SEC Info - Faro Technologies Inc - IPO: ‘424B4’ on 9/18/97

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Faro Technologies Inc – IPO: ‘424B4’ on 9/18/97

As of: Thursday, 9/18/97 · Accession #: 950144-97-10169 · File #: 333-32983

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 9/18/97  Faro Technologies Inc             424B4                  1:218K                                   Bowne of Atlanta Inc/FA

Initial Public Offering (IPO): Prospectus — Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Faro Technologies Form 424B4                          62    364K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Additional Information Business Capitalization Certain Transactions Competition Customers Description of Capital Stock Dilution Dividend Policy Experts FARO Products FARO Strategy, The Gross profit Independent Auditors' Report Index to Consolidated Financial Statements Interest expense Legal Matters Management Management's Discussion and Analysis of Financial Condition and Results of Operations Net income (loss) Notes to Consolidated Financial Statements Offering, The Overview Principal and Selling Shareholders Product Design Costs Prospectus Summary Quarterly Results Research and development Results of Operations Risk Factors Sales Selected Consolidated Financial Data Shares Eligible for Future Sale Simon Raab, Ph.D Stock Option Plans Technological Change Technology The FARO Strategy The Offering Uncertainty of Patents; Dependence on Patents, Licenses and Proprietary Rights Underwriting Use of Proceeds 1997 Non-Employee Director Stock Option Plan
1	1st Page - Filing Submission
3	Prospectus Summary
4	The Offering
6	Risk Factors
"	Competition
7	Uncertainty of Patents; Dependence on Patents, Licenses and Proprietary Rights
8	Technological Change
10	Shares Eligible for Future Sale
12	Use of Proceeds
"	Dividend Policy
13	Capitalization
14	Dilution
15	Selected Consolidated Financial Data
17	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Overview
18	Results of Operations
"	Sales
"	Gross profit
19	Interest expense
21	Net income (loss)
"	Quarterly Results
24	Business
26	The FARO Strategy
27	FARO Products
29	Customers
31	Research and development
"	Technology
35	Management
37	Simon Raab, Ph.D
"	Stock Option Plans
38	1997 Non-Employee Director Stock Option Plan
39	Principal and Selling Shareholders
40	Certain Transactions
41	Description of Capital Stock
45	Underwriting
46	Legal Matters
47	Experts
"	Additional Information
48	Index to Consolidated Financial Statements
49	Independent Auditors' Report
54	Notes to Consolidated Financial Statements
55	Product Design Costs

424B4 1st Page of 62 TOC ↑Top Previous Next ↓Bottom Just 1st
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-32983

3,360,000 SHARES

[FARO LOGO]

COMMON STOCK
------------------------

Of the 3,360,000 shares of Common Stock offered hereby, 2,760,000 shares
are being issued and sold by FARO Technologies, Inc. (the "Company") and 600,000
shares are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any proceeds from the sale of Common Stock by the Selling Shareholders.

Prior to this offering, there has been no public market for the Common
Stock. See "Underwriting" for information relating to the determination of the
initial public offering price.

The Common Stock has been approved for quotation on the Nasdaq Stock
Market's National Market under the symbol "FARO."
------------------------

SEE "RISK FACTORS" ON PAGES 6 THROUGH 11 FOR CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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=========================================================================================================================
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
-------------------------------------------------------------------------------------------------------------------------

Per Share.................... $12.00 $0.84 $11.16 $11.16
------------------------------------------------------------------------------------------------------------------------
Total(3)..................... $40,320,000 $2,822,400 $30,801,600 $6,696,000
========================================================================================================================

(1) Excludes additional compensation to be received by the Representatives of
the Underwriters in the form of warrants to purchase 100,000 shares of
Common Stock, which warrants are being registered hereunder. The Company and
the Selling Shareholders have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933. See "Underwriting."
(2) Before deducting expenses, estimated at $500,000, payable by the Company.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 504,000 additional shares of Common Stock on
the same terms and conditions as the securities offered hereby solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Shareholders will be $46,368,000,
$3,245,760, $36,426,420 and $6,696,000, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
other conditions including the right of the Underwriters to withdraw, cancel,
modify or reject any order in whole or in part. It is expected that delivery of
the shares will be made on or about September 23, 1997, at the office of Raymond
James & Associates, Inc., St. Petersburg, Florida.

RAYMOND JAMES & ASSOCIATES, INC. HANIFEN, IMHOFF INC.
The date of this Prospectus is September 17, 1997.

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The following six photographs appear here:

1. Individual using a FAROArm to measure a jet aircraft engine.

2. Individuals using a FAROArm to measure an automobile body during the
manufacturing process.

3. Individual using a FAROArm to measure an automobile subcomponent during
the manufacturing process.

4. Individual using a FAROArm to measure a contoured surface.

5. All six models of the FAROArm manufactured by the Company, including
three different sizes of the Bronze Series FAROArm and three different sizes of
the Silver Series FAROArm.

6. Close-up of a Silver Series FAROArm.

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT AND STABILIZING TRANSACTIONS, THE PURCHASE OF
SUCH SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

424B4 3rd Page of 62 TOC 1st Previous Next ↓Bottom Just 3rd

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information in this Prospectus (i) has been adjusted to reflect a 1 for
1.422272107 reverse split of the issued and outstanding shares of Common Stock
effective at June 30, 1997, (ii) assumes no exercise of the Underwriters'
over-allotment option, and (iii) does not reflect the receipt of proceeds from
the exercise of the warrants being registered hereunder. Investors should
carefully consider the information set forth under the heading "Risk Factors."
As used herein, the terms "FARO" and the "Company" refer to FARO Technologies,
Inc. and its subsidiaries, except where the context indicates otherwise.

THE COMPANY

FARO Technologies, Inc. ("FARO" or the "Company") designs, develops,
markets and supports portable, software-driven, three-dimensional ("3-D")
measurement systems that are used in a broad range of manufacturing and
industrial applications. The Company's principal products are the FAROArm(R)
articulated measuring device and its companion AnthroCam(R) software. Together,
these products integrate the measurement and quality inspection function with
computer-aided design ("CAD"), computer-aided manufacturing ("CAM") and
computer-aided engineering ("CAE") technology to improve productivity, enhance
product quality and decrease rework and scrap in the manufacturing process. The
Company's products bring precision measurement, quality inspection and
specification conformance capabilities, integrated with leading CAD software, to
the factory floor. The Company is a pioneer in the development and marketing of
3-D measurement technology for manufacturing and industrial applications and
currently holds or has pending 17 patents in the United States, ten of which
also are held or pending in other jurisdictions. The Company's products have
been purchased by more than 600 customers worldwide, ranging from small machine
shops to such large manufacturing and industrial companies as General Motors,
Chrysler, Ford, Boeing, Lockheed Martin, General Electric, Westinghouse
Electric, Caterpillar and Komatsu Dresser.

The processes of product design and manufacturing have evolved rapidly
during the past decade through the adoption of 3-D software and CAD/CAM
technology. This evolution has been driven by increasing global and competitive
pressures for shorter product cycles, greater customization and higher quality
and lower cost products. Despite such technological advances in design and
manufacturing, the measurement and quality inspection function of the
manufacturing process generally remains limited to manual, analog technology or
traditional, fixed-based coordinate measurement machines ("CMMs") that are
largely restricted to a metrology laboratory and often lengthen the
manufacturing process. These global and competitive pressures have created a
significant demand for measurement systems that bridge the gap between the
virtual 3-D world of the CAD process and the physical 3-D world of the factory
floor. The Company believes that the FAROArm(R) and AnthroCam(R) provide that
bridge by integrating CAD/CAM technology into a manufacturer's design,
production and measurement and quality inspection processes, serving a much
broader range of the manufacturing process than traditional measurement tools.

The FAROArm(R) is a portable, six-axis, instrumented, articulated device
that approximates the range of motion and dexterity of the human arm.
AnthroCam(R) is the Company's proprietary companion software for the FAROArm(R).
This CAD-based measurement software provides an interface between the FAROArm(R)
and CAD technology for design, manufacturing and measurement and quality
inspection applications. The Company's products provide its customers an
affordable way to integrate CAD technology throughout the manufacturing process.
These products are based on an open architecture and are designed to be used by
shop personnel with minimal prior computer or CAD experience and to be operated
in the often harsh environments typical of manufacturing facilities.

The Company's objective is to enhance its position as a leading provider of
portable, software-driven, 3-D measurement systems. To achieve this objective,
the Company has adopted the following principal strategies: (i) focus on the
portable 3-D measurement market; (ii) increase sales force and distribution;
(iii) further penetrate its installed customer base; (iv) increase international
sales; (v) leverage its technology; and (vi) expand its product line and service
offerings.
3

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As a result of the implementation of the Company's strategies, total sales
have increased from $4.5 million in 1994 to $14.7 million in 1996 and $10.3
million for the first six months of 1997. The Company's operating results have
improved from an operating loss of $247,000 in 1994 to operating income of $2.7
million in 1996 and $2.1 million for the first six months of 1997.

The Company commenced operations in Canada in 1982 and reincorporated in
Florida in 1992. The Company's executive offices and principal operating
facilities are located at 125 Technology Park, Lake Mary, Florida 32746 and its
telephone number is (407) 333-9911.

THE OFFERING

Common Stock offered by the Company........... 2,760,000 shares

Common Stock offered by the Selling
Shareholders.................................. 600,000 shares

Common Stock to be outstanding after the
Offering...................................... 9,760,000 shares(1)

Use of Proceeds............................... Repayment of indebtedness,
capital expenditures, working
capital and general corporate
purposes, including possible
acquisitions. See "Use of
Proceeds."

Nasdaq National Market Symbol................. FARO
---------------

(1) Excludes 383,513 shares of Common Stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $1.53 per
share.
4

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SUMMARY CONSOLIDATED FINANCIAL DATA

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SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -------------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ----------- -----------

STATEMENT OF OPERATIONS DATA:
Sales............................. $4,508,837 $9,862,242 $14,656,337 $6,460,113 $10,318,535
Cost of sales..................... 2,222,085 4,987,779 6,486,268 2,744,994 4,188,280
---------- ---------- ----------- ---------- -----------
Gross profit...................... 2,286,752 4,874,463 8,170,069 3,715,119 6,130,255
Operating expenses:
Selling......................... 1,569,014 2,008,301 3,731,762 1,653,693 2,512,066
General and administrative...... 521,040 503,184 744,206 349,645 622,092
Depreciation and amortization... 270,615 341,494 230,799 125,388 124,646
Research and development........ 173,400 363,871 730,124 236,539 394,839
Employee stock options(1)....... -- 106,700 23,100 11,550 364,146
---------- ---------- ----------- ---------- -----------
Total operating
expenses.............. 2,534,069 3,323,550 5,459,991 2,376,815 4,017,789
---------- ---------- ----------- ---------- -----------
Income (loss) from operations..... (247,317) 1,550,913 2,710,078 1,338,304 2,112,466
Other income...................... 11,706 62,212 25,145 7,814 46,067
Interest expense.................. (192,543) (355,468) (212,669) (122,806) (65,853)
---------- ---------- ----------- ---------- -----------
Income (loss) before income
taxes........................ (428,154) 1,257,657 2,522,554 1,223,312 2,092,680
Income tax expense (benefit)...... -- (342,000) 1,115,892 541,152 837,072
---------- ---------- ----------- ---------- -----------
Net income (loss)....... $ (428,154) $1,599,657 $ 1,406,662 $ 682,160 $ 1,255,608
========== ========== =========== ========== ===========
Net income (loss) per common share
and common equivalent share..... $ (0.06) $ 0.22(2) $ 0.19 $ 0.09 $ 0.17
Weighted average common shares and
common equivalent shares(3)..... 7,149,690 7,166,740 7,349,042 7,354,292 7,333,290

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AT JUNE 30, 1997
-------------------------
AS
ACTUAL ADJUSTED(4)
----------- -----------

BALANCE SHEET DATA:
Working capital............................................. $ 4,976,323 $=34,444,154
Total assets................................................ 10,558,549 39,359,713
Total debt.................................................. 1,500,436 --
Total shareholders' equity.................................. 5,349,468 35,651,068

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

(1) Reflects compensation expense incurred upon the vesting of options having an
exercise price less than the fair market value of the Common Stock on the
date of grant. The weighted average exercise price of such vested options is
$0.36 per share.
(2) Includes a benefit of $0.11 per share resulting from a reduction in the
deferred tax asset valuation allowance.
(3) Includes 7,000,000 common shares outstanding in each period plus the effect
of stock options granted, using the Treasury Stock Method. See Notes 1 and
12 to the Consolidated Financial Statements.
(4) Adjusted to give effect to the sale of 2,760,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
5

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RISK FACTORS

An investment in the shares offered hereby involves a high degree of risk,
including the risks described below. Prospective investors should carefully
consider the following risk factors together with the other information
contained in this Prospectus before purchasing the shares offered hereby.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company's quarterly operating results have varied in the past and may
vary significantly in the future depending on many factors including, among
others, the size, timing and recognition of revenue from significant orders;
increases in operating expenses required for product development and new product
marketing; the timing and market acceptance of new products and product
enhancements; customer order deferrals in anticipation of new products and
product enhancements; the Company's success in expanding its sales and marketing
programs; and general economic conditions. Further, the Company's operating
results have been, and are expected to continue to be, highly sensitive to the
length of the Company's sales cycle, from initial contact through product
shipment. Moreover, the Company has historically incurred higher expenses
relating to marketing and production in the first and second quarters of each
year. Based upon all of the foregoing factors, the Company believes that its
quarterly revenue, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its results of
operations may not be meaningful and that, in any event, such comparisons should
not be relied upon as indications of future performance. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results."

EMERGING MARKET; DEPENDENCE ON A SINGLE PRODUCT LINE

The products from which the Company derives substantially all of its
revenues were introduced in 1993, and the Company's future performance will
depend on market acceptance of these products. The measurement industry is
currently dominated by manufacturers of hand-measurement tools and traditional,
fixed-base coordinate measurement machines ("CMMs"). As a result, the Company's
focus on a new measurement technology requires its customers to reevaluate their
historical measurement procedures and methodologies. There can be no assurance
that the Company's products will attain broad market acceptance. The inability
of the Company's products to attain broad market acceptance would have a
material adverse effect on the Company's results of operations and financial
condition.

The Company has developed and marketed two closely interdependent products
(the FAROArm(R) and AnthroCam(R)) for use in the 3-D measurement field.
Substantially all of the Company's revenues are currently derived from sales of
these products, and the Company plans to continue its business strategy of
focusing on the portable, software-driven, 3-D measurement market for the
foreseeable future. Consequently, the Company's financial performance will
depend on continued market acceptance of these products and, to a lesser extent,
on the Company's introduction and market acceptance of related products. If the
Company's products are not widely accepted in the 3-D measurement field, the
Company will have reduced sales and will be required to make increased
expenditures on research and development for new applications in other fields or
new products. There can be no assurance that such efforts to develop new
products or diversify the Company's products into other fields would be
successful. Management believes that continued market acceptance of the
Company's products will depend largely on the Company's ability to enhance and
broaden its product line. Additionally, other factors adversely affecting sales
of the Company's products, such as delays in development, significant hardware
or software flaws, incompatibility with significant software or negative
evaluation of the Company's products, could have a material adverse effect on
the Company's results of operations and financial condition. See
"Business -- The FARO Strategy" and "Business -- FARO Products."

COMPETITION

The broad market for measurement devices for manufacturing and industrial
applications, which consists primarily of hand-measurement tools and CMMs, is
highly competitive. Manufacturers of hand-measurement

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tools and CMMs include a significant number of well-established companies that
are substantially larger and possess substantially greater financial, technical
and marketing resources than the Company. The Company's products compete on the
basis of portability, accuracy, application features, ease-of-use, quality,
price and technical support. These entities or others may develop products or
technologies that will directly compete with those of the Company. Furthermore,
there can be no assurance that the Company will have sufficient resources to
make additional investments in such products and technologies or that the
Company's product development efforts will allow the Company to compete
successfully as the industry evolves.

Based on its sales, its research and development activities and its
experience in the industry, the Company believes there is a worldwide trend
toward CAD-based factory-floor metrology, which has resulted in the introduction
of CAD-based inspection software for conventional CMMs by most of the large CMM
manufacturers. Certain CMM manufacturers also are miniaturizing, and in some
cases increasing the mobility of, their conventional CMMs. There can be no
assurance that CMM manufacturers will not alter their products to provide
functions which are competitive with those of the Company's products.

The Company also competes with a number of smaller companies that market
articulated arm measuring devices. There can be no assurance that such companies
will not devote additional resources to the development and marketing of
products that compete with those of the Company. See "Business -- Competition."

UNCERTAINTY OF PATENTS; DEPENDENCE ON PATENTS, LICENSES AND PROPRIETARY RIGHTS

The Company's success will depend in large part on the Company's ability to
obtain patent protection with respect to its products and processes, defend
patents once obtained, maintain trade secrets and operate without infringing
upon the patents and proprietary rights of others and obtain appropriate
licenses to patents or proprietary rights held by third parties, both in the
United States and in foreign countries.

There can be no assurance that the Company will develop or obtain the
rights to products or processes that are patentable, that patents will issue
from any of the pending applications or that claims allowed will be sufficient
to protect the technology licensed to the Company. In addition, no assurance can
be given that any patents issued to or licensed by the Company will not be
challenged, invalidated, infringed or circumvented, or that the rights granted
thereunder will provide competitive advantages to the Company.

The Company may be required to obtain licenses with respect to certain
technology for which it does not have patents or to develop or obtain
alternative technology. There can be no assurance that the Company will be able
to obtain any such license on acceptable terms or at all. If such licenses are
not obtained, the Company could be delayed in or prevented from pursuing the
development or commercialization of its products, which would have a material
adverse effect on the Company.

Litigation may also be necessary to enforce any patents to which the
Company has rights or to determine the scope, validity and enforceability of
other parties' proprietary rights, which may affect the Company's products or
processes. An adverse outcome in any patent litigation or interference
proceeding could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require
the Company to cease using such technology, any of which could have a material
adverse effect on the Company.

The Company also relies on unpatented trade secrets and know-how to
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with employees, consultants and others. There can be
no assurance that these agreements will not be breached or terminated, that the
Company will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or be independently discovered by
competitors. The Company relies on certain technologies to which it does not
have exclusive rights or which may not be patentable or proprietary and thus may
be available to competitors.

The Company has 17 patent applications and patents in the United States,
ten of which have been filed in foreign countries. The Company also has 16
registered trademarks in the United States and 12 trademark applications pending
in the United States and the European Union. The laws of some foreign countries
may not protect the Company's proprietary rights to the same extent as do the
laws of the United States.

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The Company is aware of certain risks involving certain patent rights of
the Company. Kosaka Laboratory, Ltd. ("Kosaka") has notified the Company that
the Company by virtue of its "Leap Frog" technology used in the FAROArm is
infringing U.S. Pat. No. 4,430,796 to Kosaka. The Company believes it has
identified prior art which it believes supports the Company's use of the
technology.

The Company is aware that three companies have been or are infringing the
claims on the Company's U.S. Pat. Nos. 5,251,127 and 5,305,203, which are
directed to the medical field, an area in which the Company is no longer active.
The Company has granted nonexclusive license agreements to two companies which
provide for minimum annual royalty payments, one of which obligates the Company
to enforce the patents against infringers if the sales of products amount to
more than $5,000,000. The Company is currently in negotiations with two other
companies which it believes are infringing the '127 and '203 patents. If a
license agreement with either party is not executed, the Company would be
obligated to enforce the patents or compromise the existing license agreements.

A German competitor previously sold a CMM similar to the FAROArm that is
covered by a German form of limited patent protection and is also covered by one
or more claims of a pending German utility patent application which covers the
basic CMM technology of the Company. As a result, the German company redesigned
its arm to avoid infringement. However, the Company's patent rights in Germany
could be challenged in court and could be opposed following publication. Either
event could narrow the scope of patent protection in Germany which would have a
material adverse effect on the Company.

TECHNOLOGICAL CHANGE

The market for the Company's products has only recently emerged and is
characterized by rapid technological change. Any technology in the measurement
industry, including the Company's technology, may be rendered obsolete or
non-competitive by future discoveries and developments. As a result, the
Company's growth and future financial performance depends upon its ability to
introduce new products and enhance existing products that accommodate the latest
technological advances and customer requirements. There can be no assurance that
any such products will be successfully introduced or will achieve market
acceptance. In addition, the Company believes that a substantial amount of
capital will be required for future research and development. Any failure by the
Company to anticipate or respond adequately to changes in technology and
customer preferences, or any significant delays in product development or
introductions, could have a material adverse effect on its results of operations
and financial condition. There can be no assurance that technological
developments will not render actual and proposed products or technologies of the
Company uneconomical or obsolete.

