Flir Systems Inc – ‘DEFM14A’ on 11/12/97

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Definitive Proxy Solicitation Material — Merger or Acquisition   —   Schedule 14A
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Document/Exhibit                   Description                      Pages   Size 

 1: DEFM14A     Definitive Notice of Special Meeting                 155    764K 

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SCHEDULE 14A INFORMATION  

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 
1934  
(AMENDMENT NO.  ) 

Filed by the Registrant [X]                                                     

Filed by a Party other than the Registrant [_]                                  

Check the appropriate box:                                                      

[_]Preliminary Proxy Statement            [_]CONFIDENTIAL, FOR USE OF THE       
                                          COMMISSION ONLY (AS PERMITTED BY
                           RULE 14A-6(E)(2))

[X]Definitive Proxy Statement                                                   

[_]Definitive Additional Materials                                              

[_]Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12            

FLIR Systems, Inc.  
----------------------------------------------------- 
(Name of Registrant as Specified In Its Charter)  

----------------------------------------------------- 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)  

Payment of Filing Fee (Check the appropriate box):                              

[_]No fee required.                                                             

[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.     

(1) Title of each class of securities to which transaction applies:         

(2) Aggregate number of securities to which transaction applies:            

(3) Per unit price or other underlying value of transaction computed        
pursuant to Exchange ActRule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):          

(4) Proposed maximum aggregate value of transaction:                        

(5) Total fee paid:                                                         

[X]Fee paid previously with preliminary materials.                              

[_]Check box if any part of the fee is offset as provided by Exchange Act Rule  
0-11(a)(2) and identify the filing for which the offsetting fee was paid  
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.                       

(1) Amount Previously Paid:                                                 

(2) Form, Schedule or Registration Statement No.:                           

(3) Filing Party:                                                           

(4) Date Filed:                                                             

Notes:                                                                          

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[FLIR SYSLTEMS LETTERHEAD]  

16505 S.W. 72ND AVENUE  
PORTLAND, OREGON 97224  
(503) 684-3731  

                                                             November 10, 1997

Dear Shareholder:                                                               

You are cordially invited to attend a Special Meeting of Shareholders of    
FLIR Systems, Inc. ("FLIR"), which will be held on Monday, December 1, 1997,    
at the Multnomah Athletic Club, 1849 S.W. Salmon Avenue, Portland, Oregon       
97205 at 2:00 p.m., local time (the "Special Meeting").                         

At the Special Meeting, you will be asked to consider and vote upon a       
proposal to approve the issuance (the "Issuance") of a total of 4,162,000       
shares of FLIR common stock in exchange for all of the outstanding shares of    
capital stock of AGEMA Infrared Systems AB, a corporation organized under the   
laws of Sweden, AGEMA Infrared Systems Limited, a corporation organized under   
the laws of the United Kingdom, AGEMA Infrared Systems Ltd., a corporation      
organized under the laws of Canada, and AGEMA Infrared Systems, Inc., a         
Delaware corporation (the "Combination"). If the Issuance is approved by        
FLIR's shareholders at the Special Meeting, and certain other conditions are    
satisfied, the Combination will be effected pursuant to the terms of a          
Combination Agreement dated October 6, 1997 by and among FLIR, Spectra-Physics  
AB, a corporation organized under the laws of Sweden ("Spectra"), and certain   
affiliates of Spectra (the "Combination Agreement"). If the Issuance is         
approved at the Special Meeting and the Combination is consummated, Spectra     
and its affiliates will own approximately 43 percent of the shares of FLIR      
common stock outstanding after the Combination.                                 

FLIR'S BOARD OF DIRECTORS BELIEVES THE ISSUANCE AND THE COMBINATION TO BE   
FAIR TO AND IN THE BEST INTERESTS OF FLIR AND ITS SHAREHOLDERS, HAS APPROVED    
THE ISSUANCE AND THE COMBINATION AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL   
OF THE ISSUANCE.                                                                

You should read carefully the accompanying Notice of Special Meeting of     
Shareholders and the Proxy Statement for details of the Combination and         
additional related information.                                                 

Whether or not you plan to attend the Special Meeting, please complete, sign
and date the enclosed proxy card and return it promptly in the enclosed         
postage-prepaid envelope. If you attend the Special Meeting, you may vote in    
person if you wish, even though you previously have returned your proxy card.   
Your prompt cooperation will be greatly appreciated.                            

              Sincerely,

                        /s/ Robert P. Daltry
                    Robert P. Daltry
                                        Chairman and Chief Executive Officer

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[FLIR SYSTEMS LOGO]   

16505 S.W. 72ND AVENUE  
PORTLAND, OREGON 97224  
(503) 684-3731  

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

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS 
TO BE HELD ON DECEMBER 1, 1997  

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

To the Shareholders of                                                          
FLIR Systems, Inc.:                                                             

NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the "Special 
Meeting") of FLIR Systems, Inc. ("FLIR") will be held on Monday, December 1,    
1997, at 2:00 p.m., at the Multnomah Athletic Club, 1849 S.W. Salmon Avenue,    
Portland, Oregon 97205. The purposes of the Special Meeting are: (i) to         
consider and vote upon a proposal to approve the issuance of a total of         
4,162,000 shares of FLIR common stock in exchange for all of the outstanding    
shares of capital stock of AGEMA Infrared Systems AB, a corporation organized   
under the laws of Sweden, AGEMA Infrared Systems Limited, a corporation         
organized under the laws of the United Kingdom, AGEMA Infrared Systems Ltd., a  
corporation organized under the laws of Canada, and AGEMA Infrared Systems,     
Inc., a Delaware corporation, and (ii) to transact such other business as may   
properly come before the Special Meeting or any adjournments thereof.           

The Board of Directors of FLIR has fixed the close of business on October   
24, 1997 as the record date for the determination of shareholders entitled to   
notice of and to vote at the Special Meeting. Only shareholders of record at    
the close of business on that date will be entitled to notice of and to vote    
at the Special Meeting or any adjournments thereof.                             

                          By Order of the Board,

                        /s/ Robert P. Daltry
                    Robert P. Daltry
                                      Chairman of the Board of Directors
                                 and Chief Executive Officer

Portland, Oregon                                                                
November 10, 1997                                                               

IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR  
NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, PLEASE DATE,     
SIGN AND COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED            
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.           

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FLIR SYSTEMS, INC.  
16505 S.W. 72ND AVENUE  
PORTLAND, OR 97224  
(503) 684-3731  

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

PROXY STATEMENT 
FOR THE 
SPECIAL MEETING OF SHAREHOLDERS 
TO BE HELD ON DECEMBER 1, 1997  

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

This Proxy Statement is being furnished to the shareholders of FLIR Systems,
Inc., an Oregon corporation ("FLIR"), as part of the solicitation of proxies    
by the FLIR Board of Directors (the "FLIR Board") from holders of the           
outstanding shares of FLIR common stock, par value $0.01 per share (the         
"Common Stock"), for use at the Special Meeting of FLIR Shareholders to be      
held on December 1, 1997, and at any adjournments or postponements thereof      
(the "Special Meeting").                                                        

At the Special Meeting, shareholders will be asked to consider and vote upon
a proposal to approve the issuance (the "Issuance") of a total of 4,162,000     
shares of Common Stock (the "FLIR Stock") in exchange for all of the            
outstanding shares of capital stock of AGEMA Infrared Systems AB, a             
corporation organized under the laws of Sweden ("AGEMA Sweden"), AGEMA          
Infrared Systems Limited, a corporation organized under the laws of the United  
Kingdom ("AGEMA UK"), AGEMA Infrared Systems Ltd., a corporation organized      
under the laws of Canada ("AGEMA Canada") and AGEMA Infrared Systems, Inc., a   
Delaware corporation ("AGEMA USA") (AGEMA Sweden, AGEMA UK, AGEMA Canada and    
AGEMA USA are referred to individually as an "AGEMA Company" and collectively   
as "AGEMA" or the "AGEMA Companies"). If the Issuance is approved by FLIR's     
shareholders at the Special Meeting, and certain other conditions are           
satisfied, FLIR will acquire all of the outstanding capital stock of the AGEMA  
Companies in exchange for the FLIR Stock (the "Combination"). The Combination   
will be effected pursuant to the terms of a Combination Agreement dated as of   
October 6, 1997 (the "Combination Agreement") by and among FLIR, Spectra-       
Physics AB, a corporation organized under the laws of Sweden ("Spectra"),       
Spectra-Physics Holdings S.A., a corporation organized under the laws of        
France ("Spectra France"), Spectra-Physics Holdings GmbH, a corporation         
organized under the laws of Germany ("Spectra Germany"), Spectra-Physics        
Holdings Plc, a public limited company organized under the laws of the United   
Kingdom ("Spectra UK"), Pharos Holdings, Inc., a corporation organized under    
the laws of the state of Delaware ("Spectra USA") (Spectra, Spectra France,     
Spectra Germany, Spectra UK and Spectra USA are referred to individually as a   
"Spectra Company" and collectively as the "Spectra Companies").                 

If the Issuance is approved at the Special Meeting and the Combination is   
consummated, each of the AGEMA Companies will become a wholly-owned subsidiary  
of FLIR, and Spectra and its affiliates will own approximately 43 percent of    
the shares of Common Stock issued and outstanding after the Combination. In     
addition, four people designated by Spectra will serve on FLIR's nine person    
Board of Directors.                                                             

This Proxy Statement, together with the enclosed proxy card, is first being 
mailed to shareholders of FLIR on or about November 10, 1997.                   

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TABLE OF CONTENTS 

                                                                [Download Table]
                                                                               
SUMMARY....................................................................   1
  General..................................................................   1
  The Companies............................................................   1
  The Special Meeting......................................................   3
  The Combination..........................................................   3
SUMMARY OF HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL     
 DATA......................................................................   6
  FLIR Historical Financial Data...........................................   6
  AGEMA Historical Financial Data..........................................   7
  Unaudited FLIR and AGEMA Pro Forma Condensed Combined Financial Data.....   7
COMPARATIVE PER SHARE DATA.................................................   8
COMPARATIVE PER SHARE MARKET INFORMATION...................................   9
  FLIR.....................................................................   9
  AGEMA....................................................................   9
THE SPECIAL MEETING........................................................  10
  General..................................................................  10
  Matters to be Considered at the Meeting..................................  10
  Record Date; Shares Entitled to Vote; Vote Required......................  10
  Proxies; Proxy Solicitation..............................................  10
THE COMBINATION............................................................  12
  General..................................................................  12
  Background of the Combination............................................  12
  Recommendations of the FLIR Board; Factors Considered....................  15
  Opinion of FLIR Financial Advisor........................................  16
  Business of FLIR and the AGEMA Companies Pending the Combination.........  19
  No Solicitation of Acquisition Proposals.................................  20
  Management and Operation of FLIR and AGEMA After the Combination.........  20
  Representations and Warranties...........................................  21
  Conditions; Waivers......................................................  21
  Termination; Amendment...................................................  22
  Indemnification..........................................................  23
  Amendment of FLIR Employment Agreements..................................  23
  Resale of FLIR Stock Issued in the Combination; Registration Rights......  23
  Restrictions on Purchases of FLIR Common Stock...........................  24
  Certain Federal Income Tax Considerations................................  24
  Accounting Treatment.....................................................  24
  Regulatory Requirements..................................................  24
  Expenses and Fees........................................................  25
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS................  26
BUSINESS OF FLIR...........................................................  33
  Industry Background......................................................  33
  Markets for FLIR's Products..............................................  34
  Products.................................................................  37
  Customers................................................................  39
  Sales, Distribution and Customer Service.................................  39
  Manufacturing............................................................  40
  Competition..............................................................  40
  Proprietary Rights.......................................................  40

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                                                                [Download Table]
                                                                               
  Employees................................................................  41
  Properties...............................................................  41
  Legal Proceedings........................................................  41
FLIR MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND           
 RESULTS OF OPERATIONS.....................................................  42
  Overview.................................................................  42
  Results of Operations....................................................  43
  Years ended December 31, 1996, 1995 and 1994.............................  43
  Six Months Ended June 30, 1997 and 1996..................................  46
  Liquidity and Capital Resources..........................................  47
  Recent Accounting Pronouncements.........................................  48
BUSINESS OF AGEMA..........................................................  49
  General..................................................................  49
  Industry Background......................................................  49
  Markets for AGEMA's Products.............................................  49
  Products.................................................................  50
  Customers................................................................  51
  Sales, Distribution and Customer Service.................................  51
  Manufacturing and Engineering............................................  51
  Competition..............................................................  51
  Employees................................................................  51
AGEMA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND          
 RESULTS OF OPERATIONS.....................................................  52
  Overview.................................................................  52
  Results of operations AGEMA Combined.....................................  52
  Years ended December 31, 1996, 1995 and 1994.............................  52
  Six months ended June 30, 1997 and 1996..................................  53
STOCK OWNED BY FLIR MANAGEMENT AND PRINCIPAL SHAREHOLDERS..................  54
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS...............................  55
FINANCIAL STATEMENTS....................................................... F-1
Appendix A--Combination Agreement                                              
Appendix B--Fairness Opinion of Ragen Mackenzie                                

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SUMMARY 

Certain significant matters discussed in this Proxy Statement are summarized
below. This summary is not intended to be complete and is qualified in all      
respects by reference to the more detailed information appearing or             
incorporated by reference in this Proxy Statement (including the Appendices     
hereto).                                                                        

FORWARD-LOOKING STATEMENTS                                                      

This Proxy Statement contains certain forward-looking statements within the 
meaning of the Securities Litigation Reform Act of 1995 that are based on       
current expectations, estimates, beliefs and assumptions of FLIR's and AGEMA's  
management. Words such as "expects," "anticipates," "intends," "plans,"         
"believes," "estimates" and variations of such words and similar expressions    
are intended to identify such forward-looking statements. The forward-looking   
statements in this Proxy Statement include, but are not limited to, statements  
with respect to the financial condition, results of operations and business of  
each of FLIR and AGEMA on a stand-alone basis and of FLIR and AGEMA on a pro    
forma combined basis following the completion of the Combination, including     
statements relating to (a) the market presence and growth opportunities of the  
combined companies expected to result from the Combination; (b) the operating   
efficiencies and cost savings anticipated to result from the Combination; (c)   
earnings per share and earnings per share growth expected to result from the    
Combination; and (d) the impact on revenues of the Combination. See "THE        
COMBINATION--Background of the Combination," "--Recommendations of the FLIR     
Board; Factors Considered," and "Unaudited Pro Forma Combined Condensed         
Financial Statements." These statements are not guarantees of future            
performance and involve risks, uncertainties and assumptions that are difficult 
to predict. Therefore, actual outcomes and results may differ materially from   
what is expressed or forecasted in such forward-looking statements due to       
numerous factors, including, but not limited to, the following possibilities:   
(a) conditions to the completion of the Combination may not be satisfied; (b)   
regulatory or government authorities may make adverse determinations regarding  
the Combination; (c) expected cost savings from the Combination may not be      
fully realized or realized within the expected time frame; (d) revenues         
following the Combination may be lower than expected; (e) competitive pressures 
faced by FLIR and AGEMA may increase significantly; (f) costs or difficulties   
related to the integration of the businesses of FLIR and AGEMA may be greater   
than expected; (g) the tax treatment of the Combination and/or the purchase     
price allocation and pro forma adjustments presently anticipated may change;    
(h) legislative or regulatory changes may adversely affect the businesses in    
which FLIR and AGEMA are engaged and (i) general economic or business           
conditions, either nationally or internationally, may be less favorable than    
expected.                                                                       

GENERAL                                                                         

This Proxy Statement relates to a proposal to issue a total of 4,162,000    
shares of FLIR common stock (the "FLIR Stock") in exchange for all of the       
outstanding shares of capital stock of the AGEMA Companies (the "Combination"). 
Subject to the approval of the Issuance by the shareholders of FLIR at the      
Special Meeting and the satisfaction of certain other conditions, the           
Combination will be effected pursuant to the terms of the Combination           
Agreement, a copy of which is attached hereto as Appendix A and is incorporated 
herein by reference.                                                            

THE COMPANIES                                                                   

FLIR Systems, Inc. FLIR, founded in 1978, designs, manufactures, and markets
imaging systems worldwide for a wide variety of applications in the government  
and commercial markets. Thermal imaging systems detect the infrared radiation,  
or heat, emitted directly by all objects and materials and enable the operator  
to see objects in total darkness, in adverse weather conditions and through     
obscurants such as smoke and haze. Government applications include public       
safety (law enforcement and drug interdiction, search and rescue, border patrol 
and maritime patrol, and environmental protection) and defense (surveillance,   
reconnaissance and navigation assistance). Commercial applications include      
commercial broadcast imaging, predictive and preventive maintenance, non-       
destructive testing and evaluation, research and development, manufacturing     
process control and monitoring, and machine vision and image analysis. FLIR's   
principal executive offices are located at 16505 S.W. 72nd Avenue, Portland,    
Oregon 97224 and its telephone number is 503-684-3731.                          

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AGEMA. Created in 1965 as a division of the Swedish gas manufacturer AGA AB 
and now comprised of four subsidiaries of Spectra, AGEMA designs, manufactures, 
and markets thermal imaging systems worldwide for a wide variety of             
applications in commercial and industrial markets. Thermal imaging systems      
detect heat, map temperatures and conduct non-contact temperature measurement   
and analysis. Commercial and industrial applications include predictive and     
preventive maintenance, non-destructive testing and evaluation, research and    
development, and process control and monitoring. AGEMA is comprised of the      
following corporate entities:                                                   

AGEMA Sweden. AGEMA Sweden is AGEMA's principal operating company. It       
maintains AGEMA's principal executive offices and owns and operates AGEMA's 
manufacturing facility. AGEMA Sweden is located at Rinkebyagen 19,          
Danderyd, Sweden and its telephone number is 46-8-753-25-00. AGEMA Sweden   
also has three subsidiaries that operate sales and service offices in       
France, Germany and Italy.                                                  

AGEMA Canada. AGEMA Canada owns and operates AGEMA's sales and service      
office in Canada, which is located at 5230 South Service Road, Suite 125,   
Burlington, Ontario and its telephone number is905-637-5697.                

AGEMA UK. AGEMA UK owns and operates AGEMA's sales and service office in    
Great Britain, which is located at Arden House, West Street, Leighton       
Buzzard, Bedfordshire LU7 7DD and its telephone number is 44-1525-37-56-60. 

AGEMA USA. AGEMA USA owns and operates AGEMA's sales and service office in  
the United States, which is located at 550 County Avenue, Secaucus, New     
Jersey 07095 and its telephone number is201-867-5390.                       

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THE SPECIAL MEETING                                                             

 The Special Meeting is scheduled to be held on December 1, 1997 at 2:00 p.m.,
local time, at the Multnomah Athletic Club, 1849 S.W. Salmon Avenue, Portland,  
Oregon 97205. At the Special Meeting, shareholders of FLIR will consider and    
vote upon a proposal to approve the issuance of a total of 4,162,000 shares of  
Common Stock in exchange for all of the outstanding shares of capital stock of  
the AGEMA Companies. Only holders of record of Common Stock at the close of     
business on October 24, 1997, are entitled to notice of and to vote at the      
Special Meeting. On that date, 5,563,591 shares of Common Stock were            
outstanding and entitled to vote. The affirmative vote of the holders of a      
majority of the votes cast on the proposal is required for approval of the      
Issuance. See "THE SPECIAL MEETING."                                            

THE COMBINATION                                                                 

General. Subject to the approval of the Issuance at the Special Meeting and 
the terms and conditions of the Combination Agreement, FLIR will acquire: (i)   
all of the outstanding shares of capital stock of AGEMA Sweden from Spectra in  
exchange for 3,912,280 shares of Common Stock and $100.00 in cash (the "AGEMA   
Sweden Acquisition"); (ii) all of the outstanding shares of capital stock of    
AGEMA Canada from Spectra in exchange for 41,620 shares of Common Stock and     
$30.00 in cash (the "AGEMA Canada Acquisition"); (iii) all of the outstanding   
shares of capital stock of AGEMA UK from Spectra UK in exchange for 183,128     
shares of Common Stock and $20.00 in cash (the "AGEMA UK Acquisition") and (iv) 
all of the outstanding shares of capital stock of AGEMA USA from Spectra USA in 
exchange for 24,972 shares of Common Stock (the "AGEMA USA Acquisition"). Each  
of the acquisitions will be effected simultaneously, and none of the            
acquisitions will be effected unless all are effected. Upon consummation of the 
Combination each of AGEMA Sweden, AGEMA Canada, AGEMA UK and AGEMA USA will     
become a separate wholly-owned subsidiary of FLIR. The Combination will be      
consummated and become effective (the "Effective Time") following receipt of    
all required approvals and satisfaction or waiver of the other conditions to    
the Combination. See "THE COMBINATION--Conditions; Waivers."                    

If the Issuance is approved at the Special Meeting and the Combination is   
consummated, Spectra and its affiliates will own approximately 43 percent of    
the shares of Common Stock issued and outstanding after the Combination. In     
addition, four people designated by Spectra will serve on FLIR's nine person    
Board of Directors. As a result of their stock ownership position and Board     
representation, Spectra and its affiliates will be able to significantly        
influence the direction and policies of FLIR, the election of the FLIR Board    
and the outcome of any other matter requiring shareholder approval, including   
any merger, consolidation, sale of substantially all of the assets of FLIR or   
other change of control transaction.                                            

Recommendation of FLIR Board of Directors. The FLIR Board has determined the
Issuance and the Combination to be fair to and in the best interests of FLIR    
and its shareholders and has approved the Issuance and the Combination          
Agreement. The FLIR Board recommends that FLIR shareholders vote FOR the        
Issuance. The FLIR Board's recommendations are based upon a number of factors   
discussed in this Proxy Statement. See "THE COMBINATION--Background of the      
Combination" and "--Recommendations of the FLIR Board; Factors Considered."     

Opinion of FLIR Financial Advisor. Ragen MacKenzie Incorporated ("Ragen     
MacKenzie") has been retained by FLIR to act as its financial advisor in        
connection with the Combination. Ragen MacKenzie has delivered its opinion to   
the FLIR Board of Directors dated September 23, 1997 (the "Ragen MacKenzie      
Opinion"), to the effect that, as of such date and based on the procedures      
followed, factors considered and assumptions made by Ragen MacKenzie as set     
forth therein, the consideration to be paid to holders of capital stock of the  
AGEMA Companies pursuant to the Combination Agreement is fair from a financial  
point of view to FLIR. The full text of the Ragen MacKenzie Opinion, which sets 
forth assumptions made, matters considered and limitations on the review        
undertaken, is attached hereto as Appendix B. FLIR shareholders are urged to    
read the opinion carefully and in its entirety. The Ragen MacKenzie Opinion is  
directed only to the fairness to FLIR of the consideration to be paid to the    
holders of capital stock of the AGEMA Companies pursuant to the                 

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Combination Agreement from a financial point of view and should not be deemed   
to constitute a recommendation by Ragen MacKenzie to FLIR shareholders to vote  
in favor of any matter presented in this Proxy Statement. The summary of the    
Ragen MacKenzie Opinion set forth herein is qualified in its entirety by        
reference to the full text of such opinion. See "THE COMBINATION--Opinion of    
FLIR Financial Advisor."                                                        

Business of FLIR and AGEMA Pending the Combination. FLIR and the Spectra    
Companies have agreed that, prior to the Effective Time or earlier termination  
of the Combination Agreement, except as contemplated by the Combination         
Agreement, FLIR and the AGEMA Companies will conduct their operations according 
to the ordinary course of business consistent with past practice and will not   
engage in any of a number of actions specified in the Combination Agreement.    
See "THE COMBINATION--Business of FLIR and the AGEMA Companies Pending the      
Combination."                                                                   

 No Solicitation of Acquisition Proposals. FLIR and the Spectra Companies have
agreed that, prior to the Effective Time or earlier termination of the          
Combination Agreement, neither they nor any of their affiliates will, directly  
or indirectly, encourage, solicit or engage in discussions or negotiations with 
any third party concerning any merger, consolidation, share exchange or similar 
transaction involving FLIR or AGEMA or any purchase of all or a significant     
portion of the assets of or equity interest in FLIR or AGEMA, or any other      
transaction that would involve the transfer or potential transfer of control of 
FLIR or AGEMA. See "THE COMBINATION--No Solicitation of Acquisition Proposals." 

Management and Operations of FLIR and AGEMA After the Combination. At the   
Effective Time, the FLIR Board will increase the number of directors of FLIR    
from six to nine members and appoint four designees of Spectra to the FLIR      
Board. The officers of the AGEMA Companies at the Effective Time will continue  
to serve in such positions until their successors have been duly elected or     
appointed and qualified or until their earlier death, resignation or removal.   
After the Combination, each of the AGEMA Companies will be a wholly-owned       
subsidiary of FLIR, and will operate as one of FLIR's business units. After the 
Combination, the AGEMA Companies will have access to resources generally        
available to FLIR's other business units, will participate in appropriate       
activities with other FLIR business units and will be managed by its current    
officers, under the direction and guidance of FLIR's senior management and the  
FLIR Board. See "THE COMBINATION--Management and Operations of FLIR and AGEMA   
After the Combination."                                                         

Conditions of the Combination; Termination. The consummation of the         
Combination is conditioned upon the fulfillment or waiver of certain conditions 
set forth in the Combination Agreement. See "THE COMBINATION--Conditions;       
Waivers." The Combination Agreement may be terminated (i) by mutual consent of  
FLIR and Spectra, (ii) by either FLIR or Spectra if the Combination has not     
been consummated by March 31, 1998, and (iii) under certain other               
circumstances. See "THE COMBINATION--Termination; Amendment."                   

 Resale of FLIR Stock Issued in the Combination; Registration Rights. The FLIR
Stock to be issued in the Combination will constitute "restricted securities"   
within the meaning of Rule 144 under the Securities Act of 1933, as amended     
(the "Securities Act") which may not be sold except pursuant to an effective    
registration statement under the Securities Act covering such shares, or in     
compliance with Rule 144 promulgated under the Securities Act or another        
applicable exemption from the registration requirements of the Securities Act.  
Effective as of the Closing Date, FLIR and Spectra will enter into a            
Registration Rights Agreement that will grant Spectra certain registration      
rights. The Registration Rights Agreement will provide that if FLIR proposes to 
register any of its securities under the Securities Act, whether for its own    
account or otherwise, Spectra will be entitled to notice of the registration    
and inclusion of such shares therein, subject to certain limitations. In        
addition, at any time after twelve months from the Closing Date, such holders   
may require FLIR to file a registration statement covering such shares, and     
FLIR will be obligated to use its best efforts to effect such registration,     
subject to certain conditions and limitations. See "THE COMBINATION--Resale of  
FLIR Stock Issued in the Combination; Registration Rights."                     

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Restrictions on Purchases of FLIR Common Stock. During the twelve month     
period following the Closing Date, the Spectra Companies have agreed that none  
of the Spectra Companies nor any of their affiliates will acquire or agree to   
acquire any interest in any Common Stock, other than the acquisition of Common  
Stock in connection with (i) a dividend on, subdivision of or other pro rata    
distribution in respect of any security issued by FLIR, (ii) a merger,          
consolidation or other transaction, or (iii) an offering of Common Stock by     
FLIR to the extent necessary to allow the Spectra Companies and their           
affiliates to maintain the same percentage ownership in FLIR as they had        
immediately after the Closing Date.                                             

Certain Federal Income Tax Consequences. It is expected that the AGEMA USA  
Acquisition will constitute a tax-free reorganization for federal income tax    
purposes. The AGEMA Sweden Acquisition, the AGEMA UK Acquisition and the AGEMA  
Canada Acquisition will be taxable transactions to FLIR for federal income tax  
purposes to the extent of the cash consideration paid by FLIR in such           
acquisitions. Shareholders of FLIR will not recognize any gain or loss as a     
result of the Combination. See "THE COMBINATION--Certain Federal Income Tax     
Consequences."                                                                  

Regulatory Approvals. The parties to the Combination are required to file   
notifications under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,   
as amended, but are not aware of any other regulatory approvals required to     
consummate the Combination other than compliance with the federal securities    
laws. See "THE COMBINATION--Regulatory Requirements."                           

Accounting Treatment. It is expected that the Combination will be accounted 
for as a purchase. See "THE COMBINATION--Accounting Treatment."                 

Dissenters' Rights. FLIR shareholders do not have the right to dissent from 
the proposed Combination under the Oregon Business Combination Act.             

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SUMMARY OF HISTORICAL AND UNAUDITED PRO FORMA 
CONDENSED COMBINED FINANCIAL DATA 

The following summary historical financial data of FLIR and AGEMA and the   
summary unaudited pro forma condensed combined financial data have been derived 
from the historical consolidated financial statements of FLIR and the           
historical combined financial statements of AGEMA contained herein. The pro     
forma statement of operations condensed financial data is presented to give     
effect to the Combination as if it had occurred at the beginning of the periods 
presented. The pro forma balance sheet condensed financial data is presented to 
give effect to the Combination as if it had occurred at the balance sheet date  
presented. The summary financial data presented below should be read in         
conjunction with such financial statements and the Notes thereto. The           
historical financial data at and for the five-year period ended December 31,    
1996 with respect to FLIR and AGEMA have been extracted from the financial      
statements of FLIR and AGEMA contained herein. The historical financial data at 
and for the six months ended June 30, 1996 and 1997 with respect to FLIR and    
AGEMA is unaudited. The pro forma condensed combined financial data is not      
necessarily indicative of actual or future operating results or the financial   
position that would have been achieved had the Combination been consummated at  
the beginning of the periods presented.                                         

FLIR HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                [Download Table]

                                                                 SIX MONTHS ENDED 
                                 YEAR ENDED DECEMBER 31,             JUNE 30,     
                         --------------------------------------- -----------------
                          1992    1993    1994    1995    1996     1996     1997  
                         ------- ------- ------- ------- ------- -------- --------
                                                                                  
STATEMENT OF OPERATIONS                                                           
 DATA:                                                                            
Revenues................ $32,550 $40,133 $48,977 $50,125 $66,017 $ 26,365 $ 35,760
Net earnings............   1,780   3,191   5,186   3,867   5,092    1,162    1,541
Net earnings per share.. $  0.42 $  0.66 $  0.95 $  0.70 $  0.91 $   0.21 $   0.27
Weighted average number                                                           
 of common shares and                                                             
 equivalents                                                                      
 outstanding............   4,233   4,828   5,436   5,523   5,624    5,559    5,795
BALANCE SHEET DATA:                                                               
Working capital......... $18,233 $31,610 $35,573 $37,884 $44,190 $ 41,791 $ 45,026
Total assets............  26,391  40,385  49,269  56,918  75,104   61,258   85,170
Long-term debt,                                                                   
 excluding current                                                                
 portion................   1,099   1,167   1,209   1,175   5,173    5,047    5,501
Total shareholders'                                                               
 equity................. $19,909 $33,046 $39,162 $43,470 $49,971 $ 45,006 $ 52,454

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AGEMA HISTORICAL FINANCIAL DATA 
(IN THOUSANDS SEK)(1) 

                                                                [Download Table]

                                                                  SIX MONTHS ENDED  
                                 YEAR ENDED DECEMBER 31,              JUNE 30,      
                         ---------------------------------------  ------------------
                          1992    1993    1994    1995    1996      1996      1997  
                         ------- ------- ------- ------- -------  --------  --------
                                                                                    
STATEMENT OF OPERATIONS                                                             
 DATA:                                                                              
Revenues................ 250,220 310,496 348,685 341,418 324,769   136,958   188,359
Net earnings (loss).....   5,557   6,313   2,850   2,824 (11,814)  (11,407)    4,860
BALANCE SHEET DATA:                                                                 
Working capital......... 139,019 149,952 131,838 106,764  75,366    98,193    85,004
Total assets............ 253,786 277,367 286,580 237,013 233,372   212,069   231,300
Total shareholders'                                                                 
 equity................. 123,710 140,585 129,986 107,705  74,184    75,339    82,029

--------                                                                        

(1) The selected financial data for AGEMA is presented in thousand Swedish      
   Krone consistent with the audited financial statements included on pages F-
22 to F-38. As of November 7, the exchange rate from Swedish Krone to   
 United States Dollars was 7.4580 Krone to the dollar. The following table
 presents historical information about the exchange rate for the five most
recent years and interim periods presented:                             

                                                                [Download Table]

                                                                PERIOD PERIOD
    PERIOD ENDING                  END OF PERIOD PERIOD AVERAGE  HIGH   LOW  
    -------------                  ------------- -------------- ------ ------
                                                                             
    June 30, 1997.................    7.7345         7.6006     7.8500 7.2430
    June 30, 1996.................    6.6275         6.7549     6.9470 6.6275
    December 31, 1996.............    6.8250         6.7099     6.9470 6.5750
    December 31, 1995.............    6.6290         7.1073     7.5015 6.5600
    December 31, 1994.............    7.4295         7.6637     7.9724 7.1935
    December 31, 1993.............    8.3309         7.8594     8.4821 7.1648
    December 31, 1992.............    7.0750         5.9193     7.0750 5.1281

The above rates are derived from the noon buying rate in New York City for      
cable transfers in Swedish Krone as certified for customs purposes by the       
Federal Reserve Bank of New York. The average rates are based upon the average  
of the exchange rates on the last day of each month during the periods          
indicated.                                                                      

UNAUDITED 
FLIR AND AGEMA
PRO FORMA CONDENSED COMBINED FINANCIAL DATA 
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                [Download Table]

                                                     YEAR ENDED    SIX MONTHS  
                                                    DECEMBER 31, ENDED JUNE 30,
                                                        1996          1997     
                                                    ------------ --------------
                                                                               
STATEMENT OF OPERATIONS DATA:                                                  
Revenues...........................................   $114,418      $60,542    
Net earnings.......................................      2,120        1,906    
Net earnings per share.............................   $   0.22      $  0.20    
Weighted average number of common shares and                                   
 equivalents outstanding...........................      9,786        9,957    
BALANCE SHEET DATA:                                                            
Working capital....................................        --       $55,390    
Total assets.......................................        --       159,853    
Long-term debt, excluding current portion..........        --         5,501    
Total shareholders' equity.........................        --       108,068    

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COMPARATIVE PER SHARE DATA

The following table presents comparative per share data for FLIR (on a      
historical and pro forma basis) and for AGEMA on an equivalent share basis      
based upon the historical financial statements of FLIR and AGEMA. FLIR has not  
paid any cash dividends. Pro forma combined information is not necessarily      
indicative of actual or future operating results or financial position that     
would have occurred or will occur upon consummation of the Combination. The     
information presented below should be read in conjunction with the Unaudited    
Pro Forma Combined Financial Statements included elsewhere in this Proxy        
Statement, the separate historical consolidated financial statements of FLIR    
and the separate historical combined financial statements of AGEMA contained    
herein.                                                                         

                                                                [Download Table]

                                         YEAR ENDED         SIX MONTHS     
                                      DECEMBER 31, 1996 ENDED JUNE 30, 1997
                                      ----------------- -------------------
                                                                           
FLIR                                                                       
Historical:                                                                
 Net income per common share........        $0.91              $0.27       
 Book value per common share........         9.28               9.52       
 Pro Forma (1):                                                            
 Net income.........................         0.22               0.20       
 Book value.........................          --               11.18       
AGEMA                                                                      
 Pro Forma (2):                                                            
 Net income.........................          --                 --        
 Book value.........................          --                 --        

--------                                                                        

(1) The pro forma combined financial data gives effect to the Combination by    
combining the Financial statement data of FLIR and AGEMA at and for the 
year ended December 31, 1996 and the six months ended June 30, 1997 on a
purchase basis of accounting.                                           
(2) Per share information has been omitted due to the fact that financial       
 information for Agema is presented on a combined basis for the operations
of AGEMA Sweden, AGEMA UK, AGEMA Canada, and AGEMA USA all of which are 
 wholly owned subsidiaries of Spectra. The capital structures of the AGEMA
Companies varies between the subsidiaries and accordingly, per share    
information would not be meaningful for comparative purposes.           

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COMPARATIVE PER SHARE MARKET INFORMATION

FLIR                                                                            

The Common Stock is quoted on the Nasdaq National Market. The table below   
sets forth for the fiscal periods indicated the high and low sales prices per   
share of Common Stock on the Nasdaq National Market as reported in published    
financial sources.                                                              

                                                                [Download Table]

                                                        PRICE PER SHARE OF 
                                                           COMMON STOCK    
                                                        -------------------
                                                          HIGH       LOW   
                                                        --------- ---------
                                                                           
Fiscal 1995                                                                
  First Quarter........................................    $16.75    $12.50
  Second Quarter.......................................     15.25     12.44
  Third Quarter........................................     14.50     12.25
  Fourth Quarter.......................................     13.50     12.25
Fiscal 1996                                                                
  First Quarter........................................    $14.38    $10.00
  Second Quarter.......................................     16.25     10.50
  Third Quarter........................................     15.25     11.75
  Fourth Quarter.......................................     14.50     12.75
Fiscal 1997                                                                
  First Quarter........................................    $17.75    $13.25
  Second Quarter.......................................     17.75     14.75
  Third Quarter........................................     22.00     15.75
  Fourth Quarter (through November 7, 1997)............     21.63     17.50

On August 1, 1997, the last full trading day prior to announcement of the   
proposed Combination, the reported Nasdaq National Market closing price per     
share of Common Stock was $21.25. On November 7, 1997, the most recent          
available date prior to printing this Proxy Statement, the reported Nasdaq      
National Market closing price per share of Common Stock was $19.00. On that     
date, there were 207 holders of record. FLIR shareholders are urged to obtain   
current market quotations.                                                      

FLIR has never paid cash dividends on shares of Common Stock. It is not     
anticipated that any cash dividends will be paid on Common Stock in the         
foreseeable future.                                                             

AGEMA                                                                           

 There is no public market for shares of the AGEMA Companies stock. There were
5 holders of record of the AGEMA Companies stock as of November 7, 1997. It is  
not anticipated that any cash dividends will be paid on the AGEMA Companies     
stock in the foreseeable future.                                                

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THE SPECIAL MEETING 

GENERAL                                                                         

This Proxy Statement is being furnished to holders of FLIR Common Stock in  
connection with the solicitation of proxies by the FLIR Board for use at the    
Special Meeting to be held on Monday, December 1, 1997, at the Multnomah        
Athletic Club, 1849 S.W. Salmon Avenue, Portland, Oregon 97205 at 2:00 p.m.,    
local time, and at any adjournments or postponements thereof. This Proxy        
Statement and the accompanying form of proxy are first being mailed to          
shareholders of FLIR on or about November 10, 1997.                             

MATTERS TO BE CONSIDERED AT THE MEETING                                         

At the Special Meeting, shareholders of record of FLIR as of the close of   
business on October 24, 1997, will consider and vote upon the issuance of       
4,162,000 shares of Common Stock in exchange for all of the outstanding shares  
of capital stock of the AGEMA Companies. As of the date of this Proxy           
Statement, the FLIR Board does not know of any other matters to be presented    
for action by the shareholders at the Special Meeting. If any other matters     
not now known are properly brought before the meeting, the persons named in     
the accompanying proxy will vote such proxy in accordance with the              
determination of a majority of the FLIR Board.                                  

THE FLIR BOARD HAS APPROVED THE ISSUANCE AND THE COMBINATION AGREEMENT AND  
RECOMMENDS THAT FLIR SHAREHOLDERS VOTE "FOR" APPROVAL OF THE ISSUANCE.          

RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED                             

The close of business on October 24, 1997 (the "Record Date") has been fixed
as the record date for determining the holders of Common Stock who are          
entitled to notice of and to vote at the Special Meeting. As of the Record      
Date, there were approximately 3,500 beneficial holders of the 5,563,591        
shares of Common Stock then outstanding and entitled to vote. The holders of    
record on the Record Date of Common Stock are entitled to one vote per share    
of Common Stock. The presence in person or by proxy of the holders of shares    
representing a majority of the voting power of the Common Stock entitled to     
vote is necessary to constitute a quorum for the transaction of business at     
the Special Meeting. Under Rule 4460(i) of the Rules of the Nasdaq Stock        
Market, the affirmative vote of a majority of the total votes cast on the       
proposal is required for approval of the Issuance. Abstentions from voting and  
broker nonvotes will be counted for purposes of determining whether a quorum    
exists at the Special Meeting but will not be counted and will have no effect   
on the determination of the outcome of the proposal. Holders of Common Stock    
will not be entitled to dissenters' rights as a result of the Issuance.         

PROXIES; PROXY SOLICITATION                                                     

Shares of Common Stock represented by properly executed proxies received at 
or prior to the Special Meeting that have not been revoked will be voted at     
the Special Meeting in accordance with the instructions contained therein.      
Shares of Common Stock represented by properly executed proxies for which no    
instruction is given will be voted "FOR" approval of the Issuance. FLIR         
shareholders are requested to complete, sign, date and return promptly the      
enclosed proxy card in the postage-prepaid envelope provided for this purpose   
to ensure that their shares are voted. A shareholder may revoke a proxy by      
submitting at any time prior to the vote on the Issuance a later-dated proxy    
with respect to the same shares, by delivering written notice of revocation to  
the Secretary of FLIR at any time prior to such vote or by attending the        
Special Meeting and voting in person. Mere attendance at the Special Meeting    
will not in and of itself revoke a proxy.                                       

If the Special Meeting is postponed or adjourned for any reason, at any     
subsequent reconvening of the Special Meeting all proxies will be voted in the  
same manner as such proxies would have been voted at the original convening of  
the Special Meeting (except for any proxies that have theretofore effectively   
been revoked or withdrawn), notwithstanding that they may have been             
effectively voted on the same or any other matter at a previous meeting.        

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FLIR will bear the cost of soliciting proxies from its shareholders. In     
addition to solicitation by mail, directors, officers and employees of FLIR     
may solicit proxies by telephone, telegram or otherwise. Such directors,        
officers and employees will not be additionally compensated for such            
solicitation, but may be reimbursed for out-of-pocket expenses incurred in      
connection therewith. Brokerage firms, fiduciaries and other custodians who     
forward soliciting material to the beneficial owners of FLIR Common Stock held  
of record by them will be reimbursed for their reasonable expenses incurred in  
forwarding such material. Also, W.F. Doring & Co. may solicit proxies at an     
approximate cost of $2,500 plus reasonable expenses. Such solicitations may be  
made personally, or by mail, facsimile, telephone, telegraph or messenger.      

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THE COMBINATION 

The discussion in this Proxy Statement of the Combination and the           
description of the principal terms of the Combination Agreement set forth       
below are subject to and qualified in their entirety by reference to the        
Combination Agreement, a copy of which is attached as Appendix A to this Proxy  
Statement.                                                                      

GENERAL                                                                         

The Combination. Subject to the terms and conditions of the Combination     
Agreement, FLIR will: (i) acquire all of the outstanding shares of capital      
stock of AGEMA Sweden from Spectra in exchange for 3,912,280 shares of Common   
Stock and $100.00 in cash; (ii) acquire all of the outstanding shares of        
capital stock of AGEMA Canada from Spectra in exchange for 41,620 shares of     
Common Stock and $30.00 in cash; (iii) acquire all of the outstanding shares    
of capital stock of AGEMA UK from Spectra UK in exchange for 183,128 shares of  
Common Stock and $20.00 in cash and (iv) acquire all of the outstanding shares  
of capital stock of AGEMA USA from Spectra USA in exchange for 24,972 shares    
of Common Stock. Each of the acquisitions will be effected simultaneously, and  
none of the acquisitions will be effected unless all are effected. Upon         
consummation of the Combination each of AGEMA Sweden, AGEMA Canada, AGEMA UK    
and AGEMA USA will become a separate wholly-owned subsidiary of FLIR. The       
Combination will be consummated and become effective promptly following         
receipt of all required governmental approvals and satisfaction or waiver of    
the other conditions to the Combination. See "THE COMBINATION--Conditions;      
Waivers."                                                                       

If the Issuance is approved at the Special Meeting and the Combination is   
consummated, Spectra and its affiliates will own approximately 43 percent of    
the shares of Common Stock issued and outstanding after the Combination. In     
addition, four people designated by Spectra will serve on FLIR's nine person    
Board of Directors. As a result of their stock ownership position and Board     
representation, Spectra and its affiliates will be able to significantly        
influence the direction and policies of FLIR, the election of the FLIR Board    
and the outcome of any other matter requiring shareholder approval, including   
any merger, consolidation, sale of substantially all of the assets of FLIR or   
other change of control transactions.                                           

BACKGROUND OF THE COMBINATION                                                   

Prior to 1991, FLIR specialized in the design, manufacture and marketing of 
stabilized airborne thermal imaging systems for the domestic and international  
government market, which included military, paramilitary, law enforcement, and  
other international, national, state and local governmental agencies. Although  
FLIR's revenues from sales of its systems to the governmental market were       
increasing, and the size of the government market for thermal imaging           
technology was growing, FLIR recognized that the growth of that market was      
dependent upon continued annual government funding. Further, the majority of    
orders were typically received and shipped in the later part of the year,       
causing uneven revenue growth on a quarter to quarter basis.                    

By contrast, FLIR recognized that the commercial marketplace for industrial 
applications of thermal imaging technology was potentially a much larger        
market that had shorter sales cycles, was not subject to the uncertainties of   
public budgeting and did not evidence as significantly the uneven quarter to    
quarter revenue pattern. Consequently, FLIR developed a strategic plan to       
continue to develop the government market while expanding its technology into   
the commercial infrared imaging market. Pursuant to this strategy, in August    
of 1990, FLIR acquired substantially all of the assets of Carlsbad Infrared     
Systems, Inc., the industrial imaging subsidiary of Hughes Aircraft Company,    
and initiated the development of a new line of industrial infrared products.    

