FLIR SYSTEMS INC, S-1, 1999-11-10

FLIR SYSTEMS INC
S-1, 1999-11-10
SEARCH, DETECTION, NAVAGATION, GUIDANCE, AERONAUTICAL SYS

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<PAGE>

As filed with the Securities and Exchange Commission on November 10, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933

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FLIR SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Oregon 3812 93-0708501
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)

16505 S.W. 72nd Avenue
Portland, Oregon 97224
(503) 684-3731
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices)

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J. Kenneth Stringer III
President and Chief Executive Officer
FLIR Systems, Inc.
16505 S.W. 72nd Avenue
Portland, Oregon 97224
(503) 684-3731
(Name, address, including zip code and telephone number, including area code,
of agent for service)

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Copies to:
Gregory E. Struxness, Esq.
Ater Wynne LLP
222 S.W. Columbia, Suite 1800
Portland, OR 97201
(503) 226-1191

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Approximate date of commencement of proposed sale to the public:

As soon as practicable after the Registration Statement becomes effective.

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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box:
[_]

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 ("Securities Act"), other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box.

CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Proposed
Amount Maximum Offering Maximum
Title of Each Class of to be Price Aggregate Amount of
Securities to be Registered Registered Per Share(1) Offering Price(1)(2) Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 no
par value(2).......... 2,107,552 shares $14.75 $31,086,392 $8,643
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee. The estimate is made pursuant to Rule 457(c) under the
Securities Act.
(2) Including associated Preferred Stock Purchase Rights. Prior to the
occurrence of certain events, the Preferred Stock Purchase Rights will not
be evidenced or traded separately from the Common Stock.

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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Prospectus is not complete and may be changed. The +
+securities being offered may not be sold until the Registration Statement +
+filed with the Securities and Exchange Commission is effective. This +
+Prospectus is not an offer to sell these securities and it is not soliciting +
+an offer to buy these securities in any state where the offer or sale is +
+prohibited. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1999.

2,107,552 Shares

FLIR SYSTEMS, INC.

Common Stock
(Par Value $0.01 per Share)
-----------

The Selling Shareholders identified in this prospectus are offering 2,107,552
shares of FLIR Systems, Inc. Common Stock. FLIR's Common Stock is traded on the
Nasdaq National Market under the symbol "FLIR." On November 9, 1999, the last
reported sale price for the Common Stock, as reported on the Nasdaq National
Market was $14.31 per share. We will not receive any of the proceeds from the
sale of shares by the Selling Shareholders, and we are not offering any shares
for sale under this Prospectus. See "Plan of Distribution" for a description of
sales or distributions of the shares by the Selling Shareholders.

-----------

INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

The date of this Prospectus is November , 1999
<PAGE>

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different.
This document may only be used where it is legal to sell these securities. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of the common stock. References to "FLIR," "WE," "US" and "OUR" refer
to FLIR Systems, Inc. and its subsidiaries.
----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 13
Price Range of Common Stock............................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Selected Consolidated Financial Data...................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 25
Management................................................................ 35
Compensation of Executive Officers........................................ 39
Certain Transactions and Relationships.................................... 42
Stock Owned by Management and Principal Shareholders...................... 43
Selling Shareholders...................................................... 45
Plan of Distribution...................................................... 46
Shares Eligible for Future Sale........................................... 47
Description of Capital Stock.............................................. 49
Legal Matters............................................................. 52
Experts................................................................... 52
Additional Information.................................................... 52
Index to Consolidated Financial Statements................................ F-1
</TABLE>
<PAGE>

PROSPECTUS SUMMARY

This summary highlights selected information contained in this Prospectus.
This summary does not contain all of the information you should consider before
purchasing stock in this offering. You should read the entire Prospectus,
especially "Risk Factors" and the Financial Statements and Notes, before
deciding to invest in our Common Stock.

FLIR Systems, Inc.

We are a world leader in the design, manufacture and marketing of thermal
imaging and broadcast camera systems for a wide variety of applications in the
commercial and government markets. Our state-of-the-art products include
handheld and ground based systems, as well as systems mounted on ships,
helicopters and airplanes. Our thermal imaging systems use advanced
technologies that detect infrared radiation, or heat, enabling the operator to
measure minute temperature differences and to see objects in daylight or total
darkness and through smoke, haze and most types of fog. Our broadcast camera
systems consist of high performance TV cameras and are frequently mounted on
helicopters. They are used by local television news stations that frequently
use them to film and report on breaking news stories from the air. We have
recently begun to develop and market products which use "uncooled" thermal
imaging technology. This advanced technology allows us to build smaller, less
expensive, more energy efficient products and is creating new markets and new
product applications.

Our business is organized around two principal markets, commercial and
government. The commercial market includes:

. condition monitoring (of equipment)

. research and development

. manufacturing process control

. airborne observation and broadcast

The government market includes:

. search and rescue

. federal drug interdiction, surveillance and reconnaissance

. navigation safety

. border and maritime patrol

. environmental monitoring

. ground based security

Historically, the majority of our revenue has come from government sales.
However, we have been shifting our product mix in favor of the commercial
market, which now provides the majority of our revenues--66.3% last year.

We believe we have one of the largest sales and marketing organizations in
the industry. It effectively covers the world with a combination of direct
sales, independent representatives and distributors, application engineers and
service centers. In the commercial market our customers range from local
television news stations to global corporations. In the government market our
customers range from local police departments to military organizations.

3
<PAGE>

We intend to continue growing internally as well as through the acquisition
of complementary businesses, product lines or technologies. Recent acquisitions
include AGEMA Infrared Systems AB, a Swedish corporation, and certain of its
affiliates, collectively AGEMA, in December 1997, and Inframetrics, Inc., a
Delaware corporation, in March 1999. AGEMA was the world leader in the design,
manufacture and marketing of handheld infrared cameras for detecting and
measuring temperature differences for a wide variety of commercial and research
applications. Inframetrics was one of the world's leading suppliers of
commercial thermal imaging systems.

We were incorporated in Oregon in 1978 and maintain our executive offices at
16505 S.W. 72nd Avenue, Portland, Oregon 97224. Our telephone number is 503-
684-3731. AGEMA, ThermoVision and InfraCAM are registered trademarks, and we
believe that all of our product names are trademarks, which belong to us. This
Prospectus also includes names and marks of other companies.

The Offering

<TABLE>
<S> <C>
Common Stock offered by the Selling Shareholders........... 2,107,552 shares
Common Stock outstanding after the Offering................ 14,256,996 shares(1)
Nasdaq National Market Symbol.............................. FLIR
</TABLE>
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(1) Based upon shares outstanding on June 30, 1999. Excludes (i) 1,749,443
shares of Common Stock reserved for issuance upon exercise of stock options
outstanding as of June 30, 1999 at a weighted average exercise price of
$13.98, and (ii) 1,447,608 shares of Common Stock reserved for issuance upon
exercise of options available for grant under our stock option plans as of
June 30, 1999. See Notes 12 and 13 to the Consolidated Financial Statements.

4
<PAGE>

Summary Financial Data

<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 30,
---------------------------------------------------------- -----------------
1994 1995 1996 1997(1) 1998 1998 1999(2)
------- ------- ------------ -------------------------- ------- --------
(unaudited) (in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Commercial............. $36,142 $40,262 $ 54,447 $ 86,656 $ 138,397 $61,647 $ 56,288
Government............. 42,356 40,397 57,338 58,278 70,225 27,854 20,352
------- ------- ------------ ------------ ------------ ------- --------
Total revenue........ 78,498 80,659 111,785 144,934 208,622 89,501 76,640
Cost of goods sold...... 41,068 40,233 57,864 86,835 95,329 41,801 50,056
------- ------- ------------ ------------ ------------ ------- --------
Gross profit......... 37,430 40,426 53,921 58,099 113,293 47,700 26,584
Operating expenses:
Research and
development........... 10,955 11,212 13,574 17,607 26,958 13,518 13,813
Selling and other
operating costs....... 18,298 23,008 29,989 41,225 58,933 27,487 28,294
Combination costs...... -- -- -- 36,450 -- -- 6,110
------- ------- ------------ ------------ ------------ ------- --------
Total operating
expenses............ 29,253 34,220 43,563 95,282 85,891 41,005 48,217
Earnings (loss) from
operations............. 8,177 6,206 10,358 (37,183) 27,402 6,695 (21,633)
Interest income......... 962 700 1,258 540 728 465 18
Interest expense and
other.................. (1,393) (2,402) (1,470) (4,093) (5,199) (2,673) (2,265)
------- ------- ------------ ------------ ------------ ------- --------
Earnings (loss) before
income taxes........... 7,746 4,504 10,146 (40,736) 22,931 4,487 (23,880)
Income tax provision
(benefit).............. 1,022 549 2,723 (11,548) 6,155 1,249 (7,642)
------- ------- ------------ ------------ ------------ ------- --------
Net earnings (loss) from
continuing operations.. 6,724 3,955 7,423 (29,188) 16,776 3,238 (16,238)
Discontinued operations,
net of taxes........... -- -- (830) -- -- -- --
------- ------- ------------ ------------ ------------ ------- --------
Net earnings (loss)..... $ 6,724 $ 3,955 $ 6,593 $ (29,188) $ 16,776 $ 3,238 $(16,238)
======= ======= ============ ============ ============ ======= ========
Net earnings (loss) per
share:
Basic.................. $ 0.93 $ 0.54 $ 0.89 $ (3.69) $ 1.29 $ 0.27 $ (1.15)
======= ======= ============ ============ ============ ======= ========
Diluted................ $ 0.89 $ 0.52 $ 0.86 $ (3.69) $ 1.24 $ 0.26 $ (1.15)
======= ======= ============ ============ ============ ======= ========
Weighted average shares
outstanding(3):
Basic.................. 7,226 7,323 7,438 7,920 12,983 11,964 14,163
======= ======= ============ ============ ============ ======= ========
Diluted................ 7,513 7,600 7,701 7,920 13,510 12,567 14,163
======= ======= ============ ============ ============ ======= ========
</TABLE>

<TABLE>
<CAPTION>
December 31,
------------------------------------------ June 30,
1994 1995 1996 1997 1998 1999
------- ------- -------- -------- -------- -----------
(unaudited) (in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......... $49,238 $50,829 $ 58,596 $ 50,774 $ 92,393 $ 51,406
Total assets............ 69,055 82,202 104,860 185,278 235,989 230,298
Short-term debt......... 437 2,491 8,529 32,706 42,638 68,949
Long-term debt,
excluding current
portion................ 13,516 13,482 24,106 20,634 19,296 798
Total shareholders'
equity................. 42,754 47,150 49,456 75,955 125,982 110,226
</TABLE>
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(1) In connection with the acquisition of AGEMA, which was effective on
December 1, 1997, we recorded a one-time charge of $52.5 million. The
charge consisted of $36.4 million of in-process research and development
and merger-related costs, which were included as a separate line in
operating expenses, and $16.1 million of inventories due to the creation of
duplicative product lines, which are included in cost of goods sold. These
charges and related reserves are more fully discussed in Note 16 to the
Consolidated Financial Statements.
(2) In connection with the merger with Inframetrics, Inc., which was effective
on March 30, 1999, we recorded a one time charge of $24.3 million in the
quarter ended March 31, 1999. The charge consisted of $18.2 million of
inventories due to the creation of duplicative product lines, which is
included in cost of goods sold, and $6.1 million of transaction related
costs, which are included in combination costs, a separate line in
operating expenses. These charges and related reserves are more fully
discussed in Note 17 to the Consolidated Financial Statements.
(3) See Note 1 of Notes to the Consolidated Financial Statements for an
explanation of the determination of shares used in computing net earnings
(loss) per share.

5
<PAGE>

RISK FACTORS

This prospectus contains forward-looking statements within the meaning of
the Securities Litigation Reform Act of 1995 that are based on current
expectations, estimates and projections about our business, management's
beliefs and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "sees," "estimates" and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual outcomes and results may differ materially from
what is expressed or forecasted in such forward-looking statements due to
numerous factors, including, but not limited to, those discussed below and
elsewhere in this prospectus. In addition, such statements could be affected by
general industry and market conditions and growth rates, and general domestic
and international economic conditions. Such forward-looking statements speak
only as of the date of this prospectus and we do not undertake any obligation
to update any forward-looking statement to reflect events or circumstances
after the date of this prospectus. If we do update or correct one or more
forward-looking statements, investors and others should not conclude that we
will make additional updates or corrections with respect thereto or with
respect to other forward-looking statements.

An investment in our Common Stock is risky. You should carefully consider
the following risk factors in addition to the remainder of this prospectus
before purchasing our Common Stock. In addition, you should know that the risks
and uncertainties described below are not the only ones we face. Unforeseen
risks could arise and problems or issues that we now view as minor, could
become more significant.

If we were unable to adequately respond to any of the listed risks, our
business, financial condition and results of operations could be materially
adversely affected. Additionally, we cannot be certain or give any assurances
that any actions taken to lessen known risks and uncertainties will work. Our
inability to respond to any of the risks could cause the market price of our
Common Stock to decline, and you may lose all or part of your investment.

Financial Statement Issues

FLIR's operating results fluctuate quarterly and by season. Our quarterly
operating results have fluctuated widely in the past and we expect this to
continue. Some of the reasons for the fluctuations include:

. the timing of significant orders from and shipments to customers

. a substantial portion of our sales are made in the last month of each
quarter, with sales frequently concentrated in the last week or days of
the quarter

. the timing and market acceptance of our or competitors' new products or
technological advances

. the timing of the release of government appropriated funds for
procurement of our products

. our success in developing, introducing and shipping new products

. the mix of distribution channels through which we sell products

. changes in our or competitors' pricing policies

. the timing and amount of any inventory write downs

. our ability to obtain sufficient supplies of scarce components

. foreign currency fluctuations

. costs associated with the acquisition of other businesses, product lines
or technologies

. our ability to integrate acquired businesses, product lines or
technologies

. general economic conditions, both domestically and internationally

6
<PAGE>

Seasonal fluctuations in our operating results, particularly the increase in
sales we generally experience every year in the fourth quarter, result from:

. the seasonal pattern of contracting by the U.S. and certain foreign
governments

. the frequent requirement of international customers to take delivery of
equipment prior to the end of December due to funding considerations

. the tendency of commercial enterprises to fully utilize yearly capital
budgets prior to expiration

Due to the factors identified above and other factors, our quarterly
operating results have in the past and may in the future fail to meet the
expectations of public market analysts and investors. In fact, our revenue and
net income for the first quarter of 1999 failed to meet the expectations of
analysts as a result of a substantial decrease in orders from government
customers and, to a lesser extent, disruptions in the sales channel for
commercial customers resulting from the delay in obtaining Justice Department
approval for the Inframetrics acquisition. In that and other cases, the market
price of our Common Stock has been adversely affected and it is probable that
other such events in the future would have a similar affect on the market price
of our Common Stock. As a result of the fluctuations in our quarterly operating
results, we believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful and should not be relied upon as
indicators of future performance.

Government and international sales result in high accounts receivable. We
generally experience high levels of receivables due to long payment cycles for
U.S. Government sales and sales to customers outside the United States
("International Revenue") as well as long payment terms for certain OEM and
other customers. Additionally, because of the high unit prices of our products,
amounts owed by specific customers may be substantial at any given time and if
not paid could affect our liquidity. Our receivables levels relative to cash
from operations may also result from time to time in liquidity deficiencies
requiring more borrowing. Our accounts receivable at June 30, 1999 amounted to
$68.7 million. We have established reserves for uncollectible accounts which
management feels are adequate, but such reserves might not be enough. If such
reserves are not enough, our business, financial condition and results of
operations could be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

Stock Ownership Issues

Existing shareholder controls a significant percentage of outstanding
stock. Spectra-Physics AB, the former parent company of AGEMA, and its
affiliates, collectively referred to as Spectra, beneficially own approximately
29.0% of the outstanding shares of Common Stock. In February 1999, Thermo
Instrument Systems Inc., a majority-owned, publicly traded subsidiary of Thermo
Electron Corporation purchased 98% of the outstanding shares of Spectra. We are
obligated to use reasonable best efforts to maintain two Spectra designees on
our Board so long as Spectra owns more than 20% but less than 30% of our
outstanding Common Stock. By virtue of its stock ownership position and Board
representation, Thermo Electron, through its ultimate beneficial ownership of
Spectra's shares of our Common Stock, will be able to significantly influence
our direction and policies, the election of our Board of Directors and the
outcome of any other matter requiring shareholder approval, including any
merger, consolidation, sale of substantially all of our assets or other change
of control transaction. See "Principal and Selling Shareholders."

Future sales of FLIR Common Stock could depress our stock price. As of
September 30, 1999, there were 14,347,766 shares of Common Stock outstanding,
of which 2,107,552 shares are being offered hereby. In addition, Spectra has
certain registration rights that allow it to require us to register for resale
all or a portion of a total of 4,162,000 shares of Common Stock owned by them
at any time. We originally reserved 4,269,400 shares of Common Stock for
issuance pursuant to our stock option plans. Of this amount 1,573,723 shares
were subject to outstanding options as of September 30, 1999. Sales of a
substantial number of shares of Common Stock in the public market or the
prospect of such sales, whether through this offering or otherwise, could
adversely affect the market price for our Common Stock. See "Shares Eligible
for Future Sale."

7
<PAGE>

FLIR's stock price could fluctuate. The market price of our Common Stock has
fluctuated in the past and is likely to fluctuate in the future. Factors that
may cause price fluctuations include:

. fluctuations in our quarterly operating results

. new product announcements by us or our competitors

. changes in product prices by us or our competitors

. technological innovations

. military or government budget developments in the United States and other
countries

In addition, the securities markets have experienced significant price and
volume fluctuations, and the market prices of technology companies have been
particularly affected by events unrelated to the companies' operating
performances. In the past, companies that have experienced stock price
volatility have been the object of securities class action litigation. If we
were subject to such litigation, it could result in substantial costs and a
diversion of management's attention and resources, which would have a material
adverse effect on our business, financial condition and results of operations.

Market and Technology Issues

The thermal imaging market is subject to rapid technological change. Since
its inception, the thermal imaging market has experienced rapid technological
change. Such change requires us to devote significant resources to
incorporating new technology into our products while often maintaining existing
products that use older technology. For example, the introduction of uncooled
detector technology has led to the introduction of our AGEMA 570, ThermoVision
and ThermoVision Sentry products which are smaller, lighter and solid state.
However, we must continue to maintain some of our products that incorporate the
older, cooled technology because that technology remains more appropriate for
some of our customer's needs and requirements. Although we expect sales of our
products utilizing cooled technology to continue generating a significant
portion of our revenue, we must always be prepared to offer products that
incorporate new technology. Delays in the introduction or shipment of new or
enhanced products, our inability to timely develop and introduce such new
products, the failure of such products to gain significant market acceptance,
problems associated with new product transitions or the introduction or market
acceptance of competing technology that renders our technology obsolete or less
desirable would have a material adverse effect on our business, financial
condition and results of operations.

Competition in the market for thermal imaging equipment is significant. The
rapid technological advances just discussed also result in increasing
competition within our industry. The speed with which companies can identify
new applications for thermal imaging, develop products to meet those needs and
supply commercial quantities at low prices to the market are important
competitive factors. Additionally, our products compete indirectly with
numerous other products such as image intensifiers and low-light cameras for
limited military and governmental funds. Finally, many of our competitors have
greater financial, technical and marketing resources. All of these factors
result in greater challenges from our existing competitors as well as
increasing competition from new challengers and require us to continue
investing in and focusing on research and development and new product
innovation. No assurance can be given that we will be able to compete
effectively in the future. See "Business--Competition."

FLIR depends upon the successful development and acceptance of new
products. Our future success depends on our ability to continue to improve our
existing products and to develop new products using the latest technology that
can satisfy customer requirements. For example, our near term success will
depend on the continued acceptance of the AGEMA 570, sales of which are
expected to generate a substantial amount of our annual revenue. We are also
investing a significant amount of our financial resources in the enhancement of
some of our existing products. We cannot be certain that we will successfully
complete these enhancements within the necessary time period or that customers
will accept our new products, or any future products. Any

8
<PAGE>

failure to complete the enhancement of these products or the failure of our
current or future products to gain or maintain market acceptance could have a
material adverse effect on our business, financial condition and results of
operations. See "Business--Products."

FLIR may be unable to adequately protect its proprietary technology. Our
ability to compete successfully and achieve future revenue growth depends in
part on our ability to protect our proprietary technology and operate without
infringing the rights of others. To accomplish this, we rely on a combination
of patent, trademark and trade secret laws, confidentiality agreements and
contractual provisions to protect our proprietary rights. Although we currently
hold United States patents covering certain aspects of our technologies, we
cannot be certain that we will obtain additional patents or trademarks on our
technology, products and trade names. Furthermore, we cannot be certain that
our patents or trademarks will be sufficiently broad to protect our proprietary
rights or will not be challenged or circumvented by competitors. Likewise, we
cannot be certain that measures taken to protect our proprietary rights will
adequately deter their misappropriation or disclosure. Any failure by us to
meaningfully protect our intellectual property could have a material adverse
effect on our business, financial condition and results of operations.
Moreover, because intellectual property does not necessarily represent a
barrier to entry into the thermal imaging industry, there can be no assurance
that we will be able to maintain our competitive advantage or that competitors
will not develop capabilities equal or superior to ours. See "Business--
Proprietary Rights."

FLIR's products may suffer from defects or errors. Our products use complex
system designs and components that may contain errors or defects, particularly
when new technology is incorporated into our products or new versions are
released. While we have not yet had to recall a product, if any of our products
are defective, we might be required to redesign or recall those products or pay
damages. Such an event could result in significant expenses, disrupt sales and
affect our reputation and that of our products which would have a material
adverse effect on our business, financial condition and results of operations.
Furthermore, product defects could result in product liability. We maintain
product liability insurance but cannot be certain that it is adequate or will
remain available on acceptable terms.

Component Supply Issues

FLIR depends on suppliers to provide crucial components for its products. We
rely on a number of sole source and limited source suppliers to provide certain
key components for our products. Accordingly, we could experience a scarcity in
the supply of some of our components. In particular, we have a contract with
Lockheed Martin Corporation IR Imaging Systems ("Lockheed Martin") for the
supply of uncooled detectors for integration into our AGEMA 570 product line.
Lockheed Martin is currently one of three large producers of specialized
uncooled detectors. Subject to certain exceptions, the contract gives us the
exclusive right to purchase uncooled detectors for use in the commercial market
and a limited, nonexclusive right to purchase uncooled detectors for use in the
government market. Under the contract, we have the corresponding obligation to
purchase uncooled detectors solely from Lockheed Martin for commercial
applications. Currently, the AGEMA 570, ThermoVision and ThermoVision Sentry
are our only products that use the Lockheed Martin detectors. However, we
intend to use uncooled detectors supplied by Lockheed Martin in other products,
such as the AGEMA 1000.The contract provides for the monthly delivery of a
fixed number of uncooled detectors, which may be increased or decreased by us
within certain limits. Based on current and anticipated production levels and
supply requirements, we expect that the contract will continue through 2001.
However, we may not be able to successfully negotiate a new contract with
Lockheed Martin or another company for uncooled detectors after the Lockheed
Martin contract expires. Any failure by us to renew the contract or identify
another source of uncooled detectors would have a material adverse effect on
our business, financial condition and results of operations.

Late deliveries or inadequate supplies of important components are
possible. Based on past experience, we expect to occasionally receive late
deliveries or to experience inadequate supplies of certain components. For
example, if the components provided by Lockheed Martin or any other significant
supplier were to become unavailable, our manufacturing operations would be
disrupted. Unless we could identify and qualify acceptable

9
<PAGE>

replacement components or redesign our products with different components, we
might not be able to obtain necessary components at an acceptable price. Any
extended interruption in the supply of sole or limited source components would
have a material adverse effect on our business, financial condition and results
of operations.

Management and Employee Issues

FLIR depends on key senior management and on qualified technical and sales
personnel. Our future success depends on the efforts and continued services of
our key executives and our ability to attract and retain qualified technical
and sales personnel. Significant competition exists for such personnel and we
cannot assure the retention of our key technical and sales personnel or our
ability to attract, assimilate and retain other highly qualified technical and
sales personnel as may be required in the future. We also cannot assure that
employees will not leave and subsequently compete against us. We do not
maintain key person life insurance. If we are unable to attract and retain key
personnel, our business, financial condition and results of operations could be
adversely affected. See "Management."

Rapid growth strains FLIR's resources. We expect our rapid growth to
continue causing significant strain on our managerial, operational and
financial resources. We have grown from 313 employees in 1993 to over 800
current employees and expect to continue hiring. Our future success will depend
upon our ability to manage, train and expand our employee base. In order to do
this, we must continue implementing and improving our operational,
administrative and financial systems and controls. No assurance can be given
that these factors will not have a material adverse effect on our future sales
and operations and, consequently, on our business, financial condition and
results of operations.

FLIR may experience difficulties in managing recent or future
acquisitions. We may experience difficulties in assimilating the personnel,
operations, products and technology acquired in the AGEMA acquisition in 1997,
the Inframetrics acquisition in 1999 and any future acquisitions. Additionally,
we could lose the key personnel from any of the companies that we acquire. Any
of these difficulties could disrupt our ongoing business, delay the release of
our financial results, distract our management and employees and increase our
expenses. Furthermore, we might have to incur additional debt or issue
additional equity securities to pay for any future acquisitions. The issuance
of any additional equity securities could dilute our existing shareholder's
ownership. No assurance can be given that we will realize the anticipated
benefits of any acquisition or that such acquisition will not have a material
adverse effect on our business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

Customer Issues

A reduction in government purchasing could significantly decrease revenue. A
substantial portion of our revenue is derived from sales to U.S. Government
agencies and our business will continue to be substantially dependent upon such
purchases. Accordingly, our revenue could be adversely impacted by governmental
spending cuts, general budgetary constraints, and complex and competitive
governmental procurement processes. Additionally, even though most of our
government sales are not made for defense applications, a significant reduction
in purchases of thermal imaging systems for defense applications could result
in certain of our competitors committing more attention and resources to non-
defense applications, thereby exposing us to greater competitive pressures in
our primary markets. No sales to a single agency of the U.S. Government
accounted for more than 10% of our revenue last year, but aggregate sales to
U.S. Government agencies did account for 17.5% of our revenue. A significant
decline in our sales to U.S. or foreign governments for any reason would have a
material adverse effect on our business, financial condition and results of
operations.

The loss of a major customer would cut revenues. Excluding our combined
sales to U.S. Government agencies, we do not typically have continuing
customers whose purchases total more than 10% of our annual revenue. However,
from time to time we do have purchase commitments from individual customers
that would

10
<PAGE>

be greater than 10% of our annual revenue if completed within that year. The
loss of such a customer could have a material adverse effect on our business,
financial condition and results of operations.

International Sales Issues

FLIR faces risks from international sales and currency fluctuations. We
market and sell our products worldwide and anticipate that international sales
will continue to account for a significant portion of our revenue. Our
international sales are subject to a number of risks, including:

. the imposition of governmental controls

. export license requirements

. restrictions on the export of critical technology

. political and economic instability

. trade restrictions

. labor union activities

. changes in tariffs and taxes

. difficulties in staffing and managing international operations

. general economic conditions

Historically, currency fluctuations have had little impact on our revenue
recognition. However, since we seek to reduce our exposure to currency
fluctuations by denominating the majority of our international sales in U.S.
dollars, a decrease in the value of foreign currencies relative to the U.S.
dollar could make our products less price-competitive. No assurance can be
given that these factors will not have a material adverse effect on our future
international sales and operations and, consequently, on our business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."

Remediation of problems related to the European monetary conversion may
involve significant time and expense and may reduce our future sales. We are
aware of the issues associated with the forthcoming changes in Europe aimed at
forming a European economic and monetary union. One of the changes resulting
from this union required member countries to irrevocably fix their respective
currencies to a new currency, the Euro, on January 1, 1999, at which date the
Euro became a functional legal currency of these countries. During the next
three years, business in member countries will be conducted in both the
existing national currency, such as the Deutsche Mark, and the Euro. As a
result, companies operating in or conducting business in member countries will
need to ensure that their financial and other software systems are capable of
processing transactions and properly handing these currencies, including the
Euro.

Because of the extensive European operations of our AGEMA subsidiary, the
Euro conversion might significantly impact our operations. We are currently
assessing the impact the conversion to the Euro will have on both our internal
systems and the products we sell. We will take appropriate corrective actions
based on the results of our assessment. We have not yet determined the cost
related to addressing this issue.

Miscellaneous Issues

FLIR's Articles, Bylaws and Shareholder Rights Plan as well as Oregon law
contain provisions that could discourage a takeover. Provisions of our Second
Restated Articles of Incorporation, First Restated Bylaws, Oregon law and our
Shareholder Rights Plan could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our shareholders. See
"Description of Capital Stock."

11
<PAGE>

Year 2000 remediation may involve significant time and expense and could
reduce future sales. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st Century dates from 20th Century dates. As a result, computer systems and
software used by many companies, including our customers and suppliers, may
need to be upgraded to comply with such "Year 2000" requirements. We are taking
steps to confirm that our products, computer systems and software and those of
our suppliers are Year 2000 compliant and to determine whether the failure of
such compliance would have a material adverse effect on our business, financial
condition and results of operations. Furthermore, we believe that the
purchasing patterns of customers and potential customers may be affected by
Year 2000 issues as companies expend significant resources to correct or patch
their current software systems for Year 2000 compliance. These expenditures may
result in a reduction in funds available to purchase our products and services,
which could result in a material adverse effect on our business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Impact of the Year 2000."