DEPENDENCE ON KEY PERSONNEL

The development of new products, enhancements to existing products, and the
success of the Company are largely dependent upon the efforts, direction and
guidance of Simon Raab and Gregory A. Fraser, the Company's founders. The
Company's continued growth and success also depends in part on its ability to
attract and retain qualified managers and on the ability of its executive
officers and key employees to manage its operations successfully. The loss of
any of the Company's senior management or key personnel, particularly Messrs.
Raab or Fraser, or its inability to attract and retain key management personnel
in the future, could have a material adverse effect on the Company's results of
operations and financial condition. The Company currently carries key man life
insurance policies on Messrs. Raab and Fraser in the amount of $3.0 million
each. See "Management."

MANAGEMENT OF GROWTH

The Company has grown rapidly in recent years, with sales increasing from
$4.5 million in 1994 to $14.7 million in 1996, and this growth has from time to
time placed burdens on the Company's managerial resources and systems. As part
of its business strategy, the Company intends to continue pursuing rapid growth,
which is likely to place substantial demands on the Company's financial,
managerial, operational and other resources. Effective management of growth will
require the addition and training of personnel throughout the Company,

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expanded customer services and support, expanded operational, financial and
management information systems and the implementation of additional control
procedures, including those related to the Company's international operations.
There can be no assurance that the Company will be able to maintain its recent
rate of revenue growth, continue its profitable operations or manage future
growth successfully. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition."

INTERNATIONAL OPERATIONS

In 1995, 1996 and the first six months of 1997, international sales
accounted for $2.1 million, $3.8 million and $2.7 million, or 21.6%, 26.1% and
26.0%, respectively, of the Company's total sales. The Company anticipates that
international sales will account for an increasing portion of the Company's
total sales. The Company's international business is subject to special risks,
including fluctuating exchange rates, uncertainties in patent enforcement or the
protection of other proprietary rights, changes in import and export controls
and changes in tax policies, trade policies, tariffs, product safety and other
regulatory requirements, in addition to currency controls and political and
economic risks. A portion of the Company's sales is in foreign currencies and
changes in the value of these foreign currencies relative to the United States
dollar could affect the Company's results of operations and financial position,
and gains and losses on translation to United States dollars could contribute to
fluctuations in the Company's results of operations. Although the Company has
not historically engaged in any hedging transactions to limit risks of currency
fluctuations, it intends to do so in the future. There can be no assurance that
engaging in hedging transactions would materially reduce the effects of
fluctuations in foreign currency exchange rates on the Company's results of
operations and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."

DEPENDENCE ON KEY SUPPLIERS

The Company purchases the major component parts for the FAROArm(R) from
third parties and conducts final assembly, customization and inspection of the
FAROArm(R) at its manufacturing facility. Although there is more than one
potential supplier of each of these components, the Company currently relies on
single sources of supply for several components. Accordingly, the Company is
vulnerable to the possible business interruption of its suppliers, and the
Company could experience temporary delays or interruptions while alternative
sources of supply are secured. Any such delays or interruptions could have a
material adverse effect on the Company's results of operations and financial
condition.

In particular, the Company currently purchases the vast majority of the
transducers used in certain models of the FAROArm(R) from a single supplier
located in Europe. Although there are a number of alternative suppliers for this
class of transducers, switching to these suppliers could result in temporary
delays or interruptions. While the Company maintains supplies of such
transducers for at least several months in its inventories, any reductions or
interruptions in supply, or material increases in the price of these components,
could cause the Company to suffer disruptions in the operation of its business
or to incur higher costs, which could have a material adverse effect on the
Company's results of operations and financial condition.

CYCLICALITY OF END USER MARKETS

A significant portion of the Company's sales are to manufacturers in the
automotive, aerospace and heavy equipment industries. Each of these industries
experiences cyclicality and may be adversely affected during recessionary
periods. The cyclical nature of these industries may exert significant influence
on the Company's revenues and results of operations. The volume of orders for
and prices of the Company's products are likely to be adversely impacted by
decreases in capital spending by a significant portion of its end users during
recessionary periods. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."

DEPENDENCE ON KEY CUSTOMERS

Sales to the Company's ten largest customers represented an aggregate of
28.1% and 17.5% of the Company's sales in 1996 and the first six months of 1997,
respectively. Sales to Boeing represented 10.0% of the Company's sales in 1996.
No customer represented 10.0% or more of the Company's sales in the first six

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months of 1997. The Company does not maintain long-term purchase agreements with
any of its customers, all of which may unilaterally reduce or discontinue their
purchases of the Company's products. The Company's loss of, or the failure to
continue to make additional sales to, any of its key customers could have a
material adverse effect on the Company's results of operations and financial
condition. See "Business -- Customers."

WARRANTY LIABILITY AND MAINTENANCE CONTRACTS

The Company provides an initial one-year basic warranty, without additional
charge, on all its products. Historically, warranty costs associated with
providing the basic warranty have not been material. Additionally, the Company
currently offers its customers one, two and three year extended maintenance
contracts for its products. The Company recognizes the revenue from these sales
ratably over the contract term and recognizes the cost of claims as incurred.
While the Company's deferred revenues have been sufficient to cover the expenses
of such claims, there can be no assurance that such deferred revenues will be
adequate in the future. The occurrence of a significant number of extended
warranty claims could have a material adverse effect on the Company's results of
operations and financial condition.

PRODUCT LIABILITY AND INSURANCE COVERAGE

The Company licenses and supports certain specialty products based on its
articulated arm technology that are used in medical applications. The sale of
the Company's medical products entails a risk of product liability claims.
Although no claims have been asserted to date, product liability or other claims
might be asserted against the Company by persons who allege that the use of the
Company's products resulted in injury or other adverse effects, and such claims
could involve large amounts of alleged damages and significant defense costs.
Although the Company currently maintains product liability insurance, the
liability limits or scope of the Company's insurance policies could be
inadequate to protect against potential claims. In addition, the Company's
insurance policies are subject to annual renewal. Although the Company has been
able to obtain product liability insurance in the past, the cost and
availability of this insurance varies and such coverage could be difficult to
obtain in the future. A successful claim against the Company in excess of its
available insurance coverage could have a material adverse effect on the
Company's results of operations and financial condition. In addition, the
Company's business reputation could be adversely affected by product liability
claims, regardless of their merit or the eventual outcome of such claims.

CONTROL BY PRINCIPAL SHAREHOLDERS; ANTI-TAKEOVER CONSIDERATIONS

Upon the conclusion of this offering, Messrs. Simon Raab and Gregory A.
Fraser will, in the aggregate, beneficially own approximately 34.9% of the
outstanding Common Stock (32.3% if the Underwriters' over-allotment option is
exercised in full). As a result, Messrs. Raab and Fraser will retain significant
voting power with respect to the election of the Company's directors and the
outcome of other matters requiring shareholder approval. The voting power of
Messrs. Raab and Fraser, together with the staggered Board of Directors and the
anti-takeover effects of certain provisions contained in both the Florida
Business Corporation Act and in the Company's Articles of Incorporation and
Bylaws (including, without limitation, the ability of the Board of Directors of
the Company to issue shares of Preferred Stock and to fix the rights and
preferences thereof), may have the effect of delaying, deferring, or preventing
an unsolicited change in the control of the Company, which may adversely affect
the market price of the Common Stock. See "Management," "Principal and Selling
Shareholders" and "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

Upon the completion of this offering, the Company will have outstanding
9,760,000 shares of Common Stock. Of these shares, 5,124,630 shares, including
the 3,360,000 shares of Common Stock sold in this offering (3,864,000 shares if
the Underwriters' over-allotment option is exercised in full), will be freely
tradeable by persons other than affiliates of the Company without restriction
under the Securities Act of 1933, as amended (the "Securities Act"). The
remaining 4,635,370 shares of Common Stock will be "restricted" securities
within the meaning of Rule 144 under the Securities Act and may not be sold in
the absence of registration

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under the Securities Act unless an exemption from registration is available. All
of such shares will be beneficially owned by persons who are affiliates of the
Company and, commencing 90 days after the date of this Prospectus, would be
eligible for public sale subject to the volume and other limitations of Rule
144. However, the Company's directors, executive officers and principal
shareholders and the Selling Shareholders have agreed not to sell, contract to
sell, offer, or otherwise dispose of or transfer any shares of Common Stock or
securities convertible into or exchangeable or exercisable for shares of Common
Stock or any rights to purchase any of the foregoing for a period of 180 days
after the date of this Prospectus without the prior written consent of Raymond
James & Associates, Inc. The sale of a substantial number of shares of Common
Stock could adversely affect the market price of the Common Stock. See "Shares
Eligible for Future Sale."

BROAD DISCRETION REGARDING USE OF PROCEEDS

A substantial portion of the proceeds of this offering have not been
allocated to a particular purpose. Accordingly, management will have broad
discretion concerning the use of a majority of the proceeds of this offering.
See "Use of Proceeds."

NO PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has not been a public market for the Common
Stock, and there is no assurance that an active trading market will develop or
continue following this offering. Accordingly, purchasers in this offering may
experience difficulty in selling or otherwise disposing of their shares of
Common Stock. In addition, there is no assurance that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price for the Common Stock has been determined by
negotiations among the Company, the Selling Shareholders and the Underwriters
based on several factors, and may not be indicative of the market price for the
Common Stock after this offering. See "Underwriting."

The Company believes that various factors such as general economic
conditions, changes or volatility in the financial markets, and quarterly or
annual variations in the Company's financial results could cause the market
price of the Common Stock to fluctuate substantially.

DILUTION TO NEW INVESTORS

The initial public offering price is substantially higher than the per
share net tangible book value of the Common Stock. Purchasers of Common Stock in
this offering will incur immediate and substantial dilution of $8.41 per share
in the net tangible book value of their shares of Common Stock. See "Dilution."

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USE OF PROCEEDS

The net proceeds to the Company (after deducting underwriting discounts and
estimated offering expenses payable by the Company) from the sale of 2,760,000
shares of Common Stock offered by the Company at an initial public offering
price of $12.00 per share are estimated to be approximately $30.3 million. The
Company will not receive any proceeds from the sale of shares of Common Stock by
the Selling Shareholders. See "Principal and Selling Shareholders." The Company
has agreed to grant to the Representatives and their designees warrants to
purchase up to 100,000 shares of Common Stock, which warrants are being
registered hereunder. The warrants are exercisable after one year at 110% of the
initial offering price. There can be no assurance that all or any portion of the
warrants will be exercised. Accordingly, the proceeds from the exercise of the
warrants, if any, are not reflected in this Prospectus.

The Company intends to use approximately $1.5 million of the net proceeds
of this offering to repay indebtedness incurred to finance operations, which
accrues interest at the 30-day commercial paper rate plus 2.7% per annum (8.31%
at June 30, 1997), and matures in September 1999. Although it has no specific
plan for the use of the balance of the offering proceeds, the Company will
generally use the balance of such proceeds for expansion of the Company's sales
and marketing activities for existing and new products, investment in new
technologies, including product development, capital expenditures and for
working capital and general corporate purposes, including possible acquisitions.
The Company has not yet identified the specific amounts of proceeds to be
expended for these respective corporate purposes. The amounts actually expended
for each purpose may vary significantly depending on a number of factors,
including future revenue growth, the amount of cash generated or used by the
Company's operations, the progress of the Company's new product development
efforts, technological advances and the status of competitive products.
Currently, the Company has no arrangements or understandings with respect to any
acquisition. Pending any such uses, the Company plans to invest the net proceeds
of this offering in short-term, investment grade securities or money market
instruments. The Company has undertaken this offering to strengthen its capital
position by repaying all of its outstanding indebtedness and to provide equity
capital for the execution of its strategy.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently anticipates that all of its earnings will be
retained for development and expansion of its business and does not anticipate
paying any cash dividends in the foreseeable future. Any future determination to
pay cash dividends will be at the discretion of the Board of Directors and will
be dependent upon the Company's financial condition, results of operations,
capital requirements, limitations which may be included in loan and other
agreements and such other factors as the Board of Directors deems relevant.

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CAPITALIZATION

The following table sets forth the current portion of long-term debt and
the capitalization of the Company (i) at June 30, 1997, and (ii) as adjusted to
give effect to the sale by the Company of 2,760,000 shares of Common Stock
offered hereby and the application of the estimated net proceeds therefrom as
described under "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the notes
thereto contained elsewhere in this Prospectus.

[Enlarge/Download Table]

AT JUNE 30, 1997
------------------------
AS
ACTUAL ADJUSTED
---------- -----------

Current portion of long-term debt........................... $ 666,667 $ --
========== ===========
Long-term debt, less current portion........................ $ 833,769 $ --
---------- -----------
Shareholders' equity:
Class A Preferred Stock, $0.001 par value, 10,000,000
shares authorized; no shares issued and outstanding.... -- --
Common Stock, $0.001 par value, 20,000,000 shares
authorized; 7,000,000 shares issued and outstanding,
9,760,000 shares issued and outstanding as
adjusted(1)............................................ 7,000 9,760
Additional paid-in capital.................................. 4,827,544 35,126,384
Retained earnings........................................... 1,067,243 1,067,243
Unearned compensation....................................... (508,334) (508,334)
Cumulative translation adjustments.......................... (43,985) (43,985)
---------- -----------
Total shareholders' equity........................ 5,349,468 35,651,068
---------- -----------
Total capitalization.............................. $6,183,237 $35,651,068
========== ===========

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

(1) Excludes 383,513 shares of Common Stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $1.53 per
share. In July 1997, the Company's Board of Directors and shareholders
approved the Company's Amended and Restated Articles of Incorporation (the
"Articles of Incorporation"), which increased the authorized shares of
Common Stock to 50,000,000 shares. Does not give effect to the exercise of
any of the warrants being registered hereunder.

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DILUTION

The net tangible book value of the Company at June 30, 1997 was $4.7
million, or $0.68 per share of Common Stock. Net tangible book value per share
represents the amount of the Company's tangible net worth (total assets less
patents and total liabilities) divided by the total number of shares of Common
Stock outstanding. After giving effect to the sale of 2,760,000 shares of Common
Stock by the Company in this offering and the application of the estimated net
proceeds therefrom (after deducting underwriting discounts and estimated
offering expenses payable by the Company), the pro forma net tangible book value
of the Company at June 30, 1997 would have been $35.0 million, or $3.59 per
share of Common Stock. This represents an immediate increase in net tangible
book value of $2.91 per share to existing shareholders and an immediate dilution
of $8.41 per share to purchasers of shares in this offering. The following table
illustrates this per share dilution:

[Download Table]

Initial public offering price............................... $12.00
Net tangible book value before this offering................ $0.68
Increase attributable to new investors...................... 2.91
-----
Pro forma net tangible book value after this offering....... 3.59
------
Dilution to new investors................................... $ 8.41
======

The following table sets forth the number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by the Company's existing shareholders and to be paid by new
investors in this offering:

[Enlarge/Download Table]

SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------

Existing shareholders(1)......... 7,000,000 71.7% $ 3,832,264 10.4% $ 0.55
New investors.................... 2,760,000 28.3 33,120,000 89.6 12.00
--------- ------ ----------- ------
Total.................. 9,760,000 100.0% $36,952,264 100.0% 3.79
========= ====== =========== ======

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

(1) Does not reflect the sale of 600,000 shares of Common Stock by the Selling
Shareholders in this offering (945,000 shares if the over-allotment option
is exercised in full) and excludes 383,513 shares of Common Stock issuable
upon the exercise of outstanding stock options. See "Management -- Stock
Option Plans." To the extent outstanding stock options are exercised, there
will be further dilution to new investors. Does not give effect to the
exercise of any of the warrants being registered hereunder.

Assuming the over-allotment option is not exercised, sales by the Selling
Shareholders in this offering will reduce the number of shares held by existing
shareholders to 6,400,000 shares (or 65.6% of the total number of shares of
Common Stock outstanding after this offering) and will increase the number of
shares held by new investors to 3,360,000 shares (or 34.4% of the total number
of shares of Common Stock outstanding after this offering).

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected data presented below are derived from the consolidated
financial statements of the Company and its subsidiaries at December 31, 1994,
1995 and 1996 and for the years then ended, which are included elsewhere in this
Prospectus and have been audited by Deloitte & Touche LLP, independent public
accountants. The selected consolidated financial data at December 31, 1992 and
1993 and for the years then ended have been derived from audited consolidated
financial statements not included herein. The selected consolidated financial
data for the six months ended June 30, 1996 and June 30, 1997 have been derived
from the Company's unaudited consolidated financial statements. In the opinion
of management, all unaudited consolidated financial statements used to derive
the information presented have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of the results
for the periods presented. The information for the six months ended June 30,
1997 is not necessarily indicative of the operating results to be expected for
any future period. The selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and the Consolidated Financial Statements and related
notes and other financial information included elsewhere in this Prospectus.

[Enlarge/Download Table]

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------- ---------- -----------

STATEMENT OF OPERATIONS DATA:
Sales.......................... $4,727,637 $5,106,270 $4,508,837 $9,862,242 $14,656,337 $6,460,113 $10,318,535
Cost of sales.................. 2,359,693 2,266,296 2,222,085 4,987,779(1) 6,486,268 2,744,994 4,188,280
---------- ---------- ---------- ---------- ----------- ---------- -----------
Gross profit................... 2,367,944 2,839,974 2,286,752 4,874,463 8,170,069 3,715,119 6,130,255
Operating expenses:
Selling...................... 1,839,527 1,971,177 1,569,014 2,008,301 3,731,762 1,653,693 2,512,066
General and administrative... 454,606 424,026 521,040(2) 503,184 744,206 349,645 622,092
Depreciation and
amortization............... 122,613 211,682 270,615 341,494(3) 230,799 125,388 124,646
Research and development..... 282,829 276,489 173,400 363,871 730,124 236,539 394,839
Employee stock options(4).... -- -- -- 106,700 23,100 11,550 364,146
---------- ---------- ---------- ---------- ----------- ---------- -----------
Total operating
expenses............. 2,699,575 2,883,374 2,534,069 3,323,550 5,459,991 2,376,815 4,017,789
---------- ---------- ---------- ---------- ----------- ---------- -----------
Income (loss) from
operations................... (331,631) (43,400) (247,317) 1,550,913 2,710,078 1,338,304 2,112,466
Other income................... 4,035 12,648 11,706 62,212 25,145 7,814 46,067
Interest expense............... (76,780) (110,504) (192,543) (355,468) (212,669) (122,806) (65,853)
---------- ---------- ---------- ---------- ----------- ---------- -----------
Income (loss) before income
taxes...................... (404,376) (141,256) (428,154) 1,257,657 2,522,554 1,223,312 2,092,680
Income tax expense (benefit)... -- -- -- (342,000) 1,115,892 541,152 837,072
---------- ---------- ---------- ---------- ----------- ---------- -----------
Net income (loss)...... $ (404,376) $ (141,256) $ (428,154) $1,599,657 $ 1,406,662 $ 682,160 $ 1,255,608
========== ========== ========== ========== =========== ========== ===========
Net income (loss) per common
share and common equivalent
share........................ $ (0.06) $ (0.02) $ (0.06) $ 0.22(5) $ 0.19 $ 0.09 $ 0.17
Weighted average common shares
and common equivalent
shares(6).................... 7,149,690 7,149,690 7,149,690 7,166,740 7,349,042 7,354,292 7,333,290

[Enlarge/Download Table]

AT DECEMBER 31, AT JUNE 30, 1997
-------------------------------------------------------------- ----------------------------
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(7)
---------- ---------- ---------- ---------- ---------- ----------- --------------

BALANCE SHEET DATA:
Working capital................ $ 193,499 $ (109,760) $ (718,564) $1,321,517 $3,832,424 $4,976,323 $34,444,154
Total assets................... 3,406,815 3,877,445 4,229,551 5,479,698 7,815,668 10,558,549 39,359,713
Total debt..................... 1,430,000 2,100,000 2,925,000 2,200,000 1,501,267 1,500,436 --
Total shareholders' equity..... 1,299,290 1,158,034 637,580 2,343,937 3,773,699 5,349,468 35,651,068

(footnotes on following page)

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

(1) Includes $531,186 from a change in the estimated life of product development
costs. See Note 1 to the Consolidated Financial Statements, "Product Design
Costs."
(2) Includes $146,541 for costs incurred in a terminated private stock offering.
(3) Includes a charge for unamortized patent costs of $192,570 due to the
discontinuance of certain products sold in the medical field.
(4) Reflects compensation expense incurred upon the vesting of options having an
exercise price less than the fair market value of the Common Stock on the
date of grant. The weighted average exercise price of such vested options is
$0.36 per share.
(5) Includes a benefit of $0.11 per share resulting from a reduction in the
deferred tax asset valuation allowance.
(6) Includes 7,000,000 common shares outstanding in each period plus the effect
of stock options granted, using the Treasury Stock Method. See Notes 1 and
12 to the Consolidated Financial Statements.
(7) Adjusted to give effect to the sale of 2,760,000 shares of Common Stock
being offered by the Company hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."

