to continue to expand through strategic
acquisitions. For example, the Company acquired PAI for its presence in the
high-end digital imaging market and its optics and airbearing technologies and
Teletrac for its market presence in the electronics capital equipment market
and its systems integration capabilities. Although the Company reviews and
considers possible acquisitions on an ongoing basis, no specific acquisitions
are being negotiated or planned as of the date of this Prospectus.

Expanding the Industrial Components Group. The Company intends to increase
ICG's sales of interconnect devices and precision ball bearings to the
industrial and commercial automation markets through an increased focus on
direct sales to strategic accounts. As part of this focus, ICG attempts to
work with major customers to develop new interconnect products which can be
sold generally in the market place.

29
<PAGE>

TECHNOLOGIES, PRODUCTS AND CAPABILITIES

Precision Systems Group. The key enabling technologies and capabilities
utilized in the custom design, manufacture and sale of PSG's precision optical
and positioning components, subsystems and systems include:

Optics. Precision metal optics are used in applications where performance
requirements cannot be met with glass. The advantages of metal are its lighter
weight and ease of mechanical interface with housings and actuation devices.
The Company's metal optics are fabricated using CNC machines, lathes and
diamond turning and planetary lapping machines to machine and polish metal
substrates, such as beryllium and aluminum, to tolerances as precise as one
millionth of an inch. Precision metal optics sold by PSG include monogon and
polygon mirrors, which the Company uses for high-speed electro-mechanical
scanners, head mirrors used in weapons fire control systems, fold and aspheric
mirrors used in forward looking infrared (FLIR) night vision weapons systems,
and high-performance space-borne instruments used on weather, mapping and
scientific satellites.

Precision Machining. The Company's capabilities, which allow for very
precise and exacting measurements, are applied in the precision machining of
various materials for precision optics applications, airbearings, heat sinks,
housings and gimbals. PSG machines beryllium, quartz, stainless steel and
other metals for various applications in the space, defense and selected
commercial markets. The Company's airbearings provide precise positioning and
high speeds, and are used in high-speed scanners, components for weapons
guidance systems, magnetic media disk test spindles and precision position
stages used in semiconductor processing and test equipment. Its heat sinks are
used to dissipate heat in high-performance avionics and satellite electronics.
Its gimbals are used, among other things, to position optical sensors in FLIR
night vision systems.

Magnetics. The Company designs, manufactures and sells high-performance
motors and precision resolvers using state-of-the-art magnetic materials and
technology. These motors include AC motors, brush and brushless DC motors, and
torque and servo motors. The Company's magnetic products are capable of
rotational positioning to an accuracy as precise as five arc-seconds.
Applications for these high-performance components include precision
semiconductor processing and inspection equipment, missile systems, satellite
actuators and automated industrial systems.

Electronics. The Company's electronics control the speed and position of
electro-mechanical systems, such as precision motors, actuators, X-Y stages,
and laser scanners. The Company designs, manufactures and sells opto-
electronic position sensors, including optical encoders and laser
interferometers, as well as electronic controllers and drives and continues to
invest in its electronic design capability to maintain its expertise. Optical
encoders are used to sense rotary position and speed in a variety of
applications, including laser scanners, industrial robots and defense systems.
Laser interferometers, which are designed to permit precise linear position
sensing, are used principally in the electronics capital equipment market.
Electronic controllers coordinate the positioning and speed of electro-
mechanical systems by interfacing with other motion control components. Drives
provide power to a motor based on input from a controller in order to achieve
a designated position or to achieve a specific speed.

The following table summarizes the Company's component products and services
by the technologies they incorporate:

PSG TECHNOLOGIES

<TABLE>
- -------------------------------------------------------------------------------------
<CAPTION>
OPTICS PRECISION MACHINING MAGNETICS ELECTRONICS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
. Polygon
Mirrors . Airbearings . AC motors . Optical Encoders
. Monogon
Mirrors . Custom Machining of . Brush and Brushless DC . Laser Interferometers
. Head . Speed Controls for AC
Mirrors Specialty Materials: Motors:
. Fold and DC Motors
Mirrors -Beryllium -Torque Motors
. Aspheric
Mirrors -Beryllium-aluminum -Servo Motors . Position Controllers
. Plane
Mirrors -Quartz -Limited Angle Motors . Motor Drives
-Titanium . Resolvers
. Synchros
</TABLE>

30
<PAGE>

Systems Integration. The Company combines various components and
capabilities to offer subsystems and systems to its customers. PSG's precision
subsystems include X-Y stages and rotary positioning subsystems, including
actuators, opto-mechanical laser scanners and imaging subsystems, as well as
laser tracking autofocus subsystems. These subsystems employ motion control or
optics technology available within PSG. The X-Y positioning subsystems are
used in high-precision or high-performance applications, such as semiconductor
and flat panel display positioning subsystems for use in processing or
testing. The rotary positioning subsystems are used in applications such as
night vision systems for defense contractors and cluster tool robotics in
electronics capital equipment. The laser scanning and imaging subsystems are
used by pre-press equipment manufacturers and semiconductor inspection
equipment manufacturers. The laser autofocus, which is used to automatically
focus a microscope, is sold to OEMs who manufacture automated optical
inspection machines within the electronics capital equipment market.

PSG's systems are electro-mechanical turnkey systems, with application
specific software designed by the Company for the end-user. Historically, the
Company has sold these systems only to the electronics capital equipment
industry, where it sells head gimbal assembly (HGA) and head stack assembly
(HSA) testers for mass data storage manufacturers.

The following table illustrates how PSG's technologies, products and
capabilities are integrated to develop subsystems and systems:

<TABLE>
<CAPTION>
PSG TECHNOLOGIES AND CAPABILITIES
---------------------------------------------------------------------------
SUBSYSTEMS
& PRECISION
SYSTEMS OPTICS MACHINING MAGNETICS ELECTRONICS

<S> <C> <C> <C> <C>
. Polygon or . Airbearing . Brushless DC . Optical Encoder
LASER SCANNER Monogon Mirror Servo Motor . Speed Control
. Motor Drive

. Polygon or . Airbearing . Brushless DC . Optical Encoder
Monogon Mirror Servo Motor . Speed Control
LASER IMAGER . Fold Mirror . Motor Drive
. Aspheric Mirror

LASER AUTOFOCUS . Brushless DC . Position Controller
Servo Motor . Motor Drive

ROTARY POSITIONING . Brushless DC . Position Controller
ACTUATOR Servo Motor . Motor Drive
. Resolver

. Plane Mirror . Airbearing . Linear Motor . Laser Interferometer
X-Y STAGE . Position Controller
. Motor Drive

HGA/HSA . Airbearing . Brushless DC . Laser Interferometer
TESTERS Limited Angle. Position Controller
Motor . Motor Drive

. Airbearing . Brushless DC . Optical Encoder
DISK TEST SPINDLE Servo Motor . Speed Control
. Motor Drive

</TABLE>

- --------
Italicized components are currently purchased from external sources but are in
various stages of development by the Company.

31
<PAGE>

Industrial Components Group. ICG designs, manufactures and sells a full line
of barrier terminal blocks, connectors and interconnect devices, and also
distributes a broad array of precision ball bearings.

Terminal Blocks and Connectors. The terminal blocks and connectors market is
directly related to the use of computer controls in a variety of industrial
and commercial applications, such as machine controllers, motor regulation or
security controls. The terminal blocks provide a simple method for point of
use installation and/or interchangeability of electronic components between
the computer control's printed circuit board and the device that the computer
is sensing (input) or driving (output).

ICG provides a broad array of terminal blocks. The core product line is
based on "U.S.-Style" terminal blocks, which have been the mainstay of
controls made by OEMs in the United States for several decades. ICG has also
developed a broad line of "Euro-Style" terminal blocks. These devices were
introduced by European manufacturers who began to enter the U.S. market in the
mid 1980s. In addition, ICG has applied attributes associated with "Euro-
Style" connectors to the "U.S.-Style" and vice versa.

Precision Ball Bearings. ICG distributes an array of precision ball bearings
varying in size, precision tolerance, lubrication and price. Through its
distribution arrangements with several foreign bearing manufacturers, ICG has
developed a broad product offering. ICG also provides certain value-added
services, such as bearing relubrication, white room handling of products, and
engineering consultation.

COMPETITION

The markets for the Company's products are competitive. In PSG, the Company
competes primarily on the basis of its ability to design and engineer its
products to meet performance specifications set by its customers, most of whom
are OEMs who purchase component parts or subsystems for inclusion in their
end-products. Product pricing and quality, customer support, experience,
reputation and financial stability are also important competitive factors.

There is a limited number of competitors in each of the markets for the
various types of precision optical and positioning components and subsystems,
and electrical/electronic terminal block and connector devices manufactured
and sold by the Company. These competitors, especially those in the precision
optical and positioning product lines, are typically focused on a smaller
number of product offerings than the Company, and are often well entrenched.
Some of these competitors have substantially greater resources than the
Company. The Company believes, however, that the breadth of its technologies
and product offerings provide it with a competitive advantage over certain
manufacturers which supply only discrete components or are not vertically
integrated with enabling technologies.

There are numerous competitors in markets to which the Company distributes
precision ball bearings. These competitors vary in size and include bearing
manufacturers and distributors. In the Company's opinion, ICG's breadth and
product availability, combined with the value-added services it supplies,
provide competitive advantages for ICG.

The Company expects its competitors to continue to improve the design and
performance of their products. There can be no assurance that the Company's
competitors will not develop enhancements to, or future generations of,
competitive products that will offer superior price or performance features or
that new processes or technologies will not emerge that render the Company's
products less competitive or obsolete. Increased competitive pressure could
lead to lower prices for the Company's products, thereby adversely affecting
the Company's business, financial condition or results of operations. There
can be no assurance that the Company will be able to compete successfully in
the future.

CUSTOMERS

The Company's customers include OEMs and end-users who design or utilize
high-precision, performance and throughput equipment. PSG's customers are
primarily in the defense, space, high-end digital imaging and electronics
capital equipment markets. ICG's customers are primarily in the industrial
automation market. The

32
<PAGE>

Company has an extensive customer list which includes many of the major
participants in the market segments listed below:

<TABLE>
<CAPTION>
HIGH-END ELECTRONICS INDUSTRIAL
DEFENSE SPACE DIGITAL IMAGING CAPITAL EQUIPMENT AUTOMATION
- ---------------- ------------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Allied Signal Allied Signal Agfa Applied Materials Danaher
Boeing Ball Aerospace ECRM Etec Dover Elevator
GEC Marconi Honeywell Fuji IBM Elsag Bailey
Honeywell Hughes Gerber Intel General Electric
Hughes ITT Kodak KLA/Tencor Hewlett-Packard
Litton Lockheed Martin Linotype Maxtor Honeywell
Lockheed Martin Loral Space & Scitex Orbotech Lincoln Electric
Northrop/Grumman Communications Seagate Rockwell
Raytheon Matra Marconi Space Xerox Siemens
United Technolo-
gies Motorola
Thomson
TRW
</TABLE>

There is no customer or group of affiliated customers for which sales during
fiscal 1996 or the six months ended June 30, 1997 were in the aggregate 10% or
more of the Company's consolidated net sales, and, in the Company's opinion,
there is no customer, the loss of which would have a material adverse effect
on the Company's operations taken as a whole.

In 1996 and for the six months ended June 30, 1997, the Company had
aggregate sales, both military and non-military, directly to the U.S.
Government, including its agencies and departments, of approximately $5.1
million and $2.1 million, respectively. These sales accounted for
approximately 5.6% and 3.6% of total net sales in 1996 and for the six months
ended June 30, 1997, respectively, as compared to 4.6% in 1995 and 5.8% in
1994. Approximately 22.0% of net sales in 1996 and 25.9% for the six months
ended June 30, 1997 were derived from subcontracts with U.S. Government
contractors as compared to 13.4% in fiscal 1995 and 18.1% in 1994. The
majority of these contracts may be subject to termination at the convenience
of the U.S. Government, and certain contracts may also be subject to
renegotiation. Currently, the Company is not aware of any termination or
renegotiation of such contracts which would have a material adverse effect on
its business. Because a substantial part of the Company's business is derived
directly from contracts with the U.S. Government, or agencies or departments
thereof, or indirectly through subcontracts with U.S. Government contractors,
the Company's results of operations could be materially affected by changes in
U.S. Government expenditures for products using component parts which the
Company produces. However, the Company believes that its exposure to such risk
may be lessened by the broad number and diversity of its product applications
and the strength of its engineering capabilities.

SALES, MARKETING AND CUSTOMER SUPPORT

As of June 30, 1997, the Company employed 75 sales, marketing and customer
support personnel, of whom 41 were involved with PSG's product offerings and
34 were involved with ICG's product offerings. Historically, the Company's
sales organization has been organized along product lines with four product-
specific direct sales organizations in PSG and two direct sales organizations
in ICG. As part of its integration strategy, the Company is in the process of
increasing its expenditures for sales and customer support and realigning the
sales organizations in PSG along market segments--defense, space, high-end
digital imaging and electronics capital equipment. To date, this realignment
has been limited to training of sales personnel in each of PSG's sales
organizations to identify opportunities to sell all of PSG's capabilities in
its own core market and to making joint sales calls. There can be no assurance
that these efforts will be successful and lead to increases in the Company's
sales or that the Company will recover its additional costs in implementing
this strategy.

33
<PAGE>

Also as of June 30, 1997, PSG's direct sales organization included 14 direct
sales field personnel, most of whom have engineering backgrounds, with the
remainder involved in inside sales, customer service, program management,
contract administration and applications engineering. ICG's direct sales
organization included 11 direct sales field personnel, with the remainder
involved in inside sales, customer service, product management, contract
administration and applications engineering. The Company believes that its
sales effort is enhanced by having engineering-trained sales personnel
available to meet with customers' engineering personnel. In addition, the
Company's application and design engineers are used to enhance the sales
process.

PSG and ICG also sell their products through over 200 manufacturer's sales
representatives and agents. Although the Company believes it has good
relationships with these sales representatives and agents, there can be no
assurance that these relationships will continue to be satisfactory or will
continue at all.

ENGINEERING, RESEARCH AND DEVELOPMENT

The Company seeks to develop new component products, subsystems and systems
and improve existing products in order to keep pace with customers' increasing
performance requirements. The Company devotes significant resources, a portion
of which is reimbursed by customers, to development programs directed at
creating new products and product enhancements, as well as developing new
applications for existing products. Because the Company believes that its
ability to compete effectively depends in part on maintaining and enhancing
its expertise in applying new technologies and developing new products, the
Company dedicates substantial resources to engineering, research and
development. At August 31, 1997, the Company employed 87 individuals in its
engineering, research and development functions. There can be no assurance
that the Company's product development efforts will be successful in producing
products that respond to technological changes or new products introduced by
others.

The Company's costs associated with engineering and research and
development were $2.4 million, $3.4 million, $4.1 million and $2.4 million in
1994, 1995, 1996 and the six months ended June 30, 1997, respectively. During
such periods, $1.2 million, $1.2 million, $2.2 million and $1.3 million,
respectively, were incurred in research and development. Of these amounts, the
Company recovered from customers approximately 40.4%, 38.3%, 17.0% and 10.5%
respectively. The Company intends to direct its research and development
activities to integrating its newly acquired technologies with its existing
capabilities, and continuing to develop subsystems and systems.

RAW MATERIALS; SUPPLIERS

Raw materials and purchased components are generally available from multiple
suppliers. However, beryllium, a material used extensively by PSG, is only
available from Brush Wellman, the sole U.S. supplier. Historically, the
Company and, to the Company's knowledge, its predecessors' beryllium
operations have had an excellent relationship with Brush Wellman and have not
encountered problems in obtaining their requirements. However, the partial or
complete loss of Brush Wellman as a supplier of beryllium, or production
shortfalls or interruptions that otherwise impair the supply of beryllium to
the Company, would have a material adverse effect on the Company's business,
financial condition or results of operations. If such conditions were to
occur, it is uncertain whether alternative sources could be developed. In
addition, the Company purchases a substantial part of the ball bearings it
distributes from a single foreign supplier. While the Company believes that it
could obtain alternate sources of supply, any interruption in the flow of
products from this supplier, or increases in the cost of these products, could
have an adverse effect on the Company's business, financial condition or
results of operations.

PATENTS AND TRADEMARKS

The Company is not dependent upon any single patent or trademark. The
Company has a combination of patents, trademarks and trade secrets, non-
disclosure agreements and other forms of intellectual property protection to
protect certain of its proprietary technology. Although it believes that its
patents and trademarks have value, the Company believes that its future
success will depend primarily on the innovation, technical

34
<PAGE>

expertise, manufacturing and marketing abilities of its personnel. The Company
currently holds 14 patents in the United States expiring between October 27,
1997 and April 18, 2012, and eight international patents expiring between
April 21, 1998 and December 24, 2019, and has patent applications pending or
under evaluation in the United States and various foreign jurisdictions. There
can be no assurance as to the degree of protection offered by these patents or
as to the likelihood that patents will be issued for pending applications.
There also can be no assurance, however, that the Company will be able to
maintain the confidentiality of its trade secrets or that its non-disclosure
agreements will provide meaningful protection of the Company's trade secrets,
know-how or other proprietary information in the event of any unauthorized
use, misappropriation or disclosure of such trade secrets, know-how or other
proprietary information.

Competitors in the United States and foreign countries, many of which have
substantially greater resources, may have applied for or obtained, or may in
the future apply for and obtain, patents that will prevent, limit or interfere
with the Company's ability to make and sell some of its products. Although the
Company believes that its products do not infringe on the patents or other
proprietary rights of third parties, there can be no assurance that other
third parties will not assert infringement claims against the Company or that
such claims will not be successful.

ENVIRONMENTAL REGULATION

The Company believes that it is in compliance with federal, state and local
laws and regulations governing the discharge of materials into the environment
or otherwise relating to the protection of the environment in all material
respects, and that any non-compliance with such laws will not have a material
adverse effect upon its business, financial condition or results of
operations, capital expenditures, earnings or competitive position. There can
be no assurance, however, (i) that changes in federal, state or local laws,
regulations or regulatory policy, or the discovery of unknown problems or
conditions will not in the future require substantial expenditures, or (ii) as
to the extent of the Company's liabilities, if any, for past failures, if any,
to comply with applicable environmental laws, regulations and permits, any of
which also could have a material adverse effect on the Company's business,
financial condition or results of operations.

The Company has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") with respect to three third-party waste disposal sites. In 1996,
the Company entered into a settlement agreement and paid approximately $1,000
with respect to one of these sites. Although liability under CERCLA is joint
and several, meaning that liability can exceed a PRP's pro rata share of
cleanup costs, based on currently available information, the Company believes
that costs associated with the two remaining sites will not have a material
adverse effect on the Company.

The Company, pursuant to a remedial plan approved by the Ohio Environmental
Protection Agency ("Ohio EPA") in 1993, is in the process of investigating
soils and groundwater at a site formerly owned by a division of the Company,
and has conducted certain remedial work at this site. Costs to date have not
been material to the Company, and until recently, the Company believed that
future costs similarly would not be material. In September 1997, however, the
Company was advised by its environmental consultants that the costs now
anticipated to carry out the 1993 plan would be substantially greater than
previously expected, but that the Company could pursue alternate plans which
would involve additional costs in the range of approximately $600,000 to $1.5
million. However, any such alternate plans would be subject to the approval of
the Ohio EPA. Based on the advice of its consultants, the Company has
increased its reserves relating to this site to approximately $600,000, with a
resulting charge to discontinued operations in the third quarter of 1997 of
$244,000, net of taxes (approximately $0.07 per share). Based on the advice of
its consultants, the Company believes that the Ohio EPA is likely to allow use
of an alternate plan. There can be no assurance that an alternate remedial
plan will be approved by the Ohio EPA. If such approval is not received, costs
to the Company would increase substantially. In addition, even if approval is
received, the costs actually incurred may exceed the reserves established. The
Company anticipates that actual expenditures will be incurred over a period of
several years.

In addition, the current owner of a site formerly owned by a subsidiary of
PAI has asserted that the subsidiary is responsible for investigation and
remediation costs with respect to this site. No litigation has been

35
<PAGE>

brought against the Company, and the Company has received no correspondence or
other communication for several years with respect to this site. At this time
the Company is unable to assess the extent of its potential liability, if any,
with respect to this site or to form a judgment as to the likelihood of an
unfavorable outcome in the event litigation were to be commenced.

The Company uses or generates certain hazardous substances in its
manufacturing and engineering facilities. The Company believes that its
handling of such substances is in material compliance with applicable local,
state and federal environmental, safety and health regulations at each
operating location. The Company invests in protective equipment, process
controls and specialized training to minimize risks to employees, surrounding
communities and the environment due to the presence and handling of such
hazardous substances. The Company periodically conducts employee physical
examinations and workplace air monitoring regarding such substances. When
exposure problems or potential have been indicated, corrective actions have
been implemented and re-occurrence has been minimal or non-existent. The
Company does not carry environmental impairment insurance.

EMPLOYEES

As of June 30, 1997, the Company employed 932 persons, including 691 in
manufacturing, 75 in sales, 87 in engineering and 79 in administration. All
are employed in the United States, except for one United Kingdom- based
employee engaged in international sales. The Company's approximately 80
employees at the St. Petersburg, Florida facility are subject to a collective
bargaining agreement. The Company considers its relations with its employees
to be satisfactory. There has been no significant interruption of operations
due to labor disputes.

FACILITIES AND MANUFACTURING

The Company leases its executive office, located at 645 Madison Avenue, New
York, New York. The principal plants and other materially important properties
at June 30, 1997 are:

<TABLE>
<CAPTION>
APPROXIMATE
LOCATION TYPE OF FACILITY SQUARE FOOTAGE OWNED/LEASED(1)
- ------------------- -------------------------- -------------- ---------------
<S> <C> <C> <C>
Cullman, AL Manufacturing, Engineering 110,000 Owned
Gilford, NH Manufacturing, Engineering 84,250 Owned
Montville, NJ Distribution 76,200 Leased
San Diego, CA Manufacturing, Engineering 63,100 Leased
St. Petersburg, FL Manufacturing, Engineering 52,500 Owned
Rochester Hills, MI Manufacturing, Engineering 35,000 Leased
Santa Barbara, CA Manufacturing, Engineering 13,800 Leased
Irvine, CA Distribution 7,800 Leased
Dallas, TX Distribution 2,950 Leased
</TABLE>
- --------
(1) Leases expire from 1999 to 2002.

All of the facilities owned by the Company are subject to mortgages or
security interests which secure the Company's obligations under the Credit
Facility or industrial revenue bonds. See Note 5 to the Consolidated Financial
Statements.