12
<PAGE>

USE OF PROCEEDS

We will not receive any proceeds from the sales or distribution of Common
Stock by the Selling Shareholders pursuant to this prospectus.

PRICE RANGE OF COMMON STOCK

The following table sets forth, for the periods indicated, the range of high
and low sale price per share of the Common Stock as reported by the Nasdaq
National Market.

<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Year Ended December 31, 1997
First Quarter................................................... $17.75 $13.25
Second Quarter.................................................. 17.75 14.75
Third Quarter................................................... 22.00 15.75
Fourth Quarter.................................................. 22.00 17.50
Year Ended December 31, 1998
First Quarter................................................... 20.63 16.75
Second Quarter.................................................. 21.63 17.25
Third Quarter................................................... 18.13 10.50
Fourth Quarter.................................................. 23.75 10.50
Year Ending December 31, 1999
First Quarter................................................... 23.53 17.13
Second Quarter ................................................. 18.81 11.75
Third Quarter................................................... 18.00 12.63
Fourth Quarter (through November 9, 1999)....................... 16.00 11.00
</TABLE>

On November 9, 1999, the reported last sale price of the Common Stock on the
Nasdaq National Market was $14.31 per share. As of September 30, 1999, there
were approximately 400 holders of record of the Common Stock and 14,347,766
shares then outstanding.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We
currently expect to retain our future earnings to fund the operation and
expansion of our business. We do not anticipate declaring or paying any cash
dividends in the foreseeable future.

13
<PAGE>

CAPITALIZATION

The following table sets forth our actual short-term debt and capitalization
at June 30, 1999. You should read this table in conjunction with the
Consolidated Financial Statements and related Notes included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
June 30, 1999
--------------
(in thousands)
<S> <C>
Short-term debt................................................. $ 68,949
========
Long-term debt.................................................. 798
--------
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued............................................... --
Common Stock, $.01 par value, 30,000,000 shares authorized,
14,256,996 shares issued and outstanding(1).................... 142
Additional paid-in capital...................................... 142,388
Accumulated deficit............................................. (30,493)
Accumulated other comprehensive loss............................ (1,811)
--------
Total shareholders' equity...................................... 110,226
--------
Total capitalization............................................ $111,024
========
</TABLE>
- --------
(1) Based upon shares outstanding on June 30, 1999. Excludes (i) 1,749,443
shares of Common Stock issuable upon exercise of outstanding options as of
June 30, 1999 at a weighted average exercise price of $13.98, and (ii)
1,447,608 shares of Common Stock reserved for issuance upon exercise of
options available for grant under our stock option plans as of June 30,
1999. See Notes 12 and 13 to the Consolidated Financial Statements.

14
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated statement of operations data for the years ended December
31, 1996, 1997 and 1998 and the consolidated balance sheet data as of December
31, 1997 and 1998 are derived from our Consolidated Financial Statements, which
have been audited by PricewaterhouseCoopers, LLP independent accountants,
except as they relate to Inframetrics, Inc., which financial statements were
audited by Ernst & Young LLP, independent accountants. Such Consolidated
Financial Statements are included elsewhere in this Prospectus. The
consolidated statement of operations data for years ended December 31, 1994 and
1995 and the consolidated balance sheet data as of December 31, 1994, 1995 and
1996 are derived from our unaudited consolidated financial statements which are
not included in this Prospectus. The balance sheet data as of June 30, 1999 and
the statement of operations data for the six months ended June 30, 1998 and
1999 are derived from unaudited consolidated financial statements included
elsewhere in this Prospectus. The unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments, which we consider
necessary for a fair presentation of our financial position and results of
operations for these periods. Historical results are not necessarily indicative
of future results.

When reviewing the selected consolidated financial data set forth below, it
is important that you also read the Consolidated Financial Statements and the
related Notes included in this Prospectus, as well as the next section of the
Prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

15
<PAGE>

<TABLE>
<CAPTION>
December 31,
---------------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
------- ----------- -------- -------- -------- -----------
(unaudited) (in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......... $49,238 $50,829 $ 58,596 $ 50,774 $ 92,393 $ 51,406
Total assets............ 69,055 82,202 104,860 185,278 235,989 230,298
Short-term debt......... 437 2,491 8,529 32,706 42,638 68,949
Long-term debt,
excluding current
portion................ 13,516 13,482 24,106 20,634 19,296 798
Total shareholders'
equity................. 42,754 47,150 49,456 75,955 125,982 110,226
</TABLE>
- --------
(1) In connection with the acquisition of AGEMA, which was effective on
December 1, 1997, we recorded a one-time charge of $52.5 million. The
charge consisted of $36.4 million of in-process research and development
and merger-related costs, which were included as a separate line in
operating expenses, and $16.1 million of inventories due to the creation of
duplicative product lines, which are included in cost of goods sold. These
charges and related reserves are more fully discussed in Note 16 to the
Consolidated Financial Statements.

(2) In connection with the merger with Inframetrics, Inc., which was effective
March 30, 1999, we recorded a one-time charge of $24.3 million in the
quarter ended March 31, 1999. The charge consisted of $18.2 million of
inventories due to the creation of duplicative product lines, which is
included in cost of goods sold, and $6.1 of transaction related costs,
which are included in combination costs, a separate line in operating
expenses. These charges and related reserves are more fully discussed in
Note 17 to the Consolidated Financial Statements.

(3) See Note 1 to the Consolidated Financial Statements for an explanation of
the determination of shares used in computing net earnings (loss) per
share.

16
<PAGE>

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

Except for historical information, the discussion in this Prospectus
contains certain forward-looking statements that involve risks and
uncertainties. Whenever possible, we use terms such as "expects,"
"anticipates," "intends,""plans," "believes," "sees," "estimates" and
variations of such words and similar expressions to identify forward-looking
statements. Our actual results could differ materially from those discussed in
this Prospectus. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors," as well as those discussed elsewhere
in this Prospectus.

Overview

FLIR was founded in 1978 and has become a world leader in the design,
manufacture and marketing of thermal imaging and broadcast camera systems for a
wide variety of commercial and government applications.

Our business is organized around two principal markets, commercial and
government. Historically, a majority of our revenue was derived from government
sales. However, we have shifted our product mix in favor of commercial
applications, which accounted for 66.3% and 59.8%, respectively, of our revenue
for the years ended December 31, 1998 and 1997. We continue to enhance our
state-of-the-art products within existing commercial and government markets, as
well as develop products for new market applications that use advanced thermal
imaging technology such as new "uncooled" detector technology that operates at
room temperature, allowing for systems that are cheaper, smaller, lighter, and
more energy efficient. Additionally, we have developed higher-margin image
analysis software tools that enhance the capability and customization of our
products. As hardware prices decline, the sophistication of image analysis
software and the incremental functionality provided by such analysis tools are
expected to become a more critical component of our products.

On March 30, 1999, we completed our merger with Inframetrics, Inc., a
privately held thermal imaging company headquartered in Billerica,
Massachusetts, by issuing approximately 2.3 million shares of our Common Stock
(including approximately 192,000 shares reserved for issuance upon the exercise
of outstanding options assumed by us in the merger) in exchange for all the
outstanding stock of Inframetrics. This merger increases our worldwide
commercial thermal imaging market share, enables us to expand our product
development efforts through the elimination of duplicative research and
development programs, creates an extensive sales and marketing organization and
allows us to more efficiently focus our manufacturing efforts. Inframetrics,
with 1998 sales of $54.7 million, is one of the major suppliers of commercial
thermal imaging systems in the world.

As a result of the merger with Inframetrics which was accounted for as a
pooling of interests (see Note 17 to the Consolidated Financial Statements),
the Consolidated Financial Statements and all amounts included in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations for all periods presented have been restated to reflect the combined
operations and financial position for all such periods. Such restatements had
no effect on previously reported separate results of operations or
shareholders' equity.

In connection with the merger with Inframetrics, we recorded a one-time
charge of $24.3 million in the quarter ended March 31, 1999. The charge
consisted of $18.2 million of inventories due to the creation of duplicative
product lines, which is included in cost of goods sold, and $6.1 of transaction
related costs, which are included in combination costs, a separate line in
operating expenses. These charges and related reserves are more fully discussed
in Note 17 to the Consolidated Financial Statements.

Effective December 1, 1997, we acquired AGEMA, headquartered in Stockholm,
Sweden. AGEMA was the world leader in the design, manufacture and marketing of
handheld infrared cameras for detecting and measuring temperature differences
for a wide variety of commercial and research applications. AGEMA reported
revenue of $52.4 million for the year ended December 31, 1997. However, because
the acquisition was accounted for as a purchase, our Consolidated Statement of
Operations for the year ended December 31, 1997 includes AGEMA's results only
for the month of December 1997.

17
<PAGE>

The acquisition of AGEMA was accomplished through the issuance of 4,162,000
shares of Common Stock, valued at $54.1 million, to Spectra-Physics AB, AGEMA's
parent company, in exchange for all the outstanding shares of AGEMA stock. In
connection with the acquisition we recorded a one-time charge of $52.5 million
in the quarter ended December 31, 1997. The charge consisted of $36.4 million
of in-process research and development and acquisition-related costs, which
were included as a separate line item in operating expenses, and $16.1 million
of inventories due to the creation of duplicative product lines, which were
included in cost of goods sold. In addition, we are amortizing a total of
approximately $20.6 million in intangible assets over periods ranging from 15
to 17 years. We have divided production responsibilities between our primary
facilities, with handheld and ground-based products manufactured in Stockholm
and government and airborne observation and broadcast products manufactured in
Portland.

International Revenue accounted for approximately 22.5%, 39.6% and 47.8% of
our revenue in 1996, 1997 and 1998, respectively. We anticipate that
international sales will continue to account for a significant portion of
revenue. With the acquisition of AGEMA contributing a significant volume of
sales denominated in foreign currencies, we have increased exposure to foreign
exchange fluctuations and changing dynamics of foreign competitiveness based on
variations in the value of the U.S. dollar relative to other currencies.

Results of Operations

The following table sets forth for the indicated periods certain items as a
percentage of revenue:

<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
--------------------- -------------------
1996 1997(1) 1998 1998 1999(2)
----- ------- ----- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Commercial....................... 48.7% 59.8% 66.3% 68.9% 73.4 %
Government....................... 51.3 40.2 33.7 31.1 26.6
----- ----- ----- -------- --------
Total Revenue.................. 100.0 100.0 100.0 100.0 100.0
Costs of goods sold.............. 51.8 59.9 45.7 46.7 65.3
----- ----- ----- -------- --------
Gross profit................... 48.2 40.1 54.3 53.3 34.7
Operating expenses:
Research and development......... 12.1 12.1 12.9 15.1 18.0
Selling and other operating
costs........................... 26.8 28.5 28.3 30.7 36.9
Combination costs................ -- 25.2 -- 0.0 8.0
----- ----- ----- -------- --------
Total operating expenses....... 38.9 65.8 41.2 45.8 62.9
Earnings (loss) from
operations.................... 9.3 (25.7) 13.1 7.5 (28.2)
Interest income................... 1.1 0.4 0.3 0.5 0.0
Interest expense and other........ (1.3) (2.8) (2.4) (3.0) (3.0)
----- ----- ----- -------- --------
Earnings (loss) before income
taxes............................ 9.1 (28.1) 11.0 5.0 (31.2)
Income tax provision (benefit).... 2.5 (8.0) 3.0 1.4 (10.0)
----- ----- ----- -------- --------
Net earnings (loss) from
continuing operations............ 6.6 (20.1) 8.0 3.6 (21.2)
Discontinued operations, net of
taxes............................ (0.7) -- -- 0.0 0.0
----- ----- ----- -------- --------
Net earnings (loss)............... 5.9% (20.1)% 8.0% 3.6% (21.2)%
===== ===== ===== ======== ========
</TABLE>
- --------
(1) Excluding the one-time charge of $52.5 million in connection with the
acquisition of AGEMA, cost of goods sold, gross profit, earnings (loss)
from operations and net earnings (loss) in 1997 would have been 48.8%,
51.2%, 10.6% and 5.7%, respectively.

(2) Excluding the one-time charge of $24.3 million in connection with the
acquisition of Inframetrics, cost of goods sold, gross profit, earnings
from operations and net earnings for the six months ended June 30, 1999
would have been 41.6%, 58.4%, 3.4% and 0.3%, respectively.

18
<PAGE>

Recent Developments

On June 1, 1999 we announced that we had accelerated our planned cost
reduction program associated with the integration of Inframetrics. We estimated
that this program, which included a reduction in the Company's global work
force from a peak of approximately 900 people worldwide to approximately
800 people, together with the elimination of duplicative overhead expense, the
consolidation of research and development and sales and marketing functions,
and other expense control measures, should reduce costs by approximately $10
million annually beginning in the third quarter of 1999. We recorded expenses
related to the termination costs in the quarter ended June 30, 1999. Such
termination costs approximated $370,000.

Six Months Ended June 30, 1999 and 1998

Revenue. Revenue for the six months ended June 30, 1999 decreased 14.4%,
from $89.5 million in the first half of 1998 to $76.6 million in the first half
of 1999. Commercial revenue for the six months ended June 30, 1999 decreased
8.7% from $61.6 million in the first half of 1998 to $56.3 million in first
half of 1999. The decrease in commercial revenue was primarily due to
disruptions encountered in the distribution channel as a result of the four
month delay in consummating the merger with Inframetrics caused by the delayed
approval of the transaction from the Department of Justice. This delay created
uncertainty in the Company's customer base and management believes that many
orders that would have been placed in the first six months of 1999 were delayed
until the merger was completed and the surviving product lines were identified.
Revenues from the sale of systems to government customers for the six months
ended June 30, 1999 totaled $20.4 million, a decrease of 27% from the $27.9
million in revenue generated in the first half of 1998. The significant decline
in government revenue was primarily due to issues encountered primarily in the
first quarter and the early portion of the second quarter by agencies of the
U.S. Government and other NATO countries in obtaining release of 1999
procurement funds due to the funding uncertainties caused by the NATO campaign
in Kosovo, and the continued depressed economic conditions in several
international markets.

The Company's commercial products continued to account for the majority of
the Company's total revenue. As a percentage of total revenue, commercial
revenue for the six months ended June 30, 1999, increased to 73.4% of total
revenue, as compared to 68.9% for the first six months of 1998.

For the first half of 1999, revenue from sales outside the United States
constituted 45.4% of total revenue, as compared to 38% for the first half of
1998. While the percentage of revenue from international sales will continue to
fluctuate from quarter to quarter due to the timing of shipments under
international and domestic government contracts, management anticipates that
revenue from international sales as a percentage of total revenue will continue
to comprise a significant percentage of revenue.

Gross profit. As a percentage of revenue, gross profit decreased from 53.3%
to 34.7% for the six month periods ended June 30, 1998 and 1999, respectively.
The primary reason for this significant decline was the inclusion in cost of
goods sold for the six month period ended June 30, 1999 of a one-time charge of
$18.2 million related to duplicate inventories and products which were
determined to have reached the end of life, both created by overlapping product
lines as a result of the merger with Inframetrics. Without this charge, gross
profit as a percentage of revenue would have increased from 53.3% to 58.4% for
the six months ended June 30, 1998 and 1999, respectively. This increase in
gross profit as a percentage of revenue was principally attributable to the
higher proportion of total revenue derived from the sale of commercial products
which, as a result of the favorable cost structure of the uncooled commercial
products, now generally exceed those margins experienced from the sale of
cooled imaging products and imaging systems to the government market. The
increase in gross profit as a percentage of revenue was mitigated in part by an
increase in shipments to instrumentalities of the U.S. Government which
typically have lower margins than those of other customers in the government
market and aggregated $9.5 million in the first half of 1999 compared to $8.0
million in the first half of 1998.

19
<PAGE>

Research and development. Research and development expense increased 2.2%
for the six months ended June 30, 1999, from $13.5 million in the first half of
1998 to $13.8 million in the first half of 1999. As a percentage of revenue,
research and development expense increased from 15.1% to 18.0% for the six
months ended June 30, 1998 and 1999, respectively. In absolute dollar terms,
the increase in research and development expense was primarily due to
engineering efforts related to the introduction of new products including the
FireFLIR, UltraMedia LE and UltraMedia III, as well as on-going new product
development and existing product enhancements. This increase was mitigated by
increased cost control efforts and efficiencies realized as a result of the
Inframetrics transaction. The overall level of research and development expense
reflects the continued emphasis on product development and new product
introductions. Due to the timing of revenue during the year, research and
development expense as a percentage of revenue is typically higher in the first
half of the year than on a full year basis.

Selling and other operating costs. Selling and other operating costs
increased 2.9% for the six months ended June 30, 1999, from $27.5 million in
the first half of 1998 to $28.3 million in the first half of 1999. As a
percentage of revenue, selling and other operating costs increased from 30.7%
to 36.9% for the six months ended June 30, 1998 and 1999, respectively. The
increase in absolute dollar terms was due to the costs related to increased
personnel as part of the continued shift from a primarily representative based
sales force to a more direct sales force and increased personnel required for
new markets, primarily the fire-fighting market. This increase was partially
mitigated by management's cost control efforts. Selling and other operating
costs are expected to continue to increase in absolute dollar terms, however,
as a percentage of revenue they are expected to decline throughout 1999.

Inframetrics Merger. Effective March 30, 1999, the Company completed its
merger with Inframetrics, Inc., a privately held infrared imaging company
headquartered in Billerica, Massachusetts, by issuing approximately 2.3 million
shares of the Company's common stock (including approximately 192,000 shares
reserved for exercise of outstanding options) for all the outstanding stock of
Inframetrics. Additionally, the Company assumed and paid off approximately $24
million of Inframetrics, Inc.'s short- and long-term debt.

In conjunction with the merger, during the quarter ended March 31, 1999, the
Company recorded a one-time charge of $24.3 million. The charge consisted of
$18.2 million of inventories due to the creation of duplicative product lines,
which is included in cost of goods sold, and $6.1 of transaction related costs,
which are included in combination costs, a separate line in operating expenses.
These charges and related reserves are more fully discussed in Note 17 to the
consolidated financial statements.

Interest expense and other. Interest expense and other includes costs
related to short-term and long-term debt, capital lease obligations, foreign
currency transaction gains and losses and miscellaneous bank charges. The
decrease from $2.7 million in the first half of 1998 to $2.3 in the first half
of 1999 was primarily due to lower interest rates and favorable exchange gains.

Income taxes. The provision for income taxes for the six months ended June
30, 1999 resulted in an effective tax rate of 32.0% compared to 27.8% for the
six months ended June 30, 1998. The increase in the effective tax rate was
primarily due to limitations on the timing and recognition of the Company's net
operating loss carryforwards and tax credits. The effective tax rate remained
substantially below statutory rates due to utilization of net operating loss
carryforwards, various tax credits, and benefits from the favorable tax
treatment of international revenue.

Years ended December 31, 1998, 1997 and 1996

Revenue. Revenue increased 43.9%, from $144.9 million in 1997 to $208.6
million in 1998. Commercial revenue increased 59.7%, from $86.7 million in 1997
to $138.4 million in 1998. This improvement was principally attributable to the
inclusion of a full year of AGEMA's operations in 1998 compared to only one

20
<PAGE>

month in 1997; increased deliveries of our handheld products, particularly the
AGEMA 570 with revenue aggregating $31.1 million compared to $6.3 million in
1997; and continued strong demand for the full line of broadcast camera systems
including the UltraMedia and the UltraMedia RS. Revenue from the sale of
systems to the government market increased 20.5%, from $58.3 million in 1997 to
$70.2 million in 1998. This increase was primarily attributable to continued
robust sales of the SAFIRE thermal imaging system, inclusion of revenue from
the sales of the Star SAFIRE, which was introduced in 1998, increased
deliveries to international customers, which typically have higher sales prices
than domestic orders, and increased sales of our ground-based surveillance
products, including the ThermoVision Sentry and the MilCam.

Revenue increased 29.7%, from $111.8 million in 1996 to $144.9 million in
1997. Commercial revenue increased 59.2%, from $54.4 million in 1996 to $86.7
million in 1997. This improvement was principally attributable to increased
sales of the UltraMedia (our airborne camera system for the airborne
observation and broadcast market segment, which aggregated $12.2 million in
1997 compared to $6.3 million in 1996), further production and deliveries of
our handheld imaging systems (which aggregated $47.6 million in 1997 compared
to $31.9 million in 1996), higher international sales and the one month
contribution from AGEMA's operations (which aggregated $9.4 million). Revenue
in 1997 from the sale of systems to the government market increased 1.6%, from
$57.3 million in 1996 to $58.3 million in 1997. This increase was primarily due
to increased sales of the SAFIRE thermal imaging system, principally to the
U.S. Marine Corps and the U.S. Air Force.

We have continued to benefit from our significant investment in developing a
worldwide sales and distribution channel. The majority of our revenue outside
the United States is derived from Europe, Japan and South America.
International revenue increased from $57.3 million in 1997 to $99.8 million in
1998 and accounted for approximately 47.8% of our revenue in 1998, an increase
from the 39.6% experienced in 1997 and the 22.5% experienced in 1996. The
increase in absolute dollars and as a percentage of revenue in 1998 was
primarily due to increased shipments to international government customers and
increased commercial international sales as a result of the inclusion of a full
year of AGEMA revenue in 1998 which was primarily international.

Gross profit. As a percentage of revenue, gross profit increased from 40.1%
in 1997 to 54.3% in 1998, primarily due to the $16.1 million write-off of
duplicative inventories related to the AGEMA acquisition which were included in
cost of goods sold in 1997. Exclusive of this write-off, gross margin increased
from 51.2% for 1997 to 54.3% in 1998. The gross margin increase was primarily
due to an increase in higher margin international sales and a higher proportion
of total revenue derived from the sale of commercial products which, as a
result of the favorable cost structure of the uncooled products, now generally
exceed those margins experienced from the sale of imaging systems to the
government market. This increase was mitigated, in part, by an increase in
sales to the U.S. government, which aggregated $36.5 million in 1998 compared
to $27.1 million in 1997 and which typically have lower margins than other
sales to the government market. Gross profit, exclusive of the AGEMA-related
write-off in 1997, increased as a percentage of revenue from 48.2% in 1996 to
51.2% in 1997.

Research and development. Research and development expense increased 53.1%,
from $17.6 million in 1997 to $26.9 million in 1998, and increased 29.7%, from
$13.6 million in 1996 to $17.6 million in 1997. As a percentage of revenue,
research and development expense increased from 12.1% in 1997 to 12.9% in 1998
and remained consistent at 12.1% in 1996 and 1997. The increase in research and
development expense, in absolute dollar terms, was attributable to the
inclusion of a full year of AGEMA's operations in 1998 compared to only one
month in 1997 and increased research and development activities related to the
introduction of the Star SAFIRE, UltraMedia LE and FireFLIR, as well as to
ongoing product enhancements.

Selling and other operating costs. Selling and other operating costs
increased 42.9%, from $41.2 million in 1997 to $58.9 million in 1998, and
increased 37.5%, from $29.9 million in 1996 to $41.2 million in 1997. Selling
and other operating costs as a percentage of revenue decreased slightly from
28.5% in 1997 to 28.3% in 1998, and increased from 26.8% in 1996 to 28.5% in
1997. This increase, in absolute dollar terms, was primarily due to the
inclusion of a full year of AGEMA's operations in 1998 compared to only one
month in

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<PAGE>

1997, costs associated with increased revenue, particularly the increase in
international sales, expenses related to the expanded operations of our
international operations and to increased personnel. Further, we have continued
to expand and strengthen the direct sales and marketing staff.

Interest expense and other. Interest expense and other includes costs
related to short-term and long-term debt, capital lease obligations,
miscellaneous bank charges and expenses and foreign currency transaction gains
and losses. The increase from $4.1 million in 1997 to $5.2 million in 1998 and
from $1.5 million in 1996 to $4.1 million in 1997 was primarily due to
increased short-term debt as a result of increased working capital needs during
each year.

Income taxes. Our effective income tax rates for 1998, 1997 and 1996 were
26.8%, 28.3% and 26.8%, respectively. The effective tax rates were
substantially below the statutory rate, as a result of our ability to realize
the benefits of a portion of our net operating loss carryforwards and existing
tax credits. Additionally, we recognized a net deferred tax benefit of $14.4
million and $569,000 in 1997 and 1996, respectively, under the recognition
criteria of Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes." The $14.4 million deferred tax benefit
recognized in 1997 relates primarily to the $52.5 million write-off in
conjunction with the AGEMA acquisition. The current portion of income tax
expense consists of state, federal and foreign income taxes, as the utilization
of net operating loss carryforwards and existing tax credits was limited.

At December 31, 1998, we had net operating loss carryforwards aggregating
$3.8 million, which expire in the years 2005 through 2010. Utilization of our
acquired net operating loss carryforwards related to the Company's subsidiary,
FSI Automation, is limited to future earnings of FSI Automation and further
limited to approximately $350,000 per year. Additionally, we have various tax
credits available aggregating $2.7 million which expire in the years 2007
through 2013. Finally, we have a $11.8 million deferred tax asset related to
acquired in-process research and development. The realization of this deferred
tax asset is dependent upon the ability of our foreign subsidiaries to remit
earnings to us and is further limited to realization over a 15-year period.

Liquidity and Capital Resources

At June 30, 1999, the Company had short term borrowings net of cash on hand
of $62.7 million compared to $60.9 million at March 31, 1999 and compared to
$35.2 million at December 31, 1998. The increase in short-term borrowings
during the six months ended June 30, 1999, was principally caused by the
repayment of Inframetrics' existing long-term debt which aggregated $18.3
million at December 31, 1998 and continued high levels of inventories.

At June 30, 1999, the Company had inventories on hand of $76.2 million
compared to $70.3 million at December 31, 1998. The primary reason for the
increase is the build-up of component inventory in anticipation of shipments to
government customers during the last six months of 1999 and build-up of
component inventory for FireFLIR systems in anticipation of deliveries of this
new product.

At June 30, 1999, the Company had accounts receivable in the amount of $68.7
million compared to $91.2 million at December 31, 1998. The decrease in the
level of accounts receivable was primarily due to decreased shipments during
the first six months of 1999 compared to the first six months of 1998. Also
contributing to the decrease was the greater percentage of total receivables
that represent sales to commercial customers which typically have a shorter
collection cycle than sales to government customers. Days sales outstanding
decreased from 213 at March 31, 1999 to 150 at June 30, 1999.

The Company's investing activities have consisted primarily of expenditures
for fixed assets, which totaled $4.7 million and $6.8 million for the six
months ended June 30, 1999 and 1998, respectively. The Company has budgeted for
approximately $7.0 million related to the replacement of the Company's
Enterprise Resource Planning (ERP) system to address Year 2000 and other issues
and has expended approximately $5.5 million to date.

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<PAGE>

The Company has available a $70.0 million line of credit which bears
interest at LIBOR plus 1.5% (6.7% at June 30, 1999) secured by all the
Company's assets. Additionally, the Company, through one of its subsidiaries,
has a 40,000,000 Swedish Krone (approximately $4.9 million) line of credit at
4.7% at June 30, 1999. At June 30, 1999, the Company had $68.2 million
outstanding on these lines.

The Company believes that its existing cash and available credit facilities,
financing available from other sources and continuing efforts to expedite the
collection of accounts receivable and management of inventory levels will be
sufficient to meet its cash requirements for the foreseeable future.

Quantitative and Qualitative Disclosure about Market Risk

Our exposure to market risk for changes in interest rates relates primarily
to our short-term and long-term debt obligations. We believe that our net
income or cash flow exposure relating to rate changes for short-term and long-
term debt obligations are immaterial. Interest expense is affected by the
general level of U.S. interest rates and/or LIBOR. We currently do not hedge
any interest rate exposure.

Our foreign subsidiaries generally use their local currency as the
functional currency. We do not currently enter into any foreign exchange
forward contracts to hedge certain balance sheet exposures and intercompany
balances against future movements in foreign exchange rates. To date, such
exposure has been immaterial. We do maintain small cash balances denominated in
currencies other than the U.S. Dollar. If foreign exchange rates were to weaken
against the U.S. Dollar, we believe that the fair value of these foreign
currency amounts would decline by an immaterial amount.

Impact of the Year 2000

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Such software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations leading to disruptions in
our activities and operations. If we or our significant suppliers or customers
fail to make necessary modifications, conversions and contingency plans on a
timely basis, the Year 2000 issue could have a material adverse effect on our
business, operations, cash flows and financial conditions.

The Year 2000 issue affects our internal systems as well as any of our
products that include date-sensitive software. We are currently conducting a
comprehensive Year 2000 review of our computer systems to identify the systems
that could be affected. The internal manufacturing system acquired in
connection with our acquisition of AGEMA is not Year 2000 compliant. We have,
however, completed the installation of a new enterprise resource planning
system, both hardware and software, to correct this deficiency. Our existing
product lines are being tested and reviewed to ensure Year 2000 compliance, and
our products under development are being designed to be Year 2000 compliant.
Additionally, we are evaluating Year 2000 compliance on products from our
suppliers and partners.

Both internal and external resources are being employed to identify, correct
or reprogram, and test our systems for Year 2000 compliance. The total cost of
the project is estimated to be approximately $7.0 million and is being funded
through existing cash resources. We have not developed a contingency plan for
dealing with the most reasonably likely worst-case scenario and have not yet
identified such a scenario. We currently plan to complete such analysis and
contingency planning by December 31, 1999.

Despite our current assessment, we may not identify and correct all
significant Year 2000 problems on a timely basis. Year 2000 compliance efforts
may involve significant time and expense and unremediated problems could
materially adversely affect our business, financial condition and operating
results.