Since 1991, FLIR has continued to grow its commercial division and revenues 
from the sales of its commercial products have continued to comprise a          
steadily increasing percentage of FLIR's total revenue. During that time, FLIR  
has sought to accelerate its growth in the commercial market by continuing to   
develop and market its own family of commercial thermal imaging products and    
by identifying other companies that                                             

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design, manufacture and market commercial thermal imaging systems as potential  
merger or acquisition candidates.                                               

One such potential candidate was AGEMA, which FLIR had competed against from
its initial entry into the commercial thermal imaging market in 1990 and had    
become quite familiar with. On May 1, 1997, Robert P. Daltry, Chairman and      
Chief Executive Officer of FLIR, and J. Kenneth Stringer III, President and     
Chief Operating Officer of FLIR, discussed the merits of combining businesses   
with AGEMA and decided that Mr. Stringer should meet with AGEMA in Sweden to    
initiate discussions. On May 9, 1997, Mr. Stringer and William N. Martin, Vice  
President of Sales for FLIR, met with Mr. Leif Bergstrom, President of the      
Industrial Measurement Business Group of Spectra, the parent company of AGEMA,  
and Mr. Arne Almefors, President of AGEMA, at AGEMA's offices in Stockholm,     
Sweden, to explore the possibility of a combination of FLIR and AGEMA.          
Management of FLIR and AGEMA discussed the background of their respective       
companies and the potential strategic advantages of a combination, including    
increased revenues, the diversification of product lines, the consolidation of  
sales forces and distribution channels, the elimination of duplicative          
expenditures, and the proper allocation of production activities between the    
two companies. While the parties did not discuss valuation ranges or any        
particular structure for such a combination, they did agree to move forward     
with discussions regarding a possible combination and to exchange additional    
information about their respective companies to facilitate those discussions.   
After this initial meeting, management of AGEMA began discussing this matter    
with the management of its parent company, Spectra, and both AGEMA and FLIR     
began exchanging basic financial information and continued to discuss various   
issues related to a possible combination.                                       

On June 12, 1997, after discussions with senior management of FLIR, Mr.     
Stringer met with Mr. Bergstrom, Mr. Lars Spongberg, President of Spectra and   
Mr. Lennart Rappe, Senior Vice President and Chief Financial Officer of         
Spectra, at Spectra's offices in Stockholm, Sweden to continue discussions      
about the merits of combining operations and about general approaches to        
structuring a transaction. The parties discussed the strategic advantages of a  
combined entity, including creating a larger and financially stronger           
manufacturer of thermal imaging systems for both the commercial and government  
markets, consolidating sales forces and enabling the establishment of a direct  
sales staff in Asia, properly allocating engineering resources, and having      
manufacturing capacity in both Europe and the United States. The parties also   
discussed the potential financial benefits of a combination, including          
increased liquidity for Spectra's investment, increased market capitalization,  
improved analyst coverage, expected improvements to the price/earnings ratio    
of the FLIR Common Stock, and that the transaction would likely be accretive    
to earnings on a fully diluted basis beginning in 1998 if structured properly.  
The parties agreed to meet within two weeks to discuss specific valuation       
proposals.                                                                      

On June 23-24, 1997, Messrs. Spongberg, Almefors and Bergstrom met with Mr. 
Stringer and Mr. Daltry at FLIR's offices in Portland to discuss specific       
valuation proposals and how best to allocate operational responsibilities       
between the two companies. During these more detailed discussions, Messrs.      
Daltry and Stringer proposed that the number of shares of FLIR Common Stock to  
be issued to Spectra in the proposed transaction and resulting ownership        
structure of the combined entity be based on each company's proportionate       
contribution to average combined total revenue and operating earnings of both   
companies for 1997. Based on AGEMA's expected contribution of approximately 38  
percent to the average total revenue and operating earnings of the combined     
entity in 1997, Messrs. Stringer and Daltry indicated that FLIR was prepared    
to offer up to a maximum of 3,800,000 shares of FLIR Common Stock               
(approximately 41% of the outstanding shares of FLIR Common Stock after giving  
effect to shares issued in the Combination) in exchange for all of the          
outstanding shares of capital stock of the AGEMA Companies. Mr. Spongberg       
expressed the view that the valuation of AGEMA should also reflect the          
increased future revenues to be derived by FLIR from the synergies generated    
by the acquisition. Mr. Spongberg proposed that the number of shares be         
increased to an amount that would represent 45 percent of the outstanding       
shares of FLIR Common Stock after giving effect to the shares issued in the     
Combination. After further discussions, Messrs. Daltry and Stringer proposed    
to increase the number of shares of FLIR Common Stock to be issued in the       
Combination to 3,950,000 (approximately 42% of the outstanding shares of FLIR   
Common Stock after giving effect to shares issued in the Combination). The      
parties came to a tentative agreement on this valuation and agreed to begin     
drafting a letter of intent with respect to the proposed transaction. The       
parties also agreed to meet in Stockholm during the week of July 1, 1997 to     
discuss these matters further.                                                  

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On July 3 and 4, 1997, Messrs. Daltry and Stringer met with Messrs.         
Spongberg, Rappe, Bergstrom and Mr. Gunnar Bark, Chairman of the Board of       
Directors of Spectra, to discuss further the transaction, including the         
purchase price, Spectra's representation on the FLIR Board of Directors, and    
the operational structure of the combined entity. Messrs. Spongberg and Bark    
indicated that the number of shares to be issued by FLIR in the proposed        
transaction would have to be increased in order for the transaction to be       
approved by Spectra's Board of Directors. The parties agreed to continue        
negotiating the terms of a letter of intent, including the number of shares of  
FLIR Common Stock to be issued. The parties also agreed that public disclosure  
of the discussions between the parties would be premature prior to an           
agreement on the material terms of the proposed transaction, as evidenced by    
the execution of a letter of intent.                                            

Between July 6, 1997 and July 14, 1997, several telephone conversations took
place between Messrs. Spongberg and Rappe and Messrs. Daltry and Stringer       
regarding the terms of the proposed transaction. During one of those telephone  
conversations, Mr. Spongberg noted that the total number of shares of FLIR      
Common Stock outstanding did not also reflect the total number of shares that   
were reserved for stock options, which upon exercise would dilute Spectra's     
percentage of ownership. Consequently, Spectra suggested that the number of     
shares of FLIR Common Stock be increased to ensure approval by the Spectra      
Board and to reflect this dilution, and that Spectra be entitled to nominate    
four designees on the FLIR Board of Directors. Messrs. Daltry and Stringer      
agreed to increase the total number of shares to 4,162,000 (approximately 42%   
of the outstanding shares of FLIR Common Stock after giving effect to the       
shares issued in the Combination and the exercise of all FLIR stock options     
outstanding as of March 31, 1997). It was also agreed that the number of seats  
on the FLIR Board available for nomination by Spectra would be four.            

On July 14, 1997, a special meeting of the FLIR Board was held to consider  
the proposed transaction. At that meeting, the Board reviewed and discussed     
information about the proposed transaction, including financial and other       
information regarding Spectra and AGEMA, a listing of the benefits of a         
combination, pro-forma financial statements and a description of the basic      
structure of the proposed transaction. The FLIR Board also discussed whether    
to obtain a fairness opinion on the transaction by an investment banking firm   
for inclusion in the proxy statement and also discussed the possible risks to   
FLIR if the proposed transaction did not close. Finally, the Board reviewed     
the proposed changes in the management structure of FLIR and the proposed       
changes in the composition of the Board. Following extensive discussion of      
Spectra's and AGEMA's background and the basic terms of the proposed            
transaction, the FLIR Board authorized management to execute a letter of        
intent with respect to the proposed transaction, to begin negotiating the       
definitive acquisition agreement, and to engage the services of an investment   
banking firm to provide a fairness opinion.                                     

On August 1, 1997, a meeting of the Spectra Board of Directors was held to  
discuss and consider the proposed transaction. At that meeting, the Board       
reviewed the terms of the proposed transaction as set forth in a draft letter   
of intent and considered the financial and operational background of FLIR.      
Having determined that the major terms and conditions of the proposed           
transaction, as contained in the letter of intent, were in the best interest    
of AGEMA, Spectra and its shareholders, the board authorized Spectra            
management to execute a letter of intent and proceed to negotiate a definitive  
acquisition agreement and to take all actions necessary to finalize the         
transaction. In reaching its conclusion, the Spectra board considered, among    
other things, the following factors: (1) the development of new technology for  
the design and manufacture of thermal imaging systems that will attract new     
competitors in both the thermography and surveillance markets. The combination  
of AGEMA and FLIR will result in a new entity better able to respond to this    
new competition by having a stronger presence in both markets, enhanced         
engineering resources and greater manufacturing capability; and (2) the global  
nature of the thermal imaging market. The combination of AGEMA and FLIR will    
result in a strengthened sales and marketing staff, the substantial expansion   
of market coverage and improvement of customer service, and the ability to      
aggressively pursue fast growing markets in Asia.                               

The meetings and negotiations described above culminated in the execution of
a nonbinding letter of intent dated August 1, 1997 with respect to the          
acquisition by FLIR of all of the outstanding shares of AGEMA in exchange for   
4,162,000 shares of FLIR Common Stock. The letter of intent reflected the       
general terms of the proposed combination that were negotiated and acceptable   
to FLIR and Spectra. The execution of the letter of intent was publicly         
announced by a joint press release on August 4, 1997. Thereafter, management    
of FLIR and                                                                     

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Spectra, assisted by legal counsel and outside auditors, engaged in extensive   
financial and legal due diligence regarding each other.                         

At various times after August 1, 1997, Messrs. Spongberg and Rappe, and     
Spectra's outside legal counsel engaged in extensive negotiations with Messrs.  
Daltry, Stringer and Mr. James A. Fitzhenry, Vice President and General         
Counsel of FLIR, and FLIR's outside legal counsel, regarding the terms of the   
Combination Agreement. Included in the negotiations were discussions regarding  
the appropriate structure of the transaction from a legal and tax standpoint,   
the representations and warranties to be made by both FLIR and Spectra          
particularly with regard to the contents of the financial statements, the       
period of time after the closing that such representations and warranties       
would remain in effect, the nature and extent of the liabilities of AGEMA to    
be assumed by FLIR, the nature and extent of the indemnification obligations    
of the parties, the responsibility for payment of taxes during certain time     
periods, filings pursuant to the Hart Scott Rodino Antitrust Improvements Act   
of 1976, conditions precedent to closing, disclosure schedules, a registration  
rights agreement and the forms of opinion of counsel.                           

On September 23, 1997, a special meeting of the FLIR Board of Directors was 
held to review and consider the proposed Combination Agreement. Messrs.         
Daltry, Stringer and Fitzhenry summarized the terms of the definitive           
Combination Agreement and the FLIR Board engaged in extensive discussions of    
the proposed Combination Agreement. The Board discussed again the strategic     
financial benefits to be derived from such a combination, including faster      
access to uncooled thermal imaging technology, the integration AGEMA's well     
established direct sales force throughout Europe, the access to other thermal   
imaging technologies, and the overall increased presence in the global thermal  
imaging marketplace at a time when competition is increasing. At the meeting,   
a representative of the investment banking firm of Ragen MacKenzie delivered    
and discussed its opinion that the terms of the Combination Agreement were      
fair from a financial point of view to the shareholders of FLIR. The            
representative presented material supporting Ragen MacKenzie's opinion to the   
Board, including: (1) an overview of the current financial status of AGEMA and  
FLIR, (2) an analysis of the value of AGEMA utilizing several methodologies,    
(3) historical and projected financial and market data on FLIR and AGEMA, (4)   
a listing of the proposed operating synergies expected to arise from the        
Combination, (5) an analysis of the Combination of the two companies, and (6)   
the Ragen MacKenzie's fairness opinion. After review and discussion of the      
fairness opinion and supporting materials as provided by Ragen MacKenzie and    
the draft of the Combination Agreement, the FLIR Board authorized management    
of FLIR to complete negotiations of the Combination Agreement, to make such     
changes to the agreement as FLIR management deemed necessary, to execute the    
Combination Agreement, to call a special meeting of FLIR shareholders for       
November 24, 1997 or such other date as determined by FLIR management to        
consider and vote on the proposal to approve the issuance of the FLIR Common    
Stock pursuant to the terms of the Combination Agreement, and to take all       
other actions as FLIR management deemed appropriate to finalize the             
transaction.                                                                    

Subsequent to September 23, 1997, the parties and their legal counsel       
engaged in additional discussions and negotiations in the course of finalizing  
the terms of the Combination Agreement and ancillary documents. The             
Combination Agreement was executed by the parties effective as of October 6,    
1997.                                                                           

RECOMMENDATIONS OF THE FLIR BOARD; FACTORS CONSIDERED                           

At the September 23, 1997 meeting, the FLIR Board approved the Combination  
and the Combination Agreement. The FLIR Board determined that the Issuance and  
the Combination are fair to and in the best interests of FLIR and its           
shareholders and recommends that FLIR shareholders vote FOR the Issuance. In    
reaching its conclusion, the FLIR Board considered, among other things, the     
following factors:                                                              

(1) The potential long-term benefits that could result from the         
combination of businesses of FLIR and AGEMA and their complementary         
strengths. The FLIR Board believes that the combination represents an       
opportunity for shareholders of FLIR to participate in the value of the     
improved technology, expertise and competitive posture of the combined FLIR 
and AGEMA and the complementary fit between products, production            
capability, engineering expertise, sales and distribution channels,         
management experience and resources.                                        

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(2) FLIR's accelerated growth of the Commercial Division. The FLIR Board
believes that the Company's strategic plan to accelerate penetration of the 
commercial market and to generate a greater percentage of total revenue     
from sales of its products to that market can be best achieved by combining 
operations with AGEMA, a company with established expertise in the design,  
manufacturing and marketing of industrial thermal imaging systems for the   
global commercial thermal imaging market.                                   

(3) The fairness opinion of Ragen MacKenzie. The FLIR Board took into   
account the opinion of Ragen MacKenzie that the Combination is fair from a  
financial point of view to FLIR's shareholders.                             

OPINION OF FLIR FINANCIAL ADVISOR                                               

Opinion of Ragen MacKenzie. Ragen MacKenzie has acted as financial advisor  
to FLIR in connection with the Combination. Pursuant to an engagement letter    
dated August 22, 1997 (the "Ragen MacKenzie Engagement Letter"), FLIR retained  
Ragen MacKenzie to furnish financial advisory and investment banking services   
with respect to a possible merger between FLIR and AGEMA and to render an       
opinion as to the fairness, from a financial point of view, to FLIR of the      
consideration to be paid in any proposed merger. The amount of consideration    
to be paid to AGEMA shareholders in the Combination was determined through      
negotiations between FLIR management and AGEMA management and not by Ragen      
MacKenzie.                                                                      

Ragen MacKenzie rendered its opinion on September 23, 1997 to the Board of  
Directors of FLIR to the effect that, as of such date and based upon and        
subject to the assumptions, limitations, procedures followed and                
qualifications set forth in such opinion, the consideration to be paid to       
Spectra pursuant to the Combination Agreement is fair, from a financial point   
of view to the shareholders of FLIR. FLIR shareholders should note that the     
opinion expressed by Ragen MacKenzie was provided for use by the Board of       
Directors of FLIR in its evaluation of the Combination.                         

THE FULL TEXT OF THE RAGEN MACKENZIE OPINION IS SET FORTH IN APPENDIX B TO  
THIS PROXY STATEMENT AND SHOULD BE READ CAREFULLY IN ITS ENTIRETY, INCLUDING    
WITHOUT LIMITATIONS THE DESCRIPTIONS OF THE PROCEDURES FOLLOWED ASSUMPTIONS     
MADE, OTHER MATTERS CONSIDERED AND LIMITATIONS OF THE REVIEW UNDERTAKEN IN      
ARRIVING AT SUCH OPINION. THE RAGEN MACKENZIE OPINION DOES NOT CONSTITUTE AN    
OPINION AS TO THE PRICE AT WHICH FLIR COMMON STOCK WILL ACTUALLY TRADE AT ANY   
TIME. THE RAGEN MACKENZIE OPINION ADDRESSES ONLY THE FAIRNESS TO THE            
SHAREHOLDERS OF FLIR OF THE CONSIDERATION BEING PAID TO THE AGEMA SHAREHOLDERS  
FROM A FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION AS TO   
HOW ANY SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING.                         

No restrictions or limitations were imposed on Ragen MacKenzie with respect 
to the investigations made or procedures followed by Ragen MacKenzie in         
rendering its opinion. In arriving at its opinion Ragen MacKenzie, among other  
things, (i) reviewed the most current draft of the Combination Agreement; (ii)  
reviewed certain other documents including the draft Proxy Statement relating   
to the Special Meeting of Shareholders of FLIR to be held in connection with    
the Combination Agreement to approve the Combination; (iii) reviewed the        
Annual Reports to Shareholders and the Annual Reports on Form 10-K for the      
years 1993 through 1996 and certain interim reports to shareholders and         
Quarterly Reports on Form 10-Q of FLIR; (iv) reviewed with the Management of    
FLIR its operations, historical financial performance, financial condition and  
future prospects; (v) reviewed certain financial results provided by AGEMA and  
the management of AGEMA and FLIR and certain other relevant financial and       
operating data of AGEMA and FLIR made available from the internal records of    
AGEMA and FLIR; (vi) reviewed certain financial analyses and forecasts for      
FLIR and AGEMA prepared by their respective managements; (vii) reviewed share   
price and trading volume for FLIR's shares from June 22, 1993 to September 12,  
1997; (viii) reviewed and discussed with FLIR and AGEMA management analyses     
and forecasts of certain operating efficiencies and financial synergies (the    
"Synergies") expected to be achieved as a result of the Combination; (ix)       
compared certain publicly available financial data of companies whose           
securities are publicly traded, which Ragen MacKenzie deemed generally          
comparable to the business of AGEMA, to similar data for AGEMA; (x) reviewed    
the financial terms, to the extent publicly available, of certain other         
business combinations that Ragen MacKenzie deemed generally relevant; and (xi)  
performed and/or considered                                                     

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such other information, financial studies, analyses, inquiries,                 
investigations, market and economic criteria as Ragen MacKenzie deemed          
appropriate.                                                                    

In arriving at the Ragen MacKenzie Opinion, Ragen MacKenzie did not         
independently verify any of the information reviewed by it and assumed and      
relied upon the accuracy and completeness of all of the financial and other     
information reviewed by it. Ragen MacKenzie did not conduct a physical          
inspection of the properties or facilities, nor did it make or obtain an        
independent evaluation or appraisal of the properties or assets and             
liabilities of FLIR or AGEMA. Ragen MacKenzie relied upon the estimates of the  
respective management teams of FLIR and AGEMA of the operating savings and      
other benefits and cost reductions and synergies achievable as a result of the  
Combination. Ragen MacKenzie also assumed that the financial forecasts          
relating to the prospects of FLIR and AGEMA were reasonably prepared on bases   
reflecting the best currently available estimates and judgments of the          
managements of FLIR and AGEMA as to the likely future financial performance of  
FLIR and AGEMA, respectively. Ragen MacKenzie expressed no opinion with         
respect to such forecasts or the assumptions on which they were based. Ragen    
MacKenzie also assumed that the Combination would be accounted for as a         
purchase under generally accepted accounting principals.                        

The following is a brief summary of the analyses performed by Ragen         
MacKenzie in connection with the Ragen MacKenzie Opinion and included in its    
presentations to the FLIR Board. All analyses discussed below, unless           
otherwise indicated, exclude Synergies resulting from the Combination           
estimated by the managements of FLIR and AGEMA.                                 

Discounted Cash Flow Analysis. Using discounted cash flow analysis, Ragen   
MacKenzie estimated the present value of the future streams of after-tax cash   
flows that AGEMA could produce over the years 1998-2003 on a stand-alone        
basis, under various circumstances. The analysis assumed that AGEMA performed   
in accordance with the earnings forecasts of AGEMA's management for the full    
year 1997 and for the projected years 1998 and 1999. Assumptions for the        
outlying years were developed by Ragen MacKenzie based on discussions held      
with FLIR and AGEMA management. The AGEMA terminal values were calculated       
using the perpetuity method projecting a perpetual stream of AGEMA's after-tax  
cash flows (following the planning period) at real growth rates ranging from    
0.0% to 2.0%. The cash flow streams and terminal values were then discounted    
to present values using different discount rates from 12% to 16%. Based on      
this discounted cash flow analysis, Ragen MacKenzie developed a reference       
range of between $93.0 million and $152.3 million and a midpoint (based on a    
14.0% discount rate and a 1.0% real growth rate) of $115.9 million.             

Comparable Company Analysis. Using publicly available information, Ragen    
MacKenzie compared selected financial information for AGEMA with similar        
information for selected publicly-traded companies that Ragen MacKenzie deemed  
comparable for the purposes of its analysis to AGEMA. Such comparable           
companies included Cognex Corporation, FLIR Systems, Inc., Key Technology,      
Inc., Metrika Systems Corporation, Perceptron, Inc., Robotic Vision Systems,    
ThermoSpectra Corporation and Zygo Corporation. Excluding high and low data     
points, this analysis showed acquisition prices paid that resulted in an        
average (i) 2.2 multiple of LTM Sales; (ii) 15.4 multiple of LTM EBITDA; (iii)  
21.0 multiple of LTM EBIT; (iv) 31.7 multiple of LTM Net Income; (v) 28.9       
multiple of 1997 Net Income; (vi) 16.8 multiple of 1998 Net Income; and (vii)   
6.2 multiple of Tangible Book Value. Ragen MacKenzie developed a reference      
range of between $79.0 million and $101.0 million for the aggregate value and   
$72.0 million and $94.0 million for the equity value of AGEMA. The reference    
range established based on this analysis does not factor in the control         
premium associated with an acquisition. The AGEMA equity value of $77.8         
million (or aggregate valuation of $84.8 million) represents a premium of 8.1%  
to a discount of 17.2% to this range.                                           

Comparable Transaction Analysis. Ragen MacKenzie analyzed recent merger and 
acquisition transactions it deemed relevant to the analysis of the proposed     
transaction. In the absence of directly comparable transactions, Ragen          
MacKenzie emphasized transactions in comparable industries, comparable          
transaction dynamics and comparable strategic direction. For this analysis,     
Ragen MacKenzie reviewed five transactions or pending transactions including:   
Congnex Corp./Acumen, Inc.; Cognex Corp./ISYS, Inc.; Protocol Systems,          
Inc./Pryon Corp.; FEI Company/Phillips Electro Optics Business; and Zygo        
Corp/Digital Instruments, Inc. Excluding high                                   

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and low data points, this analysis showed acquisition prices paid that          
resulted in an average (i) 2.7 multiple of Sales; (ii) 17.2 multiple of LTM     
EBITDA; (iii) 29.5 multiple of LTM EBIT; (iv) 27.6 multiple of historic Net     
Income; and a (v) 5.8 multiple of Book Value. Based on this analysis, Ragen     
MacKenzie developed a reference range of between $76.5 million and $106.0       
million for AGEMA common stock.                                                 

Contribution Analysis. Ragen MacKenzie looked at the relative contribution  
to the combined entity of both companies to Sales, EBITDA, EBIT, Net Income     
and Book Value for the calendar year 1996; the six months ended June 30th and   
projected results for calendar years 1997 and 1998. Ragen Mackenzie discounted  
the analysis of the 1996 results because, after discussions with managements    
of both FLIR and AGEMA, it concluded that the uncooled product introduction     
delay that occurred in 1996 led to a significant loss at AGEMA and benefited    
FLIR who had released a competitive product, the Prism. Based on the closing    
price of FLIR common stock one week before the announcement of the Proposed     
Transaction of $18.69 and a likely maximum of $7.0 million of net debt being    
assumed by FLIR, AGEMA shareholders will be receiving a maximum of 39.8% of     
the aggregate value of the combined company and 41.5% of the equity value.      
Excluding the impact of Synergies, AGEMA is contributing: (i) 15.7% of          
combined shareholders' equity; (ii) 23.8% of combined total assets; 36.8% and   
37.5% of 1997 and 1998 proforma combined sales; and (iii) 25.2% and 38.0% of    
1997 and 1998 combined proforma pre-tax income.                                 

Proforma Merger Analysis. Ragen MacKenzie analyzed the proforma financial   
projections for 1997 and 1998 prepared by FLIR management. The analysis         
concluded that the acquisition would add $0.06 (4.1%) per share to FLIR's EPS   
for 1998 and $0.29 (14.9%) to FLIR's EPS in 1999. These estimates include FLIR  
Management's assessment of the likely time scale of the realization of          
Synergies as evidenced in projections prepared by FLIR Management. Ragen        
MacKenzie noted that, as the transaction will be accounted for under the        
purchase method and as it is expected to close in late 1997, the impact of the  
transaction on FLIR's reported earnings for 1997 will be insignificant with     
the exception of the proposed write-off of goodwill, in-process R&D and         
merger-related costs.                                                           

Operating Synergies. Ragen MacKenzie also analyzed a number of projected    
synergies that could be derived by a combination of FLIR and AGEMA. These       
synergies constitute a very important aspect of this transaction. The           
realization of the financial benefits of these synergies will depend upon       
among other things: the implementation of the post-merger business plan and     
continuation of prevailing trends and conditions in the company's end-markets.  

The summary set forth above does not purport to be a complete description of
the analyses performed by Ragen MacKenzie, but describes, in summary form, the  
principle elements of the analyses made by Ragen MacKenzie in arriving at the   
Ragen MacKenzie Opinion. The preparation of a fairness opinion involves         
various determinations as to the most appropriate and relevant methods of       
financial analysis and the application of these methods to the particular       
circumstances and, therefore, such an opinion is not readily summarized. Each   
of the analyses was performed by Ragen MacKenzie to provide a different         
perspective on the transaction and contribute to the total mix of information   
available to the FLIR Board. Ragen MacKenzie did not form a conclusion as to    
whether any one of the analyses, considered in isolation, supported or failed   
to support an opinion as to the fairness from a financial point of view of the  
Combination. Instead, Ragen MacKenzie, in reaching its conclusion, considered   
the results of the analyses taken as a whole. Ragen MacKenzie's conclusion      
involved significant elements of judgment and qualitative analyses as well as   
financial and quantitative analyses. Ragen MacKenzie did not place particular   
emphasis or weighting on any individual factor, but instead concluded that its  
analysis taken as a whole supported its opinion. Accordingly, notwithstanding   
the separate factors summarized above, Ragen MacKenzie believes that its        
analyses must be considered as a whole and that selecting portions of its       
analysis and the factors it considered, without considering all analyses and    
factors, could create an incomplete or misleading view of the evaluation        
process underlying its opinion. In performing its analyses, Ragen MacKenzie     
made numerous assumptions with respect to industry performance, general         
business, financial economic, foreign currency and market conditions and other  
matters, many of which are beyond the control of FLIR or AGEMA management.      
Furthermore, events occurring after the date of the Ragen MacKenzie Opinion     
may materially affect the assumptions used in preparing the Ragen MacKenzie     
Opinion and accordingly the                                                     

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Ragen MacKenzie Opinion is necessarily based upon market, economic, and other   
conditions that exist and can be evaluated as of the date of the opinion, and   
on information available to Ragen MacKenzie as of such date. In addition,       
analyses relating to the value of the businesses or securities do not purport   
to be appraisals, or to reflect the prices at which such businesses or          
securities can actually be sold. Analyses based on future results are not       
necessarily indicative of actual future results, which may be significantly     
more or less favorable than suggested by such analyses.                         

Ragen MacKenzie, as part of its investment banking business, is engaged in  
the valuation of businesses and their securities in connection with mergers     
and acquisitions, negotiated underwritings, secondary distributions of          
securities, private placements and valuations. Ragen MacKenzie makes a market   
in the securities of FLIR and provides research coverage on FLIR. In the        
ordinary course of business, Ragen MacKenzie may actively trade the securities  
of FLIR for its own account and for the accounts of customers and,              
accordingly, may at any time hold a long or short position in such securities.  

Pursuant to the Ragen MacKenzie Engagement Letter, FLIR has agreed to pay   
Ragen MacKenzie, upon consummation of the Combination, as defined in the Ragen  
MacKenzie Engagement Letter a transaction fee (the "Transaction Fee") of        
$175,000. FLIR has also agreed to reimburse Ragen MacKenzie for its reasonable  
out-of-pocket expenses and to indemnify Ragen MacKenzie against certain         
liabilities relating to or arising out of services performed by Ragen           
MacKenzie as financial advisor to FLIR. The terms of the Ragen MacKenzie        
Engagement Letter, which are customary in transactions of this nature, were     
negotiated at arm's length between FLIR and Ragen MacKenzie, and the FLIR       
Board of Directors was aware of such arrangement at the time of its approval    
of the Combination Agreement.                                                   

BUSINESS OF FLIR AND THE AGEMA COMPANIES PENDING THE COMBINATION                

Pursuant to the Combination Agreement, the parties have agreed that, prior  
to the Effective Time or earlier termination of the Combination Agreement,      
except as contemplated by the Combination Agreement, FLIR and the AGEMA         
Companies will conduct their operations in compliance with applicable laws and  
according to its ordinary course of business consistent with past practice,     
not enter into any material transaction other than in the ordinary course of    
its business consistent with past practice, seek to preserve intact its assets  
and current business organization, keep available the services of its current   
officers and employees and preserve its relationship with customers, suppliers  
and others. The parties have also agreed that prior to the Effective Time,      
unless the other party agrees in writing or as otherwise permitted by the       
Combination Agreement, neither FLIR nor AGEMA will:                             

(i) issue, deliver, sell, dispose or, pledge or otherwise encumber, or  
authorize or propose the issuance, sale, disposition, pledge or other       
encumbrance of, any additional shares of its capital stock or any           
securities or rights convertible into, exchangeable for or evidencing the   
right to subscribe for any shares of its capital stock, or any other        
securities in respect of, in lieu of or in substitution for any shares of   
its capital stock, provided that FLIR shall not be prohibited from issuing  
shares of Common Stock upon the exercise of outstanding stock options nor   
from granting additional stock options under existing stock option plans in 
amounts consistent with past practice;                                      

(ii) redeem, purchase or otherwise acquire, or propose to redeem,       
purchase or otherwise acquire, any of its outstanding securities;           

(iii) split, combine, subdivide or reclassify any shares of its capital 
stock or declare, set aside for payment or pay any dividend, or otherwise   
make any payments to shareholders in their capacity as such;                

 (iv) (a) grant any increases in the compensation of any of its directors,
officers or key employees, (b) pay or agree to pay any pension, retirement  
allowance or other material employee benefit not required or contemplated   
by any of the existing benefit, severance, pension or employment plans,     
agreements or arrangements to any such director, officer or key employee,   
whether past or present, (c) enter into any new or amend any existing       
employment agreement or severance agreement with any such director, officer 
or                                                                          

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key employee, or (d) except as may be required to comply with applicable  
law, amend any existing, or become obligated under any new, employee plan 
or benefit arrangement;                                                   

 (v) dispose of, or grant liens on, any of its assets outside the ordinary
course of its business consistent with past practice, or adopt a plan of    
complete or partial liquidation, dissolution, merger, consolidation,        
restructuring, recapitalization or other reorganization;                    

(vi) make any acquisition, by means of merger, consolidation or         
otherwise, (a) of any direct or indirect ownership interest in or assets    
comprising any business enterprise or operation or (b) except in the        
ordinary course of business and consistent with past practice, of any other 
assets;                                                                     

(vii) adopt any amendments to the articles of incorporation, bylaws or  
any other organizational documents;                                         

(viii) other than borrowings under existing credit facilities, renewals 
thereof or other borrowings in the ordinary course, incur any indebtedness  
for borrowed money or guarantee any such indebtedness, or, except in the    
ordinary course of business and consistent with past practice, make any     
loans, advances or capital contributions to, or investments in, any other   
person;                                                                     

(ix) engage in the conduct of any business the nature of which is       
different from the business such entity is currently engaged in;            

(x) enter into any agreement providing for acceleration of payment or   
performance or other consequence as a result of a change of control;        

(xi) enter into any contract, arrangement or understanding requiring the
purchase of equipment, materials, supplies or services over a period        
greater than 12 months, except in the ordinary course of business for the   
distribution of products or the production of inventory; or                 

(xii) authorize or announce an intention to do any of the foregoing, or 
enter into any contract, agreement, commitment or arrangement, to do any of 
the foregoing.                                                              

NO SOLICITATION OF ACQUISITION PROPOSALS                                        

Under the Combination Agreement, FLIR, the Spectra Companies and the AGEMA  
Companies have agreed that, prior to the Closing or earlier termination of the  
Combination Agreement, neither FLIR, the Spectra Companies nor the AGEMA        
Companies nor any of their respective officers, employees, representatives,     
agents or affiliates will, directly or indirectly, encourage, solicit or        
engage in discussions or negotiations with any third party concerning any       
merger, consolidation, share exchange or similar transaction involving FLIR or  
any of the AGEMA Companies or any purchase of all or a significant portion of   
the assets of or equity interest in FLIR or any of the AGEMA Companies, or any  
other transaction that would involve the transfer or potential transfer of      
control of FLIR or any of the AGEMA Companies.                                  

MANAGEMENT AND OPERATIONS OF FLIR AND AGEMA AFTER THE COMBINATION               

At the Effective Time, the FLIR Board will increase the size of the Board   
from six to nine members and appoint four designees of Spectra to the FLIR      
Board to serve until the next Annual Meeting of FLIR shareholders. Thereafter,  
FLIR has agreed to use its reasonable best efforts to cause the number of       
designees of Spectra who are serving on the FLIR Board to be maintained at the  
number described below: (i) three (3) designees if on the date of mailing of    
the notice for the annual shareholder meeting where such directors shall be up  
for election and on the date the election is held, the Spectra Companies hold   
of record and beneficially thirty percent (30%) or more of the then issued and  
outstanding shares of Common Stock, (ii) two (2) designees if on the date of    
mailing of the notice for the annual shareholder meeting where such directors   
shall be up for election and on the date the election is held, the Spectra      
Companies hold of record and beneficially less than thirty percent (30%) but    
more than or equal to twenty percent (20%) of the then issued and outstanding   
shares of Common Stock, and (iii) one (1) designee if on the date of mailing    
of the notice for the annual shareholder meeting where                          

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such directors shall be up for election and on the date the election is held,   
the Spectra Companies hold of record and beneficially less than twenty percent  
(20)%) but more than or equal to ten (10%) percent of the then issued and       
outstanding shares of FLIR Common Stock. If at some point in the future the     
Spectra Companies hold of record and beneficially less than ten percent (10%)   
of the then issued and outstanding shares of Common Stock, the Spectra          
Companies shall no longer be entitled to the rights described above. While he   
remains employed by FLIR as Vice Chairman, FLIR will use its reasonable best    
efforts to cause Leif Bergstrom to be elected to the FLIR Board.                

The officers of the AGEMA Companies at the Effective Time will continue to  
serve in such positions until their successors have been duly elected or        
appointed and qualified or until their earlier death, resignation or removal.   
After the Combination, AGEMA will be a wholly owned subsidiary of FLIR. AGEMA   
will operate as one of FLIR's business units, and FLIR currently intends to     
maintain AGEMA's corporate headquarters in Sweden. After the Combination,       
AGEMA will have access to resources generally available to FLIR's other         
business units, will participate in appropriate activities with other FLIR      
business units and will operate under the direction and guidance of FLIR's      
senior management and the FLIR and AGEMA Boards.                                

REPRESENTATIONS AND WARRANTIES                                                  

The Combination Agreement contains certain customary representations and    
warranties of the parties thereto, relating, among other things, to (1)         
corporate organization and qualification, (2) capital structure, (3) ownership  
of subsidiaries, (4) authorization, execution, delivery, performance and        
enforceability of the Combination Agreement and the Combination Agreement's     
noncontravention of agreements, laws and charter documents and required         
consents and approvals, (5) the accuracy of financial statements, (6) the       
absence of certain changes and events, (7) litigation, (8) the accuracy of      
information supplied for inclusion in this Proxy Statement, (9) employee        
benefit plans, (10) brokers and financial advisors, (11) compliance with        
permits, applicable laws and agreements, (12) the absence of undisclosed        
liabilities, (13) tax matters, (14) the absence of defaults on agreements,      
(15) intellectual property, (16) the absence of other negotiations, (17) title  
to assets, (18) environmental matters, (19) the absence of illegal payments     
and (20) AGEMA's business and corporate records.                                

CONDITIONS; WAIVERS                                                             

Conditions to Each Party's Obligations to Effect the Combination. The       
respective obligations of FLIR and the Spectra Companies to effect the          
Combination are subject to the satisfaction or waiver of certain conditions,    
including the following: (a) the representations and warranties of the other    
party contained in the Combination Agreement shall be true in all material      
respects when made and on and as of the Effective Time as if made on and as of  
such date, (b) the other party shall have performed or complied in all          
material respects with all agreements and conditions contained in the           
Combination Agreement required to be performed or complied with on or prior to  
the Effective Time, (c) there shall have been no changes since the date of the  
Combination Agreement in the business, operations, prospects, condition         
(financial or otherwise), properties, assets or liabilities of the other        
party, except changes contemplated by the Combination Agreement and changes in  
the ordinary course of business which would not be considered to have, either   
individually or in the aggregate, a material adverse effect (d) all action      
necessary under applicable law and regulations and the organizational           
documents of the respective parties to approve the Combination, including the   
approval of the Issuance by FLIR's shareholders, shall have been taken by       
FLIR, the Spectra Companies and the AGEMA Companies, (e) no judgment, order,    
injunction, ruling or decree shall be outstanding and no claim, action,         
proceeding or government investigation shall be pending or threatened which     
would restrain, prohibit, invalidate or attempt to restrain or enjoin or        
materially adversely affect the Combination and (f) all permits, consents,      
authorizations, approvals, registrations, qualifications, designations and      
declarations necessary for the consummation of the Combination shall have been  
obtained and, to the extent required to be submitted prior to the Effective     
Time, all filings and notices required to be submitted shall have been          
submitted.                                                                      

Conditions to the Obligations of FLIR. The obligations of FLIR to effect the
Combination are subject to the satisfaction or waiver of the following          
additional conditions: (a) except for certain agreements identified in          

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the Combination Agreement, all agreements between or among any of the Spectra   
Companies or any of their affiliates (other than the AGEMA Companies), on the   
one hand, and the AGEMA Companies, on the other hand, including, but not        
limited to, all tax sharing or tax allocation agreements, all cash pooling      
agreements and all forward rate agreements, shall have been terminated, and     
there will be no liability to any party under any such terminated agreements    
following the Effective Time, (b) except for certain liabilities, indebtedness  
and liens described in the Combination Agreement, all liens on the assets of    
the AGEMA Companies shall be terminated prior to Closing, and at Closing none   
of the AGEMA Companies shall have any other indebtedness and (c) FLIR shall     
have received evidence satisfactory to FLIR that the minimum registered share   
capital of AGEMA has been increased to SEK100,000 in satisfaction of the        
requirements under Swedish law.                                                 

Conditions to the Obligations of the Spectra Companies. The obligations of  
the Spectra Companies to effect the Combination are subject to the              
satisfaction or waiver of the following additional conditions: (a) the FLIR     
Employment Agreements (as defined below) shall have been amended in a form      
satisfactory to the Spectra Companies so that the Combination does not          
constitute a Change of Control (as defined therein), provided, however, that    
if the Spectra Companies and their Affiliates' ownership of Common Stock        
exceeds forty-five percent (45%) of the total issued and outstanding Common     
Stock at any time as a result of purchases of Common Stock by the Spectra       
Companies or their Affiliates, such amendment by its terms shall become         
immediately and automatically null and void, (b) the Board of Directors of      
FLIR shall have adopted resolutions increasing the size of such Board from six  
(6) to nine (9) members and electing to fill vacancies created thereby with     
the nominees of Spectra previously provided to the Board, such actions to be    
effective upon the Closing.                                                     

TERMINATION; AMENDMENT                                                          

The Combination Agreement may be terminated at any time prior to the Closing
Date by mutual consent of the Board of Directors of FLIR and the Board of       
Directors of Spectra. The Combination Agreement also may be terminated: (i) by  
either FLIR or Spectra if the Combination has not been consummated on or        
before March 31, 1998 (provided the terminating party is not otherwise in       
material breach of its representations, warranties, covenants or agreements     
under the Combination Agreement); (ii) by Spectra if any of the conditions to   
Spectra's obligations described above have not been met or waived by Spectra    
at such time as the condition is no longer capable of satisfaction (provided    
that Spectra is not otherwise in material breach of its representations,        
warranties, covenants or agreements under the Combination Agreement, which      
breach is a direct and proximate cause of the failed condition); (iii) by FLIR  
if any of the conditions to its obligations described above have not been met   
or waived by FLIR at such time as the condition is no longer capable of         
satisfaction, including the failure to obtain any required approval of its      
shareholders at a duly held meeting of shareholders or at an adjournment        
thereof (provided FLIR is not otherwise in material breach of its               
representations, warranties, covenants or agreements under the Combination      
Agreement, which breach is the direct and proximate cause of the failed         
condition); (iv) by either of FLIR or Spectra if there has been a material      
breach on the part of the other party of any representation, warranty,          
covenant or agreement set forth in the Combination Agreement, which breach has  
not been cured within fifteen business days following receipt by the breaching  
party of written notice of such breach; (v) by either of FLIR or Spectra upon   
written notice to the other party if any governmental authority of competent    
jurisdiction shall have issued a final permanent order enjoining or otherwise   
prohibiting the consummation of the transactions contemplated by the            
Combination Agreement and in any such case the time for appeal or petition for  
reconsideration of such order shall have expired without such appeal or         
petition being granted. In the event of termination of the Combination          
Agreement by either FLIR or Spectra as provided in the preceding sentence for   
any reason other than a material breach of any representation, warranty,        
covenant or agreement by the other party, the Combination Agreement shall       
become void and there shall be no liability on the part of either FLIR or       
Spectra.                                                                        

The Combination Agreement may be amended at any time, but only by written   
instrument signed on behalf of each of the parties to the Combination           
Agreement. At any time prior to the Closing Date, the parties to the            
Combination Agreement may: (i) extend the time for performance of any of the    
obligations of the parties;                                                     

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(ii) waive any inaccuracies in the representations and warranties of any other  
party contained in the Combination Agreement or in any document delivered       
pursuant thereto by any other party; and (iii) waive compliance with any of     
the agreements or conditions contained in the Combination Agreement. Any        
agreement on the part of any party to the Combination Agreement of any such     
extension or waiver shall be valid only if set forth in an instrument in        
writing signed on behalf of such party.                                         

INDEMNIFICATION                                                                 

FLIR has agreed to indemnify and hold harmless the Spectra Companies, and   
the Spectra Companies have agreed to indemnify and hold harmless FLIR and the   
AGEMA Companies, from and against all losses, damages, liabilities, costs, and  
expenses (including reasonable attorney fees) ("Indemnifiable Damages")         
incurred by one party by reason of or arising out of or in connection with the  
breach or inaccuracy of any representation or warranty of the other party       
contained in the Combination Agreement or the failure of the other party to     
perform any agreement or covenant required by the Combination Agreement to be   
performed by it. In addition, FLIR and the Spectra Companies have each agreed   
to indemnify and hold the other harmless for any Indemnifiable Damages          
incurred by FLIR or the AGEMA Companies in an amount in excess of $90,000 in    
connection with certain litigation.                                             

AMENDMENT OF FLIR EMPLOYMENT AGREEMENTS                                         

On May 5, 1997, FLIR entered into employment agreements (the "FLIR          
Employment Agreements") with certain of its executive officers, including       
Robert P. Daltry, J. Kenneth Stringer III, James A. Fitzhenry, William N.       
Martin, Steven R. Palmquist and J. Mark Samper. Among other things, the FLIR    
Employment Agreements provide the employees with certain benefits in the event  
of a "change of control" of FLIR. The consummation of the Combination would     
constitute a "change of control" of FLIR pursuant to the existing terms of the  
FLIR Employment Agreements. However, under the terms of the Combination         
Agreement, FLIR and those certain executive officers have agreed to amend the   
FLIR Employment Agreements prior to the Closing Date to provide that the        
consummation of the Combination will not constitute a "change of control" of    
FLIR for purposes of the FLIR Employment Agreements. This amendment to the      
FLIR Employment Agreements will terminate and become null and void upon the     
acquisition by Spectra and/or its affiliates of any shares of Common Stock      
(other than the FLIR Stock acquired in the Combination) if at the time of such  
acquisition Spectra and its affiliates would beneficially own more than 45      
percent of the issued and outstanding shares of FLIR's Common Stock.            

RESALE OF FLIR STOCK ISSUED IN THE COMBINATION; REGISTRATION RIGHTS             

The FLIR Stock to be issued in the Combination will not be registered under 
the Securities Act. Accordingly, the FLIR Stock to be issued in the             
Combination will constitute "restricted securities" within the meaning of Rule  
144 under the Securities Act which may not be sold except pursuant to an        
effective registration statement under the Securities Act covering such         
shares, or in compliance with Rule 144 promulgated under the Securities Act or  
another applicable exemption from the registration requirements of the          
Securities Act.                                                                 

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

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Effective as of the Closing Date, FLIR and Spectra will enter into a        
Registration Rights Agreement that will grant Spectra certain registration      
rights. The Registration Rights Agreement will provide that if FLIR proposes    
to register any of its securities under the Securities Act, whether for its     
own account of otherwise, Spectra will be entitled to notice of the             
registration and inclusion of such shares therein, subject to certain           
limitations. In addition, at any time after twelve months from the Closing      
Date, such holders may require FLIR to file a registration statement covering   
such shares, and FLIR will be obligated to use its best efforts to effect such  
registration, subject to certain conditions and limitations. FLIR will be       
obligated to effect only two such demand registrations within any twelve month  
period. All expenses, other than underwriting discounts and commissions,        
incurred in connection with a company registration and with respect to the      
first demand registration within any twelve month period, including all         
registration, filing, qualification, printing and accounting fees, and the      
reasonable fees and disbursements of counsel for the selling stockholders and   
counsel for FLIR are required to be paid by FLIR. All such fees and expenses    
incurred in connection with a second demand registration within any twelve      
month period are required to be paid by the shareholders making such request.   
With respect to any registration effected pursuant to the registration rights   
of such holders, FLIR is required to indemnify such holders against certain     
liabilities, including liabilities under the Act.                               

RESTRICTIONS ON PURCHASES OF FLIR COMMON STOCK                                  

During the twelve month period following the Closing Date, the Spectra      
Companies have agreed that none of the Spectra Companies nor any of their       
affiliates will acquire or agree to acquire any interest in any Common Stock,   
other than the acquisition of Common Stock in connection with (i) a dividend    
on, subdivision of or other pro rata distribution in respect of, any security   
issued by FLIR, (ii) a merger, consolidation or other transaction, or (iii) an  
offering of Common Stock by FLIR to the extent necessary to allow the Spectra   
Companies and their affiliates to maintain the same percentage ownership in     
FLIR as they had immediately after the Closing Date.                            

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS                                       

It is expected that the AGEMA USA Acquisition will constitute a tax-free    
reorganization for federal income tax purposes. The AGEMA Sweden Acquisition,   
the AGEMA UK Acquisition and the AGEMA Canada Acquisition will be taxable       
transactions to FLIR for federal income tax purposes to the extent of the cash  
consideration paid by FLIR in such acquisitions. Shareholders of FLIR will not  
recognize any gain or loss as a result of the Combination.                      

ACCOUNTING TREATMENT                                                            

It is expected that the Combination will be treated as a purchase for       
accounting and financial reporting purposes.                                    

REGULATORY REQUIREMENTS                                                         

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended  
(the "HSR Act"), and the rules promulgated thereunder by the Federal Trade      
Commission (the "FTC"), the Combination may not be consummated until            
notifications have been given and certain information has been furnished to     
the FTC and the Antitrust Division of the Department of Justice (the            
"Department of Justice") and specified waiting period requirements have been    
satisfied. FLIR and Spectra each filed its respective notification and report   
forms under the HSR Act on October 9, 1997. The parties were subsequently       
notified that the Combination had been assigned to the Department of Justice    
for review. On October 24, 1997, the parties received an informal request for   
additional information from the Department of Justice. The parties responded    
to the request promptly thereafter. On November 7, 1997, the parties received   
a formal request from the Department of Justice for additional information and  
documents. The effect of this request is to extend the waiting period during    
which the Combination may not be consummated for 20 days from the date of       
receipt by the Justice Department of all materials requested by it. The         
parties have submitted additional information and documents in response to the  

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request of the Department of Justice and intend to continue to cooperate fully  
with the Department of Justice's review of the Combination.                     

Federal and state antitrust enforcement authorities review the legality of  
transactions such as the Combination. At any time before or after the           
Effective Time, and notwithstanding that the HSR Act waiting period has         
expired, any such agency could take any action under antitrust laws that it     
deems necessary or desirable in the public interest. Such action could include  
seeking to enjoin the consummation of the Combination or seeking divestiture    
of businesses of FLIR or Spectra acquired as a result of the Combination.       
Under certain circumstances, private parties may also bring legal actions       
under the antitrust laws.                                                       

Based on information available to them, FLIR and Spectra believe that the   
Combination will be effected in compliance with federal and state antitrust     
laws. However, there can be no assurance that a challenge to the consummation   
of the Combination on antitrust grounds will not be made or that, if such a     
challenge were made, FLIR and Spectra would prevail or would not be required    
to accept certain conditions (possibly including certain divestitures) in       
order to consummate the Combination. Under the Combination Agreement, a         
condition to consummation of the Combination for each of FLIR and Spectra is    
that all consents and approvals, including the expiration or termination of     
any applicable waiting period requirement, legally required for consummation    
of the Combination shall have been obtained and no temporary restraining        
order, preliminary or permanent injunction, or other order or decree which      
prevents the consummation of the Combination shall have been issued and remain  
in effect.                                                                      

EXPENSES AND FEES                                                               

FLIR will pay all expenses incurred by it in connection with the            
Combination. AGEMA will pay all expenses incurred by the AGEMA Companies and    
the Spectra Companies in connection with the Combination, except for any fees,  
commissions and expenses of any broker, finder or investment banker engaged by  
AGEMA or the Spectra Companies, which shall be paid by Spectra.                 