Management believes that the Company's manufacturing facilities are
generally sufficient to meet its current and reasonably anticipated
manufacturing, distribution and related requirements. The Company, however,
periodically reviews its space requirements to ascertain whether its
facilities are sufficient to meet its needs.

LEGAL PROCEEDINGS

The Company is a defendant in various lawsuits, none of which is expected to
have a material adverse effect on the Company's business, financial condition
or results of operations. See "--Environmental Regulation."

36
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth the names, ages and positions of the
Company's executive officers and directors. Executive officers are appointed
by, and serve at the discretion of, the Board of Directors. All directors hold
office until the annual meeting of shareholders of the Company following their
election or until their successors are duly elected and qualified.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Stephen W. Bershad...... 56 Chairman of the Board and Chief Executive Officer
Raymond F. Kunzmann..... 40 Vice President--Finance and Chief Financial Officer
Louis D. Mattielli...... 47 Vice President--General Counsel and Secretary
Kenneth F. Stern........ 37 Vice President--Corporate Development
Richard V. Howitt....... 53 Director; President of Teletrac
Anthony J. Fiorelli,
Jr..................... 67 Director
Eliot M. Fried.......... 64 Director
</TABLE>

Stephen W. Bershad has been Chairman of the Board and Chief Executive
Officer of the Company since he joined the Company in December 1986. Prior to
joining the Company, he was a Managing Director of Lehman Brothers and its
predecessor firms, where he held a series of senior management positions in
merchant banking and mergers and acquisitions. Mr. Bershad is a director of
EMCOR Group, Inc., an electrical and mechanical construction and facilities
services company.

Raymond F. Kunzmann joined the Company in June 1994 and currently serves as
Vice President--Finance and Chief Financial Officer. Prior to joining the
Company, from January 1994 until May 1994, he was Group Controller at
Mannesmann Capital Corporation, a diversified manufacturing company, and, from
January 1987 until December 1993, was Controller and held other positions at
Lear Siegler, Inc., a diversified manufacturing/service company. Prior to
that, Mr. Kunzmann was employed by Deloitte, Haskins & Sells.

Louis D. Mattielli joined the Company in June 1997 as Vice President--
General Counsel and Secretary. Prior to joining the Company, Mr. Mattielli was
a consultant to Liberty Brokerage, Inc. and its affiliated companies,
interdealer bond brokers, from September 1996 to May 1997. From June 1994 to
September 1996, he was Senior Vice President--General Counsel and Secretary of
The Pullman Company, an automotive manufacturing company. From September 1993
to June 1994, he was Senior Vice President--Administration of and then
consultant to Herzog, Heine & Geduld, Inc., a broker-dealer. From May to
September 1993, he served as Vice President and General Counsel of Hat Brands,
Inc., an apparel company. Prior to that, from January 1987 to May 1993, he was
Vice President and General Counsel of and then consultant to Lear Siegler,
Inc.

Kenneth F. Stern joined the Company in October 1994 and currently serves as
Vice President--Corporate Development. Prior to joining the Company, from
December 1992 to October 1994, he was a management consultant specializing in
strategic planning and corporate development for technology companies at
Monitor Company, and, prior to December 1992, at Lorne Weil Inc., both of
which are consulting firms.

Richard V. Howitt has been a director of the Company since June 1997,
following the Company's acquisition of Teletrac. Mr. Howitt is a co-founder of
Teletrac and has been President of Teletrac for 18 years. Prior to his full-
time employment at Teletrac, he was a member of the technical staff and
Section Head of Optical Metrology at Santa Barbara Research Center. See
"Certain Transactions."

Anthony J. Fiorelli has been a director of the Company since February 1988.
Since January 1986, Mr. Fiorelli has been President of Strategic Management
Consulting Services, Inc., a management consulting firm.

37
<PAGE>

Eliot M. Fried has been a director of the Company since 1994. He is a
Managing Director of Lehman Brothers where he has been employed for 21 years
and is a member of its Investment Committee and Investment Banking Commitment
Committee. He is also Vice President of Lehman Electric Inc. Mr. Fried is a
director of Bridgeport Machines, Inc., EVI, Inc., an oil services company, L-3
Communications Corporation, a communications equipment company, and Walter
Industries, Inc., a conglomerate of basic industries.

There are no family relationships among any of the directors and executive
officers of the Company.

COMMITTEES OF THE BOARD

The Audit Committee, the Compensation Committee and the Stock Incentive Plan
Committee are the standing committees of the Board of Directors. The Audit
Committee reviews internal and external audit procedures of the Company.
Messrs. Fiorelli and Fried are members of the Audit Committee. The
Compensation Committee oversees compensation policies of the Company. Its
members are Messrs. Bershad and Fiorelli. The Stock Incentive Plan Committee
administers the Company's Long-Term Stock Incentive Plan and is comprised of
Messrs. Fiorelli and Fried. See "--Stock Incentive Plan."

DIRECTORS' COMPENSATION

The compensation of directors is fixed by the Board of Directors. Directors
who are not employees of the Company receive meeting fees of $2,500 for each
Board meeting attended and $1,000 for each committee meeting attended other
than in connection with a Board meeting. Directors are reimbursed for travel
and other expenses incurred in the performance of their duties. The Board of
Directors met four times during 1996. For information as to certain stock
options granted to Messrs. Fiorelli and Fried, see "--Stock Incentive Plan."

38
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to the Company's
Chief Executive Officer and the other executive officers of the Company whose
aggregate cash compensation exceeded $100,000 (collectively, the "Named
Executives") during the years ended December 31, 1994, 1995 and 1996:

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
------------------- ------------
NUMBER OF
SECURITIES
UNDERLYING ALL OTHER
BONUS(1) OPTIONS(2) COMPENSATION(3)
NAME AND PRINCIPAL POSITION YEAR SALARY ($) ($) (#) ($)
- --------------------------- ---- ---------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Stephen W. Bershad(4)..... 1996 262,500 157,500 -- 7,576
Chairman of the Board and 1995 262,500 100,000 -- 6,258
Chief Executive Officer 1994 262,500 150,000 4,200 10,810
Elliot N. Konopko(5)...... 1996 210,673 82,875 -- 20,555
Vice President--General 1995 175,000 40,000 -- 6,521
Counsel and Secretary 1994 175,000 55,000 3,000 6,318
Raymond F. Kunzmann(6).... 1996 141,385 85,000 -- 10,603
Vice President--Finance 1995 120,635 45,000 -- 7,197
and Chief Financial
Officer 1994 70,000 28,000 4,000 2,721
Kenneth F. Stern(7)....... 1996 130,269 52,500 -- 10,439
Vice President-- 1995 120,000 25,000 -- 4,429
Corporate Development 1994 25,000 5,000 2,000 --
</TABLE>
- --------
(1) Reflects payments under the Company's Annual Incentive Plan, which is
described below.
(2) Reflects awards under the Company's Long-Term Stock Incentive Plan. See
"--Stock Incentive Plan."
(3) Reflects matching contributions under the Company's 401(k) Plans and
payments under the Company's executive health insurance plan and other
miscellaneous amounts. The Company's executive health insurance plan,
which covers only executive officers, provides for the reimbursement of
deductible and coinsurance amounts and certain medical expenses not
covered under the Company's basic medical plans. See "--401(k) Plans."
(4) Mr. Bershad's current annual base salary is $300,000.
(5) Mr. Konopko was Vice President--General Counsel and Secretary of the
Company from March 1990 until his resignation on June 18, 1997. Mr.
Mattielli, his successor, is employed at an annual base salary of
$175,000.
(6) Raymond F. Kunzmann joined the Company in June 1994.
(7) Kenneth F. Stern joined the Company in October 1994.

INCENTIVE PLANS

An Annual Incentive Plan and a Supplemental Revenue Growth Incentive Plan
have been established by the Company to provide additional incentive
compensation which is based on the Company's performance.

Under the Annual Incentive Plan, a payment may be made to many of the
Company's employees based on the achievement of certain consolidated or
individual business unit performance criteria, including, among other things,
operating income, bookings and return on investment. Distributions under this
plan are made in cash annually after the close of each fiscal year.

During 1996, the Board of Directors of the Company adopted a Supplemental
Revenue Growth Incentive Plan under which certain management employees of the
Company became eligible for future payments,

39
<PAGE>

contingent upon the Company achieving certain net sales growth objectives over
the three-year period 1996 to 1998. Awards (which are based on a percentage of
an employee's base salary) will be earned following the conclusion of any
fiscal year where net sales growth, adjusted to take into account structural
changes such as acquisitions and dispositions, over the higher of (i) net
sales for a base period which in general reflects 1995 net sales and (ii) the
highest net sales for any subsequent fiscal year, is at least equal to the
targeted growth percentage established by the Company. If net sales growth
exceeds the targeted growth percentage in any given year within the three-year
period, a participant receives, for that year, a two percentage point increase
in the percentage of salary on which the award is based for each full
percentage point increase in net sales growth for that year over the targeted
growth percentage. Incentive compensation earned for any year under this plan
vests in one-third increments 12 months, 24 months and 36 months after the end
of such year and is payable at each vesting date in shares of Common Stock or,
in certain circumstances, in cash. The number of shares of Common Stock earned
for any year is determined by dividing the dollar value of the award earned in
that year by the price of the Common Stock on the last day of the year for
which the award was earned.

The table below sets forth certain information relating to grants to the
Named Executives under the Supplemental Revenue Growth Incentive Plan.

<TABLE>
<CAPTION>
PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF OTHER PERIOD NON-STOCK PRICE BASED PLANS
SHARES, UNITS OR UNTIL MATURATION ------------------------------------
NAME OTHER RIGHTS (1) OR PAYOUT THRESHOLD TARGET MAXIMUM(1)
- ---- ---------------- ---------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Stephen W. Bershad...... 1996-1998 $ 90,000 $ 90,000
Raymond F. Kunzmann..... 1996-1998 43,500 43,500
Kenneth F. Stern........ 1996-1998 40,500 40,500
</TABLE>
- --------
(1) See discussion above.

TELETRAC, INC. MANAGEMENT INCENTIVE COMPENSATION PLAN

Under the Teletrac, Inc. Management Incentive Compensation Plan (the
"Teletrac Plan"), Teletrac may make certain cash bonus awards ("Awards") to
employees of Teletrac who are senior officers, members of senior management or
key employees and consultants to Teletrac. The purpose of the Teletrac Plan is
to advance the best interest of Teletrac and the Company by providing eligible
employees with additional incentives to promote the success of Teletrac's
business, to increase their vested interest in the success of Teletrac's
business and to encourage them to remain employees of Teletrac. The Teletrac
Plan was ratified and approved by Teletrac's shareholders on May 30, 1997.
Under the Teletrac Plan, Teletrac must establish incentive compensation pools
("Incentive Compensation Pools") for each of the fiscal years ending December
31, 1997 and December 31, 1998 and the thirteen-month period ending January
31, 2000 (each, an "Incentive Period") and, under certain circumstances,
additional incentive compensation pools ("Additional Incentive Compensation
Pools") for the same periods. The Incentive Compensation Pools and the
Additional Incentive Compensation Pools are determined based on a percentage
of the excess of "gross profits" (as defined in the Teletrac Plan) for each
Incentive Period over a base amount. The aggregate amount of the Incentive
Compensation Pools and the Additional Incentive Compensation Pools shall not
exceed $3.0 million and $1.1 million, respectively. Subject to the next
succeeding sentence, Mr. Howitt, the President of Teletrac and a director of
the Company, is entitled to a percentage of annual payments, not to exceed
43%, from the Incentive Compensation Pool and the Additional Incentive
Compensation Pool, if applicable, as determined by the committee administering
the Teletrac Plan. In addition, in accordance with employment agreements
between Teletrac and Messrs. Barker and Howitt, if such agreements are
terminated for certain reasons, each of them will be entitled to receive an
Award of 40% of all amounts payable to them under the Teletrac Plan after such
termination date. The Teletrac Plan is administered by a committee comprised
solely of Mr. Howitt as long as he is President and a full-time employee of
Teletrac and, in the event Mr. Howitt shall cease to be the President and a
full-time employee of Teletrac, by David Barker as long as he is Vice
President--Research and Development and at least a half-time employee of
Teletrac and thereafter by individuals appointed by the Board of Directors of
Teletrac. Subject to certain exceptions, including exceptions for amendments
that adversely affect a participant's right (without consent) to

40
<PAGE>

receive Awards under the Teletrac Plan, the Board of Directors of Teletrac may
amend the Teletrac Plan from time to time or suspend or terminate it entirely.
In the event Teletrac sells all or substantially all of its assets, the
participants in the Teletrac Plan are entitled to receive an amount equal to
$4.1 million less all amounts previously paid as Incentive Compensation Pools
and Additional Incentive Compensation Pools unless certain conditions are
satisfied. See "Certain Transactions."

STOCK INCENTIVE PLAN

The Company's Long-Term Stock Incentive Plan was approved by shareholders in
August 1991; it was then amended and restated by the Board of Directors on
September 18, 1997. Such amendment and restatement was approved by the
shareholders at a special meeting held on October 14, 1997 (the "Stock
Incentive Plan"). The amendments, among other things, increase the number of
shares of Common Stock authorized for grant from 79,400 to 400,000 and make
certain awards under the Stock Incentive Plan qualify for favorable treatment
under Section 162(m) of the Internal Revenue Code of 1986. The Stock Incentive
Plan is administered by the Stock Incentive Plan Committee (the "Committee").
The Committee selects participants from among those executives and other
employees of the Company and its subsidiaries who materially contribute to the
success of the Company and determines the amounts, times, forms, terms and
conditions of grants.

Grants may be in the form of options to purchase shares of Common Stock,
stock appreciation rights, restricted stock and performance units
(collectively, "Stock Incentives"). Stock appreciation rights may be granted
on a "free-standing" basis or in conjunction with all or a portion of the
shares covered by an option. Stock Incentives are subject to such provisions
as the Committee determines and may be exercised at one time or in such
installments and at such prices over the balance of the exercise period as
determined by the Committee. The number of shares of Common Stock underlying
Stock Incentives granted per calendar year cannot exceed (i) for any executive
officer 60,000 shares of Common Stock and (ii) for any other eligible
participant 60,000 shares of Common Stock.

Each Stock Incentive is exercisable, upon vesting, in whole or in part,
prior to its cancellation or termination, by written notice to the Company. If
any option is being exercised, such notice must be accompanied by payment in
full of the purchase price in cash or, if acceptable to the Committee, shares
of Common Stock or a combination thereof. Stock Incentives are not
transferable except by will or by laws of descent and distribution.

In general, each Stock Incentive will terminate upon the earlier of (i) the
date fixed by the Committee when the Stock Incentive is granted or (ii) unless
determined otherwise by the Committee, 90 days after the participant's
termination of employment other than for cause, to the extent the Stock
Incentive was then exercisable. In the event of termination due to death or
disability, the Stock Incentive may be exercised to the extent then
exercisable for a period of one year from such termination. If a participant's
employment is terminated for cause, his or her ability to exercise any Stock
Incentive is immediately terminated.

The Company may make loans to such participants as the Committee, in its
discretion, may determine in connection with the exercise of options in an
amount up to the exercise price of the option plus any applicable withholding
taxes. In no event may any such loan exceed the fair market value, at the date
of exercise, of the shares covered by the option exercised.

Upon a change of control, the Stock Incentives which are outstanding on the
date of such change of control and are not then exercisable may become
immediately exercisable. With respect to the Stock Incentives intended to
qualify as performance-based compensation under Section 162(m) of the Internal
Revenue Code, the Committee must set forth and define in each Stock Incentive
agreement the terms or events upon which the vesting or exercisability of the
Stock Incentives will accelerate. With respect to Stock Incentives not
intended to so qualify and with respect to options outstanding prior to the
amendment of the Stock Incentive Plan, the Committee may exercise sole
discretion to accelerate vesting or exercisability upon the occurrence of a
change of control as defined by the Committee.

41
<PAGE>

1996 Fiscal Year-End Option Values

The following table sets forth certain information regarding the year-end
number and value of unexercised stock options granted pursuant to the Stock
Incentive Plan as of December 31, 1996 held by the Named Executives. No
options were granted to or exercised by such Named Executives during 1996:

<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
---------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL
AT FISCAL YEAR-END (#) YEAR-END ($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen W. Bershad...... 2,940 1,260 20,874 8,946
Raymond F. Kunzmann..... 2,800 1,200 21,000 9,000
Elliot N. Konopko(2).... 8,100 900 60,750 6,750
Kenneth F. Stern........ 1,400 600 10,500 4,500
</TABLE>
- --------
(1) Market value of underlying securities at December 31, 1996 based on a per
share value of $11.25 less the aggregate exercise price.
(2) Mr. Konopko was Vice President--General Counsel and Secretary of the
Company from March 1990 until his resignation on June 18, 1997. On June 2,
1997, Mr. Konopko exercised all his 9,000 options for an aggregate
exercise amount of $33,750.

Stock Option Grants in 1997 (through October 21)

The following table sets forth certain information concerning individual
grants of stock options granted pursuant to the Stock Incentive Plan during
1997 (through October 21) to the Named Executives and to Mr. Mattielli. On
October 21, 1997, the Company granted options to purchase an additional
148,000 shares of Common Stock to a number of the Company's employees,
including executive officers, and to certain directors under the Stock
Incentive Plan. Except as set forth in the footnote to the foregoing table, no
options were exercised in that period by such executive officers.

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES EXERCISE OR
OPTIONS (THROUGH BASE PRICE
NAME GRANTED (#)(1) OCTOBER 21, 1997) ($/SH) EXPIRATION DATE
- ---- -------------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C>
Stephen W. Bershad...... 8,400(2) 5.0 4.15 2/11/2002
2,000 1.2 16.50 2/11/2002
Raymond F. Kunzmann..... 2,000 1.2 15.00 2/11/2007
30,000 17.8 27.00 10/20/2007
Elliot N. Konopko(3).... 2,000 1.2 15.00 2/11/2007
Louis D. Mattielli...... 4,000 2.4 17.75 6/8/2007
10,000 5.9 27.00 10/20/2007
Kenneth F. Stern........ 2,000 1.2 15.00 2/11/2007
30,000 17.8 27.00 10/20/2007
</TABLE>
- --------
(1) These options are exercisable to the extent of 40% thereof after one year
from the date of grant and an additional 30% at the end of each year
thereafter.
(2) Represents the extension of options which were originally granted in
September 1991.
(3) These options were forfeited as a result of Mr. Konopko's resignation on
June 18, 1997.

On February 12, 1997, each of Messrs. Fried and Fiorelli were granted
options to purchase 2,000 shares of Common Stock at an exercise price of
$15.00 per share with an expiration date of February 11, 2007, which were
fully vested at the date of grant. On October 21, 1997, Messrs. Fried,
Fiorelli and Howitt also were granted options to purchase 2,500, 2,500 and
6,000 shares of Common Stock, respectively, at an exercise price of $27.00 per
share with an expiration date of October 20, 2007.

42
<PAGE>

401(K) PLANS

The Company currently maintains several 401(k) salary reduction plans (the
"401(k) Plans") which are intended to qualify under Sections 401(a) and 401(k)
of the Internal Revenue Code of 1986. Generally, all employees who are not
members of collective bargaining groups and who are 21 years of age or older
are eligible to participate in a 401(k) Plan after they complete 1,000 hours
or six months of service. All eligible executive officers have elected to
participate in a 401(k) Plan.

Eligible employees electing to participate in a 401(k) Plan may defer a
portion of their compensation on a pre-tax basis, by contributing a percentage
thereof to the 401(k) Plan. The minimum contribution ranges from one to three
percent of annual gross pay. The maximum is prescribed in Section 401(k) of
the Internal Revenue Code of 1986. The limit for 1996 was $9,500 and will be
$9,500 in 1997. The Company made matching contributions ranging from up to
four percent of the employee's gross earnings in 1996. Eligible employees who
elect to participate in a 401(k) Plan are generally vested in the Company's
matching contribution, which may be in shares of Common Stock, according to
the following schedule: less than one year of service-0%; one year of service-
20%; two years of service,-40%; three years of service-60%; four years of
service-80%; and five years of service-100%.

TERMINATED PENSION PLAN

The Company has a defined benefit pension plan which was terminated on July
31, 1989. The estimated annual benefits payable upon retirement to Mr.
Bershad, the only executive officer participating in such plan, are $22,121,
assuming retirement at age 65.

INDEMNIFICATION AGREEMENTS

The Company has entered into indemnification agreements with its directors
and certain officers in order to induce them to continue to serve as directors
and officers of the Company, indemnifying them for any and all liabilities
incurred by them arising out of their service as directors or officers, other
than liabilities arising out of conduct which has been determined in a final
adjudication to constitute bad faith or a knowing violation of law or receipt
by such person of an improper personal benefit. The rights to indemnification
under such agreements are in addition to any rights to indemnification
contained in the Company's Certificate of Incorporation or By-Laws, which
provide for indemnification under certain circumstances.

SEVERANCE AGREEMENTS

The Company has entered into severance agreements with each of Messrs.
Kunzmann and Stern dated June 10, 1996. Under each of these agreements, the
Company has agreed to pay each of Messrs. Kunzmann and Stern up to one year's
base compensation, in accordance with its customary payroll practices, and
certain other benefits in the event of their respective termination by the
Company other than for cause. However, such amounts would be reduced by any
salary received from another employer, if any, in the period concerned.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is comprised of Messrs. Bershad, the Company's
Chairman of the Board and Chief Executive Officer, and Fiorelli. The Stock
Incentive Plan Committee is comprised of Messrs. Fiorelli and Fried. There are
no Compensation Committee interlocks between the Company and any other
entities involving the Company's executive officers and directors who serve as
executive officers of such entities.

KEY MAN INSURANCE

The Chairman of the Board and Chief Executive Officer is a key employee of
the Company and his contribution to the Company has been and will continue to
be a significant factor in the Company's success. The loss of his services
could adversely affect the Company's business, financial condition or results
of operations. The Company maintains, and is the beneficiary of, a life
insurance policy on his life. The face amount of such policy is $5.0 million.

43
<PAGE>

CERTAIN TRANSACTIONS

On May 30, 1997, the Company, Teletrac and Richard Howitt and the other
Teletrac Minority Shareholders (collectively, the "Sellers") entered into a
Stock Purchase Agreement pursuant to which the Sellers sold 177,935 Teletrac
shares to the Company for a purchase price of approximately $7.7 million and
the issuance of 53,000 shares of Common Stock. The Company was granted the
right to acquire the remaining 29,880 shares of Teletrac's capital stock
retained by the Sellers in exchange for 100,000 shares of Common Stock
issuable pursuant to the Stockholder Agreement described below. Mr. Howitt,
who was elected director of the Company following the closing of the
transaction, sold 82,053 Teletrac shares to the Company and retained 5,229
shares. The 53,000 shares of Common Stock issued at closing are subject to
registration rights. See "Description of Capital Stock--Registration Rights."