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In Process Research and Development

In connection with the acquisition of AGEMA in December 1997, the Company
expensed $33.6 million representing purchased in process research and
development ("IPR&D") that had not yet reached technological feasibility and
had no alternative future use. These expenditures were recognized as a period
expense in accordance with Statement of Financial Accounting Standards No. 2
and Financial Accounting Standards Board Interpretation No. 4. See Note 16 of
the notes to the financial statements for a further discussion of the AGEMA
acquisition.

The $33.6 million value assigned to IPR&D was assigned to three separate
technological projects: 570 series uncooled products ($13.7 million), uncooled
technology ($12.1 million) and QWIP technology ($7.8 million). The nature of
the efforts required to develop these projects into commercially viable
products includes the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish that the
product can be produced to meet its design specifications, including functions,
features and technical performance requirements. At the date of acquisition,
the estimated total cost to be incurred to develop the IPR&D into commercially
variable products was approximately $25.5 million in the aggregate through the
year 2002.

The value assigned to the IPR&D was determined by an independent appraiser
using a discounted cash flow method. This involved estimating the costs to
develop the purchased in process technology into commercially viable products,
estimating the resulting net cash flow from such projects and discounting the
net
cash flows back to their present values. The discount rate used was 25%, which
included a factor that is intended to take into account the uncertainty
surrounding the successful development of the purchased in process technology.
The resulting net cash flows were based on management's estimates of revenue
over a five year period, cost of sales, research and development expenses,
selling, general and administrative expense and income taxes from such projects
which were consistent with historical rates.

There can be no assurance that the Company will be able to complete the
required work in order to develop these projects into commercially viable
products. If the IPR&D projects discussed above are not successfully developed,
the revenue and profitability of the Company may be adversely affected in
future periods.

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BUSINESS

General

We are a world leader in the design, manufacture and marketing of thermal
imaging and broadcast camera systems for a wide variety of applications in the
commercial and government markets. Our products come in a variety of
configurations such as handheld or ground-based systems, as well as systems
mounted on ships, helicopters and airplanes. Our thermal imaging systems use
advanced infrared technologies that detect infrared radiation, or heat,
enabling the operator to measure minute temperature differences and to see
objects in daylight or total darkness and through smoke, haze and most types of
fog. Our products can also incorporate visible light cameras, image analysis
software and gyrostabilized gimbal technology. An example of a gyrostabilized
gimbal is the capsule-like object attached to the nose of local television news
stations' helicopters that you may have seen. These capsules, or gimbals,
contain broadcast quality cameras and, sometimes, thermal imaging cameras which
allow news stations to film breaking news stories.

Our products provide state-of-the-art imaging technology coupled with
competitive pricing. Our product configurations and image analysis software
tools increase our ability to provide products tailored to meet individual
customer requirements. In addition to our continuing line of products that
incorporate "cooled" detector technology, we have also developed and begun
selling innovative new products utilizing advanced "uncooled" thermal imaging
technology.

Industry Overview

Background

Infrared radiation is light that is not visible because its wavelength is
too long to be detected by the human eye. Unlike visible light, infrared
radiation is emitted directly by all objects and materials. Thermal imaging
systems are used to detect infrared radiation and convert it into an electronic
signal, which is then processed and formatted into a video signal and displayed
on a monitor. These systems are distinguished from one another by their
capability to detect and resolve infrared radiation, the clarity of the image
displayed, detection range, system reliability, price and adaptability to a
variety of customer requirements. Thermal imaging systems, unlike night vision
goggles, enable the operator to see objects in total darkness and through
obscurants such as smoke, haze and most types of fog. Advanced thermal imaging
systems can also detect and measure minute temperature differences, a critical
tool for a variety of commercial applications.

Early applications of thermal imaging technology primarily involved the use
of expensive high-resolution systems in military combat applications such as
weapons targeting, where performance factors were far more important than price
in purchasing decisions. A simpler form of the technology was also employed in
limited commercial applications such as detecting heat loss from buildings or
houses, where price was more important than sophisticated performance.
Consequently, a large group of potential users in both the commercial and
government markets did not use thermal imaging technology since available
systems either failed to meet performance requirements or were too expensive.

An infrared detector, which absorbs infrared radiation and converts it into
an electronic signal, is a primary component of thermal imaging systems. Until
recently, thermal imaging systems relied on infrared detectors which needed to
be cooled to near absolute zero in order to operate. This technology is
sometimes referred to as "cooled" detector technology. The cryogenic "coolers"
needed for such detectors are expensive components that consume a great amount
of power and add to the weight, size and overall complexity of the system.
Thermal imaging systems that use new "uncooled" detector technology do not
require these cooling components but instead operate at room temperature. This
feature allows for cheaper, smaller, lighter, more energy efficient, solid
state systems. These factors are expected to increase the demand for such
systems in existing market segments and create demand in new market segments,
such as fire fighting and machine vision. Despite the advantages of uncooled
technology, cooled systems should continue to play a significant role in the

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government market due to those systems' longer range performance capabilities.
As hardware prices decline, the sophistication of image analysis software and
the incremental functionality provided by such analysis tools are expected to
become a more critical component of customers' purchasing decisions.

Markets

Commercial Market. The commercial market is comprised of a broad range of
thermal imaging applications. This market has evolved from the use of simple
heat sensing devices to sophisticated radiometric (temperature measuring)
instruments that use a variety of accessories and extensive image analysis
software. The increasing emphasis on improving manufacturing efficiency and
product quality, underscored by the growing importance of quality assurance
programs such as International Standards Organization (ISO) 9000 and the
increasing complexity of manufacturing processes, has expanded the commercial
market. Uncooled thermal imaging technology has created opportunities to
further penetrate existing market segments as well as to create demand in new
markets that can benefit from the enhanced price and performance of such
technology. The growth of the commercial market has also been driven by
improvements in hardware functionality, enhanced image analysis software
performance and declining hardware prices.

The commercial market primarily consists of the following market segments:

Condition Monitoring Thermal imaging systems are used for monitoring the
condition of equipment. Such monitoring allows for
the detection of equipment faults so they can be
repaired. This increases the equipment's
productivity and avoids catastrophic failures or
major equipment damage, which in turn significantly
reduces operating expenses by lowering repair costs
and reducing downtime. Improved functionality of
image analysis software, longer battery operation
and simplicity of system operation are critical
factors for this market segment. Specific condition
monitoring applications include locating and
repairing defective power transmission components
or electrical connections, predicting the end of
life of bearings in rotating machinery, evaluating
the integrity or amount of insulation in a building
or container and locating roof leaks and related
damage.

Research and Development Because of its non-destructive analysis capability,
thermal imaging is a useful tool in a wide variety
of research and development applications. Since
many component and product designs involve the use
or control of heat, thermal imaging can be
effectively used in the research and design of the
component or product. For example, thermal imaging
is used in laser design to determine the power
distribution of the beam, in the development of
diesel engines using ceramic-coated pistons to
determine proper adhesion of the ceramic to the
metal piston and in the design of rubber tires to
evaluate uniform heat distribution. Research and
development applications typically require very
high performance systems with extensive software
capabilities and tools to analyze the thermal
image.

Manufacturing Process The ability to determine whether a manufacturing
Control process will produce acceptable results at the
earliest point in the production cycle is critical
to quality assurance and cost reduction. Thermal
imaging and image analysis allow for the monitoring
and control of heat, which is used in virtually all
industrial processes. Similarly, thermal imaging
systems can identify moisture and contaminants and
help identify the thickness of material as well as
the integrity of the bonding of composite
materials.

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Thermal imaging applications for manufacturing
process control are varied and extensive, including
monitoring the quality of metal, plastic and glass
cast parts, which are highly dependent upon the
temperature distribution in the mold, monitoring
the quality of paper, which is dependent upon
proper and even moisture distribution during the
drying process, and monitoring the quality of
products such as rubber gloves, which can be
thermally examined to locate abnormally warm or
cool spots, indicating non-uniform thickness that
may result in a quality defect.

Airborne Observation and The use of airborne observation and broadcast
Broadcast systems is becoming a standard tool for television
stations and broadcast networks. This technology is
also used by law enforcement agencies around the
world for surveillance, suspect search and
apprehension and officer support. This market
segment typically requires either very high
performance daylight cameras or dual imaging
systems with both visible light and thermal imaging
capabilities, in addition to state-of-the-art
stabilization, the ability to provide jitter-free
images from great distances, and the ability to
downlink the information from the aircraft to the
production studio or command center on a real-time
basis. Applications should increase as system size
and weight continue to decline, enabling the use of
systems on small and weight restricted helicopters.
In addition, law enforcement agencies have
established thermal imaging as a primary support
tool and should continue to take advantage of
favorable prices.

New Commercial Market New market segments for thermal imaging are
Opportunities developing due to the availability, cost
effectiveness and enhanced performance
characteristics of uncooled thermal imaging
technology. Machine vision and fire fighting are
near-term market opportunities, while landing
guidance, maritime navigation, security and
handheld law enforcement support represent future
growth opportunities. Machine vision is a
manufacturing process control that allows for real-
time, fully automated regulation and guidance of
the assembly or manufacturing process. As system
prices decline, uncooled thermal imaging technology
will provide cost effective solutions for a wide
variety of new commercial applications.

Government Market. The government market is also comprised of a broad range
of thermal imaging applications. Although the majority of government
applications require the use of cooled technology, uncooled thermal imaging
systems can be used for ground-based security, handheld observation and mine
detection applications. Customers in the government market demand competitively
priced systems that can be mounted on a variety of helicopters, airplanes and
ships, operate in different climatic conditions and perform a variety of tasks
requiring high image resolution quality and substantial image stabilization.

The government market primarily consists of the following market segments:

Search and Rescue Thermal imaging systems are used in traditional
search and rescue missions to rescue individuals in
danger or distress on boats or in vehicles, to
provide offshore oil platform safety and to provide
emergency or disaster response support for missing
persons or accident victims.

Federal Drug Thermal imaging systems enable government agencies
Interdiction to expand their drug interdiction and support
activities by allowing greater surveillance and
detection capabilities.

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Surveillance and Thermal imaging systems are used in surveillance
Reconnaissance and reconnaissance applications for the precise
positioning of objects from substantial distances
and for enhanced situation awareness, particularly
at night or in conditions of reduced or obscured
visibility.

Navigation Safety Thermal imaging systems are used in navigation
safety applications to improve missions by enabling
crews piloting aircraft or ships to see terrain and
objects and to detect and avoid obstacles at night
and in conditions of limited visibility due to
smoke, haze or fog.

Border and Maritime Thermal imaging systems are used in airborne
Patrol operations for border and maritime surveillance,
particularly at night, to monitor borders and
coastal waters, to monitor national fishing
boundaries and to prevent smuggling.

Environmental Monitoring Thermal imaging systems are used in environmental
monitoring applications including forest fire
detection and suppression, oil spill detection and
monitoring and wildlife management.

Ground-based Security Thermal imaging systems are used for ground-based
surveillance and perimeter security of government
and military installations, particularly at night.

Technology

We use our expertise in diverse technologies and engineering capabilities to
develop and produce sophisticated thermal imaging systems. In order to produce
cost-effective products and shorten the product development cycle, we integrate
the following engineering disciplines and manufacturing processes:

System Design and We believe that our extensive experience in systems
Radiometry integration allows us to effectively combine a wide
variety of engineering disciplines necessary to
design and manufacture thermal imaging systems. We
also possess the specialized system design
knowledge required to produce thermal imaging
systems that can accurately measure temperature--a
critical tool for many commercial applications.

Software Development We utilize both internal and external sources to
develop the software capabilities necessary to
simplify complex thermal imaging systems. We have
developed Windows-based image analysis software
applications that solve a variety of manufacturing
process and quality control problems. We also have
the necessary expertise to develop embedded
software control systems, communications software
and testing programs for our thermal imaging
systems.

Optical Design and We design and manufacture many of the sophisticated
Fabrication optics that are required to gather and transmit
detected thermal images with minimum distortion,
allowing us to significantly shorten the product
development cycle and avoid costs and delays
associated with reliance on third-party optics
sources.

Electronic Design We design signal processing circuits that interface
directly with the detector arrays to convert
detected infrared radiation into electronic signals
and design the electronic image processing that is
necessary to convert the electronic signals into
standard video format. Advances in

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microprocessors, electric miniaturization and image
processing have made significant contributions to
the performance and utility of our thermal imaging
systems.

Mechanical Engineering Our design and production of thermal imaging
systems involves highly sophisticated mechanical
engineering techniques. Such sophisticated
techniques are critical for the design and assembly
of the supporting structures for system components
such as detector arrays, coolers, scanners and
optics, which must meet high-precision mechanical
tolerances. Similarly, the gyrostabilized gimbal
assembly for the SAFIRE, Star SAFIRE, Mark III,
UltraMedia and UltraMedia-RS requires expertise in
electro-mechanical control, gyroscopes and
specialized stabilization controls.

Products

Commercial Products. We penetrated the commercial market by developing
customized products with increased flexibility and features, in addition to
software analysis tools. Our handheld commercial thermal imaging systems
incorporate a thermal imaging detector housed in a compact self-contained unit,
a video display or viewfinder, an embedded processor and various image analysis
software packages. A viewfinder much like that of a home video camera is a
standard feature in most models. The thermal image can also be displayed on an
independent video display. The systems also include a PC-based processor that
allows accurate measurement of minute temperature differences and extensive
real-time analysis and post-processing of the acquired image. Most of our
airborne and observation broadcast camera systems incorporate industry standard
broadcast cameras rather than thermal imaging cameras. We also manufacture
airborne dual imaging systems, including both broadcast and thermal imaging
cameras. The product is typically mounted to an aircraft, usually a helicopter,
and operated by the use of a hand controller, which remotely directs the
stabilized turret. The broadcast camera inside the turret provides the video
output that is then either recorded on a video recorder or downlinked to a
production studio for live broadcast.

ThermoVision The ThermoVision, introduced in early 1998, is an
uncooled thermal imaging camera for manufacturing
process control and machine vision applications.
Operating as a remote controlled "smart" sensor in
supervised operation or integrated into a complete
control system, the ThermoVision transmits data on
a continuous real-time basis at 60 frames per
second. Using built-in intelligence, the
ThermoVision can process multiple areas of
interest, trigger alarms or transmit control data.
A variety of flexible, high-speed and reliable
digital cable, fiber-optic and wireless
transmission media allow for flexible system
integration with controllers, computers and vision
systems. Examples of ThermoVision applications
include monitoring the manufacture of metal,
plastic or glass cast parts and automatically
making necessary adjustments in the manufacturing
line on a real-time basis to ensure consistent
product quality.

AGEMA 570/ThermaCAM 595 The AGEMA 570, introduced in December 1997 and now
known as the ThermaCAM 595, was developed to meet
the need for a high performance lightweight cost-
effective portable thermal imager and is the
world's first commercially available handheld
radiometric thermal imaging system incorporating
state-of-the-art uncooled detector technology,
solid state electronic design and instant-on
performance. The second generation uncooled
detector used in the ThermaCAM 595 provides for
accurate temperature measurement of objects from -
20(degrees)C to

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+2000(degrees)C. The imager is enclosed in a single
lightweight package weighing less than five pounds
which facilitates one-hand, point and shoot
operation.

Image optimization is automatic and menu and data
displays appear in any of 14 languages. The
ThermaCam 595 has applications across all
commercial radiometric market segments, including
locating and repairing defective power transmission
components or electrical connections, predicting
the end of life of bearings in rotating machinery,
evaluating the integrity or amount of insulation in
a building or container and locating roof leaks and
related damage.

Tracer Plus The Tracer Plus, introduced in the first quarter of
1997, is the first industrial imaging system
capable of recording and analyzing long thermal
event sequences at real-time frame rates on a
Windows-based PC. The Tracer Plus combines a high-
resolution thermal imaging camera, such as the
ThermaCam 595, with a Pentium PC, digital recording
system and Windows-based image analysis software
for research and development applications such as
in laser design to determine the power distribution
of the beam or in the development of diesel engines
using ceramic-coated pistons to determine proper
adhesion of the ceramic to the metal piston.

AGEMA 900 The AGEMA 900, first introduced by AGEMA in 1992,
is a high resolution, handheld thermal imaging
system available in both short and long wave
versions. The AGEMA 900, with its wide range of
lenses, filters and other accessories is ideally
suited for research and development applications
such as evaluating the uniformity of heat
distribution in the design of rubber tires.

AGEMA Report AGEMA Report software, the latest release of which
was introduced by AGEMA in 1996, allows for review,
analysis and processing of captured images and
data. AGEMA software is a Windows-based program
that is easy to use and affordable. AGEMA software
is typically packaged with the AGEMA 550 and 570,
though it is capable of operating with data
gathered from other imaging products as well.

UltraMedia-RS The UltraMedia-RS, introduced in the first quarter
of 1997, combines many of the features of the
larger UltraMedia system in a compact 35-pound
configuration. The UltraMedia-RS allows small and
weight restricted aircraft to gather high quality
video footage from long distances, delivering a
maximum of 40:1 magnification.

UltraMedia The UltraMedia, introduced in the first quarter of
1996, is a compact daylight broadcast system that
delivers a maximum of 72:1 magnification in a
lightweight, 5-axis gyrostabilized package that is
ideally suited for airborne broadcast teams. It was
developed to meet the needs of television stations
and entertainment networks to cover live news and
sporting events. The UltraMedia is also used by law
enforcement agencies around the world for
surveillance, suspect search and apprehension, and
officer support.

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UltraMedia LE The UltraMedia LE, introduced in the fourth quarter
of 1998, is a compact digital lowlight broadcast
system that delivers a maximum of 96:1
magnification in a lightweight, 5-axis
gyrostabilized package that is ideally suited for
airborne broadcast teams. It was developed to meet
the needs of television stations and entertainment
networks to cover live news and sporting events.
The UltraMedia LE is also used by law enforcement
agencies around the world for surveillance, suspect
search and apprehension, and officer support.

UltraVision The UltraVision, introduced in the fourth quarter
of 1998, is the newest member of the Ultra family
of broadcast camera products. Its small size and
weight allows it to be mounted on even the most
weight-restricted aircraft. A high-performance
digital camera offers quality imaging, vivid color
and up to an hour of DV digital formats video
recording.

FireFLIR The FireFLIR, introduced in the first quarter of
1999, is a lightweight, hands-free, helmet-mounted
thermal imaging system for fire fighting
applications. The FireFLIR incorporates an uncooled
microbolometer detector that delivers monochrome
and crisp, high-resolution color images. The system
can detect up to 16,000 temperature levels,
offering incredible heat sensitivity and imagery
over extremely wide temperature ranges.

Mark III Quantum The Mark III Quantum, introduced in the third
quarter of 1998, is a gimbal-mounted, continuous
zoom, dual imaging system incorporating a state-of-
the-art infrared imaging detector with a color CCD
TV camera. Features include its small size (9"
diameter gimbal), light weight (26 lbs.), built-in
autotracking, GPS annotation and user-friendly
controls and graphics.

UltraForce The UltraForce, introduced in the second quarter of
1999, is a four-axis, gyrostabilized gimbal system.
Made from lightweight composite materials such as
Kevlar, it incorporates an uncooled infrared
imaging detector together with a CCD TV camera
capable of imaging in moderately low light
conditions.

Government Products. We offer a range of state-of-the-art products to
government agencies. To meet the needs of these customers, we provide a range
of products consisting of a thermal imaging system enclosed in a gyrostabilized
gimbal which is typically mounted to an aircraft or a ship. A thermal imaging
system for the government market typically consists of a turret, an electronics
module, a hand control unit and a video display monitor. The infrared sensor
incorporates the most critical system components including a detector assembly,
closed cycle cooler, scanner (depending on detector technology utilized),
optics and electronics. The hand control unit is used to remotely direct the
turret.

Star SAFIRE Our newest product for the government market,
introduced in June 1998, is the Star SAFIRE, a 3-
axis gyrostabilized, 360 field of view thermal
imaging system incorporating third generation focal
plane array detector technology. Using three fields
of view, the system provides extended detection
range capability and visually advanced imagery. The
system permits multiple optical payloads in
addition to the infrared detector, including a TV
camera with a zoom lens for daylight operations,
laser rangefinder, laser illuminator or laser
designator. Examples of Star SAFIRE applications
include the detection of vehicles, ships or planes
transporting illegal narcotics, and search and
rescue for individuals in danger or distress.

31
<PAGE>

SAFIRE The SAFIRE system, first introduced in the second
quarter of 1992, is a digital system with an
advanced detector design that provides a range of
features designed to satisfy the most demanding
government and military customer requirements. The
unit's 3-axis gyrostabilized gimbal configuration
has been certified to operate at airspeeds in
excess of 400 knots, ensuring that the SAFIRE can
operate and produce, a stable, high resolution
image when mounted on most aircraft designed for
subsonic operations. The SAFIRE has a digital
microprocessor, which permits optional features
such as autotracking, autoscanning, laser
illumination, laser rangefinder, use of a TV
camera, navigation interfaces, digital image
filters and freeze frame. Examples of SAFIRE
applications include navigation assistance at night
and in adverse weather for medical evacuation
helicopters and border patrol.

AGEMA 1000 The ground-based AGEMA 1000, first introduced by
AGEMA in 1992, is a fixed or tripod mounted thermal
imaging system that can detect small objects up to
several kilometers away under extreme environmental
conditions, day or night. Highly reliable and ready
for 24-hour operation, these compact and versatile
thermal imaging systems switch dual lenses at a
touch of a button, optimize images automatically
and offer remote control software. The AGEMA 1000
can also be integrated into a gimbal for airborne
applications. Examples of AGEMA 1000 applications
include perimeter security of military bases and
sensitive government installations or buildings.

ThermoVision Sentry The ground-based ThermoVision Sentry, first
introduced in the fourth quarter of 1998, is the
first fixed or tripod mounted thermal imaging
system utilizing uncooled detector technology. The
system can detect small objects up to several
kilometers away under extreme environmental
conditions, day or night and incorporates an
integrated Pan and Tilt mechanism. Highly reliable
and ready for 24-hour operation, these compact and
versatile thermal imaging systems switch dual
lenses at a touch of a button, optimize images
automatically and offer remote control software.
Examples of ThermoVision Sentry applications
include perimeter security of military bases and
sensitive government installations or buildings.

Maritime FLIR The Maritime FLIR, introduced in the second quarter
of 1999, is an inverted stabilized 9" gimbal
infrared imaging system designed specifically for
the marine environment. Able to withstand
significant shock and vibration, the Maritime FLIR
is hermetically sealed and contains a 10x
continuous zoom infrared detector, a laser range
finder and an autotracker. This seaworthy system
also has a de-icing system and can be mounted on a
mast, wheelhouse or a weapons platform.

MilCAM The MilCAM, introduced in the first quarter of
1997, is a high performance hand held infrared
imaging system designed for tactical use by
military, paramilitary and law enforcement agencies
engaged in long range surveillance, target
observation, artillery observation/fire correction,
perimeter security an border surveillance.

32
<PAGE>

Customers

The primary customers for our products include domestic and foreign
government agencies, including military, paramilitary and police forces,
original equipment manufacturers, commercial manufacturers, research and
development facilities, universities, utility companies, news-gathering
agencies and various commercial enterprises. See "Risk Factors--Customer
Issues."

Sales, Distribution and Customer Service

We believe that our sales and marketing organization is the largest in the
industry and effectively covers the world with a combination of direct sales,
independent representatives and distributors, application engineers and service
centers. The process of selling and marketing our products involves extensive
product promotion, technical selling and after-sales support. Our commercial
and government products are highly technical and have distinct characteristics
and functionality. Our sales and service personnel undergo a comprehensive
training program to educate them as to the technical aspects of the products as
well as familiarize them with individual customer requirements. We also
continuously update our training programs to incorporate technological and
competitive shifts and changes.

We have distinct sales channels for commercial, airborne observation and
broadcast and government customers. We sell our commercial thermal imaging
products worldwide through a direct sales staff of more than 180 people and a
network of 75 distributors (many with multiple offices) and representatives,
each with an exclusive right to sell our products in a defined geographic area.
This network is managed by 25 regional sales managers. We sell our airborne
observation and broadcast products through a seven person direct sales staff.
We sell our government products in the United States through a 23 person direct
sales staff, and internationally, through a 14 person direct sales staff and 50
independent representatives and distributors covering all major markets
worldwide. We have a technical and customer support staff comprised of 35
people in the United States and Europe who provide application development,
technical training, operational assistance, installation design and support,
and software assistance to direct and indirect sales personnel as well as to
customers. Additionally, we maintain service facilities at our factories in
Portland, Oregon; Stockholm, Sweden; and West Malling, U.K. and at our
subsidiary locations in Brussels, Belgium; Frankfurt, Germany; Toronto, Canada;
Paris, France; and Milan, Italy. Each of our service facilities has the
capability to perform the complex calibrations required to service commercial
thermal imaging systems. We employ 35 people worldwide in our service
organizations. We also maintain limited service capability in three additional
foreign locations under the direction of our independent representatives or
distributors. Our product marketing involves Internet promotion, advertising,
direct mail, press tours, technical articles for publications and participation
in approximately 100 trade shows per year.

Backlog

We believe that backlog is not indicative of revenue for any future periods
because our sales to commercial customers are generally made pursuant to
purchase orders rather than long term contracts and, accordingly, the backlog
at any given time is for immediate shipments. In addition, the backlog for the
government business is heavily dependent upon the timing of receipt of
government contracts that may have multiple year delivery schedules.
Furthermore, delivery schedules are frequently revised to accommodate changes
in customer needs. Although orders received by us are generally subject to
cancellation, in the case of most orders included in backlog, the customer is
obligated to pay certain costs and/or penalties for cancellation.

Manufacturing

We manufacture many of the critical components for our products, including
gimbals, optics, certain detectors and high speed motors, which minimizes lead
times, facilitates prompt delivery of our products, controls costs and ensures
that these components satisfy our quality standards. We purchase other parts
pre-assembled, including detectors, coolers, circuit boards, cables and wiring
harnesses. We purchase certain components from sole or limited source
suppliers. See "Risk Factors--Component Supplies Issues."

33
<PAGE>

Our manufacturing operations are, from time to time, audited by certain of
our OEM customers, which include several major aircraft manufacturers, and have
been certified as meeting their quality standards. Our facilities in Stockholm,
Sweden and West Malling, U.K. are ISO 9000 certified.

Competition

Competition in the market for thermal imaging equipment is significant. We
believe that the principal competitive factors in our market are performance,
cost, customer service, product reputation and effective marketing and sales
efforts. Our competitors are different in each market segment. In the
commercial market, principal competitors include Raytheon Company, Cincinnati
Electronics Corp., Nippon Avionics Co., Ltd., Wescam Ltd. and Media Cybernetics
Image Analysis. In the government market, we compete with General Electric
Company, p.l.c., Wescam Ltd., Lockheed Martin Corp., The Boeing Company,
Daimler-Benz Aerospace AG and Thompson-CSF. Many of these competitors have
substantially greater financial, technical and marketing resources than we do.
See "Risk Factors--Market and Technology Issues."

Proprietary Rights

Our ability to compete successfully and achieve future revenue growth will
depend in part on our ability to protect our proprietary technology and operate
without infringing the rights of others. We rely on a combination of patent,
trademark and trade secret laws, confidentiality agreements and contractual
provisions to protect our proprietary rights. But we believe that our
historical success has been primarily a function of other competitive
advantages such as the skill and experience of our employees, our worldwide,
multi-channel sales, distribution and servicing network and our name
recognition and quality products. Because intellectual property protection does
not necessarily represent a barrier to entry into the thermal imaging industry,
we cannot be certain or give any assurance that we can maintain this
competitive advantage or that competitors will not develop similar or superior
capabilities. See "Risk Factors--Market and Technology Issues."

Employees

As of June 30, 1999, we had 840 employees of whom 81 were in administration,
212 were in engineering, 21 were in quality assurance, 264 were in
manufacturing, assembly and testing and 262 were in marketing and sales. We
have been successful in attracting and retaining highly skilled technical,
marketing and management personnel to date. None of our employees in the United
States are represented by a union or other bargaining group. Employees in
Sweden and Italy are represented by unions. We believe our relationships with
our employees and unions are good. See "Risk Factors--Management and Employee
Issues."

Legal Proceedings

We have, from time to time, been a party to certain claims, legal actions,
and complaints arising in the ordinary course of business. We do not believe
that the resolution of any such matters has had or will have a material impact
on the Company's results of operations or financial position.

34
<PAGE>

MANAGEMENT

Directors and Executive Officers

The members of our Board of Directors are elected for three-year, staggered
terms. Our directors and executive officers are as follows:

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert P. Daltry 55 Chairman of the Board of Directors
J. Kenneth Stringer III 46 President, Chief Executive Officer and Director
Arne Almerfors 54 Executive Vice President
James A. Fitzhenry 44 Vice President, General Counsel and Secretary
William N. Martin 43 Vice President, Sales
J. Mark Samper 38 Vice President, Finance and Chief Financial Officer
William A. Sundermeier 35 Vice President, Product Strategy
Jay S. Teich 45 Vice President, Boston Operations
Andrew C. Teich 38 Vice President, Marketing
John C. Hart 65 Director
Earl R. Lewis 55 Director
Ronald L. Turner 52 Director
W. Allen Reed 51 Director
</TABLE>

Robert P. Daltry. Mr. Daltry joined FLIR in 1987 as President and Chief
Executive Officer and a member of the Board of Directors. He was elected
Chairman of the Board of Directors in April 1993. Mr. Daltry's current term on
the Board of Directors expires in 2002. He served as Chief Executive Officer
until December 1998. From 1984 to 1987, Mr. Daltry was employed by Lear
Siegler, Inc., an aerospace company, where he served as Vice President of
Marketing for the Instrument and Avionics Systems Division. From 1981 to 1984,
Mr. Daltry served as Regional Manager for Singer-Kearfott, an aerospace
company. Mr. Daltry holds a B.A. in Accounting from Grove City College.