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

The following information should be read in conjunction with the
Consolidated Financial Statements of the Company, including the notes thereto,
included elsewhere in this Prospectus.

OVERVIEW

From its inception in 1982 through 1992, the Company focused on providing
computerized, 3-D measurement devices to the orthopedic and neurosurgical
markets. During this period, the Company introduced a knee laxity measurement
device, a diagnostic tool for measuring posture, scoliosis and back flexibility,
and a surgical guidance device utilizing a six-axis articulated arm.

In 1992, in an effort to capitalize on a demand for 3-D portable
measurement tools for the factory floor, the Company made a strategic decision
to target its core measurement technology to the manufacturing and industrial
markets. In order to focus on manufacturing and industrial applications of its
technology, the Company phased out the direct sale of its medical products and
entered into licensing agreements with two major neurosurgical companies for its
medical technology. Since that time, sales to the manufacturing and industrial
markets have increased to 96.5% of sales in 1996 and 98.0% of sales in the six
months ended June 30, 1997. In 1995, the Company made a strategic decision to
target international markets. The Company established sales offices in France
and Germany in 1996 and the United Kingdom in 1997. International sales
represented 21.6% of sales in 1995, 26.1% of sales in 1996 and 26.0% of sales in
the six months ended June 30, 1997.

The Company derives revenues primarily from the sale of the FAROArm(R), its
six-axis articulated measuring device, and AnthroCam(R), its companion 3-D
measurement software. The majority of the Company's revenues are derived from
the sale of its bundled hardware and software measurement systems. Revenue
related to these products is recognized upon shipment.

Revenue growth has resulted primarily from increased unit sales due to an
expanded sales effort that included the addition of sales personnel at existing
offices, the opening of new sales offices, expanded promotional efforts and the
addition of new product features. Additionally, during this period, the Company
lowered its prices on its bundled 3-D measurement systems to stimulate volume.
The Company expects to continue its revenue growth through further penetration
of its installed customer base, expansion of its domestic and international
sales force and expansion of its product line and service offerings. See
"Business -- The FARO Strategy."

In addition to providing a one-year basic warranty without additional
charge, the Company offers its customers one, two and three-year extended
maintenance contracts, which include on-line help services, software upgrades
and hardware warranties. In addition, the Company sells training and technology
consulting services relating to its products. The Company recognizes the revenue
from extended maintenance contracts ratably over the contract term and
recognizes the cost of claims as incurred.

Cost of sales consists primarily of materials, production, overhead and
labor. Selling expenses consist primarily of salaries and commissions to sales
and marketing personnel, and promotion, advertising, travel and
telecommunications expenses. General and administrative expenses consist
primarily of salaries for administrative personnel, rent, utilities and
professional and legal expenses. Research and development expenses represent
salaries, equipment and third-party services.

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Accounting for wholly-owned foreign subsidiaries is maintained in the
currency of the respective foreign jurisdiction and, therefore, fluctuations in
exchange rates may have an impact on intercompany accounts reflected in the
Company's Consolidated Financial Statements. Although the Company has not
historically engaged in any hedging transactions to limit risks of currency
fluctuations, it intends to do so in the future.

RESULTS OF OPERATIONS

The following table sets forth for the periods presented the percentage of
sales represented by certain items in the Company's Consolidated Statements of
Operations:

[Enlarge/Download Table]

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ----------------
1994 1995 1996 1996 1997
----- ----- ----- ---- ----

STATEMENT OF OPERATIONS DATA:
Sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 49.3 50.6 44.3 42.5 40.6
----- ----- ----- ----- -----
Gross profit................................... 50.7 49.4 55.7 57.5 59.4
Operating expenses:
Selling...................................... 34.8 20.4 25.5 25.6 24.3
General and administrative................... 11.6 5.1 5.1 5.4 6.0
Depreciation and amortization................ 6.0 3.5 1.6 1.9 1.2
Research and development..................... 3.8 3.7 5.0 3.7 3.8
Employee stock options....................... -- 1.1 0.2 0.2 3.5
----- ----- ----- ----- -----
Total operating expenses............. 56.2 33.7 37.3 36.8 38.9
----- ----- ----- ----- -----
Income (loss) from operations.................. (5.5) 15.7 18.5 20.7 20.5
Other income................................... 0.3 0.6 0.2 0.1 0.4
Interest expense............................... (4.3) (3.6) (1.5) (1.9) (0.6)
----- ----- ----- ----- -----
Income (loss) before income taxes.............. (9.5) 12.8 17.2 18.9 20.3
Income tax expense (benefit)................... -- (3.5) 7.6 8.4 8.1
----- ----- ----- ----- -----
Net income (loss).................... (9.5)% 16.2% 9.6% 10.6% 12.2%
===== ===== ===== ===== =====

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

Sales. Sales increased $3.9 million, or 59.7%, from $6.5 million for the
first six months of 1996 to $10.3 million for the first six months of 1997. The
increase was primarily the result of increased unit sales due to an expanded
sales effort that included the addition of sales personnel at existing offices,
the opening of new sales offices, expanded promotional efforts and the addition
of new product features. International sales increased $1.5 million, or 123.4%,
from $1.2 million for the first six months of 1996 to $2.7 million for the first
six months of 1997. This growth was attributable to the opening of the Company's
European sales offices in France and Germany in 1996 and the United Kingdom in
1997 and an increase in the number of international distributors.

Gross profit. Gross profit increased $2.4 million, or 65.0%, from $3.7
million for the first six months of 1996 to $6.1 million for the first six
months of 1997. Gross margin increased from 57.5% for the first six months of
1996 to 59.4% for the first six months of 1997. This margin increase was
attributable to a reduction in product costs as a result of technological
improvements, purchasing economies and production efficiencies, partially offset
by a decrease in average unit prices.

Selling expenses. Selling expenses increased $858,000, or 51.9%, from $1.7
million for the first six months of 1996 to $2.5 million for the first six
months of 1997. This increase was a result of the Company's expansion of sales
and marketing staff in the United States and Europe ($430,000) and expanded
promotional efforts ($460,000) offset by a decline in office expenses ($31,000).
Selling expenses as a percentage of sales decreased from 25.6% for the first six
months of 1996 to 24.3% for the first six months of 1997.

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General and administrative expenses. General and administrative expenses
increased $272,000, or 77.9%, from $350,000 for the first six months of 1996 to
$622,000 for the first six months of 1997. This increase resulted from the
hiring of additional administrative personnel, including network services and
accounting personnel ($133,000), increases in professional and legal expenses
($89,000) and other general and administrative expenses ($51,000). General and
administrative expenses as a percentage of sales increased from 5.4% for the
first six months of 1996 to 6.0% for the first six months of 1997.

Research and development expenses. Research and development expenses
increased $158,000, or 66.9%, from $237,000 for the first six months of 1996 to
$395,000 for the first six months of 1997. This increase was primarily a result
of increased personnel costs ($190,000) relating to the introduction of new
electronic circuitry, enhanced mechanical features and 32-bit functionality
offset by a reduction in material costs ($31,000). Research and development
expenses as a percentage of sales increased from 3.7% for the first six months
of 1996 to 3.8% for the first six months of 1997.

Employee stock options expenses. Employee stock options expenses increased
$353,000 from $12,000 for the first six months of 1996 to $364,000 for the first
six months of 1997. This increase was primarily attributable to the grant of
52,732 options in May 1997, which was made at an exercise price below the fair
market value of the Common Stock on the date of grant.

Interest expense. Interest expense decreased $57,000, or 46.4%, from
$123,000 for the first six months of 1996 to $66,000 for the first six months of
1997. This reduction was attributable to the refinancing of the Company's
indebtedness, resulting in a reduced principal balance and lower interest rate.

Income tax expense. Income tax expense increased $296,000, or 54.7%, from
$541,000 for the first six months of 1996 to $837,000 for the first six months
of 1997. The provision for income taxes as a percentage of income before income
taxes was 44.2% in the first six months of 1996 and 40.0% in the first six
months of 1997.

Net income. Net income increased $573,000, or 84.1%, from $682,000 for the
first six months of 1996 to $1.3 million for the first six months of 1997.

1996 COMPARED TO 1995

Sales. Sales increased $4.8 million, or 48.6%, from $9.9 million in 1995
to $14.7 million in 1996. This increase was attributable to a shift in product
mix to higher priced Silver Series models of the FAROArm(R) and increased unit
sales resulting from completion of the Company's shift in focus from the medical
market to the manufacturing and industrial markets.

Gross profit. Gross profit increased $3.3 million, or 67.6%, from $4.9
million in 1995 to $8.2 million in 1996. Gross margin increased from 49.4% in
1995 to 55.7% in 1996. This increase was due to a reduction in product costs as
a result of technological improvements and to an increase in sales of higher
margin Silver Series models of the FAROArm(R). In addition, gross profit for
1995 was adversely affected by a $531,000 charge to cost of sales relating to a
change in the estimated life of product design costs.

Selling expenses. Selling expenses increased $1.7 million, or 85.8%, from
$2.0 million in 1995 to $3.7 million in 1996 primarily as a result of the
Company's expansion of sales and marketing staff ($784,000), the opening of
additional sales offices in the United States and Europe in the second half of
1996 ($354,000) and increased promotional and related selling expenses
($409,000). Selling expenses as a percentage of sales increased from 20.4% in
1995 to 25.5% in 1996.

General and administrative expenses. General and administrative expenses
increased $241,000, or 47.9%, from $503,000 in 1995 to $744,000 in 1996. This
increase was primarily a result of additional accounting personnel ($105,000)
and increased cost of supplies and other expenses, including occupancy costs
($109,000). General and administrative expenses as a percentage of sales
remained unchanged at 5.1% in 1996 compared to 1995.

Research and development expenses. Research and development expenses
increased $366,000, or 100.7%, from $364,000 in 1995 to $730,000 in 1996. This
increase was a result of the hiring of additional personnel to design and
develop improved hardware, software and product functionality ($228,000) and
increased research and development materials and other expenses ($138,000).
Research and development expenses as a percentage of sales increased from 3.7%
in 1995 to 5.0% in 1996.

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Employee stock options expenses. Employee stock options expenses decreased
$84,000, or 78.4%, from $107,000 in 1995 to $23,000 in 1996. The Company did not
grant options in 1996, and compensation expense relating to options granted in
1995 was significantly lower in 1996 than in 1995.

Interest expense. Interest expense decreased $143,000, or 40.2%, from
$355,000 in 1995 to $213,000 in 1996 due to a reduction in the amount of the
Company's indebtedness.

Income tax expense. Income tax expense increased $1.5 million from a
benefit of $342,000 in 1995 to an expense of $1.1 million in 1996. The provision
for income taxes as a percentage of income before income taxes was 44.2% in
1996. In 1995, the Company had an income tax benefit as a result of the reversal
of a deferred tax valuation allowance.

Net income. Net income decreased $193,000, or 12.1%, from $1.6 million in
1995 to $1.4 million in 1996.

1995 COMPARED TO 1994

Sales. Sales increased $5.4 million, or 118.7%, from $4.5 million in 1994
to $9.9 million in 1995. The increase was due to increased unit sales resulting
from a shift in focus from the medical market to the manufacturing and
industrial markets and the Company's release of its AnthroCam(R) software in
late 1994. The release of AnthroCam(R) led to increased sales of the Company's
FAROArm(R) products, particularly of higher priced Silver Series models.

Gross profit. Gross profit increased $2.6 million, or 113.2%, from $2.3
million in 1994 to $4.9 million in 1995 due to an increase in 1995 in sales of
Silver Series models of the FAROArm(R) and AnthroCam(R) software, compared to
Bronze Series models and the Company's medical and surgical products. Gross
margins as a percentage of sales declined from 50.7% in 1994 to 49.4% in 1995,
primarily because of price reductions made to increase sales volume and a
$531,000 charge to cost of sales relating to a change in the estimated life of
product design costs.

Selling expenses. Selling expenses increased $439,000, or 28.0%, from $1.6
million in 1994 to $2.0 million in 1995. This increase was primarily a result of
the hiring of additional personnel related to the Company's continued expansion
of sales to manufacturing and industrial markets ($281,000) and related
marketing activities ($158,000). Selling expenses as a percentage of sales
decreased from 34.8% in 1994 to 20.4% in 1995. This decrease was due to an
increase in sales without a commensurate increase in selling expenses.

General and administrative expenses. General and administrative expenses
decreased $18,000, or 3.4%, from $521,000 in 1994 to $503,000 in 1995. General
and administrative expenses as a percentage of sales decreased from 11.6% in
1994 to 5.1% in 1995. This decrease reflects a one-time expense of $147,000 in
1994 related to a terminated private stock offering. Net of this one-time
expense, general and administrative expenses increased $129,000, or 34.4%, from
$374,000 in 1994 due to increases in legal fees ($39,000) and administrative
salaries and insurance associated with the Company's growth and increased
occupancy costs ($113,000.) However, general and administrative expenses
decreased as a percentage of sales from 8.3% in 1994 to 5.1% in 1995.

Research and development expenses. Research and development expenses
increased $190,000, or 109.8%, from $173,000 in 1994 to $364,000 in 1995. This
increase was attributable to an accounting change relating to production design
costs ($260,000), which was partially offset by a decrease in personnel costs
($70,000). Research and development expenses as a percentage of sales decreased
from 3.8% in 1994 to 3.7% in 1995.

Employee stock options expenses. The Company granted stock options for the
first time in 1995 under its 1993 Stock Option Plan. As a result, the Company
recognized employee stock options expenses of $107,000 in 1995 compared to none
in 1994.

Interest expense. Interest expense increased $163,000, or 84.6%, from
$193,000 in 1994 to $355,000 in 1995. This increase was due to new borrowings
that were obtained to finance additional working capital needs to complete the
transition from the medical market to the manufacturing and industrial markets.

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Income tax expense. The Company recognized an income tax benefit of
$342,000 in 1995 compared to no provision for income taxes in 1994. In 1994, the
deferred income tax benefit of $146,000 was offset by a valuation allowance due
to the Company's history of operating losses. In 1995, the Company's income tax
provision was offset by a corresponding reduction in its deferred tax valuation
allowance. In addition, the remaining deferred tax asset valuation allowance was
reversed because the Company had commenced profitable operations.

Net income (loss). The Company's net income (loss) for 1995 increased $2.0
million from a net loss of $428,000 in 1994 to net income of $1.6 million in
1995.

QUARTERLY RESULTS

The following table sets forth certain unaudited statements of income data
for each of the eight quarters in the period ending June 30, 1997. This data has
been derived from unaudited financial statements which, in the opinion of
management, have been prepared on the same basis as the audited financial
statements and include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the periods
presented. The results of operations for the interim periods are not necessarily
indicative of future results.

[Enlarge/Download Table]

QUARTER ENDED
-----------------------------------------------------------------------------------------------------
1995 1996 1997
----------------------- ------------------------------------------------- -----------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Sales..................... $1,855,175 $3,233,317 $3,037,610 $3,422,503 $4,083,193 $4,113,031 $4,889,471 $5,429,064
Cost of sales............. 658,225 1,687,246 1,186,666 1,558,328 1,756,120 1,985,154 1,948,549 2,239,731
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit.............. 1,196,950 1,546,071 1,850,944 1,864,175 2,327,073 2,127,877 2,940,922 3,189,333
Operating expenses:
Selling................. 383,026 699,756 731,549 922,144 940,900 1,137,169 1,158,559 1,353,507
General and
administrative........ 104,328 63,981 166,166 183,479 195,216 199,345 302,523 319,569
Depreciation and
amortization.......... 37,231 37,231 80,450 44,938 48,682 56,729 58,873 65,773
Research and
development........... 18,320 244,626 93,580 142,959 191,917 301,668 178,073 216,766
Employee stock
options............... -- 106,700 5,775 5,775 5,775 5,775 3,270 360,876
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............ 542,905 1,152,294 1,077,520 1,299,295 1,382,490 1,700,686 1,701,298 2,316,491
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations.... 654,045 393,777 773,424 564,880 944,583 427,191 1,239,624 872,842
Other income.............. 3,558 3,217 2,770 5,044 12,866 4,465 (5,810) 51,877
Interest expense.......... (85,696) (72,358) (64,147) (58,659) (53,650) (36,213) (34,262) (31,591)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes................... 571,907 324,636 712,047 511,265 903,799 395,443 1,199,552 893,128
Income tax expense
(benefit)............... (155,521) (88,280) 314,986 226,166 399,810 174,930 479,821 357,251
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............ $ 727,428 $ 412,916 $ 397,061 $ 285,099 $ 503,989 $ 220,513 $ 719,731 $ 535,877
========== ========== ========== ========== ========== ========== ========== ==========
Net income (loss) per
common share and common
equivalent share........ $ 0.10 $ 0.06 $ 0.05 $ 0.04 $ 0.07 $ 0.03 $ 0.10 $ 0.07
Weighted average common
shares and common
equivalent shares....... 7,149,690 7,217,891 7,354,292 7,354,292 7,354,292 7,333,290 7,333,290 7,333,290

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date through a combination of
cash flow from operations, borrowings and private equity financings.

Net cash provided by operating activities for the six months ended June 30,
1997 was $268,000 compared to $732,000 for the six months ended June 30, 1996.
Net cash provided by operating activities in this period decreased primarily due
to increases in accounts receivable. Net cash provided by operating activities
for 1996 was $1.5 million compared to $936,000 for 1995. Net cash provided by
operating activities in 1996 increased primarily due to increases in accounts
payable and unearned service revenues.

Net cash used in investing activities was $413,000 for the six months ended
June 30, 1997 compared to $265,000 for the six months ended June 30, 1996. Net
cash used in investing activities was $550,000 for 1996 compared to $285,000 for
1995. Net cash used in investing activities increased for the six months ended
June 30, 1997 and for 1996 primarily due to increased purchases of property and
equipment and increased patent costs.

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Net cash used in financing activities for the six months ended June 30,
1997 was $1,000 compared to $300,000 for the six months ended June 30, 1996. The
$300,000 of net cash used in financing activities in the first six months of
1996 primarily reflects the repayment of related party loans. Net cash used in
financing activities for 1996 was $715,000 compared to $725,000 for 1995. Net
cash used in financing activities decreased primarily due to the repayment of
related party loans of $2.2 million in 1996, offset by proceeds from debt of
$1.6 million.

The Company has a loan agreement in the form of a term note and a line of
credit that matures in September 1999. The Company had available borrowings
under the line of credit in the amount of $443,000 at June 30, 1997. Advances
outstanding under the loan bear interest at the 30-day commercial paper rate
plus 2.7% per annum (8.31% at June 30, 1997). Principal payments of $611,000,
$667,000 and $223,000 will be due in 1997, 1998 and 1999, respectively.
Outstanding borrowings under this loan agreement at June 30, 1997 were
approximately $1.5 million. The loan is collateralized by substantially all of
the Company's assets. The loan agreement contains restrictive covenants,
including the maintenance of certain amounts of working capital and tangible net
worth and limits on loans to related parties. In April 1997, the Company also
obtained a one-year secured $1.0 million line of credit from the same lender
which bears interest at the 30-day commercial paper rate plus 2.65% per annum
(8.26% at June 30, 1997). Approximately $1.5 million of the proceeds of this
offering will be used to repay all of the Company's outstanding long term
indebtedness.

The Company's principal commitments at June 30, 1997 were leases on its
headquarters and regional offices, and there were no material commitments for
capital expenditures at that date. The Company believes that the proceeds of
this offering, cash generated from operations and borrowings under its credit
facilities will be sufficient to satisfy its working capital and capital
expenditure needs at least through 1998.