On May 30, 1997, the Company, on the one hand, and Richard Howitt and
certain other Teletrac Minority Shareholders on the other hand, entered into a
stockholder agreement (the "Stockholder Agreement") relating to the 29,880
Teletrac shares retained by the Teletrac Minority Shareholders. Pursuant to
the Stockholder Agreement, the Teletrac Minority Shareholders have the option,
exercisable on written notice to the Company, to elect to sell any remaining
Teletrac shares to the Company in exchange for an aggregate of 100,000 shares
of the Company's Common Stock (3.3467 shares of the Company's Common Stock for
each Teletrac share) for a period of three years from the date of the
Stockholder Agreement. In addition, pursuant to the terms of the Stockholder
Agreement, the Company has the option, exercisable on written notice to each
Teletrac Minority Shareholder, to elect to purchase the Teletrac Minority
Shareholders' Teletrac shares, in exchange for an aggregate of 100,000 shares
of the Company's Common Stock (3.3467 shares of the Company's Common Stock for
each Teletrac share) at any time after three years from the date of the
Stockholder Agreement or, on a prior date, upon certain other circumstances.
Such shares of Common Stock, when issued, will be entitled to certain
registration rights. Mr. Howitt's retained shares are exchangeable for 17,500
shares of Common Stock. Under the Stockholder Agreement, the Company was
appointed as proxy to vote the Teletrac shares retained by the Teletrac
Minority Shareholders until May 30, 2007. See "Description of Capital Stock--
Registration Rights" and "Shares Eligible for Future Sale."

In connection with the purchase of Teletrac, Teletrac entered into an
employment agreement with Mr. Howitt dated May 30, 1997 (the "Employment
Agreement") and Mr. Howitt executed a Non-Competition Agreement in favor of
the Company dated as of the same date. Pursuant to the terms of such Non-
Competition Agreement, Mr. Howitt has agreed not to compete with or solicit
customers or employees from the Company for a period of six years expiring in
June 2003.

Pursuant to the terms of the Employment Agreement, Mr. Howitt is entitled to
receive an annual salary of $225,000 and a bonus for the next three fiscal
years in accordance with the terms of the Teletrac Plan as determined by the
committee administering the Teletrac Plan. Mr. Howitt's employment is for a
period of three years expiring June 1, 2000. Mr. Howitt's Employment Agreement
will terminate upon his death. In addition, Teletrac may terminate Mr.
Howitt's employment upon his "disability" or for "cause," and Mr. Howitt may
terminate his employment with Teletrac at any time without Teletrac's consent
or for "good reason" (as such terms are defined in the Employment Agreement).
If the Employment Agreement is terminated by death, or by Teletrac for
"disability" or "cause" or by Mr. Howitt without "good reason," Teletrac is
obligated to pay Mr. Howitt (or his estate) all amounts earned but not paid to
such termination date and certain other benefits accrued to such termination
date pursuant to Teletrac's benefit plans. If the Employment Agreement is
terminated by the Company other than for "disability" or "cause" or by Mr.
Howitt with "good reason," Mr. Howitt will be entitled to receive all amounts
earned and not paid to such termination date, the salary payable after such
termination date for the balance of the term of the Employment Agreement,
40.0% of any amounts payable after such termination date pursuant to the
Teletrac Plan and certain medical, dental and insurance benefits during the
balance of the term of the Employment Agreement. Throughout his employment,
Mr. Howitt is bound by a covenant not to compete with Teletrac and not to
disclose "confidential information" (as defined in the Employment Agreement).
See "Management--Teletrac's Management Incentive Compensation Plan."

44
<PAGE>

The Company maintains a banking relationship with Banque Paribas ("Paribas")
and certain of its affiliates. In addition, Paribas and Paribas Principal,
Inc. ("PPI") hold warrants to purchase shares of the Company's Common Stock
which are anticipated to be repurchased by the Company in connection with this
Offering. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity," "Principal and
Selling Shareholders" and "Description of Capital Stock--Warrants."

Lehman Electric Inc., as Selling Shareholder in this Offering, has agreed to
bear approximately 30% of the Company's expenses of this Offering. See
"Principal and Selling Shareholders."

45
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth, as of August 15, 1997 and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, certain
information with respect to the beneficial ownership of the Common Stock of
the Company by (i) each person known to the Company to beneficially own 5.0%
or more of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executives, (iv) all of the directors and
executive officers as a group, and (v) the Selling Shareholder.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1) NUMBER AFTER THE OFFERING(1)
------------------------------ OF SHARES ------------------------------
NAME NUMBER PERCENT(2) BEING OFFERED NUMBER PERCENT(2)
- ---- --------------- -------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Stephen W. Bershad(3)....... 1,256,371 39.8% -- 1,256,371 29.8%
Raymond F. Kunzmann(4)...... 4,000 * -- 4,000 *
Elliot N. Konopko(5)........ 9,000 * -- 9,000 *
Louis D. Mattielli.......... -- -- -- -- --
Kenneth F. Stern(6)......... 8,000 * -- 8,000 *
Richard V. Howitt(7)........ 39,760 1.3 -- 39,760 *
Anthony J. Fiorelli,
Jr.(8)..................... 15,885 * -- 15,885 *
Eliot M. Fried(9)........... 2,000 * -- 2,000 *
All officers and directors
as a
group (7
persons)(3)(4)(6)(7)(8)(9).. 1,326,016 41.9 -- 1,326,016 31.3
Lehman Electric Inc.(10).... 463,741 14.7 463,741 -- --
World Financial Center
200 Vesey Street
New York, NY 10285
Paribas Principal, Inc. and
Banque Paribas(11)......... 288,540 8.4 -- -- --
787 Seventh Avenue
New York, NY 10019
John W. Gildea(12).......... 154,500 4.9 -- 154,500 3.7
c/o Gildea Management Co.
115 East Putnam Avenue
Greenwich, CT 06830
Axsys Technologies, Inc.
401(k) Plan(13)............ 244,995 7.8 -- 244,995 5.8
Axsys Technologies, Inc.
645 Madison Avenue
New York, NY 10022
</TABLE>
- --------
* Less than 1%.
(1) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by such shareholder.
(2) Applicable ownership percentage is based on 3,148,381 shares of Common
Stock, consisting of 3,048,381 shares outstanding on August 15, 1997 and
4,113,190 shares of Common Stock outstanding after the completion of this
Offering plus, in each case, 100,000 shares issuable to the Teletrac
Minority Shareholders.
(3) Includes 7,560 shares of Common Stock underlying options which are
exercisable as of August 15, 1997 or within 60 days after such date. Also
includes 590,764 shares of Common Stock owned directly by SWB Holding
Corporation. Mr. Bershad is the sole shareholder and Chairman of SWB
Holding Corporation. Accordingly, Mr. Bershad is the beneficial owner of
such shares. Also includes 658,047 shares of Common Stock owned by Mr.
Bershad directly. Mr. Bershad's address is 645 Madison Avenue, New York,
NY 10022. Excludes 5,511 shares representing his interest in the
Company's 401(k) Plan.

46
<PAGE>

(4) Represents 4,000 shares of Common Stock underlying options which are
exercisable as of August 15, 1997 or within 60 days after such date.
Excludes 1,973 shares representing his interest in the 401(k) Plan.
(5) Excludes 5,839 shares representing his interest in the 401(k) Plan.
(6) Includes 2,000 shares of Common Stock underlying options which are
exercisable as of August 15, 1997 or within 60 days after such date.
Excludes 1,182 shares representing his interest in the 401(k) Plan.
(7) Represents 22,260 shares of Common Stock received by Mr. Howitt in the
Teletrac acquisition and 17,500 representing Mr. Howitt's proportional
interest in the 100,000 shares issuable to the Teletrac Minority
Shareholders.
(8) Includes 2,000 shares of Common Stock underlying options which are
exercisable as of August 15, 1997 or within 60 days after such date.
(9) Represents 2,000 shares of Common Stock underlying options which are
exercisable as of August 15, 1997 or within 60 days after such date.
(10) Lehman Electric Inc., a Delaware corporation ("Lehman Electric"), is an
investment vehicle. Lehman Brothers Inc., a Delaware corporation ("Lehman
Brothers"), is a registered broker-dealer. Lehman Brothers Group Inc., a
Delaware corporation ("Group"), is a holding company and parent of Lehman
Electric. Lehman Brothers Holdings Inc., a Delaware corporation
("Holdings"), through its domestic and foreign subsidiaries, is a full-
line securities firm. It is the immediate parent of Lehman Brothers and
Group. The foregoing entities (other than Lehman Brothers) may be deemed
to beneficially own the 463,741 shares of Common Stock directly owned by
Lehman Electric. In the ordinary course of its business on behalf of its
customers, Lehman Brothers may purchase and sell shares of Common Stock.
(11) Consists of a warrant to purchase 133,262 shares of Common Stock,
exercisable at $0.05 per share, granted to Paribas and a warrant to
purchase 155,278 shares of Common Stock, exercisable at $6.25 per share,
granted to PPI. PPI is a New York corporation and Paribas is a banking
corporation organized under the laws of the Republic of France which
maintains branches in a number of jurisdictions, and which is acting
through its Grand Cayman Branch in connection with its investment in the
Company. The principal business of PPI, a wholly-owned subsidiary of
Paribas and a small business investment company licensed by the Small
Business Administration pursuant to the Small Business Investment Act of
1958, as amended, is that of making debt and equity investments in "small
concerns" (as defined under the regulations of the Small Business
Administration). Paribas is a subsidiary of Compagnie Financiere de
Paribas ("Compagnie Financiere"), a diversified holding company organized
under the laws of the Republic of France. The operating subsidiaries of
Compagnie Financiere engage in a wide variety of banking, financial
services, manufacturing, trading, development and related activities.
Through its Grand Cayman Branch, which is licensed under the laws of the
jurisdiction to engage in banking activities, Paribas engages in lending
activities, acceptance of deposits, international trade financing and
trading activities and serves as agent for various banks under the Credit
Facility. Each of Paribas and PPI may be deemed to beneficially own the
shares held by the other. These warrants are anticipated to be
repurchased by the Company with a portion of the net proceeds from this
Offering. See "Use of Proceeds" and "Description of Capital Stock--
Warrants."
(12) Includes 139,500 shares of Common Stock beneficially owned by Net Fund
III as to which shares Gildea Management Co., a Delaware corporation, has
dispositive power by virtue of an investment advisory agreement. Mr.
Gildea is the Chairman of the Board of Directors, Chief Executive
Officer, President and sole shareholder of Gildea Management Co., and as
such may be deemed beneficial owner of the shares owned by Gildea
Management Co. Mr. Gildea also owns 15,000 shares of Common Stock in his
individual capacity.
(13) Messrs. Kunzmann and Mattielli are the sole trustees of the Company's
401(k) Plan and may be deemed to beneficially own such shares, although
each of them disclaims beneficial ownership thereof, except to the extent
of his interest therein.

47
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, par value $0.01 per share, and 4,000,000 shares of undesignated
Preferred Stock, $0.01 par value per share. At August 15, 1997, there were
3,048,381 shares of Common Stock issued and outstanding and held of record by
996 shareholders. There are no shares of Preferred Stock designated or issued.
See "Capitalization."

The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Certificate of
Incorporation and By-Laws, copies of which are incorporated by reference as
exhibits to the Registration Statement. The following summary is qualified in
its entirety by reference thereto.

COMMON STOCK

Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the shareholders of the Company.
Subject to the rights of preferred shareholders, if any, holders of shares of
Common Stock will be entitled to receive dividends when, as and if declared by
the Board of Directors and to share ratably in the assets of the Company
legally available for distribution to its shareholders in the event of the
liquidation, dissolution or winding-up of the Company. Holders of Common Stock
have no preemptive, subscription, redemption or conversion rights. All of the
issued and outstanding shares of Common Stock are, and all shares of Common
Stock to be sold in this Offering will be, duly authorized, validly issued,
fully paid and nonassessable.

PREFERRED STOCK

The Company's Board of Directors may without further action by the Company's
shareholders, from time to time, direct the issuance of any authorized, but
unissued or unreserved shares of Preferred Stock in series and may, at the
time of issuance, determine the rights, preferences and limitations of each
series. The holders of Preferred Stock may be entitled to receive a preference
payment in the event of any liquidation, dissolution or winding-up of the
Company before any payment is made to the holders of the Common Stock. The
Board of Directors could issue Preferred Stock with voting and other rights
that could adversely affect the voting power of the holders of Common Stock
and could have certain anti-takeover effects. The Company has no present plans
to issue any shares of Preferred Stock.

WARRANTS

The Company currently has issued and outstanding four warrants to purchase
shares of Common Stock as follows:

<TABLE>
<CAPTION>
NAME OF HOLDER ISSUANCE DATE EXPIRATION DATE EXERCISE PRICE ISSUABLE COMMON STOCK
- -------------- ------------- --------------- -------------- ---------------------
<S> <C> <C> <C> <C>
Paribas Principal,
Inc.(1)................ 4/25/96 4/25/06 $6.25 155,278
Banque Paribas(1)....... 4/25/96 4/25/06 0.05 133,262
DLJ First ESC L.L.C..... 4/25/96 4/25/06 6.25 20,000
The CIT Group/CrF
Securities Investment,
Inc.(2)................ 7/20/94 7/20/04 1.70 6,269
</TABLE>
- --------
(1) Warrants issued pursuant to a Warrant Purchase Agreement dated as of April
25, 1996 among the Company, PPI and Paribas.
(2) The CIT Group/Credit Finance, Inc. assigned this warrant to the CIT
Group/CrF Securities Investment, Inc., its wholly-owned subsidiary, on
October 15, 1997.

In connection with this Offering, it is anticipated that these warrants will
be repurchased by the Company at a price per share of Common Stock subject to
the respective warrant equal to the excess of the public offering price, less
the underwriting discount set forth on the cover page of this Prospectus, over
the exercise price of such warrant. Upon such repurchase, the Company will
cancel the warrants. See "Use of Proceeds" and "Principal and Selling
Shareholders."

48
<PAGE>

The Warrant Purchase Agreement dated as of April 25, 1996 among the Company,
PPI and Paribas, provides that, in the event the Company issues Common Stock,
rights, options, or warrants to subscribe for, or purchase, or other
securities exchangeable for or convertible into (the "rights"), shares of
Common Stock other than if made as a distribution or dividend to all holders
of Common Stock, Paribas and PPI have the right to purchase on a pro rata
basis such Common Stock or rights. Such right was waived in connection with
this Offering. The aforementioned right does not apply to issuances of Common
Stock or rights (i) for consideration other than cash, (ii) in connection with
certain debt financings, or (iii) subject to certain limitations, upon the
exercise of options granted to directors and employees of the Company. Paribas
and PPI are also entitled to have up to two representatives attend all
meetings of the Board of Directors. The rights described in this paragraph
will terminate upon the anticipated repurchase of the warrants by the Company
in connection with this Offering.

REGISTRATION RIGHTS

Pursuant to the Stock Purchase Agreement relating to Teletrac, until May 17,
1998, Messrs. Howitt and Barker may request that the Company file a
registration statement covering the resale of the 53,000 shares of Common
Stock issued upon consummation of the Teletrac acquisition. Pursuant to the
Stockholder Agreement, the holders of shares of Teletrac, except the Company,
have the right, upon request of Mr. Howitt and another Teletrac Minority
Shareholder, to require the Company to register under the Securities Act
shares of Common Stock which they may receive pursuant to the put or call
rights contained therein. In general, all fees, costs and expenses of any such
registration will be borne by the Company. See "Shares Eligible for Future
Sale."

LIMITATION OF DIRECTOR LIABILITY

The Certificate of Incorporation of the Company limits the liability of
directors of the Company to the Company and its shareholders to the fullest
extent permitted by Delaware law. Specifically, directors of the Company will
not be personally liable for money damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its shareholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit.

DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS

Delaware Law

The Company is subject to the provisions of Section 203 ("Section 203") of
the DGCL. In general, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder", unless the business
combination is approved in a prescribed manner. A "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an "interested stockholder," transactions with an "interested
stockholder" involving the assets or stock of the corporation or its majority-
owned subsidiaries and transactions which increase an "interested
stockholder's" percentage ownership of stock. An "interested stockholder" is a
person who, together with affiliates and associates, owns (or, in certain
cases, within three years prior, did own) 15% or more of the corporation's
outstanding voting stock. Under Section 203, a business combination between
the Company and an "interested stockholder" is prohibited unless it satisfies
one of the following conditions: (i) the Company's Board of Directors must
have previously approved either the business combination or the transaction
that resulted in the stockholder becoming an "interested stockholder"; or (ii)
upon consummation of the transaction that resulted in the stockholder becoming
an "interested stockholder", the "interested stockholder" owned at least 85%
of the voting stock of the Company outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, shares owned by (a) persons who are directors and also officers
and (b) employee stock plans, in certain instances); or (iii) the business
combination is approved by the Board of Directors and authorized at an annual
or special meeting of the shareholders by the affirmative vote of at least 66
2/3% of the outstanding voting stock which is not owned by the "interested
stockholder".

49
<PAGE>

Special Meetings

The By-Laws provide that special meetings of shareholders for any purpose or
purposes can be called only upon the request of the Chairman of the Board or
the written consent of three-quarters of the entire Board.

Number of Directors; Removal; Filling Vacancies

Subject to any rights of holders of Preferred Stock to elect additional
directors under specified circumstances, the By-Laws provide that the number
of directors shall be not less than two nor more than 12; provided, however,
that no decrease in the number of directors shall have the effect of
shortening the term of any incumbent director. Any vacancy occurring in the
Board caused by death, resignation, removal or otherwise, and any newly
created directorship resulting from an increase in the number of directors,
may be filled only by the affirmative vote of at least a majority of the
directors then in office, although such directors are less than a quorum, or
by the sole remaining director. Furthermore, the By-Laws provide that any one
or more of the directors of the Company may be removed from office only for
cause and only by the affirmative vote of three-quarters of the entire Board
of Directors or by the affirmative vote of two-thirds of the votes represented
by the issued and outstanding shares of the Company entitled to vote at a
meeting called for such purpose.

The provisions of the By-Laws governing removal may have the effect of
discouraging a third party from initiating a proxy contest, making a tender
offer or otherwise attempting to gain control of the Company, or of attempting
to change the composition or policies of the Board of Directors, even though
such attempt might be beneficial to the Company or its shareholders. These
provisions of the By-Laws could thus increase the likelihood that incumbent
directors will retain their positions.

Amendment of Company By-Laws

In order to adopt, repeal, alter or amend the provisions set forth therein,
the By-Laws require the unanimous written consent of all directors or the
affirmative vote of a majority of the entire Board of Directors acting at a
regular or special meeting called by written notice, which written notice
shall include notice of the proposed action to amend the By-Laws, or by the
affirmative vote of a majority of votes represented by the issued and
outstanding shares of the Company entitled to vote at a meeting called for
such purpose.

Advance Notice Provisions for Shareholder Nominations and Proposals

The By-Laws establish an advance notice procedure for shareholders to make
nominations of candidates for election as director, or to bring other business
before an annual or special meeting of shareholders of the Company. The By-
Laws provide that only persons nominated by, or at the direction of, a
majority of the Board of Directors, or by a shareholder who has given timely
written notice to the Secretary of the Company prior to the meeting at which
directors are to be elected, will be eligible for election as directors of the
Company. Furthermore, the By-Laws provide that at an annual meeting, only such
business may be conducted as has been brought before the meeting by, or at the
direction of, a majority of the Board of Directors or by a shareholder who has
given timely written notice to the Secretary of the Company of such
shareholder's intention to bring such business before such meeting. Under the
By-Laws, to be timely, notice of shareholder nominations or proposals to be
made at an annual meeting must be received by the Company not less than 60
days nor more than 90 days prior to the scheduled annual meeting (or, if less
than 70 days' notice or prior public disclosure of the date of the scheduled
annual meeting is given, not later than the close of business on the 10th day
following the earlier of (i) the day such notice was mailed or (ii) the day
such public disclosure was made).

Under the By-Laws, a shareholder's notice to the Company proposing to
nominate a person for election as a director must contain certain information
about the nominating shareholder and the proposed nominee. Similarly, a
shareholder's notice relating to the conduct of business other than the
nomination of directors must contain certain information about such business
and about the proposing shareholder. If a majority of the directors determine
that a person was not nominated, or if the Chairman of the Board or other
presiding officer of the annual meeting determines that other business was not
brought before the meeting, in accordance with the By-Laws, such person will
not be eligible for election as a director, or such business will not be
conducted at such meeting, as the case may be.

50
<PAGE>

By requiring advance notice of nominations by shareholders, the By-Laws
afford the Board an opportunity to consider the qualifications of the proposed
nominee and, to the extent deemed necessary or desirable by the Board, to
inform shareholders about such qualifications. By requiring advance notice of
other proposed business, the By-Laws also provide an orderly procedure for
conducting annual meetings of shareholders and, to the extent deemed necessary
or desirable by the Board, provides the Board with an opportunity to inform
shareholders, prior to such meetings, of any business proposed to be conducted
at such meetings, together with any recommendations as to the Board's position
regarding action to be taken with respect to such business, so that
shareholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.

Although the Certificate of Incorporation does not give the Board any power
to approve or disapprove shareholder nominations of the election of directors
or proposals for action, the foregoing provisions may have the effect of
precluding a contest for the election of directors or the consideration of
shareholder proposals if the proper procedures are not followed, and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal,
without regard to whether consideration of such nominees or proposals might be
harmful or beneficial to the Company and its shareholders.

Unanimous Written Consent Provisions

The Certificate of Incorporation provides that any action required or
permitted to be taken by the holders of Common Stock at any meeting of
shareholders of the Company may be taken without a meeting only by unanimous
written consent signed by the holders of all the outstanding shares of Common
Stock.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Chase Mellon
Shareholder Services.