J. Kenneth Stringer III. Mr. Stringer joined FLIR in 1984 as Vice President
of Finance and Chief Financial Officer and was appointed Executive Vice
President in 1990. Mr. Stringer was elected to the Board of Directors in April
1993. Mr. Stringer's current term on the Board of Directors expires in 2001. In
April 1995, Mr. Stringer was appointed President and Chief Operating Officer.
In December 1998 Mr. Stringer was appointed Chief Executive Officer. Prior to
joining FLIR, Mr. Stringer spent six years with Evans Products Company,
Portland, Oregon, as Director of Financial Reporting. He started his career
with Touche Ross and Company (which subsequently became Deloitte & Touche). Mr.
Stringer received his B.S. degree from the University of Oregon.

Arne Almerfors. Mr. Almerfors joined FLIR in December 1997 in connection
with FLIR's acquisition of AGEMA, and currently serves as Executive Vice
President. From 1995 to 1997, Mr. Almerfors was President and Chief Executive
Officer AGEMA. He also served as President and Chief Executive Officer of CE
Johansson AB, a manufacturer of coordinate measuring devices, from 1989 to
1995. Mr. Almerfors received his B.S. and MBA from the University of Stockholm.
Mr. Almerfors received a Masters in Political Science in addition to post-
graduate courses in corporate finance and accounting from the University of
Stockholm.

James A. Fitzhenry. Mr. Fitzhenry joined FLIR in 1993 as Corporate Counsel
and Director of Administration, and was appointed Vice President, General
Counsel and Secretary in 1995. From 1990 to 1993, Mr. Fitzhenry served in the
White House during the Bush Administration in the Office of Policy Development
and the Office of Cabinet Affairs. Previously, he served as legal counsel and
legislative director to Senator Mark O. Hatfield (R-Ore.) and practiced law in
Portland, Oregon. Mr. Fitzhenry received his B.A. from the University of Oregon
and received his J.D. and MBA degrees from Willamette University.

35
<PAGE>

William N. Martin. Mr. Martin joined FLIR in 1994 as Director of Sales and
was appointed Vice President, Sales in 1995. Prior to joining FLIR, Mr. Martin
was employed by AGEMA Infrared Systems, Inc., where he initially served as
Western Regional Sales Manager and then National Sales Manager. Prior to
joining AGEMA, Mr. Martin served as Regional Manager for Hughes Aircraft
Company. Mr. Martin who is an instrument multi-engine commercial pilot,
attended Wichita State University, majoring in speech and communications.

J. Mark Samper. Mr. Samper joined FLIR in 1990 as Corporate Controller and
was appointed Vice President of Finance and Chief Financial Officer in March
1995. Prior to joining FLIR, Mr. Samper spent six years with Price Waterhouse
where he served as an Audit Manager. Mr. Samper received his B.S. degree from
Oregon State University, with a major in accounting. He is also a Certified
Public Accountant.

William A. Sundermeier. Mr. Sundermeier joined FLIR in 1994 as Product
Marketing Manager and was appointed Director of Product Marketing in 1995. Mr.
Sundermeier currently serves as the Vice President of Product Marketing. Prior
to joining FLIR, Mr. Sundermeier was a founder of Quality Check Software, Inc.
(QCS) in 1993. From 1985 to 1993, Mr. Sundermeier served as Product Line
Manager at Cadre Technologies, Inc. Mr. Sundermeier also served as
Software/Hardware Engineer at Tektronix, Inc. from 1980 to 1985. Mr.
Sundermeier received his B.S. in Computer Science from Oregon State University.

Jay S. Teich. Mr. Teich joined FLIR in 1999 as Vice President of Boston
Operations. From 1991 to 1999, Mr. Teich was Vice President and later President
of Inframetrics, Inc. Inframetrics was acquired by FLIR in March 1999. Mr.
Teich joined Inframetrics in 1981 as an engineering manager. He received his
BSEE from Lehigh University and is an M.I.T. graduate in Engineering and
Mathematics.

Andrew C. Teich. Mr. Teich joined FLIR in 1999 as Vice President of
Marketing. From 1996, Mr. Teich served as Vice President of Sales and Marketing
at Inframetrics, Inc. Inframetrics was acquired by FLIR in March 1999. From
1984 to 1996, Mr. Teich served in the capacities of Sales Engineer, Western
Regional Sales Manager, International Sales Manager and Vice President of Sales
at Inframetrics. He holds an A.S. degree in Industrial Design from the
University of Bridgeport and received his B.S. in Marketing from Arizona State
University.

John C. Hart. Mr. Hart has served as a Director of FLIR since February 1987
and as Chairman of the Board of Directors from 1987 to April 1993. Mr. Hart's
current term on the Board of Directors expires in 2002. From 1982 until his
retirement in 1993, Mr. Hart served as Vice President of Finance, Treasurer and
a member of the Board of Directors of Louisiana-Pacific Corporation.

Earl R. Lewis. Mr. Lewis was elected to the Board in June 1999 in connection
with the acquisition of Spectra Physics AB by Thermo Instrument Systems Inc.
Mr. Lewis' current term on the Board of Directors expires in 2000. Mr. Lewis is
President and Chief Executive Officer of Thermo Instrument Systems and has
served in such capacities since March 1997 and January 1998, respectively. Mr.
Lewis is also Chief Operating Officer, Measurement and Detection, of Thermo
Electron Corporation, the parent company of Thermo Instrument Systems, and is
Chairman of the Board of several subsidiaries of Thermo Electron, including
Thermo Optek Corporation, Thermo Quest Corporation, Thermo Vision Corporation,
Thermo BioAnalysis Corporation and ONIX Systems Inc., and is a director of
Metrika Systems Corporation, ThermoSpectra Corporation and Thermo Instrument
Systems. Mr. Lewis is also a director of SpectRx Inc. Mr. Lewis holds a B.S.
from Clarkson College of Technology and has attended postgraduate programs at
the University of Buffalo, Northeastern University and Harvard University.

Ronald L. Turner. Mr. Turner was elected to the Board of Directors in 1993
and his current term on the Board of Directors expires in 2000. Mr. Turner is
President and Chief Operating Officer of Ceridian Corporation. Mr. Turner also
served as Executive Vice President, Operations from 1997 to 1998. From 1993 to
1997, Mr. Turner served as President and Chief Executive Officer of Computing
Devices International, an aerospace company, which was a division of Ceridian
Corporation. From 1987 to 1993, Mr. Turner was

36
<PAGE>

President and Chief Executive Officer of GEC-Marconi Electronic Systems
Corporation, a defense electronic company. Prior to 1987, Mr. Turner worked for
Martin Marietta Corporation for 14 years in a variety of executive positions.
Mr. Turner serves on the Board of Directors of Ceridian Corporation, BTG, Inc.,
Government Electronics and Information Technology Association and on the Board
of Governors and Executive Committee of the Electronic Industries Alliance. He
is also a past President and a member of the Board of Governors of the
Massachusetts Institute of Technology Society of Sloan Fellows.

W. Allen Reed. Mr. Reed has served as a Director of FLIR since April 1992
and his current term on the Board of Directors expires in 2001. Mr. Reed is
President of General Motors Investment Management Corporation. From 1991 to
1994, Mr. Reed was Vice President and Treasurer of GM Hughes Electronics
Corporation and Hughes Aircraft Company ("Hughes"). From 1984 to 1991, Mr. Reed
was President of the Hughes Investment Management Company, a wholly-owned
subsidiary of Hughes. Prior to joining Hughes, Mr. Reed was Vice President and
Portfolio Manager for Allen & Associates Investment Management Company. Mr.
Reed serves on the Boards of Directors of General Motors Acceptance
Corporation, Motors Insurance Corp. and WEBS Fund, Inc. Mr. Reed also serves as
Chairman of the Investment Advisory Committee for the Howard Hughes Medical
Institute.

Board Composition

Under our articles of incorporation and bylaws, the directors are divided
into three classes. The term of office of only one class of directors expires
in each year, and their successors are elected for terms of three years and
until their successors are elected and qualified. There is no cumulative voting
for election of directors.

In December 1997, we acquired all of the outstanding shares of capital stock
of AGEMA in exchange for a total of 4,162,000 shares of our Common Stock. This
acquisition was completed effective as of December 1, 1997 pursuant to the
terms of a Combination Agreement dated as of October 6, 1997 by and among FLIR
and Spectra. Pursuant to the terms of the Combination Agreement, we agreed to
use our reasonable best efforts to cause three persons designated by Spectra to
be elected to the Board of Directors, and to cause the number of designees of
Spectra serving on the Board of Directors to be maintained at the number
described below: (i) three designees if on the date of mailing of the notice
for the annual shareholder meeting where such directors shall be up for
election, the Spectra Companies own thirty percent (30%) or more of the then
issued and outstanding shares of Common Stock, (ii) two designees if on the
date of mailing of the notice for the annual shareholder meeting where such
directors shall be up for election, the Spectra Companies own less than thirty
percent (30%) but more than or equal to twenty percent (20%) of the then issued
and outstanding shares of Common Stock, and (iii) one designee if on the date
of mailing of the notice for the annual shareholder meeting where such
directors shall be up for election, the Spectra Companies own less than twenty
percent (20%) but more than or equal to ten percent (10%) of the then issued
and outstanding shares of Common Stock. If at some point in the future the
Spectra Companies own less than ten percent (10%) of the then issued and
outstanding shares of Common Stock, the Spectra Companies shall no longer be
entitled to the rights described above.

In February 1999, Thermo Instrument Systems Inc., a majority-owned, publicly
traded subsidiary of Thermo Electron Corporation, a Delaware corporation,
acquired substantially all of the outstanding capital stock of Spectra. As a
result of such acquisition, Thermo Electron became the beneficial owner of the
4,162,000 shares of Common Stock owned by Spectra and its affiliates. Lars
Spongberg, Patrick L. Edsell and Egon Linderoth, who were elected to the Board
of Directors at the 1998 Annual Meeting as designees of Spectra, resigned in
May of 1999 at Thermo Electron's request. Earl R. Lewis was elected to the
Board of Directors in June 1999 as a designee of Spectra/Thermo Electron. These
shares represent approximately 29.4% of the shares of Common Stock outstanding
as of April 12, 1999. By virtue of its stock ownership position and Board
representation, Thermo Electron will be able to significantly influence our
direction and policies, the election of our Board of Directors and the outcome
of any other matter requiring shareholder approval, including any merger,
consolidation, sale of substantially all of our assets and other change of
control transaction.

37
<PAGE>

Board Committees

The Board of Directors has appointed a standing Audit Committee. The members
of the Audit Committee during the fiscal year ended December 31, 1998 were
Allen Reed and Patrick Edsell. The Audit Committee reviews the scope of the
independent annual audit, the independent public accountants' letter to the
Board of Directors concerning the effectiveness of our internal financial and
accounting controls and management's response to that letter, if deemed
necessary. The audit committee met twice during the fiscal year ended December
31, 1998. The Board of Directors also has appointed a Compensation Committee
which reviews executive compensation and makes recommendations to the full
Board regarding changes in compensation, and also administers our stock option
plans. During the fiscal year ended December 31, 1998, the Compensation
Committee held two meetings. The members of the Compensation Committee
currently are Messrs. Hart and Turner.

Compensation of Directors

Under the current Stock Option Plan for Nonemployee Directors, nonemployee
directors receive an annual grant of 6,000 shares of Common Stock. Each option
granted expires ten (10) years from the date of grant. All directors are also
entitled to reimbursement for out-of-pocket and travel expenses incurred in
connection with attendance at Board of Director meetings.

Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee are Messrs. Hart and Turner who
have never been officers or employees of FLIR or any of our subsidiaries.

38
<PAGE>

COMPENSATION OF EXECUTIVE OFFICERS

Summary Compensation Table

The following table sets forth information for each of the fiscal years
ended December 31, 1996, 1997 and 1998 concerning the compensation of our Chief
Executive Officer and of each of our other four most highly compensated
executive officers.

<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
---------------------- ----------------------
Stock Long-term
Name and Options Incentive Plan
Principal Position Year Salary Bonus Granted Payouts(1) All Other(2)
------------------ ---- -------- -------- ------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Daltry........ 1998 $271,202 $230,000 30,000 $320,065 $5,000
Chairman of the Board of 1997 252,872 122,500 25,000 607,500 4,750
Directors 1996 227,846 130,000 10,000 183,315 5,550

J. Kenneth Stringer III.
President, Chief 1998 225,726 180,000 25,000 240,049 5,000
Executive Officer and 1997 216,292 99,000 20,000 455,625 4,750
Director 1996 183,125 100,000 8,000 137,486 5,775

Steven R. Palmquist.....
Vice President, 1998 184,750 67,500 12,000 80,016 5,000
Operations 1997 163,596 50,000 15,000 151,875 1,031

William N. Martin....... 1998 178,500 40,000 12,000 80,016 --
Vice President, Sales 1997 174,484 50,000 11,000 151,875 --
1996 175,956 35,000 5,000 45,829 --

James A. Fitzhenry...... 1998 159,579 55,000 12,000 80,016 5,000
Vice President, General 1997 149,391 40,000 11,000 151,875 4,750
Counsel and Secretary 1996 134,584 35,000 5,000 45,829 5,113
</TABLE>
- --------
(1) The amounts set forth under Long-term Incentive Plan Payouts represent the
dollar value of shares of restricted stock that were earned in 1996, 1997
and 1998 based upon achievement of specified performance goals. The value
of these shares was calculated based upon the closing price of the Common
Stock on December 31, 1996, February 3, 1998 and October 7, 1998,
respectively.

(2) The amounts set forth under All Other Compensation represent matching
amounts contributed on behalf of the named executive officers to our 401(k)
employee savings and retirement plan covering all of our employees.

39
<PAGE>

Stock Options

The following table sets forth information concerning options granted to the
named executives during the year ended December 31, 1998 under our stock
options plans:

<TABLE>
<CAPTION>
Potential Realizable
Percent of Value at Assumed
Number of Total Annual Rates of Stock
Securities Options Price Appreciation for
Underlying Granted to Exercise Option Term(2)
Options Employees Price Expiration -----------------------
Name Granted(1) in 1998 Per Share Date 5% 10%
---- ---------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Daltry........ 30,000 8.2% $16.88 02/03/08 $318,378 $806,832
J. Kenneth Stringer III. 25,000 6.8% $16.88 02/03/08 265,315 672,360
Steven R. Palmquist..... 12,000 3.3% $16.88 02/03/08 127,351 322,733
William N. Martin....... 12,000 3.3% $16.88 02/03/08 127,351 322,733
James A. Fitzhenry...... 12,000 3.3% $16.88 02/03/08 127,351 322,733
</TABLE>
- --------
(1) Options granted in 1998 became exercisable starting 12 months after the
grant date, with one-third of the options becoming exercisable at that time
and with an additional one-third of the options becoming exercisable on the
second and third anniversary dates of the option grant, respectively.

(2) The amounts shown are hypothetical gains based on the indicated assumed
rates of appreciation of the Common Stock compounded annually for a ten
year period. Actual gains, if any, on stock option exercises are dependent
on the future performance of the Common Stock and overall stock market
conditions. There can be no assurance that the Common Stock will appreciate
at any particular rate or at all in future years.

Options Exercised in Last Fiscal Year and Fiscal Year End Option Values

The following table sets forth, for each of the named executive officers,
the shares acquired during 1998 and the related value realized, and the number
and value of unexercised options as of December 31, 1998.

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Options Exercised Underlying Unexercised In-the-Money Options
in Last Fiscal Year(1) Options at December 31, 1998 at December 31, 1998(2)
------------------------ -------------------------------- -------------------------
Number of Value
Shares Realized Exercisable Unexercisable Exercisable Unexercisable
----------- ------------ -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Daltry........ 9,600 $176,400 129,000 50,000 $1,821,917 $393,333
J. Kenneth Stringer III. 6,000 88,650 77,850 41,000 1,011,530 321,042
Steven R. Palmquist..... 0 0 5,000 22,000 40,938 158,375
William N. Martin....... 5,334 30,087 5,000 21,000 54,374 168,042
James A. Fitzhenry...... 6,167 44,305 1,666 21,000 15,825 168,042
</TABLE>
- --------
(1) The value realized is based on the difference between the market price at
the time of exercise of the options and the applicable exercise price.

(2) The value of unexercised in-the-money options is based on the difference
between $23.25, which was the closing price of the Common Stock on December
31, 1998, and the applicable exercise price.

40
<PAGE>

Restricted Stock Awards

The following table sets forth information concerning outstanding restricted
stock awards for each of the named executive officers:

<TABLE>
<CAPTION>
Estimated Future Payouts under
Non-Stock Price Based Plans(1)
--------------------------------
Performance or Threshold Target Maximum
Number Other Period Until Number Number Number
Name of Shares Maturation or Payout of Shares of Shares(2) of Shares
---- --------- -------------------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Robert P. Daltry........ -- -- -- -- --

J. Kenneth Stringer III. 6,000 1/1/99-12/31/99 0 4,905 6,000
6,000 1/1/00-12/31/00 0 4,905 6,000
6,000 1/1/01-12/31/01 0 4,905 6,000

Steven R. Palmquist..... 4,000 1/1/99-12/31/99 0 3,270 4,000
4,000 1/1/00-12/31/00 0 3,270 4,000
4,000 1/1/01-12/31/01 0 3,270 4,000

William N. Martin....... 4,000 1/1/99-12/31/99 0 3,270 4,000
4,000 1/1/00-12/31/00 0 3,270 4,000
4,000 1/1/01-12/31/01 0 3,270 4,000

James A. Fitzhenry...... 4,000 1/1/99-12/31/99 0 3,270 4,000
4,000 1/1/00-12/31/00 0 3,270 4,000
4,000 1/1/01-12/31/01 0 3,270 4,000
</TABLE>
- --------
(1) Payouts of awards are tied to our achievement of specified levels of pretax
earnings growth, pretax return on equity and stock price appreciation. No
payouts are made if we do not achieve at least 10% growth in pretax
earnings and pretax return on equity, and stock price appreciation at least
equal to that of a pre-selected index during the performance period. The
maximum payout is made if pretax earnings growth exceeds 25%, pretax return
on equity exceeds 17.5% and stock price appreciation exceeds the
performance of the index by more than 20%. A cash payment representing 80%
of the value of the shares earned will be paid to each of the named
executive officers to cover the tax consequences of the total award. Terms
such as Index and Performance Period are defined terms in the Plan,
previously filed.

(2) The target number of shares payable with respect to the 1999, 2000 and 2001
performance periods are not presently determinable. As required by the
regulations of the Securities and Exchange Commission, the target number of
shares shown for such performance periods represent the number of shares
that would be earned for each period based on our actual performance in
1998.

Employment Agreements

We have entered into employment agreements (the "Employment Agreements")
with certain of our executive officers, including Robert P. Daltry, J. Kenneth
Stringer III, Arne Almerfors, James A. Fitzhenry, William N. Martin, Steven R.
Palmquist and J. Mark Samper. Each of the Employment Agreements is for a term
ending December 31, 1999, provided that if a "change of control" (as defined
below), occurs before December 31, 1999, the Employment Agreements will
continue in effect until two years after the change in control. If the
executive officer resigns voluntarily or is properly terminated "for cause" (as
defined below), all pay and benefits under the Employment Agreement will cease
as of the effective date of the termination or resignation. In the event of the
death of an executive officer, the designated beneficiary of the executive
officer would receive a lump sum payment equal to twelve months base salary at
the then current rate. With respect to Messrs. Daltry and Stringer, in the
event that the employment of such executive officer is terminated by us without
cause, such executive officer would be entitled to receive a lump sum payment
in an amount equal to two year's base salary plus bonuses earned through the
date of termination. For a period of two years following the change of control,
each executive officer would have the right to terminate his employment for
"good

41
<PAGE>

reason" (as defined), and to receive upon such termination a lump sum payment
in an amount equal to two times (three times in the case of Messrs. Daltry and
Stringer) their average annualized compensation during the five year period
preceding the change of control. In addition, the executive officers would be
entitled to the continuation of health and insurance benefits for certain
periods. For purposes of the Employment Agreements, a "change of control"
includes

. any merger or consolidation transaction that results in our shareholders
immediately before such transaction owning less than 50 percent of the
total combined voting power of the surviving corporation in the
transaction;

. the acquisition by any person of 20 percent or more of our total combined
voting power;

. the liquidation or sale of substantially all of our assets; and

. a change in the composition of the Board of Directors during any 24 month
period such that the directors in office at the beginning of the period
and/or their successors who were elected by or on the recommendation of
the directors in office at the beginning of the period do not constitute
at least a 70 percent majority of the Board.

In connection with our acquisition of AGEMA, the Employment Agreements were
amended to provide that the consummation of that transaction would not
constitute a change of control for purposes of the Employment Agreements. This
amendment to the Employment Agreements will terminate and become null and void
upon the acquisition by Spectra of any shares of Common Stock if at the time of
such acquisition Spectra would beneficially own more than 45 percent of the
issued and outstanding shares of Common Stock. In connection with the
acquisition by Thermo Electron of substantially all of the shares of Spectra,
the Employment Agreements were amended to provide that the closing of that
acquisition would not constitute a change of control for purposes of the
Employment Agreements. This amendment will terminate and become null and void
if Thermo Electron acquires any additional shares of Common Stock other than
those held by Spectra, or asserts any right to representation on our Board of
Directors. For purposes of these Employment Agreements, "cause" means the
failure to satisfactorily perform the duties assigned to the executive officer
within a certain period after notice of such failure is given and commission of
certain illegal or wrongful acts.

CERTAIN TRANSACTIONS AND RELATIONSHIPS

FLIR and Hughes Aircraft Company ("Hughes") were related parties as a result
of Hughes' stock ownership interest in us. During 1998, Hughes disposed of its
FLIR stock and accordingly was no longer a related party at December 31, 1998.
We purchased inventory parts from Hughes and its subsidiaries during the years
ended December 31, 1998, 1997 and 1996 respectively, in the amounts of
$659,000, $2,243,000 and $1,670,000. Sales of our products to Hughes and its
affiliates amounted to $211,000, $34,000 and $103,000, respectively, for the
years ended December 31, 1998, 1997 and 1996. Hughes is a wholly-owned
subsidiary of Raytheon Company. Sales of our products to Raytheon for the years
ended December 31, 1998, 1997 and 1996 amounted to $8,824,000, $5,061,000 and
$1,429,000, respectively. All transactions with Hughes and Raytheon were on
terms no more favorable than those available to unaffiliated third parties.

Spectra is a related party as a result of its representation on the Board of
Directors and stock ownership interest. During 1998, we were indebted to
Spectra in the maximum amount of $5,031,000 as a result of debt assumed by us
in connection with the acquisition of AGEMA. This amount was repaid in July
1998.

42
<PAGE>

STOCK OWNED BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS

The following table sets forth certain information known to us with respect
to the beneficial ownership of our Common Stock as of September 30, 1999 by (i)
each person known by us to beneficially own more than 5% of the outstanding
shares of Common Stock, (ii) each of our directors, (iii) each of our named
executive officers, and (iv) all directors and executive officers as a group.
Except as otherwise indicated, we believe that each of the following
shareholders has sole voting and investment power with respect to the shares
they own.

<TABLE>
<CAPTION>
Name and Address Shares Beneficially Owned(1) Percent of Outstanding(1)
- ---------------- ---------------------------- -------------------------
<S> <C> <C>
Thermo Electron
Corporation(2)......... 4,162,000 29.0%
80 Wyman Street
Waltman, MA 02454

Franklin Resources,
Inc.(3)................ 1,295,730 9.0%
777 Mariners Island
Blvd.
San Mateo, CA 94404

Advent International
Corporation(4)......... 996,524 6.9%
75 State Street
Boston, MA 02109

Robert P. Daltry........ 291,146 2.0%

John C. Hart............ 36,000 *

Earl R. Lewis(5)........ 2,000 *

W. Allen Reed........... 41,000 *

J. Kenneth Stringer III. 169,585 1.2%

Ronald L. Turner........ 39,000 *

James A. Fitzhenry...... 22,920 *

William N. Martin....... 20,087 *

Directors and Executive
Officers as a group (14
persons)(6)............ 780,960 5.3%
</TABLE>
- --------
* Less than one percent (1%).

(1) Applicable percentage of ownership is based on 14,347,766 shares of Common
Stock outstanding as of September 30, 1999. Beneficial ownership is
determined in accordance with rules of the Securities and Exchange
Commission, and includes voting power and investment power with respect to
shares. Shares issuable upon the exercise of outstanding stock options
that are currently exercisable or become exercisable within 60 days from
September 30, 1999 are considered outstanding for the purpose of
calculating the percentage of Common Stock owned by such person, but not
for the purpose of calculating the percentage of Common Stock owned by any
other person. The number of shares that are issuable upon the exercise of
options that are currently exercisable or exercisable within 60 days of
September 30, 1999 is as follows: Mr. Daltry--150,667; Mr. Hart--36,000;
Mr. Reed--39,000; Mr. Stringer--95,517; Mr. Turner--39,000; Mr. Martin--
7,666; Mr. Fitzhenry--10,999; and all officers and directors as a group--
431,066.

(2) This information as to beneficial ownership is based on an amendment to
Schedule 13D filed by Thermo Electron Corporation with the Securities and
Exchange Commission on August 16, 1999. The Schedule 13D states that (i)
Thermo Electron is the beneficial owner of 4,162,000 shares of Common
Stock as to which it has sole voting and dispositive power, and (ii) the
4,162,000 shares of Common Stock as to which beneficial ownership is
reported are held by Spectra.

43
<PAGE>

(3) This information as to beneficial ownership is based on a Schedule 13G/A
filed by Franklin Resources, Inc. with the Securities and Exchange
Commission on January 28, 1999. The Schedule 13G states that Franklin
Resources and its affiliates are the beneficial owners of 1,295,730 shares
of Common Stock as to which certain affiliates of Franklin Resources have
sole voting and dispositive power.

(4) This information as to beneficial ownership is based on a Schedule 13G
filed with the Securities and Exchange Commission on April 9, 1999 by
Global Private Equity II Limited Partnership, Advent Direct Investment
Program Limited Partnership, Advent Israel Limited Partnership, Advent
Israel (Bermuda) Limited Partnership, EnviroTech Investment Fund I Limited
Partnership (together the "Advent Partnerships"), Advent International
Corporation ("AIC") and Advent International Limited Partnership ("AILP").
The Schedule 13G states that AIC is the General Partner of AILP which in
turn is the General Partner of each of the Advent Partnerships and, as
such, that AIC has sole voting and sole dispositive power with respect to
the 996,524 shares of Common Stock as to which beneficial ownership is
reported.

(5) Mr. Lewis serves on our Board of Directors as a designee of Spectra. He
disclaims beneficial ownership of the 4,162,000 shares of Common Stock
held by Spectra.

(6) Does not include the 4,162,000 shares of Common Stock held by Spectra, as
to which all directors and executive officers disclaim beneficial
ownership.

44
<PAGE>

SELLING SHAREHOLDERS

The Selling Shareholders are the former shareholders of Inframetrics, which
we acquired in March 1999. We are registering the shares for offer and sale
under the Securities Act of 1933 as required by an agreement we entered into
with the Selling Shareholders in connection with our acquisition of
Inframetrics. Our registration of the shares does not necessarily mean that any
Selling Shareholder will sell all or any of the shares such Selling Shareholder
owns. The following table sets forth certain information regarding the Selling
Shareholders.

<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior Owned After
to Offering(1) Shares Offering(1)
---------------------- Being ----------------------
Name Number Percent Offered Number Percent
- ---- ----------- ---------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Advent Direct Investment
Program Limited
Partnership............. 206,365 1.4% 206,365 -- --
Advent Israel Limited
Partnership............. 48,504 * 48,504 -- --
Advent Israel (Bermuda)
Limited Partnership..... 5,991 * 5,991 -- --
EnviroTech Investment
Fund I Limited
Partnership............. 187,664 1.3 187,664 -- --
Global Private Equity II
Limited Partnership..... 548,000 3.8 548,000 -- --
Commonwealth Capital
Ventures Limited
Partnership............. 170,570 1.2% 170,570 -- --
Orion Capital Holdings,
Limited Partnership..... 288,538 2.0% 288,538 -- --
M-K I Partnership,
Limited Partnership..... 93,689 * 93,689 -- --
The Parthenon Group,
Inc. ................... 52,914 * 52,914 -- --
Elbit Limited............ 315,005 2.2% 315,005 -- --
Inframetrics Investment
Limited Partnership..... 17 * 17 -- --
Jay Teich................ 82,522 * 45,115 37,407 *
Azriel Biberstain........ 49,704 * 27,654 22,050 *
Dan Manitakos............ 35,593 * 13,543 22,050 *
Andy Teich............... 32,948 * 10,898 22,050 *
Tom Scanlon.............. 17,480 * 8,818 8,662 *
Guy Pas.................. 15,590 * 8,818 6,772 *
John Rutherford.......... 10,824 * 10,824 -- --
Chris Alicandro.......... 8,630 * 7,055 1,575 *
Andrew Owen.............. 8,630 * 7,055 1,575 *
Charlie Torrielli........ 8,346 * 8,346 -- --
John Keene............... 8,157 * 7,055 1,102 *
Detlev Suderow........... 6,330 * 2,550 3,780 *
Kelly Murphy............. 5,412 * 5,412 -- --
Jeff Smith............... 5,102 * 3,527 1,575 *
Maria Cote............... 4,913 * 1,763 3,150 *
Rob Herring.............. 4,913 * 1,763 3,150 *
Eli Cohen................ 4,125 * 1,763 2,362 *
Andy Nielson............. 4,125 * 1,763 2,362 *
Paul Czerepuszko......... 3,414 * 2,469 945 *
Ken Wood................. 3,338 * 1,763 1,575 *
Paul Birrow.............. 2,393 * 1,763 630 *
Chris Koenig............. 2,393 * 1,763 630 *
Rich Demare.............. 1,920 * 1,763 157 *
Mike Conley.............. 1,763 * 1,763 -- --
Mike Jewett.............. 1,763 * 1,763 -- --
Gary Orlove.............. 1,763 * 1,763 -- --
Terry Ruane.............. 2,078 * 1,763 315 --
</TABLE>
- --------
* Less than one percent (1%).
(1) Applicable percentage of ownership is based on 14,347,766 shares at Common
Stock outstanding as of September 30, 1999. Beneficial ownership is
determined in accordance with rules of the Securities and Exchange
Commission, and includes voting power and investment power with respect to
shares. Shares issuable upon the exercise of outstanding stock options that
are currently exercisable or become exercisable within 60 days from
September 30, 1999 are considered outstanding for the purpose of
calculating the percentage of Common Stock owned by such person, but not
for the purpose of calculating the percentage of Common Stock owned by any
other person. The number of shares that are issuable upon the exercise of
options that are currently exercisable or exercisable within 60 days of
September 30, 1999 are as follows: Andy Teich--22,050; Guy Pas--6,772;
Andrew Owen--1,575; Andy Nielson--2,362; Terry Ruane--315; and Chris
Koenig--630.