The proposed expansion of the Company's sales force is anticipated to
increase the Company's selling, general and administrative expenses over the
next 18 months. The Company believes that it will have adequate capital to cover
these expenses at least through 1998.

The proposed expansion of the Company's headquarters is not anticipated to
have a material impact on its capital needs. Because this facility is leased
(see "Certain Transactions"), the impact of expansion is limited to increased
rent expense and associated costs of tenancy of approximately $150,000 per year
upon completion of the expansion.

FOREIGN EXCHANGE EXPOSURE

Sales outside the United States represent a significant portion of the
Company's total revenues. Currently, the majority of the Company's revenues and
expenses are invoiced and paid in U.S. dollars. In the future, the Company
expects a greater portion of its revenues to be denominated in foreign
currencies. Fluctuations in exchange rates between the U.S. dollar and such
foreign currencies may have a material adverse effect on the Company's business,
results of operations and financial condition, particularly its operating
margins, and could also result in exchange losses. The impact of future exchange
rate fluctuations on the results of the Company's operations cannot be
accurately predicted. Historically, the Company has not managed the risks
associated with fluctuations in exchange rates but intends to undertake
transactions to manage such risks in the future. To the extent that the
percentage of the Company's revenues derived from international sales increases
in the future, the risks associated with fluctuations in foreign exchange rates
will increase. The Company may use forward foreign exchange contracts with
foreign currency options to hedge these risks.

INFLATION

The Company believes that inflation has not had a material impact on its
results of operations in recent years and does not expect inflation to have a
material impact on its operations in 1997.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." This Statement
establishes standards for computing and presenting

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earnings per share ("EPS") and applies to all entities with publicly held common
stock or potential common stock. This Statement replaces the presentation of
primary EPS and fully diluted EPS with a presentation of basic EPS and diluted
EPS, respectively. Basic EPS excludes dilution and is computed by dividing
earnings available to common stockholders by the weighted-average number of
common shares outstanding for the period. Similar to fully diluted EPS, diluted
EPS reflects the potential dilution of securities that could share in the
earnings. This Statement is effective for the Company's financial statements for
the year ended December 31, 1997.

CERTAIN FORWARD-LOOKING INFORMATION

Certain matters discussed in this Prospectus are forward-looking statements
within the meaning of the federal securities laws. Although the Company believes
that the expectations reflected in such forward-looking statements are based
upon reasonable assumptions, there can be no assurance that its expectations
will be achieved. Factors that could cause actual results to differ materially
from the Company's current expectations include market acceptance of the
Company's products, which consist of two closely interdependent products, the
amount and timing of expenses associated with the development and marketing of
new products, the Company's ability to protect and continue to develop its
proprietary technology in the face of competition and technological change,
risks associated with the Company's international operations, general economic
conditions and the other risks set forth under the caption "Risk Factors."

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BUSINESS

GENERAL

The Company designs, develops, markets and supports portable,
software-driven, 3-D measurement systems that are used in a broad range of
manufacturing and industrial applications. The Company's principal products are
the FAROArm(R) articulated measuring device and its companion AnthroCam(R)
software. Together, these products integrate the measurement and quality
inspection function with computer-aided design ("CAD"), computer-aided
manufacturing ("CAM") and computer-aided engineering ("CAE") technology to
improve productivity, enhance product quality and decrease rework and scrap in
the manufacturing process. The Company's products bring precision measurement,
quality inspection and specification conformance capabilities, integrated with
leading CAD software, to the factory floor. The Company is a pioneer in the
development and marketing of 3-D measurement technology in manufacturing and
industrial applications and currently holds or has pending 18 patents in the
United States, eight of which also are held or pending in other jurisdictions.
The Company's products have been purchased by more than 600 customers worldwide,
ranging from small machine shops to such large manufacturing and industrial
companies as General Motors, Chrysler, Ford, Boeing, Lockheed Martin, General
Electric, Westinghouse Electric, Caterpillar and Komatsu Dresser.

INDUSTRY BACKGROUND

The creation of physical products involves the processes of design,
engineering, production and measurement and quality inspection. These basic
processes have been profoundly affected by the computer hardware and software
revolution that began in the 1980s. CAD software was developed to automate the
design process, providing manufacturers with computerized 3-D design capability.
Today, most manufacturers use some form of CAD software to create designs and
engineering specifications for new products and to quantify and modify designs
and specifications for existing products. The benefits of CAD are significant.
The CAD process offers a three-dimensional, highly-efficient and inherently
flexible alternative to traditional design methods. Many manufacturers have also
recently adopted CAM technology, in which CAD data directs machines in the
manufacturing process. CAM has further improved the efficiency and quality of
the production of manufactured goods. According to International Data
Corporation, the worldwide market for mechanical CAD, CAM and CAE-based software
products amounted to $3.0 billion in 1996 and is expected to grow at a rate of
at least 15.5% per year to $5.6 billion in 2000.

A significant aspect of the manufacturing process which traditionally has
not benefitted from computer-aided technology is measurement and quality
inspection. Historically, manufacturers have measured and inspected products
using hand-measurement tools such as scales, calipers, micrometers and plumb
lines for simple measuring tasks, test fixtures for certain large manufactured
products and traditional coordinate measurement machines ("CMMs") for objects
that require higher precision measurement. However, the broader utility of each
of these measurement methods is limited. Although hand-measurement tools are
often appropriate for simple measurements, their use for complex measurements is
time-consuming and limited in adaptability. Test fixtures (customized fixed
tools used to make comparative measurements of production parts to "master
parts") are relatively expensive and must be reworked or discarded each time a
dimensional change is made in the part being measured. In addition, these manual
measuring devices do not permit the manufacturer to compare the dimensions of an
object with its CAD model.

Conventional CMMs are generally large, fixed-base machines that provide
very high levels of precision but have only recently begun to provide a link to
the CAD model of the object being measured. Fixed-base CMMs require that the
object being measured be brought to the CMM and that the object fit within the
CMM's measurement grid. In addition, conventional CMMs generally operate in
metrology laboratories or environmentally-stable quality inspection departments
of manufacturing facilities rather than on the factory floor. According to Frost
& Sullivan, an independent industry research group, the worldwide market for
fixed-base CMMs amounted to $1.2 billion in 1995.

Isolation from the factory floor and the relatively small measurement grids
of CMMs limit their utility to small, readily portable workpieces that require
high levels of measurement precision. As manufactured subassemblies increase in
size and become integrated into even larger assemblies, they become less

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transportable, thus diminishing the utility of a conventional CMM. Consequently,
manufacturers must continue to use hand-measuring tools or expensive customized
test fixtures to measure large or unconventionally shaped objects.

An increasingly competitive global marketplace has created a demand for
higher quality products with shorter life cycles. While manufacturers previously
designed their products to be in production for longer periods of time, current
manufacturing practices must accommodate more frequent product introductions and
modifications, while satisfying more stringent quality and safety standards. In
most cases, only a relatively small percentage of the components of a
manufactured product requires highly precise measurements (less than
one-thousandth of an inch). Conventional CMMs provide manufacturers with very
precise measurement capabilities and cost up to $2 million per unit. However,
they are not responsive to manufacturers' increasing need for cost-effective
intermediate precision measurement capabilities. The Company believes that a
greater percentage of components requires intermediate precision measurements
(between one- and twenty-thousandths of an inch). In the absence of intermediate
precision measuring systems, manufacturers often are unable to make appropriate
measurements or part-to-CAD comparisons during the manufacturing process,
resulting in decreased productivity, poor product quality and unacceptable
levels of product rework and scrap. Manufacturers increasingly require more
rapid design, greater control of the manufacturing process, tools to compare
components to their CAD specifications and the ability to measure precisely
components that cannot be measured or inspected by conventional CMMs. Moreover,
they increasingly require measurement capabilities to be integrated into the
manufacturing process and to be available on the factory floor.

THE FARO SOLUTION

Integration with CAD Technology. The Company's products provide a
bridge between the virtual 3-D world of the CAD process and the physical
3-D world of the factory floor. The interface to CAD allows manufacturers
to integrate design, production and measurement and quality inspection
processes on a common software platform. The Company believes that this
integration creates significant savings by reducing the need for test
fixtures and improves productivity by reducing production set-up times.
Finally, the Company's integration with CAD technology significantly
enhances product quality by maximizing the opportunities to make precise
measurements based on engineering specifications within the manufacturing
process.

Six-Axis Articulating Arm. The FAROArm(R) incorporates a six-axis
instrumented, articulating device that approximates the range of motion and
dexterity of the human arm. The flexibility of the FAROArm(R) enables the
user to measure complex shapes and ergonomic structures and to reach
behind, underneath and into previously inaccessible spaces, such as
interior surfaces of aircraft or automobiles. The flexibility of the
FAROArm(R) allows customers to measure more accurately and efficiently than
previously possible.

Portability and Adaptability. The FAROArm(R) is lightweight, portable
and designed for operation in the often harsh environments typical of
manufacturing facilities. The FAROArm(R) can be moved to multiple locations
on the factory floor to measure large parts and assemblies that cannot be
easily moved to a conventional CMM. This portability extends 3-D
measurement to previously inaccessible areas of the factory floor and
eliminates the travel time to and from quality inspection departments.

Levels of Precision Responsive to Industry Needs. The Company's
products respond to manufacturers' need for intermediate levels of
measurement precision. Although high levels of precision (less than
one-thousandth of an inch) are required for certain manufacturing
applications, the FAROArm(R) satisfies the greater demand for measurements
that require intermediate precision (one- to twenty-

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thousandths of an inch). The Company's products meet the precision
measurement requirements of a substantial portion of products in the
manufacturing process and address the underserved market for intermediate
precision measurement systems.

Broad Affordability. The Company offers various models of the
FAROArm(R) ranging in price from $14,000 to $70,000, while conventional
CMMs range in price from $20,000 to $2 million. The relatively low cost of
the Company's products compared to conventional CMMs has afforded
manufacturers the opportunity to introduce cost-effective measurement and
quality inspection functions throughout the manufacturing process.
Manufacturers are able to purchase multiple units to be used at different
locations within a single manufacturing facility and to introduce
measurement and quality inspection at additional points in the
manufacturing process.

Ease of Use. The Company's software products have been specifically
designed to be used by production line personnel with minimal prior
computer or CAD experience. The bundled hardware and software system is
designed to require minimal training for production line personnel to reach
proficiency with the product. To take a measurement, the operator simply
touches the object to be measured with a probe at the end of the arm and
presses a button. The FAROArm(R) is also ergonomically designed to
facilitate use in typical factory floor applications.

Paperless Data Collection. The FAROArm(R) allows for paperless data
collection by a connected computer hosting related CAD application
software. This function responds to current trends toward automated
statistical process controls for facilitating data analysis. Paperless data
collection improves productivity and eliminates the risk of error in
transcribing the collected information.

Open Architecture. The FAROArm(R) and AnthroCam(R) have been designed
as an open architecture system, allowing the user to unbundle the hardware
and software to interface the FAROArm(R) with other CAD-based software
packages and to interface AnthroCam(R) with other 3-D measurement devices.
In addition, the Company's software and hardware are built in accordance
with computer and communications industry standards so that these products
may be integrated with a broad range of application software packages.

THE FARO STRATEGY

The Company's objective is to strengthen its position as the leading
provider of portable, software-driven, 3-D measurement systems. To achieve this
objective, the Company has adopted the following principal strategies:

Focus on the Portable 3-D Measurement Market. The Company believes it
is a pioneer in the development and marketing of portable, software-driven,
3-D measurement systems. Based on current sales of all portable 3-D
measurement systems to date, the Company believes that the market for these
products is substantial, but is currently underserved. The Company expects
its intensive efforts to document and publicize new applications to lead to
a greater market awareness of the benefits of the Company's technology.

Increase Sales Force and Distribution. The Company has implemented an
integrated team sale process and has developed strategic relationships with
third party distributors which the Company believes have increased sales
effort efficiency. The Company intends to add additional personnel to its
existing sales offices and to open additional sales offices and add
distributors to provide geographic coverage in territories with strong
manufacturing and industrial bases.

Further Penetrate its Installed Customer Base. The Company has more
than 600 customers that use its products in a broad range of manufacturing
and industrial applications. Many of these customers are large
manufacturers with multiple facilities. For many of its customers, the
Company's products are used only at certain manufacturing facilities or by
certain divisions. Accordingly, the Company will seek to leverage
successful installations of its products to encourage adoption at
additional customer sites.

Increase International Sales. The Company believes that substantial
international demand exists for portable, software-driven, 3-D measurement
systems. Therefore, the Company plans to extend its significant commitment
to international sales and support to take advantage of worldwide market
opportunities. International sales represented 26.1% of the Company's sales
for 1996 and 26.0% for the

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first six months of 1997. The Company intends to increase international
sales by expanding its current sales organization in Europe and entering
new markets, such as the Pacific Rim and Latin America.

Leverage its Technology. The Company has made a substantial
investment in the development of its technology, employs a number of
proprietary manufacturing processes and currently holds or has pending 18
patents in the United States, eight of which are also held or pending in
other jurisdictions. The Company believes that the foundation of its
successes to date has been the technological superiority and affordability
of its products. The Company intends to leverage its existing technology to
lower the cost of producing, and enhance the functionality, of its
products.

Expand its Product Line and Service Offerings. The Company intends to
introduce new products to meet the requirements of its customers. The
Company also intends to capitalize on its experience in solving unique
production problems to increase revenues through technical service
offerings. In addition, the Company may seek to acquire complementary
businesses or technologies to expand its product and service offerings.

FARO PRODUCTS

SILVER SERIES MODEL

A schematic drawing of the Company's Silver Series FAROArm showing (i) six
numbered axes of motion, (ii) an on-board controller and (iii) a probe,
hardgrip and data switch on one end and a laptop computer connected at the
other end with the Company's Autro Cam logo on the computer screen.

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FAROArm(R)

The FAROArm(R) is a portable, six-axis, instrumented, articulated device
that approximates the range of motion and dexterity of the human arm. Each
articulated arm is comprised of three major joints, each of which may consist of
one, two or three axes of motion. The FAROArm(R) is available in a variety of
sizes, configurations and precision levels that are suitable for a broad range
of applications. To take a measurement, the operator simply touches the object
to be measured with a probe at the end of the arm and presses a button. Data can
be captured as either individual points or a series of points. Digital
rotational transducers located at each of the joints of the arm measure the
angles at those joints. This rotational measurement data is transmitted to an
on-board controller that converts the arm angles to precise locations in 3-D
space using "xyz" position coordinates and "ijk" orientation coordinates.

The FAROArm(R) has been designed as an open architecture system. The
communications parameters of the on-board processors have the ability to combine
advanced sensing probes, integrate with conventional CMM software and
communicate with different CAD software packages and a variety of computer
operating systems. This open architecture is designed to provide for easy
integration of the FAROArm(R) into the manufacturing environment. The customer's
ability to use an installed base of computing hardware and software further
reduces the cost of installation and training while initiating the transition to
the Company's preferred group of CAD-based products. To encourage integration of
the FAROArm(R) into the manufacturing environment, the Company provides a group
of seamless interface drivers for leading CAD/CAM packages, including
AutoCAD(R), CADKey(R) and SURFCAM(R). The Company also provides a full serial
communication command protocol to the FAROArm(R) for customers who write their
own interfaces.

The Company offers several models of the FAROArm(R) under two product
lines: the Silver Series and the Bronze Series.

Silver Series. The Silver Series models are the Company's higher precision
(P.003 to P.007 inches) measuring devices and are available in six, eight and
twelve foot measurement diameters. These models are most frequently used for
factory floor inspection and fit-checking applications. Depending on the size,
configuration and precision level, the Silver Series models are priced between
$50,000 and $70,000 when sold as a turnkey system including hardware and
AnthroCam(R) software and between $30,000 and $60,000 without AnthroCam(R)
software.

Bronze Series. The Bronze Series models are the Company's medium precision
(P.012 to P.016 inches) measuring devices and are available in six, eight and
ten foot measurement diameters. These models are most frequently used for
applications that do not require high-level precision, such as 3-D modeling,
mold production and reverse-engineering applications. Depending on the size,
configuration and precision level, the Bronze Series models are priced between
$30,000 and $50,000 when bundled with AnthroCam(R) software and between $14,000
and $23,000 without AnthroCam(R) software.

AnthroCam(R)

AnthroCam(R) is the Company's proprietary measurement software. It is built
on the AutoCAD/AutoSurf software development platform, which allows users to
benefit from extensive hardware, software, interfacing and product support
libraries and teaching products. AnthroCam(R) software is offered with the
FAROArm(R) and is also offered as an unbundled product. When unbundled from the
FAROArm(R), AnthroCam(R) sells for $15,000.

AnthroCam(R) is the Company's software-based bridge to CAD and CAM; it
allows users to compare measurements of manufactured components with complex CAD
data. In conventional design applications, curved or ergonomic shapes are
typically modeled physically and then converted into data for manufacturing.
AnthroCam(R) provides an alternative to the time and expense of this physical
modeling process with a digital solution. For older parts without data files,
AnthroCam(R) enables pre-existing parts to be measured in order to adapt them to
current manufacturing technologies.

AnthroCam(R) has been designed as an open architecture system, allowing for
efficient integration into the manufacturing environment. The Company provides a
full serial communication command protocol to the

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AnthroCam(R) software for customers who write interfaces to their own software.
The Company also provides comprehensive training and support for AnthroCam(R)
and offers this product in a number of international versions.

AnthroCam(R) is a Windows-based, 32-bit application written for the most
recent PC-based technology. AnthroCam(R) has been entirely designed and
programmed by the Company utilizing field input and industry wide beta site
installations. AnthroCam(R) is written as an AutoCAD runtime extension (ARX)
that is the AutoCAD(R) Application Programming Interface (API). The software is
written in the C++ development language using Microsoft Foundation Class (MFC)
standards. The software fully implements UNICODE standards for worldwide
translation allowing the Company to create foreign language versions to enter
international markets more effectively.

Specialty Products

The Company licenses and supports certain specialty products based on its
articulated arm technology that are used in medical and multimedia applications.
License and support fees from these products do not represent a significant
portion of the Company's revenues and the Company does not intend to actively
market these products.

CUSTOMERS

The Company's products have been purchased by more than 600 customers
ranging from small machine shops to large manufacturing and industrial
companies. The Company's ten largest customers by revenue represented an
aggregate of 28.1% and 17.5% of the Company's total revenues in 1996 and the six
months ended June 30, 1997, respectively. Sales to Boeing represented 10.0% of
the Company's sales in 1996. No customer represented 10.0% or more of the
Company's sales in the first six months of 1997. The following table
illustrates, by vertical market, the Company's diverse customer base:

AEROSPACE
Boeing
GE Aircraft Engines
Lockheed Martin
Nordam Repair Division
Northrop Grumman
Orbital Sciences
Dee Howard

APPAREL AND FOOTWEAR
Nike
Reebok

AUTOMOTIVE
AO Smith
Chrysler
Ford
General Motors
Honda
Hyundai
Johnson Controls
Lear Corporation
Mercedes Benz
Porsche
Samsung Motors
Toyota
Vehma International

BUSINESS AND CONSUMER
MACHINES
Corning Asahi
Xerox

ELECTRIC UTILITIES AND
MANUFACTURERS
General Electric
Southern California Edison
Tennessee Valley Authority
Westinghouse Electric

FARM/LAWN EQUIPMENT
New Holland North America
Toro

HEAVY EQUIPMENT
MANUFACTURERS
Caterpillar
Komatsu Dresser
Champion Road Machinery
Texas Steel

PERSONAL ROAD/
WATER/SNOW CRAFT
Harley Davidson
Polaris Industries

PLASTICS
Able Design Plastics
Paramount Plastics
Thermoform Plastics

CUSTOMER CASE STUDIES

The following case studies illustrate the use of the Company's products and
services by its customers:

Chrysler Canada Corporation. Chrysler Canada Corporation ("Chrysler")
manufactures the Dodge Ram truck, van and wagon at its Windsor, Ontario
plant. This plant builds approximately 420

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vehicles per shift, with two shifts per day. Chrysler discovered certain
fit problems with its large panels and bodyside assemblies. Previous
inspection tools, such as test fixtures, templates and patterns, could not
meet Chrysler's requirements for on-site product measurement. The
FAROArm(R) was originally introduced as an interim solution. Chrysler
identified one of its three production lines as its "ideal" or "good" line
and used the FAROArm(R) to compare the products produced by the lines and
adjust the two "bad" lines. Within two weeks, Chrysler experienced
significantly improved product quality. The Company's "interim" solution
resulted in measurable production improvements for the plant, together with
significant capital savings as custom test fixtures were replaced with the
FAROArm(R).