51
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Immediately following the consummation of this Offering and based on shares
outstanding as of August 15, 1997, there will be 4,113,190 shares of Common
Stock issued and outstanding, excluding the 100,000 shares issuable in
connection with the Teletrac acquisition. Of these, the 1,528,550 shares of
Common Stock sold in this Offering and 1,017,949 shares of Common Stock will
be freely transferable and tradeable in the United States (except for shares
held by affiliates of the Company) without restriction or further registration
under the Securities Act and 244,995 shares will be held by the Company's
401(k) Plan. The remaining 1,321,696 shares of Common Stock outstanding may
not be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemption afforded by
Rule 144. These 1,321,696 shares consist of 1,248,811 shares of Common Stock
owned, directly or indirectly, by Mr. Bershad, an aggregate of 19,885 shares
held by officers and directors of the Company, other than Messrs. Bershad and
Howitt, and 53,000 shares issued in connection with the Teletrac acquisition
(the "Teletrac Acquisition Shares"). The holders of 1,290,956 of such shares
are subject to certain "lock-up" arrangements pursuant to which each has
agreed not to sell or otherwise dispose of any of such Common Stock for a
period of 120 days following the date of this Prospectus without the prior
written consent of NationsBanc Montgomery Securities, Inc. After such period,
1,268,696 of such shares of Common Stock will be eligible for resale in the
public market without registration, subject to certain volume and other
limitations, pursuant to Rule 144. The Teletrac Acquisition Shares will become
eligible for resale in the public market pursuant to Rule 144 on June 1, 1998.
In addition, the 100,000 shares issuable in the future under the Teletrac
acquisition, as described below, to the Teletrac Minority Shareholders will,
upon issuance be "restricted securities" under Rule 144.

Rule 144, as currently in effect, provides that an affiliate of the Company
or a person (or persons whose sales are aggregated) who has beneficially owned
restricted securities for at least one year but less than two years is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of one percent of the then outstanding shares of Common
Stock (41,131 shares immediately after this Offering) or the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 also are subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. However, a person who is not an "affiliate" of
the Company at any time during the three months preceding a sale, and who has
beneficially owned restricted securities for at least two years, is entitled
to sell such shares under Rule 144 without regard to the limitations described
above.

Pursuant to the terms of the Stockholder Agreement, the Teletrac Minority
Shareholders have the right, under certain circumstances and subject to
certain conditions, to require the Company to register under the Securities
Act shares of Common Stock issuable to them. Pursuant to the terms of the
Stockholder Agreement, the Teletrac Minority Shareholders have the option,
exercisable on written notice to the Company, to elect to sell any remaining
Teletrac shares to the Company in exchange for an aggregate of 100,000 shares
of the Company's Common Stock (3.3467 shares of the Company's Common Stock for
each Teletrac share) for a period of three years from the date of the
Stockholder Agreement (the "Put Rights"). In addition, pursuant to the terms
of the Stockholder Agreement, the Company has the option, exercisable on
written notice to each Teletrac Minority Shareholder, to elect to purchase the
Teletrac Minority Shareholders' Teletrac shares, in exchange for an aggregate
of 100,000 shares of the Company's Common Stock (3.3467 shares of the
Company's Common Stock for each Teletrac share) at any time after three years
from the date of the Stockholder Agreement or, on a prior date, upon certain
other circumstances (the "Call Rights"). If the Put or Call Rights are
exercised, the Company will pay all expenses in connection with the
registration under the Securities Act of such shares made at the request of
both Messrs. Richard Howitt and David Barker, jointly, on behalf of themselves
and the other Teletrac Minority Shareholders. The exercise by the Teletrac
Minority Shareholders of their registration rights could adversely affect the
market price of the Common Stock.

A total of 400,000 shares of Common Stock is reserved for issuance under the
Company's Long-Term Stock Incentive Plan under which options to purchase an
aggregate of 48,600 shares of Common Stock are outstanding.

52
<PAGE>

The holders of options to purchase 17,560 of such shares have agreed not to
sell or otherwise dispose of such shares for a period of 120 days from the
date of this Prospectus.

No predictions can be made as to the effect, if any, that sales of
securities or the availability of securities for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of the Common Stock in the public market, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Risk Factors--Potential Adverse Impact of
Shares Available for Future Sale on Market Price for Common Stock."

53
<PAGE>

UNDERWRITING

The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") by and among the Company, the Selling Shareholder
and the Underwriters, to purchase from the Company and the Selling Shareholder
the number of shares of Common Stock indicated below opposite their respective
names, at the public offering price less the underwriting discount set forth
on the cover page of this Prospectus. The Underwriting Agreement provides that
the obligations of the Underwriters are subject to certain conditions
precedent and that the Underwriters are committed to purchase all of the
shares of Common Stock, if they purchase any.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
NationsBanc Montgomery Securities, Inc. ......................... 611,420
Furman Selz LLC.................................................. 458,565
Oppenheimer & Co., Inc. ......................................... 458,565
---------
Total.......................................................... 1,528,550
=========
</TABLE>

The Underwriters have advised the Company and the Selling Shareholder that
they initially propose to offer the Common Stock to the public on the terms
set forth on the cover page of this Prospectus. The Underwriters may allow
selected dealers a concession of not more than $0.94 per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $0.10 per share to certain other dealers. After the public offering, the
public offering price and other selling terms may be changed by the
Underwriters. The Common Stock is offered subject to receipt and acceptance by
the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 229,283 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial shares to be purchased by
the Underwriters. To the extent that the Underwriters exercise such over-
allotment option, the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this Offering.

The Underwriting Agreement provides that the Company and the Selling
Shareholder will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.

The directors and officers of the Company have agreed that for a period of
120 days after the date of this Prospectus they will not, without the prior
written consent of NationsBanc Montgomery Securities, Inc., directly or
indirectly, sell, offer, contract or grant an option to sell (including,
without limitation, any short sale), pledge, transfer, establish an open put
equivalent position or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock or securities
exchangeable or exercisable or convertible into shares of Common Stock held by
them. The Company also has agreed not to issue, offer, sell, grant options to
purchase or otherwise dispose of any of the Company's equity securities or any
other securities convertible into or exchangeable for its equity securities,
for a period of 120 days after the effective date of this Offering without the
prior written consent of NationsBanc Montgomery Securities, Inc., subject to
certain exceptions, including grants and exercises of stock options and,
subject to certain conditions, issuances of securities in connection with
acquisitions. In evaluating any request for a waiver of the lock-up periods,
NationsBanc Montgomery Securities, Inc. will consider, in accordance with its
customary practice, all relevant facts and circumstances at the time of the
request, including, without limitation, the recent trading market for the
Common Stock, the size of the request and, with respect to a request by the
Company to issue additional equity securities, the purpose of such an
issuance. See "Shares Eligible for Future Sale."

54
<PAGE>

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock. If the Underwriters create a
short position in the Common Stock in connection with this Offering, i.e., if
they sell more shares of Common Stock than are set forth on the cover page of
this Prospectus, the Underwriters may reduce that short position by purchasing
Common Stock in the open market. The Underwriters may also elect to reduce any
short position by exercising all or part of the over-allotment option
described above.

The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase shares of Common Stock
in the open market to reduce the Underwriters' short position or to stabilize
the price of the Common Stock, they may reclaim the amount of the selling
concession from the selling group members who sold those shares as part of
this Offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.

The public offering price of the Common Stock has been determined by
negotiations among the Underwriters and the Company, and is based largely upon
the market price for the Common Stock as reported on the Nasdaq National
Market.

The Common Stock is traded on the Nasdaq National Market under the symbol
AXYS.

LEGAL MATTERS

The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Fried, Frank, Harris, Shriver & Jacobson, a
partnership including professional corporations, New York, New York. Certain
legal matters in connection with this Offering will be passed upon for the
Underwriters by Buchanan Ingersoll, Princeton, New Jersey.

EXPERTS

The consolidated audited financial statements for Axsys Technologies, Inc.
as of December 31, 1995 and 1996 and for each of the three years in the period
ended December 31, 1996 and the financial statements for Teletrac as of
January 31, 1997 and for the year then ended included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in auditing and accounting. The consolidated audited
financial statements for PAI as of April 30, 1994 and 1995 and for each of the
three years in the period ended April 30, 1995 included in this Prospectus
have been so included in reliance on the report of McGladrey & Pullen, LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

55
<PAGE>

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). This Prospectus, which constitutes a part of a
registration statement on Form S-1 (the "Registration Statement") filed by the
Company with the Commission under the Securities Act, omits certain
information set forth in the Registration Statement. Reference is hereby made
to the Registration Statement and to the exhibits thereto for further
information with respect to the Company. Statements contained herein
concerning the provisions of such documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission. The Registration
Statement, including exhibits and schedules filed therewith, and the reports,
proxy statements and other information filed by the Company with the
Commission may be inspected without charge at the public reference facilities
maintained by the Commission at its principal office at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at regional offices
of the Commission located at Citibank Center, Suite 1400, 500 Madison Street,
Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York,
New York 10048. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in
Chicago, Illinois and New York, New York, at prescribed rates. In addition,
registration statements and certain other filings made with the Commission
through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system
are publicly available through the Commission's site on the Internet's World
Wide Web, located at http://www.sec.gov. The Registration Statement, including
all exhibits thereto and amendments thereof, has been filed with the
Commission through EDGAR. The Company's Common Stock is traded on The Nasdaq
Stock Market, as reported by the National Association of Securities Dealers,
Inc., 1735 K Street, Washington, D.C. 20006, and copies of the reports, proxy
statements and other information filed by the Company can be inspected at such
location.

56
<PAGE>

GLOSSARY OF TERMS

TERM DEFINITION

Actuator............................. A device that converts electrical
signals into controlled mechanical
motion. Actuators incorporate a
motor, position feedback device and
a rotary or linear drive mechanism.

Arc Second........................... An arc degree, which is a unit of
angular measurement equal to 1/360th
of the circumference of a circle, is
comprised of 60 arc minutes. Each
arc degree is comprised of 60 arc
seconds. An arc second is therefore
1/360 arc degree or 0.0028 arc
degree.

Airbearing........................... An airbearing is a rotary or linear
mechanism that consists of two
closely machined surfaces which move
against one another, separated by a
cushion of moving air or gas.
Because the two surfaces do not
touch one another, the airbearing
exhibits no friction, and can be
moved at extremely high speeds with
exceptional positional accuracy.

Aspheric Mirror...................... An optical element having one or
more surfaces that are not
rotationally symmetric about all
axes.

Cluster Tool Robotic................. A material handling robot that
distributes product among various
pieces of equipment which surround
the robot.

Deflector............................ The reflective surface of a mirror.

Digital Servo Control Component...... A motion or position feedback device
that provides a digital output
representation of the motion or
position (e.g., encoder, laser
interferometer).

Direct Drive Motor................... Motor designed to be coupled
directly to the device to be driven.
There are no mechanical gearing
interfaces or belt drives.

Electrical Prober.................... A system that tests electronic
devices such as integrated circuits
or flat panel displays by
positioning the electronic device
under a series of probes, raising
the device to make contact with the
probes, and then taking electrical
readings.

Encoder.............................. A device that converts rotary
position into numerical digital
codes through the use of opto-
electronics and glass "shutters".

Fold Mirror.......................... A flat optical surface that is used
to reflect a laser beam, infrared or
optical image at an angle different
from its source.

Gimbal...............................
A mechanical device that allows an
object to be moved around multiple
axes.

Heat Sink............................ A thermal conductive device that is
used to rapidly dissipate the heat
generated by electronic components.
It is attached to one or both
surfaces of a printed circuit board
or electronic component.

57
<PAGE>

Interconnection Devices.............. Mechanisms for joining two
electrical conductors to create a
reliable transmission of electrical
power or electronic signals.

Interferometer....................... An optical device employing the use
of a laser beam of very precisely
known wavelength. The beam is split
and recombined by means of semi-
transparent mirrors and reflectors
that result in the laser beam
interfering with itself in a
constructive (bright spot) or
destructive (dark spot) output at a
detector. By knowing the wavelength
and using electronic counters, the
relative displacement of the
interferometer device and its
reflector optic can be resolved to
one ten-millionth of an inch.

Optical Substrate.................... A finely machined or polished
material used to create an optical
element.

Micron............................... One millionth of a meter.

Resolver............................. A device that converts rotary
position into an electronic signal
through the use of magnetic
transformation.

Servo System......................... A control system that provides a
closed loop feedback whereby the
actual position or motion is
compared to a desired position, and
automatically adjusted until the
desired position is achieved.

Terminal Block....................... An interconnection device mating two
wires or a wire and a printed
circuit board trace path. The
wire(s) are electrically and
mechanically clamped via a screw,
enabling repeated mating and
unmating at installation or point of
use.

Torque Motor......................... See "Direct Drive Motor."

White Room Handling.................. The cleaning and relubrication of
miniature bearings in a controlled
"clean room" environment.

X-Y Positioning Stage................ Any two axis positioning subsystem
that moves a tool or the work piece
in a Cartesian (rectangular)
coordinate system.

58
<PAGE>

AXSYS TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Axsys Technologies, Inc.
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets--December 31, 1995 and 1996 and June 30,
1997 (unaudited)....................................................... F-3
Consolidated Statement of Operations--For the years ended December 31,
1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997
(unaudited)............................................................ F-4
Consolidated Statement of Cash Flows--For the years ended December 31,
1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997
(unaudited)............................................................ F-5
Consolidated Statement of Shareholders' Equity--For the years ended
December 31, 1994, 1995 and 1996 and for the six months ended June 30,
1997 (unaudited)....................................................... F-6
Notes to consolidated financial statements.............................. F-7
Pro Forma Condensed Statement of Operations (unaudited)--For the year
ended December 31, 1996 and for the six months ended June 30, 1997..... F-17
Teletrac, Inc.
Report of Independent Public Accountants................................ F-21
Balance Sheet--January 31, 1997 and April 30, 1997 (unaudited).......... F-22
Statement of Operations--For the year ended January 31, 1997 and the
three months ended April 30, 1997 (unaudited).......................... F-23
Statement of Cash Flows--For the year ended January 31, 1997 and the
three months ended April 30, 1997 (unaudited).......................... F-24
Statement of Shareholders' Equity--For the year ended January 31, 1997
and the three months ended April 30, 1997 (unaudited).................. F-25
Notes to financial statements........................................... F-26
Precision Aerotech, Inc.
Report of Independent Auditors.......................................... F-29
Consolidated Balance Sheets--April 30, 1994 and 1995.................... F-30
Consolidated Statement of Operations--For the years ended April 30,
1993, 1994 and 1995.................................................... F-31
Consolidated Statement of Cash Flows--For the years ended April 30,
1993, 1994 and 1995.................................................... F-32
Consolidated Statement of Shareholders' Equity (Deficit)--For the years
ended April 30, 1993, 1994 and 1995.................................... F-33
Notes to consolidated financial statements.............................. F-35
Unaudited:
Consolidated Condensed Balance Sheets--April 30, 1995 and January 31,
1996................................................................... F-47
Consolidated Condensed Statements of Operations--For the nine months
ended January 31, 1995 and 1996........................................ F-48
Consolidated Statements of Cash Flow--For the nine months ended January
31, 1995 and 1996...................................................... F-49
Notes to consolidated condensed financial statements.................... F-50
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Axsys Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Axsys
Technologies, Inc., a Delaware corporation, and its subsidiary as of December
31, 1995 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Axsys Technologies, Inc.
and subsidiary, as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.

Arthur Andersen LLP

New York, New York
March 21, 1997

F-2
<PAGE>

AXSYS TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................. $ 91 $ 2,691 $ 415
Accounts receivable, net of allowance of $233 and
$385 at December 31, 1995 and 1996, and $432 at
June 30, 1997 (unaudited)....................... 8,525 13,801 17,994
Inventories, net................................. 16,544 24,454 26,270
Other current assets............................. 651 850 1,161
------- ------- -------
TOTAL CURRENT ASSETS........................... 25,811 41,796 45,840
NET PROPERTY, PLANT AND EQUIPMENT.................. 7,603 13,456 14,272
EXCESS COST OVER NET ASSETS ACQUIRED, net of
accumulated amortization of $836 and $1,045 at
December 31, 1995 and 1996, and $1,171 at June 30,
1997 (unaudited).................................. 6,624 6,415 14,141
OTHER ASSETS....................................... 447 504 442
------- ------- -------
TOTAL ASSETS................................... $40,485 $62,171 $74,695
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................. $ 5,315 $ 6,881 $ 8,862
Accrued expenses and other liabilities........... 5,696 7,290 10,741
Current portion of long-term debt and capital
lease obligations............................... 466 2,831 3,057
------- ------- -------
TOTAL CURRENT LIABILITIES...................... 11,477 17,002 22,660
LONG-TERM DEBT AND CAPITAL LEASES, less current
portion........................................... 11,047 23,324 26,056
OTHER LONG-TERM LIABILITIES........................ 2,697 2,293 2,064
DEFERRED INCOME.................................... 519 387 321
SHAREHOLDERS' EQUITY:
$1.20 CUMULATIVE EXCHANGEABLE REDEEMABLE PREFERRED
STOCK, $.01 PAR VALUE: authorized 4,000,000
shares; issued and outstanding 781,642 and 738,881
shares at December 31, 1995 and 1996, none at June
30, 1997 (unaudited).............................. 8 7 --
COMMON STOCK, $.01 PAR VALUE: authorized 4,000,000
shares, issued and outstanding 2,520,821 and
2,568,940 shares at December 31, 1995 and 1996,
and 3,048,381 shares at June 30, 1997
(unaudited)....................................... 25 26 30
CAPITAL IN EXCESS OF PAR........................... 14,712 17,297 19,465
RETAINED EARNINGS.................................. -- 1,835 4,099
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY..................... 14,745 19,165 23,594
------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..... $40,485 $62,171 $74,695
======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

AXSYS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES................ $ 62,132 $ 65,213 $ 91,301 $ 40,545 $ 58,849
Cost of sales............ 44,903 47,973 67,483 29,890 43,111
Selling, general and
administrative
expenses................ 13,343 13,336 16,501 7,502 10,284
Restructuring/inventory
writedown charges....... 1,315 -- -- -- --
Amortization of
intangible assets....... 209 209 210 102 125
--------- --------- --------- --------- ---------
OPERATING INCOME......... 2,362 3,695 7,107 3,051 5,329
Interest expense......... 2,264 1,994 2,343 1,042 1,343
Other expense............ 54 252 18 (13) 26
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS BEFORE TAXES
AND EXTRAORDINARY ITEM.. 44 1,449 4,746 2,022 3,960
Provision for income
taxes................... 17 565 1,891 820 1,594
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS BEFORE
EXTRAORDINARY ITEM...... 27 884 2,855 1,202 2,366
DISCONTINUED OPERATIONS:
Loss from operations,
net of tax benefit of
$92................... (143) -- -- -- --
Loss on disposal, net
of tax benefit of
$1,317................ (2,059) -- -- -- --
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM...... (2,175) 884 2,855 1,202 2,366
Extraordinary gain
(charge), net of taxes.. 5,856 -- (173) (173) --
--------- --------- --------- --------- ---------
NET INCOME............... 3,681 884 2,682 1,029 2,366
Preferred stock
dividends............... 355 574 847 405 102
--------- --------- --------- --------- ---------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS..... $ 3,326 $ 310 $ 1,835 $ 624 $ 2,264
========= ========= ========= ========= =========
NET INCOME (LOSS) PER
COMMON SHARE:
Continuing operations.. $ (0.20) $ 0.12 $ 0.74 $ 0.31 $ 0.69
Discontinued
operations............ (1.29) -- -- -- --
Extraordinary item..... 3.44 -- (0.06) (0.07) --
--------- --------- --------- --------- ---------
Total................ $ 1.95 $ 0.12 $ 0.68 $ 0.24 $ 0.69
========= ========= ========= ========= =========
Weighted average common
shares outstanding...... 1,701,801 2,511,074 2,690,843 2,615,102 3,276,586
========= ========= ========= ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

AXSYS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.................... $ 3,681 $ 884 $ 2,682 $ 1,029 $ 2,366
Adjustments to reconcile net
income to cash provided by
(used in) operating
activities:
Extraordinary item, net of
taxes...................... (5,856) -- 173 173 --
Loss on disposal of
discontinued operations,
net of taxes............... 2,059 -- -- -- --
Realization of net operating
loss carryforward.......... 16 519 1,435 653 1,355
Depreciation and
amortization............... 1,742 1,622 2,722 1,099 1,563
(Increase) decrease in
accounts receivable........ (970) 768 13 (1,182) (2,751)
(Increase) decrease in
inventories................ 682 (2,017) (831) (771) (577)
(Increase) decrease in other
current assets............. 498 (183) 166 21 8
Increase (decrease) in
accounts payable, accrued
expenses and other
liabilities................ 349 (1,324) (2,564) (1,355) 3,875
Decrease in other long-term
liabilities................ (461) (882) (404) (229) (295)
Other--net.................. (349) (343) (1,411) (104) 174
------- ------- ------- -------- --------
NET CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES............... 1,391 (956) 1,981 (666) 5,718
------- ------- ------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures.......... (797) (1,026) (1,878) (580) (851)
Proceeds from sale of assets.. 605 2,896 11,532 -- --
Acquisition of businesses, net
of cash acquired............. -- -- (7,611) (4,728) (7,335)
------- ------- ------- -------- --------
NET CASH PROVIDED BY (USED
IN) INVESTING
ACTIVITIES............... (192) 1,870 2,043 (5,308) (8,186)
------- ------- ------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from borrowings...... 45,665 69,614 75,891 54,061 23,500
Repayment of borrowings....... (49,272) (70,464) (76,895) (47,529) (21,726)
Net proceeds from common stock
rights offering.............. 2,332 -- -- -- --
Other......................... -- -- (420) (420) (1,582)
------- ------- ------- -------- --------
NET CASH (USED IN)
PROVIDED BY FINANCING
ACTIVITIES............... (1,275) (850) (1,424) 6,112 192
------- ------- ------- -------- --------
NET INCREASE (DECREASE) IN
CASH..................... (76) 64 2,600 138 (2,276)
CASH AT BEGINNING OF PERIOD..... 103 27 91 91 2,691
------- ------- ------- -------- --------
CASH AT END OF PERIOD........... $ 27 $ 91 $ 2,691 $ 229 $ 415
======= ======= ======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

AXSYS TECHNOLOGIES, INC,

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK CAPITAL RETAINED
---------------- ---------------- IN EXCESS EARNINGS
SHARES AMOUNT SHARES AMOUNT OF PAR (DEFICIT)
-------- ------ --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994.................... 577,946 $ 6 1,037,014 $10 $ 9,586 $(4,526)
Net Income.............. -- -- -- -- -- 3,681
Dividends(a)............ 94,398 1 -- -- 354 (355)
Transfer to Capital in
Excess of Par(b)....... -- -- -- -- (355) 355
Common stock rights
offering............... -- -- 1,470,588 15 2,317 --
Amount realized from
utilization of pre
quasi-reorganization
tax benefits........... -- -- -- -- 2,182 --
Other................... -- -- -- -- (2) --
-------- ---- --------- --- ------- -------
Balance at December 31,
1994.................... 672,344 7 2,507,602 25 14,082 (845)
-------- ---- --------- --- ------- -------
Net Income.............. -- -- -- -- -- 884
Dividends(a)............ 109,298 1 -- -- 573 (574)
Transfer to Capital in
Excess of Par(b)....... -- -- -- -- (535) 535
Contribution to 401(k)
plan................... -- -- 11,619 -- 67 --
Amount realized from
utilization of pre
quasi-reorganization
tax benefits........... -- -- -- -- 519 --
Other................... -- -- 1,600 -- 6 --
-------- ---- --------- --- ------- -------
Balance at December 31,
1995.................... 781,642 8 2,520,821 25 14,712 --
-------- ---- --------- --- ------- -------
Net Income.............. -- -- -- -- -- 2,682
Dividends(a)............ 27,611 -- -- -- 847 (847)
Contribution to 401(k)
plan................... -- -- 47,671 1 311 --
Amount realized from
utilization of pre
quasi-reorganization
tax benefits........... -- -- -- -- 1,345 --
Odd-lot redemption...... (70,372) (1) -- -- (420) --
Issuance of warrants to
purchase common stock.. -- -- -- -- 500 --
Other................... -- -- 448 -- 2 --
-------- ---- --------- --- ------- -------
Balance at December 31,
1996.................... 738,881 7 2,568,940 26 17,297 1,835
-------- ---- --------- --- ------- -------
(Unaudited)
Net Income.............. -- -- -- -- -- 2,366
Dividends(a)............ -- -- -- -- 102 (102)
Contribution to 401(k)
plan................... -- -- 13,981 -- 150 --
Preferred stock
exchange............... (538,008) (5) 403,460 4 (66) --
Preferred stock
redemption............. (200,873) (2) -- -- (1,573) --
Amount realized from
utilization of pre
quasi-reorganization
tax benefits........... -- -- -- -- 1,355 --
Common stock issued for
acquisition............ -- -- 53,000 -- 2,166 --
Other................... -- -- 9,000 -- 34 --
-------- ---- --------- --- ------- -------
Balance at June 30,
1997.................... -- $-- 3,048,381 $30 $19,465 $ 4,099
======== ==== ========= === ======= =======
</TABLE>
- --------
(a) Prior to February 22, 1996, represents a 15% dividend paid in additional
shares and valued at the average of the closing bid and ask price as of
the dividend record date. The Company's right to pay dividends in
additional shares of Preferred Stock instead of cash expired on February
22, 1996, although cash dividends continued to accumulate. From February
22, 1996 to June 4, 1997, the Company did not declare or pay any dividends
on the Preferred Stock. The per share amounts of dividends, including the
accumulated but unpaid cash portion, were $0.57, $0.79, $1.11 and $0.52,
per share of Preferred Stock in 1994, 1995, 1996 and the period from
January 1, 1997 through June 4, 1997 (unaudited), respectively. The amount
of unpaid but accumulated dividends at December 31, 1996 was $1.02 per
share. On June 4, 1997, the Company redeemed all remaining outstanding
shares of its Preferred Stock for $7.70 per share, which included accrued
and unpaid dividends of $1.54 per share.
(b) Represents transfer of the excess of Preferred Stock dividends over
Retained Earnings.