45
<PAGE>

PLAN OF DISTRIBUTION

The Selling Shareholders offering shares under this Prospectus are the
former shareholders of Inframetrics. In connection with the acquisition of
Inframetrics, the former shareholders of Inframetrics received a total of
2,107,522 shares of our Common Stock in exchange for all of the outstanding
shares of capital stock of Inframetrics.

The shares of Common Stock covered by this Prospectus may be offered and
sold from time to time by the Selling Shareholders. The Selling Shareholders
will act independently of FLIR in making decisions with respect to the timing,
manner and size of each sale. The sale of the shares covered by this Prospectus
may be effected directly to purchasers by the Selling Shareholders, by any
partner, member or shareholder of a Selling Shareholder to which shares have
been distributed, or by any donee or pledgee of any such Selling Shareholder as
principals or through one or more underwriters, brokers, dealers or agents from
time to time in one or more transactions (which may involve crosses or block
transactions) (i) or on any exchange or in the over-the-counter market, (ii) in
transactions otherwise than in the over-the-counter market, (iii) through the
writing of put or call options (whether such options are listed on an options
exchange or otherwise) relating to the shares, or (iv) through a combination of
any of the above. Any of such transactions may be effected at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at varying prices determined at the time of sale or at negotiated or
fixed prices, in each case as determined by the Selling Shareholder or by
agreement between the Selling Shareholder and underwriters, brokers, dealers or
agents, or purchasers.

The Selling Shareholders may enter into hedging transactions with broker-
dealers or other financial institutions. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of our
Common Stock in the course of hedging the positions they assume with Selling
Shareholders. The Selling Shareholders may also enter into options or other
transactions with broker-dealers or other financial institutions which require
the delivery to such broker-dealer or other financial institution of shares
offered hereby, which shares such broker-dealer or other financial institution
may resell pursuant to this Prospectus (as supplemented or amended to reflect
such transaction).

If the Selling Shareholders effect transactions by selling shares to or
through underwriters, brokers, dealers or agents, such underwriters, brokers,
dealers or agents may receive compensation in the form of discounts,
concessions or commissions from the Selling Shareholders or commissions from
purchasers of shares for whom they may act as agent (which discounts,
concessions or commissions as to particular underwriters, brokers, dealers or
agents may be in excess of those customary in the types of transactions
involved). The Selling Shareholders and any brokers, dealers or agents that
participate in the distribution of the shares may be deemed to be
"underwriters" under the Securities Act of 1933 (the "Securities Act"), and any
profit on the sale of shares by them and any discounts, concessions or
commissions received by any such underwriters, brokers, dealers or agents may
be deemed to be underwriting discounts and commissions under the Securities
Act. We have agreed to indemnify each Selling Shareholder and any underwriter
against certain liabilities, including certain liabilities under the Securities
Act. The Selling Shareholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of shares
covered by this Prospectus against certain liabilities, including liabilities
under the Securities Act.

Because the Selling Shareholders may be deemed to be underwriters under the
Securities Act, the Selling Shareholders will be subject to the prospectus
delivery requirements of the Securities Act. We have informed the Selling
Shareholders that the anti-manipulative provisions of Regulation M promulgated
under the Securities Exchange Act of 1934 may apply to their sales in the
market.

Selling Shareholders may also resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of such Rule.

Upon FLIR being notified by a Selling Shareholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares
through a block trade, special offering, exchange distribution or

46
<PAGE>

secondary distribution or a purchase by a broker or dealer, a supplement to
this Prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each Selling Shareholder and of the
participating broker-dealer(s), (ii) the number of shares involved, (iii) the
price at which such shares were sold, (iv) the commissions paid or discounts or
concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information
set out or incorporated by reference in this Prospectus and (vi) other facts
material to the transaction. In addition, upon FLIR being notified by a Selling
Shareholder that a partner, member or shareholder of a Selling Shareholder or a
donee or pledgee of a Selling Shareholder intends to sell shares, a supplement
to this Prospectus will be filed.

We will pay all of the costs, expenses and fees incident to the
registration, offering and sale of the shares to the public hereunder other
than commissions, fees and discounts of underwriters, brokers, dealers and
agents. We will not receive any of the proceeds from the sale of any of the
shares by the Selling Shareholders.

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices. As of September 30, 1999,
there were 14,347,766 shares of Common Stock outstanding, of which 2,107,552
shares are being offered hereby. In addition, Spectra has certain registration
rights with respect to the 4,162,000 shares of Common Stock owned by them, and
the Selling Shareholders have certain additional registration rights with
respect to the shares of Common Stock being offered hereby.

In connection with our acquisition of AGEMA, we entered into a Registration
Rights Agreement dated as of December 1, 1997 with Spectra. That agreement
provides that if we propose to register any of our securities under the
Securities Act, whether for our own account or otherwise, Spectra, and its
permitted assigns, are entitled to notice of the registration and inclusion of
such shares therein, subject to certain limitations. In addition, Spectra, and
its permitted assigns, may require us to file a registration statement covering
such shares, and we are obligated to use our best efforts to effect such
registration, subject to certain conditions and limitations. We are obligated
to effect only two such demand registrations within any twelve month period. We
are required to pay all expenses, other than underwriting discounts and
commissions, incurred in connection with a registration initiated by us or the
first demand registration in any twelve month period, including all
registration, filing, qualification, printing and accounting fees, and the
reasonable fees and disbursements of counsel for the selling stockholders not
to exceed $25,000 and counsel for the Company. With respect to any registration
effected pursuant to the registration rights of such holders, we are required
to indemnify such holders against certain liabilities, including liabilities
under the Securities Act.

Pursuant to the Shareholders Agreement between the Company and the Selling
Shareholders dated as of March 19, 1999, as amended as of October 27, 1999 (the
"Shareholders Agreement"), the Selling Shareholders have certain additional
rights with respect to the registration under the Securities Act of the
2,107,552 shares of Common Stock offered hereby (the "Registrable Shares"). At
any time, the holders of at least 35 percent of the Registrable Shares may
require us to file another registration statement covering such shares, which
may provide for an underwritten offering of such shares, and we are obligated
to use our best efforts to effect such registration, subject to certain
conditions and limitations. We are obligated to effect only one such demand
registration except to the extent that any Registrable Shares are excluded from
such demand registration based on the advice of the underwriters of the
offering, in which case we will be obligated to effect further demand
registrations. At any time after April 1, 2000, the Selling Shareholders may
require us to file a registration statement on Form S-3 covering the
Registrable Shares, and we are obligated to use our best efforts to effect such
registration, subject to certain conditions and limitations. We are required to
pay all expenses, other than underwriting discounts and commissions, incurred
in connection with a demand or Form S-3 registration, including all
registration, filing, qualification, printing and accounting fees, and the
reasonable fees and disbursements of counsel for the selling stockholders not
to exceed $25,000 and counsel for the Company. With respect to any registration
effected pursuant to the registration rights of the Selling Shareholders, we
are required to indemnify such holders against certain liabilities, including
liabilities under the Act.

47
<PAGE>

If at any time after October 27, 1999 we are in material breach of any
material covenant or obligation set forth in the registration rights provisions
of the Shareholders Agreement, the Selling Shareholders, acting together, will
be entitled to either (i) seek damages and other remedies for such breach,
including any and all claims, causes of action, obligations, liabilities,
attorneys' fees and costs related thereto, or (ii) receive payment of late fees
from us in the amount of $10,000 for each day, if any, from the tenth business
day after the date we receive written notice of such breach from the Selling
Shareholders to the date that such breach is cured.

In addition to the registration rights described above, Spectra and the
Selling Shareholders will be entitled to sell their shares in compliance with
the provisions of Rule 144 under the Securities Act. In general, under Rule 144
as currently in effect, a person (or persons whose shares are aggregated) who
has beneficially owned restricted securities for at least one year (including
any period of ownership of preceding nonaffiliated holders) would generally be
entitled to sell, within any three month period, a number of shares that does
not exceed the greater of (i) 1% of the then-outstanding shares of Common Stock
of the Company, or (ii) the average weekly trading volume of the then-
outstanding shares of Common Stock during the four calendar weeks preceding
each such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. A person (or persons whose shares are
aggregated) who is not deemed an "affiliate" of the Company and who has
beneficially owned shares for at least two years (including any period of
ownership of preceding nonaffiliated holders) would be entitled to sell such
shares under Rule 144 without regard to the volume limitations described above.

The Company has reserved 4,269,400 shares of Common Stock for issuance
pursuant to the Company's stock option plans. Of this amount, 1,573,723 shares
were subject to outstanding options at September 30, 1999. Common Stock issued
upon exercise of stock options granted under the stock option plans will
generally be eligible for resale in the open market.

48
<PAGE>

DESCRIPTION OF CAPITAL STOCK

We are authorized to issue up to 30,000,000 shares of Common Stock, par
value $0.01 per share, and 10,000,000 shares of Preferred Stock, par value,
$0.01 per share. The following description of our capital stock is not
complete. You should carefully read our Second Restated Articles of
Incorporation and First Restated Bylaws, which have been filed as exhibits to
the Registration Statement, of which this Prospectus is a part. Additionally,
certain provisions of Oregon law may impact our capital stock.

Common Stock

As of June 30, 1999, there were 14,256,996 shares of Common Stock
outstanding which were held of record by approximately 400 shareholders.
Holders of Common Stock are entitled to receive such dividends as may from time
to time be declared by our Board of Directors out of funds legally available
for that purpose. Holders of Common Stock are entitled to one vote per share on
all matters on which they are entitled to vote. They do not have any cumulative
voting rights. There are no preemptive, conversion, redemption or sinking fund
rights applicable to the Common Stock. In the event of a liquidation,
dissolution or winding up of FLIR, holders of Common Stock are entitled to
share equally and ratably in all assets remaining after the payment of all
debts and liabilities as well as the liquidation preference of any outstanding
class or series of Preferred Stock. The outstanding shares of Common Stock,
including those offered through this Prospectus, are fully paid and
nonassessable. The rights, preferences and privileges of holders of Common
Stock are subject to any series of Preferred Stock which we may issue in the
future as described below.

Preferred Stock

The Board of Directors has the authority, without action by the
shareholders, to designate and issue Preferred Stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the Common Stock. It is not possible
to state the actual effect of the issuance of any shares of Preferred Stock
upon the rights of holders of the Common Stock until the Board of Directors
determines the specific rights of the holders of such Preferred Stock. However,
the effects might include restricting dividends on the Common Stock diluting
the voting power of the Common Stock, impairing the liquidation rights of the
Common Stock and delaying or preventing a change in control of FLIR without
further action by the shareholders. There are no agreements or understandings
for the issuance of Preferred Stock, and the Board of Directors has no present
intention of issuing any shares of Preferred Stock, except as contemplated by
the Shareholder Rights Plan described below.

Shareholder Rights Plan

On June 2, 1999, our Board of Directors approved a Shareholders Rights Plan
and declared a dividend distribution of one preferred stock purchase right
("Right") for each outstanding share of Common Stock. The dividend was payable
to shareholders of record on June 15, 1999--the Record Date. Each Right
entitles the registered holder to purchase from us one one-hundredth of a share
of Series A Junior Participating Preferred Stock at a Purchase Price of $65.00
per one one-hundredth share, subject to adjustment. The description and terms
of the Rights are set forth in a Rights Agreement dated June 2, 1999 between us
and ChaseMellon Shareholder Services, L.L.C. as Rights Agent, a copy of which
has been filed with the Securities and Exchange Commission and is incorporated
by reference as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summary of the terms of the Rights
Agreement is not complete and is qualified by reference to the Rights
Agreement.

The Rights will not be exercisable and will not trade separately from the
Common Stock until the earlier of

. 10 days following a public announcement that a person or group of
affiliated or associated persons, referred to individually or
collectively as the Acquiring Person, has acquired beneficial ownership
of 15% or more of the outstanding shares of Common Stock, or

49
<PAGE>

. 10 business days (or such later date as may be determined by the Board)
following commencement of or announcement of an intention to make a
tender offer or exchange offer which would result in the beneficial
ownership by a person of 15% or more of the outstanding shares of Common
Stock.

The earlier of such dates is referred to as the Distribution Date.

Until the Distribution Date or the earlier expiration of the Rights, the
Rights will not be separable from the Common Stock and will be transferred
along with any transfer of that stock. As soon as practicable following the
Distribution Date, however, a separate Rights Certificate evidencing the Rights
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date, and such separate Rights Certificate alone
will evidence the Rights.

The Rights will not be exercisable until the Distribution Date and will
expire at the close of business on June 2, 2009, unless that date is changed or
the Rights are earlier redeemed or exchanged by us.

In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper action will be taken so that each holder of
a Right who exercises that Right will be entitled to receive a number of shares
of Common Stock equal in value to two times the exercise price of the Right.
The Rights beneficially owned by the Acquiring Person, however, will be void
and will not be exercisable. In the event that we are acquired in a merger,
other business combination transaction or 50% or more of our consolidated
assets or earning power is sold, proper action will be taken so that each
holder of a Right, other than those voided Rights held by the Acquiring Person,
will then be entitled to receive, upon the exercise of the Right, the number of
shares of common stock of the acquiring company which at the time of such
transaction is equal to a market value of two times the exercise price of the
Right.

The Purchase Price payable and the number of one one-hundredths of a share
of Preferred Stock or other securities or property issuable upon exercise of
the Rights are subject to customary anti-dilution provisions.

The number of outstanding Rights is also subject to adjustment in the event
of a stock dividend on the Common Stock payable in shares of Common Stock or
subdivisions, consolidations or combinations of the Common Stock occurring
prior to the Distribution Date.

Shares of Preferred Stock purchasable upon exercise of the Rights will not
be redeemable. Each share of Preferred Stock will be entitled, when, as and if
declared, to a minimum preferential quarterly dividend payment of the greater
of (a) $1 per share or (b) an amount equal to 100 times the dividend declared
per share of Common Stock. In the event of liquidation, dissolution or winding
up of FLIR, the holders of the Preferred Stock will be entitled to a minimum
preferential payment of the greater of (a) $1 per share (plus any accrued but
unpaid dividends) or (b) an amount equal of 100 times the payment made per
share of Common Stock. Each share of Preferred Stock will have 100 votes when
voting together with the Common Stock. Finally, in the event of any merger,
consolidation or other transactions in which outstanding shares of Common Stock
are converted or exchanged, each share of Preferred Stock will be entitled to
receive 100 times the amount received per share of Common Stock. These rights
are protected by customary antidilution provisions. Because of the nature of
the Preferred Stock's dividend, liquidation and voting rights, the value of the
one one-hundredth share of Preferred Stock purchasable upon exercise of each
Right should approximate the value of one share of Common Stock.

The Rights Agreement provides that at any time after any person or group
becomes an Acquiring Person and prior to the acquisition by such person or
group of 50% or more of the outstanding shares of Common Stock, our Board of
Directors may exchange the Rights (other than Rights owned by such person or
group which have become void), in whole or in part, at an exchange ratio of one
share of Common Stock per Right, subject to adjustment.

With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares will be issued. In lieu of a
fractional share an adjustment in cash will be made based on the current market
price of the Preferred Stock or the Common Stock.

50
<PAGE>

In general, at any time until ten days after the date a person or group has
become an Acquiring Person, we may redeem the Rights in whole, but not in part,
at a price of $.01 per Right (payable in cash, Common Stock or other
consideration deemed appropriate by the Board of Directors). After the
redemption period has expired, our right of redemption may be reinstated if an
Acquiring Person reduces his beneficial ownership to 10% or less of the
outstanding shares of Common Stock in a transaction or series of transactions
not involving us, provided there are no other Acquiring Persons. Immediately
upon the action of the Board of Directors ordering redemption of the Rights,
the Rights will terminate and the only right of the holders of Rights will be
to receive the $.01 redemption price.

The Rights Agreement may be amended by the Board of Directors in any way
prior to the Distribution Date. After the Distribution Date, the provisions of
the Rights Agreement may only be amended by the Board in order to cure any
ambiguity, defect or inconsistency or to make any other changes which do not
adversely affect the interests of holders of Rights (excluding the interests of
any Acquiring Person).

Until a Right is exercised, the holder has no rights as a shareholder of
FLIR, including the right to vote or to receive dividends.

Anti-takeover Effects of Certain Provisions of Oregon Law, the Articles and
Bylaws

We are subject to the Oregon Business Combination Act. The Business
Combination Act generally provides that in the event a person or entity
acquires 15% or more of the voting stock of an Oregon corporation, thereby
becoming an "interested shareholder," the corporation and the interested
shareholder, or any affiliated entity, may not engage in certain business
combination transactions for a period of three years following the date the
person became an interested shareholder. Business combination transactions for
this purpose include:

. a merger or plan of share exchange;

. any sale, lease, mortgage or other disposition of the assets of the
corporation where the assets have an aggregate market value equal to 10%
or more of the aggregate market value of the corporation's assets or
outstanding capital stock; or

. certain transactions that result in the issuance of capital stock of the
corporation to the interested shareholder.

These restrictions are not applicable if:

. as a result of the transaction in which a person became an interested
shareholder, they will own at least 85% of the outstanding voting stock
of the corporation (excluding shares owned by directors who are also
officers, and certain employee benefit plans);

. the Board of Directors approves the share acquisition or business
combination before the interested shareholder acquires 15% or more of
the corporation's voting stock; or

. the Board of Directors and the holders of at least two-thirds of the
outstanding voting stock of the corporation (excluding shares owned by
the interested shareholder) approve the transaction after the interested
shareholder has acquired 15% or more of the corporation's voting stock.

Our Second Restated Articles of Incorporation contain provisions that (i)
classify the Board of Directors into three classes, each of which serves for a
three-year term with one class elected each year, (ii) provide that directors
may be removed by shareholders only for cause and only upon the vote of 75% of
the outstanding shares of Common Stock, and (iii) permit the Board of Directors
to issue Preferred Stock in one or more series and to fix the number of shares
constituting any such series, the voting powers and all other rights and
preferences of any such series, without any further vote or action by our
shareholders.

51
<PAGE>

The staggered terms for directors, the provisions allowing the removal of
directors only for cause, the availability of Preferred Stock for issuance
without shareholder approval and the Shareholder Rights Plan may have the
effect of lengthening the time required for a person to acquire control of FLIR
through a proxy contest or the election of a majority of the Board of Directors
and may deter any potential unfriendly offers or other efforts to obtain
control. This could deprive our shareholders of opportunities to realize a
premium for their Common Stock and could make removal of incumbent directors
more difficult. At the same time, these provisions may have the effect of
inducing any persons seeking control of FLIR to negotiate terms acceptable to
the Board of Directors.

Transfer Agent

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, LLC.

LEGAL MATTERS

Certain of our legal matters, including the validity of the shares of Common
Stock being offered for sale under this Prospectus, will be passed on by Ater
Wynne LLP, Portland, Oregon.

EXPERTS

The audited financial statements included in this Prospectus, except as they
relate to Inframetrics, Inc., have been audited by PricewaterhouseCoopers LLP,
independent auditors, and, insofar as they relate to Inframetrics, Inc., by
Ernst & Young LLP, independent auditors, whose reports thereon appear herein.
Such financial statements have been so included in reliance on the reports of
such independent auditors given on the authority of such firms as experts in
auditing and accounting.

The audited financial statements of Inframetrics, Inc., not separately
presented in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, whose report thereon appears herein. Such financial
statements, to the extent they have been included in the financial statements
of FLIR Systems, Inc. have been so included in reliance on the report of such
independent auditors given on the authority of said firm as experts in auditing
and accounting.

ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information included in the Registration
Statement. Certain information is omitted and you should refer to the
Registration Statement and its exhibits. With respect to references made in
this Prospectus to any of our contracts or other documents, such references are
not necessarily complete and you should refer to the exhibits attached to the
Registration Statement for copies of the actual contract or document. We are
also subject to the informational requirements of the Securities Exchange Act
of 1934 and in accordance therewith file reports, proxy statements and other
information with the SEC. You may review a copy of the Registration Statement,
including exhibits and schedules filed therewith, as well as the reports, proxy
statements and other information that we have filed at the Securities and
Exchange Commission's public reference facilities in Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Securities and Exchange Commission located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies
of such materials from the Public Reference Section of the Securities and
Exchange Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Securities and Exchange
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants,
such as FLIR, that file electronically with the Securities and Exchange
Commission.

52
<PAGE>

FLIR SYSTEMS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants............. F-2

Consolidated Statement of Operations for the Years Ended December 31,
1996, 1997 and 1998 and the Six Months Ended
June 30, 1998 and 1999................................................... F-3

Consolidated Balance Sheet as of December 31, 1997 and 1998 and
June 30, 1999............................................................ F-4

Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998 and the Six Months Ended
June 30, 1999............................................................ F-5

Consolidated Statement of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998 and the Six Months Ended
June 30, 1998 and 1999................................................... F-6

Notes to the Consolidated Financial Statements............................ F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of FLIR Systems, Inc.

In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of operations, of shareholders' equity, and of cash flows present fairly, in
all material respects, the financial position of FLIR Systems, Inc. and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Inframetrics, Inc., a
wholly-owned subsidiary, which statements reflect total assets of $34,160,000
and $31,421,000 at December 31, 1998 and 1997, respectively, and total revenues
of $54,690,000, $53,163,000 and $45,768,000 for each of the three years in the
period ended December 31, 1998. Those statements were audited by other auditors
whose report thereon has been furnished to us, and our opinion expressed
herein, insofar as it relates to the amounts included for Inframetrics, Inc.,
is based solely on the report of the other auditors. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

April 15, 1999, except as to Note 18, which is as of June 2, 1999
Portland, Oregon

F-2
<PAGE>

FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Commercial................... $ 54,447 $ 86,656 $138,397 $61,647 $ 56,288
Government................... 57,338 58,278 70,225 27,854 20,352
-------- -------- -------- ------- --------
Total revenue............... 111,785 144,934 208,622 89,501 76,640
Cost of goods sold............ 57,864 86,835 95,329 41,801 50,056
Research and development...... 13,574 17,607 26,958 13,518 13,813
Selling and other operating
costs........................ 29,989 41,225 58,933 27,487 28,294
Combination costs............. -- 36,450 -- -- 6,110
-------- -------- -------- ------- --------
101,427 182,117 181,220 82,806 98,273
Earnings (loss) from
operations................. 10,358 (37,183) 27,402 6,695 (21,633)
Interest and other income..... 1,258 540 728 465 18
Interest and other expense.... (1,470) (4,093) (5,199) (2,673) (2,265)
-------- -------- -------- ------- --------
Earnings (loss) before
income taxes............... 10,146 (40,736) 22,931 4,487 (23,880)
Income tax provision
(benefit).................... 2,723 (11,548) 6,155 1,249 (7,642)
-------- -------- -------- ------- --------
Earnings (loss) from
continuing operations...... 7,423 (29,188) 16,776 3,238 (16,238)
Discontinued operations, net
of taxes:
Loss from operations of
discontinued business (less
applicable income tax
benefit of $540)............ (830) -- -- -- --
-------- -------- -------- ------- --------
Net earnings (loss)........... $ 6,593 $(29,188) $ 16,776 $ 3,238 $(16,238)
======== ======== ======== ======= ========
Net earnings (loss) per share:
Basic....................... $ 0.89 $ (3.69) $ 1.29 $ 0.27 $ (1.15)
======== ======== ======== ======= ========
Diluted..................... $ 0.86 $ (3.69) $ 1.24 $ 0.26 $ (1.15)
======== ======== ======== ======= ========
</TABLE>

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

F-3
<PAGE>

FLIR SYSTEMS, INC.

CONSOLIDATED BALANCE SHEET
(in thousands, except for share data)
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1997 1998 1999
-------- -------- -----------
(Unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 7,545 $ 4,793 $ 5,436
Accounts receivable, net..................... 66,999 91,202 68,705
Inventories.................................. 49,014 70,312 76,171
Prepaid expenses............................. 3,610 6,061 9,759
Deferred income taxes........................ 8,326 6,776 6,776
-------- -------- --------
Total current assets....................... 135,494 179,144 166,847
Property and equipment, net.................... 20,535 26,775 27,189
Software development costs, net................ 1,043 488 367
Deferred income taxes, net..................... 10,146 9,749 16,940
Intangible assets, net......................... 14,013 15,936 15,396
Other assets................................... 4,047 3,897 3,559
-------- -------- --------
$185,278 $235,989 $230,298
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable................................ $ 26,558 $ 39,958 $ 68,158
Accounts payable............................. 21,311 24,031 31,860
Accounts payable to related parties.......... 6,228 -- --
Accrued payroll and other liabilities........ 23,035 16,189 11,685
Accrued income taxes......................... 1,440 3,893 2,947
Current portion of long-term debt............ 6,148 2,680 791
-------- -------- --------
Total current liabilities.................. 84,720 86,751 115,441
Long-term debt................................. 20,634 19,296 798
Pension liability.............................. 3,969 3,960 3,833
Commitments and contingencies.................. -- -- --
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000
shares authorized; no shares issued at
December 31, 1997, 1998 and June 30, 1999... -- -- --
Common stock, $0.01 par value, 30,000,000
shares authorized, 11,835,265, 14,133,403
and 14,256,996 shares issued at December 31,
1997, 1998 and June 30, 1999, respectively.. 119 141 142
Additional paid-in capital................... 107,278 142,169 142,388
Accumulated deficit.......................... (31,031) (14,255) (30,493)
Accumulated other comprehensive loss......... (411) (2,073) (1,811)
-------- -------- --------
Total shareholders' equity................. 75,955 125,982 110,226
-------- -------- --------
$185,278 $235,989 $230,298
======== ======== ========
</TABLE>

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

F-4
<PAGE>

FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except for share data)

<TABLE>
<CAPTION>
Accumulated
Additional Retained Other Total
Preferred Stock Common Stock Paid-in Earnings Comprehensive Comprehensive
-------------------- -------------------- Capital (Deficit) Loss Total Income (Loss)
<S> <C> <C> <C> <C> ---------- --------- ------------- -------- -------------
Shares Amount Shares Amount
---------- --------- ---------- ---------
$0.01 $0.01
Authorized......... 10,000,000 par value 30,000,000 par value
========== ========= ========== =========
Balance, December
31, 1995........... -- $-- 7,362,172 $ 74 $ 66,247 $ 14,773 $ -- $ 81,094 --
Net earnings for
the year.......... -- -- -- -- -- 6,593 -- 6,593 $ 6,593
Common stock
options exercised. -- -- 70,788 1 587 -- -- 588 --
Common stock
issued pursuant to
stock option
plans............. -- -- 33,330 -- 398 -- -- 398 --
Income tax benefit
from stock options
exercised......... -- -- -- -- 596 -- -- 596 --
Transfer of assets
to Elbit Ltd...... -- -- -- -- -- (9,310) -- (9,310) --
Purchase and
retirement of
common stock...... -- -- -- -- (16,401) (13,899) -- (30,300) --
Translation
adjustment........ -- -- -- -- -- -- (203) (203) (203)
---------- --------- ---------- --------- -------- -------- ------- -------- --------
Balance, December
31, 1996........... -- -- 7,466,290 75 51,427 (1,843) (203) 49,456 --
Comprehensive
income, year ended
December 31, 1996.. $ 6,390
========
Net loss for the
year.............. -- -- -- -- -- (29,188) -- (29,188) $(29,188)
Common stock
options exercised. -- -- 206,975 2 1,460 -- -- 1,462 --
Common stock
issued for
acquisition....... -- -- 4,162,000 42 54,064 -- -- 54,106 --
Income tax benefit
from stock options
exercised......... -- -- -- -- 327 -- -- 327 --
Translation
adjustment........ -- -- -- -- -- -- (208) (208) (208)
---------- --------- ---------- --------- -------- -------- ------- -------- --------
Balance, December
31, 1997........... -- -- 11,835,265 119 107,278 (31,031) (411) 75,955
Comprehensive loss,
year ended December
31, 1997........... $(29,396)
========
Net earnings for
the year.......... -- -- -- -- -- 16,776 -- 16,776 $ 16,776
Common stock
options exercised. -- -- 188,508 1 1,681 -- -- 1,682 --
Common stock
issued pursuant to
stock option
plans............. -- -- 111,130 1 1,181 -- -- 1,182
Common stock
issued............ -- -- 1,998,500 20 32,656 -- -- 32,676 --
Cost of stock
issuance.......... -- -- -- -- (627) -- -- (627) --
Translation
adjustment........ -- -- -- -- -- -- (1,662) (1,662) (1,662)
---------- --------- ---------- --------- -------- -------- ------- -------- --------
Balance, December
31, 1998........... -- -- 14,133,403 141 142,169 (14,255) (2,073) 125,982
Comprehensive
income year ended
December 31, 1998.. $ 15,114
========
Net loss for the
period............ -- -- -- -- -- (16,238) -- (16,238) $(16,238)
Common stock
options exercised. -- -- 123,593 1 219 -- -- 220 --
Translation
adjustment........ -- -- -- -- -- -- 262 262 262
---------- --------- ---------- --------- -------- -------- ------- -------- --------
Balance, June 30,
1999 (unaudited)... -- $-- 14,256,996 $142 $142,388 $(30,493) $(1,811) $110,226
========== ========= ========== ========= ======== ======== ======= ========
Comprehensive loss,
six months ended
June 30, 1999
(Unaudited)........ $(15,976)
========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>