Champion Road Machinery. Champion Road Machinery ("Champion") is a
worldwide manufacturer of road graders. Similar to a snow plow, road
graders are essential for shaping and smoothing new roadbeds, and are also
used in surface mining, dam work and land reclamation. Champion identified
the need to reduce the number of "reworks" or the custom fit of
subassemblies to its frames because of dimensional variations.
Historically, each time component parts did not fit together, Champion
corrected the deviations on a case-by-case basis by custom-fitting the
parts. With the FAROArm(R) and its companion AnthroCam(R) software,
Champion was able to capture measurement data from the parts and identify
the origin of the variations, which allowed it to address the source of the
problems rather than continue to make individual adjustments. Champion's
use of the FAROArm(R) resulted in a systematic solution for a recurring and
expensive manufacturing problem.

Southern California Edison. Southern California Edison ("SCE") is a
large public utility company. Like other utilities, SCE experienced
significant expense and customer dissatisfaction as a result of lengthy
downtimes. During routine turbine overhauls, scheduled and unscheduled
maintenance and forced outage conditions, SCE typically made numerous
repairs and modifications to make its equipment functional. Common problems
encountered by SCE included obsolete parts, long turnaround times for
replacement parts and difficulty in returning damaged parts to full
functionality. Using the FAROArm(R), SCE was able to measure large damaged
blades and create CAD drawings for quick manufacture of replacements. This
allowed SCE to bring its power generation units online without undue delay
and expense.

Texas Steel. Texas Steel is a foundry that produces steel castings
for off-road, mining, oil field and construction equipment. Its castings
weigh as much as 25,000 pounds and have diameters as large as twelve feet.
Texas Steel used the FAROArm(R) to improve the accuracy of dimensional
checks of these large castings, and found it to be safer, faster and more
efficient than its previous measurement methods. Texas Steel reported a 75%
time-savings in making these checks by using the FAROArm(R). In addition,
the FAROArm(R) allowed Texas Steel to measure exceptionally large parts
where such measurements were not possible with previous methods. The ease
of use of the FAROArm(R) and AnthroCam(R) also encouraged Texas Steel to
expand the range of parts checked, further increasing production quality.

Polaris Industries, Inc. Polaris Industries, Inc. ("Polaris") is a
leading manufacturer of all-terrain vehicles ("ATVs"). To satisfy its own
stringent quality standards, Polaris engineers routinely check all ATV
subassemblies and weldments to ensure quality and reduce the number of
reworks caused by dimensional variations. Before Polaris began using the
FAROArm(R), measuring the subassemblies took approximately 2.5 hours.
Polaris' engineers would manually measure various points on the
subassemblies to ensure that they matched blueprint specifications. These
measurements were difficult to make because of the complex size and shape
of the subassemblies. Using the FAROArm(R), Polaris reduced the measurement
time for subassemblies to approximately 15 minutes. Polaris reports that
its use of the FAROArm(R) has resulted in a significant increase in
productivity.

SALES AND MARKETING

The Company directs its sales and marketing efforts from its headquarters
in Lake Mary, Florida. At June 30, 1997, the Company employed 40 sales
professionals who operate from the Company's five domestic regional sales
offices located in Chicago, Dallas, Detroit, Los Angeles and Seattle, and three
international sales

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offices located in London, Paris and Stuttgart. The Company also utilizes three
domestic and 12 international distributors in territories where the Company does
not have regional sales offices.

The Company uses a process of integrated lead qualification and sales
demonstration. Once a customer opportunity is identified, the Company employs a
team-based sales approach involving inside and outside sales personnel who are
supported by application engineers.

The Company employs a variety of marketing techniques, including direct
mail, trade shows, and advertising in trade journals, and proactively seeks
publicity opportunities for customer testimonials. Management believes that
word-of-mouth advertising from the Company's existing customers provides an
important marketing advantage. The Company also has a computerized sales and
marketing software system with telemarketing, lead tracking and analysis, as
well as customer support capabilities. Each of the Company's sales offices is
linked electronically to the Company's headquarters.

In June 1996, the Company entered into an OEM agreement with Mitutoyo
Corporation ("Mitutoyo"), a Japanese company that is the world's largest
manufacturer of metrology tools. Mitutoyo markets the FAROArm(R) in Japan under
the name SPINARM(R). The agreement, which grants Mitutoyo a non-exclusive right
to sales in Japan, expires in June 1999 and is renewable for successive one year
terms.

RESEARCH AND DEVELOPMENT

The Company believes that its future success depends on its ability to
achieve technological leadership, which will require ongoing enhancements of its
products and the development of new applications and products that provide 3-D
measurement solutions. Accordingly, the Company intends to continue to make
substantial investments in the development of new technologies, the
commercialization of new products that build on the Company's existing
technological base and the enhancement and development of additional
applications for its products.

The Company's research and development efforts are directed primarily at
enhancing the technology of its current products and developing new and
innovative products that respond to specific requirements of the emerging market
for 3-D measurement systems. The Company's research and development efforts have
been devoted primarily to mechanical hardware, electronics and software. The
Company's engineering development efforts will continue to focus on the
FAROArm(R) and AnthroCam(R) products. Significant efforts are also being
directed toward the development of new measurement technologies and additional
features for existing products. See "-- Technology."

At June 30, 1997, the Company employed 16 scientists and technicians in its
research and development efforts. Research and development expenses were
$173,000, $364,000 and $730,000 in 1994, 1995 and 1996, respectively, and
$395,000 in the first six months of 1997. Research and development activities,
especially with respect to new products and technologies, are subject to
significant risks, and there can be no assurance that any of the Company's
research and development activities will be completed successfully or on
schedule, or, if so completed, will be commercially accepted. See "Risk
Factors -- Technological Change."

TECHNOLOGY

The primary measurement function of the FAROArm(R) is to provide
orientation and position information with respect to the probe at the end of the
FAROArm(R). This information is processed by software and can be compared to the
desired dimensions of the CAD data of a production part or assembly to determine
whether the measured data conforms to meet dimensional specifications.

To accomplish this measurement function, the FAROArm(R) is designed as an
articulated arm with six or seven joints. The arm consists of aluminum links and
rotating joints that are combined in different lengths and configurations,
resulting in human arm-like characteristics. Each joint is instrumented with a
rotational transducer, a device used to measure rotation, which is based on
optical digital technology. The position and orientation of the probe in three
dimensions is determined by applying trigonometric calculations at each joint.
The position of the end of a link of the arm can be determined by using the
angle measured and the known

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length of the link. Through a complex summation of these calculations at each
joint, the position and orientation of the probe is determined.

The Company's products are the result of a successful integration of
state-of-the-art developments in mechanical and electronic hardware and
applications software. The unique nature of the Company's technical developments
is evidenced by the Company's numerous U.S. and international patents. The
Company maintains low cost product design processes by retaining development
responsibilities for all electronics, hardware and software.

Mechanical Hardware. The FAROArm(R) is designed to function in diverse
environments and under rigorous physical conditions. The arm monitors its
temperature to adjust for environments ranging from -10 degrees to +50 degrees
Celsius. The arm is constructed of pre-stressed precision bearings to resist
shock loads. Low production costs are attained by the proprietary combination of
reasonably priced electromechanical components accompanied by the optimization
and on-board storage of calibration data. Many of the Company's innovations
relate to the environmental adaptability of its products. Significant features
include integrated counter-balancing, configuration convertibility and
temperature compensation.

Electronics. The rotational information for each joint is processed by an
on-board computer that is designed to handle complex analyses of joint data as
well as communications with a variety of host computers. The Company's
electronics are based on digital signal processing and surface mount
technologies. The Company's products meet all mandatory electronic safety
requirements. Advanced circuit board development, surface mount production and
automated testing methods are used to ensure low cost and high reliability.

Software. AnthroCam(R) is a Windows-based, 32-bit application written for
the most recent PC-based technology. AnthroCam(R) has been entirely designed and
programmed by the Company utilizing field input and industry wide beta site
installations. AnthroCam(R) is written as an AutoCAD runtime extension (ARX)
that is the AutoCAD(R) Application Programming Interface (API). The software is
written in the C++ development language using Microsoft Foundation Class (MFC)
standards. The software fully implements UNICODE standards for worldwide
translation allowing the Company to create foreign language versions to enter
international markets more effectively. The software is developed with the
cooperation of diverse user beta sites and a well developed system for tracking
and implementing market demands.

INTELLECTUAL PROPERTY

The Company holds or has pending 17 patents in the United States, ten of
which also are held or pending in other jurisdictions. The Company also has 16
registered trademarks in the United States and 12 trademark applications pending
in the United States and the European Union.

The Company relies on a combination of contractual provisions and trade
secret laws to protect its proprietary information. There can be no assurance
that the steps taken by the Company to protect its trade secrets and proprietary
information will be sufficient to prevent misappropriation of its proprietary
information or to preclude third-party development of similar intellectual
property.

Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. The Company
intends to vigorously defend its proprietary rights against infringement by
third parties. However, policing unauthorized use of the Company's products is
difficult, particularly overseas, and the Company is unable to determine the
extent to which piracy of its software products exists. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as the laws of the United States.

The Company does not believe that any of its products infringe on the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to current
or future products. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect upon the
Company's business, operating results

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and financial condition. See "Risk Factors -- Uncertainty of Patents; Dependence
on Patents, Licenses and Proprietary Rights."

MANUFACTURING AND ASSEMBLY

The Company manufactures its products primarily at its headquarters in Lake
Mary, Florida. Manufacturing consists primarily of assembling components and
subassemblies purchased from suppliers into finished products. The primary
components, which include machined parts and electronic circuit boards, are
produced by subcontractors according to the Company's specifications. All
products are assembled, calibrated and finally tested for accuracy and
functionality before shipment. In limited circumstances, the Company performs
in-house circuit board assembly and part machining. The Company's facilities and
operations are in the process of completing requirements for ISO 9000
registration.

COMPETITION

The broad market for measurement devices, which includes hand-measurement
tools, test fixtures and conventional, fixed-base CMMs, is highly competitive.
Manufacturers of hand-measurement tools and traditional CMMs include a
significant number of well-established companies that are substantially larger
and possess substantially greater financial, technical and marketing resources
than the Company. There can be no assurance that these entities or others will
not succeed in developing products or technologies that will directly compete
with those of the Company. The Company will be required to make continued
investments in technology and product development to maintain its technological
advantage over its competition. There can be no assurance that the Company will
have sufficient resources to make such investments or that the Company's product
development efforts will be sufficient to allow the Company to compete
successfully as the industry evolves. The Company's products compete on the
basis of portability, accuracy, application features, ease-of-use, quality,
price and technical support.

The Company's only significant direct competitor is a joint venture of
Romer SRL (France) and Romer, Inc. (California). The Company is aware of a
direct competitor in Germany and two new direct competitors in Italy, each of
which the Company believes currently has negligible sales. The Company also has
an established, indirect competitor in Japan that markets a measuring device
that is mobile but not portable. There can be no assurance that such companies
will not devote additional resources to the development and marketing of
products that compete with those of the Company.

The worldwide trend toward CAD-based factory floor metrology has resulted
in the introduction of CAD-based inspection software for conventional CMMs by
most of the large CMM manufacturers. Certain CMM manufacturers are
miniaturizing, and in some cases increasing the mobility of, their conventional
CMMs. Nonetheless, these CMMs still have small measurement volumes, lack the
adaptability typical of portable, articulated arm measurement devices and lose
accuracy outside the controlled environment of the metrology lab.

BACKLOG

At June 30, 1997, the Company had orders representing $1.9 million in
sales, compared to $1.5 million at June 30, 1996. The Company expects to ship
all such outstanding orders by August 31, 1997. The Company affords its
customers the right to cancel any order at any time before the product is
shipped. Historically, the number of canceled orders has been negligible.
Nonetheless, there can be no assurance that all orders in backlog will be
shipped, and backlog may not be indicative of future sales.

EMPLOYEES

At June 30, 1997, the Company had 104 full time employees, consisting of 40
sales/application engineering staff, 27 production staff, 16 research and
development staff, 13 administrative staff, and eight customer service
specialists. None of the Company's employees is represented by a labor
organization, and the Company is not a party to any collective bargaining
agreements. The Company believes its employee relations are good. Management
believes that its future growth and success will depend in part on its ability
to retain

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and continue to attract highly skilled personnel. The Company anticipates that
it will obtain the additional personnel required to satisfy the staffing
requirements caused by its planned expansion over the next 18 months.

FACILITIES

The Company's headquarters and principal operations are located in a leased
building in Lake Mary, Florida containing approximately 18,000 square feet. The
Company currently is in the process of increasing the size of its headquarters
facility to 36,000 square feet. The expanded facility will be used to increase
the Company's production, research and development, and training capabilities.
The Company believes that, after this expansion, its headquarters will be
adequate for its foreseeable needs and that it will be able to locate suitable
space for additional regional offices as those needs develop. The Company's
expanded facilities will constitute a fully-functional and technologically
current headquarters, administrative and operations center and production
facility. The Company anticipates that the expanded facility will be fully
utilized within 18 months of its completion.

The Company's planned expansion will require additional space for sales,
administrative and production personnel as well as for actual fabrication
activities. The Company believes that it will be able to meet these needs as it
continues to expand.

In addition, the Company has five sales offices in the United States and
three sales offices in Europe. The following table sets forth additional
information concerning these sales offices:

[Download Table]

LOCATION DATE OPENED
-------- ------------

Coventry, United Kingdom.................................... May 1997
Paris, France............................................... April 1996
Stuttgart, Germany.......................................... April 1996
Chicago, Illinois........................................... March 1996
Dallas, Texas............................................... March 1996
Los Angeles, California..................................... March 1996
Seattle, Washington......................................... March 1995
Detroit, Michigan........................................... January 1995

LEGAL PROCEEDINGS

The Company is not a party to any litigation, and is not aware of any
pending or threatened litigation, that is expected to have a material adverse
effect on the Company or its business.

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MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The executive officers and directors of the Company, as well as certain key
employees, and their ages as of August 1, 1997 are as follows:

[Enlarge/Download Table]

TERM AS
DIRECTOR
NAME AGE POSITION EXPIRES
---- --- -------- --------

EXECUTIVE OFFICERS AND DIRECTORS:
Simon Raab, Ph.D........................ 44 Chairman of the Board, President, Chief 2000
Executive Officer and Director
Gregory A. Fraser, Ph.D................. 42 Chief Financial Officer, Executive Vice 1999
President, Secretary, Treasurer and
Director
Hubert d'Amours......................... 58 Director 2000
Philip R. Colley........................ 59 Director 1999
Andre Julien............................ 54 Director 2000
Martin M. Koshar........................ 64 Director 1999
Alexandre Raab.......................... 72 Director 1998
Norman H. Schipper, Q.C................. 67 Director 1998

KEY EMPLOYEES:
Daniel T. Buckles....................... 42 Vice President -- Sales
Ali S. Sajedi........................... 37 Chief Engineer

Simon Raab, Ph.D., a co-founder of the Company, has served as the Chairman
of the Board, Chief Executive Officer and a director of the Company since its
inception in 1982 and as President since 1986. Mr. Raab holds a Ph.D. in
Mechanical Engineering from McGill University, Montreal, Canada, a Masters of
Engineering Physics from Cornell University and a Bachelor of Science in Physics
with a minor in Biophysics from the University of Waterloo, Canada.

Gregory A. Fraser, Ph.D., a co-founder of the Company, has served as Chief
Financial Officer and Executive Vice President since May 1997 and as Secretary,
Treasurer and a director of the Company since its inception in 1982. Mr. Fraser
holds a Ph.D. in Mechanical Engineering from McGill University, Montreal,
Canada, a Masters of Theoretical and Applied Mechanics from Northwestern
University and a Bachelor of Science and Bachelor of Mechanical Engineering from
Northwestern University.

Hubert d'Amours has been a director since 1990. Mr. d'Amours has served as
president of Montroyal Capital Inc. and Capimont Inc., two venture capital
investment firms, since 1990. Mr. d'Amours also serves as a director of a number
of privately held companies.

Philip R. Colley has been a director since 1984. Mr. Colley has been the
President of Colley, Borland and Vale Insurance Brokers Ltd. in Ontario, Canada,
since 1967.

Andre Julien has been a director since 1986. Mr. Julien was a co-founder in
1970 and a major shareholder until 1977 of Performance Sail Craft, Inc., a
Montreal-based sailboat manufacturer which produces the Laser(TM) sailboat. From
1969 until his retirement in 1994, Mr. Julien was president and the owner of
Chateau Paints, Inc., a coatings and paint manufacturer in Montreal Canada.
Since his retirement in 1994, Mr. Julien has sat on boards of directors of, and
provided consulting services to, a number of private companies.

Martin M. Koshar has been a director since 1992. From 1988 until his
retirement in 1992, Mr. Koshar was President of the Aerospace and Naval Division
of Martin Marietta Corporation, where he managed the production of various
aircraft structures, the VLS missile launching system and various SONAR systems
and

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undersea recovery devices. Since his retirement in 1992, Mr. Koshar has provided
consulting services to a number of organizations, including Lockheed Martin and
the U.S. Army Missile Command.

Alexandre Raab has been a director since the Company's inception in 1982.
Mr. Raab has served as the Chairman of the Board of Advanced Agro Enterprises, a
privately held company in Ontario, Canada, since 1991. From 1953 through 1990,
Mr. Raab was the principal shareholder and Chief Executive Officer of White Rose
Nurseries, Ltd., a privately held horticultural firm. Mr. Raab is the father of
Simon Raab.

Norman H. Schipper, Q.C., has been a director since the Company's inception
in 1982. Mr. Schipper has been a partner in the Toronto office of the law firm
of Goodman, Phillips & Vineberg since 1962.

Daniel T. Buckles has been Vice President -- Sales for the Company since
May 1997. From 1993 to May 1997, he served as the Director of Marketing for the
Company's Industrial Products Group. From 1991 to 1993, Mr. Buckles was the
Manager of Product Assurance Technical Operations for the Aerospace and Naval
Division of Martin Marietta Corporation. From 1987 to 1991, Mr. Buckles held
program management positions for a variety of advanced development and
manufacturing programs at Martin Marietta Corporation. From 1976 to 1987, Mr.
Buckles held various program management and manufacturing positions at the
Submarine Signal Division of Raytheon Company. Mr. Buckles holds a Bachelor of
Arts in Theoretical and Quantitative Economics and a Masters of Business
Administration from the University of Massachusetts -- Dartmouth.

Ali S. Sajedi has been Chief Engineer for the Company since its inception
in 1982. Mr. Sajedi has been responsible for implementation of research and
development plans and for production oversight of the Company's self-managed
production team. Mr. Sajedi holds a Bachelor of Mechanical Engineering from
McGill University.

COMMITTEES OF THE BOARD

The Board of Directors has established the following committees:

Audit Committee. The Audit Committee is comprised of Messrs. d'Amours,
Julien and Simon Raab and is responsible for reviewing the independence,
qualifications and activities of the Company's independent certified accountants
and the Company's financial policies, control procedures and accounting staff.
The Audit Committee recommends to the Board the appointment of the independent
certified public accountants and reviews and approves the Company's financial
statements. The Audit Committee also reviews transactions between the Company
and any officer or director or any entity in which an officer or director of the
Company has a material interest.

Compensation Committee. The Compensation Committee is comprised of Messrs.
Koshar (committee chair), d'Amours and Julien and is responsible for
establishing the compensation of the Company's directors, officers and other
managerial personnel, including salaries, bonuses, termination arrangements and
other benefits. In addition, the Committee administers the Company's 1993 Stock
Option Plan, 1997 Employee Stock Option Plan and 1997 Non-Employee Director
Stock Option Plan.

COMPENSATION OF DIRECTORS

Directors who are executive officers of the Company do not receive
compensation for service as members of either the Board of Directors or
committees thereof. Directors who are not executive officers of the Company
receive $1,000 for each Board meeting and $500 for each committee meeting
attended. The outside directors also receive options to purchase Common Stock
under the Company's 1997 Non-Employee Director Stock Option Plan. See "-- Stock
Option Plans -- 1997 Non-Employee Director Stock Option Plan."