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

AXSYS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements include the accounts of
Axsys Technologies, Inc., and its wholly-owned subsidiaries (collectively the
"Company"). All material intercompany transactions and balances have been
eliminated in consolidation.

Revenue is recognized upon the shipment of product or when services are
rendered.

Inventories are priced at the lower of cost (principally first-in, first-
out, or average) or market.

Deferred financing costs are amortized ratably over the life of the
corresponding debt or commitment.

The excess of cost over net assets acquired is being amortized over periods
ranging from 30 to 35 years using the straight-line method. The Company
continually reviews goodwill to assess recoverability from future operations
using undiscounted cash flows. Impairments would be recognized in operating
results if a permanent diminution in value occurred.

Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided primarily by the straight-line method
using estimated lives for buildings and improvements of 20 years and for
machinery and equipment using estimated useful lives ranging from 3 to 8
years.

Certain items in the 1995 and 1994 financial statements have been
reclassified to conform to the 1996 presentation.

Earnings per share data for each period was computed by dividing net income
applicable to common shareholders by the weighted average number of shares of
common stock outstanding during each period. The calculation of weighted
average number of shares assumes the conversion of those common stock
equivalents which have a dilutive effect on earnings for the period presented.
Common stock equivalents consist of warrants and employee stock options.

Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" was issued in February 1997 and replaces Accounting Principle Board
("APB") Opinion No. 15. The new statement simplifies the computations of
earnings per share ("EPS") by replacing the presentation of primary EPS with
basic EPS, which is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS under the new statement is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 is effective for
financial statements for both interim and annual periods ending after December
15, 1997. Early application is prohibited. For the six months ended June 30,
1997, the effect of adopting SFAS No. 128 on the Company's reported EPS would
be immaterial.

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

The information presented for June 30, 1997 and for the six months ended
June 30, 1996 and 1997 is unaudited and has been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Operating
results for the six months ended June 30, 1997 are not indicative of the
results that may be expected for the year ending December 31, 1997.

F-7
<PAGE>

AXSYS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

NOTE 2--DISCONTINUED OPERATIONS

In September 1994, the Company disposed of all of its Electronic Components
business which was comprised of the trimmer, transformer and microwave
component product lines. The disposal was accounted for as a discontinued
operation and, accordingly, the related net assets and operating results are
reported separately from continuing operations. The loss on disposal of the
Electronic Components business for the year ended December 31, 1994 is
comprised of the loss on disposal of the net assets of the business and
operating losses until disposal. During 1994, the Company sold a portion of
the assets of its Electronic Components business for $605. During 1995, the
Company sold the remaining discontinued business assets for $1,500.

Revenues applicable to the discontinued business for the years ended
December 31, 1995 and 1994 were $290 and $6,897, respectively. The losses from
operations of the discontinued Electronic Components business from September
30, 1994 to December 31, 1994 and through the date of disposal in 1995, were
$326 and $40, respectively, net of related tax benefits. These losses were
charged to a reserve established in 1994 as part of the loss on disposal.

NOTE 3--ACQUISITIONS AND DIVESTITURE

On May 30, 1997, the Company acquired Teletrac, Inc. ("Teletrac") for
$9,926, including the issuance of 153,000 shares of Axsys common stock, 53,000
of which shares were issued at the closing, and 100,000 of which shares will
be issued pursuant to a Stockholder Agreement entered into as of May 30, 1997
with certain selling shareholders and employees of Teletrac. Teletrac designs
and manufactures laser-based precision measurement systems and state-of-the-
art precision linear and rotary positioning servo systems for use in the
electronics capital equipment market.

On April 25, 1996, the Company acquired all of the outstanding shares of
Precision Aerotech, Inc., ("PAI") for $4,728, net of cash acquired. In
addition, the Company repaid $12,000 of borrowings under PAI term loans.
Precision Aerotech designs, manufactures and markets laser scanners, precision
metal optics, high-performance airbearings and precision machined parts sold
predominantly in commercial markets.

The acquisitions of Teletrac and PAI were accounted for under the purchase
method of accounting and, accordingly, the results of operations of Teletrac
and PAI have been included in the accompanying consolidated financial
statements since the date of their respective acquisition. The cost of the
acquisitions was allocated on the basis of the estimated fair market value of
the assets acquired and liabilities assumed. The purchase price allocations
for Teletrac have been completed on a preliminary basis, and management does
not believe that changes in the allocations will be material. During the PAI
acquisition process, the Company determined that L&S Machine Company, Inc.
("L&S"), a wholly-owned subsidiary of PAI which manufactures structural
components for the aerospace industry, did not fit its long-term strategy and
would be subsequently sold. As a result, L&S was accounted for as a net asset
held for disposal as of the PAI acquisition date. The portion of the PAI
acquisition cost allocated to this asset represented the net proceeds realized
upon sale. In December 1996, the Company completed the sale of L&S for an
aggregate purchase price of approximately $13,000. The price included the
assumption of approximately $1,800 in long-term capitalized leases.

F-8
<PAGE>

AXSYS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Summarized below are the unaudited pro forma results of operations of the
Company. The pro forma results for the years ended December 31, 1995 and 1996
have been prepared as if Teletrac and PAI had been acquired on January 1,
1995. The pro forma results for the six months ended June 30, 1996 and 1997
have been prepared as if Teletrac and PAI had been acquired on January 1,
1996.

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- -----------------
1995 1996 1996 1997
------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales................................... $96,898 $108,759 $ 53,703 $ 63,160
Income before extraordinary item.......... 933 3,322 1,252 2,455
Net income................................ 933 3,149 1,079 2,455
Earnings per share:
Income before extraordinary item.......... $ 0.13 $ 0.87 $ 0.31 $ 0.69
Net income................................ $ 0.13 $ 0.81 $ 0.24 $ 0.69
</TABLE>

The pro forma financial information presented is not necessarily indicative
of either the results of operations that would have occurred had the
acquisitions of Teletrac and PAI taken place as of the dates indicated or the
future operating results of the combined companies. Pro forma income before
extraordinary item and net income for the year ended December 31, 1996 and the
six months ended June 30, 1996 include certain special charges totaling
approximately $400. No such charges have been recorded for the year ended
December 31, 1995 or the six months ended June 30, 1997.

On October 2, 1996, the Company acquired substantially all of the assets of
Lockheed Martin Beryllium Corporation ("LMBC") for $2,883 subject to post-
closing adjustments. LMBC's operations consist primarily of precision
machining of beryllium. This acquisition has also been accounted for under the
purchase method of accounting and, accordingly, the results of operations of
LMBC have been included in the accompanying consolidated financial statements
since the date of acquisition. The cost of the acquisition has been allocated
on the basis of the estimated fair market value of the assets acquired and
liabilities assumed. The purchase price allocation has been completed on a
preliminary basis. Management does not believe that changes in the purchase
price allocation will be material.

NOTE 4--SHAREHOLDERS' EQUITY

Common Stock

In July 1994, the Company completed a rights offering of common stock in
which 1,470,588 shares were issued for gross proceeds of $2,500 ($2,332, net
of expenses).

On July 25, 1996, the Company completed a one-for-five reverse stock split
of its $0.01 par value common stock following approval by the Company's
shareholders at the Company's 1996 Annual Meeting of Shareholders. In
conjunction with the split, the Company's Certificate of Incorporation has
been amended to reduce the number of shares of common stock authorized for
issuance to 4,000,000. The stated par value of each share was not changed from
$0.01. All share and per share data presented in this report has been restated
to reflect the reverse stock split.

Preferred Stock

The certificate of designation setting forth the amended terms of the
Company's $1.20 Cumulative Exchangeable Redeemable Preferred Stock ("Preferred
Stock") provides for, among other things, (i) a liquidation preference of $8
per share, (ii) an annual dividend of $1.20 per share, and (iii) the ability
to pay dividends thereon in additional shares instead of cash up to February
22, 1996. Under the certificate of

F-9
<PAGE>

AXSYS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

designation, the right to receive cash dividends is expressly subject to,
among other things, any provision contained from time to time in the Company's
financing agreements prohibiting the payment of cash dividends. The Company's
Credit Facility prohibits the payment of cash dividends (see Note 5).

From August 1991 through February 22, 1996, the Company paid quarterly
dividends on the Preferred Stock in additional shares at an annual rate of 15%
based on the shares outstanding. On February 22, 1996, the Company's right to
pay dividends in additional shares of Preferred Stock expired. From February
22, 1996 to June 4, 1997, the Company did not declare or pay any dividends on
the Preferred Stock, although they continued to accumulate. The amount of
unpaid but accumulated dividends at December 31, 1996 was $757 or, $1.02 per
share.

On February 14, 1997, the Company commenced an offer to exchange 0.75 shares
of its common stock for each outstanding share of its Preferred Stock. On
March 17, 1997, the Exchange Offer terminated and the Company accepted for
exchange all shares of Preferred Stock validly tendered as of that time.
Approximately 538,000 shares of Preferred Stock were exchanged for 403,500
shares of common stock. Holders of shares of Preferred Stock accepted for
exchange will not receive any separate payment in respect of dividends not
paid subsequent to February 22, 1996, the last date on which dividends were
paid on the Preferred Stock.

On June 4, 1997, the Company redeemed all the remaining approximately
200,900 outstanding shares of its Preferred Stock. The redemption price was
$7.70 per share, including accrued and unpaid dividends of $1.54 per share
through the redemption date.

For the year ended December 31, 1996 and the six months ended June 30, 1997,
on a pro forma basis, assuming the Exchange Offer and subsequent redemption of
Preferred Stock had been consummated on January 1, 1996, earnings per share
data would have been as follows:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------------
(UNAUDITED)
<S> <C> <C>
Net income (loss) per common share:
Continuing operations....................... $ 0.90 $ 0.68
Extraordinary item.......................... (0.06) --
--------- ---------
Total..................................... $ 0.84 $ 0.68
========= =========
Weighted average common shares outstanding.... 3,094,303 3,276,586
========= =========
</TABLE>

NOTE 5--LONG-TERM DEBT

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Credit Facility.................................. $ 9,643 $22,285 $24,758
Industrial Revenue Bond.......................... 1,870 1,870 1,620
Capital Lease Obligations........................ -- 2,000 2,735
------- ------- -------
11,513 26,155 29,113
Less current portion............................. 466 2,831 3,057
------- ------- -------
$11,047 $23,324 $26,056
======= ======= =======
</TABLE>

F-10
<PAGE>

AXSYS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

In order to obtain the funds necessary to finance the Company's acquisition
of PAI (see Note 3), to refinance PAI's and the Company's existing debt and
pay the fees and expenses related to the acquisition and refinancing, Axsys
entered into a Credit Agreement, dated April 25, 1996 (and subsequently
amended as of September 25, 1996), between the Company, the various banks
named therein and Banque Paribas, as agent, providing for borrowings under a
$37,000 senior secured credit facility (the "Credit Facility"). During 1996,
the total facility was reduced by $10,500 as a result of a prepayment of term
debt using proceeds from the sale of L&S (see Note 3) and by $1.3 million as a
result of scheduled term payments. The remaining Credit Facility of $25,200 as
of December 31, 1996 is comprised of (i) a term loan in the principal amount
of $7,300 payable in installments and maturing on April 25, 2000, (ii) a term
loan in the principal amount of $6,900 payable in installments and maturing on
April 25, 2002 and (iii) a revolving credit line in an aggregate principal
amount of up to the lesser of $11,000 or the borrowing base in effect from
time to time, maturing on April 25, 2000.

On April 10, 1997, in connection with the acquisition of Teletrac, the
Company amended its Credit Agreement to increase the revolving credit portion
of its Credit Facility from $11,000 to $18,000.

Borrowings under the Credit Facility bear interest at a fluctuating rate per
annum equal to the rate of interest publicly announced by Chase Manhattan
Bank, N.A. as its prime rate (the prime rate was 8.50% at June 30, 1997), plus
a margin ranging from 1.75% to 2.25%, or the London Interbank Offered Rate
(LIBOR), plus a margin ranging from 3.25% to 3.75%. A commitment fee of 0.5%
is payable on any unused amount of the Credit Facility. The Credit Facility
contains certain restrictive covenants which, among other things, impose
limitations with respect to the incurrence of additional liens and
indebtedness, mergers, consolidations and specified sale of assets and
requires the Company to meet certain financial tests including minimum levels
of earnings and net worth and various other financial ratios. In addition, the
Credit Facility prohibits the payment of cash dividends. Borrowings under the
Credit Facility are secured by substantially all of the assets of the Company
and its subsidiary.

The Company had outstanding at December 31, 1996 and at June 30, 1997,
industrial development revenue bonds (the "Bonds") in the amount of $1,870 and
$1,620 (unaudited), respectively, secured by its Gilford, NH manufacturing
facility which has a net carrying amount of approximately $2,000. The Bonds,
which bear interest at a fixed rate of 13%, are payable in 2005. The Company,
however, may make optional prepayments of $250 annually.

As of December 31, 1996, scheduled debt maturities during the next five
years, which are comprised of payments under the Company's Credit Facility and
capital lease obligations, are $2,831 (1997), $3,023 (1998), $3,105 (1999),
$11,428 (2000) and $3,277 (2001).

In 1994, the Company recorded an extraordinary gain of $5,856, net of a
charge in lieu of taxes of $3,744, in connection with the repurchase of bank
indebtedness.

F-11
<PAGE>

AXSYS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

NOTE 6--BALANCE SHEET INFORMATION

The details of certain balance sheet accounts are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Inventories:
Raw materials..................................... $ 7,203 $ 8,033 $ 9,030
Work-in-process................................... 5,293 12,942 12,717
Finished goods.................................... 9,255 10,118 10,576
------- ------- -------
21,751 31,093 32,323
Less reserves..................................... 5,207 6,639 6,053
------- ------- -------
$16,544 $24,454 $26,270
======= ======= =======

Work-in-process inventory at December 31, 1996 and June 30, 1997 is recorded
net of $1,576 and $1,110 (unaudited) of progress payments received from
customers on uncompleted contracts, respectively.

<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net property, plant and equipment:
Land.............................................. $ 600 $ 891 $ 891
Buildings and improvements........................ 3,923 5,994 6,214
Machinery and equipment........................... 8,155 14,029 16,119
------- ------- -------
12,678 20,914 23,224
Less accumulated depreciation and amortization.... 5,075 7,458 8,952
------- ------- -------
$ 7,603 $13,456 $14,272
======= ======= =======
Accrued expenses and other liabilities:
Compensation and related benefits................. $ 2,180 $ 3,741 $ 4,844
Other............................................. 3,516 3,549 5,897
------- ------- -------
$ 5,696 $ 7,290 $10,741
======= ======= =======
</TABLE>

NOTE 7--INCOME TAXES

At December 31, 1996, the Company has net operating loss carryforwards of
approximately $10,000 which expire in the years 2005 through 2009 and
alternative minimum tax credit carryforwards of approximately $340. In
addition, the Company has approximately $7,600 of previously unrecognized tax
benefits, principally related to inventories. As the portion of the loss
carryforwards and deferred tax benefits originating prior to the 1991 quasi-
reorganization are realized, the corresponding tax effect will be credited to
Capital in Excess of Par under quasi-reorganization accounting principles
rather than reducing the Provision for Taxes. During the year ended December
31, 1996 and the six months ended June 30, 1997 (unaudited), $1,435 and $1,355
were credited to Capital in Excess of Par, respectively, representing the
utilization of such pre quasi-reorganization tax benefits to offset current
year tax expense. As of December 31, 1996, $3,181 of the pre quasi-
reorganization tax effected benefits remain unutilized. The utilization and
realization of the carryforwards and future tax benefits will substantially
reduce the amount of cash taxes payable on taxable income in the future.

The Company utilizes the liability method (SFAS No. 109) in accounting for
income taxes. Income from continuing operations before taxes is from domestic
sources only for all periods presented.

F-12
<PAGE>

AXSYS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

The provision for taxes on income from continuing operations consists of:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- ------------------
1994 1995 1996 1996 1997
------ ------ ------ ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current taxes--charge in lieu of taxes
and taxes:
U.S. Federal........................ $14 $454 $1,579 $ 672 $ 1,283
State and local..................... 3 111 312 148 311
--- ---- ------ ------- ---------
17 565 1,891 820 1,594
--- ---- ------ ------- ---------
Deferred taxes:
U.S. Federal........................ -- -- -- -- --
--- ---- ------ ------- ---------
$17 $565 $1,891 $ 820 $ 1,594
=== ==== ====== ======= =========
</TABLE>

The reasons for the difference between the provision for taxes and the
amount computed by applying the statutory federal income tax rate to income
before taxes are as follows:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- -------------------
1994 1995 1996 1996 1997
------ ------ ------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
U.S. federal statutory rate......... 34% 34% 34% 34% 34%
Computed expected tax provision..... $15 $493 $1,614 $687 $ 1,346
Increase (decrease) in taxes
resulting from:
State and local taxes, net of
federal tax benefit.............. 2 72 206 98 205
Amortization of goodwill.......... 71 71 71 35 43
Other............................. (71) (71) -- -- --
--- ---- ------ ------- ---------
Actual tax provision................ $17 $565 $1,891 $820 $ 1,594
=== ==== ====== ======= =========
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Tax net operating loss carryforwards.............. $ 4,794 $ 3,740 $ 2,471
Inventory valuation differences................... 2,070 2,002 1,959
Other, net........................................ 389 606 635
------- ------- -------
Sub-Total......................................... 7,253 6,348 5,065
Valuation allowance............................... (7,253) (6,348) (5,065)
------- ------- -------
Total deferred taxes.............................. $ -- $ -- $ --
======= ======= =======
</TABLE>

The net change in the valuation allowance in 1996 and 1995 was a decrease of
$905 and an increase of $330, respectively. The net change in the valuation
allowance for the six months ended June 30, 1997 was a decrease of $1,283.

F-13
<PAGE>

AXSYS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

NOTE 8--PENSION ARRANGEMENTS

The Company has two pension plans for which benefits and participation have
been frozen. Pension benefits under these plans are generally based upon years
of service and compensation. The Company's funding policy is to contribute
amounts to these plans sufficient to meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as the Company may determine to be appropriate from time to
time.

Multi-employer plans covering certain union members generally provided
benefits of stated amounts for each year of service. During 1994, in
connection with the restructuring of the Precision Systems group, the
employment of the union members participating in these multi-employer plans
ended and, as a result, contributions to these plans ceased. As of December
31, 1996, there were no unpaid contributions to multi-employer plans.

A summary of components of net periodic pension cost for the defined benefit
plans and the total contribution charged to pension expense for the multi-
employer plans follows:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, JUNE 30,
---------------- ------------
1994 1995 1996 1996 1997
---- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Defined benefit plans:
Service cost-benefits earned during the peri-
od........................................... $-- $-- $-- $ -- $ --
Interest cost on projected benefit obliga-
tion......................................... 73 74 71 35 37
Actual return on plan assets.................. 1 (25) (46) (9) (15)
Net amortization and deferral................. (5) 17 26 (1)
---- ---- ---- ----- -----
Net pension cost of defined benefit plans..... 69 66 51 26 21
---- ---- ---- ----- -----
Multi-employer plans.......................... 59 -- -- -- --
---- ---- ---- ----- -----
Total pension expense....................... $128 $ 66 $ 51 $ 26 $ 21
==== ==== ==== ===== =====
</TABLE>

Assumptions used in accounting for the defined benefit plans as of the
plans' measurement dates were:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, JUNE 30,
---------------- -------------
1994 1995 1996 1996 1997
---- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted-average discount rate............... 7.5% 7.5% 7.5% 7.5% 7.5%
Expected long-term rate of return on assets.. 6.0 6.0 6.0 6.0 6.0
</TABLE>

F-14
<PAGE>

AXSYS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

The following table sets forth the funded status and amount recognized in
the consolidated balance sheets for the Company's defined benefit pension
plans:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996 1997
------ ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation.................... $1,026 $1,116 $1,053 $1,079
====== ====== ====== ======
Accumulated benefit obligation............... $1,026 $1,116 $1,053 $1,079
====== ====== ====== ======
Projected benefit obligations................ $1,026 $1,116 $1,053 $1,079
Less plan assets at fair market value........ 32 231 451 635
------ ------ ------ ------
Projected benefit obligation in excess of
plan assets................................. 994 885 602 444
Unrecognized net gain........................ 83 98 151 194
------ ------ ------ ------
Net pension liability recognized in the
balance sheet............................... $1,077 $ 983 $ 753 $ 638
====== ====== ====== ======
</TABLE>

Unrecognized net gains and losses are amortized over the average future
service lives of participants. Plan assets are invested in a managed portfolio
consisting primarily of equity securities.