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UNAUDITED PRO FORMA COMBINED CONDENSED  
FINANCIAL STATEMENTS  

The following Unaudited Pro Forma Condensed Combined Financial Statements of
Operations and Balance Sheet give effect to the Combination on a purchase       
basis of accounting. These Unaudited Pro Forma Condensed Combined Financial     
Statements have been prepared from the historical consolidated financial        
statements of FLIR and the historical combined financial statements of AGEMA    
and should be read in conjunction therewith. The historical consolidated        
financial statements of FLIR and the historical combined financial statements   
of AGEMA are contained in this Proxy Statement. See "FINANCIAL STATEMENTS."     

The Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 1997
gives effect to the Combination as if it occurred on that date. The Unaudited   
Pro Forma Condensed Combined Statement of Operations for the year ended         
December 31, 1996 and the six months ended June 30, 1997, gives effect to the   
Combination as if it occurred at the beginning of the periods presented by      
combining the financial statements of FLIR and AGEMA and giving effect for      
applying the purchase method of accounting for the Combination. Under purchase  
accounting the purchase price will be allocated to assets acquired and          
liabilities assumed based on their estimated fair values. The adjustments       
included in the unaudited pro forma condensed combined financial statements     
represent a preliminary determination of these adjustments based upon           
available information. There is no assurance that the actual adjustments will   
not differ significantly from the pro forma adjustments reflected in the pro    
forma information. This pro forma condensed information is not necessarily      
indicative of actual or future operating results or financial position that     
would have occurred or will occur upon the consummation of the Combination.     

The Unaudited Pro Forma Condensed Combined Statement of Operations included 
herein does not reflect (1) expected operating savings which management         
believes are achievable by the end of 1998 and (2) a charge of approximately    
$40.0 million representing the write-off of acquired in process research and    
development, costs related to the potential restructuring of FLIR's post-       
Combination operations and write-off of inventory related to duplicate FLIR's   
commercial products.                                                            

The AGEMA Balance Sheet at June 30, 1997 has been translated from Swedish   
Krone at an exchange rate of 7.7345 Swedish Krone to the U.S. Dollar which      
represents the noon buying rate in New York City for cable transfers in         
Swedish Krone as certified for customs purposes by the Federal Reserve Bank of  
New York as of June 30, 1997. The AGEMA Statements of Operations have been      
translated based upon an average rate for the periods presented. The average    
rates are based upon the average of the exchange rates on the last day of each  
month during the periods indicated. The average based upon the above for the    
six months ended June 30, 1997 and the year ended December 31, 1996 was 7.6006  
and 6.7099, respectively.                                                       

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1997 
(IN THOUSANDS)

                                                                [Download Table]

                                     HISTORICAL           PRO FORMA            
                                   ----------------  ----------------------    
                                    FLIR     AGEMA   ADJUSTMENTS   COMBINED    
                                   -------  -------  -----------   --------    
                                                                               
ASSETS:                                                                        
Current assets:                                                                
 Cash and cash equivalents........ $ 1,428  $ 3,210    $    --     $  4,638    
 Accounts receivable..............  35,641   11,321       (298)(g)   46,664    
 Account receivable from related                                               
  parties.........................      --      161         --          161    
 Inventories......................  33,854    9,757         --       43,611    
 Prepaid expenses.................   1,318    1,117         --        2,435    
                                   -------  -------    -------     --------    
  Total current assets............  72,241   25,566       (298)      97,509    
Property and equipment............   8,904    3,747         --       12,651    
Trademarks........................      --       --      2,655 (a)    2,655    
Intangible assets.................      --       --     (2,655)(a)             
                                                       (30,162)(b)             
                                                        (1,000)(c)             
                                                        55,771 (d)             
                                                       (10,606)(e)             
                                                           850 (f)   12,198 (h)
In-process research and                                                        
 development......................      --       --     30,162 (b)   30,162    
Software development costs........   1,008       --         --        1,008    
Deferred income taxes.............   2,200      478         61 (g)    2,739    
Other assets......................     817      114         --          931    
                                   -------  -------    -------     --------    
                                   $85,170  $29,905    $44,778     $159,853    
                                   =======  =======    =======     ========    
LIABILITIES AND SHAREHOLDERS'                                                  
 EQUITY:                                                                       
Current Liabilities:                                                           
 Notes payable.................... $13,143  $   730    $    --     $ 13,873    
 Accounts payable.................   7,652    2,434         --       10,086    
 Accounts payable to related                                                   
  parties.........................     703    6,379     (1,000)(c)    6,082    
 Accrued payroll and other                                                     
  liabilities.....................   2,936    5,370        850 (f)    9,156    
 Accrued income taxes.............   1,383      141         --        1,524    
 Current portion of long-term                                                  
  debt............................   1,398       --         --        1,398    
                                   -------  -------    -------     --------    
  Total current liabilities.......  27,215   15,054       (150)      42,119    
Long-term debt....................   5,501                  --        5,501    
Accrued pension liability.........      --    4,074        (80)(g)    3,994    
Deferred income taxes.............      --      171         --          171    
Commitments and contingencies.....      --       --         --           --    
Shareholders' equity:                                                          
 Preferred stock..................      --       --         --           --    
 Common stock.....................      55    1,026         42 (d)             
                                                        (1,026)(e)       97    
 Additional paid-in capital.......  42,646    8,922     55,729 (d)             
                                                        (8,922)(e)   98,375    
 Retained earnings (accumulated                                                
  deficit)........................   9,798     (428)       428 (e)             
                                                          (157)(g)    9,641    
 Cumulative foreign translation                                                
  adjustments.....................     (45)   1,086     (1,086)(e)      (45)   
                                   -------  -------    -------     --------    
  Total shareholders' equity......  52,454   10,606     45,008      108,068    
                                   -------  -------    -------     --------    
                                   $85,170  $29,905    $44,778     $159,853    
                                   =======  =======    =======     ========    

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET 
JUNE 30, 1997 

(a) Represents the recognition of AGEMA's existing trademarks at fair market    
value. The life assigned to such trademarks is twenty years.            

(b) Represents the amount of purchase price allocated to in-process research    
and development based on its estimated fair value. The amount primarily 
represents the value of various projects which are in process, but which
 have not reached technological feasibility. Such projects are expected to
  generate future revenues if such projects reach technological feasibility.
The value assigned is based primarily on the discounted cash flow of    
expected future revenues. No amortization of the balance is recorded, as
the amount will be written off immediately following the consummation of
the Combination.                                                        

(c) Represents the amount of AGEMA Net Intercompany Indebtedness to be          
 retained by Spectra as specified in section 7.16 of Combination Agreement
(See Appendix A).                                                       

(d) Represents the issuance of 4,162,000 shares of FLIR Common Stock, at an     
estimated fair value of $13.40 per share as consideration in the        
  Combination. The determined market value is based upon an estimated $20.00
 share closing price less a 33% discount from the value of such share. The
discount is based upon the lack of liquidity resulting from the         
unregistered status of the shares issued.                               

(e) Represents the elimination of AGEMA's historical equity.                    

(f) Represents the payment of merger costs and fees. These fees are summarized  
as follows (in thousands):                                              

                                                                [Download Table]
                                                                          
Investment banking fees.............................................. $175
Accounting fees......................................................  125
Legal fees...........................................................  350
Other direct Combination costs.......................................  200
                                                                      ----
                                                                      $850
                                                                      ====

(g) Represents adjustment required to conform the Balance Sheet as of June 30,  
 1997 from Swedish GAAP to U.S. GAAP. See Note 12 to the December 31, 1996
 AGEMA Combined Financial Statements and Note 3 to the June 30, 1997 AGEMA
Combined Financial Statements.                                          
(h) The purchase price and preliminary calculation of the excess of cost over   
 the fair value of net assets acquired is as follows (in thousands, except
share information):                                                     

                                                                [Download Table]
                                                                          
Purchase Price:                                                           
 4,162,000 shares issued at a discounted market value of $13.40           
  per share...................................................... $55,771 
 Fees and expenses...............................................     850 
                                                                  ------- 
 Total purchase price............................................  56,621 
                                                                  ------- 
 Fair value of assets acquired...................................  62,722 
 Fair value of liabilities assumed............................... (18,299)
                                                                  ------- 
                                                                   44,423 
                                                                  ------- 
 Excess of purchase price over fair value of net assets acquired          
  resulting from the Combination................................. $12,198 
                                                                  ======= 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA) 

                                                                [Download Table]

                                            HISTORICAL          PRO FORMA       
                                          ---------------  ---------------------
                                           FLIR    AGEMA   ADJUSTMENTS  COMBINED
                                          -------  ------  -----------  --------
                                                                                
REVENUES:                                                                       
Government..............................  $19,379  $  --      $ --      $19,379 
Commercial..............................   16,381  24,782       --       41,163 
                                          -------  ------     -----     ------- 
  Total revenues........................   35,760  24,782       --       60,542 
Cost of goods sold......................   16,524  12,561       --       29,085 
                                          -------  ------     -----     ------- 
Gross profit............................   19,236  12,221       --       31,457 
OPERATING EXPENSES:                                                             
Research and development................    5,345   2,384       --        7,729 
Selling and other operating costs.......   10,959   8,942       (36)(a)  19,865 
Amortization of intangibles.............      --      --        371 (b)     371 
                                          -------  ------     -----     ------- 
  Total operating costs.................   16,304  11,326       335      27,985 
Earnings from operations................    2,932     895      (335)      3,492 
Interest income.........................       20      41       --           61 
Interest expense and other..............     (872)   (327)      (83)(a)  (1,282)
                                          -------  ------     -----     ------- 
Earnings before income taxes and group                                          
 contribution...........................    2,080     609      (418)      2,271 
Group contribution......................      --       19       (19)(a)     --  
                                          -------  ------     -----     ------- 
Earnings before income taxes............    2,080     590      (399)      2,271 
Provision for income taxes..............      539     (49)     (112)(c)     365 
                                                                (13)(a)         
                                          -------  ------     -----     ------- 
Net earnings............................  $ 1,541  $  639      (274)    $ 1,906 
                                          =======  ======     =====     ======= 
Net earnings per share..................  $  0.27                       $  0.20 
                                          =======                       ======= 
Weighted average number of common shares                                        
 and equivalents outstanding............    5,795             4,162       9,957 
                                          =======             =====     ======= 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS 
SIX MONTHS ENDED JUNE 30, 1997  

(a) Represents adjustment required to conform net earnings as of June 30, 1997  
  from Swedish GAAP to U.S. GAAP. See Note 12 to the December 31, 1996 AGEMA
Combined Financial Statements and Note 3 to the June 30, 1997 AGEMA     
Combined Financial Statements.                                          

(b) Represents amortization of intangible assets for the six months ended June  
30, 1997. The amortization is summarized as follows (in thousands):     

                                                                [Download Table]
                                                                         
Trademarks..........................................................   66
Intangible assets...................................................  305
                                                                     ----
                                                                     $371
                                                                     ====

Trademarks are amortized on a straight-line basis over an estimated useful  
life of twenty years. Intangible assets are amortized on a straight-line    
basis over an estimated useful life of twenty years.                        

(c) The pro forma adjustment to the provision for income taxes is based upon    
the statutory tax rate of 28% applied to pro forma adjustments discussed
above.                                                                  

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA) 

                                                                [Download Table]

                                        HISTORICAL           PRO FORMA         
                                      ----------------  -----------------------
                                       FLIR     AGEMA   ADJUSTMENTS    COMBINED
                                      -------  -------  -----------    --------
                                                                               
REVENUES:                                                                      
Government........................... $42,958  $   --     $   --       $42,958 
Commercial...........................  23,059   48,401        --        71,460 
                                      -------  -------    -------      ------- 
  Total revenues.....................  66,017   48,401        --       114,418 
Cost of goods sold...................  30,415   25,356        --        55,771 
                                      -------  -------    -------      ------- 
Gross profit.........................  35,602   23,045        --        58,647 
OPERATING EXPENSES:                                                            
Research and development.............   9,485    4,954        --        14,439 
Selling and other operating costs....  17,739   20,532        (15) (a)  38,256 
Allowance for doubtful accounts......   1,260      --         --         1,260 
Amortization of intangibles..........     --       --         743 (b)      743 
                                      -------  -------    -------      ------- 
  Total operating costs..............  28,484   25,486        728       54,698 
Earnings from operations.............   7,118   (2,441)      (728)       3,949 
Interest income......................      44      252        --           296 
Interest expense and other...........    (819)    (463)      (204) (a)  (1,486)
                                      -------  -------    -------      ------- 
Earnings (loss) before income taxes                                            
 and group contribution..............   6,343   (2,652)      (932)       2,759 
Group contribution...................     --      (824)       824 (a)      --  
                                      -------  -------    -------      ------- 
Earnings (loss) before income taxes..   6,343   (1,828)    (1,756)       2,759 
Provision for income taxes...........   1,251      (67)       (53)(a)          
                                                             (492)(c)      639 
                                      -------  -------    -------      ------- 
Net earnings (loss).................. $ 5,092  $(1,761)   $(1,211)     $ 2,120 
                                      =======  =======    =======      ======= 
Net earnings per share............... $  0.91                          $  0.22 
                                      =======                          ======= 
Weighted average number of common                                              
 shares and equivalents outstanding..   5,624               4,162        9,786 
                                      =======             =======      ======= 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS 
YEAR ENDED DECEMBER 31, 1996  

(a) Represents adjustment required to conform net loss as of December 31, 1996  
  from Swedish GAAP to U.S. GAAP. See Note 12 to the December 31, 1996 AGEMA
Combined Financial Statements and Note 3 to the June 30, 1997 AGEMA     
Combined Financial Statements.                                          

(b) Represents amortization of intangible assets for the year ended December    
31, 1996. The amortization is summarized as follows (in thousands):     

                                                                [Download Table]
                                                                         
Trademarks..........................................................  133
Intangible assets...................................................  610
                                                                     ----
                                                                     $743
                                                                     ====

Trademarks are amortized on a straight-line basis over an estimated useful  
life of ten years. Intangible assets are amortized on a straight-line basis 
over and estimated useful life of twenty years.                             

(c) The pro forma adjustment to the provision for income taxes is based upon    
the statutory tax rate of 28% applied to pro forma adjustments discussed
above.                                                                  

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BUSINESS OF FLIR  

FLIR, founded in 1978, designs, manufactures and markets imaging systems,   
image analysis software and broadcast quality surveillance systems worldwide    
for a wide variety of applications in the government and commercial markets.    
Thermal imaging systems detect infrared radiation or heat, which is emitted     
directly by all objects and materials, enabling the user to see objects in      
total darkness, adverse weather, and through obscurants such as smoke and       
haze. FLIR's night vision products for the government market are used in such   
diverse applications as public safety (law enforcement and drug interdiction    
support, search and rescue, border and maritime patrol, and environmental       
protection) and defense (surveillance, reconnaissance and navigational          
assistance).                                                                    

Thermal imaging systems can also detect and measure temperature differences,
which is important in a variety of industrial and commercial applications       
including predictive and preventative maintenance, manufacturing process        
control and monitoring, non-destructive testing and evaluation, and research    
and development. FLIR's business has also expanded into the larger imaging and  
machine vision markets. Two FLIR subsidiaries, Broadcast and Surveillance       
Systems, Ltd. ("BSS"), located just outside London, England, and Optimas        
Corporation ("Optimas"), located in the Seattle, Washington area, play an       
important part in that expansion. BSS designs, manufactures and markets day     
and night imaging systems designed for the non-military and commercial          
broadcast markets. Optimas specializes in the development of computer software  
products that enable image analysis across a full range of applications for     
the industrial, biomedical and research markets.                                

In April 1996, FLIR entered into the commercial broadcast market with the   
introduction of two products, the ULTRA 4000 and the UltraMedia. The ULTRA      
4000 is a fully stabilized airborne camera system that couples a high-          
resolution infrared camera with an industry-standard broadcast camera for 24-   
hour-a-day news coverage. The UltraMedia is a broadcast-quality imaging system  
that delivers clear, crisp and jitter-free daylight images.                     

FLIR's Government customers include local law enforcement agencies,         
instrumentalities of the U.S. Government, foreign governments and various       
aircraft manufacturers and resellers. Customers for FLIR's Commercial products  
include various manufacturers, resellers, research and development facilities,  
universities, biomedical research facilities, utility companies, motion         
picture and entertainment companies and various commercial enterprises.         

INDUSTRY BACKGROUND                                                             

Infrared radiation is essentially light that is not visible because its     
wavelength is too long to be detected by the human eye. Unlike visible light,   
infrared radiation is emitted directly by all objects and materials. Thermal    
imaging systems are used to detect infrared radiation and convert it into an    
electronic signal, which is then formatted into a video scene and displayed on  
a monitor. Thermal imaging systems enable the operator to see objects in total  
darkness and through obscurants such as smoke, haze and many forms of fog.      
Unlike other night vision devices, such as night vision goggles, a thermal      
imaging system does not require any visible light to operate. Thermal imaging   
systems can also detect and measure temperature differences, which is           
important in a variety of industrial applications.                              

Early applications of thermal imaging primarily involved the use of very    
expensive high-resolution systems in military combat applications such as       
weapons targeting, where performance factors were far more important in the     
procurement decision than the system acquisition cost. A basic form of the      
technology was also employed in limited industrial applications such as         
detection of heat loss from buildings, where system price was more important    
than sophisticated performance. Consequently, a large group of potential users  
in both the public safety sector and commercial markets did not use thermal     
imagers, since available systems either failed to meet their performance        
requirements or were too expensive. FLIR was among the first to bridge the gap  
between high-cost, high-performance and low-cost, low-performance systems by    
developing thermal imaging products with a combination of price and             
performance suited to the needs of a broad range of customers in the            
government                                                                      

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market. In addition, commercial applications and markets began to expand as     
thermal imaging companies developed products with enhanced performance          
characteristics.                                                                

FLIR expects continued growth in the government and commercial markets due  
primarily to the general improvements in the price and performance              
characteristics of imaging systems for these government and commercial          
markets. FLIR believes the primary factors that will contribute to the growth   
in the government market are the increasing use of thermal imaging in public    
safety applications worldwide, the increasing emphasis of governments on        
public safety roles and the transition of defense procurement policies          
worldwide to favor cost-effective commercially developed technology. FLIR       
believes that the use of thermal imaging and broadcast systems in commercial    
applications will increase, and the commercial imaging market will expand       
significantly, as high-performance industrial systems become more affordable    
and industrial customers better understand the improvements in quality and      
productivity that can be gained by the use of these systems and the related     
image analysis software. FLIR's commercial products and image analysis          
software capabilities are designed to take advantage of these opportunities.    

MARKETS FOR FLIR'S PRODUCTS                                                     

Government Products. The worldwide government market consists of two        
segments: public safety and defense. FLIR is a leader in the public safety      
segment, which is rapidly expanding but represents a small percentage of the    
total government market. FLIR also sells its products for selected              
applications in the defense segment.                                            

Public Safety. FLIR is a worldwide leader in the emerging public safety     
market, which consists of products sold for a variety of uses in law            
enforcement and drug interdiction, search and rescue, border and maritime       
patrol, and environmental protection. FLIR has been instrumental in the         
development of this market worldwide, with systems operating in over 47         
countries. During the last three years, FLIR has sold into this market over     
400 systems with a dollar value in excess of $112 million. While no consistent  
data is available as to the size of this market, FLIR believes this represents  
only a small percentage of the existing and potential global market.            

Customers in the public safety market demand systems that are both          
affordable and capable of performing a variety of tasks requiring high          
resolution and image quality. FLIR's products are well positioned to meet       
these customers' requirements for performance and affordability. Additionally,  
FLIR's broad product range is well suited to the principal customer groups in   
the public safety market, each of which require different product               
configurations. FLIR's products meet customer needs for systems that can be     
mounted on a variety of aircraft and ships, operate in different climatic       
conditions and accommodate changes in methods of operations. Installations for  
FLIR's systems have been certified by the Federal Aviation Administration and   
equivalent authorities in foreign countries for most of the aircraft used in    
the market.                                                                     

Law Enforcement and Drug Interdiction: Thermal imaging systems enable law   
enforcement agencies to expand their capabilities in activities ranging from    
routine patrol and surveillance to suspect apprehension and drug interdiction.  
There is a trend in law enforcement toward the use of aircraft, which have      
advantages over traditional ground operations in these activities. Airborne     
enforcement has historically been limited by an inability to perform            
effectively at night or under conditions of limited visibility -- precisely     
the conditions under which significant criminal activity occurs. By providing   
night vision capability, thermal imaging systems significantly enhance the      
performance capabilities of airborne law enforcement.                           

FLIR believes that law enforcement is an emerging market for its systems and
that a relatively small percentage of law enforcement aircraft worldwide are    
presently equipped with thermal imaging systems. As various law enforcement     
agencies have gained familiarity with the uses and capabilities of these        
systems, FLIR has expanded the applications for its products to meet the needs  
of a broader customer base. Over the past three years, demand for FLIR's        
products has continued to be strong as a result of their effective use by       
customers in law enforcement and drug interdiction activities worldwide.        

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Law enforcement agencies are also beginning to recognize the utility of     
thermal imaging systems in ground operations, an application in which cost,     
portability and image quality are key customer requirements. FLIR has           
addressed these requirements with its Prism Camera. See "Products."             

Search and Rescue: Search and rescue operations include the traditional     
mission of rescuing boats and vehicles in distress, offshore oil platform       
safety and emergency response support for missing persons or accident victims.  
These operations are routinely conducted in most nations by military,           
governmental, or local entities in both coastal waters and inland areas. The    
range of FLIR's customers in this market has expanded from initial coast guard  
sales to include military agencies, private contractors, oil companies and      
emergency response teams. FLIR believes that this market will continue to       
grow, primarily due to the evolving need to maintain search and rescue          
capability on a 24-hour basis and under adverse weather conditions.             

Border and Maritime Patrol: As the frequency of regional disputes throughout
the world increases and concern over the effects of illegal immigration grows   
in most countries, the importance of border surveillance, particularly night    
time surveillance, has increased. FLIR was among the first to demonstrate the   
effectiveness of thermal imaging systems for airborne operations in this        
market. Maritime patrol activities are performed by military or governmental    
agencies charged with maintaining the territorial integrity of coastal waters,  
monitoring national fishing boundaries and preventing smuggling.                

Environmental Protection: With the growing worldwide emphasis on protection 
of natural resources, FLIR expects the market for its systems in environmental  
protection activities to expand. FLIR's thermal imaging systems have been       
effectively used in forest fire detection and extinguishment, oil spill         
detection and monitoring, and wildlife management. Potential additional         
applications include monitoring toxic waste sites, identifying sources of       
environmental contamination, and gas leak detection. In many cases, proper      
detection cannot be accomplished without thermal imaging. For example, heavy    
smoke inhibits the application of flame retardant while fighting forest fires;  
thermal imaging systems see through smoke and allow accurate airdrops of both   
retardant and water. FLIR has successfully begun to market its systems for      
environmental protection applications in the United States and Canada, but      
this market is in its infancy and is expected to grow as users become           
increasingly aware of the applications and utility of thermal imaging systems.  

Defense. The defense market for thermal imagers, which consists primarily of
sophisticated weapon systems, has historically constituted the largest segment  
of the market for night vision products. While FLIR has purposely limited its   
participation in this market segment, due to the changing nature of defense     
priorities, FLIR has begun to develop relationships with prime defense          
contractors that require cost-effective thermal sensors for inclusion in their  
systems.                                                                        

In addition to the traditional weapons systems applications, thermal imaging
systems are increasingly being employed by the military for surveillance,       
reconnaissance, and navigation assistance as part of a larger trend toward      
expansion of night operations capability. As a result, night vision systems     
have been identified as a critical component of a more technology-based         
military. FLIR believes that these trends will provide selected ongoing growth  
opportunities for FLIR in the defense market.                                   

Commercial Products. The ability of thermal imaging systems to detect heat  
and measure temperature differences make them useful in a broad range of        
industrial applications. For example, thermal imaging systems can be used to    
observe the performance of heating and cooling devices, monitor the             
performance of electronic components or the movement of electrical current,     
detect water or moisture, identify leaks, locate bonding defects, detect        
cracks and voids in an object and determine surface uniformity. FLIR believes   
that the increasing emphasis on improving manufacturing productivity and        
product quality, underscored by the growing importance of programs such as      
International Standards Organization (ISO) 9000 certification and the           
increasing complexity of high technology products and processes, creates an     
opportunity for a significant expansion of the commercial market. This market   
typically requires very high performance systems with extensive analytical      
software. FLIR believes that growth of the commercial market will be further    
enhanced as thermal imaging systems achieve higher performance, the             
capabilities and benefits of thermal imaging are understood by a growing        
number of                                                                       

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potential customers, the image analysis software capabilities continue to       
improve and systems become more affordable and easy to use.                     

FLIR believes that its commercial imaging systems and related software      
products will enable it to continue to capture market share and significantly   
expand applications in six principal areas: predictive and preventive           
maintenance, non-destructive testing and evaluation, research and development,  
manufacturing process control and monitoring as well as expand into the much    
larger machine vision market, commercial broadcast and image analysis.          

Predictive and Preventive Maintenance ("PPM"): Thermal imaging systems      
improve productivity by allowing the location and detection of equipment        
faults so they can be corrected before they lead to catastrophic failure or     
major equipment damage. This allows companies to significantly reduce           
operating expenses by lowering repair costs and reducing downtime. PPM is       
currently the largest segment of the industrial market.                         

Specific PPM applications are numerous. Utility companies utilize FLIR's    
thermal imaging products to locate and repair defective power transmission      
components thereby significantly improving service reliability by reducing      
annual power outages per customer. The bearings of rotating machinery will      
operate at an increasingly warmer temperature as the end of their useful life   
approaches; thermal imaging surveys can predict the bearing's end of life,      
allowing planned maintenance to be performed before experiencing a plant shut-  
down or severe machinery damage. Thermal imaging is used to evaluate the        
integrity and amount of insulation in a building or container, providing        
substantial energy cost savings. Thermal imaging allows roof leaks and          
associated specific damaged areas to be located and repaired, avoiding the      
major expense of replacing the entire roof.                                     

Non-Destructive Testing and Evaluation ("NDT"): Non-destructive testing and 
evaluation is a market classification adopted by a broad group of users of      
various technologies for specialized testing. NDT in a broad sense applies to   
all testing and evaluation that is non-destructive in nature and is utilized    
in all industrial thermal imaging market segments. More specifically, the       
designation applies to a segment that focuses on the testing of composite       
materials or of products using composite materials. This is a relatively new    
thermal imaging market and has experienced strong growth. Many different types  
of products must be inspected to ensure they are properly constructed, meet     
acceptable quality standards, or have not been damaged. For many applications,  
technologies such as ultrasound and x-ray have not proven to be effective.      
Thermal imaging has proven to be non-destructive, effective, quick and          
affordable and is increasingly being used for this type of inspection.          

Thermal imaging can be used to evaluate, monitor and test composite material
in this process. For example, when two composite materials are bonded           
together, thermal imaging, unlike visual inspection, can be used to determine   
the quality of the bond. A similar inspection technique is used to inspect      
composite materials for damage after sustaining an impact. Additionally,        
during the production of solar cells, thermal imaging is used to verify the     
integrity of the bond between the various composition layers -- a factor        
critical to the cell's performance. Due to pressure and temperature             
differences experienced by an aircraft, water will collect in the internal      
honeycomb structure or insulation if there is a leak in the aircraft's outer    
skin; such leaks can be located through the use of thermal imaging.             

Research and Development: Thermal imaging, due to its non-destructive       
analysis capability, is a new tool for use in research from automobiles to      
electronics. This market typically requires very high performance systems with  
extensive capabilities and tools to analyze the thermal image. FLIR believes    
that this segment of the commercial market will grow as system resolution and   
image analysis capabilities increase.                                           

Because many component and product designs involve the use or control of    
heat, thermal imaging can be effectively used in the research and design of     
the component or product. For example, thermal imaging is used in laser design  
to determine the power distribution of the beam. Once the laser is in           
production, thermal imaging is used as a process and product specification      
monitoring system. In addition, thermal imaging is used in development of       
diesel engines using ceramic coated pistons to determine proper adhesion of     
the ceramic to the                                                              

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metal piston. During the design of a rubber tire, uniform heat distribution     
can be evaluated using thermal imaging.                                         

Manufacturing Process Control and Monitoring: The ability to determine that 
a manufacturing process will produce unacceptable results at the earliest       
point in the production cycle is critical to quality improvement and cost       
reduction. Thermal imaging and image analysis allows for the monitoring and     
control of heat, which is used in most industrial processes. Depending on the   
process, too much, too little, or uneven heat can result in a defective         
product. FLIR believes that, as all phases of the manufacturing process become  
increasingly competitive and quality standards increase, the use of thermal     
imaging and image analysis software in these applications will grow.            

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

Commercial Broadcast: The use of stabilized broadcast and thermal imaging   
systems is becoming a standard feature in today's electronic news gathering     
markets. This market typically requires very high performance systems with      
extensive capabilities including state-of-the-art stabilization, the ability    
to provide jitter-free images from great distances and the ability to downlink  
the information on a real-time basis. FLIR believes that this segment of the    
market will grow as more and more TV stations acquire helicopters to provide    
real-time reporting of news events and as system size and weight continue to    
decline which enable the use of such systems on small and weight restricted     
helicopters.                                                                    

Image Analysis: The acquisition of Optimas, in early 1996, has enabled FLIR 
to greatly expand its image analysis capabilities. Image analysis is the        
extraction of specific quantitative information in an objective, repeatable     
fashion in order that such data can be more meaningfully employed or            
understood and used to make informed and better decisions. Image analysis       
incorporates image processing (improving or otherwise modifying of the visual   
appearance of an image), but goes further to incorporate the identification of  
features of interest, extracting the desired measurements of those features     
and then making such measurements available for productive use.                 

Uses of image analysis software may include monitoring and controlling      
industrial processes, improving product quality, enhancing medical analysis or  
otherwise enabling or enhancing critical decision-making processes. For         
example, in the manufacture of laser and ink jet printers, the precise          
alignment of thousands of tiny dots of ink and a minimization of scatter or     
excess ink spots in printing are critical quality concerns. Printer             
manufacturers examine a test sheet from each printer using FLIR's image         
analysis software. The software can rapidly examine a digital scan of those     
pages and provide analysis of whether the printer is functioning within         
tolerances.                                                                     

PRODUCTS                                                                        

The following is a listing of FLIR's main products and a brief description of   
such products:                                                                  

Series 2000. The Series 2000(TM), first introduced in 1983, is a real-time  
analog TV-compatible thermal imaging system for use in applications such as     
military surveillance, narcotics interdiction, crime fighting, search and       
rescue and environmental protection.                                            

SAFIRE. The SAFIRE(TM), first introduced in the second quarter of 1992, is a
high-resolution digital thermal imaging system featuring gyro stabilization     
and image processing. SAFIRE systems are currently fielded by all               

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branches of the U.S. military and are manufactured to meet the rigors of        
diverse missions from airborne and naval surveillance to search and rescue.     

ULTRA 3000. The ULTRA 3000(TM), first introduced in the fourth quarter of   
1994, is one of the smallest and lightest airborne thermal imaging systems      
available on the market today. A variety of system features and options make    
the ULTRA 3000 a truly versatile thermal imaging system for use in day and      
night surveillance, search and rescue, and environmental protection.            

Prism SP. The Prism SP(TM), first introduced in the second quarter of 1994, 
is a high resolution, battery powered, handheld infrared camera. The Prism SP   
combines compact size, high quality imaging and temperature measurement         
capabilities which make it ideal for a broad range of industrial applications,  
including predictive and preventative maintenance, research and development,    
process control, and other types of non-destructive evaluation.                 

Prism DS. The Prism DS(TM), which was introduced in the first quarter of    
1995, is a high resolution, battery powered, handheld infrared camera with the  
added capabilities of digital storage and image processing. The Prism DS        
features an on-board 486 microprocessor which enables digital capture of        
images onto Windows  based PC cards. The Prism DS is ideally suited for         
industrial applications where post analysis in the area of predictive and       
preventative maintenance, research and development, process control, and other  
types of non-destructive evaluation are crucial.                                

Tracer. The Tracer(TM), introduced in the first quarter of 1997, is the     
first industrial imaging system capable of recording and analyzing long         
thermal event sequences at real-time frame rates on a Windows  based PC.        
Tracer combines a high-resolution thermal imaging camera with a Pentium  PC,    
digital recording system, and Windows-based analysis software.                  

SeekIR. The SeekIR(TM), introduced in the third quarter of 1996, is a       
handheld infrared camera system that uses "uncooled" detector technology.       
Silent operation, "instant on" imaging, compact size, portability and a long-   
life battery make the SeekIR a strong tool for gathering evidence and           
conducting "night vision" surveillance or monitoring.                           

ULTRA 4000. The ULTRA 4000(TM), introduced in the third quarter of 1994, is 
a fully stabilized aerial camera system that couples a high-resolution          
infrared camera for low light or no light situations with an industry-standard  
broadcast camera for daylight coverage. The ULTRA 4000 provides the capability  
for long range airborne surveillance and broadcast video transmission in law    
enforcement, news gathering, and similar applications.                          

UltraMedia. The UltraMedia(TM), introduced in the first quarter of 1996, is 
a compact daylight broadcast system that delivers a maximum of 72:1             
magnification in a lightweight, low-profile package which is ideally suited     
for airborne broadcast teams. The UltraMedia breaks new ground by giving        
airborne broadcast teams hardware that delivers high-resolution images without  
high payload concerns.                                                          

UltraMedia-RS. The UltraMedia-RS(TM), introduced in the first quarter of    
1997, combines many of the features of the larger UltraMedia system in a        
compact 35 pound configuration. The UltraMedia RS provides small and weight     
restricted aircraft the ability to gather high quality video footage from long  
distances.                                                                      

AnalyzIR. AnalyzIR(TM) Software, introduced in the second quarter of 1995,  
allows for review, analysis and processing of captured images and data.         
AnalyzIR software is a Windows based program which provides for an ease of use  
and affordability that is unmatched in the industry. AnalyzIR software is       
typically packaged with the Prism systems, though it is capable of operating    
with data gathered from other imaging modalities as well.                       

OPTIMAS. OPTIMAS(TM) software, introduced in the first quarter of 1989, is a
Windows based application designed to meet the needs of the advanced            
scientific and engineering markets. The OPTIMAS software package                

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includes custom user interface tools which enable both novice and highly        
skilled users to efficiently and effectively solve their image analysis         
problems.                                                                       

Xcaliper. Xcaliper(TM) software, introduced in the second quarter of 1995,  
is a high precision software product addressing certain industrial machine      
vision tasks such as gauging, part-presence or absence, edge detection and      
part alignment. Xcaliper software combines high speed with easy development     
using Visual Basic programming.                                                 

Sentinel. Sentinel(TM) software, introduced in the fourth quarter of 1995,  
is an image pattern and industrial OCR software application using neural        
network-based technology to perform fast pattern recognition on personal        
computers. Applications include form reading, package label identification,     
part orientation and inspection. Sentinel software employs a simple drag and    
drop interface to train patterns and build applications.                        

Library. Library(TM) software, introduced in the fourth quarter of 1995, is 
a flexible, multi-user image database with internal image management            
capabilities. Library software provides support for network and removable       
media and seamless links to OPTIMAS for one step archiving of images from       
OPTIMAS. Images can be retrieved and batch-analyzed using internal search       
features and automated field updates of analysis results. Library software      
utilizes a drag and drop interface to enable custom database and report         
development.                                                                    

CUSTOMERS                                                                       

The primary customers for FLIR's products include instrumentalities of      
domestic and foreign governments, original equipment manufacturers, commercial  
manufacturers, research and development facilities, universities, utility       
companies, news gathering agencies and various commercial enterprises.          

A substantial portion of FLIR's revenues is derived from sales to agencies  
and instrumentalities of the U.S. Government, which aggregated more than 10%    
of FLIR's revenues in each of the last three years. For the year ended          
December 31, 1996, such sales represented 40.1% of FLIR's total revenue. Of     
this amount approximately $22.8 million, or 34.5% of FLIR's 1996 revenues,      
consisted of sales to the U.S. Marine Corps of additional SAFIRE systems for    
their fleet of UH-1N "Huey" helicopters. With the exception of the continuing   
sales to agencies and instrumentalities of the U.S. Government, FLIR does not   
typically have continuing customers whose purchases constitute more than 10%    
of revenues on a year to year basis. At any given time, however, FLIR may have  
purchase commitments from customers which, if completed, would constitute more  
than 10% of revenues in any given year. The failure of any such customer to     
complete such purchases or the loss of the agencies and instrumentalities of    
the U.S. Government as a customer could have a material adverse effect on       
FLIR's business, financial position and results of operations.                  

SALES, DISTRIBUTION AND CUSTOMER SERVICE                                        

FLIR markets its night vision products for the government market in the     
United States directly through a 17-person direct sales staff, and              
internationally through 12 independent representatives covering all major       
markets worldwide.                                                              

FLIR sells its commercial products worldwide through a 24-person direct     
sales staff and a network of 35 distributors and representatives, each with an  
exclusive right to sell FLIR's products in a defined geographic area. All       
distributors and representatives report to one of five regional sales managers  
employed by FLIR. FLIR sells its software products primarily through 56         
authorized dealers, 30 of whom are located within the U.S. and Canada. Many of  
these dealers, particularly internationally, maintain their own network of      
subsidiary agents.                                                              

In support of both direct and distribution sales activities, FLIR has a     
technical support group that provides installation, technical training and      
repair services. FLIR maintains service facilities at its factory in Portland,  
Oregon and at its subsidiaries in the United Kingdom and Seattle, Washington.   
FLIR also maintains limited service capability in three foreign locations       
under the direction of its independent representatives.                         

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MANUFACTURING                                                                   

FLIR manufactures most critical components of its products, including       
detectors, optics and high speed motors. This allows FLIR to minimize lead      
times, facilitate prompt delivery of its products, control costs and ensure     
that these components satisfy its quality standards. FLIR purchases other       
parts pre-assembled, including coolers, circuit boards, FPA detectors, cables   
and wiring harnesses. The interruption of certain sources of supply or the      
failure of suppliers of key components to adapt their products to FLIR's        
changing technological requirements could disrupt FLIR's ability to             
manufacture products or cause FLIR to incur costs associated with the           
development of alternative sources, either of which could have an adverse       
effect on FLIR's business, financial position, and financial results of         
operations. FLIR has experienced delays in production due to its inability to   
timely obtain a necessary component from third-party supplier. No assurance     
can be given that similar delays will not be experienced in the future.         

Certain critical components, such as detectors and optical systems, are made
with special minerals, compounds or materials. FLIR believes that all such      
materials are readily available and will continue to be available in the        
foreseeable future at costs that are not prohibitive or that would materially   
affect FLIR's ability to manufacture such components.                           

FLIR's manufacturing operations have been audited by its OEM customers,     
which include several major aircraft manufacturers, and were certified as       
meeting their quality standards. In addition, FLIR has been certified for       
inclusion of its products in government systems after government audits of its  
manufacturing facilities.                                                       

COMPETITION                                                                     

FLIR's competitors are different in each market segment. In the public      
safety and law enforcement market, FLIR faces a variety of competitors,         
including Raytheon, AGEMA, Inframetrics, GEC and Wescam. In the commercial      
thermographic market, major competitors are Raytheon, Inframetrics, GEC, Avio,  
I.S.I., Land Instruments, AGEMA, Mitsubishi and NEC. In the commercial          
broadcast market, FLIR's principal competitor is Wescam. In the technical       
image analysis software market, FLIR competes with Media Cybernectics and       
Noesis Vision, and to a lesser extent Data Translation, Jandel Scientific and   
Matrox Electronics Systems. In the industrial machine vision imaging markets,   
FLIR competes with Adept, Allen-Bradley Company, Cognex and Robotic Vision      
Systems. Competition in the defense market is intense, and includes companies   
such as Lockheed Martin, Boeing, Thomson, GEC, and Thorn EMI. As the markets    
for FLIR's products expand, FLIR expects that additional competition will       
emerge and that existing competitors may commit more resources to the markets   
addressed by FLIR. Most of FLIR's competitors have substantially greater        
financial, technical and marketing resources than FLIR. In addition, FLIR's     
products compete indirectly with numerous other products, such as image         
intensifiers and low-light cameras, for limited military and governmental       
funds.                                                                          

FLIR believes that the principal competitive factors in its market are      
performance, cost, customer service, product reputation, and effectiveness of   
marketing and sales efforts. In addition, FLIR believes that the speed with     
which companies can identify applications for thermal imaging, develop          
products to meet those needs and supply commercial quantities to the market     
are important competitive factors. FLIR believes that it competes favorably     
with respect to each of these factors.                                          

PROPRIETARY RIGHTS                                                              

FLIR relies on intellectual property rights to protect its proprietary      
technology. FLIR enters into confidentiality agreements with its employees and  
consultants and limits access to and distribution of its documentation and      
other proprietary information. There can be no assurance that the steps taken   
by FLIR in this regard will be adequate to deter misappropriation of its        
technology or independent third-party development of competing technologies.    

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EMPLOYEES                                                                       

As of September 30, 1997, FLIR had 434 employees of whom 56 were in         
administration, 133 were in engineering, 5 were in quality assurance, 159 were  
in manufacturing, assembly and testing and 81 were in marketing and sales.      
FLIR has been successful in attracting and retaining highly skilled technical,  
marketing and management personnel to date. None of FLIR's employees are        
represented by a union or other bargaining group. FLIR believes its             
relationship with its employees is good.                                        

PROPERTIES                                                                      

FLIR leases approximately 85,000 square feet of office, manufacturing, and  
laboratory space in Portland, Oregon, under a lease which expires in 2000. The  
lease calls for fixed monthly payments over its term. FLIR also leases          
approximately 12,500 square feet of office and manufacturing space in the       
United Kingdom, under a lease that expires in 2000 and leases approximately     
9600 square feet of office and manufacturing space in Bothell, Washington,      
under a lease that expires in 2000.                                             

LEGAL PROCEEDINGS                                                               

In the normal course of business, FLIR is and has been involved in certain  
litigation, however, FLIR is not the subject of or a party to any material      
legal proceedings.                                                              

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

OVERVIEW                                                                        

FLIR, founded in 1978, designs, manufactures, and markets imaging systems   
worldwide for a wide variety of applications in the government and commercial   
markets. Thermal imaging systems detect the infrared radiation, or heat,        
emitted directly by all objects and materials and enable the operator to see    
objects in total darkness, in adverse weather conditions and through            
obscurants such as smoke and haze. Government applications include public       
safety (law enforcement and drug interdiction, search and rescue, border        
patrol and maritime patrol, and environmental protection) and defense           
(surveillance, reconnaissance and navigation assistance). Commercial            
applications include commercial broadcast imaging, predictive and preventive    
maintenance, non-destructive testing and evaluation, research and development,  
manufacturing process control and monitoring, and machine vision and image      
analysis.                                                                       

FLIR was profitable in the year ended December 31, 1988 and has reported    
profitable results for each succeeding year. In June 1993, FLIR completed an    
initial public offering of its stock, which is traded on the Nasdaq National    
Market System.                                                                  

In January 1996, FLIR continued to expand the market potential for the      
growing commercial product line as well as government products by acquiring     
Optimas Corporation ("Optimas") in Seattle, Washington. Optimas specializes in  
the development of image analysis software for a wide range of applications     
for the industrial, biomedical, research and machine vision markets.            

In April 1996, FLIR entered into the commercial broadcast market with the   
introduction of two products, the ULTRA 4000 and the UltraMedia. The ULTRA      
4000 is a fully stabilized airborne camera system that couples a high-          
resolution infrared camera with an industry-standard broadcast camera for 24-   
hour-a-day news coverage. The UltraMedia is a broadcast-quality imaging system  
that delivers clear, crisp and jitter-free daylight images.                     

During 1996, FLIR continued the significant investment in the infrastructure
of FLIR. This included significant investments in expanding the operations of   
both of FLIR's subsidiaries, Broadcast and Surveillance Systems, Ltd. ("BSS")   
and Optimas; continued emphasis on corrective action related to production      
issues with the Prism product line; restructuring the marketing channels to a   
more direct sales force from a predominately representative-based network; and  
the continued investment in research and development related to new products    
and enhancement of existing products. FLIR is now beginning to benefit from     
this investment as evidenced by the introduction of the two new aerial          
broadcast products in 1996, profitable operations of BSS, the continued         
enhancement to existing products, and in early 1997, the introduction of the    
extremely lightweight UltraMedia-RS and the Tracer, the first industrial        
imager capable of recording and analyzing long sequences of thermal activity    
on a real-time basis.                                                           

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RESULTS OF OPERATIONS                                                           

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

                                                                [Download Table]

                                        SIX MONTHS ENDED       YEAR ENDED       
                                            JUNE 30,          DECEMBER 31,      
                                        ------------------  ------------------- 
                                          1997      1996    1996   1995   1994  
                                        --------  --------  -----  -----  ----- 
                                                                                
REVENUES:                                                                       
 Government............................     54.2%     62.5%  65.1%  67.0%  73.1%
 Commercial............................     45.8      37.5   34.9   33.0   26.9 
                                        --------  --------  -----  -----  ----- 
  Total revenues.......................    100.0     100.0  100.0  100.0  100.0 
Cost of goods sold.....................     46.2      47.9   46.1   45.3   48.6 
                                        --------  --------  -----  -----  ----- 
 Gross profit..........................     53.8      52.1   53.9   54.7   51.4 
OPERATING EXPENSES:                                                             
 Research and development..............     14.9      16.2   14.4   15.5   15.5 
 Selling and other operating costs.....     30.7      29.5   26.9   29.2   24.3 
 Allowance for doubtful accounts.......       --        --    1.9    0.1    0.9 
                                        --------  --------  -----  -----  ----- 
  Total operating expenses.............     45.6      45.7   43.2   44.8   40.7 
   Earnings from operations............      8.2       6.4   10.7    9.9   10.7 
Interest income........................       --       0.1    0.1    0.5    1.4 
Interest expense and other.............     (2.4)     (0.9)  (1.2)  (1.6)  (0.3)
                                        --------  --------  -----  -----  ----- 
   Earnings before income taxes........      5.8       5.6    9.6    8.8   11.8 
Provision for income taxes.............      1.5       1.2    1.9    1.0    1.2 
                                        --------  --------  -----  -----  ----- 
Net earnings...........................      4.3%      4.4%   7.7%   7.8%  10.6%
                                        ========  ========  =====  =====  ===== 

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994                                    

Overall. FLIR's revenues increased 31.7%, from $50.1 million in 1995 to     
$66.0 million in 1996. Net earnings increased 31.7%, from $3.9 million (or      
$0.70 per share) in 1995 to $5.1 million (or $0.91 per share) in 1996. The      
increase in overall revenue and net income was primarily due to the inclusion   
of revenue from the sale of FLIR's two aerial broadcast products, the ULTRA     
4000 and the UltraMedia, for the broadcast market, as well as to increased      
deliveries of SAFIRE night vision system to the Federal Government,             
particularly to the U.S. Marine Corps and the U.S. Air Force. Further, the      
increase in revenue and net income was due to the fact that 1995 government     
revenues were constrained due to delays in the finalization of several          
international and domestic contracts and the inclusion, in 1995, of the         
significant one-time transaction costs associated with the Optimas              
acquisition. These increases were sufficient to offset several items that had   
a dilutive impact on 1996 net earnings including the $1.2 million fourth        
quarter increase in the allowance for doubtful accounts related to one long-    
outstanding international receivable, the increase in interest expense related  
to increased short and long-term borrowings and the increase in the effective   
tax rate.                                                                       

During 1995, FLIR's overall revenues increased 2.3%, from $49.0 million in  
1994 to $50.1 million in 1995. Net earnings decreased 25.4%, from $5.2 million  
(or $0.95 per share) in 1994 to $3.9 million (or $0.70 per share) in 1995. The  
slight increase in overall revenues, despite the decline in revenues            
experienced by FLIR's government division, was primarily due to increased       
sales of the Prism family of products, principally the Prism DS and increased   
sales at BSS. The decline in net earnings was primarily due to the significant  
one-time costs associated with the Optimas acquisition, and the reduction in    
interest income earned on cash balances.                                        

Revenues. Revenues from the sale of government systems increased 27.9%, from
$33.6 million in 1995 to $43.0 million in 1996. This increase was primarily     
attributable to increased sales of the SAFIRE night vision system from $23.9    
million in 1995 to $29.9 million in 1996, principally to the U.S. Government,   
particularly the U.S. Marine Corps and the U.S. Air Force. Additionally,        
revenues from the sale of BSS products increased                                

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during 1996. Commercial imaging systems revenues increased 39.3%, from $16.6    
million in 1995 to $23.1 million in 1996. This improvement was principally      
attributable to the inclusion of revenues from sales of FLIR's two aerial       
broadcast products, the UltraMedia and the ULTRA 4000, which were introduced    
in the first quarter of 1996 and aggregated $10.4 million in 1996. This         
increase was partially offset by reduced sales of the Prism family of products  
due to supplier-related production constraints experienced in 1996. FLIR        
continues to make improvements in its production capacity for the Prism         
products by working with existing suppliers to improve performance and also by  
identifying alternative sources of detector components that utilize a           
different electronic design. FLIR is now producing Prism cameras that utilize   
these new components and FLIR is now is the process of ramping up production    
utilizing both existing and new supplier components. While the results of this  
effort have been positive, the Prism revenues for 1996 reflect that full        
production had not been achieved.                                               

Revenues in 1995 from the sale of government systems decreased 6.2%, from   
$35.8 million in 1994 to $33.6 million in 1995. This slight decrease was        
primarily due to delays in the finalization of several international and        
domestic contracts, which resulted in revenues from these contracts being       
postponed from the latter half of 1995 into 1996 and 1997. Revenues from the    
sale of commercial imaging systems increased 25.6%, from $13.2 million in 1994  
to $16.6 million in 1995. This improvement was principally attributable to      
increased sales of the Prism family of products, particularly the Prism DS,     
which was introduced in the first quarter of 1995. Sales of the Prism family    
of products aggregated $7.8 million in 1995 compared with $5.2 million in       
1994.                                                                           

FLIR has continued to benefit from its significant investment to develop    
worldwide sales and distribution channels. The majority of FLIR's revenue       
outside the United States was from Europe. However, during 1996, international  
revenues decreased slightly from $23.1 million in 1995 to $21.2 million in      
1996. Sales outside the United States accounted for approximately 32.0% of      
FLIR's revenue in 1996. This represents a decrease from the 46.0% experienced   
in 1995 and the 42.3% experienced in 1994. The decrease, in 1996, in absolute   
dollars and as a percentage of revenue was primarily due to increased           
shipments under the terms of existing domestic contracts, primarily to the      
U.S. Marine Corps. FLIR anticipates that revenues from international sales as   
a percentage of total revenue will continue to comprise a significant           
percentage of revenues but may vary modestly from year to year.                 