The Company's 1997 Non-Employee Directors' Fee Plan permits non-employee
directors to elect to receive directors' fees in the form of Common Stock rather
than cash. Shares issued in lieu of cash directors' fees are issued at the end
of the quarter in which the fees are earned, with the number of shares being
based on the fair market value of the Common Stock for the five trading days
immediately preceding the last business

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day of the quarter. Directors may defer the receipt of fees for federal income
tax purposes, whether payable in cash or in shares.

In May 1997, in consideration for his serving on the Board of Directors,
the Company granted Martin M. Koshar options under the 1993 Stock Option Plan to
purchase 52,732 shares of Common Stock at an exercise price of $0.36 per share.
These options become exercisable in full upon the completion of this offering.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee are Messrs. d'Amours, Julien and
Koshar. Compensation decisions for 1996 were made by the Compensation Committee.
There have been no transactions during the last three years between the Company
and members of the Compensation Committee or entities in which they own an
interest.

EXECUTIVE COMPENSATION

The following table sets forth certain information concerning compensation
paid to the Company's Chief Executive Officer and each of the Company's other
most highly compensated executive officers who earned more than $100,000 in
salary and bonus for the year ended December 31, 1996.

SUMMARY COMPENSATION TABLE

[Download Table]

ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
--------------------------- --------- --------

Simon Raab, Ph.D.
President and Chief Executive Officer..................... $130,000 --
Gregory A. Fraser, Ph.D.
Chief Financial Officer and Executive Vice President...... $111,467 $11,643

STOCK OPTION PLANS

The Company maintains three stock option plans to attract, motivate and
retain key employees and members of the Board of Directors who are not employees
of the Company.

1993 Stock Option Plan. The Company's 1993 Stock Option Plan (the "1993
Plan") provides for the grant of incentive or nonqualified stock options to key
employees and nonqualified stock options to non-employee directors. An aggregate
of 703,100 shares of Common Stock may be granted under the 1993 Plan. The 1993
Plan is administered by the Compensation Committee of the Board of Directors,
which has broad discretion in the granting of awards. As of August 25, 1997, 21
key employees and one non-employee director held an aggregate of 383,513 options
under the 1993 Plan with ten-year terms and a weighted average exercise price of
$1.53 per share. The executives named in the Summary Compensation Table do not
hold any options under the 1993 Plan.

1997 Employee Stock Option Plan. The Company also has adopted a 1997
Employee Stock Option Plan (the "1997 Plan") that provides for the grant to key
employees of the Company of incentive or nonqualified stock options. An
aggregate of 750,000 shares of Common Stock may be granted under the 1997 Plan.
The 1997 Plan is administered by the Compensation Committee of the Board of
Directors, which has broad discretion in the granting of awards. The exercise
price of all options granted under the 1997 Plan must be at least equal to the
fair market value of the Common Stock on the date of grant. Options granted
under the 1997 Plan will be exercisable after the period or periods specified in
the option agreement with respect to such grants and expire ten years from the
date of grant. As of August 25, 1997, no options have been granted under the
1997 Plan. It is anticipated that upon completion of this offering, Simon Raab
will be granted 80,000 options, Gregory A. Fraser will be granted 60,000 options
and approximately 74 other employees will be granted options to purchase a total
of 220,000 shares of Common Stock at the initial public offering price (except
for options granted at 110% of the initial public offering price to qualify for
treatment as incentive

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stock options). These options will become exercisable in one-third increments on
each anniversary of the date of grant, commencing in 1998.

1997 Non-Employee Director Stock Option Plan. The Company's 1997
Non-Employee Director Stock Option Plan (the "Non-Employee Plan") provides for
the grant of nonqualified stock options to purchase up to 250,000 shares of
Common Stock to members of the Board of Directors who are not employees of the
Company. As of August 25, 1997, no options had been granted under the
Non-Employee Plan. Under the formula grant provisions of the Non-Employee Plan;
(i) each outside director will be granted options to purchase 3,000 shares of
Common Stock upon the completion of this offering; (ii) thereafter, on the date
on which a new outside director is first elected or appointed, he or she will
automatically be granted options to purchase 3,000 shares of Common Stock; and
(iii) each outside director also will be granted options to purchase 3,000
shares of Common Stock annually on the day following the annual meeting of
shareholders. The Non-Employee Plan also permits discretionary option grants
approved by the Board of Directors, and it is anticipated that upon completion
of this offering the Board will grant an aggregate of 160,000 options pursuant
to these provisions. All options granted under the Non-Employee Plan will have
an exercise price equal to the then fair market value of the Common Stock.
Options will become exercisable in one-third increments on each anniversary of
the date of grant.

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PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of August 1, 1997 and as adjusted to reflect the
sale of Common Stock offered hereby, with respect to: (i) each director and
executive officer of the Company; (ii) all directors and executive officers of
the Company as a group; (iii) each person known by the Company to be the
beneficial owner of five percent or more of the outstanding Common Stock; and
(iv) the Selling Shareholders. Except as otherwise indicated, the Company
believes that all beneficial owners named below have sole voting and investment
power with respect to all shares of Common Stock beneficially owned by them.

[Enlarge/Download Table]

SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
THE OFFERING SHARES THE OFFERING
------------------- BEING -------------------
NAME OF BENEFICIAL OWNER(1) NUMBER(2) PERCENT OFFERED NUMBER(2) PERCENT
--------------------------- --------- ------- ------- --------- -------

DIRECTORS AND EXECUTIVE OFFICERS:
Simon Raab, Ph.D.(3)............................. 3,102,723 44.3% 166,855 2,935,868 30.1%
Gregory A. Fraser, Ph.D.......................... 542,265 7.7 75,995 466,270 4.8
Hubert d'Amours(4)............................... 59,572 * 7,800 51,772 *
Phillip R. Colley(5)............................. 144,611 2.1 14,395 130,216 1.3
Alexandre Raab(6)................................ 463,158 6.6 0 463,158 4.7
Martin M. Koshar(7).............................. 52,732 * 0 52,732 *
Norman H. Schipper, Q.C.(8)...................... 166,549 2.4 21,807 144,742 1.5
Andre Julien(9).................................. 510,139 7.3 66,795 443,344 4.5
All directors and executive officers as a group
(8 persons).................................... 5,041,729 71.5 353,647 4,688,102 47.8
OTHER SELLING SHAREHOLDERS:
William Alcamo................................... 19,944 * 2,611 17,333 *
Alexis Nihon Credit Inc.......................... 43,686 * 5,720 37,966 *
Thomas H. Beck................................... 40,447 * 5,296 35,151 *
Alec Bloom....................................... 13,106 * 1,716 11,390 *
Charles Rosner Bronfman Family Trust............. 87,373 1.3 11,440 75,933 *
Capital CDPQ, Inc................................ 144,959 2.1 18,980 125,979 1.3
Stephen Cole..................................... 2,420 * 317 2,103 *
Consumers Glass Company Ltd. Pension Fund........ 119,145 1.7 15,600 103,545 1.1
William and Gail Cornwall........................ 20,683 * 2,708 17,975 *
Fiducie de Quebec................................ 26,211 * 3,432 22,779 *
Hawk Hill Investments Limited.................... 165,387 2.4 21,655 143,732 1.5
H.T. Beck Investments............................ 300,851 4.3 39,391 261,460 2.7
Island City Investments Ltd...................... 19,858 * 2,600 17,258 *
Josyd Inc........................................ 11,915 * 1,560 10,355 *
Les Fiduciares de la Cite et du District de
Montreal....................................... 26,211 * 3,432 22,779 *
Levesque Beaubien Geoffrion Inc.................. 11,915 * 1,560 10,355 *
L'Industrielle-Alliance, Compagnie d'Assurance
sur la Vie..................................... 48,055 * 6,292 41,763 *
O. Jack Mandel................................... 95,931 1.4 12,561 83,370 *
Remi Marcoux..................................... 15,886 * 2,080 13,806 *
Marleau Lemire Inc............................... 11,915 * 1,560 10,355 *
Mar-Pick Enterprises, Inc........................ 14,485 * 1,442 13,043 *
Nicanco Holdings Inc............................. 11,915 * 1,560 10,355 *
Nodel Investments Limited........................ 11,915 * 1,560 10,355 *
Power Corporation of Canada...................... 43,686 * 5,720 37,966 *
Rash Holdings Reg'd.............................. 15,886 * 2,080 13,806 *
Redpoll Holdings Ltd............................. 17,475 * 2,288 15,187 *
Richard Renaud................................... 131,595 1.9 17,230 114,365 1.2

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[Enlarge/Download Table]

Michael Rosenbloom............................... 13,106 * 1,716 11,390 *
Ali S. Sajedi(10)................................ 184,563 2.6 24,166 160,397 1.6%
1236344 Ontario Limited.......................... 162,431 2.3 21,268 141,163 1.4
Starjay Holdings Inc............................. 13,106 * 1,716 11,390 *
T.N.G. Corporation Inc........................... 23,035 * 3,016 20,019 *
Stephen Vineberg................................. 15,886 * 2,080 13,806 *

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

* Less than 1%
(1) The business address for each of the officers and directors is 125
Technology Park, Lake Mary, Florida 32746. The business address for
Alexandre Raab is 675 Cochrane Drive, Suite 504, Markham, Ontario, Canada
L3R 0B8.
(2) Except as noted, all shares are held beneficially and of record.
(3) Represents shares owned by Xenon Research, Inc. All of the outstanding
capital stock of Xenon Research, Inc. is owned by Mr. Raab and Diana Raab,
his spouse.
(4) Includes 29,786 shares owned by Mr. d'Amours' spouse. Of the shares being
sold by this shareholder, 3,900 shares are being sold by Mr. d'Amours and
3,900 shares are being sold by his wife.
(5) Includes 49,995 shares owned by 483663 Ontario Ltd. Mr. Colley owns a
controlling interest in 483663 Ontario Ltd. Of the shares being sold by
this shareholder, 9,110 shares are being sold by Mr. Colley and 5,285
shares are being sold by 483663 Ontario Ltd.
(6) Represents shares owned by Geanal Holdings, Inc. All of the outstanding
capital stock of Geanal Holdings, Inc. is owned by Mr. Raab and his spouse.
(7) Represents options which become exercisable upon consummation of this
offering.
(8) Represents shares owned by Shanklin Investments. Mr. Schipper owns a
controlling interest in Shanklin Investments.
(9) Represents 438,652 shares owned by Philanderer Tree, Inc. ("Tree") and
71,487 shares owned by Philanderer Six Inc. ("Six"), over which Mr. Julien
has shared voting and investment power. Tree and Six are private investment
companies of which Mr. Julien is an executive officer, director and
shareholder and are selling 57,435 shares and 9,360 shares, respectively,
in the offering.
(10) Mr. Sajedi has been the Chief Engineer for the Company since its inception
in 1982. See "Management."

CERTAIN TRANSACTIONS

The Company leases its headquarters from Xenon Research, Inc. ("Xenon"), a
44.3% shareholder. All of the issued and outstanding capital stock of Xenon is
owned by Simon Raab, the Company's President and Chief Executive Officer, and
Diana Raab, Mr. Raab's wife. The term of the lease expires on February 28, 2001,
and the Company has two five-year renewal options. Base rent under the lease was
$150,000 for 1996 and $148,000 for both 1995 and 1994. Upon completion of the
expansion of the leased facility, base rent will increase to $300,000 per year.
Base rent during renewal periods will reflect changes in the U.S. Bureau of
Labor Statistics Consumer Price Index for all Urban Consumers. The terms of the
lease were approved by an independent committee of the Company's Board of
Directors upon review of an independent market study of comparable rental rates
and such terms are, in the opinion of the Board of Directors, no less favorable
than those that could be obtained on an arms-length basis.

In June 1994, the Company obtained a $3.5 million line of credit from Xenon
which was secured by substantially all of the Company's assets. Advances under
the line accrued interest at a varying interest rate that was determined by an
independent committee of the Company's Board of Directors after an independent
review of interest rates charged by lenders on comparable loans to third
parties. The Company repaid the

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outstanding balance and terminated the line in September 1996. The Company also
received an unsecured $100,000 demand, non-interest bearing loan from Simon Raab
in November 1995, which the Company repaid in January 1996.

The Audit Committee of the Board of Directors is responsible for reviewing
all future transactions between the Company and any officer, director or
principal shareholder of the Company or any entity in which an officer, director
or principal shareholder has a material interest. Any such transactions must be
on terms no less favorable than those that could be obtained on an arms-length
basis from independent third parties.

DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $0.001 per share, and 10,000,000 shares of Preferred
Stock, par value $0.001 per share. As of the date of this prospectus, 7,000,000
shares of Common Stock held by 47 holders of record and no shares of Preferred
Stock were issued and outstanding.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted upon by the shareholders. The Company's
Articles of Incorporation do not provide for cumulative voting. Subject to
preferences that might be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. Holders of
Common Stock have no conversion, preemptive or other rights to subscribe for
additional shares or other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. The issued and outstanding shares of
Common Stock are, and the shares offered hereby will be upon payment therefor,
fully paid and nonassessable.

PREFERRED STOCK

The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without shareholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of the Company's Common Stock and,
in certain instances, could adversely affect the market price of such stock. In
the event of issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. No shares of Preferred Stock are outstanding and the
Company has no present intention to issue any shares of its Preferred Stock.

CERTAIN STATUTORY AND OTHER PROVISIONS

Statutory Provisions. The Company is subject to several anti-takeover
provisions under Florida law that apply to public corporations organized under
Florida law unless the corporation has elected to opt out of those provisions in
its Articles of Incorporation or (depending on the provision in question) its
Bylaws. The Company has not elected to opt out of these provisions. The Florida
Business Corporation Act (the "Florida Act") prohibits the voting of shares in a
publicly held Florida corporation that are acquired in a "control share
acquisition" unless the board of directors approves the control share
acquisition or the holders of a majority of the corporation's voting shares
(exclusive of shares held by officers of the corporation, inside directors or
the acquiring party) approve the granting of voting rights as to the shares
acquired in the control share acquisition. A "control share acquisition" is
defined as an acquisition that immediately thereafter entitles the acquiring
party to, directly or indirectly, exercise voting power in the election of
directors within any of the following

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ranges: (i) one-fifth or more but less than one-third of such voting power, (ii)
one-third or more but less than a majority of such voting power and (iii) a
majority or more of such voting power. This statutory voting restriction is not
applicable in certain circumstances set forth in the Florida Act.

The Florida Act also contains an "affiliated transaction" provision that
prohibits a publicly-held Florida corporation from engaging in a broad range of
business combinations or other extraordinary corporate transactions with an
"interested shareholder" unless (i) the transaction is approved by a majority of
disinterested directors, (ii) the Company has not had more than 300 shareholders
of record during the past three years, (iii) the interested shareholder has
owned at least 80% of the Company's outstanding voting shares for at least five
years, (iv) the interested shareholder is the beneficial owner of at least 90%
of the voting shares (excluding shares acquired directly from the Company in a
transaction not approved by a majority of the disinterested directors), (v)
consideration is paid to the holders of the Company's shares equal to the
highest amount per share paid by the interested shareholder for the acquisition
of Company shares in the last two years or fair market value and certain other
conditions are met or (vi) the transaction is approved by the holder of
two-thirds of the Company's voting shares other than those owned by the
interested shareholder. An interested shareholder is defined as a person who,
together with affiliates and associates, beneficially owns (as defined in
Section 607.0901(1)(e) of the Florida Act) more than 10% of the Company's
outstanding voting shares.

Classified Board of Directors. The Company's Articles of Incorporation and
Bylaws provide that the Board of Directors of the Company will be divided into
three classes, with staggered terms of three years for each class. The term of
one class expires each year. The Company's Articles of Incorporation provide
that any vacancies on the Board of Directors will be filled only by the
affirmative vote of a majority of the directors then in office, even if less
than a quorum. The Articles of Incorporation of the Company also provide that
any director may be removed from office, but only for cause and only upon the
affirmative vote of the holders of at least two-thirds of the Common Stock.

Special Voting Requirements. The Company's Articles of Incorporation
provide that all actions taken by the shareholders must be taken at an annual or
special meeting of the shareholders or by written consent of the holders of not
less than two-thirds of the Company's outstanding voting shares. The Articles of
Incorporation provide that special meetings of the shareholders may be called
only by the President, the Chairman of the Board, a majority of the members of
the Board of Directors, or the holders of not less than 50% of the Company's
outstanding voting shares. Under the Company's Bylaws, shareholders will be
required to comply with advance notice provisions with respect to any proposal
submitted for shareholder vote, including nominations for elections to the Board
of Directors. The Articles of Incorporation and Bylaws of the Company contain
provisions requiring the affirmative vote of the holders of at least two-thirds
of the Common Stock to amend certain provisions of the Company's Articles of
Incorporation and Bylaws.

Stock Option Plans. The 1997 Plan and the Non-Employee Plan each provides
that in the event of (i) the adoption of a plan or reorganization, merger, share
exchange or consolidation of the Company with one or more other entities as a
result of which the holders of the outstanding shares of Common Stock would
receive less than 50% of the voting power of the capital stock or other
interests of the surviving or resulting corporation or entity; (ii) the adoption
of a plan of liquidation or the approval of the dissolution of the Company;
(iii) the approval by the board of directors of an agreement providing for the
sale or transfer of substantially all of the assets of the Company; or (iv) the
acquisition of more than 20% of the outstanding shares of Common Stock by any
person within the meaning of Rule 13(d)(3) of the Securities Exchange Act of
1934, as amended, if such acquisition is not preceded by a prior expression of
approval by the board of directors, then in each such case the options granted
thereunder shall become immediately exercisable in full. Notwithstanding the
foregoing, if a successor corporation or other entity as contemplated above
agrees to assume the outstanding options or to substitute substantially
equivalent options, the options issued thereunder shall not be immediately
exercisable but shall remain exercisable in accordance with the terms of the
1997 Plan or the Non-Employee Plan, as applicable, and the applicable stock
option agreements.

Indemnification and Limitation of Liability. The Florida Act authorizes
Florida corporations to indemnify any person who was or is a party to any
proceeding (other than an action by, or in the right of, the

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corporation), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation or other entity, against liability incurred in connection with such
proceeding, including any appeal thereof, if he or she acted in good faith and
in a manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
In the case of an action by or on behalf of a corporation, indemnification may
not be made if the person seeking indemnification is adjudged liable, unless the
court in which such action was brought determines such person is fairly and
reasonably entitled to indemnification. The indemnification provisions of the
Florida Act require indemnification if a director or officer has been successful
on the merits or otherwise in defense of any action, suit or proceeding to which
he or she was a party by reason of the fact that he or she is or was a director
or officer of the corporation. The indemnification authorized under Florida law
is not exclusive and is in addition to any other rights granted to officers and
directors under the Articles of Incorporation or Bylaws of the corporation or
any agreement between officers and directors and the corporation. A corporation
may purchase and maintain insurance or furnish similar protection on behalf of
any officer or director against any liability asserted against the officer or
director and incurred by the officer or director in such capacity, or arising
out of the status, as an officer or director, whether or not the corporation
would have the power to indemnify him or her against such liability under the
Florida Act.

The Company's Articles of Incorporation provide for the indemnification of
directors and executive officers of the Company to the maximum extent permitted
by Florida law and for the advancement of expenses incurred in connection with
the defense of any action, suit or proceeding that the director or executive
officer was a party to by reason of the fact that he or she is or was a director
or executive officer of the Company.

Under the Florida Act, a director is not personally liable for monetary
damages to the Company or any other person for acts or omissions in his or her
capacity as a director except in certain limited circumstances such as certain
violations of criminal law and transactions in which the director derived an
improper personal benefit. As a result, shareholders may be unable to recover
monetary damages against directors for actions taken by them which constitute
negligence or gross negligence or which are in violation of their fiduciary
duties, although injunctive or other equitable relief may be available.

The foregoing provisions of the Florida Act and the Company's Articles of
Incorporation and Bylaws could have the effect of preventing or delaying a
person from acquiring or seeking to acquire a substantial equity interest in, or
control of, the Company.