The Company also sponsors 401(k) plans under which eligible employees may
elect to contribute a percentage of their earnings. The Company has matched
employee contributions to these plans in amounts ranging from up to 3% to 5%
of the employees' gross earnings over the three years ended December 31, 1996.
Company matching contributions were $363 in 1994, $325 in 1995 and $709 in
1996.

NOTE 9--SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is summarized as follows:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------
1994 1995 1996 1996 1997
------- ------- ------- ---- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the year for:
Interest................................ $ 1,883 $ 1,989 $ 2,586 $669 $1,162
Income tax payments (refunds)........... (9) 52 441 373 37
Noncash investing activities:
Equipment acquired under capital
leases................................. $ -- $ -- $ 786 $464 $1,158
Capital Stock issued for acquisition.... -- -- -- -- 2,166
</TABLE>

NOTE 10--OTHER INFORMATION

Restructuring Plan

In connection with a restructuring of the Precision Systems Group initiated
in 1993, the Company recorded a $1,300 charge in 1994, of which $1,000 related
to the write-down of slow moving and excess inventory to net realizable value
and $300 to adjust the carrying value of an idle Deer Park, New York facility.
In September 1995, the Company sold the idle Deer Park, New York facility for
net proceeds of $1,401. Included in other expense in 1995 is a loss on the
sale of this facility of $233.

Stock Options and Warrants

As of December 31, 1996, options to purchase up to 38,600 shares of Axsys
common stock, with exercise prices of $3.75-$4.15 per share, have been granted
to certain key employees of the Company. Of that amount,

F-15
<PAGE>

AXSYS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

32,840 options are vested, with the balance becoming vested in 1997. These
options are exercisable for up to seven years from the date of grant. As of
December 31, 1996, there were 49,800 shares available for future grant. There
were no stock options granted to employees in 1996 or 1995.

During the six months ended June 30, 1997 (unaudited), 21,000 additional
stock options, net of forfeitures, were granted to certain employees and
directors of the Company. In addition, 9,000 options were exercised and 2,000
previously issued options were forfeited. The newly granted options, which
have exercise prices of $15.00-$17.75 per share, are exercisable for up to ten
years from the date of grant and vest as follows: 4,000 (1997), 6,800 (1998),
5,100 (1999) and 5,100 (2000). As of June 30, 1997, a total of 48,600 options
have been granted, and options to purchase up to 30,800 additional shares are
available for grant.

During 1996, a warrant to acquire up to 133,263 shares of Common Stock at an
exercise price of $.05 per share and warrants to acquire up to 175,278 shares
of Common Stock at an exercise price of $6.25 per share, were issued.

NOTE 11--COMMITMENTS AND CONTINGENCIES

Future minimum payments under noncancellable operating leases (exclusive of
property expenses and net of sublease rental income), as of December 31, 1996,
are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997.................................. $1,604
1998.................................. 1,361
1999.................................. 1,243
2000.................................. 162
2001.................................. 38
2002 and thereafter................... 206
------
$4,614
======
</TABLE>

Rent expense under such leases, net of sublease rental income, amounted to
$1,379, $1,539 and $1,589 during the years ended December 31, 1994, 1995 and
1996, respectively, and was $955 for the six months ended June 30, 1997
(unaudited).

In February 1990, the Company sold and leased back its San Diego, California
facility under an operating lease. The Company has a deferred gain as of
December 31, 1996 on this transaction of $387, which is being amortized to
income over the ten year lease term as a reduction of annual rent expense.

The Company has various lawsuits, claims, commitments and contingent
liabilities arising from the ordinary conduct of its business; however, they
are not expected to have a material adverse effect on the Company's financial
position or results of operations.

NOTE 12--SUBSEQUENT EVENT (UNAUDITED)

In September 1997, the Board of Directors approved the filing of a
registration statement on Form S-1 with the Securities and Exchange Commission
to register 1,757,833 shares of Common Stock, of which up to 1,294,092 shares
will be issued and sold by the Company and 463,741 shares will be sold by the
Selling Shareholder. The Board of Directors also approved the repurchase and
cancellation of outstanding warrants upon consummation of this Offering.

In September 1997, the Company was advised by its environmental consultants
that the costs associated with the remediation of a previously discontinued
operation site are now estimated to be higher than originally anticipated. The
current estimates to remediate this site now range from approximately $600 to
$1,500. Actual costs may be different than the current estimates. Based on
this information, the Company intends to increase its reserve relating to this
site to approximately $600 by recording an after-tax discontinued operation
charge of $244 in the third quarter of 1997.

F-16
<PAGE>

PRO FORMA CONDENSED STATEMENT OF OPERATIONS

The unaudited pro forma condensed statements of operations of the Company
for the six months ended June 30, 1997 and the year ended December 31, 1996,
present results for the Company as if the Company's acquisition of Precision
Aerotech, Inc. ("PAI") and Teletrac, Inc. ("Teletrac") had occurred as of
January 1, 1996. Teletrac's fiscal year does not coincide with a calendar
year. The pro forma condensed statements of operations for the six months
ended June 30, 1997 and the year ended December 31, 1996, include Teletrac's
historical results for the six months ended June 30, 1997 and the year ended
January 31, 1997, respectively. The unaudited pro forma financial information
does not purport to represent what the Company's results of operations
actually would have been had the acquisitions occurred on the dates indicated,
or to project the Company's results of operations for any future date or
period. The pro forma adjustments are based on available information and
certain assumptions that the Company currently believes are reasonable in the
circumstances. The unaudited financial information should be read in
conjunction with the accompanying notes thereto, the separate historical
financial statements of the Company as of and for the six month period ended
June 30, 1997 which are contained herein; and the historical financial
statements of the Company as of and for the year ended December 31, 1996 which
are contained herein.

The pro forma adjustments and pro forma combined amounts are provided for
informational purposes only. The Company's financial statements reflect the
effects of the acquisition and related financing transaction from the date the
events occurred. The pro forma adjustments are applied to the historical
financial statements to, among other things, account for the acquisitions as
purchases. Under purchase accounting, the total purchase cost was allocated to
the PAI and Teletrac assets and liabilities based on their fair values. The
purchase price allocations for Teletrac have been completed on a preliminary
basis. Accordingly, the final allocations will be different from the amounts
reflected herein. Although the final allocations will differ, the unaudited
pro forma financial information reflects management's best estimate based on
currently available information.

F-17
<PAGE>

AXSYS TECHNOLOGIES, INC.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED--DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
(JANUARY 1, 1996-
APRIL 25, 1996) PRO FORMA
AXSYS PRECISION AXSYS
TECHNOLOGIES, INC. AEROTECH, INC.(G) TELETRAC, INC. ADJUSTMENTS TECHNOLOGIES, INC.
------------------ ----------------- -------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
NET SALES............... $ 91,301 $9,657 $7,995 $ (194)(a) $ 108,759
Cost of sales........... 67,483 7,495 4,938 (194)(a) 79,722
Selling, general and
administrative
expenses............... 16,501 2,042 1,472 (394)(b) 19,621
Amortization of
intangible assets...... 210 -- -- 272 (c) 482
--------- ------ ------ ------- ---------
OPERATING INCOME........ 7,107 120 1,585 122 8,934
Interest expense........ 2,343 446 12 399 (d) 3,200
Other (income) expense.. 18 (3) 15
--------- ------ ------ ------- ---------
INCOME BEFORE TAXES AND
EXTRAORDINARY ITEM..... 4,746 (323) 1,573 (277) 5,719
Provision (benefit) for
income taxes........... 1,891 (126) 634 (2)(e) 2,397
--------- ------ ------ ------- ---------
INCOME BEFORE
EXTRAORDINARY LOSS..... 2,855 (197) 939 (275) 3,322
Extraordinary loss on
early extinguishment of
debt, net
of tax benefit......... (173) -- -- -- (173)
--------- ------ ------ ------- ---------
NET INCOME.............. 2,682 (197) 939 (275) 3,149
Preferred dividends .... 847 -- -- -- 847
--------- ------ ------ ------- ---------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS.... $ 1,835 $ (197) $ 939 $ (275) $ 2,302
========= ====== ====== ======= =========
NET INCOME (LOSS) PER
COMMON SHARE:
Net income before
extraordinary item..... $ 0.74 $ 0.87
Extraordinary item...... (0.06) (0.06)
--------- ---------
Total................. $ 0.68 $ 0.81
========= =========
Weighted average number
of common shares
outstanding............ 2,690,843 153,000(f) 2,843,843
========= ======= =========
</TABLE>

See accompanying notes to unaudited pro forma condensed statement of
operations.

F-18
<PAGE>

AXSYS TECHNOLOGIES, INC.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED--DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
(JANUARY 1, 1997- PRO FORMA
AXSYS MAY 30, 1997) AXSYS
TECHNOLOGIES, INC. TELETRAC, INC. ADJUSTMENTS TECHNOLOGIES, INC.
------------------ ----------------- ----------- ------------------
<S> <C> <C> <C> <C>
NET SALES............... $ 58,849 $4,311 $ -- $ 63,160
Cost of sales........... 43,111 2,407 -- 45,518
Selling, general and
administrative
expenses............... 10,284 1,284 -- 11,568
Amortization of
intangible assets...... 125 -- 113 (c) 238
--------- ------ ------- ---------
OPERATING INCOME........ 5,329 620 (113) 5,836
Interest expense........ 1,343 -- 275 (d) 1,618
Other (income) expense.. 26 -- -- 26
--------- ------ ------- ---------
INCOME BEFORE TAXES..... 3,960 620 (388) 4,192
Provision (benefit) for
income taxes........... 1,594 250 (107)(e) 1,737
--------- ------ ------- ---------
NET INCOME.............. 2,366 370 (281) 2,455
Preferred stock
dividends.............. 102 -- -- 102
--------- ------ ------- ---------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS.... $ 2,264 $ 370 $ (281) $ 2,353
========= ====== ======= =========
NET INCOME PER COMMON
SHARE.................. $ 0.69 $ 0.69
========= =========
Weighted average number
of common shares
outstanding............ 3,276,586 127,500(f) 3,404,086
========= ======= =========
</TABLE>

See accompanying notes to unaudited pro forma condensed statement of
operations.

F-19
<PAGE>

AXSYS TECHNOLOGIES, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS

(a) To eliminate intercompany sales.
(b) To reflect reductions in overhead expenses as a result of the integration
of Axsys Technologies, Inc. and Precision Aerotech, Inc. ("PAI").
(c) To amortize the incremental Excess of Cost over Net Assets Acquired,
created as a result of the acquisition of Teletrac, Inc., over 30 years.
(d) To adjust interest expense for: (i) interest on incremental borrowings
required to fund the acquisitions, (ii) interest savings from lower rates
on the new credit facility entered into in connection with the PAI
acquisition, (iii) amortization of deferred financing fees, and (iv)
interest attributed to net assets held for disposal.
(e) To reflect the tax effect of the pro forma adjustments.
(f) To fully reflect the 153,000 shares of Axsys stock issued or to be issued
as part of the purchase price for Teletrac, Inc.
(g) Historical PAI amounts exclude the results of L&S Machine Company, Inc., a
wholly-owned subsidiary of PAI, which was accounted for as a net asset
held for sale as of the PAI acquisition date.

F-20
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Teletrac, Inc.:

We have audited the accompanying balance sheet of Teletrac, Inc. (a
California corporation) as of January 31, 1997, and the related statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Teletrac, Inc. as of
January 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.

Arthur Andersen LLP

Los Angeles, California
March 28, 1997

F-21
<PAGE>

TELETRAC, INC.

BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1997 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................. $ 372 $ 147
Short-term investments............................... 201 --
Accounts receivable.................................. 891 1,964
Inventories.......................................... 1,175 1,190
Prepaid expenses and other........................... 20 16
Deferred income tax asset............................ 42 42
------ ------
TOTAL CURRENT ASSETS............................... 2,701 3,359
------ ------
PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment.............................. 205 221
Computer hardware and software....................... 265 256
Furniture and fixtures............................... 8 8
Leasehold improvements............................... 85 85
------ ------
563 570
Less: Accumulated depreciation and amortization...... (334) (353)
------ ------
229 217
------ ------
OTHER ASSETS:
Shareholder loan..................................... 19 17
Other assets......................................... 19 13
------ ------
TOTAL ASSETS....................................... 38 30
------ ------
$2,968 $3,606
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of bank debt and note payable........ $ 20 $ 120
Accounts payable..................................... 258 465
Accrued liabilities.................................. 158 531
Deferred revenue..................................... 46 47
Customer advances.................................... 39 86
Income taxes payable................................. 494 165
------ ------
TOTAL CURRENT LIABILITIES.......................... 1,015 1,414
------ ------
NOTE PAYABLE, net of current portion................... 44 39
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
COMMON STOCK, NO PAR VALUE:
authorized--10,000,000 shares; issued and
outstanding--207,815 shares......................... 51 51
RETAINED EARNINGS...................................... 1,858 2,102
------ ------
TOTAL SHAREHOLDERS' EQUITY......................... 1,909 2,153
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $2,968 $3,606
====== ======
</TABLE>

See accompanying notes to financial statements.

F-22
<PAGE>

TELETRAC, INC.

STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JANUARY 31, 1997 APRIL 30, 1997
---------------- ------------------
(UNAUDITED)
<S> <C> <C>
NET SALES.................................. $7,995 $2,593
Cost of Goods Sold......................... 4,548 1,408
------ ------
GROSS PROFIT............................... 3,447 1,185
------ ------
OPERATING EXPENSES:
General and administrative expenses........ 1,004 491
Selling and marketing expenses............. 467 185
Research and development expenses.......... 390 101
------ ------
1,861 777
------ ------
OPERATING INCOME........................... 1,586 408
Interest expense........................... (14) (2)
Interest income............................ 2 4
------ ------
(12) 2
------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES... 1,574 410
Provision for Income Taxes................. 634 165
------ ------
NET INCOME................................. $ 940 $ 245
====== ======
</TABLE>

See accompanying notes to financial statements.

F-23
<PAGE>

TELETRAC, INC.

STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JANUARY 31, 1997 APRIL 30, 1997
---------------- ------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 939 $ 245
Adjustments to reconcile net income to
net cash provided by
(used in) operating activities:
Depreciation and amortization.......... 85 19
Decrease (increase) in accounts
receivable............................ (133) (1,073)
Decrease (increase) in inventories..... (547) (15)
Decrease (increase) in prepaid expenses
and other............................. (41) 4
Decrease (increase) in deferred income
tax asset............................. (11) --
Decrease (increase) in other Assets.... -- 8
Increase (decrease) in accounts
payable............................... (76) 207
Increase (decrease) in accrued
liabilities........................... (13) 373
Increase (decrease) in customer
advances.............................. (35) --
Increase (decrease) in deferred
revenue............................... 46 47
Increase (decrease) in income taxes
payable............................... 418 (329)
----- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES................. 632 (514)
----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...... (134) (6)
Purchases of investments................. (201) --
Proceeds from investments................ -- 201
----- -------
NET CASH USED IN (PROVIDED BY)
INVESTING ACTIVITIES................. (335) 195
----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable............... 81 --
Proceeds from line of credit............. -- 100
Principal payments on notes payable...... (82) (5)
Repayment of line of credit.............. (110) --
----- -------
NET CASH USED IN (PROVIDED BY)
FINANCING ACTIVITIES................. (109) 95
----- -------
NET INCREASE/(DECREASE) IN CASH............ 188 (224)
CASH AT BEGINNING OF YEAR.................. 185 372
----- -------
CASH AT END OF YEAR........................ $ 373 $ 148
===== =======
</TABLE>

See accompanying notes to financial statements.

F-24
<PAGE>

TELETRAC, INC.

STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK
-------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------- ------ -------- ------
<S> <C> <C> <C> <C>
Balance at January 31, 1996..................... 207,815 $51 $ 918 $ 969
Net income.................................... -- -- 939 939
------- --- ------ ------
Balance at January 31, 1997..................... 207,815 51 1,857 1,908
Net Income.................................... -- -- 245 245
------- --- ------ ------
Balance at April 30, 1997 (unaudited)........... 207,815 $51 $2,102 $2,153
======= === ====== ======
</TABLE>

See accompanying notes to financial statements.

F-25
<PAGE>

TELETRAC, INC.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 1--BACKGROUND AND OPERATIONS

Teletrac, Inc. (the "Company") was incorporated in the state of California
in October 1980. The Company designs, markets, manufactures and sells
equipment for the testing of computer disk drives.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

Revenue Recognition

Revenues are recognized at the time of shipment, except for revenues on
long-term contracts which are recorded on the percentage of completion method.

In fiscal 1996, the Company entered into a long-term contract with a
customer to manufacture a specific product for the customer. At January 31,
1997 and April 30, 1997 (unaudited), the entire amount of the contract had
been billed to the customer and $46 of deferred revenue was recorded relating
to the contract. The Company has completed its obligations under the contract
during the second quarter of fiscal 1998.

Significant Customer

In fiscal 1997, sales to one customer accounted for approximately ten
percent of the Company's net sales. This customer accounted for approximately
25 percent and 11 percent (unaudited) of the Company's accounts receivable
balance as of January 31, 1997 and April 30, 1997, respectively. Substantially
all of this customer's balance has been collected during the second quarter of
fiscal 1998.

Short-Term Investments

The Company accounts for its investments under the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities."

At January 31, 1997, short-term investments consisted of two certificates of
deposit. As defined by the standard, the Company has classified its
investments as "held-to-maturity" investments. Both investments mature in
fiscal 1998.

Inventories

Inventories include material, labor and overhead, are valued at the lower of
cost (first-in, first-out) or market and consist of the following:

<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1997 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Raw material......................................... $ 678 $ 778
Work in progress..................................... 497 412
------ ------
$1,175 $1,190
====== ======
</TABLE>

F-26
<PAGE>

TELETRAC, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

Property and Equipment

Property and equipment is stated at acquisition cost, net of accumulated
depreciation and amortization, which is computed using straight-line and
accelerated methods over five to seven years.

Costs of normal maintenance and repairs are charged to expense as incurred.
Major replacements or betterments of property and equipment are capitalized.
When items are sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in operations.

Supplemental Cash Flow Information

Cash paid for income taxes was approximately $181 and $495 (unaudited) in
fiscal 1997 and during the three months ended April 30, 1997, respectively.
Cash paid for interest was approximately $14 and $2 (unaudited) in fiscal 1997
and the three months ended April 30, 1997, respectively.

NOTE 3--LINE OF CREDIT

The Company has entered into a line of credit agreement with a bank under
which the Company may borrow up to $300. At January 31, 1997 and April 30,
1997, no amount and $100 were outstanding under the agreement, respectively.
The agreement expires on May 15, 1997. Borrowings under the agreement bear
interest at the bank's reference rate (8.25 percent at January 31, 1997) plus
.75 percent. The line of credit is secured by essentially all assets of the
Company.

NOTE 4--NOTE PAYABLE TO A BANK

In March 1996, the Company entered into a note payable agreement with a bank
under which the Company borrowed $81 for the purchase of equipment. The note
is repayable in 48 monthly principal payments of approximately $2 through
March 2000. At January 31, 1997 and April 30, 1997, $64 and $59 (unaudited)
were outstanding under the agreement, respectively. Borrowings under the
agreement bear interest at the bank's reference rate (8.25 percent at January
31, 1997) plus .75 percent. The note is secured by the related equipment.

NOTE 5--INCOME TAXES

The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109.

The deferred income tax asset at January 31, 1997 and April 30, 1997
primarily relates to an accrued liability.

The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JANUARY 31, APRIL 30,
1997 1997
----------- ------------------
(UNAUDITED)
<S> <C> <C>
Current Taxes
U.S. Federal................................ $495 $126
State and Local............................. 150 39
---- ----
645 165
==== ====
Deferred Taxes
U.S. Federal................................ (9) --
State and Local............................. (2) --
---- ----
(11) --
---- ----
$634 $165
==== ====
</TABLE>

F-27
<PAGE>

TELETRAC, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate are as follows:

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JANUARY 31, APRIL 30,
1997 1997
----------- -------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income tax provision at the statutory fed-
eral rate.................................. $ 535 34.0% $ 139 34.0%
State and local income taxes, net of federal
benefit.................................... 96 6.1 26 6.3
Other....................................... 3 .2 -- --
----- ----- --------- ---------
$ 634 40.3% $ 165 40.3%
===== ===== ========= =========
</TABLE>

NOTE 6--COMMITMENTS AND CONTINGENCIES

Lease Commitment

The Company leases its facility under an operating lease agreement that
expires in July 1999. Future minimum payments relating to this operating lease
as of January 31, 1997 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
JANUARY 31, AMOUNT
----------- ------
<S> <C>
1998.............................................................. $121
1999.............................................................. 121
2000.............................................................. 61
----
$303
====
</TABLE>

Rental expense relating to the lease for the year ended January 31, 1997 was
approximately $108.

Litigation

The Company is subject to lawsuits in the normal course of business. In the
opinion of management, pending litigation will not result in any material
losses to the Company.

NOTE 7--SUBSEQUENT EVENT

On May 30, 1997, Axsys Technologies, Inc. purchased approximately 85.6
percent of the outstanding common shares of the Company and entered into
arrangements where under certain conditions it would acquire the remainder of
the Company.

F-28
<PAGE>

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Shareholders Precision Aerotech, Inc. La Jolla,
California

We have audited the accompanying consolidated balance sheets of Precision
Aerotech, Inc. and subsidiaries as of April 30, 1995 and 1994 and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended April 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Precision
Aerotech, Inc. and subsidiaries as of April 30, 1995 and 1994 and the results
of their operations and their cash flows for each of the three years in the
period ended April 30, 1995, in conformity with generally accepted accounting
principles.