FLIR SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- ------- ------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash (used) provided by
operating activities:
Net earnings (loss)........... $ 6,593 $(29,188) $16,776 $ 3,238 $(16,238)
Income charges not affecting
cash:
Loss from discontinued
operations................... 830 -- -- -- --
In-process research and
development write-off........ -- 33,600 -- -- --
Depreciation.................. 2,697 3,485 6,065 2,936 3,453
Amortization.................. 481 680 2,412 1,443 1,175
Disposal and write-offs of
property and equipment....... 239 333 446 165 471
Deferred income taxes......... (569) (14,073) 1,947 146 (7,191)
Changes in certain working
capital components, net of
effects of acquisition:
(Increase) decrease in
accounts receivable.......... (6,932) (18,288) (24,203) (1,457) 22,497
(Increase) decrease in
inventories.................. (12,760) 6,739 (21,298) (7,246) (5,859)
(Increase) decrease in prepaid
expenses..................... (386) 73 (2,451) 202 (3,698)
(Increase) decrease in other
assets....................... (329) 1,324 (80) 133 230
Increase (decrease) in
accounts payable............. 4,560 4,588 2,720 2,614 7,829
(Decrease) increase in
accounts payable to related
parties...................... (145) 976 (6,228) (1,198) --
Increase (decrease) in accrued
payroll and other
liabilities.................. 1,084 5,383 (6,846) (13,272) (4,504)
(Decrease) increase in accrued
income taxes................. (88) (1,037) 2,453 807 (946)
------- -------- ------- ------- ---------
Cash used by continuing
operations.................... (4,725) (5,405) (28,287) (11,489) (2,781)
Cash used in discontinued
operations.................... (4,376) -- -- -- --
------- -------- ------- ------- ---------
Cash used by operating
activities.................... (9,101) (5,405) (28,287) (11,489) (2,781)
------- -------- ------- ------- ---------
Cash used by investing
activities:
Additions to property and
equipment.................... (6,798) (11,905) (13,182) (6,838) (4,744)
Net cash acquired from Agema.. -- 805 -- -- --
Increase in intangible assets. -- -- (2,880) -- --
Software development costs.... (630) (703) (239) (239) --
------- -------- ------- ------- ---------
Cash used by investing
activities.................... (7,428) (11,803) (16,301) (7,077) (4,744)
------- -------- ------- ------- ---------
Cash provided by financing
activities:
Net increase in notes payable. 4,309 19,971 13,400 14,152 28,200
Proceeds from long-term debt.. 25,317 1,893 1,570 567 --
Repayments of long-term debt
including current portion.... (1,599) (1,381) (6,376) (896) (20,387)
(Decrease) increase of pension
liability.................... -- (107) (9) 25 (127)
Common stock issued........... 10,000 -- 32,676 -- --
Cost of common stock issuance. (562) -- (627) -- --
Purchase and retirement of
common stock................. (30,300) -- -- -- --
Proceeds from exercise of
stock options
and shares issued pursuant to
incentive stock option
plans, including tax benefit. 1,582 1,789 2,864 2,114 220
------- -------- ------- ------- ---------
Cash provided by financing
activities.................... 8,747 22,165 43,498 15,962 7,906
------- -------- ------- ------- ---------
Effect of exchange rate changes
on cash....................... (173) (208) (1,662) (821) 262
------- -------- ------- ------- ---------
Net (decrease) increase in
cash.......................... (7,955) 4,749 (2,752) (3,425) 643
Cash and cash equivalents,
beginning of period........... 10,751 2,796 7,545 7,545 4,793
------- -------- ------- ------- ---------
Cash and cash equivalents, end
of period..................... $ 2,796 $ 7,545 $ 4,793 $ 4,120 $ 5,436
======= ======== ======= ======= =========
</TABLE>

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

F-6
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1--Nature of Business and Significant Accounting Policies

FLIR Systems, Inc. (the "Company") is a world leader in the design,
manufacture and marketing of thermal imaging and broadcast camera systems for a
wide variety of applications in commercial and government markets. The
Company's thermal imaging systems use advanced infrared technologies that
detect infrared radiation, or heat, enabling the operator to measure minute
temperature differences and to see objects in daylight or total darkness and
through obscurants such as smoke, haze and most types of fog. The Company's
products can also incorporate visible light cameras, proprietary image analysis
software and gyrostabilized gimbal technology. The Company's products come in a
variety of configurations such as handheld or ground-based systems, or can be
mounted on ships, helicopters or fixed-wing aircraft. The Company's products
provide state-of-the-art imaging technology coupled with competitive price
performance characteristics for existing commercial and government
applications, including condition monitoring, research and development,
manufacturing process control, airborne observation and broadcast, search and
rescue, federal drug interdiction, surveillance and reconnaissance, navigation
safety, border and maritime patrol, environmental monitoring and ground-based
security. The Company has also developed innovative new products utilizing
advanced "uncooled" thermal imaging technology, which allows for less-
expensive, smaller, lighter, solid-state systems that require less power to
operate. In addition, the Company's product configurations and image analysis
software tools increase the Company's ability to provide products tailored to
meet individual customer requirements.

The accompanying consolidated financial statements as of and for the six
months ended June 30, 1998 and 1999 are unaudited and have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, these statements have been prepared
on the same basis as the audited consolidated financial statements and include
all adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation of the consolidated financial position and results of
operations for the interim periods. Certain information and footnote
disclosures related to the interim periods normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and the notes thereto for
the year ended December 31, 1998.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.

Recognition of revenue

Revenue on commercial sales is generally recognized upon shipment.
Government sales often require significant integration with other aircraft
components and related revenue is generally recognized when products are
shipped from the Company's facilities and realization is reasonably assured.
Adjustments in estimates, which can affect both revenues and earnings, are made
in the period in which the information necessary to make the adjustment becomes
available. Provisions for estimated losses on sales or related receivables are
recorded when identified.

Cash and cash equivalents

The Company considers short-term investments which are highly liquid,
readily convertible into cash and have original maturities of less than three
months to be cash equivalents for purposes of the statement of cash flows. The
Company generally invests its excess cash in investment grade, short-term
commercial paper which is held to maturity. At December 31, 1997, 1998 and June
30, 1999 the Company did not hold any short-term investments.

F-7
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Inventories

Inventories are stated at the lower of average cost or market.

Property and equipment

Property and equipment are stated at cost and are depreciated using a
straight-line methodology over their estimated useful lives. Such lives range
from three to ten years.

Repairs and maintenance are charged to operations as incurred.

Software development costs

The Company capitalizes software development costs when a project reaches
technological feasibility and ceases capitalization once the related product is
ready for release. Research and development costs related to software
development that has not reached technological feasibility are expensed as
incurred. Software development costs are amortized at the greater of (a) the
ratio of number of units shipped to the current and anticipated future units to
be shipped or (b) the straight-line method over the remaining estimated
economic life of the product. Generally, the estimated economic life is three
years.

Earnings per share

Earnings per share are based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods,
computed using the treasury stock method for stock options. The following table
sets forth the reconciliation of the denominator utilized in the computation of
basic and diluted earnings (loss) per share (in thousands):

<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------ ---------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average number of common
shares outstanding................... 7,438 7,920 12,983 11,964 14,163
Assumed exercise of stock options net
of shares assumed reacquired under
the treasury stock method............ 263 -- 527 603 --
------- ------- -------- ------- -------
Diluted shares outstanding............ 7,701 7,920 13,510 12,567 14,163
======= ======= ======== ======= =======
</TABLE>

The effect of stock options for the year ended December 31, 1997 and the six
months ended June 30, 1999, which aggregated 604,000 and 340,000, respectively,
have been excluded for purposes of diluted earnings per share since the effect
would have been anti-dilutive.

Reclassifications

Certain reclassifications have been made to prior years' data to conform
with the current year's presentation. These reclassifications had no impact on
previously reported results of operations or shareholders' equity.

F-8
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Statement of cash flows

Cash paid for interest and income taxes amounted to the following (in
thousands):

<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 30,
----------------------- -------------
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash paid for:
Interest................................ $ 914 $ 2,273 $ 3,930 $1,808 $1,964
Taxes................................... $ 1,010 $ 3,332 $ 3,812 $ 442 $1,068
</TABLE>

The non-cash portion of the AGEMA acquisition in December 1997 was excluded
from the 1997 statement of cash flows (see Note 16).

Fair value of financial assets and liabilities

The Company estimates the fair value of its monetary assets and liabilities
based upon comparison of such assets and liabilities to the current market
values for instruments of a similar nature and degree of risk. The Company
estimates that the recorded value of all of its monetary assets and liabilities
approximates fair value as of December 31, 1998, except for the patent note
described in Note 9. Interest has been imputed on the patent note at 14%, which
exceeds the current market rate for this type of note. Therefore, the fair
value of this note is estimated to be approximately $14,000 in excess of its
recorded value at December 31, 1998.

Stock-based compensation

The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 allows companies to choose whether to account for
stock-based compensation under the method prescribed in Accounting Principles
Board Opinion No. 25 (APB 25) or use the fair value method described in SFAS
No. 123. The Company follows the provisions of APB 25 (see Note 13).

Concentration of credit risk

Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade receivables. Concentration of credit
risk with respect to trade receivables is limited because a relatively large
number of geographically diverse customers make up the Company's customer base,
thus diversifying the trade credit risk. The Company controls credit risk
through credit approvals, credit limits and monitoring procedures. The Company
performs in-depth credit evaluations for all new customers and requires letters
of credit, bank guarantees and advanced payments, if deemed necessary.

Certain risks and uncertainties

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. Significant estimates and judgments made by management of the
Company include matters such as collectibility of accounts receivable,
realizability of inventories and recoverability of capitalized software and
deferred tax assets. Actual results could differ from those estimates.

Comprehensive income

Translation adjustment represents the Company's only other comprehensive
income item. Translation adjustment represents unrealized gains/losses
resulting from the translation of the financial statements of the

F-9
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company's foreign subsidiaries in accordance with SFAS No. 52, "Foreign
Currency Translation." The Company has no intention of liquidating the assets
of the foreign subsidiaries in the foreseeable future.

Recent accounting pronouncements

In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities." The Company plans to adopt SFAS No. 133 in 2001,
however, management believes that the impact of adoption will not have a
significant effect on the Company's financial position or results of
operations.

Note 2--Other Operating Costs

Selling and other operating costs consist of the following (in thousands):

<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 30,
----------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Representative commissions............. $ 3,148 $ 4,331 $ 8,297 $ 3,589 $ 1,710
Allowance for doubtful accounts........ 1,320 1,059 417 169 326
Other selling, general and
administrative expenses............... 25,521 35,835 50,219 23,729 26,258
------- ------- ------- ------- -------
$29,989 $41,225 $58,933 $27,487 $28,294
======= ======= ======= ======= =======
</TABLE>

Note 3--Income Taxes

SFAS No. 109, "Accounting for Income Taxes," requires the Company to
recognize deferred tax liabilities and assets for the expected future tax
consequences of events and basis differences that have been recognized in the
Company's financial statements and tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amount and the tax basis of assets and liabilities
using the enacted tax rates in effect in the years in which the differences are
expected to reverse.

The provision (benefit) for income taxes is as follows (in thousands):

<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1996 1997 1998
------- -------- -------
<S> <C> <C> <C>
Current tax expense:
Federal........................................... $ 2,966 $ 1,640 $ 2,209
State............................................. 326 350 68
Foreign........................................... -- 538 1,931
------- -------- -------
3,292 2,528 4,208
------- -------- -------
Deferred tax expense (benefit):
Federal........................................... 531 (16,802) 4,556
State............................................. 119 (1,858) 122
Foreign........................................... -- 478 --
------- -------- -------
650 (18,182) 4,678
------- -------- -------
(Decrease) increase in valuation allowance.......... (1,219) 4,106 (2,731)
------- -------- -------
Total provision (benefit)........................... $ 2,723 $(11,548) $ 6,155
======= ======== =======
</TABLE>

F-10
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred tax assets (liabilities) are composed of the following components
(in thousands):

<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Allowance for doubtful accounts............................... $ 821 $ 1,095
Warranty reserve.............................................. 592 577
Inventory basis differences................................... 3,905 2,521
Accrued liabilities........................................... 1,873 2,503
Other......................................................... 1,135 80
------- -------
Net current deferred tax assets............................... $ 8,326 $ 6,776
======= =======
Acquired in-process research and development.................. $12,768 $11,846
Net operating loss carryforwards.............................. 3,358 1,406
Credit carryforwards.......................................... 1,334 2,673
Depreciation.................................................. (29) (6)
Software development costs.................................... (396) (185)
Intangible assets............................................. -- (1,003)
Unremitted foreign earnings................................... -- (824)
------- -------
Gross long-term deferred tax asset............................ 17,035 13,907
Deferred tax asset valuation allowance........................ (6,889) (4,158)
------- -------
Net long-term deferred tax asset.............................. $10,146 $ 9,749
======= =======
</TABLE>

The provision for income taxes differs from the amount of tax determined by
applying the applicable U.S. statutory federal income tax rate to pretax income
as a result of the following differences:

<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Statutory federal tax rate........................ 34.0% (34.0)% 34.0%
Increase (decrease) in rates resulting from:
State taxes..................................... 4.3 (4.0) 1.9
Foreign sales corporation benefit............... (2.0) (2.8) (1.5)
Research and development credits................ (8.8) (0.5) (5.3)
(Decrease) increase in valuation allowance...... (3.9) 10.1 (11.9)
Non-deductible expenses......................... 2.0 1.4 8.6
Other........................................... 1.2 1.5 1.0
------- -------- --------
Effective tax rate................................ 26.8% (28.3)% 26.8%
======= ======== ========
</TABLE>

As of December 31, 1998, the Company had net operating loss carryforwards
which aggregated $3,795,000 and expire in the years 2005 through 2010.
Utilization of the Company's acquired net operating loss carryforwards related
to the Company's subsidiary FSI Automation is limited to future earnings of FSI
Automation and is further limited to approximately $350,000 per year. In
addition, the Company has various tax credits available aggregating $2,673,000
as of December 31, 1998, which expire in the years 2007 through 2013.

U.S. and foreign withholding taxes are provided on the earnings of foreign
subsidiaries. The Company is required to remit earnings of foreign subsidiaries
in order to realize the benefit of the acquired in-process research and
development deferred tax assets. Such assets are realizable over a 15 year
period. The valuation

F-11
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

allowance related to long-term deferred tax assets was decreased in 1998 due to
the effects that foreign subsidiaries profitability had on management's
assessment of the amount of deferred tax asset that is more likely than not to
be realized in the future.

Note 4--Accounts Receivable

Accounts receivable are net of an allowance for doubtful accounts of
$2,639,000, $3,216,000 and $2,730,000 at December 31, 1997 and 1998 and June
30, 1999, respectively.

Note 5--Inventories

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
December 31,
---------------- June 30,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Raw material and subassemblies.................... $31,541 $36,315 $41,805
Work-in-progress.................................. 14,910 12,527 18,165
Finished goods.................................... 5,359 22,330 17,615
------- ------- -------
51,810 71,172 77,585
Less progress payments received from customers.... (2,796) (860) (1,414)
------- ------- -------
$49,014 $70,312 $76,171
======= ======= =======
</TABLE>

Note 6--Property and Equipment

Property and equipment are summarized as follows (in thousands):

<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1997 1998 1999
-------- -------- -----------
(Unaudited)
<S> <C> <C> <C>
Machinery and equipment......................... $ 25,775 $ 31,953 $ 32,157
Office equipment and other...................... 11,568 17,250 20,801
-------- -------- --------
37,343 49,203 52,958
Less accumulated depreciation................... (16,808) (22,428) (25,769)
-------- -------- --------
$ 20,535 $ 26,775 $ 27,189
======== ======== ========
</TABLE>

Property and equipment includes the cost of equipment held by the Company
under capital lease agreements. Such cost and related accumulated depreciation
aggregated $3,674,000 and $1,939,000, respectively, at December 31, 1997, and
$2,938,000 and $2,078,000 respectively, at December 31, 1998, and $2,938,000
and $2,214,000, respectively, at June 30, 1999.

Note 7--Software Development Costs

Software development costs are summarized as follows (in thousands):

<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1997 1998 1999
------- ----- -----------
(Unaudited)
<S> <C> <C> <C>
Software development costs.......................... $ 2,236 $ 765 $ 765
Less accumulated amortization....................... (1,193) (277) (398)
------- ----- -----
$ 1,043 $ 488 $ 367
======= ===== =====
</TABLE>

F-12
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

During 1998, the Company sold a software product line for $1,500,000.
Related to this sale, the Company wrote off all capitalized software costs and
related accumulated amortization, which aggregated $1,710,000 and $1,225,000,
respectively. The unamortized balance of the capitalized software sold, which
aggregated $485,000, is included in cost of sales as amortization expense for
the year ended December 31, 1998.

Amortization of capitalized software costs aggregated $794,000, $459,000 and
$300,000 for the years ended December 31, 1998, 1997 and 1996, respectively and
$667,000 and $121,000 for the six months ended June 30, 1998 and 1999,
respectively.

Note 8--Notes Payable

The Company has a $42,000,000 line of credit bearing interest at LIBOR plus
1.50% (7.0% and 6.7% at December 31, 1998 and June 30, 1999, respectively),
which is secured by all assets of the Company and expires on June 1, 2000. In
conjunction with the completion of the Inframetrics transaction on March 30,
1999 (see Note 17), the Company's line of credit was increased to $70,000,000.
Approximately $24,000,000 of the line of credit was utilized to payoff existing
Inframetrics debt at the time of merger.

Additionally, the Company, through one of its subsidiaries, has a 40,000,000
Swedish Kroner (approximately $4,878,000) line of credit at 4.7% at December
31, 1998 and June 30, 1999.

In 1996, the Company, through one of its subsidiaries, entered into a
revolving credit agreement with a commercial bank consisting of a revolving
credit facility of $6.5 million. At December 31, 1998, the revolving credit
facility enabled the Company to borrow up to $6.5 million. The interest rate on
the revolving line of credit ranged from 7.1% to 7.4% at December 31, 1998.
This line of credit was paid-off and closed in connection with the completion
of the Inframetrics transaction (See Note 17).

At December 31, 1997, 1998 and June 30, 1999, the Company had $26,558,000,
$39,958,000 and $68,158,000, respectively, outstanding against these lines.
Standby letters of credit were outstanding at December 31, 1998 and June 30,
1999, totaling $662,000 and $330,000, respectively.

Note 9--Long-Term Debt

Long-term debt is summarized as follows (in thousands):

<TABLE>
<CAPTION>
December 31,
---------------- June 30,
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Note payable--patent............................. $ 206 $ 109 $ 109
Note payable--Elbit Ltd. (paid in full in March
1999)........................................... 11,000 11,000 --
Interest on note payable to Elbit Ltd. (paid in
full in March 1999)............................. 1,117 2,087 --
Note payable to bank (paid in full in March
1999)........................................... 7,713 6,837 --
Note payable to bank (paid in full in 1998)...... 4,609 -- --
Capital leases................................... 2,137 1,943 1,480
------- ------- ------
26,782 21,976 1,589
Less current portion............................. (6,148) (2,680) (791)
------- ------- ------
$20,634 $19,296 $ 798
======= ======= ======
</TABLE>

The patent note calls for annual payments through 1999 of $70,000 plus an
adjustment for changes in the Consumer Price Index. Because the note did not
include a stated interest rate, interest has been imputed at a

F-13
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

rate of 14%. The Consumer Price Index was estimated assuming an average
increase of 5% per year. Payments of $119,000, $116,000 and $115,000 were made
in the years ended December 31, 1998, 1997 and 1996, respectively. The related
patent was capitalized based on the present value, at inception, of the patent
note of $683,000. The patent was fully amortized as of December 31, 1990.

The Company had a subordinated promissory note for $11 million to Elbit Ltd.
The note bears interest at 8% and was paid in full on March 30, 1999 in
conjunction with the closing of the Inframetrics merger. At December 31, 1997
and 1998, accrued interest of $1,117,000 and $2,087,000, respectively, on this
note is included in long-term debt on the accompanying balance sheet.

In 1996, the Company, through one of its subsidiaries, entered into a term
loan agreement with a commercial bank consisting of a note payable of $8.5
million The interest rate on the note payable ranged from 7.1% to 7.4% at
December 31, 1998. This note payable was paid-off and closed in connection with
the completion of the Inframetrics transaction. At December 31, 1997 and 1998,
the note payable balance of $7,713,000 and $6,837,000, respectively, is
included in long-term debt.

Note 10--Pension Plans

The Company offers most of the employees outside the United States
participation in defined benefit pension plans (the "Plans").

A summary of the components of the net periodic pension expense for the
Plans for substantially all employees outside the United States follows (in
thousands):

<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Change in benefit obligation:
Projected benefit obligation at beginning of the period........ $3,421
Service costs.................................................. --
Interest costs................................................. 278
Actuarial loss................................................. 241
Benefits paid.................................................. (57)
Foreign currency exchange changes.............................. (288)
------
Projected benefit obligation at December 31.................... 3,595
------
Fair value of plan assets at January 1........................... $ -- --
Funded status.................................................... 3,421 3,595
Unrecognized net (loss) gain..................................... 90 (73)
Unrecognized transition obligation............................... 458 438
------ ------
Pension liability recognized..................................... $3,969 $3,960
====== ======
</TABLE>

Changes in benefit obligation amounts are not reflected for 1997 since the
Plans for employees outside the United States were acquired with AGEMA in
December 1997, (see Note 16). Assumptions used for the Plans were as follows:

<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Weighted average discount rate...................................... 6.00% 5.00%
Rates of increase in compensation levels............................ 3.00% 2.50%
Inflation rate...................................................... 2.00% 1.50%
</TABLE>

F-14
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Components of net periodic benefit cost are as follows (in thousands):

<TABLE>
<CAPTION>
1998
----
<S> <C>
Interest costs............................................................ $278
Amortization of transition costs.......................................... (35)
----
Net periodic pension costs................................................ $243
====
</TABLE>

Note 11--Commitments and Contingencies

The Company leases its primary facilities under various operating leases
which expire in 1999 through 2004. Total rent expense for the years ended
December 31, 1996, 1997 and 1998 amounted to $1,910,000, $2,379,000 and
$3,629,000, respectively. Rent expense aggregated $1,190,000 and $1,815,000 for
the six months ended June 30, 1998 and 1999, respectively.

Minimum rental payments required under all non-cancelable leases for
equipment and facilities at December 31, 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ---------
<S> <C> <C>
1999....................................................... $ 836 $3,019
2000....................................................... 719 2,591
2001....................................................... 456 1,016
2002....................................................... 198 165
2003....................................................... 39 129
Thereafter................................................. -- 12
------ ------
Total minimum lease payments................................. 2,248 $6,932
======
Less amount representing interest............................ (305)
------
Present value of lease payments.............................. $1,943
======
</TABLE>

The Company recorded $129,000 and $138,000 in sublease income from a non-
cancelable sublease in 1997 and 1998, respectively. The future minimum rentals
to be received by the Company as of December 31, 1998 are $128,000 in 1999.

The Company has a 401(k) Savings and Retirement Plan (the "Plan") to provide
for voluntary salary deferral contributions on a pre-tax basis for employees
within the United States in accordance with Section 401(k) of the Internal
Revenue Code of 1986, as amended. The Plan allows for contributions by the
Company. The Company recorded matching contributions of $842,000, $933,000 and
$1,120,000 for the years ended December 31, 1996, 1997 and 1998, respectively.

From time to time, the Company may be subject to certain contingent
liabilities that arise in the ordinary course of its business activities. The
Company accrues for contingent liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated. In
the opinion of management, there are no pending claims for which the outcome is
expected to result in a material adverse effect on the financial position or
results of operations of the Company.

Note 12--Capital Stock

In 1998, the Company increased the number of shares of common stock reserved
for future issuance pursuant to its incentive stock plans to 4,269,400. Under
the plans, restricted stock, incentive stock options or non-qualified stock
options may be granted to employees, consultants or non-employee directors of
the

F-15
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company with an exercise price of not less than the fair market value of the
stock on the date of grant. Options granted pursuant to the plans expire ten
years from date of grant and the plan terminates in 2003.

Under the 1992 incentive stock plan, 430,000 shares of common stock were
reserved for restricted stock awards. Shares awarded are earned ratably over
the term of the restricted stock agreement, based upon achievement of specified
performance goals. Shares granted in 1997 and 1998 aggregated 115,000 and
133,500 shares, respectively. Of the shares granted, 57,500 and 53,630 shares
were earned in 1997 and 1998, respectively, based upon achievement of specified
performance goals. Shares granted which are not issued lapse and cease to be
subject to the award. Compensation expense related to these awards in the
amounts of $398,000, $1,747,000 and $1,050,000 was recorded in 1996, 1997 and
1998, respectively, and is included in selling and other operating costs. At
December 31, 1998, there were 81,500 shares available for future awards.

On July 6, 1998, the Company completed a secondary public offering of
2,399,130 shares of common stock, including 1,638,630 shares of common stock
issued and sold by the Company. Additionally, on July 24, 1998, the
underwriters exercised the over-allotment option related to the secondary
offering and the Company issued and sold an additional 359,870 shares of common
stock. The net proceeds of $32,049,000 were completely utilized to repay in
full a payable to a related party, which aggregated approximately $4,985,000,
and to reduce amounts outstanding under the Company's lines of credit.

Note 13--Stock Options

The Company has elected to account for its stock-based compensation under
APB 25; however, as required by SFAS No, 123, the Company has computed for pro
forma disclosure purposes the value of options granted during 1996, 1997 and
1998 using the Black-Scholes option pricing model. The weighted average
assumptions used for stock option grants for 1996, 1997 and 1998 were a risk-
free interest rate of 5.2%, 6.0% and 5.7%, respectively; an expected dividend
yield of 0%; an expected life of three years; and an expected volatility of
22.7%, 40.2% and 48.4%, respectively.

Options were assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting. For the
years ended December 31, 1996, 1997 and 1998, the total value of the options
granted was computed to be $819,000, $1,879,000 and $2,440,000, respectively,
which would be amortized on a straight-line basis over the vesting period of
the options.

If the Company had accounted for these plans in accordance with SFAS No.
123, the Company's net earnings and pro forma net earnings per share would have
been as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1997 1998
------ -------- -------
<S> <C> <C> <C>
Net earnings (loss)--as reported...................... $6,593 $(29,188) $16,776
Net earnings (loss)--pro forma........................ $6,138 $(29,969) $15,606
Net earnings (loss) per share:
Basic--as reported.................................. $ 0.89 $ (3.69) $ 1.29
Diluted--as reported................................ $ 0.86 $ (3.69) $ 1.24
Net earnings (loss) per share:
Basic--pro forma.................................... $ 0.83 $ (3.78) $ 1.20
Diluted--pro forma.................................. $ 0.80 $ (3.78) $ 1.16
</TABLE>

The effects of applying SFAS No. 123 for providing pro forma disclosure for
1996, 1997 and 1998 are not likely to be representative of the effects on
reported net earnings and earnings per share for future years, since options
vest over several years and additional awards may be made.

F-16
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The table below summarizes the Company's stock option activity:

<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Balance at December 31, 1995........................ 828,571 $ 9.41
Granted............................................. 331,000 11.07
Exercised........................................... (70,788) 8.41
Terminated.......................................... (27,757) 11.56
--------- ------
Balance at December 31, 1996........................ 1,061,026 9.94
Granted............................................. 580,085 9.73
Exercised........................................... (206,975) 7.97
Terminated.......................................... (94,608) 11.13
--------- ------
Balance at December 31, 1997........................ 1,339,528 10.09
Granted............................................. 386,309 16.67
Exercised........................................... (188,508) 8.92
Terminated.......................................... (116,935) 12.47
--------- ------
Balance at December 31, 1998........................ 1,420,394 11.84
Granted............................................. 474,100 17.31
Exercised........................................... (123,592) 1.75
Terminated.......................................... (21,459) 16.12
--------- ------
Balance at June 30, 1999 (unaudited)................ 1,749,443 $13.98
========= ======
</TABLE>

The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and the remaining contractual lives by group
of similar price and grant dates, as of December 31, 1998:

<TABLE>
<CAPTION>
Weighted
Average
Weighted Remaining
Number of Average Contractual
Exercise Price Range Shares Exercise Price Life
- -------------------- --------- -------------- -----------
<S> <C> <C> <C>
$0.38 179,323 0.38 9.0
$1.63 8,400 1.63 0.7
$3.17 14,372 3.17 9.0
$5.23 116,849 5.23 2.6
$9.13-$13.69 407,449 11.46 6.2
$13.75-$20.50 651,501 16.14 8.5
$20.63-$21.38 42,500 20.93 9.4
--------- ------ ---
1,420,394 $11.84 7.4
========= ====== ===
</TABLE>

Options exercisable at December 31, 1998, totaled 873,822 shares at a
weighted average exercise price of $9.22. Options available for grant at
December 31, 1998 totaled 1,900,249 shares.