WARRANTS

REGISTRATION RIGHTS

The Representatives' Warrants provide that the Company will file a shelf
registration statement relating to the shares of Common stock issuable pursuant
to the Warrants (the "Warrant Shares") no later than one day following the one
year anniversary of the effective date of this Registration Statement.
Additionally, the Company shall use its best efforts to (i) have the shelf
registration statement declared effective as soon as reasonably practicable and
(ii) keep the shelf registration statement continuously effective from the date
the shelf registration statement is declared effective until the earlier of the
expiration date of the Warrants, the date that all the Warrant Shares are
eligible for sale pursuant to Rule 144(k) under the Securities Act or any

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successor or comparable provision without restriction or the date that all of
the Warrant Shares have been sold. The Company has agreed to pay the costs and
expenses incurred in connection with the shelf registration statement, other
than underwriting discounts and commissions and the fees and expenses of counsel
to the Warrantholders.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Firstar Trust
Company, Milwaukee, Wisconsin.

SHARES ELIGIBLE FOR FUTURE SALE

Upon the completion of this offering, the Company will have 9,760,000
shares of Common Stock outstanding. Of these shares, 5,124,630 shares, including
the 3,360,000 shares of Common Stock sold in this offering (3,864,000 shares if
the Underwriters' over-allotment option is exercised in full), will be freely
tradeable by persons other than affiliates of the Company, without restriction
under the Securities Act. The remaining 4,635,370 shares of Common Stock will be
"restricted" securities within the meaning of Rule 144 under the Securities Act
and may not be sold in the absence of registration under the Securities Act
unless an exemption from registration is available. All of such shares will be
beneficially owned by persons who are affiliates of the Company and, commencing
90 days after the date of this Prospectus, would be eligible for public sale
subject to the volume and other limitations of Rule 144. However, the Company's
directors, executive officers and principal shareholders and the Selling
Shareholders have agreed not to sell, contract to sell, offer or otherwise
dispose of or transfer any shares of Common Stock or securities convertible into
or exchangeable or exercisable for shares of Common Stock or any rights to
purchase any of the foregoing for a period of 180 days after the date of this
Prospectus without the prior written consent of Raymond James & Associates, Inc.

In general, Rule 144, as currently in effect, allows a shareholder
(including persons who are deemed "affiliates" of the Company) who has
beneficially owned restricted shares for at least one year (including the prior
holding period of any prior owner other than an affiliate) to sell within any
three-month period that number of shares which does not exceed the greater of
(i) 1% of the outstanding shares of the Common Stock or (ii) the average weekly
trading volume during the four calendar weeks preceding such sale. Sales under
Rule 144 also are subject to certain manner of sale and notice requirements and
the availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not an "affiliate" of the Company at
any time during the 90 days immediately preceding the sale and who has
beneficially owned shares for at least two years (including the holding period
of any prior owner other than an affiliate) is entitled to sell such shares
under Rule 144 without regard to the limitations described above. Shares
properly sold in reliance on Rule 144 to persons who are not "affiliates"
thereafter are freely tradeable without restriction or registration under the
Securities Act.

Before this offering, there has been no public market for the Common Stock.
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.

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UNDERWRITING

The Underwriters named below, acting through their representatives, Raymond
James & Associates, Inc. and Hanifen, Imhoff, Inc. (the "Representatives") have
severally agreed, subject to the terms and conditions of the underwriting
agreement by and among the Company, the Selling Shareholders and the
Underwriters (the "Underwriting Agreement"), to purchase from the Company and
the Selling Shareholders the number of shares of Common Stock set forth opposite
their respective names below:

[Download Table]

NUMBER
UNDERWRITERS OF SHARES
------------ ---------

Raymond James & Associates, Inc............................. 1,260,000
Hanifen, Imhoff Inc......................................... 1,260,000
Cowen & Company............................................. 70,000
Hambrecht & Quist LLC....................................... 70,000
Lazard Freres & Co. LLC..................................... 70,000
Lehman Brothers Inc......................................... 70,000
Robertson, Stephens & Company LLC........................... 70,000
First Equity Corporation of Florida......................... 35,000
Legg Mason Wood Walker, Incorporated........................ 35,000
McDonald & Company Securities, Inc.......................... 35,000
Pennsylvania Merchant Group Ltd............................. 35,000
Piper Jaffray Inc........................................... 35,000
The Robinson-Humphrey Company, Inc.......................... 35,000
Soundview Financial Group................................... 35,000
Southcoast Capital Corp..................................... 35,000
Southwest Securities, Inc................................... 35,000
Stephens Inc................................................ 35,000
Tucker Anthony Incorporated................................. 35,000
Unterberg Harris............................................ 35,000
Wessels, Arnold & Henderson................................. 35,000
Wheat, First Securities, Inc................................ 35,000
---------
Total............................................. 3,360,000
=========

The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares offered hereby, if any are purchased. The Company and
the Selling Shareholders have been advised by the Representatives that the
Underwriters propose initially to offer the shares to the public at the offering
price set forth on the cover page of this Prospectus and to certain selected
dealers, including the Underwriters, at such price less a concession not in
excess of $0.49 per share. The public offering price and concession may be
changed after the initial offering to the public. The Representatives have
informed the Company and the Selling Shareholders that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.

The Underwriting Agreement provides for indemnification among the Company,
the Selling Shareholders and the Underwriters against certain liabilities in
connection with this offering, including liabilities under the Securities Act.

The Company, each of its officers and directors and the Selling
Shareholders have agreed not to, directly or indirectly, issue, sell, contract
to sell, offer or otherwise dispose of or transfer any shares of Common Stock or
securities convertible into or exchangeable or exercisable for shares of Common
Stock or any rights to purchase any of the foregoing, other than shares offered
hereby, without the consent of Raymond James & Associates, Inc. for a period of
180 days following the effectiveness of this Registration Statement. This
restriction does not apply to certain issuances of Common Stock by the Company
pursuant to its stock option plans. See "Shares Eligible for Future Sale."

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The Company and Selling Shareholders have granted to the Underwriters an
option exercisable during a 30-day period after the date of this Prospectus to
purchase up to an aggregate of 504,000 additional shares at the same price per
share as the Company and Selling Shareholders receive for the 3,360,000 shares
which the Underwriters have agreed to purchase from the Company and Selling
Shareholders, for the sole purpose of covering over-allotments, if any. To the
extent that the Underwriters exercise such option, each Underwriter will be
committed, subject to certain conditions, to purchase a number of the additional
shares of Common Stock proportionate to each Underwriter's initial commitment.

The Company has agreed to grant to the Representatives and their designees
warrants (the "Representatives' Warrants") to purchase up to 100,000 shares of
Common Stock for a period of five years from the date of this Prospectus (the
"Warrant Exercise Term") at 110% of the initial public offering price. The
Representatives' Warrants are not exercisable until one year from the date of
this Prospectus and may not be transferred, assigned, pledged or hypothecated by
any person for one year from the date of this Prospectus, except to the
officers, employees, affiliates, partners and shareholders of the
Representatives. The Representatives' Warrants will bear appropriate legends
indicating the restrictions on transferability. During the Warrant Exercise
Term, the holders of the Representatives' Warrants are given the opportunity to
profit from a rise in the market price of the Common Stock. Any profit realized
by the Representatives on the sale of the Representatives' Warrants or the
underlying shares of Common Stock may be deemed additional underwriting
compensation.

The foregoing contains a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement that is on file as an exhibit to the Registration
Statement of which this Prospectus is a part.

Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price has been determined by negotiation
among the Company, the Selling Shareholders and the Representatives. Among the
factors considered in determining the initial public offering price were
prevailing market and economic conditions, revenues and earnings of the Company,
market valuations of other companies engaged in activities similar to the
Company, estimates of the business potential and prospects of the Company, the
present state of the Company's business operations, the Company's management and
other factors deemed relevant.

The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions. In
"passive" market making, market makers in the Common Stock who are Underwriters
or prospective underwriters may, subject to certain limitations, make bids for
or purchases of the Common Stock until the time, if any, at which a stabilizing
bid is made. Penalty bids permit the Representatives to reclaim a selling
concession from a syndicate member when shares of Common Stock originally sold
by such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Common Stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on The Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company and the Selling Shareholders by Foley &
Lardner, Tampa, Florida. The validity of the Common Stock offered hereby will be
passed upon for the Underwriters by King & Spalding, Atlanta, Georgia.

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EXPERTS

The Consolidated Financial Statements at December 31, 1995 and 1996, and
for each of the three years in the period ended December 31, 1996 included in
this Prospectus and in the registration statement, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their report appearing herein
and in the registration statement, and have been so included herein in reliance
upon the report of said firm given upon their authority as experts in accounting
and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part)
under the Securities Act with respect to the securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. Statements contained in the Prospectus as to
the contents of any contract or other document are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference and the exhibits and schedules
thereto. For further information regarding the Company and the Common Stock
offered hereby, reference is hereby made to the Registration Statement and such
exhibits and schedules which may be obtained from the Commission at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Registration
Statement can be obtained from the Commission's web site at http://www.sec.gov.

The Company intends to furnish its shareholders written annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports containing unaudited financial statements
for the first three quarters of each calendar year.

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FARO TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

[Download Table]

PAGE
----

Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996
and June 30, 1997 (Unaudited)............................. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996 and the Six Months Ended
June 30, 1996 and 1997 (Unaudited)........................ F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1994, 1995 and 1996 and the Six
Months Ended June 30, 1997 (Unaudited).................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996 and the Six Months Ended
June 30, 1996 and 1997 (Unaudited)........................ F-6
Notes to Consolidated Financial Statements.................. F-7

F-1

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INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
of FARO Technologies, Inc.:

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

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such consolidated financial statements present fairly, in
all material respects, the financial position of FARO Technologies, Inc. and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Jacksonville, Florida
February 24, 1997
(September 10, 1997 as to Note 11)

F-2

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

[Enlarge/Download Table]

DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
----------- ---------- -----------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash................................................... $ 3,921 $ 263,342 $ 117,537
Accounts and notes receivable -- net of allowance...... 2,177,764 2,992,681 4,852,362
Inventories............................................ 2,068,287 3,298,744 3,778,618
Prepaid expenses....................................... 96,306 40,871 25,127
Deferred taxes......................................... 111,000 102,500 193,978
----------- ---------- -----------
Total current assets........................... 4,457,278 6,698,138 8,967,622
----------- ---------- -----------
PROPERTY AND EQUIPMENT -- At cost:
Leasehold improvements................................. 14,938 14,938 14,938
Machinery and equipment................................ 245,195 700,799 923,159
Furniture and fixtures................................. 492,681 453,892 496,477
----------- ---------- -----------
Total.......................................... 752,814 1,169,629 1,434,574
Less accumulated depreciation.......................... 425,435 568,279 669,966
----------- ---------- -----------
Property and equipment -- net.......................... 327,379 601,350 764,608
----------- ---------- -----------
PATENTS -- net of accumulated amortization of $186,223,
$270,925 and $293,884, respectively.................... 441,041 486,480 611,795
DEFERRED TAXES........................................... 254,000 29,700 214,524
----------- ---------- -----------
TOTAL ASSETS................................... $ 5,479,698 $7,815,668 $10,558,549
=========== ========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt...................... $ -- $ 611,111 $ 666,667
Related party loans.................................... 2,200,000 -- --
Accounts payable and accrued liabilities............... 735,828 1,710,814 1,850,670
Income taxes payable................................... 23,000 128,216 777,306
Current portion unearned service revenues.............. -- 185,180 413,876
Customer deposits...................................... 176,933 230,393 282,780
----------- ---------- -----------
Total current liabilities...................... 3,135,761 2,865,714 3,991,299
----------- ---------- -----------
UNEARNED SERVICE REVENUES -- less current portion -- 286,099 384,013
LONG-TERM DEBT -- less current portion................... -- 890,156 833,769
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY:
Class A preferred stock -- par value $.001, 10,000,000
shares authorized, no shares issued and
outstanding......................................... -- -- --
Common stock -- par value $.001, 20,000,000 shares
authorized, 7,000,000 issued and outstanding........ 7,000 7,000 7,000
Additional paid-in capital............................. 3,971,764 3,961,564 4,827,544
Retained earnings (accumulated deficit)................ (1,595,027) (188,365) 1,067,243
Unearned compensation.................................. (39,800) (6,500) (508,334)
Cumulative translation adjustments..................... -- -- (43,985)
----------- ---------- -----------
Total shareholders' equity..................... 2,343,937 3,773,699 5,349,468
----------- ---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..... $ 5,479,698 $7,815,668 $10,558,549
=========== ========== ===========

See notes to consolidated financial statements.

F-3

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

[Enlarge/Download Table]

SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ---------- -----------
(UNAUDITED)

SALES.............................. $4,508,837 $9,862,242 $14,656,337 $6,460,113 $10,318,535
COST OF SALES...................... 2,222,085 4,987,779 6,486,268 2,744,994 4,188,280
---------- ---------- ----------- ---------- -----------
Gross profit............. 2,286,752 4,874,463 8,170,069 3,715,119 6,130,255
---------- ---------- ----------- ---------- -----------
OPERATING EXPENSES:
Selling.......................... 1,569,014 2,008,301 3,731,762 1,653,693 2,512,066
General and administrative....... 521,040 503,184 744,206 349,645 622,092
Depreciation and amortization.... 270,615 341,494 230,799 125,388 124,646
Research and development......... 173,400 363,871 730,124 236,539 394,839
Employee stock options........... -- 106,700 23,100 11,550 364,146
---------- ---------- ----------- ---------- -----------
Total operating
expenses............... 2,534,069 3,323,550 5,459,991 2,376,815 4,017,789
---------- ---------- ----------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS...... (247,317) 1,550,913 2,710,078 1,338,304 2,112,466
---------- ---------- ----------- ---------- -----------
OTHER INCOME (EXPENSE):
Other income..................... 11,706 62,212 25,145 7,814 46,067
Interest expense................. (192,543) (355,468) (212,669) (122,806) (65,853)
---------- ---------- ----------- ---------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES............................ (428,154) 1,257,657 2,522,554 1,223,312 2,092,680
INCOME TAX EXPENSE (BENEFIT)....... -- (342,000) 1,115,892 541,152 837,072
---------- ---------- ----------- ---------- -----------
NET INCOME (LOSS)........ $ (428,154) $1,599,657 $ 1,406,662 $ 682,160 $ 1,255,608
========== ========== =========== ========== ===========
PER COMMON SHARE AND COMMON
EQUIVALENT SHARE:
NET INCOME (LOSS)........ $ (0.06) $ 0.22 $ 0.19 $ 0.09 $ 0.17
========== ========== =========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON EQUIVALENT SHARES......... 7,149,690 7,166,740 7,349,042 7,354,292 7,333,290
========== ========== =========== ========== ===========

See notes to consolidated financial statements.

F-4

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

[Enlarge/Download Table]

RETAINED
COMMON STOCK ADDITIONAL CUMULATIVE EARNINGS
------------------- PAID-IN UNEARNED TRANSLATION (ACCUMULATED
SHARES AMOUNTS CAPITAL COMPENSATION ADJUSTMENT DEFICIT) TOTAL
--------- ------- ---------- ------------ ----------- ------------ ----------

BALANCE, JANUARY 1, 1994.............. 7,000,000 $7,000 $3,825,264 $ -- $ -- $(2,766,530) $1,065,734
Net loss...................... -- -- -- -- -- (428,154) (428,154)
--------- ------ ---------- --------- -------- ----------- ----------
BALANCE, DECEMBER 31, 1994............ 7,000,000 7,000 3,825,264 -- -- (3,194,684) 637,580
Granting of employee stock
options........................... -- -- 146,500 (39,800) -- -- 106,700
Net income.................... -- -- -- -- -- 1,599,657 1,599,657
--------- ------ ---------- --------- -------- ----------- ----------
BALANCE, DECEMBER 31, 1995............ 7,000,000 7,000 3,971,764 (39,800) -- (1,595,027) 2,343,937
Employee stock options, forfeitures
and amortization of unearned
compensation...................... -- -- (10,200) 33,300 -- -- 23,100
Net income.................... -- -- -- -- -- 1,406,662 1,406,662
--------- ------ ---------- --------- -------- ----------- ----------
BALANCE, DECEMBER 31, 1996............ 7,000,000 7,000 3,961,564 (6,500) -- (188,365) 3,773,699
Granting of employee and director
stock options (unaudited)......... -- -- 865,980 (501,834) -- -- 364,146
Currency translation adjustment
(unaudited)....................... -- -- -- -- (43,985) -- (43,985)
Net income for period
(unaudited)................. -- -- -- -- -- 1,255,608 1,255,608
--------- ------ ---------- --------- -------- ----------- ----------
BALANCE, JUNE 30, 1997 (unaudited).... 7,000,000 $7,000 $4,827,544 $(508,334) $(43,985) $ 1,067,243 $5,349,468
========= ====== ========== ========= ======== =========== ==========

See notes to consolidated financial statements.

F-5

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

[Enlarge/Download Table]

SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ---------- ----------- --------- -----------
(UNAUDITED)

OPERATING ACTIVITIES:
Net income (loss)......................... $ (428,154) $1,599,657 $ 1,406,662 $ 682,160 $ 1,255,608
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization........... 270,615 341,494 230,799 125,388 124,646
Private placement costs................. 146,541 -- -- -- --
Product design costs.................... -- 531,186 -- -- --
Employee stock options.................. -- 106,700 23,100 11,550 364,146
Provision for bad debts................. 31,207 24,806 28,432 -- --
Provision for obsolete inventory........ -- 27,629 -- -- --
Deferred income taxes................... -- (365,000) 232,800 365,000 (276,302)
Changes in operating assets and
liabilities:
Decrease (Increase) in:
Accounts receivable................... (241,474) (1,147,174) (843,349) (159,992) (1,903,666)
Notes receivable...................... 80,994 47,947 -- -- --
Inventory............................. (35,821) (453,120) (1,230,457) (861,615) (479,874)
Prepaid expenses and other assets..... (22,971) (47,193) 55,435 (7,659) 15,744
Increase (Decrease) in:
Accounts payable and accrued
liabilities........................... (94,359) 126,925 990,993 419,081 139,856
Income taxes payable.................... -- 23,000 105,216 44,652 649,090
Unearned service revenues............... -- -- 471,278 162,218 326,610
Customer deposits....................... 49,619 118,865 53,460 (48,410) 52,387
----------- ---------- ----------- --------- -----------
Net cash provided by (used in)
operating activities............. (243,803) 935,722 1,524,369 732,373 268,245
----------- ---------- ----------- --------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment....... (89,266) (210,868) (416,162) (194,026) (264,945)
Payment of patent costs................... (122,120) (74,088) (134,046) (71,178) (148,274)
Payments for product design costs......... (304,703) -- -- -- --
----------- ---------- ----------- --------- -----------
Net cash used in investing
activities....................... (516,089) (284,956) (550,208) (265,204) (413,219)
----------- ---------- ----------- --------- -----------
FINANCING ACTIVITIES:
Proceeds from related party loans......... 2,525,000 -- -- -- --
Repayment of related party loans.......... -- (725,000) (2,200,000) (300,000) --
Proceeds from debt........................ -- -- 1,625,816 -- --
Payments on debt.......................... (1,700,000) -- (140,556) -- (831)
----------- ---------- ----------- --------- -----------
Net cash (used in) provided by
financing activities............. 825,000 (725,000) (714,740) (300,000) (831)
INCREASE (DECREASE) IN CASH................. 65,108 (74,234) 259,421 167,169 (145,805)
CASH, BEGINNING OF PERIOD................... 13,047 78,155 3,921 3,921 263,342
----------- ---------- ----------- --------- -----------
CASH, END OF PERIOD......................... $ 78,155 $ 3,921 $ 263,342 $ 171,090 $ 117,537
=========== ========== =========== ========= ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................... $ 182,399 $ 352,987 $ 256,654 $ 127,237 $ 19,226
=========== ========== =========== ========= ===========
Cash paid for income taxes................ $ -- $ -- $ 777,876 $ 135,500 $ 464,283
=========== ========== =========== ========= ===========
Translation adjustment effect on accounts
receivable.............................. $ -- $ -- $ -- $ -- $ (43,985)
=========== ========== =========== ========= ===========

See notes to consolidated financial statements.

F-6

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business. FARO Technologies, Inc. (the "Company") develops,
manufactures, markets and supports portable, software-driven, 3-D measurement
systems that are used in a broad range of manufacturing and industrial
applications. The Company has two wholly-owned subsidiaries, FARO Worldwide,
Inc. and FARO FRANCE, s.a.s., which distribute the Company's 3-D measurement
equipment throughout Europe through two primary offices located in France and
Germany. FARO FRANCE, s.a.s., commenced operations in July 1996.

Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and all wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.