McGladrey & Pullen, LLP

San Diego, California
July 19, 1995

F-29
<PAGE>

PRECISION AEROTECH, INC.

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
APRIL 30,
---------------
1994 1995
------- -------
<S> <C> <C>
ASSETS (NOTE 6)
CURRENT ASSETS
Cash......................................................... $ 711 $ 240
Accounts receivable, net (Notes 2 and 12).................... 3,967 4,664
Inventories (Note 3)......................................... 6,852 7,700
Prepaid expenses and other current assets.................... 84 103
Deferred tax assets (Note 10)................................ -- 961
------- -------
TOTAL CURRENT ASSETS....................................... 11,614 13,668
------- -------
NET PROPERTY, PLANT AND EQUIPMENT (Notes 4 and 8).............. 9,709 9,535
------- -------
OTHER ASSETS................................................... 29 75
------- -------
TOTAL ASSETS............................................... $21,352 $23,278
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................. $ 1,208 $ 3,130
Income taxes payable......................................... -- 235
Accrued expenses and other current liabilities (Note 9)...... 2,698 3,370
Current portion of long-term debt and capital lease
obligations (Notes 6 and 8)................................. 1,276 1,227
------- -------
TOTAL CURRENT LIABILITIES.................................. 5,182 7,962
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion (Notes 6 and 8)....................................... 15,427 13,690
DEFERRED TAX LIABILITIES (Note 10)............................. -- 820
COMMITMENTS AND CONTINGENCIES (Notes 8 and 15)
SHAREHOLDERS' EQUITY (Notes 6, 7 and 11)
COMMON STOCK, $.01 par value authorized 15,000,000 shares,
issued and outstanding 789,250 shares......................... 8 8
ADDITIONAL PAID-IN CAPITAL..................................... 735 735
RETAINED EARNINGS since May 1, 1994 ($15,927 accumulated
deficit eliminated in quasi-reorganization on April 30,
1994)......................................................... -- 63
------- -------
TOTAL SHAREHOLDERS' EQUITY................................. 743 806
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $21,352 $23,278
======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-30
<PAGE>

PRECISION AEROTECH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
NET SALES (Note 12).............................. $ 47,602 $ 36,528 $35,806
Cost of sales.................................... 37,746 28,305 27,007
-------- -------- -------
GROSS PROFIT..................................... 9,856 8,223 8,799
-------- -------- -------
Selling, general, and administrative expenses.... 8,628 6,353 7,098
Amortization (Note 5)............................ 9,477 527 1
Debt restructuring expenses...................... 2,529 -- --
(Income) loss on disposal of subsidiaries (Note
14)............................................. 2,165 (378) (97)
-------- -------- -------
22,799 6,502 7,002
-------- -------- -------
OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS...................................... (12,943) 1,721 1,797
Interest income (expense), net................... (4,978) (5,794) (1,686)
Other income (expense), net...................... (48) 31 45
-------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES.................................... (17,969) (4,042) 156
Income taxes (Note 10)........................... 149 43 93
-------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS......... (18,118) (4,085) 63
-------- -------- -------
DISCONTINUED OPERATIONS (Note 14):
Gain (loss) from Aero operations............... (75) 175 --
-------- -------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.......... (18,193) (3,910) 63
Extraordinary item, gain on troubled debt
restructuring (Note 6).......................... -- 23,669 --
-------- -------- -------
NET INCOME (LOSS)................................ $(18,193) $ 19,759 $ 63
======== ======== =======
EARNINGS PER SHARE:
Income (loss) from continuing operations....... $(532.44) $(106.33) $ 0.08
Gain (loss) from discontinued operations....... (2.17) 4.56 --
Extraordinary item, gain on troubled debt
restructuring................................. -- 616.05 --
-------- -------- -------
Net income (loss)............................ $(534.61) $ 514.28 $ 0.08
======== ======== =======
Weighted average number of shares outstanding
(Note 11)....................................... 34,483 38,419 789,250
======== ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-31
<PAGE>

PRECISION AEROTECH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------
1993 1994 1995
-------- -------- ------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)................................. $(18,193) $ 19,759 $ 63
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization of property, plant
and equipment................................... 2,538 2,265 2,370
Other amortization............................... 9,972 527 1
Gain on troubled debt restructuring.............. -- (23,669) --
Provision for losses on accounts receivable...... 51 35 --
Provision for losses on inventory................ 32 (330) 222
(Gain) loss on sale of assets.................... (78) 3 --
Deferred income taxes............................ -- -- (141)
Noncash (income) loss on disposal of subsidiaries
or discontinued operations...................... 1,986 (553) --
Accrued interest added to long-term debt......... 1,441 3,522 --
(Increase) decrease in Accounts receivable....... 1,345 593 (697)
(Increase) decrease in Inventories............... 1,142 3,789 (1,070)
(Increase) decrease in Prepaid expenses and other
current assets.................................. 187 (3) (19)
(Increase) decrease in Other noncurrent assets... 90 25 (45)
Increase (decrease) in Accounts payable.......... (1,648) (1,221) 1,922
Increase (decrease) in Income taxes payable...... -- -- 235
Increase (decrease) in Accrued expenses and other
current liabilities............................. 2,750 (3,412) 672
-------- -------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES.... 1,615 1,330 3,513
-------- -------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.............................. (1,144) (451) (1,000)
Proceeds from disposal of assets.................. 139 490 42
-------- -------- ------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................. (1,005) 39 (958)
-------- -------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt...................... 40,042 -- 6,060
Principal payments on long-term debt and capital
lease obligations................................ (38,452) (2,858) (9,086)
-------- -------- ------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.................................. 1,590 (2,858) (3,026)
-------- -------- ------
NET INCREASE (DECREASE) IN CASH.............. 2,200 (1,489) (471)
CASH AT BEGINNING................................. -- 2,200 711
-------- -------- ------
CASH AT ENDING.................................... $ 2,200 $ 711 $ 240
======== ======== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest......................................... $ 2,423 $ 2,155 $1,575
Income tax payments.............................. 139 284 --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Equipment acquired under capital leases........... $ 794 $ 246 $1,239
Accrued interest added to long-term debt.......... 1,441 3,522 --
</TABLE>

See accompanying notes to consolidated financial statements.

F-32
<PAGE>

PRECISION AEROTECH, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------------- ------------------ ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1992.... 4,980 $ 1 45,188 $ 4 79,080 $ 8
Net (loss)................. -- -- -- -- -- --
-------- ------ --------- ------ --------- ------
Balance at April 30, 1993.... 4,980 1 45,188 4 79,080 8
Reclassification/conversion
of stock in troubled debt
restructuring (Notes 6 and
11)....................... (4,980) (1) (45,188) (4) (79,080) (8)
Reverse stock split common
stock (Note 11)........... -- -- -- -- -- --
Change in common stock par
value..................... -- -- -- -- -- --
Net income................. -- -- -- -- -- --
Adjustment for quasi-
reorganization as of
April 30, 1994 (Note 7)... -- -- -- -- -- --
-------- ------ --------- ------ --------- ------
Balance at April 30, 1994.... -- -- -- -- -- --
Net income................. -- -- -- -- -- --
-------- ------ --------- ------ --------- ------
Balance at April 30, 1995.... -- $ -- -- $ -- -- $ --
======== ====== ========= ====== ========= ======
</TABLE>

See accompanying notes to consolidated financial statements.

F-33
<PAGE>

PRECISION AEROTECH, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------ PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1992.... 3,448,253 $ 345 $ 14,064 $(17,493) $(3,071)
Net (loss)................. -- -- -- (18,193) (18,193)
---------- ----- -------- -------- -------
Balance at April 30, 1993.... 3,448,253 345 14,064 (35,686) (21,264)
Reclassification/conversion
of stock in troubled debt
restructuring (Notes 6 and
11)....................... 754,968 8 2,253 -- 2,248
Reverse stock split common
stock (Note 11)........... (3,413,971) -- -- -- --
Change in common stock par
value..................... -- (345) 345 -- --
Net income................. -- -- -- 19,759 19,759
Adjustment for quasi-
reorganization as of
April 30, 1994 (Note 7)... -- -- (15,927) 15,927 --
---------- ----- -------- -------- -------
Balance at April 30, 1994.... 789,250 8 735 -- 743
Net income................. -- -- -- 63 63
---------- ----- -------- -------- -------
Balance at April 30, 1995.... 789,250 $ 8 $ 735 $ 63 $ 806
========== ===== ======== ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-34
<PAGE>

PRECISION AEROTECH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

The Company manufactures precision assemblies and components used primarily
in the aerospace, defense, communication and reprographics industries
generally under long-term contracts, which are typically less than three years
in duration. The Company's accounts receivable are due primarily from
companies in these industries located throughout the United States. Credit is
extended based on an evaluation of the customer's financial condition and
collateral is not required.

A summary of the Company's significant accounting policies follows:

Principles of Consolidation

The consolidated financial statements include the accounts of Precision
Aerotech, Inc. and its subsidiaries (the Company). All significant
intercompany accounts and transactions have been eliminated.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market,
net of progress payments received. Under the contractual arrangements by which
progress payments are received, the customer has a security interest in the
inventory identified with related contracts.

Revenue Recognition

Revenue is generally recognized on the units-of-delivery method. Sales and
costs of sales are generally recognized when inventory manufactured pursuant
to a contract is shipped. Provisions are made on a current basis to fully
recognize any anticipated losses on contracts.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Leasehold improvements are amortized on the
straight-line method over the shorter of the term of the related lease or the
estimated useful life of the improvement. Depreciation of plant and equipment
is provided over the estimated useful lives of the respective assets using the
straight-line method, typically five to eight years. Amortization of equipment
acquired under capital leases is included in depreciation of plant and
equipment.

Excess of Cost Over Fair Value of Purchased Subsidiaries

Prior to the implementation of the quasi-reorganization, the excess of cost
over fair value of purchased subsidiaries was amortized over 20 years using
the straight-line method. Annually, management reviewed the unamortized value
of the intangibles using a discounted cash flow method of valuation using a
rate of 13.5% for each subsidiary having a material balance and reduced their
balances if the values were permanently impaired. Due to the elimination of
the unamortized balance of the excess of cost over fair value of purchased
subsidiaries effective April 28, 1994, there is no remaining balance reflected
on the accompanying consolidated balance sheets (see Notes 5 and 7).

Income taxes

Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when it is determined to be more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.

F-35
<PAGE>

PRECISION AEROTECH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

Research and Development Expense

The Company incurred and expensed $305, $426 and $553 for research and
development during the years ended April 30, 1993, 1994 and 1995,
respectively.

Earnings Per Share

Earnings per share is computed on the basis of the weighted average number
of shares outstanding as restated for the effect of the reverse stock split
(see Note 11) after adjusting for dividend requirements of Preferred Stock in
1993 and 1994.

NOTE 2--ACCOUNTS RECEIVABLE

Following are the components of accounts receivable, substantially all from
long-term contracts:

<TABLE>
<CAPTION>
APRIL 30,
-------------
1994 1995
------ ------
<S> <C> <C>
Amounts billed................................................ $4,142 $4,748
Less allowance for doubtful accounts.......................... 175 84
------ ------
$3,967 $4,664
====== ======
</TABLE>

NOTE 3--INVENTORIES

The components of inventories, substantially all of which relate to long-
term contracts:

<TABLE>
<CAPTION>
APRIL 30,
-------------
1994 1995
------ ------
<S> <C> <C>
Work-in-process and finished components...................... $6,839 $7,528
Raw materials................................................ 233 345
Less amounts representing progress payments received on
uncompleted contracts....................................... 220 173
------ ------
$6,852 $7,700
====== ======
</TABLE>

Inventories are net of reserves of $583 and $805 at April 30, 1994 and 1995,
respectively.

NOTE 4--PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
APRIL 30,
-------------
1994 1995
------ ------
<S> <C> <C>
Land.......................................................... $ 465 $ 465
Building and leasehold improvements........................... 2,313 2,417
Machinery and equipment....................................... 3,369 4,571
Machinery and equipment under capital leases.................. 2,962 3,510
Furniture and fixtures........................................ 600 926
------ ------
9,709 11,889
Less accumulated depreciation and amortization................ -- 2,354
------ ------
$9,709 $9,535
====== ======
</TABLE>
Included in accumulated depreciation and amortization are amounts related to
assets acquired under capital leases of $0 and $607 at April 30, 1994 and
1995, respectively (see Note 7).

F-36
<PAGE>

PRECISION AEROTECH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

NOTE 5--EXCESS OF COST OVER FAIR VALUE

In its annual evaluation of the unamortized value of the excess of cost over
fair value of purchased subsidiaries at April 30, 1993, management determined
there was an impairment of the value recorded in connection with subsidiaries
purchased in 1988. Based upon changes in the national political and economic
environment it was felt that this impairment was permanent. Loss from
continuing operations reflects a charge of approximately $8,995 for the year
ended April 30, 1993 for additional amortization as a result of recording this
impairment. In addition, management reevaluated its estimate of the useful
life of the excess of cost related to this 1988 acquisition from 40 to 20
years.

In connection with the comprehensive restructuring accomplished in 1994, the
Company implemented a quasi-reorganization and as a result recorded a charge
of approximately $7,378 to accumulated deficit to eliminate the remaining
unamortized value of the excess of cost over fair value of purchased
subsidiaries (see Note 7). The reduction in the intangible asset was a result
of the implementation of the quasi-reorganization and was not based on an
indication of further impairment using the evaluation method described above.

NOTE 6--DEBT AND CAPITAL LEASE OBLIGATIONS

Following is a summary of long-term debt and capital lease obligations:

<TABLE>
<CAPTION>
APRIL 30,
---------------
1994 1995
------- -------
<S> <C> <C>
$10,500 term loan bearing interest at 10%, interest payable
monthly, quarterly principal payments of $101 through
September 30, 1998 and the unpaid balance due December 31,
1998(a)(b)................................................... $10,500 $10,096
$2,500 term loan bearing interest at 10% interest payable
monthly, quarterly principal payments of $24,038 through
September 30, 1998 and the unpaid balance due December 31,
1998(a)(b)................................................... 2,500 2,404
$4,000 revolving credit agreement bearing interest at 10%
interest payable monthly and principal due December 31,
1998(a)(b)(c)................................................ 2,000 360
Obligations under capital leases with interest at 6.7% to
13.4%, due in monthly installments through December 1998,
collateralized by certain equipment.......................... 1,703 2,057
------- -------
16,703 14,917
Less current portion.......................................... 1,276 1,227
------- -------
$15,427 $13,690
======= =======
</TABLE>
- --------
(a) On April 28, 1994 the Company entered into a capital Restructuring
agreement with its two primary lending institutions. The Company issued
532,744 shares of common stock to Foothill Capital Corporation (Foothill)
and 217,044 shares of common stock to Teachers Insurance and Annuity
Association (TIAA) in exchange for amendment of the Company's Senior
Credit Agreement to reduce the principal and accrued interest outstanding
from $49,767 to $17,000 including a $2,500 note to TIAA in exchange for
all of its outstanding 14.5% Guaranteed Senior Subordinated Notes and all
of its outstanding Convertible Exchangeable Preferred Stock (Series B) and
Convertible Participating Preferred Stock (Series C). Additionally, the
holders of the Reincorporation Preferred Stock (Series A) agreed to
reclassify their shares into shares of common stock of the Company.
Concurrent with the closing of the Restructuring agreement, all series of
preferred stock were canceled and the Company is now authorized to only
issue shares of common stock. The value assigned to the common shares
issued to the lending institutions was $2,249 as of April 28, 1994 based
on a "bid" price provided by the NASDAQ in the month prior to the
restructuring. There was no significant trading

F-37
<PAGE>

PRECISION AEROTECH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

activity between the date of the proxy and the date of the restructuring.
The restructuring required four representatives of the creditors serve on
the Company's five person Board of Directors. The gain was measured by
reducing the recorded obligation prior to restructuring by the value of the
common shares issued to the lenders, then comparing this amount to the
total future principal and interest payments required under the
restructured agreements. The restructuring with TIAA resulted in an
extraordinary gain of $23,669 or $616.05 per share. There was no tax effect
of the extraordinary gain because a portion of the gain was nontaxable and
the remaining portion was offset by utilization of net operating loss
carryforwards. This transaction was accounted for in accordance with the
Financial Accounting Standards Board Statement No. 15 "Accounting by
Debtors and Creditors for Troubled Debt Restructurings."
In connection with implementation of the quasi-reorganization (see Note 7),
the Company recorded a credit of approximately $6,849 to accumulated
deficit to eliminate the prospective restructuring interest to reduce the
debt to approximate fair market value.
(b) The term loans and revolving credit agreement contain certain restrictive
covenants which included, among other things, restrictions on the payments
of dividends and the incurrence of additional indebtedness. Substantially
all assets of the Company, with the exception of assets acquired and
collateralized pursuant to capital lease obligations and amounts
representing progress payments received on uncompleted contracts, are
pledged as collateral under the term notes and revolving credit agreement.
Under the term loan and revolving credit agreement, the Company is required
to pay the creditor a quarterly commitment fee as long as any amounts are
outstanding.
(c) The revolving credit agreement provides for an amount not to exceed the
Borrowing Base (as defined). Under the terms of the agreement, amounts
borrowed may be repaid and reborrowed at any time prior to the termination
date, December 31, 1998. At April 30, 1995, borrowings of $3,640 are
available under the agreement.

Scheduled maturities of long-term debt and capital lease obligations are as
follows:

<TABLE>
<CAPTION>
YEAR ENDING
APRIL 30, AMOUNT
----------- -------
<S> <C>
1996............................. $ 1,227
1997............................. 1,091
1998............................. 821
1999............................. 11,714
2000............................. 64
-------
$14,917
=======
</TABLE>

The Company had issued warrants prior to the fiscal year ended April 30,
1994 to the senior creditor and senior subordinated note holder, for a total
of 457,310 shares (prior to effect of reverse stock split) of its common
stock, in consideration for the terms and conditions in the term loan,
revolving note and senior subordinated note agreements. The warrants were
canceled as part of the debt restructuring.

Foothill, the holder of the $10,500 term note and the $4,000 revolving
credit agreement, became the holder of the majority of the Company's common
stock on April 28, 1994. Interest expense on indebtedness to Foothill was
$403, $1,500 and $1,205 for the years ending April 30, 1993, 1994 and 1995,
respectively.

TIAA, the holder of the $2,500 term note and former holder of the senior
subordinated notes and preferred stock, also became a holder of common stock
on April 28, 1994. Interest expense on indebtedness to TIAA amounted to
$3,185, $2,887 and $247 for the years ended April 30, 1993, 1994 and 1995,
respectively.

F-38
<PAGE>

PRECISION AEROTECH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

NOTE 7--QUASI-REORGANIZATION

After the debt restructuring accomplished on April 28, 1994, the Company
implemented, for accounting purposes, a "quasi-reorganization", an elective
accounting procedure that permits a company which has emerged from previous
financial difficulty to restate its accounts and establish a fresh start in an
accounting sense. After implementation of the accounting quasi-reorganization,
the Company's assets and liabilities were adjusted to fair value, however
these adjustments were limited so as to not increase net assets. The deficit
balance in retained earnings was charged to additional paid-in capital. The
Company effected the accounting quasi-reorganization as of April 30, 1994.

The following represents the effects of the reorganization at April 30,
1994:

<TABLE>
<CAPTION>
PRIOR TO AFTER
REORGANIZATION REORGANIZATION
-------------- --------------
<S> <C> <C>
CURRENT ASSETS............................... $ 11,614 $11,614
Property, plant and equipment................ 9,180 9,709
Excess of costs over fair value of purchased
subsidiaries................................ 7,378 --
Other assets................................. 29 29
-------- -------
TOTAL ASSETS............................. $ 28,201 $21,352
======== =======
CURRENT LIABILITIES.......................... $ 5,182 $ 5,182
Long-term obligations:
Principal.................................. 15,427 15,427
Interest................................... 6,849 --
-------- -------
TOTAL LIABILITIES........................ 27,458 20,609
-------- -------
COMMON STOCK................................. 8 8
Additional paid-in capital................... 16,662 735
RETAINED EARNINGS (deficit).................. (15,927) --
-------- -------
TOTAL SHAREHOLDERS' EQUITY............... 743 743
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.................................. $ 28,201 $21,352
======== =======
</TABLE>

NOTE 8--LEASES

The Company leases a facility in Rochester Hills, Michigan at $216 annually
through 1996 and $250 annually through 1999. The lease contains four five-year
renewal options with increases in the annual rent of 20% per renewal term. The
Company accrues rent expense on a straight-line basis and at April 30, 1994
and 1995, deferred rent was approximately $102 and $105, respectively.

F-39
<PAGE>

PRECISION AEROTECH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

Future minimum payments under the capital leases and noncancellable
operating leases with terms of one year or more consist of the following:

<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
APRIL 30, LEASES LEASES
----------- ------- ---------
<S> <C> <C>
1996...................... $ 912 $ 301
1997...................... 703 277
1998...................... 389 251
1999...................... 385 251
2000...................... 64 125
Thereafter................ -- --
------ ------
2,453 $1,205
======
Less portion relating to
interest................. 396
------
$2,057
======
</TABLE>

Total rent expense charged to operations, exclusive of property tax,
insurance and maintenance, was $641, $393 and $308 during the years ended
April 30, 1993, 1994 and 1995, respectively.

In May 1995, the Company entered into a capital lease agreement for
equipment. The lease agreement provides for sixty monthly payments of $11
which have not been included in the future minimum capital lease payments
above. The initial present value of the future rental payments calculated at
an implied rate of 14.1% is $515.

NOTE 9--ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

<TABLE>
<CAPTION>
APRIL 30,
-------------
1994 1995
------ ------
<S> <C> <C>
Accrued compensation.......................................... $1,332 $2,149
Customer advances............................................. 528 213
State income taxes payable.................................... 75 103
Accrued expenses in connection with disposal of Coast......... 33 --
Other......................................................... 730 905
------ ------
$2,698 $3,370
====== ======
</TABLE>

NOTE 10--INCOME TAXES

Effective May 1, 1993, the Company adopted FASB Statement No. 109,
Accounting for Income Taxes. The adoption of Statement 109 changes the
Company's method of accounting for income taxes from the deferred method to a
liability method. Under the deferred method, the Company deferred the past tax
effects of timing differences between financial reporting and taxable income.
As explained in Note 1, the liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the reported amounts of assets and
liabilities and their tax bases.

The adoption of Statement 109 had no effect on the May 1, 1993 balance
sheet.