Gross profit. As a percentage of revenue, gross profit decreased slightly   
from 54.7% in 1995 to 53.9% in 1996. This decrease was primarily due to the     
decrease in higher margin international sales and the increase in sales to the  
U.S. Government which aggregated $26.5 million in 1996 compared to $15.7        
million in 1995. The decrease was mitigated by the increased sales of FLIR's    
commercial broadcast products, which typically have a slightly higher margin    
than other commercial products, and to higher margin software sales from        
Optimas.                                                                        

Gross profit increased as a percentage of revenue from 51.4% in 1994 to     
54.7% in 1995, primarily due to the higher percentage of higher margin          
international sales in 1995.                                                    

Gross profit percentages are affected by a variety of factors, including the
mix of domestic and international government and commercial imaging sales, the  
more competitive nature of the commercial imaging market, and the impact of     
competitive bids for significant government contracts.                          

Research and development. Research and development expense increased 21.8%, 
from $7.8 million in 1995 to $9.5 million in 1996, and increased 2.6%, from     
$7.6 million in 1994 to $7.8 million in 1995. As a percentage of revenue,       
research and development expense decreased from 15.5% in 1995 to 14.4% in 1996  
and remained consistent at 15.5% for 1995 and 1994. The increase in research    
and development expense, in absolute dollar terms, was attributable to          
increased research and development activities related to introduction of the    
UltraMedia, ULTRA 4000, UltraMedia-RS and the Tracer, as well as to on-going    
product enhancements. Research and development expense was also impacted by     
the classification of development costs directly associated with engineering    
revenues as cost of goods sold rather than research and development expenses.   
Such costs amounted to $200,000, $425,000 and $306,000 in 1996, 1995 and 1994,  
respectively. Without these reclassifications, research and development         
expense as a percentage of revenue would have been 14.7%, 16.4% and 16.1% in    
1996, 1995 and 1994 respectively, reflecting the fact that a large percentage   
of research and development expense is fixed in nature.                         

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The general trend in research and development expense reflects FLIR's       
continuing emphasis on product development and new product introductions. FLIR  
expects that research and development expenses will continue to increase in     
absolute dollars but, as FLIR's revenues increase and given the large           
percentage of research and development expense that is fixed in nature, such    
expenses should continue to decline as a percentage of revenue.                 

Selling and other operating costs. Selling and other operating costs        
increased 21.5%, from $14.6 million in 1995 to $17.7 million in 1996 and        
increased 22.7%, from $11.9 million in 1994 to $14.6 million in 1995,           
primarily due to costs associated with increased revenues, expenses related to  
the expanded operations of BSS and Optimas, and to increased personnel.         
Further, FLIR has continued to expand and strengthen the direct sales and       
marketing staffs at both FLIR and Optimas. Selling and other operating costs    
decreased as a percentage of revenue from 29.2% in 1995 to 26.9% in 1996, and   
increased from 24.3% in 1994 to 29.2% in 1995. FLIR expects that selling and    
other operating costs will continue to grow in absolute terms in 1997 as a      
result of further planned increases in sales and marketing personnel and        
anticipated increased marketing efforts and related expenses.                   

Allowance for doubtful accounts. In 1996, FLIR increased the reserve for    
doubtful accounts by $1.3 million, primarily related to the possible            
uncollectibility of a receivable from an international customer located in      
Genoa, Italy. FLIR had previously established a partial reserve for the         
possible uncollectibility of this receivable but determined that the continued  
delays in the restructuring of the company by the Italian Government            
necessitated a one-hundred-percent reserve.                                     

Interest income and Interest expense and other. Interest income consists of 
amounts earned on cash balances and short-term investments. The decrease from   
$705,000 in 1994 to $226,000 in 1995 and to $44,000 in 1996 reflects the        
decline in cash balances during 1995 and 1996 due to increased working capital  
needs, primarily inventories and accounts receivable as well as expanded        
operations of BSS and Optimas. Additionally, 1994 interest income reflects the  
inclusion of interest on certain long-term receivables.                         

Interest expense and other includes costs related to short-term and long-   
term debt, capital lease obligations and miscellaneous bank charges and         
expenses. The increase from $795,000 in 1995 ($195,000 exclusive of the one-    
time costs associated with the acquisition of Optimas) to $819,000 in 1996 was  
primarily due to increased short-term and long-term debt as a result of         
increased working capital needs discussed above. The increase from $172,000 in  
1994 to $795,000 in 1995 was due to the one-time costs associated with the      
acquisition of Optimas, which aggregated approximately $600,000.                

Income taxes. FLIR's effective income tax rates for 1996, 1995 and 1994 were
19.7%, 11.9% and 9.9%, respectively. The effective tax rates were               
substantially below the statutory rate as FLIR was able to realize the          
benefits of a portion of its net operating loss carryforwards and existing tax  
credits. FLIR recognized a net deferred tax benefit of $400,000, $950,000 and   
$850,000 in 1996, 1995 and 1994, respectively, under the recognition criteria   
of Statement of Financial Accounting Standard No. 109 (SFAS 109), "Accounting   
for Income Taxes." The current portion of income tax expense consists of state  
and federal income taxes, as the utilization of net operating loss              
carryforwards and existing tax credits was limited. As a result of FLIR's       
initial public offering in 1993, FLIR experienced a cumulative change in        
ownership of more than 50% within a three-year period, which resulted in the    
imposition of a limitation on the utilization of net operating losses and       
existing tax credits of $2.6 million per year.                                  

At December 31, 1996, FLIR had utilized all its net operating loss          
carryforwards, however, in connection with the acquisition of Optimas, FLIR     
acquired net operating loss carryforwards aggregating $5.5 million which        
expire in the years 1997 through 2010. Utilization of these carryforwards is    
limited to future earnings of Optimas and further limited to approximately      
$350,000 per year, as Optimas experienced a cumulative change in ownership of   
more than 50% within a three-year period. Additionally, FLIR has various tax    
credits available aggregating $771,000 which expire in the years 1999 through   
2011.                                                                           

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SIX MONTHS ENDED JUNE 30, 1997 AND 1996                                         

Overall. For the six months ended June 30, 1997, net earnings increased     
32.6%, from $1.2 million, or $0.21 per share, in the first half of 1996 to      
$1.5 million, or $0.27 per share, in the first half of 1997. Earnings from      
operations for the six months ended June 30, 1997 increased 74.8%, from $1.7    
million in the first half of 1996 to $2.9 million in the first half on 1997.    
The increase in net earnings did not increase at the same rate as earnings      
from operations primarily due to an increase in interest expense and an         
increase in the effective tax rate for the first six months of 1997.            

Revenues. Revenues for the six months ended June 30, 1997, increased 35.6%, 
from $26.4 million in the first half of 1996 to $35.8 million in the first      
half of 1997. Revenues from the sale of FLIR's commercial imaging systems for   
the six months ended June 30, 1997, increased 65.5% from the comparable period  
in 1996, from $9.9 million in 1996 to $16.4 million in 1997. The improvement    
was principally attributable to the inclusion of a full six months of revenues  
from sales of FLIR's aerial broadcast systems for the broadcast and             
entertainment markets which were introduced in the second quarter of 1996 and   
the increased deliveries of the Prism DS as a result of production              
improvements. Revenues from the sale of systems to governmental customers for   
the six months ended June 30, 1997, totaled $19.4 million, an increase of       
17.7% from the $16.5 million in revenues generated in the first half of 1996.   
This growth is primarily due to the increased sales of the SAFIRE thermal       
imaging system including increased international sales which typically have a   
higher selling price.                                                           

As a percentage of total revenue, revenues from the sale of commercial      
imaging systems for the six months ended June 30, 1997, increased to 45.8%, as  
compared to 37.5% for the first six months of 1996. This increase indicates     
that sales of FLIR's commercial imaging systems continue to comprise a larger   
percentage of FLIR's total revenue.                                             

Revenue from sales outside the United States increased significantly as a   
percentage of total revenue from approximately 43.3% of total revenue in the    
first half of 1997 from 34.5% for the first half of 1996. The increase in the   
percentage of international sales was primarily due to increased deliveries on  
existing international contracts and increased market penetration of FLIR's     
commercial products in Europe. While the percentage of revenue from             
international sales will continue to fluctuate from quarter to quarter due to   
the timing of shipments under existing international and domestic government    
contracts, management anticipates that revenues from international sales as a   
percentage of total revenues will continue to comprise a significant            
percentage of revenues.                                                         

Gross profit. As a percentage of revenue, gross profit increased from 52.1% 
to 53.8% for the six month periods ended June 30, 1996 and 1997, respectively.  
This increase in gross profit as a percentage of revenue was principally        
attributable to the increased proportion of higher margin international sales   
and decreased shipments to instrumentalities of the U.S. Government which       
typically have lower margins than those of other customers in the government    
market and aggregated $8.3 million in the first half of 1997 compared to $10.2  
in the first half of 1996. Gross profit percentages are affected by a variety   
of factors, including the mix of domestic and international sales, the more     
competitive nature of the commercial imaging market, and the impact of          
competitive bids for significant government contracts.                          

Research and development. Research and development expense increased 24.8%  
for the six months ended June 30, 1997, from $4.3 million in the first half of  
1996 to $5.3 million in the first half of 1997. As a percentage of revenue,     
research and development expense decreased from 16.2% to 14.9% for the six      
months ended June 30, 1996 and 1997, respectively. The overall level of         
research and development expense reflects FLIR's continuing emphasis on         
product development and new product introduction. The overall decrease as a     
percentage of revenue reflects the fact that a relatively large percentage of   
research and development expense is fixed in nature. While FLIR expects the     
absolute dollar amount of research and development expense to increase as the   
year progresses, research and development expense as a percentage of total      
revenue should decline as revenues increase.                                    

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Selling and other operating costs. Selling and other operating costs        
increased 41.0% for the six months ended June 30, 1997, from $7.8 million in    
the first half of 1996 to $11.0 million in the first half of 1997. As a         
percentage of revenue, selling and other operating costs increased from 29.5%   
to 30.6% for the six months ended June 30, 1996 and 1997, respectively. The     
increases in absolute dollar terms were primarily due to costs associated with  
the increase in international revenues, particularly commissions, for the       
quarter and to increased sales and marketing personnel as FLIR continues to     
expand and strengthen the direct sales and marketing staff at both FLIR and     
Optimas. These efforts have directly resulted in increased sales of commercial  
products.                                                                       

Income taxes. The provision for income taxes for the six months ended June  
30, 1997 resulted in an effective tax rate of 25.9% compared to 21.5% for the   
first half of 1996. The increase in the effective tax rate is primarily due to  
the fact that FLIR has utilized all of its internally generated net operating   
loss carryforwards. The effective tax rate remains substantially below          
statutory rates due to utilization of a portion of FLIR's acquired net          
operating loss carryforwards, utilization of various tax credits, and benefits  
from the favorable tax treatment of international revenue.                      

LIQUIDITY AND CAPITAL RESOURCES                                                 

At June 30, 1997, FLIR had short term borrowings net of cash on hand of     
$11.7 million compared to $11.1 million at March 31, 1997 and with $5.6         
million at December 31, 1996. The increased use of cash during the six months   
ended June 30, 1997, was principally attributable to increased working capital  
needs, primarily increased accounts receivable levels.                          

At June 30, 1997, FLIR had inventory on hand of $33.9 million compared to   
$33.5 million at December 31,1996. Consistent with the prior quarter, the       
efforts to reduce inventory levels for existing product lines were partially    
offset by the increase in inventory needed to support deliveries of FLIR's new  
product lines, including the SeekIR, the Tracer, the UltraMedia and the         
UltraMedia RS. Further, because of the extremely long lead times for many of    
the most expensive components, it is necessary to have inventory on hand to     
meet the required delivery schedule.                                            

At June 30, 1997, FLIR had accounts receivable in the amount of $35.6       
million compared to $28.3 million at December 31, 1996. The increase in the     
level of accounts receivable is primarily due to the significant level of       
shipments in the last month of the quarter primarily to international           
customers and domestic governmental customers.                                  

FLIR has available a $14.0 million line of credit which bears interest at   
the prime rate. At June 30, 1997, FLIR had a $13.1 million balance outstanding  
on this line.                                                                   

The increased use of cash by operating activities is consistent with prior  
years and is primarily due to the increase in accounts receivable discussed     
above. FLIR has completed negotiations to increase the available line of        
credit from $14.0 million to $25.0 million. While use of the credit facility    
will vary significantly and is heavily dependent upon the timing of             
collections of significant receivables, FLIR believes that its existing cash    
and available credit facilities will be sufficient to meet its cash             
requirements for the foreseeable future.                                        

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RECENT ACCOUNTING PRONOUNCEMENTS                                                

In February 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128)       
which requires disclosure of basic earnings per share and diluted earnings per  
share and is effective for periods ending subsequent to December 15, 1997. The  
pro forma effect of adoption of SFAS 128 is included in the following table     
below.                                                                          

                                                                [Download Table]

                                           SIX MONTHS                          
                                              ENDED                            
                                            JUNE 30,    YEAR ENDED DECEMBER 31,
                                          ------------- -----------------------
                                           1997   1996   1996    1995    1994  
                                          ------ ------ ------- ------- -------
                                                                               
As Reported:                                                                   
  Net earnings per share................. $ 0.27 $ 0.21 $  0.91 $  0.70 $  0.95
  Weighted average number of common                                            
   shares and equivalents outstanding....  5,795  5,559   5,624   5,523   5,436
Pro Forma:                                                                     
  Basic net earnings per share........... $ 0.28 $ 0.22 $  0.95 $  0.74 $  1.01
  Weighted average number of common                                            
   shares outstanding....................  5,456  5,312   5,361   5,246   5,149
  Diluted net earnings per share......... $ 0.27 $ 0.21 $  0.91 $  0.70 $  0.95
  Weighted average number of common                                            
   shares and equivalents outstanding....  5,795  5,559   5,624   5,523   5,436

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BUSINESS OF AGEMA 

GENERAL                                                                         

AGEMA was originally created in 1965 as a division of AGA AB, a Swedish gas 
manufacturer located in Stockholm. Following a restructuring of AGA during the  
early 1970's, the division was separately incorporated as AGEMA Infrared        
Systems, AB, and became the subsidiary of the Swedish company Pharos AB, which  
later changed its name to Spectra-Physics AB. AGEMA is comprised of four        
separate corporate entities: AGEMA Sweden, AGEMA Canada, AGEMA UK and AGEMA     
USA.                                                                            

AGEMA designs, manufactures, and markets thermal imaging systems worldwide  
for a wide variety of applications in commercial and industrial markets.        
Thermal imaging systems detect heat, map temperatures and conduct non-conduct   
temperature measurement and analysis. Commercial and industrial applications    
include predictive and preventive maintenance, non-destructive testing and      
evaluation, research and development, and process control and monitoring.       
AGEMA's principal executive offices and manufacturing facility are owned and    
operated by AGEMA Sweden and are located just outside Stockholm, Sweden. AGEMA  
Sweden also has three subsidiaries which operate sales and service offices in   
France, Germany and Italy. AGEMA Canada, AGEMA UK and AGEMA USA own and         
operate sales and service offices in Canada, Great Britain, and the United      
States, respectively.                                                           

From its inception, AGEMA has been recognized as a world leader in the      
design, manufacture and marketing of high quality infrared cameras for          
detecting and mapping temperature differences and for non-contact temperature   
measurement for a wide variety of industrial and research applications. AGEMA   
has built a global sales and service network through its subsidiaries and       
distributors in over 30 countries. Headquartered in Stockholm, Sweden, AGEMA    
exports approximately 98 percent of its production to other countries in        
Europe, the United States, Asia, South America, the Middle East and Africa.     

INDUSTRY BACKGROUND                                                             

Infrared, or heat radiation, is emitted by all objects and materials.       
Systems that detect and measure infrared radiation are used in a growing        
number of applications where the spectral properties of the radiation offer     
unique opportunities for detection, measurement and analysis such as nighttime  
surveillance, missile guidance, hot spot detection (predictive and              
preventative maintenance), and non-contact temperature measurement (non-        
destructive testing and evaluation). Approximately 80 percent of AGEMA's        
products are used for predictive and preventive maintenance and non-            
destructive testing and evaluation applications. During the past four years,    
AGEMA has sold systems for surveillance applications primarily through          
original equipment manufacturers. AGEMA does not currently market its products  
or technology for missile guidance, tank sights or other military sighting      
applications.                                                                   

The infrared imaging industry is undergoing an evolution in technology as   
uncooled focal plane array detectors are developed to replace conventional      
cooled scanning array detectors. This new technology offers excellent image     
resolution, greater portability of systems, longer battery operating time,      
less maintenance and ultimately reduced cost. AGEMA was one of the first        
companies to unveil a radiometric (temperature measuring) infrared camera       
based on the uncooled focal plane array detector technology developed by        
Honeywell and licensed to Lockheed-Martin.                                      

MARKETS FOR THE AGEMA'S PRODUCTS                                                

Condition Monitoring. Virtually every industrial process utilizes equipment 
that generates heat. Detecting and monitoring heat distribution and the         
temperature of components is useful in a variety of applications, including     
electrical power generation facilities, the production of circuit boards, even  
the operation of a boiler or furnace. This imaging information can be used to   
prevent catastrophic failures or to make more effective decisions about         
preventive maintenance actions.                                                 

Research and Development. Thermal mapping and temperature analysis in       
various R&D applications can shorten development times and prevent future       
quality problems in finished products. The ability to measure                   

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temperature at several different points without actually coming into contact    
with the object is an important, and in some cases the only, method to          
evaluate the nature of dynamic processes and heat propagation in complex        
systems.                                                                        

Process Monitoring & Control. Many industrial processes such as those being 
used in the paper industry, in the steel industry and for metal refining        
require accurate temperature information in real time at different stages of    
the process. This information is fed to the process computer and serves as      
input for the control of the process parameters. AGEMA offers both its range    
of infrared cameras and specially developed line scanners along with process    
dedicated software products.                                                    

Search & Rescue and Ground Security. AGEMA introduced in 1992 its           
Thermovision 1000 infrared camera. This is a sensor that can be integrated in   
airborne stabilized gimbals and in area surveillance systems. AGEMA believes    
that these are areas with significant growth potential during the years to      
come. AGEMA's leadership in applying the uncooled and other focal plane array   
technologies will be of significant importance to the successful development    
of these markets.                                                               

PRODUCTS                                                                        

Themovision(TM)900. The 900 series was introduced in 1992 as a general      
system for advanced R&D. The camera is available in short and long wave         
versions, with open or closed cooling facilities and in the case of 900 S/W     
with thermo-electric cooling. There is a choice of a wide range of lenses,      
filters and other accessories. The 900 scanner is connected to a special        
control unit that also can be used in dual mode i.e. to drive one L/W and one   
S/W scanner simultaneously.                                                     

ERICA Thermal Analysis Software. The ERICA software was developed by AGEMA  
solely for The Thermovision 900. The functionality for thermal image analysis   
is vast since AGEMA has continued to add features based on new customer         
requirements over the past five years.                                          

Thermovision(TM)550. The Thermovision 550 is a handheld infrared camera     
developed for the condition monitoring market. It was introduced in December    
1995 and full production rate was established in the fall of 1996. The 550      
series uses a stirling cooled 320 x 240 PtSi focal plane array and is, in its   
standard version, calibrated for temperature measurement up to 1500(degrees)    
C. The camera has built-in digital recording and an easy-to-use control panel.  
Lenses for different fields of view are available as well as filters and other  
accessories.                                                                    

Thermovision(TM)570. The 570 is the latest addition to AGEMA's product      
range. It is the first radiometric infrared imager using the new uncooled       
microbolometer technology that has been introduced in limited quantities as     
the technology is developed for production. . The Thermovision 570 is a light   
weight low power consumption unit that opens new opportunities for condition    
monitoring applications through its ease of use and ruggedness.                 

IRWin software. IRWin is a software package that has been developed to fit  
the needs of the condition monitoring market segment. IRWin runs in a Windows   
format and has extensive capabilities for thermal image analysis and            
reporting.                                                                      

Thermovision(TM) 510. The 510 is an affordable hand held thermal imager with
no analysis or measurement capabilities. It is used for hot spot detection      
where temperature information is not needed and as a night vision aid in        
police surveillance operations and the like.                                    

Thermovision(TM)1000. In following a diversification strategy AGEMA         
introduced its 1000 series of infrared cameras in 1992. Originally the camera   
was engineered to be a sensor for airborne surveillance using the GEC SPRITE    
detector and a dual field of view lens system. Further development has          
extended the 1000 series of products to cover other applications such as i.e.   
ground surveillance and security.                                               

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Thermoprofile(TM)6. For process monitoring and control it is often a        
requirement to record a temperature profile across a moving object. The         
movement of the object creates in itself a scan in one direction. The AGEMA     
Thermoprofile  was designed to monitor the temperature on the surface of a      
rotating cement kiln. Later AGEMA has applied the line scanner technology to    
hot and cold rolling steel mills, float glass manufacturing, metal refining     
and the like. In addition to the sensor AGEMA provides soft-ware and            
engineering to its line scanner customers.                                      

CUSTOMERS                                                                       

AGEMA's primary customers are electric power utilities, the manufacturing   
industry, research establishment and consultants in condition monitoring.       
Sales to government agencies amount to less than 10% of the total revenue. No   
single customer in 1994, 1995 or 1996 accounted for more than 5% of AGEMA's     
total revenue.                                                                  

SALES, DISTRIBUTION AND CUSTOMER SERVICE                                        

AGEMA markets its products through six wholly owned sales subsidiaries in   
the USA, Canada, UK, Germany, France and Italy. Sales to the Nordic countries   
and the rest of the world are handled by AGEMA Direct Sales which is a          
department in the parent company in Sweden. There is an extensive network of    
distributors and agents covering Asia, South America, and the Middle East. All  
AGEMA sales units provide after sales service including customer training,      
repair and calibration.                                                         

For back-up of the sales organization there is a technical support group in 
Sweden that gives application support and that responds to special customer     
inquiries for product modifications.                                            

MANUFACTURING AND ENGINEERING                                                   

All products with one exception, are developed and manufactured at AGEMA's  
main facility in Danderyd, Sweden. The exception is Thermovision(TM)510 which   
is bought from an outside vendor.                                               

The Danderyd operations is ISO 9001 certified since 1995. The facility is   
modern and well laid out for its purpose. AGEMA has made considerable           
investments in capital equipment both for the support of the engineering team   
and for the rational manufacturing of critical components. AGEMA has a long     
term lease agreement on the building with options for renewal.                  

COMPETITION                                                                     

AGEMA's competitors in the commercial thermographic market are primarily US,
European and Japanese companies offering products with similar specifications   
to the Thermovision(TM) product line. The major competitors are FLIR,           
Inframetrics, Raytheon, I.S.I., Land, GEC, Mitsubishi, AVIO, JEOL and NEC.      
Following the technology shift from mechanical scanning to Focal Plane Arrays   
AGEMA expects an increasing number of competitors will enter the market. Texas  
Instruments has recently announced that it will introduce an uncooled           
radiometric thermal imager in late 1997 and several Japanese companies are on   
the move to the international market. In the defense and law enforcement        
areas, AGEMA's competitors in the US include Lockhead Martin, Raytheon and      
other defense contractors. In Europe and Asia, competitors include Thomson,     
GEC, Wescam and Inframetrics.                                                   

AGEMA believes that it has a competitive advantage in its long application  
experience, its world wide sales and service network and its reputation for     
high quality products.                                                          

EMPLOYEES                                                                       

As of September 30, 1997 AGEMA had 190 employees of whom 45 were in         
engineering, 110 were in marketing, sales, service and sales administration,    
30 were in manufacturing and logistics and 5 were in administration. AGEMA has  
been fortunate to attract a skilled and dedicated work force.                   

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

OVERVIEW                                                                        

AGEMA has a track record of profitable operations since its incorporation in
1975. In the later part of the 1980's and during selected years in the 1990's   
AGEMA generated operating profits in the range of 12 to 17% of revenues. In     
these years, return on capital employed was approximately 30 to 50%. In 1996    
AGEMA showed a loss for the first time in the company's history. The reason     
was that AGEMA was late in adapting to the technology shift from mechanical     
scanning to focal plane arrays. This caused lost market share, in particular    
in the US. As a consequence AGEMA launched an aggressive cost saving program    
that was implemented and paid for in 1996. AGEMA also accelerated its           
development program on the uncooled technology.                                 

During 1997, AGEMA's results have improved significantly, cost savings      
implemented in 1996 have had a favorable impact. New orders have increased for  
the six months ended June 30, 1997 as compared to the prior year and revenues   
have increased during the same period by 37.5%.                                 

RESULTS OF AGEMA'S COMBINED OPERATIONS                                          

                                                                [Download Table]

                              SIX MONTHS ENDED                            
                                   JUNE 30       YEAR ENDED DECEMBER 31   
                              -----------------  ------------------------ 
                                1997     1996     1996     1995    1994   
                              -------- --------  -------  ------- ------- 
                                                                          
Sales.......................    100.0%   100.0%   100.0%   100.0%  100.0% 
Cost of goods sold..........     50.7%    50.3%    52.4%    46.3%   44.5% 
                              -------- --------  -------  ------- ------- 
Gross margin................     49.3%    49.7%    47.6%    53.7%   55.5% 
Operating expenses                                                        
 Product Development........      9.6%    12.2%    10.2%    10.8%    8.9% 
 Selling & other oper. exp..     36.1%    47.4%    42.4%    37.2%   34.8% 
 Non-recurring items........      0.0%     0.0%     0.0%     0.0%   (2.0%)
                              -------- --------  -------  ------- ------- 
Total operating expenses....     45.7%    59.6%    52.6%    48.0%   41.7% 
                              -------- --------  -------  ------- ------- 
Operating income............      3.6%    (9.9%)   (5.0%)    5.7%   13.8% 
                              ======== ========  =======  ======= ======= 

YEARS ENDED DECEMBER 31 1996, 1995 AND 1994                                     

Overall. AGEMA's revenues decreased from 349 million Swedish Krone in 1994  
to 341 million Swedish Krone in 1995 and to 325 million Swedish Krone in 1996   
as a result of the previously mentioned late introduction of a focal plane      
array thermal imager. The competition had such products available already in    
1994. Hence AGEMA was at a disadvantage in competitive situations for more      
than two years. In spite of this, operating profits for 1995 and in particular  
for 1994 were 20 million Swedish Krone and 48 million Swedish Krone,            
respectively.                                                                   

In 1996 AGEMA launched a cost saving program which took the number of       
employees from 216 to below 200. Other measures were also taken such as re-     
negotiation of vendor contracts, investment in new machines for in house        
production of lenses and general reduction of operating expenses. The cost of   
the program, including extra capital expenditures of approximately 6 million    
Swedish Krone, was recorded entirely in 1996.                                   

Gross profit. As a percentage of revenues the gross margin decreased        
substantially from 55.5% in 1994 to 53.7% in 1995 and to 47.6% in 1996. During  
this period AGEMA was forced to cut prices in order to prevent further loss of  
market share. Secondly, the drop in production volumes of almost 10% between    
1994 and 1996 caused higher production overhead costs.                          

Research and Development. For the period 1994-1996, AGEMA has spent         
approximately 34 million Swedish Krone annually on R&D. As result of the        
decline in revenues, R&D expenses as a percentage of sales have increased from  
8.9% in 1994 to 10.2% in 1996.                                                  

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Selling and other operating expenses. Selling and other operating expenses  
have increased from 121.4 million Swedish Krone in 1994 to 137.8 million        
Swedish Krone in 1996. Included in selling and other operating expenses are     
commissions which comprise approximately 7% of gross revenue.                   

Operating income. During 1994 and 1995, the Company generated operating     
income of 48.0 million Swedish Krone and 19.6 million Swedish Krone. In 1996,   
the Company had an operating loss of 16.4 million Swedish Krone.                

SIX MONTHS ENDED JUNE 30, 1997 AND 1996                                         

Revenues and bookings. Bookings for AGEMA during the first half of 1997 were
202.9 million Swedish Krone, an increase of 58.4% over the 128.1 million        
Swedish Krone for the first half of 1996. For the same period revenues          
increased 37.5%, from 137.0 million Swedish Krone to 188.4 million Swedish      
Krone. This recovery was primarily the result of the introduction in 1996 of    
the AGEMA Thermovision(TM)550 focal plane array thermal imager.                 

Gross profit. For the first half of 1997 the gross margin was 49.3% compared
to 47.6% for the full year of 1996. The improvement is due to a combination of  
increased production volumes and improvement in operating costs.                

Operating Income. Operating income for the first six months of 1997 was 6.8 
million Swedish Krone compared to a loss of 13.7 million Swedish Krone in the   
first half of 1996.                                                             

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STOCK OWNED BY FLIR MANAGEMENT  
AND PRINCIPAL SHAREHOLDERS  

The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of         
September 30, 1997, and such beneficial ownership as adjusted to reflect the    
issuance of 4,162,000 shares of Common Stock to the Spectra Companies in the    
Combination by: (i) each person known by the Company to beneficially own more   
than 5% of the outstanding shares of Common Stock, (ii) each of the Company's   
directors, (iii) each of the Company's named executive officers, and (iv) all   
directors and executive officers as a group. Except as otherwise indicated,     
the Company believes that each of the following shareholders has sole voting    
and investment power with respect to the shares beneficially owned by such      
shareholder.                                                                    

                                                                [Download Table]

                           SHARES OF                                             
                          COMMON STOCK   PERCENT OF     SHARES OF     PERCENT OF 
                          BENEFICIALLY  COMMON STOCK  COMMON STOCK   COMMON STOCK
                          OWNED BEFORE  OUTSTANDING   BENEFICIALLY   OUTSTANDING 
NAME AND ADDRESS OF           THE        BEFORE THE  OWNED AFTER THE  AFTER THE  
BENEFICIAL OWNER         COMBINATION(1) COMBINATION  COMBINATION(1)  COMBINATION 
-------------------      -------------- ------------ --------------- ------------
                                                                                 
The Spectra Companies...        --           --         4,162,000        42.8%   
 Sturgaten 32                                                                    
 Box 5226, S-102 45                                                              
 Stockholm, Sweden                                                               
Hughes Aircraft                                                                  
 Company(2).............    760,500         13.7%         760,500         7.8%   
 7200 Hughes Terrace                                                             
 Bldg.                                                                           
 Los Angeles, CA 90045                                                           
Fidelity Investments(3).    541,200          9.7%         541,200         5.6%   
 82 Devonshire Street                                                            
 Boston, MA 02109                                                                
Heartland Advisors,                                                              
 Inc.(4)................    437,000          7.9%         437,000         4.5%   
 790 North Milwaukee                                                             
 Street                                                                          
 Milwaukee, WI 53202                                                             
Robert P. Daltry........    208,128          3.7%         208,128         2.1%   
John C. Hart............     27,000            *           27,000           *    
George Porter...........     32,000            *           32,000           *    
W. Allen Reed(5)........     27,000            *           27,000           *    
J. Kenneth Stringer III.    111,877          2.0%         111,877         1.1%   
Ronald L. Turner........     27,000            *           27,000           *    
J. Richard Kerr.........     19,528            *           19,528           *    
James A. Fitzhenry......      3,533            *            3,533           *    
William N. Martin.......      9,167            *            9,167           *    
Directors and Executive                                                          
 Officers as a group                                                             
 (13 persons)...........    491,566          8.3%         491,566         4.9%   

--------                                                                        
*Less than one percent (1%).                                                  
(1) Beneficial ownership is determined in accordance with rules of the SEC,     
and includes voting power and investment power with respect to shares.  
Shares issuable upon the exercise of outstanding stock options that are 
 currently exercisable or become exercisable within 60 days from September
30, 1997 are considered outstanding for the purpose of calculating the  
percentage of Common Stock owned by such person, but not for the purpose
of calculating the percentage of Common Stock owned by any other person.
The number of shares that are issuable upon the exercise of options that
are currently exercisable or exercisable within 60 days of September 30,
 1997 is as follows: Mr. Daltry - 116,800; Mr. Hart - 27,000; Mr. Porter -
  27,000; Mr. Reed - 27,000; Mr. Stringer - 64,517; Mr. Turner - 27,000; Mr.
  Martin - 5,834; Dr. Kerr-- 13,333; Mr. Fitzhenry - 0; and all officers and
directors as a group - 332,984.                                         
(2) This information as to beneficial ownership is based on a Schedule 13G      
filed by General Motors Corporation ("GM"), GM Hughes Electronics       
Corporation ("GMHE") and Hughes Aircraft Company ("Hughes") with the    
Securities and Exchange Commission on February 7, 1994. Hughes is a     
wholly-owned subsidiary of GMHE, which is a wholly-owned                

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subsidiary of GM. Each of GM and GMHE has its principal executive offices 
located at 3044 West Grand Blvd., Detroit, Michigan 48202-3091. The       
Schedule 13G states that as of December 31, 1993 Hughes was the beneficial
owner of 760,500 shares of Common Stock as to which it had sole voting and
dispositive power and that GM and GMHE had shared voting and dispositive  
power with respect to such shares.                                        
(3) This information as to beneficial ownership is based on a Schedule 13G      
 filed by Fidelity Investments with the Securities and Exchange Commission
  on February 7, 1997. The Schedule 13G states that as of December 31, 1996,
 Fidelity Investments was the beneficial owner of 541,200 shares of Common
Stock as to which it had sole voting and dispositive power.             
(4) This information as to beneficial ownership is based on a Schedule 13G      
filed by Heartland Advisors, Inc., with the Securities and Exchange     
Commission on February 12, 1997. The Schedule 13G states that as of     
December 31, 1996, Heartland Advisors, Inc., was the beneficial owner of
437,000 shares of Common Stock as to which it had sole voting and       
dispositive power.                                                      
(5) Mr. Reed is President of General Motors Investment Management Corporation.  
Mr. Reed disclaims beneficial ownership of the 760,500 shares of Common 
Stock beneficially owned by Hughes Aircraft Company.                    

DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS  

Any shareholder proposal intended for inclusion in the proxy statement and  
form of proxy relating to FLIR's 1998 annual meeting of shareholders must be    
received by FLIR not later than December 1, 1997, pursuant to the proxy         
soliciting regulations of the Securities and Exchange Commission (the "SEC").   
In addition, FLIR's Bylaws require that notice of shareholder proposals and     
nominations for director be delivered to the Secretary of FLIR not less than    
60 days nor more than 90 days prior to the date of an annual meeting, unless    
notice or public disclosure of the date of the meeting occurs less than 60      
days prior to the date of such meeting, in which event, shareholders may        
deliver such notice not later than the 10th day following the day on which      
notice of the date of the meeting was mailed or public disclosure thereof was   
made. Nothing in this paragraph shall be deemed to require FLIR to include in   
its proxy statement and form of proxy for such meeting any shareholder          
proposal which does not meet the requirements of the SEC in effect at the       
time.                                                                           

AVAILABLE INFORMATION 

FLIR is subject to the information and reporting requirements of the        
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in        
accordance therewith files reports, proxy statements and other information      
with the Securities and Exchange Commission (the "Commission"). Such reports,   
proxy statements and other information may be inspected and copied at the       
public reference facilities maintained by the Commission at 450 Fifth Street,   
N.W., Washington, D.C. 20549, and at certain regional offices of the            
Commission located at Suite 1400, Northwestern Atrium Center, 500 West Madison  
Street, Chicago, Illinois 60661, and 7 World Trade Center, 13th Floor, New      
York, New York 10048. Copies of such information can be obtained at prescribed  
rates from the Public Reference Section of the Commission, 450 Fifth Street,    
N.W., Washington, D.C. 20549. The Commission maintains a World Wide Web site    
on the Internet at http://www.sec.gov that contains reports, proxy statements   
and other information regarding registrants that file electronically with the   
Commission.                                                                     

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INDEX TO FINANCIAL STATEMENTS 

This item includes the following financial information:                     

FLIR SYSTEMS, INC.

                                                                [Download Table]

STATEMENT                                                                PAGE
---------                                                                ----
                                                                             
Report of Price Waterhouse LLP, Independent Accountants................   F-2
Consolidated Statement of Operations for the Years Ended December 31,        
 1996,                                                                       
 1995 and 1994.........................................................   F-3
Consolidated Balance Sheet as of December 31, 1996 and 1995............   F-4
Consolidated Statement of Shareholders' Equity for the Years Ended           
 December 31, 1996,                                                          
 1995 and 1994.........................................................   F-5
Consolidated Statement of Cash Flows for the Years Ended December 31,        
 1996,                                                                       
 1995 and 1994.........................................................   F-6
Notes to the Consolidated Financial Statements for the Year Ended            
 December 31, 1996, 1995 and 1994......................................   F-7
Consolidated Statement of Operations for the Three and Six Months Ended      
 June 30, 1997 and 1996 (unaudited)....................................  F-17
Consolidated Balance Sheet as of June 30, 1997 (unaudited) and December      
 31, 1996..............................................................  F-18
Consolidated Statement of Cash Flows for the Six Months Ended June 30,       
 1997 and 1996 (unaudited).............................................  F-19
Notes to the Consolidated Financial Statements for the Six Months Ended      
 June 30, 1997 and 1996 (unaudited)....................................  F-20

                                  AGEMA                                      


STATEMENT                                                                PAGE
---------                                                                ----
                                                                             
Report of Ohrlings Coopers & Lybrand AB, Independent Accountants.......  F-22
Combined Statement of Operations for the Years Ended December 31, 1996,      
 1995 and 1994.........................................................  F-23
Combined Balance Sheet as of December 31, 1996 and 1995................  F-24
Combined Statement of Shareholders' Equity for the Years Ended December      
 31, 1996,                                                                   
 1995 and 1994.........................................................  F-25
Combined Statement of Cash Flows for the Years Ended December 31, 1996,      
 1995 and 1994.........................................................  F-26
Notes to the Combined Financial Statements for the Year Ended December       
 31, 1996,                                                                   
 1995 and 1994.........................................................  F-27
Combined Statement of Operations for the Six Months Ended June 30, 1997      
 and 1996 (unaudited)..................................................  F-39
Combined Balance Sheet as of June 30, 1997 (unaudited) and December 31,      
 1996..................................................................  F-40
Combined Statement of Cash Flows for the Six Months Ended June 30, 1997      
 and 1996 (unaudited)..................................................  F-41
Notes to the Combined Financial Statements for the Six Months Ended          
 June 30, 1997 and 1996 (unaudited)....................................  F-42

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REPORT OF INDEPENDENT ACCOUNTANTS 

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

In our opinion, the accompanying consolidated balance sheet and the related 
consolidated statements of operations, of shareholders' equity, and of cash     
flows present fairly, in all material respects, the financial position of FLIR  
Systems, Inc. and its subsidiaries at December 31, 1996 and 1995, 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. 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 of these      
statements in accordance with generally accepted auditing standards which       
require that we plan and perform the audit to obtain reasonable assurance       
about whether the financial statements are free of material misstatement. An    
audit includes examining, on test basis, evidence supporting the amounts and    
disclosures in the financial statements, assessing the accounting principles    
used and significant estimates made by management, and evaluating the overall   
financial statement presentation. We believe that our audits provide a          
reasonable basis for the opinion expressed above.                               

                            /s/ Price Waterhouse LLP

                        PRICE WATERHOUSE LLP

Portland, Oregon                                                                
February 25, 1997                                                               

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FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                [Download Table]

                                                      YEAR ENDED DECEMBER 31,  
                                                     ------------------------- 
                                                      1996     1995     1994   
                                                     -------  -------  ------- 
                                                                               
Revenues:                                                                      
  Government........................................ $42,958  $33,575  $35,805 
  Commercial........................................  23,059   16,550   13,172 
                                                     -------  -------  ------- 
                                                      66,017   50,125   48,977 
Cost of goods sold..................................  30,415   22,724   23,813 
Research and development............................   9,485    7,786    7,588 
Selling and other operating costs...................  17,739   14,601   11,903 
Allowance for doubtful accounts.....................   1,260       55      450 
                                                     -------  -------  ------- 
                                                      58,899   45,166   43,754 
    Earnings from operations........................   7,118    4,959    5,223 
Interest income.....................................      44      226      705 
Interest expense and other..........................    (819)    (795)    (172)
                                                     -------  -------  ------- 
    Earnings before income taxes....................   6,343    4,390    5,756 
Provision for income taxes..........................   1,251      523      570 
                                                     -------  -------  ------- 
Net earnings........................................ $ 5,092  $ 3,867  $ 5,186 
                                                     =======  =======  ======= 
Net earnings per share.............................. $  0.91  $  0.70  $  0.95 
                                                     =======  =======  ======= 
Weighted average number of common shares and                                   
equivalents outstanding.............................   5,624    5,523    5,436 
                                                     =======  =======  ======= 

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

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FLIR SYSTEMS, INC.

CONSOLIDATED BALANCE SHEET

(IN THOUSANDS, EXCEPT FOR SHARE DATA) 

                                                                [Download Table]

                                                                 DECEMBER 31   
                                                               ----------------
                                                                1996     1995  
                                                               -------  -------
                                                                               
ASSETS                                                                         
Current assets:                                                                
  Cash and cash equivalents................................... $   775  $ 1,154
  Accounts receivable.........................................  28,311   24,898
  Inventories.................................................  33,513   23,666
  Prepaid expenses............................................   1,551      439
                                                               -------  -------
    Total current assets......................................  64,150   50,157
Property and equipment........................................   7,137    4,003
Software development costs....................................     799      469
Deferred income taxes.........................................   2,200    1,800
Other assets..................................................     818      489
                                                               -------  -------
                                                               $75,104  $56,918
                                                               =======  =======
LIABILITIES AND SHAREHOLDERS' EQUITY                                           
Current liabilities:                                                           
  Notes payable............................................... $ 6,365  $ 2,056
  Accounts payable............................................   7,628    5,477
  Accounts payable to related parties.........................     128      273
  Accrued payroll and other liabilities.......................   1,907    1,631
  Accrued warranty reserve....................................     936      893
  Accrued commissions.........................................     546      923
  Accrued income taxes........................................   1,073      585
  Current portion of long-term debt...........................   1,377      435
                                                               -------  -------
    Total current liabilities.................................  19,960   12,273
Long-term debt................................................   5,173    1,175
Commitments and contingencies.................................     --       -- 
Shareholders' equity:                                                          
  Preferred stock, $0.01 par value, 10,000,000 shares                          
   authorized; no shares issued at December 31, 1996 or 1995..     --       -- 
  Common stock, $0.01 par value, 30,000,000 shares authorized,                 
   5,387,483 and 5,283,365 shares issued at December 31, 1996                  
   and 1995, respectively.....................................      54       53
Additional paid-in capital....................................  41,833   40,252
Retained earnings.............................................   8,257    3,165
Cumulative foreign translation adjustment.....................    (173)     -- 
                                                               -------  -------
    Total shareholders' equity................................  49,971   43,470
                                                               -------  -------
                                                               $75,104  $56,918
                                                               =======  =======

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

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FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT FOR SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                                        CUMULATIVE          
                           PREFERRED STOCK        COMMON STOCK     ADDITIONAL RETAINED    FOREIGN           
                         -------------------- --------------------  PAID-IN   EARNINGS  TRANSLATION         
                           SHARES    AMOUNT     SHARES    AMOUNT    CAPITAL   (DEFICIT) ADJUSTMENT   TOTAL  
                         ---------- --------- ---------- --------- ---------- --------- ----------- ------- 
                                                                                                            
                                      $0.01                $0.01                                            
Authorized.............. 10,000,000 par value 30,000,000 par value                                          
                         ========== ========= ========== =========                                          
Balance December 31,                                                                                        
 1993...................        --  $     --   4,964,668 $      50  $38,884    $(5,888)    $ --     $33,046 
 Net earnings for the                                                                                       
  year..................        --        --         --        --       --       5,186                5,186 
 Common stock options                                                                                       
  exercised.............        --        --     176,152         2      491        --        --         493 
 Common shares issued...        --        --      46,984       --       437        --        --         437 
                         ---------- --------- ---------- ---------  -------    -------     -----    ------- 
Balance December 31,                                                                                        
 1994...................        --        --   5,187,804        52   39,812       (702)      --      39,162 
 Net earnings for the                                                                                       
  year..................        --        --         --        --       --       3,867       --       3,867 
 Common stock options                                                                                       
  exercised.............        --        --      79,275         1      363        --        --         364 
 Common shares issued...        --        --      16,286       --        77        --        --          77 
                         ---------- --------- ---------- ---------  -------    -------     -----    ------- 
Balance December 31,                                                                                        
 1995...................        --        --   5,283,365        53   40,252      3,165       --      43,470 
 Net earnings for the                                                                                       
  year..................        --        --         --        --       --       5,092       --       5,092 
 Common stock options                                                                                       
  exercised.............        --        --      70,788         1      587        --        --         588 
 Common shares issued                                                                                       
  pursuant to stock                                                                                         
  option plans..........        --        --      33,330       --       398        --        --         398 
 Income tax benefit from                                                                                    
  stock options                                                                                             
  exercised.............        --        --         --        --       596        --        --         596 
 Foreign translation                                                                                        
  adjustment............        --        --         --        --       --         --       (173)      (173)
                         ---------- --------- ---------- ---------  -------    -------     -----    ------- 
Balance December 31,                                                                                        
 1996...................        --  $     --   5,387,483 $      54  $41,833    $ 8,257     $(173)   $49,971 
                         ========== ========= ========== =========  =======    =======     =====    ======= 

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

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FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(IN THOUSANDS)

                                                                [Download Table]

                                                      YEAR ENDED DECEMBER 31,  
                                                     ------------------------- 
                                                      1996     1995     1994   
                                                     -------  -------  ------- 
                                                                               
Cash (used) provided by operations:                                            
  Net earnings...................................... $ 5,092  $ 3,867  $ 5,186 
  Income charges not affecting cash:                                           
    Depreciation....................................   1,972    1,854    1,532 
    Amortization....................................     481      506      198 
    Disposal and write-offs of property and                                    
     equipment......................................     239      104      110 
    Deferred income taxes...........................    (400)    (950)    (850)
  Changes in certain working capital components:                               
    Increase in accounts receivable.................  (3,413)  (3,847) (12,573)
    Increase in inventories.........................  (9,847)  (6,762)  (2,353)
    (Increase) decrease in prepaid expenses.........  (1,112)    (106)      53 
    (Increase) decrease in other assets.............    (329)     109     (514)
    Increase in accounts payable....................   2,151    1,843    1,147 
    (Decrease) increase in accounts payable to                                 
     related parties................................    (145)     (51)     119 
    Increase (decrease) in accrued payroll and other                           
     liabilities....................................     276     (647)     371 
    Increase in accrued warranty reserve............      43       73      191 
    (Decrease) increase in accrued commissions......    (377)     (30)     346 
    Increase in accrued income taxes................     488      133      452 
                                                     -------  -------  ------- 
Cash (used) by operations...........................  (4,881)  (3,904)  (6,585)
                                                     -------  -------  ------- 
Cash used by investing activities:                                             
  Additions to property and equipment...............  (5,526)  (2,987)  (2,367)
  Software development costs........................    (630)    (599)    (304)
                                                     -------  -------  ------- 
Cash used by investing activities...................  (6,156)  (3,586)  (2,671)
                                                     -------  -------  ------- 
Cash provided by financing activities:                                         
  Net increase in notes payable.....................   4,309    2,056      --  
  Proceeds from long-term debt......................   5,817      572      572 
  Repayments of long-term debt including current                               
   portion..........................................    (877)    (608)    (430)
  Common stock issued...............................     --        77      437 
  Proceeds from exercise of stock options and shares                           
   issued pursuant to incentive stock option plans,                            
   including tax benefit............................   1,582      364      493 
                                                     -------  -------  ------- 
Cash provided by financing activities...............  10,831    2,461    1,072 
                                                     -------  -------  ------- 
Effect of exchange rate changes on cash.............    (173)     --       --  
                                                     -------  -------  ------- 
Net decrease in cash................................    (379)  (5,029)  (8,184)
Cash and cash equivalents, beginning of year........   1,154    6,183   14,367 
                                                     -------  -------  ------- 
Cash and cash equivalents, end of year.............. $   775  $ 1,154  $ 6,183 
                                                     =======  =======  ======= 

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

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FLIR SYSTEMS, INC.  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  

NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:                 

The Company designs, manufactures, and markets imaging systems worldwide for
a wide variety of applications in the government and commercial markets.        
Thermal imaging systems detect the infrared radiation, or heat, emitted         
directly by all objects and materials and enable the operator to see objects    
in total darkness, in adverse weather conditions and through obscurants such    
as smoke and haze. Government applications include public safety (law           
enforcement and drug interdiction, search and rescue, border patrol and         
maritime patrol, and environmental protection) and defense (surveillance,       
reconnaissance and navigation assistance). Commercial applications include      
commercial broadcast imaging, predictive and preventive maintenance, non-       
destructive testing and evaluation, research and development, manufacturing     
process control and monitoring, and machine vision and image analysis.          