Note 14--Related Party Transactions

The Company and Hughes Aircraft Company ("Hughes") were related parties as a
result of Hughes' stock ownership interest in the Company. During 1998, Hughes
disposed of its holdings of the Company's stock and accordingly was no longer a
related party at December 31, 1998. The Company purchased inventory parts from
Hughes and its subsidiaries during the years ended December 31, 1998, 1997 and
1996 respectively, in the amounts of $659,000, $2,243,000 and $1,670,000. Sales
of the Company's products to Hughes and its affiliates amounted to $211,000,
$34,000 and $103,000, respectively, for the years ended December 31, 1998, 1997
and 1996. Hughes is a wholly-owned subsidiary of Raytheon Company. Sales of the
Company's products to Raytheon for the years ended December 31, 1998, 1997 and
1996 amounted to $8,824,000, $5,061,000 and $1,429,000, respectively. All
transactions with Hughes and Raytheon were on terms no more favorable than
those available to unaffiliated third parties.

F- 17
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Spectra is a related party as a result of its representation on the
Company's Board of Directors and stock ownership interest. During 1998, the
Company was indebted to Spectra in the maximum amount of $5,031,000 as a result
of debt assumed by the Company in connection with the acquisition of AGEMA.
This amount was repaid in July 1998.

Note 15--Segment Information

The Company has determined its operating segments to be the commercial and
government market segments. The commercial segment consists of thermal imaging
applications including condition monitoring, research and development,
manufacturing process control and airborne observation and broadcast. The
government segment comprises thermal imaging applications including search and
rescue, federal drug interdiction, surveillance and reconnaissance, navigation
safety, border and maritime patrol, environment monitoring, and ground-based
security.

The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates performance based upon revenue and gross profit
for each segment and does not evaluate segment performance on any other income
measurement.

Operating segment information including revenue and gross profit are as
follows (in thousands):

<TABLE>
<CAPTION>
Year ended December 31, Six months ended June 30,
--------------------------------------------------- -------------------------------
1996 1997 1998 1998 1999
---------------- ---------------- ----------------- --------------- ---------------
(Unaudited)
Gross Gross Gross Gross Gross
Revenue Profit Revenue Profit Revenue Profit Revenue Profit Revenue Profit
-------- ------- -------- ------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 54,447 $25,227 $ 86,656 $26,403 $138,397 $ 76,477 $61,647 $31,728 $56,288 $20,880
Government.............. 57,338 28,694 58,278 31,696 70,225 36,816 27,854 15,972 20,352 5,704
-------- ------- -------- ------- -------- -------- ------- ------- ------- -------
Total................... $111,785 $53,921 $144,934 $58,099 $208,622 $113,293 $89,501 $47,700 $76,640 $26,584
======== ======= ======== ======= ======== ======== ======= ======= ======= =======
</TABLE>

Information related to revenue by significant geographical location is as
follows (in thousands):

<TABLE>
<CAPTION>
Year ended December 31, June 30,
-------------------------- ----------
1996 1997 1998 1999
-------- -------- -------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
United States................... $ 86,604 $ 87,606 $108,803 $41,832
Europe.......................... 16,842 30,372 43,939 25,791
Other foreign................... 8,339 26,956 55,880 9,017
-------- -------- -------- -------
$111,785 $144,934 $208,622 $76,640
======== ======== ======== =======
Major customers:
U.S. government
instrumentalities............ $ 36,905 $ 27,123 $ 36,477 $ 9,512
======== ======== ======== =======
</TABLE>

All longed-lived assets are generally located in the United States with the
exception of property and equipment. Property and equipment is located in the
following geographic areas (in thousands):

<TABLE>
<CAPTION>
December 31, June 30,
--------------- -----------
1997 1998 1999
------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
United States....................................... $10,588 $18,577 $19,314
Europe.............................................. 9,947 8,198 7,875
------- ------- -------
$20,535 $26,775 $27,189
======= ======= =======
</TABLE>

F-18
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 16--AGEMA Acquisition

Effective December 1, 1997, the Company acquired all of the outstanding
shares of AGEMA Infrared Systems AB, a corporation organized under the laws of
Sweden, AGEMA Infrared Systems Limited, a corporation organized under the laws
of the United Kingdom, AGEMA Infrared Systems Ltd., a corporation organized
under the laws of Canada and AGEMA Infrared Systems, Inc., a Delaware
corporation ("AGEMA") in exchange for 4,162,000 shares of the Company's common
stock with a value of $54,106,000. An additional $1,559,000 of direct
acquisition costs were also incurred and included in the purchase price. AGEMA
designs, manufactures and markets handheld infrared imaging systems for the
commercial market. The results of AGEMA's operations have been combined with
those of the Company since the date of acquisition.

The acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the net assets acquired based
upon their estimated fair values as follows (in thousands):

<TABLE>
<CAPTION>
Balance at
December 1, 1997
----------------
<S> <C>
Current assets................................................. $ 23,413
Property and equipment......................................... 3,590
Other long-term assets......................................... 1,599
In-process research and development............................ 33,600
Intangibles.................................................... 3,600
Excess of purchase price over net assets acquired.............. 14,092
Current liabilities............................................ (20,153)
Long-term liabilities.......................................... (4,076)
--------
$ 55,665
========
</TABLE>

Included in current liabilities acquired was $2,000,000 of estimated costs
to shut down certain identified AGEMA facilities. Such estimated costs included
the cost to involuntarily terminate or relocate employees, sell or relocate
certain assets, terminate operating leases and otherwise wind up operations
(collectively "the shutdown") at certain facilities formerly operated by AGEMA.
The shutdown was substantially completed prior to December 1, 1998. Actual
costs to accomplish the shutdown exceeded the costs originally estimated by
approximately $2,880,000. Excess shutdown costs were recorded as an adjustment
to the purchase price of AGEMA and resulted in an increase in the excess of
purchase price over net assets acquired. Total shutdown costs incurred are
summarized as follows (in thousands):

<TABLE>
<S> <C>
Salaries and personnel related.......................................... $2,466
Plant shutdown costs.................................................... 1,263
Relocation costs........................................................ 1,151
------
$4,880
======
</TABLE>

Intangible assets acquired and the excess of purchase price over net assets
acquired are being amortized on a straight-line basis over 15 years. Related
amortization expense aggregated $1,179,000 and $79,000 for 1998 and 1997,
respectively, and $594,000 and $648,000 for the six months ended June 30, 1998
and 1999, respectively, and is included in selling and other operating costs.

F-19
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The consolidated, unaudited results of operations, on a pro forma basis, are
presented as though the acquisition of AGEMA had occurred on January 1, 1996,
excluding one-time charges for acquired in-process research and development,
acquisition related costs and duplicative inventories (in thousands, except per
share data).

<TABLE>
<CAPTION>
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
Revenue....................................................... $187,988 $160,186
Net earnings.................................................. $ 8,522 $ 3,389
Earnings per share:
Basic....................................................... $ 1.08 $ 0.46
Diluted..................................................... $ 1.00 $ 0.44
</TABLE>

These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional amortization
expense of the excess of purchase price over net assets acquired and other
intangible assets. They do not purport to be indicative of the results of
operations which actually would have resulted had the combination been in
effect on January 1, 1996, or of future results of operations of the
consolidated entities.

For the purposes of this pro-forma presentation, amounts were translated at
an average rate of 7.60 and 6.71 Swedish Kroner to the U.S. dollar for 1997 and
1996, respectively.

In conjunction with the acquisition, during the quarter ended December 31,
1997, the Company recognized a one-time charge of $52,549,000. The write-off
consisted of $36,450,000 of acquired in-process research and development and
acquisition-related costs, which are included as a separate line in operating
expense, and $16,099,000 of inventories due to the creation of duplicative
product lines, which is included in cost of goods sold.

Note 17--Inframetrics Merger

Pursuant to the terms of the Agreement and Plan of Merger (the "Merger
Agreement") dated as of March 19, 1999 by and among the Company, IRABU
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary
of the Company ("Merger Sub"), Inframetrics, Inc., a Delaware corporation
("Inframetrics") and the stockholders of Inframetrics, Merger Sub was merged
with and into Inframetrics effective as of March 30, 1999 (the "Effective
Time").

The shares of capital stock of Inframetrics outstanding immediately prior to
the effective time were converted into and exchanged for a total of 2,107,552
shares of the Company's common stock (including 210,755 shares of the Company's
common stock held in escrow to secure the indemnification obligations of the
stockholders of Inframetrics until September 26, 1999). In addition, all
employee stock options to purchase Inframetrics common stock that were
outstanding immediately prior to the effective time were assumed by the
Company. A total of 192,439 shares of the Company's common stock are issuable
upon the exercise of the stock options assumed by the Company in the Merger.

The transaction was accounted for as a pooling of interests and, therefore,
financial statements for all periods presented have been restated to reflect
combined operations and financial position for all such periods. Such
restatements had no effect on previously reported separate results of
operations or shareholders' equity.

F-20
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In conjunction with the merger, on March 31, 1999, the Company recognized a
one-time charge of $24.3 million consisting of the following (in thousands):

<TABLE>
<CAPTION>
Description: Amount
- ------------ -------
<S> <C>
Reserve for duplicative inventories.................................... $18,150
Transaction related costs.............................................. 3,110
Cost to exit activities................................................ 3,000
-------
Total.................................................................. $24,260
=======
</TABLE>

The inventory reserve relates to duplicative product lines created by the
merger and is included in cost of goods sold. The Company intends to write-off
and dispose of the related inventories throughout 1999. The transaction related
costs consisted of investment advisor fees, legal and accounting fees and other
direct transaction costs. Such costs are included in combination costs, a
separate line item in operating expenses. The cost to exit activities amount
relates to estimated shut down costs related to duplicative sales offices in
the United Kingdom, Germany and France. The related accrual is recorded in
accrued payroll and other liabilities on the balance sheet. Preliminary
shutdown plans have been identified and activities related to the shutdown of
these facilities has begun. It is expected that the shutdown of these
facilitates will be completed by December 31, 1999. Such costs are also
included in combination costs.

The following reconciles revenue and net earnings (loss) previously reported
to the restated information presented in the consolidated financial statements:

<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
Revenue:
- --------
<S> <C> <C> <C>
Previously reported............................... $ 66,017 $ 91,771 $153,932
Inframetrics...................................... 45,768 53,163 54,690
-------- -------- --------
Restated.......................................... $111,785 $144,934 $208,622
======== ======== ========
<CAPTION>
Net earnings (loss):
- --------------------
<S> <C> <C> <C>
Previously reported............................... $ 5,092 $(30,588) $ 16,254
Inframetrics...................................... 1,501 1,400 522
-------- -------- --------
Restated.......................................... $ 6,593 $(29,188) $ 16,776
======== ======== ========
</TABLE>

Consolidated results of operations for the three months ended March 31, 1999
of the Company and Inframetrics on a stand-alone basis, excluding one time
charges for duplicative inventories created as a result of overlapping product
lines, reserve for shutdown of duplicate sales offices and other direct
transaction costs are as follows (in thousands):

<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
---------------------
(unaudited)
FLIR Inframetrics
------- ------------
<S> <C> <C>
Revenue................................................... $20,788 $13,650
------- -------
Net (loss) earnings....................................... $(2,764) $ 177
======= =======
<CAPTION>
Three Months Ended
March 31, 1998
---------------------
(unaudited)
FLIR Inframetrics
------- ------------
<S> <C> <C>
Revenue................................................... $27,699 $12,405
------- -------
Net earnings (loss)....................................... $ 290 $ (486)
======= =======
</TABLE>

F-21
<PAGE>

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 18--Subsequent Event

On June 2, 1999, the Board of Directors approved a Shareholder Rights Plan
which provides for
the issuance of one right for each share of outstanding common stock. The
rights will become exercisable only in the event that an acquiring party
acquires beneficial ownership of 15% or more of the Company's outstanding
common stock or announces a tender or exchange offer, the consummation of which
would result in beneficial ownership by that party of 15% or more of the
Company's outstanding common stock. Each right entitles the holder to purchase
one one-hundredth of a share of the Company's Series A Junior Participating
Preferred Stock with economic terms similar to that of one share of the
Company's common stock at a purchase price of $65.00, subject to adjustment.
The Company will generally be entitled to redeem the rights at $0.01 per right
at any time on or prior to the tenth day after an acquiring person has acquired
beneficial ownership of 15% or more of the Company's common stock. If an
acquiring person or group acquires beneficial ownership of 15% or more of the
Company's outstanding common stock and the Company does not redeem or exchange
the rights, each right not beneficially owned by the acquiring person or group
will entitle its holder to purchase, at the rights' then current exercise
price, that number of shares of common stock having a value equal to two times
the exercise price. The rights expire on June 2, 2009 if not previously
redeemed, exchanged or exercised.

F-22
<PAGE>

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

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

2,107,552 Shares

[FLIR SYSTEMS LOGO]

Common Stock

------------
PROSPECTUS
------------

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses expected to be
incurred by the Registrant in connection with the offering described in this
Registration Statement. All amounts are estimates except the SEC registration
fee.

<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 8,643
Printing Expenses............................................... 50,000
Accounting Fees and Expenses.................................... 50,000
Legal Fees and Expenses......................................... 75,000
Transfer Agent and Registrar Fees............................... 5,000
Miscellaneous Expenses.......................................... 15,000
--------
Total......................................................... $203,643
========
</TABLE>

Item 14. Indemnification of Directors and Officers.

As an Oregon corporation, we are subject to the Oregon Business Corporation
Act ("OBCA") and the exculpation from liability and indemnification provisions
contained therein. Pursuant to Section 60.047(2)(d) of the OBCA, Article IV of
our Second Restated Articles of Incorporation (the "Restated Articles")
eliminates the liability of our directors to us or our shareholders, except for
any liability related to breach of the duty of loyalty, actions not in good
faith and certain other liabilities.

Section 60.387 et seq. of the OBCA allows corporations to indemnify their
directors and officers against liability where the director or officer has
acted in good faith and with a reasonable belief that actions taken were in the
best interests of the corporation or at least not adverse to the corporation's
best interests and, if in a criminal proceeding, the individual had no
reasonable cause to believe the conduct in question was unlawful. Under the
OBCA, corporations may not indemnify against liability in connection with a
claim by or in the right of the corporation but may indemnify against the
reasonable expenses associated with such claims. Corporations may not indemnify
against breaches of the duty of loyalty. The OBCA provides for mandatory
indemnification of directors against all reasonable expenses incurred in the
successful defense of any claim made or threatened whether or not such claim
was by or in the right of the corporation. Finally, a court may order
indemnification if it determines that the director or officer is fairly and
reasonably entitled to indemnification in view of all the relevant
circumstances whether or not the director or officer met the good faith and
reasonable belief standards of conduct set out in the statute. Article IV of
the Restated Articles requires us to indemnify our directors and officers to
the fullest extent not prohibited by law.

The OBCA also provides that the statutory indemnification provisions are not
deemed exclusive of any other rights to which directors or officers may be
entitled under a corporation's articles of incorporation or bylaws, any
agreement, general or specific action of the board of directors, vote of
shareholders or otherwise.

We also have entered into indemnity agreements with each of our executive
officers and each member of our Board of Directors. These indemnity agreements
provide for indemnification of the indemnitee to the fullest extent allowed by
law.

Item 15. Recent Sale of Unregistered Securities.

During the last three years, we sold or issued the following securities that
were not registered under the Securities Act:

II-1
<PAGE>

(a) On December 1, 1997, we issued 4,162,000 shares of Common Stock to the
shareholders of AGEMA Infrared Systems AB in exchange for all of the
outstanding capital stock of AGEMA pursuant to the terms of a Combination
Agreement among FLIR, Spectra-Physics AB, Spectra-Physics Holdings S.A.,
Spectra-Physics Holding GmbH, Spectra-Physics Holdings PLC and Pharos Holdings,
Inc. This transaction was effected in reliance upon the exemption from
registration under the Securities Act provided under Section 4(2) of the
Securities Act.

(b) On March 30, 1999, we issued 2,107,552 shares of Common Stock to the
shareholders of Inframetrics, Inc. in exchange for all of the outstanding
capital stock of Inframetrics pursuant to the terms of an Agreement and Plan of
Merger among FLIR, Inframetrics, the shareholders of Inframetrics and Irabu
Acquisition Corporation, an Oregon corporation and wholly-owned subsidiary of
FLIR. This transaction was effected in reliance upon the exemption from
registration under the Securities Act provided by Regulation D under the
Securities Act. In addition to the shares of Common Stock issued to those
shareholders, all options to purchase Inframetrics common stock that were
outstanding immediately prior to the merger were assumed by us. A total of
192,439 shares of Common Stock are issuable upon the exercise of the
Inframetrics stock options we assumed. These shares have been registered with
the SEC pursuant to a Registration Statement on Form S-8.

(c) We sold securities upon the exercise of certain stock options granted
under our 1984 Stock Incentive plan. An aggregate of 94,087 shares of Common
Stock were issued at exercise prices ranging from $1.63 to $5.23. These
transactions were effected in reliance upon the exemption from registration
under the Securities Act provided by Rule 701 promulgated by the SEC pursuant
to authority granted under Section 3(b) of the Securities Act.

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits

II-2
<PAGE>

<TABLE>
<CAPTION>
No. Description
--- -----------
<C> <S>
10.5 Lease Dated February 11, 1985, as amended, by and among the FLIR
Systems, Inc. and Pacific Realty Association, L.P. (incorporated by
reference to Exhibit 10.6 to Registration Statement on Form S-1 (File
No. 33-62582))
10.6 Business Loan Agreement with Bank of America NT & SA (incorporated by
reference to Annual Report on Form 10-K for the year ended December 31,
1998)
10.7 Amendment No. 1 to Business Loan Agreement with Bank of America NT & SA
(incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1998)
10.8 Combination Agreement, Dated October 6, 1997, Among FLIR Systems, Inc.,
Spectra-Physics AB, Spectra-Physics Holding S.A., Spectra-Physics
Holdings GmbH, Spectra-Physics Holdings PLC, and Pharos Holdings, Inc.
(incorporated by reference to Exhibit 2.0 to Current Report on Form 8-K
filed on October 24, 1997)
10.9 Form of Executive Employment Agreement dated as of May 5, 1997 (Robert
P. Daltry and J. Kenneth Stringer III) (incorporated by reference to
Exhibit 10.1 to Current Report on Form 8-K filed on October 24, 1997)
10.10 Form of Executive Employment Agreement dated as of May 5, 1997 (James A.
Fitzhenry, J. Mark Samper, William N. Martin and Steven R. Palmquist)
(incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K
filed on October 24, 1997)
10.11 Form of Agreement amending Executive Employment Agreement dated as of
December 1, 1997 for Robert P. Daltry, J. Kenneth Stringer III, James A.
Fitzhenry, J. Mark Samper, William N. Martin and Steven R. Palmquist
(incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K
filed on December 15, 1997)
10.12 Form of Agreement Amending Executive Employment Agreement dated as of
January 20, 1999 amending Executive Employment Agreement of Robert P.
Daltry, J. Kenneth Stringer III, James A. Fitzhenry, J. Mark Samper,
William N. Martin, Arne Almorfors and David Smith (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q filed on
August 16, 1999)
10.13 Registration Rights Agreement dated as of December 1, 1997 by and among
FLIR Systems, Inc., Spectra-Physics AB, Spectra-Physics Holdings PLC and
Pharos Holdings (incorporated by reference to Exhibit 10.2 to Current
Report on Form 8-K filed on December 15, 1997)
10.14 Contract for the Supply of Uncooled Imaging Modules, dated January 15,
1997* (incorporated by reference to Exhibit 10.1 to Form 10-QA filed May
28, 1998)
10.15 Contract for the Supply of Uncooled Imaging Modules, dated March 4,
1998* (incorporated by reference to Exhibit 10.1 to Form 10-QA filed May
28, 1998)
10.16 Shareholders Agreement dated as of March 19, 1999 by and among FLIR,
Inframetrics and the shareholders of Inframetrics (incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed on April
14, 1999)
10.17 Amendment to Inframetrics, Inc. Shareholders Agreement dated as of
October 27, 1999 by and among FLIR, Inframetrics and the former
shareholders of Inframetrics.
10.18 FLIR Systems, Inc. 1999 Employee Stock Purchase Plan (incorporated by
reference to Exhibit A to the Company's Proxy Statement dated April 30,
1999)
21.0 Subsidiaries of FLIR Systems, Inc.
23.1 Consent of Ater Wynne LLP (included in legal opinion filed as Exhibit
5.1)**
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Ernst & Young LLP
24.1 Powers of Attorney (included at page II-5)
99.0 Report of Ernst & Young LLP
</TABLE>
- --------
* Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment under 17 C.F.R. (S) 240.24b-2.
** To be filed by amendment.

II-3
<PAGE>

(b) Financial Statement Schedule.

Schedule II--Valuation and Qualifying Accounts

Report of Independent Accountants on Financial Statement Schedule

Item 17. Undertakings.

We hereby undertake that, for the purpose of determining any liability under
the Securities Act each filing of our annual report pursuant to Section 13(a)
or Section 15(d) of the Securities Exchange Act (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than our payment of expenses incurred or paid
by a director, officer or controlling person in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

We hereby undertake:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by section 10(a)(3) of the Securities Act; (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
this offering.

(4) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(5) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

II-4
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-1 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Portland, State of Oregon, on November 9, 1999.

FLIR SYSTEMS, INC.

/s/ J. Kenneth Stringer III
By: ________________________________
J. Kenneth Stringer III
President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert P. Daltry and J. Kenneth Stringer III and
each of them singly, as true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign the Registration Statement filed
herewith and any or all further amendments to said Registration Statement
(including post-effective amendments and new registration statements pursuant
to Rule 462 or otherwise), and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the foregoing, as full to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or his substitute, may
lawfully do or cause to be done by virtue hereof.

Witness our hands on the date set forth below. Pursuant to the requirements
of the Securities Act, this Registration Statement has been duly signed by the
following persons in the capacities indicated on November 9, 1999.

Signature Title

/s/ Robert P. Daltry Chairman of the Board
- -------------------------
Robert P. Daltry

/s/ J. Kenneth Stringer III Director, President and Chief Executive Officer
- ------------------------- (Principal Executive Officer)
J. Kenneth Stringer III

/s/ J. Mark Samper Vice President Finance and Chief Financial Officer
- ------------------------- (Principal Financial and Accounting Officer)
J. Mark Samper

/s/ John C. Hart Director
- -------------------------
John C. Hart

Director
- -------------------------
Earl R. Lewis

/s/ W. Allen Reed Director
- -------------------------
W. Allen Reed

/s/ Ronald L. Turner Director
- -------------------------
Ronald L. Turner

II-5
<PAGE>

FLIR SYSTEMS, INC.

Schedule II--Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------------------------- ---------- --------------------- ---------- --------
Balance at Charged to Balance
Beginning Changes to Other Write-off at the
of the Cost and Account Net of End of
Year Expenses (Describe) Recoveries the Year
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1998
Allow. For Doubtful
Accts................... 2,639 417 0 160 3,216
Allow. For Deferred Tax
Assets.................. 6,889 (2,731) 0 0 4,158
Year ended December 31,
1997
Allow. For Doubtful
Accts................... 1,744 1,059 0 (164) 2,639
Allow. For Deferred Tax
Assets.................. 2,783 4,106 0 0 6,889
Year ended December 31,
1996
Allow. For Doubtful
Accts................... 842 1,320 0 (418) 1,744
Allow. For Deferred Tax
Assets.................. 4,002 (1,219) 0 0 2,783
</TABLE>

S-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of FLIR Systems, Inc.:

Our audits of the consolidated financial statements referred to in our
report dated April 15, 1999, except as to Note 18, which is as of June 2, 1999,
appearing in this Registration Statement on Form S-1 also included an audit of
the financial statement schedule listed in Item 16(b) of this Form S-1. We did
not audit the financial statement schedule of Inframetrics, Inc., a wholly-
owned subsidiary. That schedule was audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Inframetrics, Inc., is based solely on
the report of the other auditors. In our opinion, based on our audit and the
report of the other auditors, the financial statement schedule presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP

Portland, Oregon
April 15, 1999

S-2
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
No. Description
--- -----------
<C> <S>
2.1 Merger Agreement dated as of March 19, 1999 by and among FLIR Systems,
Inc., Inframetrics, Inc., Irabu Acquisition Corporation and the
Shareholders of Inframetrics, Inc. (incorporated by reference to Current
Report on Form 8-K filed on April 14, 1999)
3.1 Second Restated Articles of Incorporation of the FLIR Systems, Inc.
(incorporated by reference to Exhibit 3.1 to Registration Statement on
Form S-1 (File No. 33-62582))
3.2 First Amendment to Second Restated Articles of Incorporation of FLIR
Systems, Inc. (incorporated by reference to Exhibit 1.1 to Registration
Statement on Form 8-A filed on June 11, 1999)
3.3 First Restated Bylaws of the FLIR Systems, Inc. (incorporated by
reference to Exhibit 3.2 to Registration Statement on Form S-1 (File No.
33-62582))
4.1 Rights Agreement dated as of June 2, 1999 (incorporated by reference to
Exhibit 1.1 to the Registration Statement on Form 8-A filed on June 11,
1999)
5.1 Opinion of Ater Wynne LLP as to the legality of the securities being
registered.**
10.1 Form of Indemnity Agreement between the FLIR Systems, Inc. and each
member of its Board of Directors (incorporated by reference to Exhibit
10.1 to Registration Statement on Form S-1 (File No. 33-62582))
10.2 1984 Incentive Stock Option Plan and Amendments (incorporated by
reference to Exhibit 10.2 to Registration Statement on Form S-1 (File
No. 33-62582))
10.3 1992 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to
Registration Statement on Form S-1 (File No. 33-62582))
10.4 1993 Stock Option Plan for Non-employee Directors (incorporated by
reference to Exhibit 10.4 to Registration Statement on Form S-1 (File
No. 33-62582))
10.5 Lease Dated February 11, 1985, as amended, by and among the FLIR
Systems, Inc. and Pacific Realty Association, L.P. (incorporated by
reference to Exhibit 10.6 to Registration Statement on Form S-1 (File
No. 33-62582))
10.6 Business Loan Agreement with Bank of America NT & SA (incorporated by
reference to Annual Report on Form 10-K for the year ended December 31,
1998)
10.7 Amendment No. 1 to Business Loan Agreement with Bank of America NT & SA
(incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1998)
10.8 Combination Agreement, Dated October 6, 1997, Among FLIR Systems, Inc.,
Spectra-Physics AB, Spectra-Physics Holding S.A., Spectra-Physics
Holdings GmbH, Spectra-Physics Holdings PLC, and Pharos Holdings, Inc.
(incorporated by reference to Exhibit 2.0 to Current Report on Form 8-K
filed on October 24, 1997)
10.9 Form of Executive Employment Agreement dated as of May 5, 1997 (Robert
P. Daltry and J. Kenneth Stringer III) (incorporated by reference to
Exhibit 10.1 to Current Report on Form 8-K filed on October 24, 1997)
10.10 Form of Executive Employment Agreement dated as of May 5, 1997 (James A.
Fitzhenry, J. Mark Samper, William N. Martin and Steven R. Palmquist)
(incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K
filed on October 24, 1997)
10.11 Form of Agreement amending Executive Employment Agreement dated as of
December 1, 1997 for Robert P. Daltry, J. Kenneth Stringer III, James A.
Fitzhenry, J. Mark Samper, William N. Martin and Steven R. Palmquist
(incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K
filed on December 15, 1997)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
No. Description
--- -----------
<C> <S>
10.12 Form of Agreement Amending Executive Employment Agreement dated as of
January 20, 1999 amending Executive Employment Agreement of Robert P.
Daltry, J. Kenneth Stringer III, James A. Fitzhenry, J. Mark Samper,
William N. Martin, Arne Almorfors and David Smith (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q filed on
August 16, 1999)
10.13 Registration Rights Agreement dated as of December 1, 1997 by and among
FLIR Systems, Inc., Spectra-Physics AB, Spectra-Physics Holdings PLC and
Pharos Holdings (incorporated by reference to Exhibit 10.2 to Current
Report on Form 8-K filed on December 15, 1997)
10.14 Contract for the Supply of Uncooled Imaging Modules, dated January 15,
1997* (incorporated by reference to Exhibit 10.1 to Form 10-QA filed May
28, 1998)
10.15 Contract for the Supply of Uncooled Imaging Modules, dated March 4,
1998* (incorporated by reference to Exhibit 10.1 to Form 10-QA filed May
28, 1998)
10.16 Shareholders Agreement dated as of March 19, 1999 by and among FLIR,
Inframetrics and the shareholders of Inframetrics (incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed on April
14, 1999)
10.17 Amendment to Inframetrics, Inc. Shareholders Agreement dated as of
October 27, 1999 by and among FLIR, Inframetrics and the former
shareholders of Inframetrics.
10.18 FLIR Systems, Inc. 1999 Employee Stock Purchase Plan (incorporated by
reference to Exhibit A to the Company's Proxy Statement dated April 30,
1999)
21.0 Subsidiaries of FLIR Systems, Inc.
23.1 Consent of Ater Wynne LLP (included in legal opinion filed as Exhibit
5.1)**
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Ernst & Young LLP
24.1 Powers of Attorney (included at page II-5)
99.0 Report of Ernst & Young LLP
</TABLE>
- --------
* Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment under 17 C.F.R. (S) 240.24b-2.
** To be filed by amendment.