Revenue Recognition, Product Warranty and Extended Maintenance
Contracts. Revenue related to the Company's 3-D measurement equipment is
recognized on the shipping date, as the Company considers the earnings process
substantially complete as of the shipping date. Revenue from sales of software
only is not recognized unless remaining obligations under the sales agreement
are insignificant. Revenues related to extended maintenance plans, which include
hardware warranties and software upgrades, are recognized ratably over the
period services are performed. The Company warrants its products against defects
in design, materials and workmanship for one year. A provision for estimated
future costs relating to warranty expenses is recorded when products are
shipped. Costs relating to extended maintenance plans are recognized as
incurred.

One customer accounted for approximately 10% of total sales for the year
ended December 31, 1996.

Inventories. Inventories are stated at the lower of cost (determined on
the first-in, first-out method) or market value. In order to achieve a better
matching of production costs with the revenues generated in production, certain
fixed overhead costs and certain general and administrative costs that are
related to production are capitalized into inventory when they are incurred and
are charged to cost of sales as product costs at the time of sale. General and
administrative expenses for the years ended 1996 and 1995 remaining in inventory
totaled approximately $68,000 and $60,000, respectively.

Sales demonstration inventory is comprised of measuring devices utilized by
sales representatives to present the Company's products to customers. The
products remain in sales demonstration inventory for up to six months and are
subsequently sold at prices that produce slightly reduced gross margins.

Property and Equipment. Property and equipment are recorded at cost.
Depreciation is computed using the straight-line and declining-balance methods
over the estimated useful lives of the various classes of assets as follows:

[Download Table]

Machinery and equipment..................................... 5 years
Furniture and fixtures...................................... 5 years
Computer equipment.......................................... 2 years

Leasehold improvements are amortized on the straight-line basis over the lesser
of the life of the asset or term of the lease.

Patents. Patents are recorded at cost. Amortization is computed using the
straight-line method over the lives of the patents, which is 17 years. In
addition, unamortized patents of $192,570 relating to certain products sold in
the medical field were charged to amortization expense in 1995 due to the
discontinuance of those products.

Research and Development. Research and development costs incurred in the
discovery of new knowledge and the resulting translation of this new knowledge
into plans and designs for new products, prior to

F-7

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the attainment of the related products' technological feasibility, are recorded
as expenses in the period incurred.

Product Design Costs. Prior to 1995, costs incurred in the refinement of
products after technological feasibility is attained were capitalized and
amortized using the straight-line method over the 5-year estimated lives of the
related products. However, based on the current rate of technological
development, products now have estimated lives of less than one year. As a
result, the $531,186 unamortized balance of product design costs at January 1,
1995 was charged to cost of product sales in 1995, and such costs incurred since
that date are recorded as costs in the period in which they are incurred.

Income Taxes. The Company utilizes the asset and liability method to
measure and record deferred income tax assets and liabilities. Under the asset
and liability method, deferred tax assets and liabilities are recognized for the
future consequences attributed to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.

Private Placement Costs. Costs incurred relating to a terminated private
stock offering, in the amount of $146,541, were charged to general and
administrative expense in 1994.

Earnings Per Common Share and Common Equivalent Share. Earnings per common
share and common equivalent share for the years ended December 31, 1994, 1995
and 1996 were computed as follows: (i) 7,000,000 common shares issued and
outstanding each year, plus (ii) 149,690 common shares issuable under the 1997
stock options granted under the 1993 stock option plan based on the Treasury
Stock Method assuming an initial public offering price of $11.00 per share, plus
(iii) common shares issuable under the 1995 stock options granted under the 1993
stock option plan of 17,050 in 1995 and 199,352 in 1996, respectively, based on
the Treasury Stock Method assuming an initial public offering price of $11.00
per share.

The Company intends to file a registration statement with the Securities
and Exchange Commission for the initial public offering of 1,700,000 shares of
its common stock at an estimated price of $11 per share. The Company plans on
utilizing a portion of the proceeds from the sale of such stock to retire debt.
On a supplemental basis, for the year ended December 31, 1996 and the six months
ended June 30, 1997, net income per common share and common equivalent share
would have been $.20 and $.17, respectively, had such transaction been made
effective December 31, 1995.

Concentration of Credit Risk. Financial instruments which potentially
expose the Company to concentrations of credit risk consist principally of
operating demand deposit accounts. The Company's policy is to place its
operating demand deposit accounts with high credit quality financial
institutions.

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

New Accounting Standards. Effective January 1, 1996, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS No. 121) which requires that long-lived assets and certain
intangibles to be held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The adoption of SFAS No. 121 did not have a
material impact on the Company.

Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 establishes a fair
value based method of accounting for stock-based employee compensation plans;
however, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by

F-8

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Under the fair value based method, compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. The Company has elected to
continue to account for its employee stock compensation plans under APB Opinion
No. 25 with pro forma disclosures of net earnings and earnings per share, as if
the fair value based method of accounting defined in SFAS No. 123 has been
applied. See Note 8.

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
This Statement establishes standards for computing and presenting earnings per
share ("EPS") and applies to all entities with publicly held common stock or
potential common stock. This Statement replaces the presentation of primary EPS
and fully diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects
the potential dilution of securities that could share in the earnings. This
Statement is effective for the Company's financial statements for the year ended
December 31, 1997. The proforma effect of applying SFAS No. 128 is as follows:

[Enlarge/Download Table]

SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ---------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
(UNAUDITED)

Basic income (loss) per common share.......... $(0.06) $ 0.23 $ 0.20 $ 0.10 $ 0.18
Diluted income (loss) per common share and
common equivalent share..................... (0.06) 0.22 0.19 0.09 0.17

On June 30, 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management has not determined
the effect of this statement on its financial statement disclosure.

Reclassifications. Certain reclassifications have been made in the 1994
and 1995 financial statements to conform to the 1996 presentation.

Interim Financial Information. Interim Financial Information at June 30,
1997 and for the six months ended June 30, 1996 and 1997 is unaudited. The
unaudited interim financial statements reflect all adjustments, consisting of
only normal recurring adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods.
Information for the interim periods is not necessarily indicative of results to
be achieved for the full year.

2. ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable are net of an allowance for doubtful accounts
of $25,002, $5,655 and $9,534 as of December 31, 1994, 1995 and 1996,
respectively.

F-9

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVENTORIES

Inventories consist of the following:

[Enlarge/Download Table]

DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)

Raw materials...................................... $1,063,219 $1,888,227 $1,954,451
Finished goods..................................... 387,234 472,408 593,472
Sales demonstration................................ 617,834 938,109 1,230,695
---------- ---------- ----------
$2,068,287 $3,298,744 $3,778,618
========== ========== ==========

4. LONG-TERM DEBT

The Company has a loan agreement (the "Agreement") in the form of a term
note and a line of credit. The Agreement combines the equivalent of three
successive one-year term loans, each equal to that portion of the loan that will
be fully amortized in the ensuing year, with a line of credit equal to that
portion of the loan that will not be amortized in the ensuing year. The Company
has available borrowings under the line of credit in the amount of $443,177 as
of December 31, 1996. Principal is due in the amount of $611,111 in 1997,
$666,667 in 1998 and $223,489 in 1999. Interest accrues at the 30-day commercial
paper rate plus 2.7% (8.1% at December 31, 1996) and is payable monthly. The
loans are collateralized by the Company's accounts and notes receivable,
inventory, property and equipment, intangible assets, and deposits. The
Agreement contains restrictive covenants, including the maintenance of certain
amounts of working capital and tangible net worth and limits on loans to related
parties, and prohibits the Company from declaring dividends.

5. RELATED PARTY TRANSACTIONS

The Company leases its plant and office building from Xenon Research, Inc.
("Xenon"), a 44.3% shareholder. The lease expires on February 28, 2001, and the
Company has two five-year renewal options. The base rent during renewal periods
will reflect changes in the U.S. Bureau of Labor Statistics, Consumer Price
Index for all Urban Consumers. Rent expense under this lease was approximately
$148,000 for both 1994 and 1995 and $150,000 for 1996.

Related party loans payable consisted of the following:

Xenon Research, Inc. Revolving line of credit, which was repaid and
terminated in 1996. Interest was at prime plus 5% (13.5% at December 31,
1995) and amounted to $192,543 in 1994, $355,468 in 1995 and $185,585 in
1996.

Stockholder Loan. An unsecured noninterest bearing $100,000 note was
outstanding at December 31, 1995 and repaid during 1996.

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES

The components of the expense (benefit) for income taxes is comprised of
the following as of December 31:

[Enlarge/Download Table]

1994 1995 1996
---------- --------- ----------

Current:
Federal.......................................... $ -- $ 23,000 $ 721,700
State............................................ -- -- 161,392
---------- --------- ----------
-- 23,000 883,092
---------- --------- ----------
Deferred:
Federal.......................................... (334,000) 221,100
State............................................ -- (31,000) 11,700
---------- --------- ----------
-- (365,000) 232,800
---------- --------- ----------
$ -- $(342,000) $1,115,892
========== ========= ==========

Income taxes for the years ended December 31, 1994, 1995 and 1996 differ
from the amount computed by applying the federal statutory corporate rate to
income before income taxes. The differences are reconciled as follows:

[Enlarge/Download Table]

1994 1995 1996
--------- --------- ----------

Tax expense (benefit) at statutory rate............. $(145,600) $ 428,000 $ 857,700
State income taxes, net of federal benefit.......... -- 46,000 114,200
Research and development credit..................... -- (30,000) --
Nondeductible items................................. -- -- 61,000
Other............................................... -- -- 82,992
Change in deferred tax asset valuation allowance.... 145,600 (786,000) --
--------- --------- ----------
Total income tax expense (benefit)........ $ -- $(342,000) $1,115,892
========= ========= ==========

The components of the Company's net deferred tax asset at December 31, 1995
and 1996 are as follows:

[Download Table]

1995 1996
-------- --------

Deferred tax assets:
Inventory write-down...................................... $ 97,000 $ --
Other..................................................... 14,000 9,400
Employee stock options.................................... 40,000 51,300
Unearned service revenue.................................. -- 186,200
Net operating loss carryforwards and alternative minimum
tax credits............................................ 197,000 --
Research and development credits.......................... 134,000 --
-------- --------
Gross deferred assets....................................... 482,000 246,900
-------- --------
Deferred tax liabilities:
Patent amortization....................................... 83,000 88,200
Depreciation.............................................. 6,000 26,500
Other..................................................... 28,000 --
-------- --------
Gross deferred tax liabilities.............................. 117,000 114,700
-------- --------
Net deferred tax asset............................ $365,000 $132,200
======== ========

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. COMMITMENTS

The following is a schedule of future minimum lease payments required under
noncancelable leases, including leases with related parties (see Note 5), in
effect at December 31, 1996:

[Download Table]

YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------

1997...................................................... $236,200
1998...................................................... 205,600
1999...................................................... 168,400
2000...................................................... 166,700
2001...................................................... 27,800
--------
Total future minimum lease payments............. $804,700
========

8. EMPLOYEE STOCK OPTION PLAN

In 1993, the Company adopted the 1993 Stock Option Plan (the "Plan"). The
Company reserved 703,100 shares of common stock for issuance to eligible
participants under the Plan. Options granted under the Plan generally vest over
a four-year period and are exercisable ten years from the date of the grant. The
exercisability of such options accelerates in the event of an initial public
offering of the Company's common stock. On December 19, 1995, the Company
granted options to purchase shares of common stock of the Company to certain
employees at an exercise price of $0.36. At December 31, 1995, the estimated
fair value of one share of common stock was determined to be $1.07, based on a
third-party offer for Company stock.

Compensation cost charged to operations was $0, $106,700 and $23,100 in
1994, 1995 and 1996 respectively. Compensation cost was based on the difference
between the estimated fair value of the stock and its exercise price, multiplied
by the number of shares vested in each year.

SFAS No. 123 Required Disclosure

If compensation cost for stock options was determined based on the fair
value at the grant dates for 1995 and 1996 consistent with the method prescribed
by SFAS No. 123, the Company's net income and income per share would have been
adjusted to the pro forma amounts indicated below:

[Download Table]

1995 1996
---------- ----------

Net income:
As reported............................................... $1,599,657 $1,406,662
Pro forma................................................. 1,572,628 1,382,140
Income per share:
As reported............................................... $ 0.22 $ 0.19
Pro forma................................................. 0.22 0.19

Under SFAS No. 123, the fair value of each option is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for options in 1995: dividend yield of 0%,
expected volatility of 90%, risk-free interest rate of 5.63%, and expected life
of 10 years. There were no stock options granted in 1996.

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the status of options under the Company's stock-based
compensation plans as of December 31, 1995 and 1996, and changes during the
years ending on those dates is presented below:

[Enlarge/Download Table]

1995 1996
-------------------- -------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISED EXERCISED
OPTIONS PRICE OPTIONS PRICE
-------- --------- ------- ---------

Outstanding at beginning of year............... -- 210,902 $0.36
Granted........................................ 210,902 $0.36 --
Exercised...................................... -- --
Forfeited...................................... -- (20,390) 0.36
-------- -------
Outstanding at end of year..................... 210,902 0.36 190,512 0.36
======== =======
Grants exercisable at year-end................. -- --
Weighted-average fair value of options granted
during the year.............................. $225,700 --

The following table summarizes information about the outstanding grants at
December 31, 1996:

[Enlarge/Download Table]

OPTIONS OUTSTANDING
--------------------------------------
NUMBER WEIGHTED-
OUTSTANDING AVERAGE WEIGHTED-
AT REMAINING AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE
YEAR GRANTED PRICE 1996 LIFE PRICE
------------ -------- ------------ ----------- ---------

1995......................................... $0.36 190,512 10 $0.36

No options were exercisable as of December 31, 1996. Non-exercisable
options become exercisable in 2005 unless the Company completes a public
offering of its common stock. In that case, all vested options become
exercisable immediately and unvested options become exercisable immediately upon
vesting.

9. BENEFIT PLAN

During 1996, the Company established a defined contribution retirement plan
(401(k) Plan) for its employees, which provides benefits for all employees
meeting certain age and service requirements. The Company may make a
discretionary contribution each Plan year as determined by its Board of
Directors. Discretionary contributions or employer matches can be made to the
participant's account but cannot exceed 4% of the participant's annual
compensation. The Company made no contribution to the 401(k) Plan in 1996.

10. SEGMENT INFORMATION

Revenues are segmented according to the country in which the customer is
located.

[Enlarge/Download Table]

UNITED OTHER
STATES ASIA EUROPE CANADA FOREIGN TOTAL
----------- ---------- ---------- -------- -------- -----------

Year ended December 31,
1996..................... $10,829,543 $1,606,916 $1,292,592 $715,728 $211,558 $14,656,337
Year ended December 31,
1995..................... 7,727,400 385,361 625,730 850,271 273,480 9,862,242
Year ended December 31,
1994..................... 4,059,837 -- -- -- 449,000 4,508,837

11. SUBSEQUENT EVENTS

All per share amounts, number of common shares and capital accounts in the
accompanying financial statements have been restated to give retroactive effect
for all periods presented for a 1 for 1.422272107 reverse stock split effective
June 30, 1997. The par value of the common stock was not changed. As a result,

F-13

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$2,956, representing the reduction in par value for the shares no longer issued
was transferred to additional paid-in capital from common stock.

On January 1, 1997, the Company granted certain employees options to
purchase 140,269 shares of common stock at $3.57 per share, vesting over the
earlier to occur of ten years from the date of grant or a period of three years
commencing with an initial public offering of the Company's stock. The options
are exercisable upon the earlier to occur of (i) ten years from the date of
grant, or (ii) upon completion of vesting after the consummation of the
Company's initial public offering. The Company obtained an independent appraisal
as of January 1, 1997 which was used to determine compensation expense
associated with the options granted. The fair value per share of common stock
outstanding at January 1, 1997 was determined to be $7.32.

12. SUPPLEMENTAL INTERIM INFORMATION (UNAUDITED)

On May 1, 1997, as consideration for his serving on the Board of Directors,
a director was granted options for 52,732 shares of common stock at $0.36 per
share, exercisable upon the earlier to occur of (i) ten years from the date of
grant, or (ii) upon completion of the Company's initial public offering. Such
options are deemed to be immediately vested; consequently, the associated
compensation expense is reported in the six months ended June 30, 1997. The
Company obtained an independent appraisal as of May 1, 1997 which was used to
determine compensation expense associated with the options granted. The fair
value per share of common stock outstanding at May 1, 1997 was determined to be
$8.11.

In July 1997, the Company adopted the 1997 Employee Stock Option Plan (the
"1997 Plan") that provides for the grant to key employees of the Company of
incentive or nonqualified stock options. An aggregate of 750,000 shares of
common stock are reserved for issuance pursuant to the 1997 Plan. The 1997 Plan
is administered by the Compensation Committee of the Board of Directors, which
has broad discretion in the granting of awards. The exercise price of all
options granted under the 1997 Plan must be at least equal to the fair market
value of the common stock on the date of grant. Options granted under the 1997
Plan will be exercisable after the period or periods specified in the option
agreement with respect to such grants and expire ten years from the date of
grant. As of the date of this Prospectus, no options have been granted under the
1997 Plan. It is anticipated that upon completion of this offering, Simon Raab
will be granted 80,000 options, Gregory A. Fraser will be granted 60,000 options
and approximately 74 other employees will be granted options to purchase a total
of 220,000 shares of common stock at the initial public offering price (except
for options granted at 110% of the initial public offering price to qualify for
treatment as incentive stock options). These options will become exercisable in
one-third increments on each anniversary of the date of grant, commencing in
1998.

In July 1997, the Company adopted the 1997 Non-Employee Director Stock
Option Plan (the "Non-Employee Plan") which provides for the grant of
nonqualified stock options to purchase up to 250,000 shares of common stock to
members of the Board of Directors who are not employees of the Company. As of
the date of this Prospectus, no options had been granted under the Non-Employee
Plan. Each outside director will be granted options to purchase 3,000 shares of
common stock upon the completion of this offering. Thereafter, on the date on
which a new outside director is first elected or appointed, he or she will
automatically be granted options to purchase 3,000 shares of common stock. Each
outside director also will be granted options to purchase 3,000 shares of common
stock annually on the day following the annual meeting of shareholders. All
options granted under the Non-Employee Plan will have an exercise price equal to
the then fair market value of the common stock. Options will become exercisable
in one-third increments on each anniversary of the date of grant.

In April 1997, the Company obtained a one-year unsecured $1.0 million line
of credit which bears interest at the 30-day commercial paper rate plus 2.65%
per annum (8.26% at June 30, 1997). No borrowings existed under the line of
credit at June 30, 1997.

F-14

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======================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER TO SELL IS NOT AUTHORIZED OR IN WHICH THE PERSON IS NOT AUTHORIZED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.

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

TABLE OF CONTENTS

[Download Table]

PAGE
----

Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 24
Management............................ 35
Principal and Selling Shareholders.... 39
Certain Transactions.................. 40
Description of Capital Stock.......... 41
Shares Eligible for Future Sale....... 44
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 47
Additional Information................ 47
Index to Consolidated Financial
Statements.......................... F-1

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

UNTIL OCTOBER 12, 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================

3,360,000 SHARES

[FARO LOGO]

COMMON STOCK

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

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

RAYMOND JAMES &
ASSOCIATES, INC.

HANIFEN, IMHOFF INC.

SEPTEMBER 17, 1997

======================================================

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B4’ Filing	Date	First	Last	Other Filings

	2/28/01	40	57
	12/31/97	23	56	10-K405, 10-K405/A
	12/15/97	56
	10/12/97	62
	9/23/97	1
Filed on:	9/18/97
	9/17/97	1	62	S-1/A, S-1MEF
	9/10/97	49		S-1/A
	8/31/97	33
	8/25/97	37	38
	8/1/97	35	39
	6/30/97	3	61
	5/1/97	61
	2/24/97	49
	1/1/97	61
	12/31/96	15	60
	6/30/96	15	56
	1/1/96	55
	12/31/95	15	60
	12/19/95	59
	1/1/95	55
	12/31/94	15	60
	1/1/94	52
	12/31/93	15
	12/31/92	15
				List all Filings

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Filing Submission 0000950144-97-010169 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Faro Technologies Inc – IPO: ‘424B4’ on 9/18/97

As of: Thursday, 9/18/97 · Accession #: 950144-97-10169 · File #: 333-32983

Initial Public Offering (IPO): Prospectus — Rule 424(b)(4)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Initial Public Offering (IPO): Prospectus — Rule 424(b)(4)
Filing Table of Contents