PRINCIPLES OF CONSOLIDATION                                                     

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

RECOGNITION OF REVENUES                                                         

Revenue is recognized when products are shipped or when services are        
performed, except for certain long-term contracts, which are recorded on the    
percentage-of-completion method. The percentage-of-completion method is used    
for research and development contracts and for production contracts that        
require significant amounts of initial engineering and development costs. The   
percentage-of-completion is determined by relating the actual costs incurred    
to date to the total costs to complete the respective contract.                 

CASH AND CASH EQUIVALENTS                                                       

The Company considers short term investments which are highly liquid,       
readily convertible into cash and having original maturities of less than       
three months to be cash equivalents for purposes of the statement of cash       
flows. The Company generally invests its excess cash in investment grade,       
short-term commercial paper which is held to maturity. In 1994, the Company     
adopted Statement of Financial Accounting Standard No. 115 "Accounting for      
Certain Investments in Debt and Equity Securities." The adoption did not have   
a material effect on the financial statements. At December 31, 1996, the        
Company did not hold any short term investments.                                

INVENTORIES                                                                     

Inventories are stated at the lower of cost or market. The Company uses the 
first-in, first-out (FIFO) method to determine cost.                            

PROPERTY AND EQUIPMENT                                                          

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

Repairs and maintenance are charged to operations as incurred.              

SOFTWARE DEVELOPMENT COSTS                                                      

The Company capitalizes software development costs when a project reaches   
technological feasibility and ceases when the related product is ready for      
release. Research and development costs related to software                     

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FLIR SYSTEMS, INC.  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):     

development that has not reached technological feasibility are expensed as      
incurred. Software development costs are amortized at the greater of (a) the    
ratio of number of units shipped to the current and anticipated future units    
to be shipped or (b) the straight-line method over the remaining estimated      
economic life of the product. Generally, the estimated economic life is three   
years.                                                                          

INCOME TAXES                                                                    

The Company utilizes the liability method as set forth in Statement of      
Financial Accounting Standard No. 109 (SFAS 109), "Accounting for Income        
Taxes" (see Note 3).                                                            

EARNINGS PER SHARE                                                              

Earnings per share are based on the weighted average number of shares of    
common stock and common stock equivalents outstanding during the periods,       
computed using the treasury stock method for stock options.                     

RECLASSIFICATIONS                                                               

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

STATEMENT OF CASH FLOWS                                                         

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

                                                                [Download Table]

                                                  YEAR ENDED DECEMBER 31,
                                                 ------------------------
                                                  1996     1995     1994 
                                                 ------- --------- ------
                                                                         
Cash paid for:                                                           
  Interest......................................  $782    $  133    $ 90 
  Taxes.........................................  $763    $1,340    $604 

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES                                  

The Company estimates the fair value of its monetary assets and liabilities 
based upon the existing interest rates related to such assets and liabilities   
compared to the current market rates of interest for instruments of a similar   
nature and degree of risk. The Company estimates that the recorded value of     
all of its monetary assets and liabilities approximate fair value as of         
December 31, 1996, except for the patent note described in Note 9. Interest     
has been imputed on the patent note at 14% which exceeds the current market     
rate for this type of note. Therefore, the fair value of this note is           
estimated to be approximately $30,000 in excess of its recorded value at        
December 31, 1996.                                                              

STOCK-BASED COMPENSATION                                                        

The Company adopted the disclosure only provisions of Statement of Financial
Accounting Standards Number 123 (SFAS 123) "Accounting for Stock-Based          
Compensation," effective January 1, 1996. SFAS 123 was issued by the Financial  
Accounting Standards Board in October 1995, and allows companies to choose      
whether to account for stock-based compensation under the current method as     
prescribed in Accounting Principles Board Opinion Number 25 (APB 25) or use     
the fair value method described in SFAS 123. The Company elected to continue    
to follow the provisions of APB 25 (See Note 12).                               

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FLIR SYSTEMS, INC.  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):     

CONCENTRATION OF CREDIT RISK                                                    

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

CERTAIN RISKS AND UNCERTAINTIES                                                 

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

NOTE 2--OTHER OPERATING COSTS:                                                  

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

                                                                [Download Table]

                                                   YEAR ENDED DECEMBER 31,
                                                   -----------------------
                                                    1996    1995    1994  
                                                   ------- ------- -------
                                                                          
Representative commissions........................ $ 1,587 $ 2,390 $ 1,669
Other selling, general and administrative                                 
 expenses.........................................  16,152  12,211  10,234
                                                   ------- ------- -------
                                                   $17,739 $14,601 $11,903
                                                   ======= ======= =======

NOTE 3--INCOME TAXES:                                                           

SFAS 109 requires the Company to recognize deferred tax liabilities and     
assets for the expected future tax consequences of events and basis             
differences that have been recognized in the Company's financial statements or  
tax returns. Under this method, deferred tax liabilities and assets are         
determined based on the difference between the financial statement carrying     
amount and the tax basis of assets and liabilities using the enacted tax rates  
in effect in the years in which the differences are expected to reverse.        

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

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

                                                                [Download Table]

                                                   YEAR ENDED DECEMBER 31, 
                                                  ------------------------ 
                                                   1996     1995    1994   
                                                  -------  ------  ------- 
                                                                           
Current tax expense:                                                       
  Federal........................................ $ 1,361  $1,210  $ 1,097 
  State..........................................     290     263      323 
                                                  -------  ------  ------- 
                                                    1,651   1,473    1,420 
                                                  -------  ------  ------- 
Deferred tax expense (benefit):                                            
  Federal........................................     675    (146)     600 
  State..........................................     144     (15)     (49)
                                                  -------  ------  ------- 
                                                      819    (161)     551 
                                                  -------  ------  ------- 
Decrease in valuation allowance..................  (1,219)   (789)  (1,401)
                                                  -------  ------  ------- 
Total provision.................................. $ 1,251  $  523  $   570 
                                                  =======  ======  ======= 

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

                                                                [Download Table]

                                                           DECEMBER 31,    
                                                          ---------------- 
                                                           1996     1995   
                                                          -------  ------- 
                                                                           
Allowance for doubtful accounts.......................... $   679  $   300 
Warranty reserve.........................................     347      327 
Inventory basis differences..............................     665      521 
Vacation accrual.........................................     324      251 
Depreciation.............................................      75      223 
Software development costs...............................    (325)    (159)
Net operating loss carryforwards.........................   1,870    1,870 
Credit carryforwards.....................................     771    2,253 
Other....................................................     577      216 
                                                          -------  ------- 
Gross deferred tax asset.................................   4,983    5,802 
Deferred tax asset valuation allowance...................  (2,783)  (4,002)
                                                          -------  ------- 
                                                           $2,200  $ 1,800 
                                                          =======  ======= 

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FLIR SYSTEMS, INC.  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

NOTE 3--INCOME TAXES--(CONTINUED):                                              

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

                                                                [Download Table]

                                                           YEAR ENDED      
                                                          DECEMBER 31,     
                                                       ------------------- 
                                                       1996   1995   1994  
                                                       -----  -----  ----- 
                                                                           
Statutory federal tax rate............................  34.0%  34.0%  34.0%
Increase (decrease) in rates resulting from:                               
State taxes...........................................   4.5    6.0    5.6 
Utilization of net operating loss carryforwards.......    --  (15.0) (15.5)
Foreign sales corporation benefit.....................  (3.2)  (7.6)  (5.2)
Utilization of research and development credits....... (11.3)  (0.8)  (5.2)
Recognition of deferred tax asset.....................  (6.3) (21.6) (14.8)
Alternative minimum tax...............................    --   16.1    7.4 
Other.................................................   2.0    0.8    3.6 
                                                       -----  -----  ----- 
Effective tax rate....................................  19.7%  11.9%   9.9%
                                                       =====  =====  ===== 

As of December 31, 1996, the Company's acquired net operating loss          
carryforwards aggregating $5,500,000 expire in the years 1997 through 2010.     
Utilization of these carryforwards is limited to future earnings of Optimas     
and further limited to approximately $350,000 per year, as Optimas has          
experienced a cumulative change in ownership of more than 50% within a three-   
year period. In addition, the Company has various tax credits available         
aggregating $771,000 at December 31, 1996, which expire in the years 1999       
through 2011.                                                                   

NOTE 4--ACCOUNTS RECEIVABLE:                                                    

Accounts receivable are net of an allowance for doubtful accounts of        
$1,671,000 and $743,000 at December 31, 1996 and 1995, respectively.            

NOTE 5--INVENTORIES:                                                            

Inventories consist of the following (in thousands):                        

                                                                [Download Table]

                                                            DECEMBER 31,   
                                                          ---------------- 
                                                           1996     1995   
                                                          -------  ------- 
                                                                           
Raw material and subassemblies........................... $23,855  $16,151 
Work-in-progress.........................................   8,171    6,057 
Finished goods...........................................   1,494    1,580 
                                                          -------  ------- 
                                                           33,520   23,788 
Less--progress payments received from customers..........      (7)    (122)
                                                          -------  ------- 
                                                          $33,513  $23,666 
                                                          =======  ======= 

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FLIR SYSTEMS, INC.  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

NOTE 6--PROPERTY AND EQUIPMENT:                                                 

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

                                                                [Download Table]

                                                            DECEMBER 31,   
                                                          ---------------- 
                                                           1996     1995   
                                                          -------  ------- 
                                                                           
Machinery and equipment.................................. $ 8,445  $ 6,276 
Office equipment and other...............................   5,382    3,366 
                                                          -------  ------- 
                                                           13,827    9,642 
Less--accumulated depreciation...........................  (6,690)  (5,639)
                                                          -------  ------- 
                                                          $ 7,137  $ 4,003 
                                                          =======  ======= 

Property and equipment include the cost of equipment held by the Company    
under capital lease agreements. Such cost and related accumulated depreciation  
aggregated $2,724,000 and $1,336,000, respectively, at December 31, 1996, and   
$2,419,000 and $1,377,000, respectively, at December 31, 1995.                  

NOTE 7--SOFTWARE DEVELOPMENT COSTS:                                             

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

                                                                [Download Table]

                                                             DECEMBER 31,  
                                                             ------------- 
                                                              1996   1995  
                                                             ------  ----- 
                                                                           
Software development costs.................................. $1,533  $ 903 
Less--accumulated amortization..............................   (734)  (434)
                                                             ------  ----- 
                                                             $  799  $ 469 
                                                             ======  ===== 

Amortization of capitalized software costs aggregated $300,000, $393,000 and
$41,000 for the years ended December 31, 1996, 1995 and 1994, respectively.     

NOTE 8--NOTES PAYABLE:                                                          

The Company has a $10.0 million line of credit bearing interest at the prime
rate (8.25% at December 31, 1996), collateralized by all receivables and        
inventories and it requires the Company to maintain working capital in excess   
of $40.0 million and net tangible worth of $40.0 million. Additionally, the     
Company, through one of its subsidiaries, has a $250,000 line of credit at      
prime plus 2.0% (10.25% at December 31, 1996), secured by all the inventories,  
furniture and equipment of the subsidiary. At December 31, 1996 and 1995, the   
Company had $6,365,000 and $2,056,000, respectively, outstanding against these  
lines.                                                                          

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FLIR SYSTEMS, INC.  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

NOTE 9--LONG-TERM DEBT:                                                         

Long-term debt at December 31 is summarized as follows (in thousands):      

                                                                [Download Table]

                                                           DECEMBER 31,   
                                                          --------------- 
                                                           1996     1995  
                                                          -------  ------ 
                                                                          
Note payable--patent..................................... $   294  $  365 
Note payable to bank; 8.77% interest rate. Payable in                     
 monthly installments of $104 due July 30, 2001, secured                  
 by inventories, furniture and equipment.................   4,663     --  
Notes payable to bank; prime plus 2.5% (11.25% at                         
 December 31, 1995)......................................     --       13 
Note payable to bank; Prime plus 2.5%, with                               
 11.5% minimum interest rate.............................     --       65 
Capital leases...........................................   1,593   1,167 
                                                          -------  ------ 
                                                            6,550   1,610 
Less--current portion....................................  (1,377)   (435)
                                                          -------  ------ 
                                                          $ 5,173  $1,175 
                                                          =======  ====== 

The patent note calls for annual payments through 1999 of $70,000 plus an   
adjustment for changes in the Consumer Price Index. Because the note did not    
include a stated interest rate, interest has been imputed at a rate of 14%.     
The Consumer Price Index was estimated at an average increase of 5% per year.   
Payments of $115,000, $112,000 and $108,000 were made in the years ended        
December 31, 1996, 1995 and 1994, respectively. The related patent was          
capitalized based on the present value, at inception, of the patent note of     
$683,000. The patent was fully amortized as of December 31, 1990.               

NOTE 10--COMMITMENTS:                                                           

The Company leases its primary facilities under operating leases expiring in
1997-2000. Total rent expense for the years ended December 31, 1996, 1995 and   
1994, amounted to $1,417,000, $871,000 and $838,000, respectively.              

Minimum rental payments required under all non-cancelable leases for        
equipment and facilities at December 31, 1996, are as follows (in thousands):   

                                                                [Download Table]

                                                         CAPITAL  OPERATING
                                                         LEASES    LEASES  
                                                         -------  ---------
                                                                           
1997.................................................... $  552    $  730  
1998....................................................    496       748  
1999....................................................    374       755  
2000....................................................    264       566  
2001....................................................    191        --  
                                                         ------    ------  
Total minimum lease payments............................  1,877    $2,799  
                                                                   ======  
Less amount representing interest.......................   (284)           
                                                         ------            
Present value of lease payments......................... $1,593            
                                                         ======            

The Company has a 401(k) Savings and Retirement Plan (the "Plan") to provide
for voluntary salary deferral contributions on a pre-tax basis in accordance    
with Section 401(k) of the Internal Revenue Code of 1986, as amended. The Plan  
allows for contributions by the Company. The Company recorded matching          
contributions of $533,000, $0 and $355,000 for the years ended December 31,     
1996, 1995 and 1994, respectively.                                              

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FLIR SYSTEMS, INC.  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

NOTE 11--CAPITAL STOCK:                                                         

In 1996, the Company increased the number of shares of common stock reserved
for future issuance pursuant to its incentive stock plans to 2,769,400. Under   
the plans, restricted stock, incentive stock options or non-qualified stock     
options may be granted to employees, consultants or non-employee directors of   
the Company with an exercise price of not less than the fair market value of    
the stock on the date of grant. Options granted pursuant to the plans expire    
ten years from date of grant and the plan terminates in 2003.                   

Under the 1992 incentive stock plan, 430,000 shares of common stock were    
reserved for restricted stock awards. Shares awarded are earned ratably over    
the term of the restricted stock agreement, based upon achievement of           
specified performance goals. Shares granted in 1996 aggregated 100,000 shares.  
Of the shares granted, 33,330 shares were earned in 1996 based upon             
achievement of specified performance goals. Shares granted which are not        
issued lapse and cease to be subject to the award. Compensation expense,        
related to these awards, in the amount of $398,000 was recorded in 1996 and is  
included in Selling and other operating costs. At December 31, 1996, there      
were 330,000 shares available for future awards.                                

NOTE 12--STOCK OPTIONS:                                                         

The Company has elected to account for its stock based compensation under   
Accounting Principles Board Opinion No. 25; however, as required by SFAS 123,   
the Company has computed for pro-forma disclosure purposes the value of         
options granted during 1995 and 1996 using the Black-Scholes option pricing     
model. The weighted average assumptions used for stock option grants for 1995   
and 1996 were a risk free interest rate of 7.7% and 5.2%, respectively, an      
expected dividend yield of 0% and 0%, respectively, an expected life of 3       
years and 3 years, respectively, and an expected volatility of 23.9% and        
22.7%, respectively.                                                            

Options were assumed to be exercised upon vesting for purposes of this      
valuation. Adjustments are made for options forfeited prior to vesting. For     
the years ended December 31, 1995 and 1996, the total value of the options      
granted was computed to be $1,200,000 and $819,000, respectively, which would   
be amortized on a straight line basis over the vesting period of the options.   

If the Company had accounted for these plans in accordance with SFAS 123,   
the Company's net earnings and pro-forma net earnings per share would have      
been reported as follows:                                                       

                                                                [Download Table]

                                                            DECEMBER 31,  
                                                            ------------- 
                                                            1996     1995 
                                                           ------   ------
                                                                          
Net earnings--as reported................................. $5,092   $3,867
Net earnings--pro-forma................................... $4,593   $3,578
Earnings per share--as reported........................... $ 0.91   $ 0.70
Earnings per share--pro-forma............................. $ 0.82   $ 0.65

The effects of applying SFAS 123 for providing pro-forma disclosure for 1995
and 1996 are not likely to be representative of the effects on reported net     
earnings and earnings per share for future years since options vest over        
several years and additional awards may be made.                                

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FLIR SYSTEMS, INC.  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

NOTE 12--STOCK OPTIONS--(CONTINUED):                                            

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

                                                                [Download Table]

                                                               WEIGHTED    
                                                           AVERAGE EXERCISE
                                                 SHARES         PRICE      
                                                ---------  ----------------
                                                                           
Balance at December 31, 1993...................   751,599       $5.80      
Granted........................................    46,500       12.88      
Exercised......................................  (176,152)       2.80      
Terminated.....................................   (10,534)       8.66      
                                                ---------       -----      
Balance at December 31, 1994...................   611,413        7.16      
Granted........................................   361,500       12.76      
Exercised......................................   (79,275)       5.85      
Terminated.....................................   (65,067)      11.25      
                                                ---------       -----      
Balance at December 31, 1995...................   828,571        9.41      
Granted........................................   331,000       11.07      
Exercised......................................   (70,788)       8.41      
Terminated.....................................   (27,757)      11.56      
                                                ---------       -----      
Balance at December 31, 1996................... 1,061,026       $9.94      
                                                =========       =====      

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

                                                                [Download Table]

                                                               WEIGHTED  
                                                                AVERAGE  
                                                   WEIGHTED    REMAINING 
                                       NUMBER OF   AVERAGE    CONTRACTUAL
EXERCISE PRICE RANGE                    SHARES      PRICE        LIFE    
--------------------                   ---------   --------   -----------
                                                                         
$1.63--$5.23..........................   221,736    $ 4.07        3.8    
$9.50--$14.75.........................   839,290    $11.48        8.3    
                                       ---------    ------        ---    
                                       1,061,026    $ 9.94        7.3    
                                       =========    ======        ===    

Options exercisable at December 31, 1996 totaled 569,177 shares at a        
weighted average exercise price of $8.49. Options available for grant at        
December 31, 1996 totaled 2,439,985 shares.                                     

NOTE 13--LONG TERM CONTRACTS:                                                   

During 1994, the Company entered into a long-term research and development  
contract with a consortium of companies to develop an Autonomous Landing        
Guidance System for commercial and military aircraft as part of the U.S.        
Government's Technology Reinvestment Program. The Company's portion of this     
contract aggregates $650,000. In April 1995, the Company was awarded an         
additional $900,000 under this contract for the second phase of the             
development. Revenues from this contract aggregated $416,000, $896,000 and      
$300,000 during the years ended December 31, 1996, 1995 and 1994,               
respectively, and are included in revenues. Costs associated with this          
contract aggregated $200,000, $425,000 and $173,000 in 1996, 1995 and 1994,     
respectively and are included in cost of goods sold. Outstanding billings at    
December 31, 1996 and 1995 aggregated $35,000 and $786,000, respectively and    
are included in accounts receivable.                                            

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FLIR SYSTEMS, INC.  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 

NOTE 14--RELATED PARTY TRANSACTIONS:                                            

The Company and Hughes Aircraft Company are related parties resulting from  
Hughes' stock interest in the Company. The Company purchases inventory parts    
from Hughes and its subsidiaries. During the years ended December 31, 1996,     
1995 and 1994, the Company purchased parts aggregating $1,670,000, $1,320,000   
and $2,300,000, respectively, from Hughes and its subsidiaries. As of December  
31, 1996 and 1995, the Company owed Hughes $128,000 and $265,000,               
respectively. Sales of the Company's products to Hughes and its affiliates      
amounted to $103,000, $320,000 and $90,000 for the years ended December 31,     
1996, 1995 and 1994, respectively.                                              

Also, included in accounts payable to related parties at December 31, 1995  
is a note payable to a shareholder aggregating $8,000 payable on demand at a    
stated interest rate of 12.0%.                                                  

NOTE 15--EXPORT SALES AND MAJOR CUSTOMERS:                                      

Export sales and sales to major customers are as follows (in thousands):    

                                                                [Download Table]

                                                    YEAR ENDED DECEMBER 31,  
                                                 ----------------------------
                                                   1996      1995      1994  
                                                 --------   -------   -------
                                                                             
United States................................... $ 44,865   $27,062   $28,244
Europe..........................................   14,883    15,872    13,103
Other foreign...................................    6,269     7,191     7,630
                                                 --------   -------   -------
                                                 $ 66,017   $50,125   $48,977
                                                 ========   =======   =======
Major Customers:                                                             
  U.S. Government...............................   26,469    15,686    14,937
  Danish Ministry of Defense....................      620     1,837     5,264
  McDonnell Douglas Corporation.................      --         13     2,759

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FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) 

                                                                [Download Table]

                                                                  SIX MONTHS    
                                           THREE MONTHS ENDED        ENDED      
                                                JUNE 30,            JUNE 30,    
                                          -------------------- ---------------- 
                                            1997       1996     1997     1996   
                                          ---------  --------- -------  ------- 
                                                                                
Revenues:                                                                       
  Government............................  $  10,976  $  9,991  $19,379  $16,470 
  Commercial............................      8,963     5,138   16,381    9,895 
                                          ---------  --------  -------  ------- 
    Total revenues......................     19,939    15,129   35,760   26,365 
Cost of goods sold......................      8,995     7,386   16,524   12,630 
Research and development................      2,569     2,166    5,345    4,283 
Selling and other operating costs.......      5,872     4,039   10,959    7,775 
                                          ---------  --------  -------  ------- 
                                             17,436    13,591   32,828   24,688 
    Earnings from operations............      2,503     1,538    2,932    1,677 
Interest income.........................         14       --        20       29 
Interest expense and other..............       (560)     (129)    (872)    (225)
                                          ---------  --------  -------  ------- 
    Earnings before income taxes........      1,957     1,409    2,080    1,481 
Provision for income taxes..............        507       303      539      319 
                                          ---------  --------  -------  ------- 
Net earnings............................  $   1,450  $  1,106  $ 1,541  $ 1,162 
                                          =========  ========  =======  ======= 
Net earnings per share..................  $    0.25  $   0.20  $  0.27  $  0.21 
                                          =========  ========  =======  ======= 
Weighted average number of common Shares                                        
 and equivalents outstanding ...........      5,842     5,603    5,795    5,559 
                                          =========  ========  =======  ======= 

The accompanying notes are an integral part of these financial statements 

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FLIR SYSTEMS, INC.

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                                [Download Table]
                                                                               

                                                        JUNE 30,   DECEMBER 31,
                                                          1997         1996    
                                                       ----------- ------------
ASSETS                                                 (UNAUDITED)             
                                                                               
Current assets:                                                                
  Cash and cash equivalents...........................  $ 1,428    $   775     
  Accounts receivable.................................   35,641     28,311     
  Inventories.........................................   33,854     33,513     
  Prepaid expenses....................................    1,318      1,551     
                                                        -------    -------     
    Total current assets..............................   72,241     64,150     
Property and equipment................................    8,904      7,137     
Software development costs............................    1,008        799     
Deferred income taxes.................................    2,200      2,200     
Other assets..........................................      817        818     
                                                        -------    -------     
                                                        $85,170    $75,104     
                                                        =======    =======     
LIABILITIES AND SHAREHOLDERS' EQUITY                                           
Current liabilities:                                                           
  Notes payable.......................................  $13,143    $ 6,365     
  Accounts payable....................................    7,652      7,628     
  Accounts payable to related parties.................      703        128     
  Accrued payroll and other liabilities...............    2,936      3,389     
  Accrued income taxes................................    1,383      1,073     
  Current portion of long-term debt...................    1,398      1,377     
                                                        -------    -------     
    Total current liabilities.........................   27,215     19,960     
Long-term debt........................................    5,501      5,173     
Commitments and contingencies.........................      --         --      
Shareholders' equity:                                                          
  Preferred stock, $0.01 par value, 10,000,000 shares                          
   authorized; no shares issued at June 30, 1997, and                          
   December 31, 1996..................................      --         --      
  Common stock, $0.01 par value, 30,000,000 shares                             
   authorized, 5,507,774 and 5,387,483 shares issued                           
   at June 30, 1997, and December 31, 1996,                                    
   respectively.......................................       55         54     
  Additional paid-in capital..........................   42,646     41,833     
  Retained earnings...................................    9,798      8,257     
  Cumulative foreign translation adjustment...........      (45)      (173)    
                                                        -------    -------     
Total shareholders' equity............................   52,454     49,971     
                                                        -------    -------     
                                                        $85,170    $75,104     
                                                        =======    =======     

The accompanying notes are an integral part of these financial statements 

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FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED) 

                                                                [Download Table]

                                                                  SIX MONTHS    
                                                                ENDED JUNE 30,  
                                                               ---------------- 
                                                                1997     1996   
                                                               -------  ------- 
                                                                                
Cash used by operations:                                                        
  Net earnings................................................ $ 1,541  $ 1,162 
  Adjustments to reconcile net earnings to net cash used                        
   by operating activities:                                                     
    Depreciation..............................................   1,176      936 
    Amortization..............................................     302      209 
    Disposals and write-offs of property and equipment........      35      244 
  Changes in certain assets and liabilities:                                    
    Increase in accounts receivable...........................  (7,330)    (755)
    Increase in inventories...................................    (341)  (2,879)
    Decrease (increase) in prepaid expenses...................     233     (142)
    Decrease (increase) in other assets.......................       1      (98)
    Increase (decrease) in accounts payable...................      24     (940)
    Increase in accounts payable to related parties...........     575      131 
    Decrease in accrued payroll and other liabilities.........    (453)  (1,625)
    Increase (decrease) in accrued income taxes...............     310     (168)
                                                               -------  ------- 
  Cash used by operating activities...........................  (3,927)  (3,925)
                                                               -------  ------- 
Cash used by investing activities:                                              
    Additions to property and equipment.......................  (3,072)  (2,505)
    Software development costs................................    (417)    (287)
                                                               -------  ------- 
  Cash used by investing activities...........................  (3,489)  (2,792)
                                                               -------  ------- 
Cash provided by financing activities:                                          
  Net increase in notes payable...............................   6,778      742 
  Proceeds from long term debt................................     995    5,000 
  Repayment of long term debt including current portion.......    (646)    (336)
  Proceeds from exercise of stock options.....................     814      374 
                                                               -------  ------- 
  Cash provided by financing activities.......................   7,941    5,780 
                                                               -------  ------- 
Effect of exchange rate changes on cash.......................     128       -- 
                                                               -------  ------- 
Net increase (decrease) in cash and cash equivalents..........     653     (937)
Cash and cash equivalents, beginning of period................     775    1,154 
                                                               -------  ------- 
Cash and cash equivalents, end of period...................... $ 1,428  $   217 
                                                               =======  ======= 

The accompanying notes are an integral part of these financial statements 

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FLIR SYSTEMS, INC.  

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  
(UNAUDITED) 

NOTE 1 -- BASIS OF PRESENTATION:                                                

The accompanying consolidated financial statements are unaudited and have   
been prepared by the Company pursuant to the rules and regulations of the       
Securities and Exchange Commission. In the opinion of management, these         
statements have been prepared on the same basis as the audited consolidated     
financial statements and include all adjustments, consisting of only normal     
recurring adjustments, necessary for a fair presentation of the consolidated    
financial position and results of operations for the interim periods. Certain   
information and footnote disclosures normally included in financial statements  
prepared in accordance with generally accepted accounting principles have been  
condensed or omitted pursuant to such rules and regulations. These              
consolidated financial statements should be read in conjunction with the        
Company's audited financial statements and the notes thereto for the year       
ended December 31, 1996.                                                        

The accompanying financial statements include the accounts of FLIR Systems, 
Inc. and its subsidiaries. All intercompany accounts and transactions have      
been eliminated. The results of the interim period are not necessarily          
indicative of the results for the entire year.                                  

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

NOTE 2 -- REVENUE RECOGNITION:                                                  

Revenue is recognized when products are shipped or when services are        
performed, except for certain long-term contracts which are recorded on the     
percentage-of-completion method. The percentage-of-completion method is used    
for research and development contracts and for production contracts which       
require significant amounts of initial engineering and development costs. The   
percentage-of-completion is determined by relating the actual costs incurred    
to date to total costs to complete the respective contract.                     

NOTE 3 -- NET EARNINGS PER SHARE:                                               

Net earnings per share are based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods,       
computed using the treasury stock method for stock options. The Company will    
adopt Statement of Financial Accounting Standards No. 128, "Earnings Per        
Share" in 1997. The effect of the adoption of such pronouncement is expected    
to be immaterial to the financial statements taken as whole.                    

NOTE 4 -- INVENTORIES:                                                          

Inventories consist of the following (in thousands):                        

                                                                [Download Table]

                                                      JUNE 30,  DECEMBER 31,
                                                        1997        1996    
                                                      --------  ------------
                                                                            
Materials............................................ $23,570     $23,855   
Work-in-progress.....................................  10,385       8,171   
Finished goods.......................................     585       1,494   
                                                      -------     -------   
                                                       34,540      33,520   
Less--progress payments received from customers......    (686)         (7)  
                                                      -------     -------   
                                                      $33,854     $33,513   
                                                      =======     =======   

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FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 
(UNAUDITED) 

NOTE 5 -- CHANGES IN SHAREHOLDERS' EQUITY:                                      

Changes in Shareholders' Equity consist of the following (in thousands):    

                                                                [Download Table]

                                                              CUMULATIVE         
                                          ADDITIONAL            FOREIGN          
                         PREFERRED COMMON  PAID-IN   RETAINED TRANSLATION        
                           STOCK   STOCK   CAPITAL   EARNINGS ADJUSTMENT   TOTAL 
                         --------- ------ ---------- -------- ----------- -------
                                                                                 
Balance, December 31,                                                            
 1996...................    $--     $54    $41,833    $8,257     $(173)   $49,971
Common stock options                                                             
 exercised..............     --       1        813        --        --        814
Net earnings for six                                                             
 month period...........     --      --         --     1,541        --      1,541
Foreign translation                                                              
 adjustment.............     --      --         --        --       128        128
                            ---     ---    -------    ------     -----    -------
Balance, June 30, 1997..    $--     $55    $42,646    $9,798     $ (45)   $52,454
                            ===     ===    =======    ======     =====    =======

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REPORT OF INDEPENDENT ACCOUNTANTS 

To the Board of Directors of Agema Infrared Systems:                            

We have audited the accompanying combined balance sheets of Agema Infrared  
Systems, collectively "AGEMA", (as described in Note 1), as of December 31,     
1995 and 1996, respectively, and the related combined 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 AGEMA's management. Our responsibility is to express an       
opinion on these financial statements based on our audits.                      

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

The accompanying financial statements were prepared to present the financial
position, results of operations and cash flows of AGEMA on the basis described  
in Note 1 to the financial statements. Accordingly, these financial statements  
are not intended to present the historical consolidated financial position as   
of December 31, 1995 and 1996 and results of operations and cash flows for      
each of the three years in the period ended December 31, 1996 of Agema.         

In our opinion, the financial statements referred to above present fairly,  
in all material respects, the financial position of AGEMA as of December 31,    
1995 and 1996, and the results of operations and cash flows for each of the     
three years in the period ended December 31, 1996, (on the basis described in   
Note 1), in conformity with generally accepted accounting principles in         
Sweden.                                                                         

Accounting principles generally accepted in Sweden vary in certain          
significant respects from accounting principles generally accepted in the       
United States. Application of accounting principles generally accepted in the   
United States would have affected net income for each of the years in the two   
year period ended December 31, 1996 and shareholders' equity as of December     
31, 1995 and 1996, to the extent summarized in Note 12 to the financial         
statements.                                                                     

Stockholm, Sweden, 14 October 1997                                              

OHRLINGS COOPERS & LYBRAND AB                                                   

/s/ Robert Barden                                                               

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AGEMA 

COMBINED STATEMENTS OF OPERATIONS 
(SEK IN THOUSANDS)

                                                                [Download Table]

                                                    YEAR ENDED DECEMBER 31,     
                                                   ---------------------------- 
                                                     1996      1995      1994   
                                                   --------  --------  -------- 
                                                                                
Sales.............................................  324,769   341,418   348,685 
Cost of goods sold................................ (170,133) (158,032) (155,066)
Research and development expenses.................  (33,243)  (36,906)  (30,898)
Selling and other operating expenses.............. (137,771) (126,868) (121,418)
Non-recurring items...............................      --        --      6,692 
                                                   --------  --------  -------- 
  Operating income (loss).........................  (16,378)   19,612    47,995 
Interest income...................................    1,690     4,967     6,759 
Interest expense..................................   (3,481)   (2,472)   (3,052)
Exchange gain (loss)..............................      371       (59)       33 
                                                   --------  --------  -------- 
  Income (loss) before income taxes                                             
   and group contributions........................  (17,798)   22,048    51,735 
Group contribution................................    5,532   (16,220)  (45,761)
                                                   --------  --------  -------- 
Income (loss) before income taxes.................  (12,266)    5,828     5,974 
Provision (benefit) for income taxes..............     (452)    3,004     3,124 
                                                   --------  --------  -------- 
Net income (loss).................................  (11,814)    2,824     2,850 
                                                   ========  ========  ======== 

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

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AGEMA 

COMBINED BALANCE SHEETS 
(SEK IN THOUSANDS)

                                                                [Download Table]

                                                                DECEMBER 31,   
                                                               ----------------
                                                                1996     1995  
                                                               -------  -------
                                                                               
                            ASSETS                                             
Current assets:                                                                
  Cash and cash equivalents...................................  21,198   43,657
  Accounts receivable, less allowance for doubtful accounts of                 
   4,275 and 3,947 in 1996 and 1995, respectively............. 100,806   89,439
  Prepaid expenses............................................   4,456    4,523
  Income taxes receivable.....................................     131      -- 
  Current receivables from affiliates.........................   1,061      179
  Inventories.................................................  66,959   61,908
  Deferred taxes..............................................   3,270    1,099
  Other current assets........................................   4,439    4,352
                                                               -------  -------
    Total current assets...................................... 202,320  205,157
                                                               -------  -------
Non-current assets:                                                            
  Long-term notes receivables from affiliates.................     --     2,455
  Other long-term receivables.................................     798      782
  Property and equipment......................................  30,254   28,619
                                                               -------  -------
    Total non-current assets..................................  31,052   31,856
                                                               -------  -------
Total assets.................................................. 233,372  237,013
                                                               =======  =======
             LIABILITIES AND SHAREHOLDERS' EQUITY                              
Current liabilities:                                                           
  Liabilities to affiliates...................................  39,653   39,444
  Short-term borrowings.......................................  13,572      -- 
  Accounts payable............................................  22,355   20,505
  Advance payments from customers.............................   2,146      619
  Income taxes payable........................................   1,783    3,621
  Accrued payroll-related expenses............................  18,242   15,527
  Accrued commissions.........................................   7,361    6,293
  Other accrued expenses......................................  16,221    6,215
  Other current liabilities...................................   5,621    6,169
                                                               -------  -------
    Total current liabilities................................. 126,954   98,393
                                                               -------  -------
Long-term liabilities:                                                         
  Accrued pension liability...................................  30,910   29,752
  Deferred taxes..............................................   1,324    1,163
                                                               -------  -------
    Total long-term liabilities...............................  32,234   30,915
                                                               -------  -------
Commitments and contingencies (Note 9)                                         
Shareholders' equity:                                                          
  Share capital...............................................   7,934    7,934
  Other restricted reserves...................................  48,789   48,374
  Additional paid-in capital..................................  20,215   20,215
  Retained earnings...........................................  (8,170)  26,860
  Cumulative foreign currency translation adjustment..........   5,416    4,322
                                                               -------  -------
    Total shareholders' equity................................  74,184  107,705
                                                               -------  -------
Total liabilities and shareholders' equity.................... 233,372  237,013
                                                               =======  =======

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

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AGEMA 
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY 
(IN SEK THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                 CUMULATIVE          
                                                                   FOREIGN           
                                 ADDITIONAL   OTHER    RETAINED   CURRENCY           
                          SHARE   PAID-IN   RESTRICTED EARNINGS  TRANSLATION         
                         CAPITAL  CAPITAL    RESERVES  (DEFICIT) ADJUSTMENT   TOTAL  
                         ------- ---------- ---------- --------- ----------- ------- 
                                                                                     
Balance, December 31,                                                                
 1993...................  8,293    20,215     63,311     32,657    16,109    140,585 
  Net earnings for the                                                               
   year.................                                  2,850                2,850 
  Dividends.............                                 (7,548)              (7,548)
  Transfers between                                                                  
   restricted and                                                                    
   unrestricted equity..                     (13,794)    13,794                  --  
  Foreign currency                                                                   
   translation                                                                       
   adjustment...........                                           (5,901)    (5,901)
                          -----    ------    -------    -------    ------    ------- 
Balance, December 31,                                                                
 1994...................  8,293    20,215     49,517     41,753    10,208    129,986 
  Net earnings for the                                                               
   year.................                                  2,824                2,824 
  Dividends.............                                 (5,887)              (5,887)
  Change in legal                                                                    
   structure............   (359)              (1,000)   (11,973)             (13,332)
  Transfers between                                                                  
   restricted and                                                                    
   unrestricted equity..                        (143)       143                  --  
  Foreign currency                                                                   
   translation                                                                       
   adjustment...........                                           (5,886)    (5,886)
                          -----    ------    -------    -------    ------    ------- 
Balance, December 31,                                                                
 1995...................  7,934    20,215     48,374     26,860     4,322    107,705 
  Net loss for the year.                                (11,814)             (11,814)
  Dividends.............                                (22,801)             (22,801)
  Transfers between                                                                  
   restricted and                                                                    
   unrestricted equity..                         415       (415)                 --  
  Foreign currency                                                                   
   translation                                                                       
   adjustment...........                                            1,094      1,094 
                          -----    ------    -------    -------    ------    ------- 
Balance, December 31,                                                                
 1996...................  7,934    20,215     48,789     (8,170)    5,416     74,184 
                          =====    ======    =======    =======    ======    ======= 

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

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AGEMA 

COMBINED STATEMENTS OF CASH FLOWS 
(SEK IN THOUSANDS)

                                                                [Download Table]

                                                     YEAR ENDED DECEMBER 31,   
                                                     ------------------------- 
                                                      1996     1995     1994   
                                                     -------  -------  ------- 
                                                                               
Cash (used) provided by operations:                                            
  Net income (loss)................................. (11,814)   2,824    2,850 
  Adjustments to reconcile net income (loss) to net                            
   cash provided by operating activities:                                      
    Depreciation and amortization...................   9,001    8,549    8,132 
    Non-recurring items.............................     --       --    (6,692)
    Group contribution..............................  (5,532)  16,220   45,761 
    Deferred income taxes...........................  (1,933)    (392)  (5,535)
  Changes in operating assets and liabilities:                                 
    Increase in accounts receivable.................  (6,835) (14,566) (15,415)
    Increase in inventories.........................  (4,106)  (7,125)  (5,639)
    (Increase) decrease in current receivables from                            
     affiliates.....................................    (882)   1,536   (1,332)
    (Increase) decrease in other assets.............      (2)   4,535   (2,013)
    (Decrease) increase in accounts payable.........     (65)   1,751    5,581 
    Increase (decrease) in deferred tax assets and                             
     other long-term receivables....................       1      (81)    (213)
    Increase (decrease) in accrued payroll-related                             
     expenses.......................................   2,715    1,034   (4,303)
    Increase (decrease) in other accrued expenses...   9,570   (1,520)     964 
    Increase (decrease) in advance payments from                               
     customers, taxes payable, and other current                               
     liabilities....................................  (1,512)  (3,394)   5,293 
    Increase (decrease) in accrued commissions......   1,068     (289)  (1,732)
    Increase in accrued pension liability, deferred                            
     tax liabilities, and other long-term                                      
     liabilities....................................   1,095      863    1,390 
                                                     -------  -------  ------- 
Net cash (used) provided by operations..............  (9,231)   9,945   27,097 
                                                     -------  -------  ------- 
Cash used by investing activities:                                             
  Additions to property and equipment............... (10,367) (13,031) (11,729)
  Long-term receivable from affiliates..............   2,510      --      (532)
                                                     -------  -------  ------- 
Net cash used by investing activities...............  (7,857) (13,031) (12,261)
                                                     -------  -------  ------- 
Cash provided by financing activities:                                         
  Net increase (decrease) in liabilities to                                    
   affiliates.......................................   5,190  (33,518) (28,579)
  Net increase (decrease) in short-term borrowings..  13,027   (2,308)   3,139 
  Dividends......................................... (25,555)  (4,917)  (7,548)
                                                     -------  -------  ------- 
Cash provided by financing activities...............  (7,338) (40,743) (32,988)
                                                     -------  -------  ------- 
Effect of exchange rate changes on cash.............   1,967   (2,451)  (1,590)
                                                     -------  -------  ------- 
Net decrease in cash................................ (22,459) (46,280) (19,742)
Cash and cash equivalents, beginning of year........  43,657   89,937  109,679 
                                                     -------  -------  ------- 
Cash and cash equivalents, end of year..............  21,198   43,657   89,937 
                                                     =======  =======  ======= 
Supplemental disclosures of cash flow information:                             
Cash paid during the year for                                                  
    Interest........................................   3,481    2,472    3,052 
                                                     =======  =======  ======= 
    Income taxes....................................   3,450    9,094    3,454 
                                                     =======  =======  ======= 

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

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AGEMA 

NOTES TO THE COMBINED FINANCIAL STATEMENTS  

NOTE 1 -- NATURE OF BUSINESS AND OTHER GENERAL INFORMATION                      

Basis of presentation                                                         

In these notes to the combined financial statements references to the       
"Group" or "AGEMA" are to the combined businesses of Agema Infrared Systems,    
as described below, if not otherwise stated. The Group is engaged in the        
business of developing and manufacturing high quality infrared cameras for      
mapping of temperature differences and non-contact temperature measurement in   
a wide range of industries and research establishments.                         

These combined financial statements have been prepared in connection with   
the proposed sale of shares of AGEMA by Spectra Physics AB. For all periods     
presented, the entities and divisions which comprise the AGEMA Group were       
wholly owned by Spectra Physics AB and subsidiaries (collectively the           
"Parent"). Since AGEMA does not currently comprise one legal group of           
companies, these financial statements are a combination of the entities and     
divisions of AGEMA for all periods presented.                                   

The combined financial statements of the AGEMA Group have been prepared in  
accordance with accounting principles generally accepted in Sweden ("Swedish    
GAAP"). These accounting principles differ in certain significant respects      
from accounting principles generally accepted in the United States ("U.S.       
GAAP"). See Note 12 for a reconciliation of the principal differences between   
Swedish GAAP and U.S. GAAP affecting Agema's net income and shareholders'       
equity.                                                                         

Principles of combination                                                     

The combined financial statements have been prepared using the historical   
basis in the assets and liabilities and historical results of operations        
related to the Group's businesses. The combined financial statements generally  
reflect the financial position, results of operations and cash flows of the     
Group as if it were a stand-alone entity for all periods presented. The         
assumptions and related adjustments included herein are, in the view of         
management, reasonable and necessary to present the financial position,         
results of operations and cash flows as if the Group had operated on a stand-   
alone basis for the periods presented. The combined financial statements are,   
however, not necessarily indicative of the financial position, results of       
operations and cash flows in the future or what they would have been had the    
Group been a stand-alone entity during the periods presented. The effects of    
all significant transactions between the combined entities have been            
eliminated.                                                                     

Transactions with Spectra Physics and subsidiaries                            

The Group was charged a management fee of SEK 1,200, SEK 784 and SEK 0 in   
1996, 1995 and 1994, respectively. Amounts are included in selling and other    
operating costs in the combined statements of operations.                       

The Group enters into forward foreign exchange contracts with Spectra       
Physics AB.                                                                     

Balances with companies in the Spectra Physics Group are presented as       
payables and receivables to related parties. The Company's cash needs, not      
internally funded by operations, have been funded by Spectra Physics.           
Historically, the Group was charged interest at a rate which approximated the   
market rate.                                                                    

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AGEMA 

NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

Spectra Physics manages the cash of all its subsidiaries under cash pool    
arrangements. AGEMA's participation in the cash pool is presented as cash and   
cash equivalents in the combined balance sheet. Information relating to         
AGEMA's cash pool balances is presented below:                                  

                                                                [Download Table]

                                                          DECEMBER 31,    
                                                       -------------------
                                                       1996   1995   1994 
                                                       ----- ------ ------
                                                       (IN SEK THOUSANDS) 
                                                                          
Balance at December 31................................ 9,408 26,191 65,220
Interest income, net..................................   491  2,991  4,652

Income taxes                                                                  

The provision for income taxes in the combined financial statements         
represents AGEMA's historical income tax expense. Since several companies were  
part of a tax pool arrangements with the Parent, the resultant tax expense may  
not be indicative of the tax expense that might have resulted if the Group had  
operated on a stand-alone basis. See Note 5.                                    