F-40
<PAGE>

PRECISION AEROTECH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

The components giving rise to deferred taxes described above consist of:

<TABLE>
<CAPTION>
APRIL 30,
----------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances.............................. $ 66 $ 64
Inventory allowances........................................ 246 313
Long-term contracts......................................... 1,053 1,051
Contribution to employee benefit plan....................... 107 --
State income tax............................................ -- 38
Loan restructuring costs.................................... 488 320
Deferred rent............................................... 37 36
Accrued vacation............................................ 173 234
Other....................................................... 196 120
------- -------
2,366 2,176
Less valuation allowance...................................... 1,006 1,026
------- -------
1,360 1,150
------- -------
Deferred tax liabilities:
Property and equipment...................................... (1,360) (1,009)
------- -------
$ -- $ 141
======= =======
</TABLE>

The components giving rise to the net deferred tax assets described above
have been included in the accompanying consolidated balance sheet as follows:

<TABLE>
<CAPTION>
APRIL 30,
1995
---------
<S> <C>
Current assets..................................................... $ 961
Noncurrent (liabilities)........................................... (820)
-----
$ 141
=====
</TABLE>

A valuation allowance was established for the net deferred tax assets for
which the ultimate realization depends on the Company's ability to generate
sufficient taxable income in the future. The Company has undergone substantial
restructuring (see Note 6), however, due to the nature of the deferred tax
assets and historical results of operations, a valuation allowance of $1,026
and $1,006 was recorded as of April 30, 1995 and 1994, respectively. If the
Company is able to generate sufficient taxable income in the future through
operating results or tax planning opportunities, reductions in the valuation
allowance established as of April 30, 1994 will be recorded by a charge
directly to additional paid-in capital as required after implementation of the
quasi-reorganization (see Note 7).

Because of limitations imposed by the tax laws on the Company due to the
occurrence of an ownership change (see Note 6), all unused net operating loss
carryforwards generated prior to 1994 were eliminated as of April 30, 1994.

F-41
<PAGE>

PRECISION AEROTECH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income from continuing
operations for the years ended April 30, 1995, 1994 and 1993 due to the
following:

<TABLE>
<CAPTION>
APRIL 30,
----------------------
1993(A) 1994 1995
------- ------- ----
<S> <C> <C> <C>
Computed "expected" tax expense (credit)................. $(2,953) $(1,757) $ 54
Increase (decrease) in income taxes resulting from:
Losses for which no current benefit is available....... 2,953 1,757 --
State taxes, net of federal tax benefits, if any....... 149 43 19
Change in valuation allowance.......................... -- -- 20
------- ------- ----
$ 149 $ 43 $ 93
======= ======= ====
</TABLE>
- --------
(a) As computed in accordance with APB Opinion No. 11.

The provision for income taxes charged to operations for the year ended
April 30, 1995 consist of $234 of currently payable income taxes and a
deferred tax benefit of $141. The income taxes in the consolidated statements
of operations consist of current state income taxes for the years ended April
30, 1993 and 1994.

An examination of the Company's Alabama Franchise Tax returns by the Alabama
Department of Revenue for the years 1989 through 1994 has been completed.

Notices for the years 1989 through 1994 assess additional taxes. The Company
is contesting the proposed additional taxes, which relate primarily to the
inclusion of various liability and equity accounts in the tax base of Alabama
and amount to approximately $388 (plus penalties and interest) for the years
1989 through 1994 combined, after giving effect to offsetting adjustments
available to the Company. Management intends to contest the Department of
Revenue's position and believes that the contested additional taxes will be
substantially reduced from those proposed by the agents.

No accrual has been made in the financial statements for the contested
adjustments since the ultimate liability, if any, cannot be reasonably
estimated. Any ultimate liability is not expected to be material in relation
to the consolidated financial position of the Company, but could be material
in relation to the earnings of the period in which a determination occurs.

NOTE 11--STOCK TRANSACTIONS

On April 28, 1994 the Board of Directors authorized, and the Company
executed, a 1-for-100 reverse stock split with respect to the Company's common
stock, thereby decreasing the number of issued and outstanding shares to
789,250. Additionally, the par value of each share was decreased to $0.01.
Certain references in the accompanying consolidated financial statements to
the number of common shares for 1993 have been restated to reflect the reverse
stock-split. Weighted average number of shares outstanding for calculation of
earnings per share have been restated for the year ended April 30, 1993 to
reflect the reverse stock split.

In connection with the Company's capital restructuring agreement, the
holders of Series A preferred stock agreed to reclassify their shares into
shares of common stock of the Company. The Series B and Series C holder
exchanged those shares for debt (see Note 6).

In May 1989, the Company registered 850,000 shares (prior to effect of
reverse stock split) of common stock with the Securities and Exchange
Commission pursuant to the Amended and Restated 1986 Stock Option

F-42
<PAGE>

PRECISION AEROTECH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Plan of Precision Aerotech, Inc. (the Stock Option Plan) and the Stock Bonus
Plan for Key Employees of Precision Aerotech, Inc. (the Stock Bonus Plan).

The Stock Option Plan provides for the granting of options for up to 350,000
shares (prior to effect of reverse stock split) of its common stock to
employees for a price not less than the fair market value of the stock at the
date of grant. The term of the options cannot exceed ten years and no option
may be exercised during the first year after such option is granted.

The following table summarizes stock option activity for the three years
ended April 30, 1995:

<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES PER SHARE
--------- ------------------
<S> <C> <C>
Outstanding at April 30, 1992.................... 344,550 $1.00 to $7.25
Expired or forfeited........................... (16,450) $1.00
-------- ------------------
Outstanding at April 30, 1993.................... 328,100 $1.00 to $7.25
Expired or forfeited........................... (23,350) $1.00 to $7.25
Effects of reverse stock split................. (301,702) --
-------- ------------------
Outstanding at April 30, 1994.................... 3,048 $100.00 to $725.00
Expired or forfeited........................... (1,902) $100.00 to $725.00
-------- ------------------
Outstanding at April 30, 1995.................... 1,146 $100.00 to $725.00
======== ==================
</TABLE>

At April 30, 1995, 1,146 options (after effect of reverse stock split) were
exercisable. Options to purchase 2,354 shares were available for grant at
April 30, 1995.

The Stock Bonus Plan provides that any key employee of the Company is
eligible to be granted a stock bonus. The stock bonus will be determined by
the stock bonus committee in its sole discretion. The plan covers 50 shares
(after effect of reverse stock split) of the Company's unissued common stock.

The former Chairman of the Board has a stock appreciation right with respect
to 500 shares (after effect of reverse stock split) of common stock under
which he could receive cash equal to the difference between the market value
of the stock on the date of grant ($62.50, as adjusted for effect of reverse
stock split) and on the date the right is exercised. The right became vested
in February 1992 and is exercisable for four years thereafter.

Following is a summary of common stock reserved for future issuance:

<TABLE>
<CAPTION>
APRIL 30,
-----------
1994 1995
----- -----
<S> <C> <C>
The Amended and Restated 1989 Stock Option Plan..................... 3,500 3,500
The Stock Bonus Plan for Key Employees.............................. 3,747 3,747
----- -----
7,247 7,247
===== =====
</TABLE>

NOTE 12--OPERATIONS

Major customers

Sales to a major customer in the Precision Machining and Assembly segment
aggregated 22%, 15% and 17% for the years ended April 30, 1993, 1994 and 1995.
In addition, sales to another customer in the optical systems segment
aggregated 15% in 1995. Accounts receivable from these two customers were $623
and $538, respectively at April 30, 1995.

F-43
<PAGE>

PRECISION AEROTECH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

Termination payments

During the year ended April 30, 1994, the Company recognized $3,540 in
settlement revenue including gross profit of $1,989 on contracts terminated by
customers for convenience.

NOTE 13--EMPLOYEE BENEFIT PLANS

The Company's subsidiaries maintain various defined contribution employee
benefit plans covering substantially all employees. These plans include
primarily a salary deferred plan under Section 401(k). There are no minimum
funding requirements for any plans and contributions to the plans are
discretionary. Amounts charged to operations pursuant to such plans were $298,
$358 and $214, during the years ended April 30, 1993, 1994 and 1995,
respectively.

NOTE 14--DISPOSAL OF SUBSIDIARIES

The Company decided to terminate operations at its Coast Aerotech, Inc.
(Coast) subsidiary effective as of February 1, 1993. Coast was included in the
Precision Machining and Assembly segment and was an assembler of welded tube
and duct assemblies, hose and bellows components and dip brazing. Coast's
sales for the year ended April 30, 1993 were $5,784. At April 30, 1993, the
Company recorded a provision for disposition in the amount of $2,165 for costs
estimated to be incurred prior to Coast's disposition. During the year ended
April 30, 1994 it was determined that the provision for disposition recorded
April 30, 1994 was in excess of the costs to discontinue the operations of
Coast. As a result, $378 is included as income on disposal of subsidiaries for
the year ended April 30, 1994. During 1995 Coast collected an additional $97
from a customer for payment for intellectual property. This amount is shown as
income on disposal of subsidiaries for the year ended April 30, 1995.

During 1991, the Company decided to liquidate its Aero Technologies, Inc.
(Aero) subsidiary and all of its machinery and equipment was auctioned with
the proceeds used to pay off existing obligations. The land and building were
offered for sale and a provision for anticipated losses was recorded which
included an amount to reduce the carrying value to an expected net realizable
value of $200. During the year ended April 30, 1994, the Company decided to
utilize the Aero land and buildings as a manufacturing facility and,
therefore, were reclassified at April 30, 1994 to property, plant and
equipment of the Precision Machining and Assembly segment. The facility has
been revalued at an economic use amount rather than the net realizable value
used at April 30, 1994. This change in value along with completion of the
other phase-out costs resulted in a gain from discontinued operations in the
amount of $175 for the year ended April 30, 1994.

NOTE 15--CONTINGENCIES

The Company has been identified as one of many potentially responsible
parties (PRP's) for cleanup at a Government licensed, third party waste
disposal site and, separately at a plant site sold by one of the subsidiaries
12 years prior to Precision Aerotech, Inc.'s ownership.

In the first matter, the Environmental Protection Agency (EPA) has notified
the Company, along with many other parties, that it is potentially liable for
costs related to removal of materials and remediation of damage that may have
been caused by hazardous substances at a licensed third-party waste disposal
site. Management intends to respond by cooperating with all EPA requests. The
EPA has notified the Company that it has completed the cleanup of the site at
a cost of $4,721 and has made a demand seeking payment. The EPA is currently
negotiating a potential global settlement agreement with the PRP's. However,
if a global settlement is not achieved, the EPA reserves the right to
determine an allocation formula and tender prorated settlement offers on a
take-it or leave-it basis. Based on information provided by the EPA,
management has estimated the future liability for the

F-44
<PAGE>

PRECISION AEROTECH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

Company's portion of the cleanup to be no more than approximately $75. The
estimate is based on the current EPA calculation of the Company's proportional
share of responsibility based on the ratio of the Company's gallonage at the
site compared to the total gallonage of all PRP's. Joint and several
liabilities among the PRP's can be imposed. Joint and several liability means
that any one party could theoretically be liable for the entire cleanup. In
light of the large number of PRP's, the Company believes this is highly
unlikely. However, the large number of PRP's does not change the maximum
theoretical exposure of joint and several liabilities. It was also hoped that
the site insurance carrier would be obligated to contribute to the cleanup
costs. To date, there has been no contribution by the insurance carrier and it
is unlikely that any such contribution will occur. Management's estimate of
the future liability does not include any assumed amounts to be recovered from
the insurance carrier.

In the second matter, during the process of selling the property, the
current owner of the plant site has made various assertions regarding
environmental contamination at the site and the potential it may incur
significant remediation costs. No litigation has been brought against the
Company. Management denies that it is liable for any potential contamination
at the site, which was never occupied or used during Precision Aerotech, Inc.
ownership, and intends to vigorously contest any claims related thereto. The
Company's legal counsel is unable to assess the extent of the Company's
exposure or form a judgment as to the likelihood of an unfavorable outcome in
this matter, if any, until further documentation and more complete factual
allegations are provided.

The Company is also subject to lawsuits and claims which arise out of the
normal course of business. In the opinion of management, based upon the
opinions of legal counsel, the disposition of such actions of which it is
aware will not have a material effect on the consolidated financial position,
results of operations or liquidity of the Company.

NOTE 16--BUSINESS SEGMENTS

Precision Aerotech, Inc. currently consists of two operating segments. The
Precision Machining and Assembly segment include the following areas of
activity: (i) precision machining, assembly, bending, metal forming, spinning
and joining of military and commercial aircraft parts, integration of parts
into complex mechanical and electrical assemblies for aircraft; and (ii) ultra
precision machining and the machining of exotic and difficult materials used
in static and dynamic structures in airborne vehicle space systems. The
Optical Systems segment designs, assembles, manufactures and services optical
systems which are used in reprographics, communications and defense
applications.

F-45
<PAGE>

PRECISION AEROTECH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

A summary of information about the Company's operations by segment are as
follows:

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------
1993 1994 1995
-------- ------- -------
<S> <C> <C> <C>
NET SALES:
Precision Machining and Assembly
Unaffiliated Customers............................ $ 38,244 $27,488 $24,459
Intersegment...................................... 624 1,092 1,213
Optical Systems
Unaffiliated Customers............................ 9,358 9,040 11,347
Intersegment...................................... 417 384 408
Less Intersegment Sales............................. (1,041) (1,476) (1,621)
-------- ------- -------
TOTAL NET SALES................................. $ 47,602 $36,528 $35,806
======== ======= =======
OPERATING INCOME (LOSS)(a):
Precision Machining and Assembly(b)
Unaffiliated Customers............................ $(13,273) $ 1,399 $ 650
Intersegment...................................... 28 -- (21)
Optical Systems..................................... --
Unaffiliated Customers............................ 226 290 1,144
Intersegment...................................... 76 32 24
-------- ------- -------
TOTAL OPERATING INCOME.......................... $(12,943) $ 1,721 $ 1,797
======== ======= =======
ASSETS(c):
Precision Machining and Assembly(b)................. $ 24,494 $15,417 $17,249
Optical Systems..................................... 7,861 4,484 4,465
Corporate Assets.................................... 3,584 1,451 1,564
Assets of Discontinued Operations................... 265 -- --
-------- ------- -------
TOTAL ASSETS.................................... $ 36,204 $21,352 $23,278
======== ======= =======
DEPRECIATION AND AMORTIZATION:
Precision Machining and Assembly(b)................. $ 11,552 $ 2,168 $ 1,903
Optical Systems..................................... 433 634 458
-------- ------- -------
TOTAL DEPRECIATION AND AMORTIZATION............. $ 11,985 $ 2,802 $ 2,361
======== ======= =======
CAPITAL EXPENDITURES:
Precision Machining and Assembly.................... $ 1,397 $ 528 $ 1,847
Optical Systems..................................... 531 164 392
-------- ------- -------
TOTAL CAPITAL EXPENDITURES...................... $ 1,928 $ 692 $ 2,239
======== ======= =======
</TABLE>
- --------
(a) Reflected in operating loss for the year ended April 30, 1993 are costs
associated with the Corporate debt restructuring activities. These costs
as allocated amounted to $1,500 to the Precision Machining and Assembly
Segment and $400 to the Optical Systems Segment.
(b) During the year ended April 30, 1993, an impairment in excess of cost over
fair value of purchased subsidiaries, in the amount of $8,995 was charged
to operations (see Note 5).
(c) In connection with the comprehensive restructuring accomplished in 1994,
the Company implemented a quasi-reorganization and as a result recorded a
charge of approximately $7,378 to accumulated deficit to eliminate the
remaining unamortized value of the excess of cost over fair value of
purchased subsidiaries (see Note 7).

F-46
<PAGE>

PRECISION AEROTECH, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1995 1996
--------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................. $ 240 $ --
Accounts receivable, net.............................. 4,664 5,500
Inventories........................................... 7,700 9,057
Deferred tax assets................................... 961 1,003
Prepaid expenses and other current assets............. 103 127
------- -------
TOTAL CURRENT ASSETS................................ 13,668 15,687
NET PROPERTY, PLANT & EQUIPMENT......................... 9,535 9,576
OTHER NON-CURRENT ASSETS................................ 75 39
------- -------
TOTAL ASSETS........................................ $23,278 $25,302
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 3,130 $ 4,272
Income taxes payable.................................. 235 654
Current portion of long-term debt and capital lease
obligation 1,227 1,455
Accrued expenses...................................... 3,370 3,013
------- -------
TOTAL CURRENT LIABILITIES........................... 7,962 9,394
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less
current portion........................................ 13,690 13,506
DEFERRED TAX LIABILITIES................................ 820 659
SHAREHOLDERS' EQUITY:
COMMON STOCK............................................ 8 8
ADDITIONAL PAID-IN CAPITAL.............................. 735 735
RETAINED EARNINGS since May 1, 1994 ($15,927 accumulated
deficit eliminated in quasi-reorganization)............ 63 1,000
------- -------
TOTAL SHAREHOLDERS' EQUITY.......................... 806 1,743
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $23,278 $25,302
======= =======
</TABLE>

See accompanying notes to consolidated condensed financial statements.

F-47
<PAGE>

PRECISION AEROTECH, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS--(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
NET SALES................................................... $ 25,134 $ 32,819
Cost of sales............................................... 19,582 24,484
-------- --------
GROSS PROFIT................................................ 5,552 8,335
Selling, general and administrative expenses................ 4,970 5,587
(Income) on disposal of subsidiary.......................... (97) --
-------- --------
OPERATING INCOME............................................ 679 2,748
Interest expense............................................ (1,288) (1,201)
Other income (expense), net................................. 27 16
-------- --------
TOTAL OTHER EXPENSE......................................... (1,261) (1,185)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... (582) 1,563
INCOME TAX EXPENSE.......................................... 19 626
-------- --------
NET INCOME (LOSS)........................................... $ (601) $ 937
======== ========
EARNINGS (LOSS) PER SHARE................................... $ (.76) $ 1.19
======== ========
Weighted average number of common shares outstanding........ 789,250 789,250
</TABLE>

See accompanying notes to consolidated condensed financial statements.

F-48
<PAGE>

PRECISION AEROTECH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW--(UNAUDITED)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (601) $ 937
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property, plant and
equipment............................................. 1,781 1,802
Deferred income taxes.................................. -- (203)
Provision for losses on inventory...................... 27 (104)
Loss on disposal of assets............................. 2 --
Decrease (increase) in accounts receivable............. (54) (836)
Decrease (increase) in inventories..................... (434) (1,253)
Decrease (increase) in prepaid expenses and other
current assets........................................ (75) (24)
Decrease (increase) in non-current assets.............. (45) 36
Increases (decrease) in accounts payable............... 1,235 796
Increases (decrease) in accrued expenses............... 219 (357)
Increases (decrease) in income taxes payable........... -- 419
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 2,055 1,213
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................... (584) (554)
Proceeds from disposal of assets....................... 1 --
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES.............. (583) (554)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt........................... 3,828 6,300
Principal payments on long-term debt and capital lease
obligations........................................... (5,794) (7,545)
Outstanding checks in excess of available cash
balances.............................................. -- 346
-------- --------
NET CASH (USED IN) FINANCING ACTIVITIES.............. (1,966) (899)
-------- --------
NET (DECREASE) IN CASH............................... (494) (240)
CASH AT BEGINNING OF PERIOD................................ 711 240
-------- --------
CASH AT END OF PERIOD...................................... $ 217 $ --
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest................................................ $ 1,288 $ 1,201
Income taxes............................................ -- 423
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Capital equipment acquired under capital leases............ 1,222 1,289
</TABLE>

See accompanying notes to consolidated condensed financial statements.

F-49
<PAGE>

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

JANUARY 31, 1996
(DOLLARS IN THOUSANDS)

NOTE A--INTERIM FINANCIAL STATEMENTS

The preceding interim consolidated condensed financial statements
("statements") should be read in conjunction with the Registrant's audited
financial statements for the year ended April 30, 1995.

The preceding statements reflect all adjustments which are, in the opinion
of management, necessary for a fair statement of financial position at January
31, 1996 and the results of operations for the period then ended. All
adjustments are of a normal recurring nature. The financial statements have
not been audited or reviewed.

NOTE B--BACKLOG

Backlog of unfilled orders for which contractual commitments have been
received as of January 31, 1996 was $32,600.

F-50
<PAGE>

PRODUCTS AND CAPABILITIES

OPTICS

Pictures with title description: the reflective front surface and the light-
weighted back of a beryllium mirror used for an electro-optic sensor system,
accompanied by the following additional language: designs and manufactures
precision metal optics, fabricated from either beryllium or aluminum, for use
as rotary monogons and polygons, as well as fold, head and aspheric mirrors,
using sophisticated processing equipment

PRECISION MACHINING SERVICES

Picture with title description: a machinist measuring a product that has just
been machined described as microprecision machining of an inertial measurement
unit, accompanied by the following additional language: machines large and
complex structures from specialty materials such as beryllium and quartz, to a
tolerance of 0.025 microns in multiple axes

ELECTRONICS

Picture with title description: laser interferometers and optical encoder,
accompanied by the following additional language: designs and manufactures
opto-electronic sensors such as encoders and laser interferometers, as well as
high-performance motor drives, speed and position controllers

MAGNETICS

Picture with title description: assortment of high-performance motors,
accompanied by the following additional language: designs and manufactures
high-performance AC, brush and brushless DC motors and precision resolvers
using state-of-the-art magnetic designs and technologies

SYSTEMS INTEGRATION

Picture with title description: a large area flat panel electrical prober,
accompanied by the following additional language: integrates motion control
components and subsystems into higher-level systems, which incorporate machine
vision, robotic material handling and precision linear and rotary actuation

BEARINGS & CONNECTORS

Picture with title description: precision ball bearings and connectors,
accompanied by the following additional language: designs and manufactures
terminal blocks and connectors and distributes precision ball bearings and
value-added services [Company Logo here]
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this of-
fering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been au-
thorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the shares of Common Stock to which it relates or an offer to, or a
solicitation of, any person in any jurisdiction where such an offer or solici-
tation would be unlawful. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company or that information
herein is correct as of any time subsequent to the date hereof.

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TABLE OF CONTENTS

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<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 12
Price Range of Common Stock.............................................. 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 27
Management............................................................... 37
Certain Transactions..................................................... 44
Principal and Selling Shareholders....................................... 46
Description of Capital Stock............................................. 48
Shares Eligible for Future Sale.......................................... 52
Underwriting............................................................. 54
Legal Matters............................................................ 55
Experts.................................................................. 55
Available Information.................................................... 56
Glossary of Terms........................................................ 57
Index to Consolidated Financial Statements............................... F-1
</TABLE>

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1,528,550 SHARES

AXSYS
-----
TECHNOLOGIES

COMMON STOCK

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PROSPECTUS

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NationsBanc Montgomery Securities, Inc.

Furman Selz

Oppenheimer & Co., Inc.

, 1997

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