<PAGE>

Exhibit 10.17

AMENDMENT
TO
INFRAMETRICS, INC. SHAREHOLDERS AGREEMENT

This Amendment to Shareholders Agreement (the "Amendment") is made and
entered into as of October 27, 1999, by and among FLIR Systems, Inc., an Oregon
corporation ("Acquiror"), Inframetrics, Inc., a Delaware corporation ("Target")
and each of the former shareholders of Target identified on the signature page
hereto (each a "Shareholder" and collectively, the "Shareholders").

WHEREAS, Acquiror, Target and the Shareholders (together, the "Parties"
entered into the Inframetrics, Inc. Shareholders Agreement dated as of March 19,
1999 (the "Agreement") in connection with that certain Agreement and Plan of
Merger dated as of March 19, 1999 (the "Merger Agreement") by and among
Acquiror, Irabu Acquisition Corporation, Target and the Shareholders.

WHEREAS, the Parties desire to amend and restate certain provisions of the
Agreement;

NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the Parties hereto hereby agree
as follows:

1. Capitalized terms used herein but not defined herein shall have their
defined meanings as set forth in the Merger Agreement.

2. The last sentence of Section 4(b) of the Agreement is hereby deleted in
its entirety.

3. Section 7 of the Agreement is hereby amended and restated in its
entirety as follows:

7. Registration of Shares Issued in the Merger.

(a) Registrable Shares. For purposes of this Agreement
------------------
"Registrable Shares" shall mean the shares of Acquiror Common Stock issued
in the Merger, including any and all Escrow Shares, but excluding shares of
Acquiror Common Stock issued in the Merger that have been sold or otherwise
transferred by the shareholders of Target who initially received such
shares in the Merger prior to the effective date of the Registration
Statement (as defined below) (collectively, the "Holders") and excluding
shares of Acquiror Common Stock issuable upon exercise of Target Options
(the issuance of which has been registered on Form S-8); provided, however,
that a distribution of shares of Acquiror Common Stock issued in the Merger
without additional consideration, to underlying beneficial owners (such as
the general and limited partners, shareholders or trust beneficiaries of a
Holder) shall not be deemed such a sale or transfer for purposes of this
Section 7 and such underlying beneficial owners shall be entitled to the
same rights under this Section

Page 1- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

7 as the initial Holder from which the Registrable Shares were received and
shall be deemed a Holder for the purposes of this Section 7; and provided
further that, in the case of Elbit Limited, the sale or transfer of the
Acquiror Common Stock issued in the Merger by operation of law in a
transaction in which all of the outstanding equity interests of Elbit are
acquired by another party shall not be deemed such a sale or transfer and
such party shall be entitled to the same rights under this Section 7 as
Elbit Limited and shall be deemed a Holder for the purposes of this Section
7.

(b) Immediate Shelf Registration. On or before November 10,
----------------------------
1999, Acquiror shall file with the SEC a shelf registration statement on
Form S-1 under the Securities Act with respect to the Registrable Shares
(the "Initial Shelf Registration Statement") and effect all such
registrations, qualifications and compliances (including, without
limitation, obtaining appropriate qualifications under applicable state
securities or "blue sky" laws and compliance with any other applicable
governmental requirements or regulations) as any Selling Stockholder may
reasonably request (it being understood that each Holder hereby requests
qualification or other clearance for the sale of Registrable Shares in the
states of the United States) and that would permit or facilitate the sale
of Registrable Shares. Acquiror shall maintain the effectiveness of the
Initial Shelf Registration Statement and other applicable registrations,
qualifications and compliances for up to eighteen (18) months (the
"Registration Effective Period") from the date that the Initial Shelf
Registration Statement first becomes effective (the "Initial Shelf
Effective Date"); provided, however, that Acquiror shall not be required to
maintain the effectiveness of the Initial Shelf Registration Statement
after the effective date of a registration statement on Form S-3 covering
the Registrable Shares. Following the Initial Shelf Effective Date, the
Selling Stockholders shall be permitted (subject in all cases to the
provisions of paragraph (e) of this Section 7) to offer and sell
Registrable Shares in the manner described in the Initial Shelf
Registration Statement. In the event that the Registrable Shares of any
Selling Stockholder are withdrawn from the Initial Shelf Registration
Statement in connection with a registration pursuant to paragraph (c) below
and all Registrable Shares held by such Selling Stockholder are not sold
thereunder, Acquiror shall, upon request, take such action as may be
required to cause such Registrable Shares to be covered by a shelf
registration statement and maintain the effectiveness of such registration
statement for up to twelve months from the effective date of such shelf
registration statement.

(1) If Acquiror shall receive at any time after October 27,
1999, a written request from the Holders of Registrable Shares that
Acquiror file a registration statement under the Securities Act covering at
least thirty-five (35) percent of the Registrable Shares (or, in the case
of a request for registration pursuant to subparagraph (6), the percentage
specified therein), then

Page 2- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

Acquiror shall, within ten (10) days after the receipt thereof, give
written notice of such request to all Holders and shall, subject to the
provisions hereof, effect as soon as practicable, and in any event shall
use its best efforts to effect within 120 days of the receipt of such
request, the registration under the Securities Act of all Registrable
Shares that the Holders request to be registered within 20 days of the
mailing of such notice by Acquiror. Acquiror shall use its best efforts to
maintain the effectiveness of such registration statement until the earlier
of (i) the completion of the sale of all Registrable Shares included in the
registration, or (ii) the first anniversary of the effective date of such
registration statement.

(2) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Shares covered
by their request by means of an underwriting, they shall so advise Acquiror
as a part of their request made pursuant to this Agreement and Acquiror
shall include such information in the written notice referred to in this
section. In such event, the right of any Holder to include his or her
Registrable Shares in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Shares in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting shall (together with Acquiror) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected
for such underwriting by the Initiating Holders. Such underwriter or
underwriters shall be reasonably acceptable to Acquiror.

(3) Notwithstanding any other provision of this Agreement, if
the underwriter advises Acquiror in writing that marketing factors require
a limitation of the number of shares to be underwritten, then Acquiror
shall so advise all Holders of Registrable Shares that would otherwise be
underwritten pursuant hereto, and the number of shares of Registrable
Shares that may be included in the underwriting shall be allocated among
all Holders who have requested the inclusion of Registrable Shares in the
registration in proportion (as nearly as practicable) to the number of
shares of Acquiror Common Stock owned by each such requesting shareholder;
provided, however, that the rights of the Holders to include Registrable
-------- -------
Shares in the registration shall be subject to the rights and obligations
of the parties to the Registration Rights Agreement dated as of December 1,
1997 by and among FLIR, Spectra-Physics AB, Spectra-Physics Holdings PLC
and Pharos Holdings, Inc. Any Registrable Shares excluded or withdrawn from
such underwriting shall be withdrawn from the registration.

(4) Notwithstanding the foregoing, if Acquiror shall furnish to
Holders requesting registration pursuant to this Agreement, a certificate
signed by the Chairman of the Board of Directors of Acquiror stating that
in the good faith judgment of the Board of Directors of Acquiror, the
filing of such registration

Page 3- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

statement would have a material adverse effect on Acquiror and it is
therefore essential to defer the filing of such registration statement,
Acquiror shall have the right to defer the filing of such registration
statement for a period of not more than 90 days after receipt of the
request of the Initiating Holders (the "Deferral Right"); provided,
however, that the Deferral Right shall not be exercised more than once in
any twelve (12) month period, except in the event that one or more requests
for registration are withdrawn pursuant to the following proviso; and
provided, further, that in the event that the Deferral Right is exercised,
the Initiating Holders shall be entitled to withdraw such request for
registration and, if the request is withdrawn, such requests for
registration will not count as one of the permitted requests for
registration hereunder.

(5) Except as otherwise provided in subsection (6) of this
paragraph (c), the Holders shall be limited to one (1) request for
registration pursuant to this paragraph (c).

(6) If any Registrable Shares are excluded from a registration
pursuant to subparagraph (3) of this paragraph (c) (the "Excluded Shares")
the Holders of the Excluded Shares shall be entitled to such additional
requests for registration pursuant to this paragraph (c) as may be required
to permit the registration of the Excluded Shares; provided, however, that
(i) only those Registrable Shares that were Excluded Shares in the
immediately preceding registration pursuant to this paragraph (c) shall be
entitled to participate in any additional request for registration pursuant
to this subparagraph (6), (ii) each request for registration of Excluded
Shares must cover at least thirty-five (35) percent of the Registrable
Shares that constitute Excluded Shares at the time of such request, and,
(iii) in no event shall Acquiror be obligated to effect more than two (2)
registrations pursuant to this paragraph (c) in any twelve month period.

(d) Form S-3 Registration Acquiror shall use its best efforts to
---------------------
become eligible to use Form S-3 for the resale of shares of Acquiror Common
Stock by Acquiror's shareholders under the Securities Act and to continue
thereafter to qualify at all times for registration of its capital stock
for resale by Acquiror's shareholders on Form S-3 or a successor form.
After April 1, 2000, any Holder or Holders may deliver to Acquiror a
written request that Acquiror effect a registration on Form S-3 and any
related qualification or compliance with respect to all or a part of the
Registrable Shares owned by such Holder or Holders. Upon receipt of such a
request, Acquiror will:

(1) within ten (10) days after receipt of such request, give
written notice of the proposed registration, and any related qualification
or compliance, to all other Holders; and

Page 4- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

(2) as soon as practicable, using its best efforts, effect such
registration and all such qualifications and compliances as may be so
requested and as would permit or facilitate the sale and distribution of
all or such portion of such Holder's or Holders' Registrable Shares as are
specified in such request, together with all or such portion of the
Registrable Shares of any other Holder or Holders joining in such request
as are specified in a written request given within 30 days after receipt of
such written notice from Acquiror; provided, however, that Acquiror shall
not be obligated to effect any such registration, qualification or
compliance, pursuant to this section: (i) if Form S-3 is not available for
such offering by the Holders, (ii) if the aggregate offering price of the
Registrable Shares to be registered does not exceed $500,000, (iii) in any
particular jurisdiction in which Acquiror would be required to qualify to
do business or to execute a general consent to service of process in
effecting such registration, qualification or compliance and in which
Acquiror was not already qualified to do business or had not yet executed a
general consent to service of process, as the case may be, or (iv) if
Acquiror shall furnish to the Holders a certificate signed by the Chairman
of the Board of Directors of Acquiror stating that in the good faith
judgment of the Board of Directors of Acquiror and based on the advice of
counsel, it would be materially detrimental to Acquiror and its
shareholders for such Form S-3 Registration to be effected at such time
because it would require the disclosure of a material transaction or other
material information, in which event Acquiror shall have the right to defer
the filing of the Form S-3 registration statement for a period of not more
than 90 days after receipt of the request of the Holder or Holders under
this section; provided, however, that Acquiror shall not utilize this right
to delay the requested registration more than once in any 12 month period;
and

(3) subject to the foregoing, Acquiror shall file a Form S-3
registration statement covering the Registrable Shares and other securities
so requested to be registered as soon as practicable after receipt of the
requests of the Holders received in response to the notice given under
subparagraph (1) of this paragraph (d), and use its best efforts to
maintain the effectiveness of such registration statement until the earlier
of (i) the completion of the sale of all Registrable Shares included in the
registration, or (ii) eighteen (18) months after the effective date of such
registration statement.

(e) Suspension Right. Notwithstanding any other provision of
----------------
this Section 7, Acquiror shall have the right at any time to require that
all Holders suspend further open market offers and sales of Registrable
Shares whenever, and for so long as, in the reasonable judgment of Acquiror
after consultation with counsel, the use of a registration statement and
the prospectus related thereto must be suspended due to the happening of
any event as a result of which the prospectus included in the registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or

Page 5- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

necessary to make the statements therein not misleading in the light of the
circumstances then existing (the "Suspension Right"). In the event
Acquiror exercises the Suspension Right, such suspension will continue for
the period of time reasonably necessary for disclosure to occur at a time
that is not detrimental to Acquiror and its shareholders or, if earlier,
until such time as the information or event is no longer material, each as
determined in good faith by Acquiror after consultation with counsel.
Notwithstanding the foregoing, Acquiror shall not impose the Suspension
Right at any time for more than thirty (30) consecutive days or more than a
total of ninety (90) days during any twelve (12) month period. Acquiror
will promptly give the Holders written notice of any such suspension and
will use its best efforts to minimize the length of the suspension. The
Registration Effective Period shall be extended by a period of time equal
to the duration of any period during which the Suspension Right is imposed.

(f) Obligations of Acquiror Whenever required under this
-----------------------
Agreement to effect the registration of any Registrable Shares, Acquiror
shall use its best efforts to:

(1) Prepare and file with the SEC a registration statement with
respect to such Registrable Shares and use its best efforts to cause such
registration statement to become effective within the time period specified
in paragraphs (b), (c) or (d), as applicable, and, use its best efforts to
maintain the effectiveness of such registration statement during the time
period specified in paragraphs (b), (c) or (d), as applicable.

(2) As promptly as reasonably practicable, prepare and file with
the SEC such amendments and supplements to such registration statement and
the prospectus used in connection with such registration statement as may
be necessary to respond to comments or requests for additional information
from the SEC or comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such registration
statement.

(3) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Shares owned by them.

(4) Register and qualify the securities covered by such
registration statement under such other securities or Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holders, provided
that Acquiror shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.

Page 6- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

(5) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering.

(6) As promptly as reasonably practicable, notify each Holder of
Registrable Shares covered by such registration statement at any time when
a prospectus relating thereto covered by such registration statement is
required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing.

(7) As promptly as reasonably practicable, notify each Holder
(i) when a prospectus or any prospectus supplement or post-effective
amendment has been filed, and with respect to the registration statement or
post-effective amendment, when the same has become effective, (ii) of any
request by the SEC or any other federal or state governmental authority for
amendments or supplements to the registration statement or prospectus or
for additional information, (iii) of the issuance by the SEC or any other
federal or state governmental authority of any stop order suspending the
effectiveness of the registration statement or the initiation of any
proceeding for that purpose, and (iv) of the receipt by Acquiror of any
notification with respect to the suspension of the qualification of any of
the Registrable Shares for sale in any jurisdiction or the initiation of
any proceeding for that purpose.

(8) Use its best efforts to prevent the issuance of any stop
order suspending the effectiveness of the registration statement, and if
one is issued, use its best efforts to obtain the withdrawal of any stop
order suspending the effectiveness of the registration statement, or the
lifting of any suspension of the qualification (or exemption from
qualification) of any Registrable Shares for sale in any jurisdiction at
the earliest possible time.

(g) Obligations of Holders. Whenever a registration of
----------------------
Registrable Shares is required to be effected under this Agreement.

(1) Each Holder covenants and agrees that it shall promptly
furnish to Acquiror such information regarding themselves or the
Registrable Shares held by them, and the intended method of disposition of
such securities, and shall execute such documents in connection with such
registration, in each case, as shall be reasonably requested by Acquiror in
order to effect the registration of its Registrable Shares. Each Holder
agrees that it will not effect any disposition of its Registrable Shares
that would constitute a sale within the meaning

Page 7- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

of the Securities Act (including a disposition which qualifies for an
exemption from registration thereunder) except in compliance with the
Securities Act and the regulations thereunder, including all applicable
prospectus delivery requirements.

(2) Each Holder covenants and agrees that it will promptly
advise the Company of any changes in the information concerning such Holder
contained in any registration statement required by this Agreement and that
such Holder will not make any sale of Registrable Shares pursuant to any
registration statement without complying with the prospectus delivery
requirements of the Securities Act.

(3) Each Holder acknowledges that occasionally there may be
times (as described in paragraph (e) of this Section 7 when Acquiror must
temporarily suspend the use of the prospectus forming a part of a
registration statement until such time as an amendment to the registration
statement has been filed by Acquiror and declared effective by the SEC, the
relevant prospectus supplemented by Acquiror or until such time as Acquiror
has filed an appropriate report with the SEC pursuant to the Exchange Act.
During any period in which sales are suspended, each Holder covenants and
agrees that it will not offer or sell any such Registrable Shares pursuant
to the registration statement or any such prospectus.

(h) Expenses. Acquiror agrees to bear the costs and expenses for any
--------
registration pursuant to this Section 7. The costs and expenses to be borne
by Acquiror for purposes of this Section 7 shall include, without
limitation, printing expenses (including a reasonable number of
prospectuses for circulation by the selling Holders), legal fees and
disbursements of counsel for Acquiror, legal fees and disbursements of one
counsel for the Holders in an amount not to exceed $25,000, "blue sky"
expenses, accounting fees and registration, filing and qualification fees,
but shall not include underwriting commissions or similar charges.

(i) Underwriting Requirements. In connection with any offering
-------------------------
involving an underwriting of shares of capital stock of Acquiror, Acquiror
shall not be required under this Agreement to include any of the Holders'
securities in such underwriting unless such Holders accept the terms of the
underwriting as agreed upon between Acquiror and the underwriters.

(j) Delay of Registration. No Holder shall have any right to obtain
---------------------
or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect
to the interpretation or implementation of this Agreement.

(k) Reports Under Securities Exchange Act of 1934. With a view to
---------------------------------------------
making available to the Holders the benefits of Rule 144 promulgated under
the

Page 8- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

Securities Act ("Rule 144") and any other rule or regulation of the SEC
that may at any time permit a Holder to sell securities of Acquiror to the
public without registration, Acquiror agrees to: file with the SEC in a
timely manner all reports and other documents required of Acquiror under
the Securities Act and the Exchange Act; take all action required as a
condition to the availability of Rule 144 (or any successor rule
hereinafter in effect) and furnish to any Holder promptly upon written
request, so long as the Holder owns any Registrable Shares, (i) a written
statement by Acquiror that it has complied with the reporting requirements
of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the
most recent annual or quarterly report of Acquiror and such other reports
and documents so filed with the SEC by Acquiror, and (iii) such other
information as may be reasonably requested in availing any Holder of any
rule or regulation of the SEC that permits the selling of any such
securities without registration or pursuant to such form.

(l) Indemnification. In the event any Registrable Shares are
---------------
included in a registration statement under this Agreement:

(1) To the extent not prohibited by law, Acquiror will
indemnify and hold harmless each Holder, the partners, shareholders,
officers, directors, employees and agents (individually, an "Affiliate" and
collectively, the "Affiliates") of each holder, any underwriter (as defined
in the Securities Act) for such Holder and each person, if any, who
controls such Holder, Affiliate or underwriter within the meaning of the
Securities Act or the Exchange Act or is under common control with, or is
controlled by such Holder, Affiliate or underwriter together with the
Affiliates of such controlling person (individually, a "Controlling Person"
and collectively, the "Controlling Persons"), against any losses, claims,
damages, liabilities (joint or several) or expenses to which they may
become subject under the Securities Act, the Exchange Act or other federal
or state law, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively, a
"Violation"): (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary
to make the statements therein not misleading, or (iii) any violation or
alleged violation by Acquiror of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation promulgated under the
Securities Act, the Exchange Act or any state securities law; and Acquiror
will pay to each such Holder, Affiliate, underwriter or Controlling Person,
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
section shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability, expense or action if such

Page 9- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

settlement is effected without the consent of Acquiror (which consent shall
not be unreasonably withheld), nor shall Acquiror be liable in any such
case for any such loss, claim, damage, liability, expense or action to the
extent that it arises out of or is based upon a Violation that occurs in
reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
Affiliate, underwriter or Controlling Person.

(2) To the extent not prohibited by law, each selling
Holder will indemnify and hold harmless Acquiror, each of its directors,
each of its officers who has signed the registration statement, each
person, if any, who controls Acquiror within the meaning of the Securities
Act, any underwriter and any other Holder selling securities in such
registration statement and any partner, officer, director, or controlling
person of any such underwriter or other Holder, against any losses, claims,
damages, liabilities (joint or several) or expenses to which any of the
foregoing persons may become subject, under the Securities Act, the
Exchange Act or other federal or state law, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereto) arise out
of or are based upon any Violation, in each case to the extent (and only to
the extent) that such Violation occurs in reliance upon and in conformity
with written information furnished by such Holder under an instrument duly
executed by such Holder and stated to be specifically for use in connection
with such registration; and each such Holder will pay, as incurred, any
legal or other expenses reasonably incurred by any person intended to be
indemnified pursuant to this section, in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided,
however, that the indemnity agreement contained in this section shall not
apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of
the Holder, which consent shall not be unreasonably withheld; provided,
that, in no event shall any indemnity under this section exceed the gross
proceeds from the offering received by such Holder.

(3) Promptly after an indemnified party under this Agreement
has actual knowledge of any claim as to which indemnity may be sought
(including the commencement of any governmental or other action), such
indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party under this Agreement, deliver to the indemnifying
party a written notice of such claim and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to
assume the defense thereof with counsel mutually satisfactory to the
indemnified party and the indemnifying party, and the indemnified party may
participate in such defense at such party's expense; provided, however,
that an indemnified party shall have the right to retain its own counsel,
with reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would

Page 10- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

be inappropriate due to actual or potential differing interests between
such indemnified party and any other party represented by such counsel in
such proceeding. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action, if
materially prejudicial to its ability to defend such action, shall relieve
such indemnifying party of any liability to the indemnified party under
this Agreement, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to
any indemnified party otherwise than under this Agreement. No indemnifying
party, in the defense of any such claim or litigation, shall (except with
the consent of the indemnified party) consent to entry of any judgment or
enter into any settlement that does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect of such claim or litigation.

(4) If the indemnification provided for in this Agreement
is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any losses, claims, damages, liabilities
or expenses referred to herein, the indemnifying party, in lieu of
indemnifying such indemnified party thereunder, shall to the extent
permitted by applicable law contribute to the amount paid or payable by
such indemnified party as a result of such loss, claim, damage, liability
or expense in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and of the indemnified
party on the other, in connection with the Violation(s) that resulted in
such loss, claim, damage, liability or expense, as well as any other
relevant equitable considerations. The relative fault of the indemnifying
party and of the indemnified party shall be determined by a court of law by
reference to, among other things, whether the untrue or allegedly untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.

(5) The foregoing indemnity agreements of Acquiror and Holders
are subject to the condition that, insofar as they relate to any Violation
made in a preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the SEC at the time the registration statement in
question becomes effective or the amended prospectus filed with the SEC
pursuant to SEC Rule 424(b) (the "Final Prospectus"), such indemnity
agreement shall not inure to the benefit of an indemnified party if a copy
of the Final Prospectus was timely furnished to that indemnified party,
that indemnified party had an obligation to furnish the Final Prospectus to
the person asserting the loss, liability, claim or damage, and the
indemnified party failed to so furnish the Final Prospectus at or prior to
the time such action is required by the Securities Act.

Page 11- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

(6) The obligations of Acquiror and Holders under this
Agreement shall survive the completion of any offering of Registrable
Shares in a registration statement under this Agreement, and otherwise.

(m) Remedies. If, at any time after October 27, 1999, Acquiror
---------
is in material breach of any material covenant or obligation of Acquiror
set forth in this Section 7 then, at the sole discretion of the Holders,
the Holders, acting together, shall be entitled to either (i) seek damages
and other remedies for such breach, including any and all claims, causes of
action, obligations, liabilities, attorneys' fees and costs related
thereto, or (ii) receive a payment of late fees from Acquiror in the amount
of $10,000 for each day, if any, from the tenth business day after the date
Acquiror receives written notice of such breach from the Holders to the
date that such breach is cured.

4. Except as set forth and amended and restated herein, the Agreement
shall remain unchanged and in full force and effect.

IN WITNESS WHEREOF, the Parties have caused this Amendment to be duly
executed on the date and year first written above.

FLIR SYSTEMS, INC.,
an Oregon corporation

By /s/ J. Kenneth Stringer III
----------------------------------------
J. Kenneth Stringer III
President and Chief Executive Officer

INFRAMETRICS, INC.,
a Delaware corporation

By: /s/ Jay S. Teich
----------------------------------------
Name: Jay S. Teich
--------------------------------------
Title: President
-------------------------------------

Page 12- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

SHAREHOLDERS: Advent Direct Investment Program Limited
Partnership

By: Advent International Limited
Partnership, General Partner

By: Advent International Corporation,
General Partner

By: /s/ Dennis R. Costello
-----------------------------------
Name: Dennis R. Costello
---------------------------------
Title: Senior Vice President
--------------------------------

Advent Israel Limited Partnership

By: Advent International Limited
Partnership, General Partner

By: Advent International Corporation,
General Partner

By: /s/ Dennis R. Costello
-----------------------------------
Name: Dennis R. Costello
---------------------------------
Title: Senior Vice President
--------------------------------

Advent Israel (Bermuda) Limited Partnership

By: Advent International Limited
Partnership, General Partner

By: Advent International Corporation,
General Partner

By: /s/ Dennis R. Costello
-----------------------------------
Name: Dennis R. Costello
---------------------------------
Title: Senior Vice President
--------------------------------

Page 13- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

EnviroTech Investment Fund I Limited
Partnership

By: Advent International Limited
Partnership, General Partner

By: Advent International Corporation,
General Partner

By: /s/ Dennis R. Costello
-----------------------------------
Name: Dennis R. Costello
---------------------------------
Title: Senior Vice President
--------------------------------

Global Private Equity II Limited Partnership

By: Advent International Limited
Partnership, General Partner

By: Advent International Corporation,
General Partner

By: /s/ Dennis R. Costello
-----------------------------------
Name: Dennis R. Costello
---------------------------------
Title: Senior Vice President
--------------------------------

Commonwealth Capital Ventures Limited
Partnership

By: Commonwealth Venture Partners, L.P.,
its General Partner

By: /s/ J. Hurst
-----------------------------------
Name: J. Hurst
---------------------------------
Title: General Partner
--------------------------------

Page 14- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

Orion Capital Holdings, Limited Partnership

By: Orion Capital Partners, L.P., General
Partner

By: Eagle Capital Management Limited
Partnership, General Partner

By: Eagle Capital Holdings, Inc., General
Partner

By: /s/ Steven A. Kandarian
-----------------------------------
Name: Steven A. Kandarian
---------------------------------
Title: Managing Director
--------------------------------

M-K I Partnership, Limited Partnership

By: Orion Capital Partners, L.P., General
Partner

By: Eagle Capital Management Limited
Partnership, General Partner

By: Eagle Capital Holdings, Inc., General
Partner

By: /s/ Steven A. Kandarian
-----------------------------------
Name: Steven A. Kandarian
---------------------------------
Title: Managing Director
--------------------------------

The Parthenon Group, Inc.

By: /s/ Kelly G. Murphy
-----------------------------------
Name: Kelly G. Murphy
---------------------------------
Title: Managing Director
--------------------------------

Inframetrics Investment Limited Partnership

By: /s/ Jay S. Teich
-----------------------------------
Name: Jay S. Teich
---------------------------------
Title: President
--------------------------------

Page 15- AMENDMENT TO SHAREHOLDERS AGREEMENT
<PAGE>

Elbit Limited

By: /s/ P. Kirshen
-----------------------------------
Name: P. Kirshen
---------------------------------
Title: V.P. and General Counsel
--------------------------------

/s/ Azriel Biberstain
--------------------------------------
Azriel Biberstain

/s/ Dan Manitakos
--------------------------------------
Dan Manitakos

/s/ Detlev Suderow
--------------------------------------
Detlev Suderow

/s/ Jay Teich
--------------------------------------
Jay Teich

/s/ Andy Teich
--------------------------------------
Andy Teich

/s/ Charlie Torrielli
--------------------------------------
Charlie Torrielli

Page 16- AMENDMENT TO SHAREHOLDERS AGREEMENT

<PAGE>

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

EXHIBIT 21.0

Subsidiaries of FLIR Systems, Inc.
----------------------------------

. FLIR Systems AB, a Swedish Corporation

. FLIR Systems Boston, Inc., a Delaware Corporation

. FSI Automation, Inc., a Washington Corporation

. FSI International, Inc., a Barbados Corporation

. FLIR Systems, Ltd., a Canadian Corporation

. FLIR Systems International, Ltd., a United Kingdom Corporation

. FLIR Systems Limited, a United Kingdom Corporation

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

<PAGE>

Exhibit 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated April 15, 1999, except as to note 18, which is as of June 2,
1999, relating to the financial statements of FLIR Systems, Inc., which appear
in such Registration Statement. We also consent to the use of our report dated
April 15, 1999 relating to the financial statement schedule, which appears in
this Registration Statement on Form S-1. We also consent to the references to
us under the headings "Experts" and "Selected Consolidated Financial Data" in
such Registration Statement.

PricewaterhouseCoopers LLP

Portland, Oregon
November 9, 1999

<PAGE>
EXHIBIT 23.3

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 19, 1999, with respect to the consolidated
financial statements and schedule of Inframetrics, Inc. included (not presented
separately) in the Registration Statement on Form S-1 and related Prospectus of
FLIR Systems, Inc. for the registration of 2,107,552 shares of its common stock.

Ernst & Young LLP

Boston, Massachusetts
November 5, 1999

<PAGE>

Exhibit 99.0

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors
Inframetrics, Inc.

We have audited the accompanying consolidated balance sheets of Inframetrics,
Inc. and subsidiaries (the Company) as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31, 1998
(not presented separately herein). Our audits also included the financial
statement schedule listed in the Index at Item 16(b). These financial statements
and schedule 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 consolidated financial position of Inframetrics, Inc.
and subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

Ernst & Young LLP

Boston, Massachusetts
February 19, 1999