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES                                       

Revenue recognition                                                           

Revenue is recognized when products are shipped or when services are        
performed.                                                                      

Research and development costs                                                

Expenditures relating to research and development are expensed as incurred. 

Income taxes                                                                  

The provision (benefit) for income taxes is computed on the pretax income   
(loss) for the combined entities located within each taxing country based on    
the current rate. Deferred taxes have been recorded with respect to             
accumulated amount of untaxed earnings (see below under appropriations) and     
all other temporary differences.                                                

Earnings per share                                                            

Earnings per share data has been omitted as AGEMA is a wholly-owned         
subsidiary of Spectra Physics.                                                  

Foreign currency                                                              

The balance sheet of the Group's foreign entities are translated from their 
respective functional currency to Swedish kronor at the exchange rate in        
effect at the balance sheet date. Results of operations are translated using    
average exchange rates in effect during the reporting period. Resulting         
translation adjustments are accumulated in a separate component of              
shareholders' equity.                                                           

Assets and liabilities in foreign currency are translated into Swedish      
kronor at the exchange rate at the balance sheet date. Unrealized exchange      
gains and losses are reported in the combined statements of operations.         

Forward foreign exchange contracts (forward contracts) purchased to hedge   
future sales are not recorded until the respective sales transactions are       
recorded. Such foreign currency transactions are considered hedges of sales     
when the foreign currency commitments are reasonably assured and the foreign    
currency transaction is designated as a hedge of the foreign currency           
commitment.                                                                     

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AGEMA 

NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

Inventories                                                                   

Inventories are stated at the lower of costs or market. The Group uses the  
first-in, first-out method to determine cost.                                   

Nonrecurring items                                                            

Significant income or expense items which are not expected to occur         
frequently are classified net as nonrecurring items and presented in a          
separate component within operating income. In 1994, a capital gain of SEK      
6,692,000 was recognized in connection with a change in the legal structure     
(see Note 3).                                                                   

Cash and cash equivalents                                                     

The Group considers all highly liquid, low risk debt instruments with       
original maturity dates of three months or less from the date of purchase to    
be cash equivalents.                                                            

Property and equipment                                                        

Property and equipment are stated at cost, net of accumulated depreciation  
and amortization. Depreciation and amortization are computed using the          
straight-line method based upon the estimated useful lives of the assets which  
range from 5 to 10 years. Upon retirement or sales of property and equipment,   
cost and accumulated depreciation on such assets are removed from the accounts  
and any gains or losses are reflected in the statement of operations. Repairs   
and maintenance are charged to expense as incurred. Leasehold improvements are  
amortized using the straight-line method over the shorter of the estimated      
life of the asset or the remaining term of the lease.                           

Appropriations                                                                

In Sweden, companies are permitted to reduce or increase taxable income by  
net charges or by income representing adjustments to untaxed reserve accounts,  
provided that such amounts are reflected in the company's financial             
statements.                                                                     

In the combined financial statements, accumulated appropriations are        
included in the balance sheet as "Restricted equity", net of taxes. Transfers   
to and from untaxed reserves are reflected through retained earnings            
(unrestricted equity).                                                          

Restricted equity                                                             

The components of restricted equity include paid-in capital in excess of par
value, untaxed reserves and legal reserves (net of taxes), as required by law   
in certain countries where the Group's companies are incorporated.              

Concentration of credit risks                                                 

The Group sells products to distributors and other customers and extends    
credit based on an evaluation of the customers financial condition, generally   
without requiring collateral. Exposure to losses on receivables is principally  
dependent on each customer's financial condition. The Group monitors its        
exposure for credit losses and maintains allowances for anticipated losses.     

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AGEMA 

NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

Use of estimates                                                              

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

Fair value of financial instruments                                           

The Group estimates the fair value of its financial instruments based upon  
the existing interest rates related to such instruments compared to the         
current market rate for instruments of a similar nature and degree of risk.     
The Group estimates that the recorded value of all of its financial             
instruments approximate fair value as of December 31, 1996 with the exception   
of forward exchange contracts.                                                  

Cash flow statements                                                          

The cash flow statements are prepared in accordance with U.S. GAAP.         

NOTE 3 -- RELATED PARTY TRANSACTIONS                                            

The combined financial statements include certain transactions and balances     
with the Group's Parent and certain affiliated companies. A summary of these    
transactions and balances is as follows:                                        

                                                                [Download Table]

                                                   FOR THE YEARS ENDED    
                                                       DECEMBER 31,       
                                                   ---------------------- 
                                                    1996    1995    1994  
                                                   ------  ------  ------ 
                                                    (IN SEK THOUSANDS)    
                                                                          
STATEMENTS OF OPERATIONS                                                  
Sales-affiliated customers.......................   2,342   6,194   7,954 
Operating expenses-charged by the Parent.........  (1,200)   (784)    --  
Interest income from affiliate...................     698   3,214   4,816 
Interest expense to affiliate....................  (1,286)   (302)    (69)

                                                   DECEMBER 31,           
                                                   --------------         
                                                    1996    1995          
                                                   ------  ------         
                                                                          
BALANCE SHEETS                                                            
Accounts receivable from affiliates..............     232     559         
Current receivables from affiliates..............   1,061     179         
Long-term notes receivables from affiliates......     --    2,455         
                                                   ------  ------         
Total receivables from affiliates................   1,293   3,193         
                                                   ------  ------         
Accounts payable to affiliates...................     129     418         
Liabilities to affiliates........................  39,653  39,444         
                                                   ------  ------         
Total liabilities to affiliates..................  39,782  39,862         
                                                   ------  ------         
Net liabilities to affiliates....................  38,489  36,669         
                                                   ======  ======         

CHANGE IN LEGAL STRUCTURE                                                       

In 1994, the Agema entity in Italy sold the majority of its assets and      
liabilities to Spectra-Physics which resulted in a capital gain of SEK 6,692    
thousand. The Italian operations became a division of Spectra Physics,          
however, this transaction did not represent a transfer of assets outside of     
the combined group of Agema. In substance, the transaction represents a         
capital contribution from Spectra-Physics equivalent to the excess of the       
transaction price over the book value of the assets and liabilities sold.       

In 1995, the remaining assets of the Agema entity in Italy were transferred 
to the corporate division of Spectra-Physics which is outside the combined      
group of AGEMA. Net assets of SEK 13,332 thousand were transferred as a non-    
cash transaction. In substance, this represents a dividend from Agema to        
Spectra-Physics.                                                                

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AGEMA 

NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

NOTE 4 -- DEPRECIATION AND AMORTIZATION                                         

                                                                [Download Table]

                                                         FOR THE YEARS    
                                                             ENDED        
                                                         DECEMBER 31,     
                                                       -----------------  
                                                     1996    1995    1994 
                                                     -----   -----   -----
                                                     (IN SEK THOUSANDS)   
                                                                          
Goodwill..........................................    --       --      478
Machinery and equipment...........................  8,725    8,361   7,473
Leasehold improvements............................    276      188     181
                                                    -----    -----   -----
Total.............................................  9,001    8,549   8,132
                                                    =====    =====   =====

NOTE 5 -- INCOME TAXES                                                          

Income (loss) before taxes was distributed geographically as follows:           

                                                                [Download Table]

                                                    FOR THE YEARS ENDED    
                                                        DECEMBER 31,       
                                                  ------------------------ 
                                                   1996     1995    1994   
                                                  -------  ------  ------- 
                                                    (IN SEK THOUSANDS)     
                                                                           
Sweden...........................................  (2,275)  3,206  (18,471)
United States.................................... (13,246) (5,803)   7,166 
Other markets....................................   3,255   8,425   17,279 
                                                  -------  ------  ------- 
Total............................................ (12,266)  5,828    5,974 
                                                  =======  ======  ======= 

Income taxes were distributed geographically as follows:                        

                                                                [Download Table]

                                                      FOR THE YEARS ENDED  
                                                         DECEMBER 31,      
                                                     --------------------- 
                                                      1996   1995    1994  
                                                     ------  -----  ------ 
                                                     (IN SEK THOUSANDS)    
                                                                           
Current income tax expense:                                                
 Sweden.............................................    --     --      (15)
 United States......................................   (222)    50   2,972 
 Other markets......................................  1,734  3,346   5,702 
                                                     ------  -----  ------ 
  Total.............................................  1,512  3,396   8,659 
                                                     ======  =====  ====== 
Deferred tax expense:                                                      
 Sweden.............................................    161    (55) (5,378)
 United States...................................... (2,064)  (316)   (157)
 Other markets......................................    (61)   (21)    --  
                                                     ------  -----  ------ 
  Total............................................. (1,964)  (392) (5,535)
                                                     ------  -----  ------ 
Total tax provision (benefit).......................   (452) 3,004   3,124 
                                                     ======  =====  ====== 

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AGEMA 

NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

Deferred income taxes reflect the impact of temporary differences between   
the basis of assets and liabilities for financial reporting purposes and such   
amounts as measured by tax laws. The tax effects of temporary differences that  
give rise to deferred tax assets and liabilities are presented below:           

                                                                [Download Table]

                                                      AS OF DECEMBER 31,  
                                                     -------------------- 
                                                       1996       1995    
                                                     ---------  --------- 
                                                     (IN SEK THOUSANDS)   
                                                                          
Deferred income taxes, non-current asset                                  
  Allowance for bad debts..........................        397        386 
  Inventory........................................        636        391 
  Accrued expenses.................................      2,143        324 
  Other............................................         94         (2)
                                                     ---------  --------- 
Total deferred income taxes, current asset.........      3,270      1,099 
                                                     =========  ========= 
Deferred income taxes, long-term liability                                
  Depreciation.....................................     (1,324)    (1,163)
                                                     ---------  --------- 
Total deferred income taxes, long-term liability...     (1,324)    (1,163)
                                                     =========  ========= 

As described in Note 1, several entities have been part of tax pool         
arrangements with the Parent. The entities in Sweden have been able to          
increase or decrease taxable income through group contributions to/from the     
Parent. As part of the tax pool arrangements and through the use of group       
contributions, net operating tax loss carryforwards (NOL) have been             
surrendered to other companies of the Parent. Accordingly, the Group has not    
recorded any deferred tax assets related to net operating losses.               

Realization of the deferred tax asset of SEK 3,270 thousand as of December  
31, 1996, is dependent on generating sufficient taxable income in the future    
or alternative tax strategies. Estimated future earnings necessary to fully     
realize the deferred tax asset are SEK 9,600 thousand. Such earnings are        
currently forecasted to be realized. There can be no assurance that future      
earnings, if any, will meet currently forecasted levels, however, it is         
managements's opinion that the realization of such earnings in the future is    
more likely than not. The amount of the deferred tax asset considered           
realizable, however, could be reduced in the near term if estimates of future   
taxable income are reduced or alternative tax strategies are no longer viable.  

The difference between the effective income tax rate and income taxes       
computed using the Swedish statutory rate of 28 percent is primarily            
attributable to the Group's ability to transfer taxable income to other         
entities of the Parent and differing tax rates in foreign jurisdictions.        
Accordingly, these statements may not be indicative of the tax expense that     
might have resulted if the Group had operated on a stand-alone basis.           

Stand-alone tax expense (benefit)                                             

If the Group had operated on a stand-alone basis net operating losses       
transferred to other entities of the Parent would have been available to        
offset taxable income during the periods presented. The Group has no further    
NOL's available for utilization subsequent to December 31, 1996.                

NOTE 6 -- INVENTORIES                                                           

Inventories consist of the following:                                       

                                                                [Download Table]

                                                              DECEMBER 31,     
                                                              -------------    
                                                               1996   1995     
                                                              ------     ------
                                                           (IN SEK THOUSANDS)  
                                                                               
Parts, components and sub-assemblies......................... 26,762     24,230
Work in process..............................................  9,775     11,345
Finished goods............................................... 30,422     26,333
                                                              ------     ------
Total........................................................ 66,959     61,908
                                                              ======     ======

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NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

NOTE 7 -- PROPERTY AND EQUIPMENT                                                

                                                                [Download Table]

                                                    DECEMBER 31, 1996     
                                                --------------------------
                                                       ACCUMULATED   NET  
                                                 COST  DEPRECIATION VALUE 
                                                ------ ------------ ------
                                                    (IN SEK THOUSANDS)    
                                                                          
Construction in progress including advance                                
payments......................................      44       --         44
Machinery and equipment.......................  75,773    47,356    28,417
Leasehold improvements........................   3,243     1,450     1,793
                                                ------    ------    ------
Total.........................................  79,060    48,806    30,254
                                                ======    ======    ======

                                                                [Download Table]

                                                   DECEMBER 31, 1995     
                                               --------------------------
                                                      ACCUMULATED   NET  
                                                COST  DEPRECIATION VALUE 
                                               ------ ------------ ------
                                                   (IN SEK THOUSANDS)    
                                                                         
Construction in progress including advance                               
payments......................................  1,170       --      1,170
Machinery and equipment....................... 64,742    39,310    25,432
Leasehold improvements........................  3,114     1,097     2,017
                                               ------    ------    ------
Total......................................... 69,026    40,407    28,619
                                               ======    ======    ======

NOTE 8 -- FINANCIAL INSTRUMENTS                                                 

The Group operates internationally, giving rise to exposure to market risk  
from changes in foreign exchange rates. Forward exchange contracts have been    
utilized by the Group since 1995 to reduce those risks. Such contracts are      
entered into with Spectra-Physics. The carrying amounts, face (notional)        
amounts and estimated fair values of forward exchange contracts are summarized  
below as of December 31:                                                        

                                                                [Download Table]

                                     1996                          1995             
                         ----------------------------- -----------------------------
                                     FACE    ESTIMATED             FACE    ESTIMATED
                         CARRYING (NOTIONAL)   FAIR    CARRYING (NOTIONAL)   FAIR   
                          AMOUNT   AMOUNT      VALUE    AMOUNT   AMOUNT      VALUE  
                         -------- ---------  --------- -------- ---------  ---------
                                            (IN SEK THOUSANDS)                      
                                                                                    
Forward exchange                                                                    
contracts...............    --     35,925     (1,366)     --     33,803      (311)  

The fair value of forward exchange contracts reflects the estimated amounts 
that the Group would receive or pay to terminate the contracts at the balance   
sheet date, thereby taking into account the current unrealized gains or losses  
on open contracts.                                                              

NOTE 9 -- COMMITMENTS AND CONTINGENCIES                                         

The Group leases office facilities under various non-cancelable operating   
lease agreements.                                                               

Aggregate future minimum lease payments under non-cancelable operating      
leases are as follows as of December 31, 1996 (in SEK thousands):               

                                                                [Download Table]
                                                                           
1997................................................................  8,643
1998................................................................  8,643
1999................................................................  8,572
2000................................................................  8,150
2001................................................................  6,270
Thereafter..........................................................  1,056
                                                                     ------
Total future minimum lease payments................................. 41,334
                                                                     ======

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NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

The Group has an agreement to purchase a specified quantity of products from
an external supplier. The Group has the right and expects to cancel the         
agreement prior to fulfilling the purchase commitment. The Group has provided   
for SEK 2.5 million as of December 31, 1996. This amount represents additional  
consideration on units purchased as of December 31, 1996 which is expected to   
be paid to the supplier for canceling the agreement.                            

NOTE 10 -- GEOGRAPHIC INFORMATION                                               

The following table sets forth information relating to sales by geographic  
location of the entities of the Group:                                          

                                                                [Download Table]

                                                      FOR THE YEAR ENDED   
                                                         DECEMBER 31,      
                                                    -----------------------
                                                     1996    1995    1994  
                                                    ------- ------- -------
                                                      (IN SEK THOUSANDS)   
                                                                           
Sweden.............................................  74,563  87,931  78,091
Great Britain......................................  83,438  77,357  72,871
Germany............................................  37,557  36,997  29,555
France.............................................  22,517  22,997  30,648
Italy..............................................  15,060  23,672  19,325
                                                    ------- ------- -------
Total Europe (excluding Sweden).................... 158,572 161,023 152,399
USA................................................  90,773  91,685 117,267
Canada.............................................     861     779     928
                                                    ------- ------- -------
Total, other markets...............................  91,634  92,464 118,195
Grand total........................................ 324,769 341,418 348,685
                                                    ======= ======= =======

NOTE 11 -- PERSONNEL                                                            

The following table sets forth information relating to the average number of
employees in the Group:                                                         

                                                                [Download Table]

                                                        FOR THE YEAR ENDED 
                                                           DECEMBER 31,    
                                                       --------------------
                                                        1996   1995   1994 
                                                       ------ ------ ------
                                                                           
Average number of employees...........................                     
Sweden................................................   136    135    128 
Outside Sweden........................................    73     78     80 
                                                       -----  -----  ----- 
Group total...........................................   209    213    208 
                                                       =====  =====  ===== 

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NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

The average number of men employed in the Group was 163, 165, and 159 of    
whom 111, 110, 104 were in Sweden during the years ended December 31, 1996,     
1995 and 1994, respectively. The average number of women employed was 46, 48,   
and 49 of whom 25, 25, and 24 were in Sweden during the years ended December    
31, 1996, 1995 and 1994, respectively.                                          

The following table sets forth the wages and salaries for the Group:        

                                                                [Download Table]

                                                    FOR THE YEAR ENDED   
                                                       DECEMBER 31,      
                                                  -----------------------
                                                   1996    1995    1994  
                                                  ------- ------- -------
                                                    (IN SEK THOUSANDS)   
                                                                         
Wages and salaries:                                                      
Agema AB                                                                 
 Salaries and remuneration to Board of Directors                         
  and President..................................     752   1,257   1,523
 Wages and salaries to other employees...........  39,940  37,265  33,867
 Payroll overheads...............................  20,202  17,496  16,033
                                                  ------- ------- -------
Total............................................  60,894  56,018  51,423
Subsidiaries outside Sweden                                              
 Wages and salaries..............................  30,824  32,968  33,950
 Payroll overheads...............................   8,101   8,002   8,220
                                                  ------- ------- -------
Total............................................  38,925  40,970  42,170
                                                  ------- ------- -------
Group total......................................  99,819  96,988  93,593
                                                  ======= ======= =======

The following table sets forth the average number employees and salaries and
wages by geographic location of the entities in the Group:                      

                                                                [Download Table]

                                        AVERAGE NUMBER                     
                                         OF EMPLOYEES   SALARIES AND WAGES 
                                        -------------- --------------------
                                        1996 1995 1994  1996   1995   1994 
                                        ---- ---- ---- ------ ------ ------
                                                        (IN SEK THOUSANDS) 
                                                                           
Sweden................................. 136  135  128  40,692 38,522 35,390
Great Britain..........................  20   22   22   7,175  8,531  8,711
Germany................................  10   11   13   5,561  7,435  7,217
France.................................  10   11    9   3,279  3,556  3,137
Italy..................................  10   11   14   2,973  3,273  3,049
                                        ---  ---  ---  ------ ------ ------
Total Europe (excl Sweden).............  50   55   58  18,988 22,795 22,114
USA....................................  19   19   18  10,463  8,834 10,268
Canada.................................   4    4    4   1,373  1,339  1,568
                                        ---  ---  ---  ------ ------ ------
Total, other markets...................  23   23   22  11,836 10,173 11,836
                                        ---  ---  ---  ------ ------ ------
Grand total............................ 209  213  208  71,516 71,490 69,340
                                        ===  ===  ===  ====== ====== ======

NOTE 12 -- GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (U.S.  
GAAP)                                                         

The financial statements have been prepared in accordance with Swedish GAAP.
These accounting principles differ in certain respects from U.S. GAAP.          

Following is a summary of the material adjustments to the Group's combined  
net income for the years ended December 31, 1995 and 1996, and combined         
shareholders' equity as of December 31, 1995 and 1996, which                    

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NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

would be required if U.S. GAAP had been applied instead of Swedish GAAP,        
together with a discussion of the principal differences between Swedish GAAP    
and U.S. GAAP that are significant to the Group's financial statements.         

                                                                [Download Table]

                                                              DECEMBER 31,     
                                                            ----------------   
                                                           1996         1995   
                                                          -------      ------- 
                                                           (IN SEK THOUSANDS)  
                                                                               
Net income (loss) in accordance with Swedish GAAP.......  (11,814)       2,824 
Adjustments:                                                                   
Foreign exchange contracts..............................   (1,366)        (311)
Pensions................................................       98          369 
Group contribution......................................   (3,983)      11,678 
Deferred taxes on U.S. GAAP adjustments.................      355          (16)
                                                          -------      ------- 
Net income in accordance with U.S. GAAP.................  (16,710)      14,544 
                                                          =======      ======= 
Shareholders' equity in accordance with Swedish GAAP....   74,184      107,705 
Adjustments:                                                                   
Foreign exchange contracts..............................   (1,677)        (311)
Pensions................................................      347          249 
Deferred taxes on U.S. GAAP adjustments.................      373           18 
                                                          -------      ------- 
Shareholders' equity in accordance with U.S. GAAP.......   73,227      107,661 
                                                          =======      ======= 

FOREIGN EXCHANGE CONTRACTS                                                      

Forward foreign exchange contracts (forward contracts) purchased to hedge   
future sales are not recorded until the respective sales transaction is         
recorded. Such foreign currency transactions are considered hedges of sales     
when the foreign currency commitment is reasonably assured and the foreign      
currency transaction is designated as a hedge of the foreign currency           
commitment.                                                                     

Under U.S. GAAP, unrealized gains and losses are recorded on forward        
contracts from the date such contracts are entered. To the extent such          
contracts qualify as hedges, unrealized gains and losses are deferred until     
the transaction being hedged is recorded.                                       

Gains and losses on forward exchange contracts that do not qualify as hedges
under U.S. GAAP are not deferred but are recorded directly in income or loss,   
as appropriate.                                                                 

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NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

PENSIONS                                                                        

Under Swedish GAAP, Agema provides for its pension obligations based on     
actuarial calculations. Under U.S. GAAP, the determination of pension costs     
and obligations are also based on actuarial assumptions, but the methods and    
assumptions are different under SFAS No. 87, "Employers' Accounting for         
Pensions".                                                                      

In 1993, the Group switched from the book reserve method to the insured     
method of financing its pension obligations in Sweden. Pensions earned prior    
to this change continue to be provided directly by the Group through a book     
reserve method. The insured pensions are provided through annual insurance      
premiums, which are approximately equivalent to the cost which would be         
attributed to the current period under US GAAP, hence there is no US GAAP       
adjustment necessary.                                                           

A summary of the funded status of the Group's defined benefit pension plan  
in Sweden in accordance with SFAS No. 87 follows:                               

                                                                [Download Table]

                                                         DECEMBER 31,     
                                                      ------------------- 
                                                        1996      1995    
                                                      --------- --------- 
                                                      (IN SEK THOUSANDS)  
                                                                          
 Accumulated vested benefit obligations                                   
 Projected benefit obligation........................    24,039    23,354 
 Plan assets at fair value...........................       --        --  
                                                      --------- --------- 
 Projected benefit obligation in excess of plan                           
 assets..............................................    24,039    23,354 
 Unrecognized actuarial gain (loss)..................       115      (643)
 Unrecognized transition obligation..................     5,491     5,883 
                                                      --------- --------- 
 Liability for FPG/PRI pensions......................    29,645    28,594 
 Liability for other plans...........................       918       909 
                                                      --------- --------- 
 Accrued pension liability...........................    30,563    29,503 
                                                      ========= ========= 

Pension cost calculated in accordance with U.S. GAAP includes the following:

                                                                [Download Table]

                                                      FOR THE YEAR ENDING  
                                                         DECEMBER 31,      
                                                      -------------------- 
                                                        1996       1995    
                                                      ---------  --------- 
                                                      (IN SEK THOUSANDS)   
                                                                           
 Service costs benefits earned during the year.......       --         --  
 Interest cost on projected benefit obligation.......     1,852      1,749 
 Amortization of actuarial gain......................       --         --  
 Amortization of remaining transition obligation.....      (392)      (392)
                                                      ---------  --------- 
 Net pension cost for FPG/PRI pensions...............     1,460      1,357 
                                                      =========  ========= 

Assumptions used for the defined plans were:                                

                                                                [Download Table]

                                                                DECEMBER 31, 
                                                                ------------ 
                                                                 1996   1995 
                                                                 ----   -----
                                                                             
Weighted average discount rate.................................. 8.0%   8.25%
Rates of increase in compensation levels........................ 5.0%    5.0%
Inflation rate.................................................. 4.0%    4.0%

GROUP CONTRIBUTION                                                              

According to Swedish GAAP, group contributions are recorded in income. In   
accordance with U.S. GAAP, group contributions are recognized as an adjustment  
to tax expense to the extent of the reduction or increase in tax resulting      
from the contribution.                                                          

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NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED) 

DEFERRED TAXES ON U.S. GAAP ADJUSTMENTS                                         

Deferred taxes are calculated on the U.S. GAAP adjustments, with the        
exception of group contributions, in accordance with SFAS 109, "Accounting for  
Income Taxes", where appropriate.                                               

SUPPLEMENTAL CASH FLOW INFORMATION                                              

Group contributions were not paid or received in cash but recorded as       
liabilities to affiliates.                                                      

In 1994, the capital gain of SEK 6,692 was not received in cash but recorded
as current receivables from affiliate.                                          

In 1995, the transfer of assets of SEK 13,332 (See Note 3) represented non- 
cash reductions in accounts receivable and current receivables from affiliates  
of SEK 6,640 thousand and SEK 6,692 thousand, respectively.                     

CLASSIFICATIONS                                                                 

Interest expense associated with the Swedish pension liability that is      
included in financial items, net under Swedish GAAP in the amounts of SEK       
1,750,000 and SEK 1,765,000 for the years ended December 31, 1995 and 1996,     
respectively, would be included in operating expenses under U.S. GAAP.          

EFFECT OF RECENT PRONOUNCEMENTS                                                 

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related      
Information." SFAS No. 130 establishes standards for reporting and display of   
comprehensive income and its components in a full set of general-purpose        
financial statements. The Group will be required to comply with the             
requirements of SFAS No. 130 for the year ending December 31, 1998. SFAS No.    
131 establishes revised guidelines for determining an entity's operating        
segments and the type and level of financial information to be disclosed. The   
Group will be required to comply with the requirements of SFAS No. 131 in the   
year ending December 31, 1998. The Group believes that the implementation of    
these statements will not have a significant impact on the nature of            
information disclosed in the financial statements.                              

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COMBINED STATEMENTS OF OPERATIONS 
(SEK IN THOUSANDS)
(UNAUDITED) 

                                                                [Download Table]

                                                                 SIX MONTHS     
                                                                    ENDED       
                                                                  JUNE 30,      
                                                               ---------------- 
                                                                1997     1996   
                                                               -------  ------- 
                                                                                
Sales......................................................... 188,359  136,958 
Cost of goods sold............................................ (95,468) (68,957)
Research and development...................................... (18,119) (16,716)
Selling and other operating costs............................. (67,962) (64,950)
                                                               -------  ------- 
  Operating income (loss).....................................   6,810  (13,665)
Interest income...............................................     309    1,492 
Interest expense..............................................  (2,430)  (1,340)
Exchange gain (loss)..........................................     (55)     139 
                                                               -------  ------- 
  Income (loss) before income taxesand group contributions....   4,634  (13,374)
Group contribution............................................    (144)   1,568 
                                                               -------  ------- 
Income (loss) before income taxes.............................   4,490  (11,806)
Provision (benefit) for income taxes..........................    (370)    (399)
                                                               -------  ------- 
Net income (loss).............................................   4,860  (11,407)
                                                               =======  ======= 

The accompanying notes are an integral part of these financial statements 

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COMBINED BALANCE SHEETS 
(SEK IN THOUSANDS)

                                                                [Download Table]

                                                         JUNE 30,   DECEMBER 31,
                                                           1997         1996    
                                                        ----------  ------------
                        ASSETS                          (UNAUDITED)             
                                                                                
Current assets:                                                                 
  Cash and cash equivalents............................   24,825       21,198   
  Accounts receivable..................................   81,831      100,806   
  Prepaid expenses.....................................    8,641        4,456   
  Income taxes receivable..............................       91          131   
  Current receivables from affiliates..................    1,245        1,061   
  Inventories..........................................   75,466       66,959   
  Deferred taxes.......................................    3,696        3,270   
  Other current assets.................................    5,644        4,439   
                                                         -------      -------   
    Total current assets...............................  201,439      202,320   
                                                         -------      -------   
Non-current assets:                                                             
  Other long-term receivables..........................      881          798   
  Property and equipment...............................   28,980       30,254   
                                                         -------      -------   
    Total non-current assets...........................   29,861       31,052   
                                                         -------      -------   
Total assets...........................................  231,300      233,372   
                                                         =======      =======   
         LIABILITIES AND SHAREHOLDERS' EQUITY                                   
Current liabilities:                                                            
  Liabilities to affiliates............................   49,338       39,653   
  Short-term borrowings................................    5,646       13,572   
  Accounts payable.....................................   16,772       22,355   
  Advance payments from customers......................    2,053        2,146   
  Income taxes payable.................................    1,094        1,783   
  Accrued payroll-related expenses.....................   35,664       18,242   
  Accrued commissions..................................      --         7,361   
  Other accrued expenses...............................      --        16,221   
  Other current liabilities............................    5,868        5,621   
                                                         -------      -------   
    Total current liabilities..........................  116,435      126,954   
                                                         -------      -------   
Long-term liabilities:                                                          
  Accrued pension liability............................   31,512       30,910   
  Deferred taxes.......................................    1,324        1,324   
                                                         -------      -------   
    Total long-term liabilities........................   32,836       32,234   
                                                         -------      -------   
Shareholders' equity:                                                           
  Share capital........................................    7,934        7,934   
  Other restricted reserves............................   48,789       48,789   
  Additional paid-in capital...........................   20,215       20,215   
  Retained earnings....................................   (3,309)      (8,170)  
  Cumulative foreign translation adjustment............    8,400        5,416   
                                                         -------      -------   
    Total shareholders' equity.........................   82,029       74,184   
                                                         -------      -------   
Total liabilities and shareholders' equity.............  231,300      233,372   
                                                         =======      =======   

The accompanying notes are an integral part of these financial statements 

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COMBINED STATEMENTS OF CASH FLOWS 
(SEK IN THOUSANDS)
(UNAUDITED) 

                                                                [Download Table]

                                                            SIX MONTHS ENDED   
                                                                JUNE 30,       
                                                            ------------------ 
                                                              1997      1996   
                                                            --------  -------- 
                                                                               
Cash (used) provided by operations:                                            
  Net income (loss)........................................    4,860   (11,407)
  Adjustments to reconcile net income (loss) to net cash                       
   provided by operating activities:                                           
    Depreciation...........................................    4,772     4,863 
    Group contribution.....................................      144    (1,568)
    Deferred income taxes..................................      (26)     (724)
  Changes in operating assets and liabilities:                                 
    Decrease in accounts receivable........................   26,095    24,090 
    Increase in inventories................................   (6,730)  (14,312)
    Increase in current receivables from affiliates........     (184)     (334)
    Increase in other assets...............................   (5,150)   (1,069)
    Decrease in accounts payable...........................   (7,254)   (2,656)
    Decrease in deferred tax assets and other long-term                        
     receivables...........................................       (7)      (26)
    Increase (decrease) in accrued payroll-related                             
     expenses..............................................   (7,677)      199 
    Decrease in advance payments from customers, taxes                         
     payable, and other current liabilities................     (986)     (834)
    Increase in provision for pensions, deferred tax                           
     liabilities, and other long-term liabilities..........      592       640 
                                                            --------  -------- 
Net cash (used) provided by operations.....................    8,449    (3,138)
                                                            --------  -------- 
Cash used by investing activities:                                             
  Additions to property and equipment......................   (2,787)   (4,284)
  Long-term receivable from affiliates.....................      --      2,430 
                                                            --------  -------- 
Net cash used by investing activities......................   (2,787)   (1,854)
                                                            --------  -------- 
Cash provided by financing activities:                                         
  Net increase (decrease) in liabilities to affiliates.....    6,632    (7,970)
  Net increase (decrease) in short-term borrowings.........   (9,576)      170 
                                                            --------  -------- 
Cash provided by financing activities......................   (2,944)   (7,800)
                                                            --------  -------- 
Effect of exchange rate changes on cash....................      909      (311)
                                                            --------  -------- 
Net decrease in cash.......................................    3,627   (13,103)
Cash and cash equivalents, beginning of year...............   21,198    43,657 
                                                            --------  -------- 
Cash and cash equivalents, end of year.....................   24,825    30,554 
                                                            ========  ======== 

The accompanying notes are an integral part of these financial statements 

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NOTES TO THE INTERIM COMBINED FINANCIAL STATEMENTS  
(UNAUDITED) 

NOTE 1 -- COMBINED FINANCIAL STATEMENTS                                         

In these Notes to the interim combined financial statements, references to  
the "Group" or "Agema" are to Agema Infrared Systems and its combined business  
and assets, as described in Note 1 to the combined financial statements as of   
and for the years ended December 31, 1994, 1995 and 1996, unless the context    
otherwise requires.                                                             

The accompanying combined financial statements have been prepared in        
accordance with accounting principles generally accepted in Sweden ("Swedish    
GAAP"). These accounting principles differ in certain significant respects      
from accounting principles generally accepted in the United States ("U.S.       
GAAP"). See Note 3 for a reconciliation of the principal differences between    
Swedish GAAP and U.S. GAAP affecting Agema's net income and shareholders'       
equity.                                                                         

The interim combined financial statements should be read in conjunction with
the combined financial statements and Notes thereto as of and for each of the   
three years in the period ended December 31, 1996. The interim combined         
financial statements have been prepared using the same principles as in         
previous years as described in Note 1 to the combined financial statements as   
of and for each of the three years in the period ended December 31, 1996.       

NOTE 2 -- INVENTORIES                                                           

Inventories consist of the following:                                       

                                                                [Download Table]

                                                      JUNE 30, DECEMBER 31,
                                                        1997       1996    
                                                      -------- ------------
                                                       (IN SEK THOUSANDS)  
                                                                           
Parts, components and sub-assemblies.................  26,864     26,762   
Work in process......................................   9,436      9,775   
Finished goods.......................................  39,166     30,422   
                                                       ------     ------   
Total................................................  75,466     66,959   
                                                       ======     ======   

NOTE 3 -- GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES (U.S.   
GAAP)                                                           

The financial statements have been prepared in accordance with Swedish GAAP.
These accounting principles differ in certain respects from U.S. GAAP.          

Following is a summary of the estimated adjustments under U.S. GAAP that    
affect the Group's combined net income for the six months ended June 30, 1996   
and 1997, and total combined shareholders' equity as of June 30, 1996.          

                                                                [Download Table]

                                              FOR THE SIX MONTHS ENDED   
                                                      JUNE 30,           
                                              -------------------------- 
                                                 1997          1996      
                                              ------------ ------------- 
                                                 (IN SEK THOUSANDS)      
                                                                         
Net income (loss) in accordance with Swedish                             
 GAAP........................................       4,860        (11,407)
Adjustments:                                                             
Foreign exchange contracts...................        (629)           384 
Pensions.....................................         271            623 
Group contribution...........................         104         (1,129)
Deferred taxed on U.S. GAAP adjustments......         100           (282)
                                              -----------  ------------- 
Net income in accordance with U.S. GAAP......       4,706        (11,811)
                                              ===========  ============= 

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AGEMA 

NOTES TO THE INTERIM COMBINED FINANCIAL STATEMENTS--(CONTINUED) 
(UNAUDITED) 

                                                                [Download Table]

                                                                 AS OF    
                                                             JUNE 30, 1997
                                                             -------------
                                                                (IN SEK   
                                                              THOUSANDS)  
                                                                          
Shareholders' equity in accordance with Swedish GAAP........    82,029    
Adjustments:                                                              
Foreign exchange contracts..................................    (2,306)   
Pensions....................................................       618    
Deferred taxes on U.S GAAP adjustments......................       473    
                                                                ------    
Shareholders' equity in accordance with U.S. GAAP...........    80,814    
                                                                ======    

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                                                                      APPENDIX A
--------------------------------------------------------------------------------

COMBINATION AGREEMENT 

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

DATED AS OF 
OCTOBER 6, 1997 

AMONG 

FLIR SYSTEMS, INC., SPECTRA-PHYSICS AB, 

SPECTRA-PHYSICS HOLDINGS S.A., SPECTRA-PHYSICS HOLDINGS GMBH, 

SPECTRA-PHYSICS HOLDINGS PLC, 

AND 

PHAROS HOLDINGS, INC. 

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TABLE OF CONTENTS 

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                                                                      PAGE NO.
                                                                      --------
                                                                              
RECITALS.............................................................    A-1  
ARTICLE 1 -- DEFINITIONS AND PRINCIPLES OF INTERPRETATION............    A-2  
  1.1  Defined Terms.................................................    A-2  
  1.2  Certain Rules of Interpretation...............................    A-6  
  1.3  Exhibits and Schedules........................................    A-6  
  1.4  Accounting Principles.........................................    A-7  
ARTICLE 2 -- SALE AND PURCHASE OF AGEMA STOCK........................    A-7  
  2.1  Sale and Purchase of AGEMA Stock..............................    A-7  
  2.2  Sale and Purchase of AGEMA Canada Stock.......................    A-7  
  2.3  Sale and Purchase of AGEMA UK Stock...........................    A-7  
  2.4  Exchange of AGEMA USA Stock...................................    A-7  
  2.5  Delivery of Shares............................................    A-8  
ARTICLE 3 -- CLOSING.................................................    A-8  
  3.1  Closing.......................................................    A-8  
  3.2  Deliveries by Stockholders....................................    A-8  
  3.3  Deliveries by FLIR............................................    A-9  
ARTICLE 4 -- REPRESENTATIONS AND WARRANTIES BY THE SPECTRA COMPANIES.    A-9  
  4.1  Spectra Companies' Organization and Qualification.............    A-9  
  4.2  Spectra Companies' Authority Relative to this Agreement.......   A-10  
  4.3  Title to Companies Stock......................................   A-10  
  4.4  Transfer of Title.............................................   A-10  
  4.5  AGEMA Companies' Organization and Qualification...............   A-11  
  4.6  Capitalization................................................   A-11  
  4.7  Subsidiaries..................................................   A-11  
  4.8  AGEMA Companies' Authority Relative to this Agreement.........   A-11  
  4.9  Financial Statements..........................................   A-12  
  4.10 Absence of Certain Changes or Events..........................   A-12  
  4.11 Litigation....................................................   A-13  
  4.12 Taxes.........................................................   A-13  
  4.13 Compliance with Permits, Applicable Laws and Agreements.......   A-14  
  4.14 Employee Plans and Benefit Arrangements.......................   A-14  
  4.15 Title to Assets...............................................   A-15  
  4.16 Intangible Property...........................................   A-15  
  4.17 Environmental Matters.........................................   A-16  
  4.18 Absence of Certain Payments...................................   A-16  
  4.19 No Broker, Etc................................................   A-17  
  4.20 Other Negotiations............................................   A-17  
  4.21 Business......................................................   A-17  
  4.22 Securities Act Representations................................   A-17  
  4.23 Proxy Statement...............................................   A-17  
  4.24 No Untrue Statement or Omission...............................   A-18  
ARTICLE 5 -- REPRESENTATIONS AND  WARRANTIES OF FLIR.................   A-18  
  5.1  Organization and Qualification................................   A-18  
  5.2  Authority Relative to this Agreement..........................   A-18  
  5.3  FLIR Stock to Be Issued at Closing............................   A-19  

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  5.4  FLIR Common Stock Outstanding.....................................   A-19
  5.5  Subsidiaries......................................................   A-19
  5.6  SEC Filings; Financial Statements.................................   A-20
  5.7  Absence of Certain Changes or Events..............................   A-20
  5.8  Litigation........................................................   A-21
  5.9  Taxes.............................................................   A-21
  5.10 Compliance with Permits, Applicable Laws and Agreements...........   A-21
  5.11 Employee Plans and Benefit Arrangements...........................   A-22
  5.12 Title to Assets...................................................   A-22
  5.13 Intangible Property...............................................   A-23
  5.14 Environmental Matters.............................................   A-23
  5.15 Absence of Certain Payments.......................................   A-24
  5.16 No Broker, Etc....................................................   A-24
  5.17 Other Negotiations................................................   A-24
  5.18 Business..........................................................   A-24
  5.19 Securities Act Representations....................................   A-25
  5.20 Proxy Statement...................................................   A-25
  5.21 No Untrue Statement or Omission...................................   A-25
ARTICLE 6 -- TAX MATTERS.................................................   A-25
  6.1  Tax Payment and Tax Return Filing Responsibilities................   A-25
  6.2  Tax Sharing and Indemnification...................................   A-26
  6.3  Tax Sharing Agreements............................................   A-27
  6.4  Net Operating Loss Carryforward...................................   A-27
  6.5  Cooperation.......................................................   A-27
ARTICLE 7 -- ADDITIONAL AGREEMENTS AND COVENANTS.........................   A-27
  7.1  Conduct of Business of FLIR and the AGEMA Companies...............   A-27
  7.2  Notice of Breach..................................................   A-29
  7.3  Reasonable Efforts................................................   A-29
  7.4  Other Transactions................................................   A-29
  7.5  Access to Information.............................................   A-29
  7.6  Employee Matters..................................................   A-30
  7.7  Access to Records and Personnel After Closing.....................   A-30
  7.8  Purchases of FLIR Common Stock....................................   A-30
  7.9  Directors.........................................................   A-31
  7.10 AGEMA and European Subsidiaries Stock.............................   A-31
  7.11 Tax Treatment of Exchange of AGEMA USA Stock......................   A-31
  7.12 Confidentiality...................................................   A-31
  7.13 Proxy Statement...................................................   A-32
  7.14 Stockholders' Meeting.............................................   A-32
  7.15 HSR Act Filings...................................................   A-32
  7.16 Transferred Liabilities...........................................   A-32
  7.17 Interim Financial Statements......................................   A-32
  7.18 Further Assurances................................................   A-33
ARTICLE 8 -- CONDITIONS PRECEDENT........................................   A-33
  8.1  Conditions to Obligations of FLIR.................................   A-33
  8.2  Conditions to Obligations of Stockholders.........................   A-34

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ARTICLE 9 -- TERMINATION, AMENDMENT AND WAIVER............................   A-36
  9.1   Termination.......................................................   A-36
  9.2   Effect of Termination.............................................   A-37
  9.3   Amendment.........................................................   A-37
  9.4   Waiver............................................................   A-37
ARTICLE 10 -- SURVIVAL AND INDEMNIFICATION................................   A-37
  10.1  Survival of Representations, Warranties, Covenants and                   
          Agreements......................................................   A-37
  10.2  Indemnification by the Spectra Companies..........................   A-38
  10.3  Indemnification by FLIR...........................................   A-38
  10.4  Notification and Defense of Claims or Actions.....................   A-38
  10.5  Reliance..........................................................   A-39
ARTICLE 11 -- GENERAL PROVISIONS..........................................   A-39
  11.1  Expenses..........................................................   A-39
  11.2  Public Announcements..............................................   A-39
  11.3  Notices, Etc......................................................   A-40
  11.4  Attorneys' Fees...................................................   A-40
  11.5  Severability......................................................   A-40
  11.6  Remedies..........................................................   A-41
  11.7  No Third-Party Beneficiaries......................................   A-41
  11.8  Governing Law.....................................................   A-41
  11.9  Jurisdiction......................................................   A-41
  11.10 Assignment and Binding Effect....................................   A-41 
  11.11 Joint and Several Obligations....................................   A-42 
  11.12 Entire Agreement.................................................   A-42 
  11.13 Counterparts.....................................................   A-43 

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COMBINATION AGREEMENT 

COMBINATION AGREEMENT (hereinafter called "Agreement"), dated as of October 
6, 1997, among FLIR SYSTEMS, INC., an Oregon corporation ("FLIR"), SPECTRA-     
PHYSICS AB, a corporation organized under the laws of Sweden ("Spectra"),       
SPECTRA-PHYSICS HOLDINGS S.A., a corporation organized under the laws of        
France ("Spectra France"), SPECTRA-PHYSICS HOLDINGS GMBH, a corporation         
organized under the laws of Germany ("Spectra Germany"), SPECTRA-PHYSICS        
HOLDINGS PLC, a public limited company organized under the laws of the United   
Kingdom ("Spectra UK"), PHAROS HOLDINGS, INC., a corporation organized under    
the laws of the state of Delaware ("Pharos") (collectively, Spectra, Spectra    
France, Spectra Germany, Spectra UK and Pharos are referred to individually as  
a "Spectra Company" and collectively as "the Spectra Companies") (Spectra,      
Spectra UK and Pharos are referred to individually as "Stockholder and          
collectively as "Stockholders"):                                                

RECITALS  

A. AGEMA INFRARED SYSTEMS AB, a corporation organized under the laws of     
Sweden ("AGEMA"), AGEMA INFRARED SYSTEMS LTD., a corporation organized under    
the federal laws of Canada ("AGEMA Canada"), AGEMA INFRARED SYSTEMS S.A.R.L.,   
a corporation organized under the laws of France ("AGEMA France"), AGEMA        
INFRARED SYSTEMS GMBH, a corporation organized under the laws of Germany        
("AGEMA Germany"), AGEMA INFRARED SYSTEMS LIMITED, a company organized under    
the laws of the United Kingdom ("AGEMA UK"), and AGEMA INFRARED SYSTEMS, INC.,  
a Delaware corporation authorized to do business in New Jersey ("AGEMA USA")    
(AGEMA, AGEMA Canada, AGEMA France, AGEMA Germany, AGEMA UK, AGEMA Italy        
(hereinafter defined), and AGEMA USA are referred to individually as an "AGEMA  
Company" and collectively as the "AGEMA Companies") (AGEMA France, AGEMA        
Germany, and AGEMA Italy are referred to individually as a "European            
Subsidiary" and collectively as the "European Subsidiaries") engage in the      
business of design, manufacture and distribution of thermal imaging devices.    

B. Spectra is the record and beneficial owner of 100% of the issued and     
outstanding shares of capital stock of SPECTRA-PHYSICS INDUSTRI AB, a           
corporation organized under the laws of Sweden ("Spectra Industri"), AGEMA      
Canada, Pharos, Spectra UK, Spectra France and Spectra Germany. Spectra         
Industri is the record and beneficial owner of 100% of the issued and           
outstanding capital stock of AGEMA.                                             

C. The Spectra Companies and Spectra Industri are the record and beneficial 
owner of 100% of the issued and outstanding shares of capital stock of the      
AGEMA Companies (the "AGEMA Companies Stock").                                  

D. Before Closing, (i) Spectra shall cause Spectra Industri to transfer to  
Spectra 100% of the issued and outstanding capital stock of AGEMA, so that at   
Closing, Spectra will be the record and beneficial owner of 100% of the issued  
and outstanding shares of capital stock of AGEMA and (ii) the Spectra           
Companies shall transfer to AGEMA 100% of the issued and outstanding shares of  
capital stock of the European Subsidiaries, so that at Closing, AGEMA will be   
the record and beneficial owner of 100% of the issued and outstanding shares    
of capital stock of the European Subsidiaries (the "European Subsidiaries       
Stock").                                                                        

E. Before Closing, AGEMA shall form an Italian corporation as a wholly-owned
subsidiary, called AGEMA INFRARED SYSTEMS S.R.L., a corporation to be           
organized under the laws of Italy ("AGEMA Italy"), into which Spectra shall     
contribute certain assets and employees related to the business of design,      
manufacture and distribution of thermal imaging devices conducted by Spectra    
in Italy.                                                                       

F. Spectra desires to sell to FLIR, and FLIR desires to purchase from       
Spectra 100% of the issued and outstanding shares of capital stock of AGEMA     
(the "AGEMA Stock") for an aggregate number of three million nine hundred       
twelve thousand two hundred eighty (3,912,280) shares of FLIR Stock and One     
hundred Dollars ($100).                                                         

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G. Spectra desires to sell to FLIR, and FLIR desires to purchase from       
Spectra 100% of the issued and outstanding shares of capital stock of AGEMA     
Canada (the "AGEMA Canada Stock") for an aggregate number of forty one          
thousand six hundred twenty (41,620) shares of FLIR Stock and Thirty Dollars    
($30).                                                                          

H. Spectra UK desires to sell to FLIR, and FLIR desires to purchase from    
Spectra UK 100% of the issued and outstanding shares of capital stock of AGEMA  
UK (the "AGEMA UK Stock") for an aggregate number of one hundred eighty three   
thousand one hundred twenty eight (183,128) shares of FLIR Stock and Twenty     
Dollars ($20).                                                                  

I. Pharos desires to exchange in accordance with the terms and conditions of
this Agreement, 100% of the issued and outstanding shares of capital stock of   
AGEMA USA (the "AGEMA USA Stock") solely for an aggregate number of twenty      
four thousand nine hundred seventy two (24,972) shares of newly-issued FLIR     
Stock, and FLIR desires to acquire the AGEMA USA Stock from Pharos, solely in   
exchange for such shares of FLIR Stock, as hereinafter provided (the AGEMA      
Stock, the AGEMA Canada Stock, the AGEMA UK Stock and the AGEMA USA Stock are   
referred to collectively as the "Target Stock").                                

J. The Boards of Directors of the Spectra Companies have determined that the
Transaction is in the best interest of the Spectra Companies and the            
stockholders of the Spectra Companies.                                          

K. The Board of Directors of FLIR has determined that the Transaction is in 
the best interest of FLIR and the stockholders of FLIR.                         

L. FLIR and the Spectra Companies wish to make certain representations,     
warranties, covenants and agreements in connection with the Transaction.        

NOW, THEREFORE, in consideration of the mutual representations, warranties, 
covenants and agreements set forth herein, the parties hereby agree as          
follows:                                                                        

ARTICLE 1 

DEFINITIONS AND PRINCIPLES OF INTERPRETATION  

1.1 DEFINED TERMS                                                               

As used in this Agreement, the following terms shall have the respective    
meanings set forth below:                                                       

"Accredited Investor": As defined in Regulation D of the Securities Act.    

"Affiliate": As to any Person, any other Person which, directly or          
indirectly through one or more intermediaries, controls, or is controlled by,   
or is under common control with, such Person.                                   

"Affiliated Group": An "affiliated group" as defined in Section 1504(a)(1)  
of the Code.                                                                    

"AGEMA Material Adverse Effect": An adverse effect on the business,         
properties, assets, condition (financial or otherwise), liabilities,            
operations or prospects of the AGEMA Companies (taken as a whole) in an amount  
in excess of $300,000.                                                          

"AGEMA Intercompany Indebtedness": Any advance, loan or credit provided to  
any of the AGEMA Companies by any of the Spectra Companies or any of their      
Affiliates (other than the AGEMA Companies).                                    

"AGEMA Intercompany Receivables": Any advance, loan or credit provided by   
any of the AGEMA Companies to any of the Spectra Companies or any of their      
Affiliates (other than the AGEMA Companies), including, but not limited to,     
any balances for the account of the AGEMA Companies maintained by the Spectra   
Companies in subaccounts and other pooled cash funds or deposits.               

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"AGEMA Net Intercompany Indebtedness": The aggregate amount of all AGEMA    
Intercompany Indebtedness minus the aggregate amount of all AGEMA Intercompany  
Receivables.                                                                    

"Authorized Representative": As to any Person, such Person's officers,      
directors, employees, counsel and accountants.                                  

"Claims Period": Except as otherwise specifically provided in Section 10.1, 
the period beginning on the Closing Date and ending on the first anniversary    
of the Closing Date.                                                            

"Code": The Internal Revenue Code of 1986, as amended, and all regulations  
promulgated thereunder, as in effect from time to time.                         

"Consent": Any consent, permission, approval or authorization of or by any  
Person.                                                                         

"Contract": Any written or oral contract, purchase or sale order, real or   
personal property lease or sale agreement, Lien, promissory note, loan          
agreement, guaranty or other agreement in which any of the AGEMA Companies or   
the FLIR Companies, as applicable, is a party or by which any of the AGEMA      
Companies or the FLIR Companies, as applicable, is bound (other than the        
Employee Contracts) including, without limitation, all distributor, sales       
representative and dealer agreements, joint venture and teaming agreements,     
purchase and supply contracts, maintenance contracts, license and royalty       
agreements, government contracts, partnering agreements, indebtedness           
instruments, letters of credit, performance bonds, currency contracts,          
agreements with respect to guaranties, suretyship, covenants not to compete or  
solicit, confidentiality agreements and indemnification agreements, by or for   
the benefit of the AGEMA Companies or the FLIR Companies, as applicable, or by  
which any of the AGEMA Companies or the FLIR Companies, as applicable, is       
bound, and all other contracts and agreements whatsoever, and all amendments    
relating to any of the foregoing.                                               

"Corporate Records": The articles of incorporation (including all amendments
thereto), bylaws (including all amendments thereto), similar organizational     
documents (including all amendments thereto), minutes, unanimous written        
consents, resolutions, stock records, stock transfer ledger, canceled           
certificates and other documents customarily contained in corporate minute      
books.                                                                          

"Employee Contract": Any written or oral contract, agreement, arrangement,  
policy, program, plan or practice (exclusive of any such contract which is      
terminable within thirty (30) days without liability to the employer),          
directly or indirectly providing for or relating to any employment,             
consulting, remuneration, compensation or benefit, severance or other similar   
arrangement, insurance coverage (including any self-insured arrangements),      
medical-surgical-hospital or other health benefits, workers' compensation,      
disability benefits, supplemental employment benefits, vacation benefits and    
other forms of paid or unpaid leave, retirement benefits, tuition               
reimbursement, deferred compensation, savings or bonus plans, profit-sharing,   
stock options, stock appreciation rights, or other forms of incentive           
compensation or post-retirement compensation or benefit, employment guarantee   
or security, or limitation on right to discipline or discharge, or relating to  
confidentiality, nonsolicitation, ownership of inventions, noncompetition or    
the like, which is not a Plan.                                                  

"Employees": All current or former officers, directors, employees, agents,  
or independent contractors.                                                     

"Employment Agreements": Executive Employment Agreement dated May 5, 1997   
between FLIR and J. Mark Samper; Executive Employment Agreement dated May 5,    
1997 between FLIR and James A. Fitzhenry; Executive Employment Agreement dated  
May 5, 1997 between FLIR and William N. Martin; Executive Employment Agreement  
dated May 5, 1997 between FLIR and Robert P. Daltry; Executive Employment       
Agreement dated May 5, 1997 between FLIR and J. Kenneth Stringer III; and       
Executive Employment Agreement dated May 5, 1997 between FLIR and Steven R.     
Palmquist.                                                                      

"Environmental Laws": All present and future national, federal, provincial, 
state and local laws (whether under common law, statute, rule, regulation or    
otherwise), Permits, and other requirements of Governmental Authorities         
relating to the protection of human health or the environment or to any         
Hazardous Materials.                                                            

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"ERISA": The Employee Retirement Income Security Act of 1974, as amended,   
and all regulations promulgated thereunder.                                     

"ERISA Affiliates": Any trade or business, whether or not incorporated, that
is now or has at any time in the past been treated as a single employer with    
any one or more of the AGEMA Companies or the FLIR Companies, as applicable,    
under Section 414(b) or (c) of the Code and the Treasury Regulations            
thereunder.                                                                     

"Exchange Act": The Securities Exchange Act of 1934, as amended.            

"FLIR Companies": FLIR and the FLIR Subsidiaries.                           

"FLIR Disclosure Schedule": The disclosure schedule dated the date of this  
Agreement, delivered by FLIR to Stockholders and attached hereto, each page of  
which has been initialed by a duly authorized officer of FLIR.                  

"FLIR Material Adverse Effect:" An adverse effect on the business,          
properties, assets, condition (financial or otherwise), liabilities,            
operations or prospects of the FLIR Companies (taken as a whole) in an amount   
in excess of $300,000.                                                          

"FLIR Stock": Shares of voting Common Stock of FLIR, $0.01 par value, newly-
issued by FLIR (and not the transfer of treasury shares).                       

"FLIR Subsidiaries": Optimas Corporation, a Washington corporation          
("Optimas"), Broadcast and Surveillance Systems, Ltd., a limited company        
organized under the laws of the United Kingdom ("BSS"), FSI International,      
Inc., a company organized under the laws of Barbados ("FSII"), and Hoeger       
Optical Co., Inc., a California corporation ("Hoeger").                         

"GAAP": With respect to the AGEMA Companies, Swedish generally accepted     
accounting principles in effect from time to time, and with respect to FLIR,    
United States generally accepted accounting principles in effect from time to   
time.                                                                           

"Governmental Authority": Any national, federal, provincial, state or       
municipal entity, any other government, or any political subdivision or other   
executive, legislative, administrative, judicial, quasi-judicial or other       
governmental department, commission, court, board, bureau, agency or            
instrumentality, of any country, including, but not limited to, any of the      
Pertinent Countries.                                                            

"Hazardous Materials": Materials that, because of their quantity,           
concentration or physical, chemical or infectious characteristics, may cause    
or pose a present or potential hazard to human health or the environment when   
improperly used, treated, stored, disposed of, generated, manufactured,         
transported or otherwise handled. "Hazardous Materials" shall include, but is   
not limited to, any and all hazardous or toxic substances, materials or wastes  
as defined or listed under any of the Environmental Laws. "Hazardous            
Materials" shall specifically include, but not be limited to, petroleum or      
petroleum products, including crude oil and any fraction thereof.               

"Indebtedness": Any indebtedness for borrowed money or for the deferred     
purchase price of property or services owned, or guarantee of such              
indebtedness, excluding any trade payables and other accrued current            
liabilities arising in the ordinary course of business, but including, but not  
limited to, all obligations, contingent or otherwise, in connection with any    
letters of credit, bonds, notes, debentures, conditional sale or other title    
retention agreements, or other similar instruments.                             

"Intangible Property": All intellectual property rights, including, but not 
limited to, patents, patent applications, trademarks, trademark applications    
and registrations, service marks, service mark applications and registrations,  
tradenames, copyrights, licenses and customer lists, proprietary processes,     
formulae, inventions, trade secrets, know-how, development tools and other      
proprietary rights used by any of the AGEMA Companies or the FLIR Companies,    
as applicable, pertaining to any product, software or service manufactured,     
marketed,                                                                       

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licensed or sold by any of the AGEMA Companies or the FLIR Companies, as        
applicable, in the conduct of its business or used, employed or exploited, or   
available for use, in the development, licensing, sale, marketing,              
distribution or maintenance thereof, and all documentation and media            
constituting, describing or relating to the above, including, but not limited   
to, manuals, memoranda, know-how, notebooks, software, records and              
disclosures.                                                                    

"Knowledge": With respect to the Spectra Companies, that which the Persons  
listed on Schedule 1.1(a) actually knows or reasonably should know after        
reviewing all relevant records and making due inquiries regarding the relevant  
matter. With respect to the FLIR Companies, that which the Persons listed on    
Schedule 1.1(b) actually knows or reasonably should know after reviewing all    
relevant records and making due inquiries regarding the relevant matter.        

"Lien": Any mortgage, pledge, lien, charge, encumbrance, security interest, 
claim or restriction of any kind.                                               

"Loss": Any and all loss, damage, claim, obligation, liability, cost and    
expense (including, without limitation, reasonable attorney and other           
professional fees and costs and expenses incurred in investigating, preparing,  
defending against or prosecuting any Proceeding).                               

"Order": Any judgment, writ, injunction, order, directive, ruling or decree 
of any arbitrator or any court or other Governmental Authority.                 

"Permit": Any permit, license, franchise, consent, variance, exemption, or  
approval issued or granted by, or authorization of, expiration or termination   
of any waiting period requirement by, or filing, registration, qualification,   
declaration or designation with, any Governmental Authority.                    

"Person": Any individual or corporation, company, general partnership,      
limited partnership, limited liability company, limited liability partnership,  
trust, incorporated or unincorporated association, joint venture, Governmental  
Authority or other entity of any kind.                                          

"Pertinent Countries": Sweden, Canada, France, Germany, the United Kingdom, 
Italy and the United States.                                                    

"Plans": All plans, programs, policies, contracts and arrangements providing
for bonuses, incentives, pensions, retirement, deferred compensation, profit    
sharing, stock or stock-related awards, severance pay, salary continuation or   
similar benefits, hospitalization, medical, dental or disability benefits,      
life insurance or other employee benefits, or compensation to or for any        
Employees or any beneficiaries or dependents of any Employee, whether or not    
insured or funded, and all other material employee benefit plans, programs,     
agreements and arrangements sponsored, maintained or contributed to, or         
required to be sponsored, maintained or contributed to, by any of the AGEMA     
Companies or the FLIR Companies, as applicable.                                 

"Proceeding": Any claim, suit, action, arbitration, government investigation
or proceeding.                                                                  

"Real Property": All real property now or in the past owned, leased or      
occupied by any of the AGEMA Companies or the FLIR Companies, as applicable,    
or any other Person to which any of the AGEMA Companies or the FLIR Companies,  
as applicable, is or is deemed to be a successor in interest, whether directly  
or indirectly (including, without limitation, by merger, under applicable       
Environmental Laws or otherwise), or in which any of the AGEMA Companies or     
the FLIR Companies, as applicable, or any such other Person has now or in the   
past had any interest, together with (i) all buildings and improvements         
located thereon and (ii) all rights, privileges, interests, easements,          
hereditaments and appurtenances relating thereto.                               

"Release": Any spilling, leaking, pumping, pouring, emitting, emptying,     
discharging, injecting, escaping, leaching, migration, dumping or disposing     
into the environment.                                                           

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"Relevant Insider": Any holder of more than 10% of the outstanding shares   
of, and any officer, director, manager or purchasing agent of, any of the       
AGEMA Companies or the FLIR Companies, as applicable.                           

"SEC": The Securities and Exchange Commission.                              

"Securities Act": The Securities Act of 1933, as amended.                   

"Spectra Disclosure Schedule": The disclosure schedule dated the date of    
this Agreement, delivered by the Spectra Companies to FLIR and attached         
hereto, each page of which has been initialed by a duly authorized officer of   
Spectra and AGEMA.                                                              

"Subsidiary": As to any Person, any other Person of which at least the      
majority of the equity or voting interests are owned, directly or indirectly,   
by such first Person.                                                           

"Tax": Any income, profits, corporation, capital gains, excise, franchise,  
sales, turnover, value added, use, transfer, gross receipts, payroll,           
occupation, social security, personal property, real property, occupancy or     
other tax, customs, duty, levy, impost, fee, imposition, assessment,            
contribution, withholding or similar charge, together with any related          
addition to tax, interest or penalty thereon, of any Governmental Authority.    

"Tax Affiliate": With respect to any Person, any other Person that is a     
member of the same Affiliated Group as such Person.                             

"Tax Period" or "Taxable Period": Any period prescribed by any Governmental 
Authority for which a Tax Return is required to be filed or a Tax is required   
to be paid.                                                                     

"Tax Return": Any type of return or report required to be filed as a result 
of any Tax, and any return or informational report required to be filed under   
the Code or any other tax law, statute, rule or regulation of any Governmental  
Authority.                                                                      

"Transaction": The execution, delivery and performance of this Agreement and
the other agreements contemplated hereby, including the acquisition by FLIR of  
the Target Stock in exchange for FLIR Stock and cash, as applicable, the other  
transactions contemplated by this Agreement, and the other actions required in  
connection therewith.                                                           

1.2 CERTAIN RULES OF INTERPRETATION.                                            

1.2.1 The name assigned to this Agreement and the section captions used     
herein are for convenience of reference only and shall not affect the           
interpretation or construction hereof. Unless otherwise specified, (a) the      
terms "hereof," "herein" and similar terms refer to this Agreement as a whole   
and (b) references herein to "Articles" or "Sections" refer to articles or      
sections of this Agreement.                                                     

1.2.2 The use of words in the singular or plural, or with a particular      
gender, shall not limit the scope or exclude the application of any provision   
of this Agreement to such Person or Persons or circumstances as the context     
otherwise permits.                                                              

1.2.3 Time is of the essence in the performance of the parties' respective  
obligations.                                                                    

1.2.4 Unless otherwise specified, all references to money amounts are to    
U.S. currency.                                                                  

1.3 EXHIBITS AND SCHEDULES.                                                     

The exhibits and schedules to this Agreement, as listed below, are          
incorporated by this reference into this Agreement:                             

FLIR Disclosure Schedule                                              
Spectra Disclosure Schedule                                           

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Schedule 1.1(a) -- List of the Spectra Companies' Knowledge Persons   
Schedule 1.1(b) -- List of the FLIR Companies' Knowledge Persons      
Schedule 8.1.8 -- List of Agreements Between Spectra Companies and the
 AGEMA Companies to Remain in Effect
Schedule 8.1.9 -- List of Transferred Liabilities, Indebtedness and   
Liens                             
Exhibit 3.2.2 -- Registration Rights Agreement                        
Exhibit 3.2.5 -- Opinions of Counsel for the Spectra Companies and the
AGEMA Companies                     
Exhibit 3.3.5 -- Opinion of Counsel for FLIR                          

1.4 ACCOUNTING PRINCIPLES                                                       

All references, if any, to generally accepted accounting principles means to
GAAP and all accounting terms, if any, not otherwise defined in this Agreement  
have the meanings assigned to them in accordance with GAAP.                     

ARTICLE 2 

SALE AND PURCHASE OF AGEMA STOCK  
SALE AND PURCHASE OF AGEMA CANADA STOCK 
SALE AND PURCHASE OF AGEMA UK STOCK 
EXCHANGE OF AGEMA USA STOCK 
DELIVERY OF FLIR STOCK  

2.1 SALE AND PURCHASE OF AGEMA STOCK                                            

Subject to the terms and conditions of this Agreement and in reliance upon  
the representations, warranties and agreements of the parties hereto, on the    
Closing Date, Spectra shall sell and transfer to FLIR and FLIR shall buy from   
Spectra the AGEMA Stock free and clear of all Liens. The purchase price to be   
paid by FLIR to Spectra at the Closing will consist of an aggregate number of   
three million nine hundred twelve thousand two hundred eighty (3,912,280)       
shares of FLIR Stock plus One hundred Dollars ($100). The FLIR Stock shall be   
newly-issued shares and not treasury shares.                                    

2.2 SALE AND PURCHASE OF AGEMA CANADA STOCK                                     

Subject to the terms and conditions of this Agreement and in reliance upon  
the representations, warranties and agreements of the parties hereto, on the    
Closing Date, Spectra shall sell and transfer to FLIR and FLIR shall buy from   
Spectra the AGEMA Canada Stock free and clear of all Liens. The purchase price  
to be paid by FLIR to Spectra at the Closing will consist of an aggregate       
number of forty one thousand six hundred twenty (41,620) shares of FLIR Stock   
plus Thirty Dollars ($30). The FLIR Stock shall be newly-issued shares and not  
treasury shares.                                                                

2.3 SALE AND PURCHASE OF AGEMA UK STOCK                                         

Subject to the terms and conditions of this Agreement and in reliance upon  
the representations, warranties and agreements of the parties hereto, on the    
Closing Date, Spectra UK shall sell and transfer to FLIR and FLIR shall buy     
from Spectra UK the AGEMA UK Stock free and clear of all Liens. The purchase    
price to be paid by FLIR to Spectra UK at the Closing will consist of an        
aggregate number of one hundred eighty three thousand one hundred twenty eight  
(183,128) shares of FLIR Stock plus Twenty Dollars ($20). The FLIR Stock shall  
be newly-issued shares and not treasury shares.                                 

2.4 EXCHANGE OF AGEMA USA STOCK                                                 

Subject to the terms and conditions of this Agreement and in reliance upon  
the representations, warranties and agreements of the parties hereto, on the    
Closing Date, Pharos shall deliver or cause to be delivered to FLIR the AGEMA   
USA Stock. In exchange for the AGEMA USA Stock, FLIR shall issue to Pharos an   
aggregate                                                                       

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number of twenty four thousand nine hundred seventy two (24,972) shares of      
FLIR Stock. The FLIR Stock shall be newly-issued shares and not treasury        
shares.                                                                         

2.5 DELIVERY OF SHARES                                                          

2.5.1 At the Closing, Stockholders, as holders of all certificates          
representing all outstanding shares of the Target Stock, shall, upon surrender  
of such certificates, be entitled to receive the cash and the number of shares  
of FLIR Stock described in Sections 2.1, 2.2, 2.3 and 2.4.                      

2.5.2 Stockholders shall deliver the certificates representing the Target   
Stock, duly endorsed in blank by Stockholders along with all other instruments  
of endorsement necessary to effect the transfer of such shares under            
applicable law, with signatures notarized, and with all necessary transfer tax  
and other revenue stamps, acquired at Stockholders' expense, affixed and        
canceled. Stockholders agree to cure any deficiencies with respect to the       
endorsement of the certificates or other documents of conveyance with respect   
to such Target Stock or with respect to the stock powers or other instruments   
of conveyance accompanying any Target Stock.                                    

ARTICLE 3 

CLOSING 

3.1 CLOSING                                                                     

Subject to the terms and conditions of this Agreement, the closing of the   
exchange and delivery of shares pursuant to Article 2 hereof (the "Closing")    
shall take place at FLIR's offices in Portland, Oregon, at 8:00 a.m. Pacific    
Standard Time on the later of (i) November 26, 1997 or (ii) three business      
days after receipt of FLIR shareholder consent, or such earlier or later date   
as the parties may mutually agree upon in writing (the "Closing Date"). The     
time of the Closing shall be referred to as the "Effective Time."               

3.2 DELIVERIES BY STOCKHOLDERS                                                  

At Closing, Stockholders shall deliver, or cause to be delivered, to FLIR   
the following:                                                                  

3.2.1 The certificates representing the Target Stock, duly endorsed in blank
or with duly executed stock powers or instruments of conveyance attached;       

3.2.2 Duly executed original counterparts of a Registration Rights Agreement
in substantially the form of attached Exhibit 3.2.2 (the "Registration Rights   
Agreement");                                                                    

3.2.3 Spectra's Bring-Down Certificate (hereinafter defined);               

3.2.4 A certified copy of the resolutions duly adopted by the Board of      
Directors and stockholders of each of the Spectra Companies authorizing the     
Transaction;                                                                    

3.2.5 Opinions of counsel for the Spectra Companies and the AGEMA Companies,
dated as of the Closing Date, to the effect and substantially in the form set   
forth in Exhibit 3.2.5;                                                         

3.2.6 An affidavit executed by Pharos to the effect that Pharos is not a    
"foreign person" within the meaning of Section 1445 of the Code;                

3.2.7 Affidavits executed by each of the AGEMA Companies (other than AGEMA  
USA) that it has not made an election, pursuant to Section 897(i) of the Code   
and US Treasury Regulations Section 1.897-3, to be treated as a U.S. domestic   
corporation for purposes of Code Sections 897, 1445 and 6039C;                  

3.2.8 Evidence satisfactory to FLIR that the European Subsidiaries Stock has
been duly registered in AGEMA's name on the share transfer books and official   
registries of the European Subsidiaries;                                        

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3.2.9 Evidence satisfactory to FLIR that the Target Stock has been duly     
registered in FLIR's name on the share transfer books and official registries   
of the AGEMA Companies; and                                                     

3.2.10 Such other agreements and documents, the delivery of which is        
specified in Article 8 as a condition to FLIR's closing obligations, and such   
other agreements, documents, certificates and instruments as FLIR may           
reasonably request.                                                             

3.3 DELIVERIES BY FLIR                                                          

At the Closing, FLIR shall deliver to Stockholders the following:           

3.3.1 The shares of FLIR Stock and cash due Stockholders in accordance with 
Section 2.5.1;                                                                  

3.3.2 Duly executed original counterparts of the Registration Rights        
Agreement;                                                                      

3.3.3 FLIR's Bring-Down Certificate (hereinafter defined);                  

3.3.4 Certified copies of the resolutions duly adopted by the Board of      
Directors and stockholders of FLIR authorizing the Transaction;                 

3.3.5 An opinion of Ater Wynne Hewitt Dodson & Skerritt, counsel for FLIR,  
dated as of the Closing Date, to the effect and substantially in the form set   
forth in Exhibit 3.3.5;                                                         

3.3.6 Evidence satisfactory to Stockholders that the FLIR Stock has been    
duly registered in Stockholders' names on the share transfer books of FLIR;     
and                                                                             

3.3.7 Such other agreements and documents, the delivery of which is         
specified in Article 8 as a condition to Stockholders' closing obligations,     
and such other agreements, documents, certificates and instruments as           
Stockholders may reasonably request.                                            

ARTICLE 4 

REPRESENTATIONS AND WARRANTIES BY THE SPECTRA COMPANIES 

As a material inducement to FLIR to enter into this Agreement, the Spectra  
Companies jointly and severally represent and warrant to FLIR as of the date    
hereof and as of the Closing Date that, except as set forth in the Spectra      
Disclosure Schedule:                                                            

4.1 SPECTRA COMPANIES' ORGANIZATION AND QUALIFICATION                           

Spectra is a corporation duly organized and validly existing under the laws 
of Sweden. Spectra France is a corporation duly organized and validly existing  
under the laws of France. Spectra Germany is a corporation duly organized and   
validly existing under the laws of Germany. Spectra UK is a public limited      
company duly organized and validly existing under the laws of the United        
Kingdom. Pharos is a corporation duly organized and validly existing under the  
laws of the state of Delaware. Each of the Spectra Companies is duly licensed   
or qualified and in good standing (to the extent that the concept of good       
standing exists in the relevant jurisdiction) as a foreign corporation in each  
jurisdiction in which it is required to be so licensed or so qualified, except  
where the failure to be so qualified will not have a material adverse effect    
on the business, properties, assets, condition (financial or otherwise),        
liabilities, operations or prospects of the Spectra Companies, taken as a       
whole. Each of the Spectra Companies has the corporate power to own its         
properties and to carry on its business as it is now being conducted. None of   
the Spectra Companies is bankrupt or insolvent or has committed any act of      
bankruptcy or entered into any scheme or composition or arrangement with its    
creditors.                                                                      

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4.2 SPECTRA COMPANIES' AUTHORITY RELATIVE TO THIS AGREEMENT                     

4.2.1 Each of the Spectra Companies has the corporate power to enter into   
this Agreement and to carry out its obligations hereunder.                      

4.2.2 The Transaction has been duly authorized by the Board of Directors of 
each of the Spectra Companies. No other corporate proceedings on the part of    
any of the Spectra Companies are necessary to authorize the Transaction.        

4.2.3 This Agreement constitutes a valid and binding obligation of each of  
the Spectra Companies, enforceable against each of them in accordance with its  
terms except as enforcement may be limited by bankruptcy, insolvency or other   
similar laws affecting the enforcement of creditors' rights generally, and      
except that the availability of equitable remedies, including specific          
performance, is subject to the discretion of the court in which any such        
Proceeding therefor may be brought.                                             

4.2.4 Neither the execution, delivery or performance of this Agreement, or  
any other agreement relating hereto, or any other aspect of the Transaction,    
will: (a) require any Consent of the shareholders of the Spectra Companies;     
(b) conflict with, or violate any provision of, or constitute or result in a    
breach or default (with or without notice, lapse of time or both) or give rise  
to a right of termination, cancellation or acceleration of any obligation or    
the loss of any material benefit, under (i) any charter or bylaw of any of the  
Spectra Companies, or (ii) any indenture, loan document provision or other      
Contract, Permit, Order, statute, law, ordinance, rule or regulation            
applicable to any of the Spectra Companies or their properties or assets; or    
(c) result in or require the imposition of any Lien with respect to, or upon,   
any of the Spectra Companies or its properties or assets, except where any      
item noted in (a) through (c) will not have an AGEMA Material Adverse Effect.   

4.2.5 None of the Spectra Companies is subject to or obligated under (i) any
charter or bylaw, or (ii) any indenture, loan document provision or any other   
contract, Permit, Order, lease, instrument, statute, law, ordinance, rule or    
regulation applicable to any of the Spectra Companies or their respective       
properties or assets which would be breached or violated, or under which there  
would be a default (with or without notice or lapse of time, or both), as a     
result of any aspect of the Transaction.                                        

4.2.6 No Permit or Consent is necessary for the consummation by the Spectra 
Companies or the AGEMA Companies of the Transaction.                            

4.3 TITLE TO COMPANIES STOCK                                                    

The Spectra Companies are the lawful record and beneficial owners of the    
AGEMA Companies Stock, in the amounts set forth opposite their respective       
names in Section 4.3(i) of the Spectra Disclosure Schedule. Immediately before  
the Closing, Stockholders will be the lawful record and beneficial owners of    
the Target Stock, in the amounts set forth opposite their respective names in   
Section 4.3(ii) of the Spectra Disclosure Schedule. Immediately before the      
Closing, AGEMA will be the lawful record and beneficial owner of the European   
Subsidiaries Stock, in the amounts set forth in Section 4.3(iii) of the         
Spectra Disclosure Schedule, free and clear of all Liens. Before Closing, all   
actions required under applicable law to reflect AGEMA as the record owner of   
the European Subsidiaries Stock shall have been taken. Immediately before the   
Closing, Stockholders will have, good, valid and indefeasible title to the      
Target Stock, free and clear of all Liens, with full right and lawful           
authority to sell and transfer the Target Stock. Before Closing, all action     
required under applicable law to reflect Stockholders as the record owners of   
the Target Stock shall have been taken.                                         

4.4 TRANSFER OF TITLE                                                           

Upon delivery of the Target Stock as provided in Section 2.5.1, FLIR will   
acquire good beneficial and legal, valid and indefeasible title to the Target   
Stock, free and clear of all Liens arising with respect to the Target Stock     
prior to Closing.                                                               

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4.5 AGEMA COMPANIES' ORGANIZATION AND QUALIFICATION                             

Each of AGEMA, AGEMA Canada, AGEMA France, AGEMA Germany, AGEMA UK and AGEMA
USA is a corporation duly organized and validly existing under the laws of      
Sweden, Canada, France, Germany, the United Kingdom and the state of Delaware,  
United States, respectively. At Closing, AGEMA Italy will be a corporation      
duly organized and validly existing under the laws of Italy. Each of the AGEMA  
Companies is duly licensed or qualified and in good standing (to the extent     
that the concept of good standing exists in the relevant jurisdiction) as a     
foreign corporation in each jurisdiction in which it is required to be so       
licensed or so qualified, except where the failure to be so qualified will not  
have an AGEMA Material Adverse Effect. None of the AGEMA Companies is bankrupt  
or insolvent or has committed any act of bankruptcy or entered into any scheme  
or composition or arrangement with its creditors.                               

4.6 CAPITALIZATION                                                              

The authorized number of shares of capital stock of each of the AGEMA       
Companies, and the par value thereof, is described in Section 4.6 of the        
Spectra Disclosure Schedule. The AGEMA Companies Stock constitutes all of the   
issued and outstanding stock or equity interests in the AGEMA Companies as of   
the date hereof and as of the Closing Date. The AGEMA Companies Stock were      
duly authorized, validly issued, fully paid and nonassessable. No shares of     
the AGEMA Companies' capital stock are held in the AGEMA Companies' treasury.   
As of the date hereof, there are no bonds, debentures, notes or other           
evidences of indebtedness having the right to vote on any matters on which any  
shareholders of the AGEMA Companies may vote issued or outstanding. There are   
no subscriptions, options, warrants, calls, or other rights (including, but     
not limited to, preemptive rights), agreements or commitments outstanding       
which obligate any of the AGEMA Companies to issue, deliver, sell or otherwise  
cause to become outstanding any of its capital stock or debt securities, or     
which obligate any of the AGEMA Companies to grant, extend or enter into any    
such option, warrant, call or other such right, agreement or commitment. There  
are no outstanding or authorized stock appreciation, phantom stock, profit      
participation or similar rights with respect to any of the AGEMA Companies.     

4.7 SUBSIDIARIES                                                                

None of the AGEMA Companies has any Subsidiaries, other than the European   
Subsidiaries, which at Closing shall be wholly-owned subsidiaries of AGEMA.     
None of the AGEMA Companies has any equity investment or other interest in or   
has made advances to, any Person.                                               

4.8 AGEMA COMPANIES' AUTHORITY RELATIVE TO THIS AGREEMENT                       

4.8.1 Except as described in Section 4.8 of the Spectra Disclosure Schedule,
neither the execution, delivery or performance of this Agreement, or any other  
agreement relating hereto, or any other aspect of the Transaction, will: (a)    
require any Consent of the Board of Directors or the shareholders of the AGEMA  
Companies; (b) conflict with, or violate any provision of, or constitute or     
result in a breach or default (with or without notice, lapse of time or both)   
or give rise to a right of termination, cancellation or acceleration of any     
obligation or the loss of any material benefit, under (i) any charter or bylaw  
of any of the AGEMA Companies, or (ii) any indenture, loan document provision   
or other Contract, Permit, Order, statute, law, ordinance, rule or regulation   
applicable to any of the AGEMA Companies or its properties or assets; or (c)    
result in or require the imposition of any Lien with respect to, or upon, any   
of the AGEMA Companies or its properties or assets.                             

4.8.2 None of the AGEMA Companies is subject to or obligated under (i) any  
charter or bylaw, or (ii) any indenture, loan document provision or any other   
contract, Permit, Order, lease, instrument, statute, law, ordinance, rule or    
regulation applicable to any of the AGEMA Companies or their respective         
properties or assets which would be breached or violated, or under which there  
would be a default (with or without notice or lapse of time, or both), as a     
result of any aspect of the Transaction.                                        

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4.9 FINANCIAL STATEMENTS                                                        

4.9.1 The Spectra Companies have previously furnished FLIR with true and    
complete copies of the (i) combined audited balance sheets of the AGEMA         
Companies as of December 31, 1995 and 1996, (ii) related combined audited       
statements of income, stockholders' equity and cash flows for the periods       
ending December 31, 1994, 1995 and 1996 (including all audit opinions and all   
notes accompanying such statements), (iii) combined unaudited balance sheet as  
of June 30, 1997, and (iv) related combined unaudited statement of income and   
cash flows for the six months ending June 30, 1997. All such balance sheets     
and statements covered by (i) through (iv) are collectively referred to in      
this Agreement as the "AGEMA Combined Financial Statements."                    

4.9.2 The AGEMA Combined Financial Statements are in accordance with the    
books and records of the AGEMA Companies and fairly present the financial       
position, results of operations and cash flows of the AGEMA Companies as of     
the dates and for the periods indicated, in each case in conformity with GAAP   
consistently applied, except as otherwise indicated in such AGEMA Combined      
Financial Statements, and in the case of unaudited AGEMA Combined Financial     
Statements, subject to normal year-end adjustments, the absence of footnotes    
and other disclosures associated with an audited report. The AGEMA Combined     
Financial Statements for June 30, 1997 include all consolidating information    
required by GAAP for the AGEMA Companies and accurately reflect in all          
material respects, consistent with past practice, the allocation of revenues    
and expenses between the AGEMA Companies. To the Spectra Companies' Knowledge,  
(i) the AGEMA Combined Financial Statements provide fully for all fixed and     
non-contingent liabilities of the AGEMA Companies and disclose or provide       
fully for all contingent liabilities of a type required to be disclosed or      
provided for in financial statements in accordance with GAAP and (ii) all       
prepaid expenses, if any, included as assets of the AGEMA Companies represent   
payments theretofore made by the AGEMA Companies, the benefit and advantage of  
which may be obtained or enjoyed by the AGEMA Companies, as applicable, after   
the Closing Date.                                                               

4.9.3 To the Spectra Companies' Knowledge, the AGEMA Companies do not have  
any indebtedness, liabilities or obligations of their own or of any             
predecessor in interest (whether known or unknown, accrued, absolute,           
contingent or otherwise or whether due or to become due) of any nature          
whatsoever which are not disclosed or provided for in the most recent balance   
sheet contained in the AGEMA Combined Financial Statements, other than (i)      
liabilities and obligations incurred between June 30, 1997 and the date hereof  
in the ordinary course of the business of the AGEMA Companies, consistent with  
past practice and (ii) except as otherwise disclosed in this Agreement,         
including the Spectra Disclosure Schedule. To Spectra Companies' Knowledge,     
there is no basis for any such indebtedness, liability or obligation (whether   
known or unknown, accrued, absolute, contingent or otherwise or whether due or  
to become due) of any nature whatsoever against the AGEMA Companies, which is   
or would have an AGEMA Material Adverse Effect, not reflected in the most       
recent balance sheet contained in the AGEMA Combined Financial Statements.      

4.10 ABSENCE OF CERTAIN CHANGES OR EVENTS                                       

Since December 31, 1996, except as disclosed in Section 4.10 of the Spectra 
Disclosure Schedule, there has not been:                                        

4.10.1 any material adverse change in the business, financial condition,    
liabilities (net of any corresponding increase in assets), results of           
operations or, to the Spectra Companies' Knowledge, prospects of any of the     
AGEMA Companies, other than changes in laws or regulations of general           
applicability;                                                                  

4.10.2 any damage, destruction or loss, whether covered by insurance or not,
materially and adversely affecting the financial condition, prospects,          
properties or businesses of any of the AGEMA Companies;                         

4.10.3 any declaration, payment or setting aside for payment of any dividend
or other distribution (whether in cash, stock or property) with respect to the  
capital stock of any of the AGEMA Companies or any direct or indirect           
redemption, purchase or other acquisition of any shares of capital stock of     
any of the AGEMA Companies;                                                     

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4.10.4 any accrual or arrangement for or payment by any of the AGEMA        
Companies of severance bonuses or special compensation of any kind to any       
director, officer or Employee of the AGEMA Companies;                           

4.10.5 any sale or other transfer by any of the AGEMA Companies of any      
material tangible or intangible asset, any granting of a Lien relating to any   
such material asset, any lease of real property or equipment, or any            
cancellation of any debt or claim, except any transaction involving the above   
made in the ordinary course of business;                                        

4.10.6 any incurrence by any of the AGEMA Companies of any obligation or    
liability (absolute or contingent), except current obligations and liabilities  
incurred in the ordinary course of business in amounts and on terms consistent  
with past practices;                                                            

4.10.7 any material change in accounting methods or principles or any       
revaluation of any of the assets of any of the AGEMA Companies (including,      
without limitation, any change in depreciation or amortization policies or      
rates);                                                                         

4.10.8 any amendment or termination of any Contract or Permit to which any  
of the AGEMA Companies is a party, except in the ordinary course of business    
or where the same could not reasonably be expected to have an AGEMA Material    
Adverse Effect;                                                                 

4.10.9 any loan by any of the AGEMA Companies to any Person or guaranty by  
any of the AGEMA Companies of any loan, other than inter-company advances       
among the AGEMA Companies made in the ordinary course of business and of an     
amount consistent with past practices;                                          

4.10.10 any inter-company transaction between any of the AGEMA Companies and
any of the Spectra Companies, other than transactions contemplated by this      
Agreement and made in the ordinary course of business and of an amount          
consistent with past practices;                                                 

4.10.11 any waiver or release of any material right or claim of any of the  
AGEMA Companies, except in the ordinary course of business;                     

4.10.12 any commencement or notice or, to the Spectra Companies' Knowledge, 
threat of commencement of any Proceeding against or investigation of any of     
the AGEMA Companies; or                                                         

4.10.13 any actual or threatened strike or other labor trouble or dispute or
claim of wrongful discharge or other unlawful labor practice or action          
involving any of the AGEMA Companies which could reasonably be expected to      
have an AGEMA Material Adverse Effect.                                          

4.11 LITIGATION                                                                 

Except as disclosed in Section 4.11 of the Spectra Disclosure Schedule,     
there is no Proceeding pending or, to the Spectra Companies' Knowledge,         
threatened against any of the AGEMA Companies which, either alone or in the     
aggregate, could reasonably be expected to have an AGEMA Material Adverse       
Effect, nor is there any Order outstanding against any of the AGEMA Companies   
having, or which in the future could reasonably be expected to have, either     
alone or in the aggregate, any AGEMA Material Adverse Effect.                   

4.12 TAXES                                                                      

4.12.1 The Spectra Companies and the AGEMA Companies have accurately        
prepared and timely filed all material Tax Returns required to be filed with    
respect to the AGEMA Companies at or before the Effective Time and such Tax     
Returns are true and correct in all material respects and have been completed   
in all material respects in accordance with applicable law.                     

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4.12.2 The Spectra Companies and the AGEMA Companies as of the Effective    
Time: (i) will have paid all Taxes they are required to pay (including, but     
not limited to, all estimated Taxes due) with respect to the AGEMA Companies    
prior to the Effective Time and (ii) will have withheld with respect to the     
AGEMA Companies' employees all Taxes required to be withheld, except where any  
failure to make such payment or withholding would not be reasonably likely to   
have an AGEMA Material Adverse Effect.                                          

4.12.3 There is no material Tax deficiency outstanding, proposed in writing 
or assessed against any of the AGEMA Companies that is not reflected as a       
liability on the most recent balance sheet contained in the AGEMA Combined      
Financial Statements nor has any of the AGEMA Companies executed any waiver of  
any statute of limitations on or extending the period for the assessment or     
collection of any Tax.                                                          

4.12.4 The AGEMA Companies do not have any material liabilities for unpaid  
Taxes that have not been accrued for or reserved on the AGEMA Combined          
Financial Statements, whether asserted or unasserted, contingent or otherwise.  

4.13 COMPLIANCE WITH PERMITS, APPLICABLE LAWS AND AGREEMENTS                    

4.13.1 To the Spectra Companies' Knowledge, except as disclosed in Section  
4.13 of the Spectra Disclosure Schedule, each of the AGEMA Companies holds all  
Permits, the failure of which to hold would have an AGEMA Material Adverse      
Effect (the "AGEMA Material Permits"). Each of the AGEMA Companies is in        
compliance with the terms of the AGEMA Material Permits, except for such        
failures to comply which, individually or in the aggregate, would not have an   
AGEMA Material Adverse Effect.                                                  

4.13.2 To the Spectra Companies' Knowledge, except as disclosed in Section  
4.13 of the Spectra Disclosure Schedule, the business of each of the AGEMA      
Companies is being conducted in compliance with all laws, ordinances and        
regulations of all Governmental Authorities (including, but not limited to,     
laws pertaining to customs and duties, employment and employment practices,     
terms and conditions of employment, wages and hours, safety, health, fire       
prevention and other matters), except for possible violations which             
individually or in the aggregate do not and would not have an AGEMA Material    
Adverse Effect.                                                                 

4.13.3 To the Spectra Companies' Knowledge, except as disclosed in Section  
4.13 of the Spectra Disclosure Schedule, none of the AGEMA Companies is in      
default (and not in a circumstance which, with notice or lapse of time, or      
both, would constitute a default) under any agreement or instrument to which    
such AGEMA Company is a party, whether or not such default has been waived,     
except for any such default which, alone or in the aggregate with other such    
defaults, would not have an AGEMA Material Adverse Effect.                      

4.13.4 The provisions of this Section shall not be construed or applied to  
narrow or otherwise restrict the scope of any other representations and         
warranties in this Article 4.                                                   

4.14 EMPLOYEE PLANS AND BENEFIT ARRANGEMENTS                                    

4.14.1 The Spectra Companies have set forth in Section 4.14 of the Spectra  
Disclosure Schedule all Plans for the benefit of, or relating to, any current   
or former employee of the AGEMA Companies or any ERISA Affiliate of the AGEMA   
Companies.                                                                      

4.14.2 With respect to each such Plan, the Spectra Companies have made      
available to FLIR, a true and correct copy of (i) the most recent annual        
report filed with the applicable Governmental Authority, (ii) such Plan, (iii)  
each trust agreement and group annuity contract, if any, relating to such Plan  
and (iv) the most recent actuarial report or valuation relating to such Plan.   

4.14.3 With respect to such Plans, individually and in the aggregate, no    
event has occurred, and to the Spectra Companies' Knowledge, there exists no    
condition or set of circumstances in connection with which any of the AGEMA     
Companies could be subject to any liability that is reasonably likely to have   
an AGEMA Material Adverse Effect under ERISA, the Code or any other applicable  
law.                                                                            

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4.14.4 With respect to such Plans, individually and in the aggregate, there 
are no funded benefit obligations for which contributions have not been made    
or properly accrued and there are no unfunded benefit obligations which have    
not been accounted for by reserves, or otherwise properly footnoted in          
accordance with GAAP, on the AGEMA Combined Financial Statements, which         
obligations are reasonably expected to have an AGEMA Material Adverse Effect.   

4.14.5 Except as disclosed in Section 4.14 of the Spectra Disclosure        
Schedule, there are no pending petitions for recognition of a labor union,      
confederation or association as the exclusive bargaining agent for any of the   
Employees of any of the AGEMA Companies; no such petitions have been pending    
at any time within two years of the date of this Agreement, and, to the         
Spectra Companies' Knowledge, there has not been any organizing effort by any   
union, confederation or association or other group seeking to represent any     
Employees of any of the AGEMA Companies as their exclusive bargaining agent at  
any time within two years of the date of this Agreement. There are no labor     
strikes, work stoppages or other labor troubles, other than routine grievance   
matters, now pending or, to the Spectra Companies' Knowledge, threatened        
against any of the AGEMA Companies.                                             

4.14.6 The AGEMA Companies have performed their duty to inform their        
respective employees about the Transaction in accordance with applicable law,   
if any, concerning the employees' right to participate in the decision making   
process, including but not limited to, any requirements under the               
"medbestammande i arbetslivet (co-determination at the workplace), Swedish Law  
1976:580.                                                                       

4.15 TITLE TO ASSETS                                                            

Each of the AGEMA Companies has good and marketable title to all of its     
leasehold interests and other assets as described in the most recent balance    
sheet contained in the AGEMA Combined Financial Statements and in the Spectra   
Disclosure Schedule, except for such assets that have been disposed of in the   
ordinary course of business since the date of such balance sheet, free and      
clear of all Liens, except (i) the Lien for current taxes, payments of which    
are not yet delinquent, (ii) such imperfections in title and easements and      
encumbrances, if any, as are not substantial in character, amount or extent     
and do not materially detract from the value or interfere with the present use  
of the property subject thereto or affected thereby, or otherwise materially    
impair the AGEMA Companies' business operations, or (iii) as otherwise set      
forth in Section 4.15 of the Spectra Disclosure Schedule, and except for such   
matters which, individually or in the aggregate, could not reasonably be        
expected to have an AGEMA Material Adverse Effect. All leases under which the   
AGEMA Companies lease any real or personal property are in good standing,       
valid and effective in accordance with their respective terms, and there is     
not, under any of such leases, any existing default or event which with notice  
or lapse of time or both would become a default other than failures to be in    
good standing, valid and effective and defaults under such leases which in the  
aggregate will not have an AGEMA Material Adverse Effect. None of the AGEMA     
Companies owns any real property, of record or beneficially.                    

4.16 INTANGIBLE PROPERTY                                                        

4.16.1 The AGEMA Companies own, or are licensed or otherwise possess legally
enforceable rights to use, all patents, trademarks, trade names, service        
marks, copyrights, and any applications for such patents, trademarks, trade     
names, service marks and copyrights, processes, formulae, methods, schematics,  
technology, know-how, computer software programs or applications and tangible   
or intangible proprietary information or material that are necessary to         
conduct the business of the AGEMA Companies as currently conducted, or          
proposed to be conducted, the absence of which would be reasonably likely to    
have an AGEMA Material Adverse Effect (the "AGEMA Intellectual Property         
Rights"). Section 4.16 of the Spectra Disclosure Schedule lists (i) all         
patents and patent applications and all trademarks, registered copyrights,      
trade names and service marks material to the AGEMA Companies' business and     
included in the AGEMA Intellectual Property Rights, including the               
jurisdictions in which each such AGEMA Intellectual Property Right has been     
issued or registered or in which any such application for such issuance and     
registration has been filed, (ii) all material licenses, sublicenses and other  
agreements as to which any of the AGEMA Companies is a party and pursuant to    
which                                                                           

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any person is authorized to use any AGEMA Intellectual Property Rights, and     
(iii) all material licenses, sublicenses and other agreements as to which any   
of the AGEMA Companies is a party and pursuant to which any of the AGEMA        
Companies is authorized to use any third-party patents, trademarks or           
copyrights, including software ("AGEMA Third Party Intellectual Property        
Rights") which are incorporated in, are, or form a part of any product of any   
of the AGEMA Companies that is material to their business.                      

4.16.2 None of the AGEMA Companies is, nor will it be as a result of the    
execution and delivery of this Agreement or the performance of its obligations  
under this Agreement, in breach of any license, sublicense or other agreement   
relating to the AGEMA Intellectual Property Rights or AGEMA Third Party         
Intellectual Property Rights, the breach of which would be reasonably likely    
to have an AGEMA Material Adverse Effect.                                       

4.16.3 To the Spectra Companies' Knowledge, all patents, registered         
trademarks, service marks and copyrights held by the AGEMA Companies are valid  
and subsisting. Except as set forth in Section 4.16 of the Spectra Disclosure   
Schedule, the AGEMA Companies (i) have not been sued in any suit, action or     
proceeding which involves a claim of infringement of any patents, trademarks,   
service marks, copyrights or violation of any trade secret or other             
proprietary right of any third party; and (ii) have no knowledge that the       
manufacturing, marketing, licensing or sale of their products infringes any     
patent, trademark, service mark, copyright, trade secret or other proprietary   
right of any third party, which such infringement would reasonably be expected  
to have an AGEMA Material Adverse Effect.                                       

4.17 ENVIRONMENTAL MATTERS                                                      

4.17.1 To the Spectra Companies' Knowledge, each of the AGEMA Companies, and
each of such Company's assets, properties and operations are now and at all     
times have been in compliance in all material respects with all applicable      
Environmental Laws. To the Spectra Companies' Knowledge, there has not been     
any Release or threatened Release of any Hazardous Material at, on, under, in,  
to or from any of the AGEMA Companies' Real Property which relates to any       
Company's operations and activities at such Real Property or otherwise. None    
of the AGEMA Companies has received any notice of alleged, actual or potential  
responsibility for, or any Proceeding regarding, the presence, Release or       
threatened Release of any Hazardous Material at any location, whether at the    
AGEMA Companies' Real Property or otherwise, which Hazardous Materials were     
allegedly manufactured, used, generated, processed, treated, stored, disposed   
or otherwise handled at or transported from the AGEMA Companies' Real Property  
or otherwise.                                                                   

4.17.2 None of the AGEMA Companies has received any notice of any Proceeding
by any Person alleging any actual or threatened injury or damage to any         
Person, property, natural resource or the environment arising from or relating  
to the presence, Release or threatened Release of any Hazardous Materials at,   
on, under, in, to or from the AGEMA Companies' Real Property or in connection   
with any operations or activities thereat, or at, on, under, in, to or from     
any other property. To the Spectra Companies' Knowledge, neither the AGEMA      
Companies' Real Property nor any operations or activities thereat is or has     
been subject to any Proceeding, Order or Lien relating to any applicable        
Environmental Laws.                                                             

4.17.3 To the Spectra Companies' Knowledge, there are no underground storage
tanks presently located at the AGEMA Companies' Real Property and there have    
been no Releases of any Hazardous Materials from any underground storage tanks  
or related piping at the AGEMA Companies' Real Property. To the Spectra         
Companies' Knowledge, there are no PCBs located at, on or in the AGEMA          
Companies' Real Property. To the Spectra Companies' Knowledge, there is no      
asbestos or asbestos-containing material located at, on or in the AGEMA         
Companies' Real Property.                                                       

4.18 ABSENCE OF CERTAIN PAYMENTS                                                

To the Spectra Companies' Knowledge, none of the AGEMA Companies nor any of 
its Employees or other Persons acting on behalf of the AGEMA Companies, or any  
Affiliate of any of the foregoing, have with respect to the AGEMA Companies'    
businesses, (i) engaged in any activity, prohibited by the United States        
Foreign                                                                         

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Corrupt Practices Act of 1977 or any other similar law, regulation or Order of  
any Governmental Authority or (ii) without limiting the generality of the       
preceding clause (i), used any corporate or other funds for unlawful            
contributions, payments, gifts or entertainment, or made any unlawful           
expenditures relating to political activity to officials of any Governmental    
Authority. To the Spectra Companies' Knowledge, none of the AGEMA Companies or  
any of such AGEMA Company's shareholders, Employees or other Persons acting on  
behalf of any of them, or any Affiliate of any of the foregoing, has accepted   
or received any unlawful contributions, payments, gifts or expenditures.        

4.19 NO BROKER, ETC.                                                            

No broker, finder or investment banker is entitled to any brokerage,        
finder's or other fee or commission in connection with the Transaction based    
upon arrangements made by or on behalf of any of the Spectra Companies or the   
AGEMA Companies.                                                                

4.20 OTHER NEGOTIATIONS                                                         

Except for the Transaction, there is no existing commitment or offer by any 
of the Spectra Companies or the AGEMA Companies to sell all or any of the       
AGEMA Companies Stock or all or a significant part of the assets of any of the  
AGEMA Companies or to merge or consolidate any of the AGEMA Companies with or   
into any other Person, and there are no pending negotiations for any such       
sale, exchange, merger or consolidation.                                        

4.21 BUSINESS                                                                   

Since December 31, 1996, the business of the AGEMA Companies has been       
conducted in the normal course, consistent with past practices of the AGEMA     
Companies. Without limiting the foregoing, since December 31, 1996, the AGEMA   
Companies have paid in a manner consistent with past practices all liabilities  
of the AGEMA Companies owed to Persons other than the Spectra Companies,        
including, without limitation, all accounts payable.                            

4.22 SECURITIES ACT REPRESENTATIONS                                             

Stockholders (i) understand that the FLIR Stock to be issued to Stockholders
at Closing has not been, and will not prior to the Closing be, registered       
under the Securities Act, or under any state or foreign securities laws (and    
that the certificates evidencing such FLIR Stock shall be legended to reflect   
this), and is being offered and sold in reliance upon federal, state and        
foreign exemptions for transactions not involving any public offering, (ii)     
are acquiring such FLIR Stock solely for their own account for investment       
purposes, and not with a view to the distribution thereof in violation of the   
Securities Act, (iii) are sophisticated investors with knowledge and            
experience in business and financial matters, (iv) have received certain        
information concerning FLIR and have had the opportunity to obtain additional   
information as desired in order to evaluate the merits and the risks inherent   
in holding such FLIR Stock, (v) are able to bear the economic risk and lack of  
liquidity inherent in holding the FLIR Stock, and (vi) are each an Accredited   
Investor. FLIR has furnished to Stockholders copies of the FLIR SEC Reports.    
The foregoing notwithstanding, nothing contained in this Section 4.22 shall     
limit Stockholders' rights with respect to any breach by FLIR of any            
representation, warranty or covenant by FLIR contained in this Agreement, or    
shall prevent Stockholders from enforcing such rights.                          

4.23 PROXY STATEMENT                                                            

The information supplied by the Spectra Companies in writing specifically   
for inclusion in the proxy statement to be sent to the stockholders of FLIR in  
connection with the meeting of FLIR's stockholders (the "FLIR Stockholders'     
Meeting") to consider the issuance of shares of FLIR Stock pursuant to the      
Transaction (the "Proxy Statement") shall not, on the date the Proxy Statement  
is first mailed to stockholders of FLIR, at the time of the FLIR Stockholders'  
Meeting and at the Effective Time, contain any statement which, at such time    
and in light of the circumstances under which it was made, is false or          
misleading with respect to any                                                  

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material fact, or omit to state any material fact necessary in order to make    
the statements made in the Proxy Statement not false or misleading, or omit to  
state any material fact necessary to correct any statement in any earlier       
communication with respect to the solicitation of proxies for the FLIR          
Stockholders Meeting which has become false or misleading. If at any time       
prior to the Effective Time any event relating to the Spectra Companies, the    
AGEMA Companies or any of their Affiliates, officers or directors should be     
discovered by the Spectra Companies which should be set forth in a supplement   
to the Proxy Statement, the Spectra Companies shall promptly inform FLIR.       

4.24 NO UNTRUE STATEMENT OR OMISSION                                            

No representation or warranty made by the Spectra Companies contained in    
this Agreement and no statement by the Spectra Companies and/or any Authorized  
Representatives of the Spectra Companies or the AGEMA Companies contained in    
this Agreement or the Spectra Disclosure Schedule contains (or will contain     
when made) any untrue statement of a material fact or omits (or will omit when  
made) to state a material fact necessary to make the statements contained       
therein, in light of the circumstances under which they were (or will be        
made), not misleading.                                                          

ARTICLE 5 

REPRESENTATIONS AND WARRANTIES OF FLIR  

As a material inducement to the Spectra Companies to enter into this        
Agreement, FLIR represents and warrants to the Spectra Companies as of the      
date hereof and as of the Closing Date that, except as set forth in the FLIR    
Disclosure Schedule:                                                            

5.1 ORGANIZATION AND QUALIFICATION                                              

FLIR is a corporation duly organized and validly existing under the laws of 
the State of Oregon. Optimas is a corporation duly organized and validly        
existing under the laws of the state of Washington. BSS is a limited company    
duly organized and validly existing under the laws of the United Kingdom. FSII  
is a corporation duly organized and validly existing under the laws of          
Barbados. Each of the FLIR Companies is duly licensed or qualified and in good  
standing (to the extent that the concept of good standing exists in the         
relevant jurisdiction) as a foreign corporation in each jurisdiction in which   
it is required to be so licensed or so qualified, except where the failure to   
be so qualified will not have a FLIR Material Adverse Effect. Each of the FLIR  
Companies has the corporate power to own its properties and to carry on its     
business as it is now being conducted. None of the FLIR Companies is bankrupt   
or insolvent or has committed any act of bankruptcy nor entered into any        
scheme or composition or arrangement with its creditors.                        

5.2 AUTHORITY RELATIVE TO THIS AGREEMENT                                        

5.2.1 FLIR has the corporate power to enter into this Agreement and to carry
out its obligations hereunder.                                                  

5.2.2 The Transaction has been duly authorized by FLIR's Board of Directors.
Except for the consent of FLIR's stockholders, no other corporate proceedings   
on the part of FLIR are necessary to authorize the Transaction.                 

5.2.3 This Agreement constitutes a valid and binding obligation of FLIR,    
enforceable against FLIR in accordance with its terms except as enforcement     
may be limited by bankruptcy, insolvency or other similar laws affecting the    
enforcement of creditors' rights generally, and except that the availability    
of equitable remedies, including specific performance, is subject to the        
discretion of the court in which any such Proceeding may be brought.            

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5.2.4 Neither the execution, delivery or performance of this Agreement, or  
any other agreement relating hereto, or any other aspect of the Transaction,    
will: (a) conflict with, or violate any provision of, or constitute or result   
in a breach or default (with or without notice, lapse of time or both) or give  
rise to a right of termination, cancellation or acceleration of any obligation  
or the loss of any material benefit, under (i) any charter or bylaw of any of   
the FLIR Companies, or (ii) any indenture, loan document provision or other     
Contract, Permit, Order, statute, law, ordinance, rule or regulation            
applicable to any of the FLIR Companies or their properties or assets; or (b)   
result in or require the imposition of any Lien with respect to, or upon, any   
of the FLIR Companies or their properties or assets, except where any item      
noted in (a) through (c) will not have a FLIR Material Adverse Effect.          

5.2.5 None of the FLIR Companies is subject to or obligated under (i) any   
charter or bylaw, or (ii) any indenture, loan document provision or any other   
contract, Permit, Order, lease, instrument, statute, law, ordinance, rule or    
regulation applicable to any of the FLIR Companies or their properties or       
assets which would be breached or violated, or under which there would be a     
default (with or without notice or lapse of time, or both), as a result of any  
aspect of the Transaction.                                                      

5.2.6 No Permit or Consent is necessary for the consummation by FLIR of the 
Transaction.                                                                    

5.3 FLIR STOCK TO BE ISSUED AT CLOSING                                          

The FLIR Stock to be issued to Stockholders at Closing will be at Closing   
duly and validly authorized and, when issued and delivered against payment      
therefor as provided herein, will be duly and validly issued and fully paid     
and nonassessable and will conform to the description thereof contained in the  
SEC Reports. Stockholders will acquire good beneficial and legal, valid and     
indefeasible title to the FLIR Stock to be issued to Stockholders under         
Section 2.5.1.                                                                  

5.4 FLIR COMMON STOCK OUTSTANDING                                               

The authorized capital stock of FLIR consists of 30,000,000 shares of Common
Stock, $0.01 par value, of which 5,559,724 shares are outstanding as of the     
date hereof, and 10,000,000 shares of Preferred Stock, $0.01 par value, of      
which no shares are outstanding as of the date hereof. All such shares of FLIR  
Stock outstanding were duly authorized, validly issued, fully paid and          
nonassessable. No shares of FLIR's capital stock are held in FLIR's treasury.   
As of the date hereof, there are no bonds, debentures, notes or other           
evidences of indebtedness having the right to vote on any matters on which any  
shareholders of FLIR may vote issued or outstanding. Except as disclosed in     
Section 5.4 of the FLIR Disclosure Schedule, there are no subscriptions,        
options, warrants, calls, or other rights (including, but not limited to,       
preemptive rights), agreements or commitments outstanding which obligate FLIR   
to issue, deliver, sell or otherwise cause to become outstanding any of its     
capital stock or debt securities, or which obligate FLIR to grant, extend or    
enter into any such option, warrant, call or other such right, agreement or     
commitment. Except as disclosed in Section 5.4 of the FLIR Disclosure           
Schedule, there are no outstanding or authorized stock appreciation, phantom    
stock, profit participation or similar rights with respect to FLIR.             

5.5 SUBSIDIARIES                                                                

FLIR has no Subsidiaries, except for the FLIR Subsidiaries. Neither FSII nor
Hoeger own or lease any real or other property, including inventory,            
equipment, hardware or tools, or any assets (except for the minimum amount of   
assets necessary for FSII to qualify for business in Barbados), has any         
liabilities or employees, agents, or independent contractors or conducts any    
business operations, provided, however that FSII acts as a facilitator for the  
transfer to the United States of foreign currency generated by FLIR and the     
FLIR Subsidiaries in their non-United States business operations. The FLIR      
Companies have no equity investment or other interest in, or have made no       
advances to, any Person.                                                        

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5.6 SEC FILINGS; FINANCIAL STATEMENTS                                           

5.6.1 FLIR has made available to the Spectra Companies copies of all        
registration statements, reports, statements and documents required to be       
filed by FLIR with the SEC since December 31, 1992 (collectively, the "FLIR     
SEC Reports"). The FLIR SEC Reports (i) at the time filed, complied in all      
material respects with the applicable requirements of the Securities Act and    
the Exchange Act, as the case may be, and (ii) did not at the time they were    
filed (or if amended or superseded by a filing prior to the Closing Date, then  
on the date of such filing) contain any untrue statement of a material fact or  
omit to state a material fact required to be stated in such FLIR SEC Reports    
or necessary in order to make the statements in such FLIR SEC Reports, in the   
light of the circumstances under which they were made, not misleading.          

5.6.2 The consolidated financial statements (including, in each case, any   
related notes) contained in the FLIR SEC Reports, including any FLIR SEC        
Reports filed after the date of this Agreement until the Closing (the "FLIR     
Consolidated Financial Statements"), complied as to form in all material        
respects with the applicable published rules and regulations of the SEC with    
respect thereto, were prepared in accordance with GAAP applied on a consistent  
basis throughout the periods involved (except as may be indicated in the notes  
to such financial statements or, in the case of unaudited statements, as        
permitted by Form 10-Q of the SEC) and are in accordance with the books and     
records of the FLIR Companies and fairly present the consolidated financial     
position of FLIR as at the respective dates and the consolidated results of     
its operations and cash flows for the periods indicated, except that the        
unaudited interim financial statements were or are subject to normal and        
recurring year-end adjustments which do not or are not expected to be material  
in amount.                                                                      

5.7 ABSENCE OF CERTAIN CHANGES OR EVENTS                                        

Since December 31, 1996, except as disclosed in Section 5.7 of the FLIR     
Disclosure Schedule, there has not been:                                        

5.7.1 any material adverse change in the business, financial condition,     
liabilities (net of any corresponding increase in assets), results of           
operations or, to the FLIR Companies' Knowledge, prospects of any of the FLIR   
Companies, other than changes in laws or regulations of general applicability;  

5.7.2 any damage, destruction or loss, whether covered by insurance or not, 
materially and adversely affecting the financial condition, prospects,          
properties or businesses of any of the FLIR Companies;                          

5.7.3 any declaration, payment or setting aside for payment of any dividend 
or other distribution (whether in cash, stock or property) with respect to the  
capital stock of FLIR or any direct or indirect redemption, purchase or other   
acquisition of any shares of capital stock of FLIR;                             

5.7.4 any accrual or arrangement for or payment by any of the FLIR Companies
of severance bonuses or special compensation of any kind to any director,       
officer or Employee of any of the FLIR Companies;                               

5.7.5 any sale or other transfer by any of the FLIR Companies of any        
material tangible or intangible asset, any granting of a Lien relating to any   
such material asset, any lease of real property or equipment, or any            
cancellation of any debt or claim, except in the ordinary course of business;   

5.7.6 any incurrence by any of the FLIR Companies of any obligation or      
liability (absolute or contingent), except current obligations and liabilities  
incurred in the ordinary course of business in amounts and on terms consistent  
with past practices;                                                            

5.7.7 any material change in accounting methods or principles or any        
revaluation of any of the assets of any of the FLIR Companies (including,       
without limitation, any change in depreciation or amortization policies or      
rates);                                                                         

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5.7.8 any amendment or termination of any Contract or Permit to which any of
the FLIR Companies is a party, except in the ordinary course of business or     
where the same could not reasonably be expected to have a FLIR Material         
Adverse Effect;                                                                 

5.7.9 any loan by any of the FLIR Companies to any Person or guaranty by any
of the FLIR Companies of any loan, other than advances made in the ordinary     
course of business and of an amount consistent with past practices;             

5.7.10 any waiver or release of any material right or claim of any of the   
FLIR Companies, except in the ordinary course of business;                      

5.7.11 any commencement or notice or, to the FLIR Companies' Knowledge,     
threat of commencement of any Proceeding against or investigation of any of     
the FLIR Companies; or                                                          

5.7.12 any actual or threatened strike or other labor trouble or dispute or 
claim of wrongful discharge or other unlawful labor practice or action          
involving any of the FLIR Companies which could reasonably be expected to have  
a FLIR Material Adverse Effect.                                                 

5.8 LITIGATION                                                                  

Except as disclosed in Section 5.8 of the FLIR Disclosure Schedule, there is
no Proceeding pending or, to the FLIR Companies' Knowledge, threatened against  
any of the FLIR Companies which, either alone or in the aggregate, could        
reasonably be expected to have a FLIR Material Adverse Effect, nor is there     
any Order outstanding against any of the FLIR Companies having, or which in     
the future could reasonably be expected to have, either alone or in the         
aggregate, any FLIR Material Adverse Effect.                                    

5.9 TAXES                                                                       

5.9.1 The FLIR Companies have accurately prepared and timely filed all      
material Tax Returns required to be filed with respect to the FLIR Companies    
at or before the Effective Time and such Tax Returns are true and correct in    
all material respects and have been completed in all material respects in       
accordance with applicable law.                                                 

5.9.2 The FLIR Companies as of the Effective Time: (i) will have paid all   
Taxes they are required to pay (including, but not limited to, all estimated    
Taxes due) with respect to the FLIR Companies prior to the Effective Time and   
(ii) will have withheld with respect to the FLIR Companies' employees all       
Taxes required to be withheld, except where any failure to make such payment    
or withholding would not be reasonably likely to have a FLIR Material Adverse   
Effect.                                                                         

5.9.3 There is no material Tax deficiency outstanding, proposed in writing  
or assessed against any of the FLIR Companies that is not reflected as a        
liability on the most recent balance sheet contained in the FLIR Consolidated   
Financial Statements nor has any of the FLIR Companies executed any waiver of   
any statute of limitations on or extending the period for the assessment or     
collection of any Tax.                                                          

5.9.4 None of the FLIR Companies has any material liabilities for unpaid    
Taxes that have not been accrued for or reserved on the FLIR Consolidated       
Financial Statements, whether asserted or unasserted, contingent or otherwise.  

5.10 COMPLIANCE WITH PERMITS, APPLICABLE LAWS AND AGREEMENTS                    

5.10.1 To the FLIR Companies' Knowledge, except as disclosed in Section 5.10
of the FLIR Disclosure Schedule, each of the FLIR Companies holds all Permits,  
the failure of which to hold would have a FLIR Material Adverse Effect (the     
"FLIR Material Permits"). Each of the FLIR Companies is in compliance with the  
terms of the FLIR Material Permits, except for such failures to comply which,   
individually or in the aggregate, would not have a FLIR Material Adverse        
Effect.                                                                         

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5.10.2 To the FLIR Companies' Knowledge, except as disclosed in Section 5.10
of the FLIR Disclosure Schedule, the business of the FLIR Companies are being   
conducted in compliance with all laws, ordinances and regulations of all        
Governmental Authorities (including, but not limited to, laws pertaining to     
customs and duties, employment and employment practices, terms and conditions   
of employment, wages and hours, safety, health, fire prevention and other       
matters), except for possible violations which individually or in the           
aggregate do not and would not have a FLIR Material Adverse Effect.             

5.10.3 To the FLIR Companies' Knowledge, except as disclosed in Section 5.10
of the FLIR Disclosure Schedule, none of the FLIR Companies is in default (and  
not in a circumstance which, with notice or lapse of time, or both, would       
constitute a default) under any agreement or instrument to which such FLIR      
Companies is a party, whether or not such default has been waived, except for   
any such default which, alone or in the aggregate with other such defaults,     
would not have a FLIR Material Adverse Effect.                                  

5.10.4 The provisions of this Section shall not be construed or applied to  
narrow or otherwise restrict the scope of any other representations and         
warranties in this Article 5.                                                   

5.11 EMPLOYEE PLANS AND BENEFIT ARRANGEMENTS                                    

5.11.1 FLIR has set forth in the FLIR SEC Reports or Section 5.11 of the    
FLIR Disclosure Schedule all Plans for the benefit of, or relating to, any      
current or former employee of any of the FLIR Companies or any ERISA Affiliate  
of any of the FLIR Companies.                                                   

5.11.2 With respect to each such Plan, FLIR has made available to           
Stockholders, a true and correct copy of (i) the most recent annual report      
filed with the applicable Governmental Authority, (ii) such Plan, (iii) each    
trust agreement and group annuity contract, if any, relating to such Plan and   
(iv) the most recent actuarial report or valuation relating to such Plan.       

5.11.3 With respect to such Plans, individually and in the aggregate, no    
event has occurred, and to the FLIR Companies' Knowledge, there exists no       
condition or set of circumstances in connection with which any of the FLIR      
Companies could be subject to any liability that is reasonably likely to have   
a FLIR Material Adverse Effect under ERISA, the Code or any other applicable    
law.                                                                            

5.11.4 With respect to such Plans, individually and in the aggregate, there 
are no funded benefit obligations for which contributions have not been made    
or properly accrued and there are no unfunded benefit obligations which have    
not been accounted for by reserves, or otherwise properly footnoted in          
accordance with United States generally accepted accounting principles, on the  
FLIR Consolidated Financial Statements, which obligations are reasonably        
expected to have a FLIR Material Adverse Effect.                                

5.11.5 Except as disclosed in Section 5.11 of the FLIR Disclosure Schedule, 
there are no pending petitions for recognition of a labor union, confederation  
or association as the exclusive bargaining agent for any of the Employees of    
any of the FLIR Companies; no such petitions have been pending at any time      
within two years of the date of this Agreement, and, to the FLIR Companies'     
Knowledge, there has not been any organizing effort by any union,               
confederation or association or other group seeking to represent any Employees  
of any of the FLIR Companies as their exclusive bargaining agent at any time    
within two years of the date of this Agreement. There are no labor strikes,     
work stoppages or other labor troubles, other than routine grievance matters,   
now pending or, to FLIR's Knowledge, threatened against any of the FLIR         
Companies.                                                                      

5.11.6 FLIR has performed its duty to inform its employees about the        
Transaction in accordance with applicable law, if any, concerning the           
employees' right to participate in the decision making process.                 

5.12 TITLE TO ASSETS                                                            

Each of the FLIR Companies has good and marketable title to all of its      
leasehold interests and other assets as described in the most recent balance    
sheet contained in the FLIR Consolidated Financial Statements, except           

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for such assets that have been disposed of in the ordinary course of business   
since the date of such balance sheet or report, free and clear of all Liens,    
except (i) the Lien for current taxes, payments of which are not yet            
delinquent, (ii) such imperfections in title and easements and encumbrances,    
if any, as are not substantial in character, amount or extent and do not        
materially detract from the value or interfere with the present use of the      
property subject thereto or affected thereby, or otherwise materially impair    
any of the FLIR Companies' business operations, or (iii) as otherwise set       
forth in Section 5.12 of the FLIR Disclosure Schedule, and except for such      
matters which, individually or in the aggregate, could not reasonably be        
expected to have a FLIR Material Adverse Effect. All leases under which any of  
the FLIR Companies lease any real or personal property are in good standing,    
valid and effective in accordance with their respective terms, and there is     
not, under any of such leases, any existing default or event which with notice  
or lapse of time or both would become a default other than failures to be in    
good standing, valid and effective and defaults under such leases which in the  
aggregate will not have a FLIR Material Adverse Effect. FLIR does not own any   
real property, of record or beneficially.                                       

5.13 INTANGIBLE PROPERTY                                                        

5.13.1 The FLIR Companies own, or are licensed or otherwise possesses       
legally enforceable rights to use, all patents, trademarks, trade names,        
service marks, copyrights, and any applications for such patents, trademarks,   
trade names, service marks and copyrights, processes, formulae, methods,        
schematics, technology, know-how, computer software programs or applications    
and tangible or intangible proprietary information or material that are         
necessary to conduct the business of the FLIR Companies as currently            
conducted, or proposed to be conducted, the absence of which would be           
reasonably likely to have a FLIR Material Adverse Effect (the "FLIR             
Intellectual Property Rights"). Section 5.13 of the FLIR Disclosure Schedule    
lists (i) all patents and patent applications and all trademarks, registered    
copyrights, trade names and service marks, material to the FLIR Companies'      
business and included in the FLIR Intellectual Property Rights, including the   
jurisdictions in which each such FLIR Intellectual Property Right has been      
issued or registered or in which any such application for such issuance and     
registration has been filed, (ii) all material licenses, sublicenses and other  
agreements as to which any of the FLIR Companies is a party and pursuant to     
which any person is authorized to use any FLIR Intellectual Property Rights,    
and (iii) all material licenses, sublicenses and other agreements as to which   
any of the FLIR Companies is a party and pursuant to which any of the FLIR      
Companies is authorized to use any third-party patents, trademarks or           
copyrights, including software ("FLIR Third Party Intellectual Property         
Rights") which are incorporated in, are, or form a part of any product of any   
of the FLIR Companies that is material to their business.                       

5.13.2 None of the FLIR Companies is, nor will it be as a result of the     
execution and delivery of this Agreement or the performance of its obligations  
under this Agreement, in breach of any license, sublicense or other agreement   
relating to the FLIR Intellectual Property Rights or FLIR Third Party           
Intellectual Property Rights, the breach of which would be reasonably likely    
to have a FLIR Material Adverse Effect.                                         

5.13.3 To the FLIR Companies' Knowledge, all patents, registered trademarks,
service marks and copyrights held by the FLIR Companies are valid and           
subsisting. Except as set forth in Section 5.13 of the FLIR Disclosure          
Schedule, FLIR (i) has not been sued in any suit, action or proceeding which    
involves a claim of infringement of any patents, trademarks, service marks,     
copyrights or violation of any trade secret or other proprietary right of any   
third party; and (ii) has no knowledge that the manufacturing, marketing,       
licensing or sale of its products infringes any patent, trademark, service      
mark, copyright, trade secret or other proprietary right of any third party,    
which such infringement would reasonably be expected to have a FLIR Material    
Adverse Effect.                                                                 

5.14 ENVIRONMENTAL MATTERS                                                      

5.14.1 To the FLIR Companies' Knowledge, each of the FLIR Companies, and    
each of such company's assets, properties and operations are now and at all     
times have been in compliance in all material respects with all applicable      
Environmental Laws. To the FLIR Companies' Knowledge, there has not been and    
any Release or threatened Release of any Hazardous Material at, on, under, in,  
to or from any of the FLIR Companies' Real                                      

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Property which relates to such companies operations and activities at such      
Real Property or otherwise. None of the FLIR Companies has received any notice  
of alleged, actual or potential responsibility for, or any Proceeding           
regarding, the presence, Release or threatened Release of any Hazardous         
Material at any location, whether at the FLIR Companies' Real Property or       
otherwise, which Hazardous Materials were allegedly manufactured, used,         
generated, processed, treated, stored, disposed or otherwise handled at or      
transported from the FLIR Companies' Real Property or otherwise.                

5.14.2 None of the FLIR Companies has received any notice of any Proceeding 
by any Person alleging any actual or threatened injury or damage to any         
Person, property, natural resource or the environment arising from or relating  
to the presence, Release or threatened Release of any Hazardous Materials at,   
on, under, in, to or from the FLIR Companies' Real Property or in connection    
with any operations or activities thereat, or at, on, under, in, to or from     
any other property. To the FLIR Companies' Knowledge, neither the FLIR          
Companies' Real Property nor any operations or activities thereat is or has     
been subject to any Proceeding, Order or Lien relating to any applicable        
Environmental Laws.                                                             

5.14.3 To the FLIR Companies' Knowledge, there are no underground storage   
tanks presently located at the FLIR Companies' Real Property and there have     
been no Releases of any Hazardous Materials from any underground storage tanks  
or related piping at the FLIR Companies' Real Property. To the FLIR Companies'  
Knowledge, there are no PCBs located at, on or in the FLIR Companies' Real      
Property. To the FLIR Companies' Knowledge, there is no asbestos or asbestos-   
containing material located at, on or in the FLIR Companies' Real Property.     

5.15 ABSENCE OF CERTAIN PAYMENTS                                                

To the FLIR Companies' Knowledge, none of the FLIR Companies nor any of     
their Employees nor other Persons acting on behalf of the FLIR Companies, or    
any Affiliate of any of the foregoing, have with respect to the FLIR            
Companies' businesses, (i) engaged in any activity, prohibited by the United    
States Foreign Corrupt Practices Act of 1977 or any other similar law,          
regulation or Order of any Governmental Authority or (ii) without limiting the  
generality of the preceding clause (i), used any corporate or other funds for   
unlawful contributions, payments, gifts or entertainment, or made any unlawful  
expenditures relating to political activity to officials of any Governmental    
Authority. To the FLIR Companies' Knowledge, none of the FLIR Companies nor     
any of the FLIR Companies' shareholders, Employees or other Persons acting on   
behalf of the FLIR Companies, or any Affiliate of any of the foregoing, has     
accepted or received any unlawful contributions, payments, gifts or             
expenditures.                                                                   

5.16 NO BROKER, ETC.                                                            

No broker, finder or investment banker is entitled to any brokerage,        
finder's or other fee or commission in connection with the Transaction based    
upon arrangements made by or on behalf of any of the FLIR Companies.            

5.17 OTHER NEGOTIATIONS                                                         

Except for the Transaction and as disclosed in the FLIR Disclosure Schedule,
there is no existing commitment or offer by FLIR to sell all or any of the      
FLIR Stock or all or a significant part of the assets of FLIR or to merge or    
consolidate FLIR with or into any other Person, and there are no pending        
negotiations for any such sale, exchange, merger or consolidation.              

5.18 BUSINESS                                                                   

Since December 31, 1996, the business of the FLIR Companies has been        
conducted in the normal course, consistent with past practices of the FLIR      
Companies. Without limiting the foregoing, since December 31, 1996, the FLIR    
Companies have paid in a manner consistent with past practices all liabilities  
of the FLIR Companies, including, without limitation, all accounts payable.     

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5.19 SECURITIES ACT REPRESENTATIONS                                             

FLIR (i) understands that the Target Stock has not been, and will not prior 
to the Closing be, registered under the Securities Act, or under any state or   
foreign securities laws (and that the certificates representing the Target      
Stock may be legended to reflect this), and is being offered and sold in        
reliance upon federal, state and foreign exemptions for transactions not        
involving any public offering, (ii) is acquiring the Target Stock solely for    
its own account for investment purposes, and not with a view to the             
distribution thereof in violation of the Securities Act, (iii) is a             
sophisticated investor with knowledge and experience in business and financial  
matters, (iv) has received certain information concerning the AGEMA Companies   
and has had the opportunity to obtain additional information as desired in      
order to evaluate the merits and the risks inherent in holding the Target       
Stock, (v) is able to bear the economic risk and lack of liquidity inherent in  
holding the Target Stock, and (vi) is an Accredited Investor. The foregoing     
notwithstanding, nothing contained in this Section 5.19 shall limit FLIR's      
rights with respect to any breach by the Spectra Companies of any               
representation, warranty or covenant by the Spectra Companies contained in      
this Agreement, or shall prevent FLIR from enforcing such rights.               

5.20 PROXY STATEMENT                                                            

Other than the information supplied by the Spectra Companies in writing     
specifically for inclusion in the Proxy Statement, the Proxy Statement shall    
not, on the date the Proxy Statement is first mailed to stockholders of FLIR,   
at the time of the FLIR Stockholders' Meeting and at the Effective Time,        
contain any statement which, at such time and in light of the circumstances     
under which it shall be made, is false or misleading with respect to any        
material fact, or omit to state any material fact necessary in order to make    
the statements made in the Proxy Statement not false or misleading, or omit to  
state any material fact necessary to correct any statement in any earlier       
communication with respect to the solicitation of proxies for the FLIR          
Stockholders' Meetings which has become false or misleading. If at any time     
prior to the Effective Time any event relating to the FLIR Companies or any of  
their Affiliates, officers or directors should be discovered by FLIR which      
should be set forth in a supplement to the Proxy Statement, FLIR shall          
promptly inform the Spectra Companies.                                          

5.21 NO UNTRUE STATEMENT OR OMISSION                                            

No representation or warranty made by FLIR contained in this Agreement and  
no statement of FLIR and/or any Authorized Representative of FLIR contained in  
this Agreement or the FLIR Disclosure Schedule, contains (or will contain when  
made) any untrue statement of a material fact or omits (or will omit when       
made) to state a material fact necessary to make the statements contained       
therein, in light of the circumstances under which they were (or will be        
made), not misleading.                                                          

ARTICLE 6 

TAX MATTERS 

6.1 TAX PAYMENT AND TAX RETURN FILING RESPONSIBILITIES                          

6.1.1 Taxes on Exchange and Sale of Companies Stock                         

The Spectra Companies shall be solely responsible for, and shall timely pay,
all Taxes related to the ownership of the AGEMA Companies Stock at and prior    
to the Closing and the exchange and transfer, pursuant to this Agreement, of    
(i) the European Subsidiaries Stock to AGEMA and (ii) the Target Stock to       
FLIR, including, without limitation, applicable interest and penalties.         
Without limiting the foregoing, on or before Closing, the Spectra Companies     
shall comply with all requirements of applicable Tax treaties, and shall file   
all forms required to be filed under such Tax treaties, to ensure that no       
withholding tax is required to be withheld by FLIR, and that no Tax is          
required to be paid with respect to the delivery of the shares of FLIR Stock    
to the Stockholders as described in Section 2.5.1 above that would otherwise    
not be required to be withheld or paid if the Spectra Companies had complied    
with such tax treaties, and the Spectra Companies shall be solely responsible   
for, and shall timely pay, all such Taxes and withholding taxes, including,     
without limitation, applicable interest and penalties.                          

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6.1.2 FLIR's Tax Return Filing Responsibilities                             

(a) FLIR shall be responsible for, and shall timely file, all Tax Returns of
the AGEMA Companies that are required to be filed after the Closing Date        
(taking into account extensions) other than the Tax Returns for which the       
Spectra Companies are responsible under Section 6.1.3(a).                       

(b) With respect to any Tax Return for the AGEMA Companies to be filed by   
FLIR or the AGEMA Companies for a Taxable Period beginning on or before the     
Closing Date, FLIR or the AGEMA Companies shall deliver, at least 10 business   
days prior to the earlier of the actual filing date or the due date for filing  
of such Tax Return (including extensions), to Spectra a statement setting       
forth the amount of Tax for which the Spectra Companies are responsible         
pursuant to this Agreement, and copies of such Tax Return. Spectra shall have   
the right to review such Tax Return and, in the case of Tax Returns that        
relate to periods ending on or before the Closing Date, to direct FLIR to make  
any changes to such Tax Returns for which there is a reasonable basis.          

6.1.3 Spectra Companies' Tax Return Filing Responsibilities                 

(a) The Spectra Companies shall be responsible for, shall prepare or cause  
to be prepared, and shall timely file or cause to be timely filed, all Tax      
Returns of the AGEMA Companies that are required to be filed for Taxable        
Periods ending on or before the Closing Date (taking into account extensions).  

(b) To the extent permitted by law and consistent with the prior year's     
practice or required by law, the Spectra Companies shall include, or cause to   
be included, the AGEMA Companies in the Spectra Companies' consolidated income  
Tax Returns of the Spectra Companies or any of their Affiliates and all other   
consolidated, combined or unitary Tax Returns for all Taxable Periods of the    
AGEMA Companies ending on or prior to the Closing Date.                         

(c) The Spectra Companies shall deliver to FLIR a copy of each Tax Return   
prepared by or on behalf of the AGEMA Companies for which the Spectra           
Companies are responsible to file under this Section 6.1.3 within 10 business   
days prior to the earlier of the actual filing date or the due date for filing  
such Tax Return (including extensions). FLIR shall have the right to review     
each such Tax Return and to direct the Spectra Companies to make any changes    
to each such Tax Return for which there is a reasonable basis.                  

(d) In the case of all Tax Returns for which the Spectra Companies are      
responsible under Section 6.1.3(a), FLIR shall deliver to the Spectra           
Companies, at the Spectra Companies' request, a tax information package or pro  
forma Tax Return consistent with past practices so as to enable the Spectra     
Companies to prepare such Tax Returns.                                          

6.2 TAX SHARING AND INDEMNIFICATION                                             

6.2.1 Taxable Periods Ending on or Before the Closing Date                  

The Spectra Companies shall be liable for, shall pay or cause to be paid,   
and shall indemnify and hold the AGEMA Companies, FLIR and FLIR's Tax           
Affiliates, and all of their respective directors, officers, employees and      
agents, harmless from: (a) any unpaid or unaccrued Taxes (including, but not    
limited to, estimated Taxes due) with respect to the AGEMA Companies for any    
Tax Period ending on or before the Closing Date; (b) that portion of the        
Spectra Companies' liability determined under Section 6.2.3; and (c) the AGEMA  
Companies' inclusion in any consolidated, combined, or unitary Tax Return       
(including, but not limited to, any liability of any Tax Affiliate for any Tax  
Period ending on or before the Closing Date).                                   

6.2.2 Taxable Periods Commencing after the Closing Date                     

FLIR shall be liable for, shall pay or cause to be paid, and shall indemnify
and hold the Spectra Companies, all Tax Affiliates of the Spectra Companies,    
and their respective directors, officers, employees and agents, harmless from:  
(a) Taxes with respect to the AGEMA Companies for any Taxable Period            
commencing after the Closing Date (excluding any income Taxes with respect to   
actual or deemed dividends or distributions by FLIR to its shareholders         
occurring or deemed to have occurred in the ordinary course of business after   
the Closing Date and not as a consequence of the Transaction); (b) that         
portion of FLIR's liability determined under                                    

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Section 6.2.3; and (c) any Taxes attributable to transactions that occur or     
are deemed to occur on the Closing Date and that arise on account of actions    
(including Tax elections, such as elections under Section 338 of the Code)      
taken or caused to be taken by FLIR other than those Taxes which are            
contemplated by operation of Section 6.1.1.                                     

6.2.3 Taxable Periods Commencing before the Closing Date and Ending After   
the Closing Date                                                                

The AGEMA Companies shall close their books and records as of the Effective 
Time. The Spectra Companies and FLIR will, to the extent permitted by           
applicable law, elect with the relevant Governmental Authority to close the     
Taxable Periods of the AGEMA Companies as of the Effective Time (or, as of the  
Closing Date if a Taxable Period is not permitted to be closed as of the        
Effective Time). In any case where applicable law does not permit the AGEMA     
Companies to close their Taxable Period as of the Effective Time (or as of the  
Closing Date), Taxes for such Taxable Periods shall be allocated between the    
Spectra Companies and FLIR as follows: (a) with respect to Taxes based on       
income, in accordance with taxable income and losses of the AGEMA Companies,    
as applicable, for such portions of such period as determined from the AGEMA    
Companies' books and records, (b) with respect to Taxes based on sales or       
similar transactions, in accordance with the sales by the AGEMA Companies for   
such portions of such period as determined from the AGEMA Companies books and   
records, determined in accordance with applicable tax law, (c) with respect to  
ad valorem Taxes, based on the number of days in the applicable Tax Period      
that the asset was owned by the AGEMA Companies before the Effective Time and   
after the Effective Time and (d) with respect to any other Taxes not described  
in (a), (b) or (c) above, based on a method mutually acceptable to the Spectra  
Companies and FLIR.                                                             

6.3 TAX SHARING AGREEMENTS                                                      

All Tax sharing agreements and similar agreements (other than the provisions
of this Agreement) between the AGEMA Companies, on the one hand, and the        
Spectra Companies and/or the Spectra Companies' Tax Affiliates (other than the  
AGEMA Companies), on the other hand, shall be terminated as of the Closing      
Date, and there will be no liability to the AGEMA Companies or FLIR under any   
such agreement following the Closing Date.                                      

6.4 NET OPERATING LOSS CARRYFORWARD                                             

Any net operating losses of the AGEMA Companies not utilized by the Spectra 
Companies in filing their consolidated income Tax Returns for any Taxable       
Periods ending on, or including, the Closing Date shall be retained by the      
AGEMA Companies to the extent allowed under applicable law. The Spectra         
Companies shall make available to FLIR prior to the Closing Date all relevant   
schedules and worksheets which calculate any net operating losses attributable  
to the AGEMA Companies during any Period for which the Spectra Companies have   
filed a consolidated Tax Return which included any of the AGEMA Companies.      

6.5 COOPERATION                                                                 

The Spectra Companies and FLIR shall reasonably cooperate, and shall cause  
their respective Tax Affiliates, officers, employees, agents, auditors, and     
representatives reasonably to cooperate, in preparing and filing all Tax        
Returns (including amended returns and claims for refund), including            
maintaining and making available to each other all records necessary in         
connection with Taxes and in resolving all disputes and audits with respect to  
all Taxable Periods relating to Taxes.                                          

ARTICLE 7 

ADDITIONAL AGREEMENTS AND COVENANTS 

7.1 CONDUCT OF BUSINESS OF FLIR AND THE AGEMA COMPANIES                         

During the period from the date of this Agreement to the Closing Date, FLIR 
shall and shall cause the FLIR Subsidiaries to comply, and the Spectra          
Companies shall cause the AGEMA Companies to comply, fully with each of the     
covenants set forth in this Section 7.1:                                        

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7.1.1 Each of the FLIR Companies and the AGEMA Companies will: (i) conduct  
its operations in compliance with all applicable laws and according to its      
ordinary course of business consistent with past practice, (ii) not enter into  
any material transaction other than in the ordinary course of business          
consistent with past practice, (iii) with no less diligence and effort than     
would be applied in the absence of this Agreement, seek to preserve intact its  
assets and current business organizations, keep available the service of its    
current officers and employees and preserve its relationships with customers,   
suppliers and others having business dealings with it with the objective that   
their goodwill and ongoing businesses shall be unimpaired at the Closing Date,  
and (iv) subject to applicable law, consult with the other parties hereto on a  
regular basis concerning the management of its assets, properties and business  
generally, any material new contracts, agreements, commitments or transactions  
proposed to be entered into or employees proposed to be engaged in by it and    
any other material developments relating to its assets, properties or           
business.                                                                       

7.1.2 Except as otherwise permitted in this Agreement, prior to the Closing 
Date, none of the FLIR Companies or the AGEMA Companies will, without the       
prior written consent of the other parties hereto:                              

(i) Issue, deliver, sell, dispose or, pledge or otherwise encumber, or  
authorize or propose the issuance, delivery, sale, disposition or pledge or 
other encumbrance of (a) any additional shares of its capital stock of any  
class, or any securities or rights convertible into, exchangeable for or    
evidencing the right to subscribe for any shares of its capital stock, or   
any rights, warrants, options, calls, commitments or any other agreements   
of any character to purchase or acquire any shares of its capital stock or  
any securities or rights convertible, into, exchangeable for or evidencing  
the right to subscribe for any shares of its capital stock (provided,       
however, that FLIR shall not be prohibited from issuing shares of its       
capital stock upon the exercise of stock options outstanding under its      
stock option plans or from granting additional stock options under existing 
stock option plans in amounts consistent with past practices) or (b) any    
other securities in respect of, in lieu of or in substitution for any       
shares of its capital stock outstanding on the date hereof;                 

(ii) Redeem, purchase or otherwise acquire, or propose to redeem,       
purchase or otherwise acquire, any of its outstanding securities;           

(iii) Split, combine, subdivide or reclassify any shares of its capital 
stock or declare, set aside for payment or pay any dividend, or make any    
other actual, constructive or deemed distribution in respect of any shares  
of its capital stock or otherwise make any payments to shareholders in      
their capacity as such;                                                     

 (iv) (a) Grant any increases in the compensation of any of its directors,
officers or Employees, (b) pay or agree to pay any pension, retirement      
allowance or other material employee benefit not required or contemplated   
by any Plan covering such party as in effect on the date hereof to any such 
director, officer or Employee, whether past or present, (c) except as       
otherwise provided herein, enter into any new or amend any existing         
employment agreement with any such director, officer or Employee, (d) enter 
into any new or amend any existing severance agreement with any such        
director, officer or Employee or (e) except as may be required to comply    
with applicable law, amend any existing, or become obligated under any new, 
Plan covering such party;                                                   

 (v) Dispose of, or grant Liens on, any of its assets outside the ordinary
course of its business consistent with past practice, or adopt a plan of    
complete or partial liquidation, dissolution, merger, consolidation,        
restructuring, recapitalization or other reorganization (other than the     
Transaction);                                                               

(vi) Make any acquisition, by means of merger, consolidation or         
otherwise, of (i) any direct or indirect ownership interest in, or assets   
comprising, any business enterprise or operation, or (ii) except in the     
ordinary course and consistent with past practice, any other assets;        

(vii) Adopt any amendments to its articles of incorporation, bylaws or  
any other organizational document;                                          

(viii) Other than borrowings under existing credit facilities, renewals 
thereof or other borrowings in the ordinary course, incur any indebtedness  
for borrowed money or guarantee any such indebtedness or, except in the     
ordinary course of business consistent with past practice, make any loans,  
advances or capital contributions to, or investments in, any other Person;  

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(ix) Engage in the conduct of any business, the nature of which is      
different than the business such entity is currently engaged in;            

(x) Enter into any agreement providing for acceleration of payment or   
performance or other consequence as a result of a change of control of FLIR 
or any of the AGEMA Companies;                                              

(xi) Enter into any contract, arrangement or understanding requiring the
purchase of equipment, materials, supplies or services over a period        
greater than 12 months, except in the ordinary course of business for the   
distribution of products or the production of inventory; or                 

(xii) Authorize or announce an intention to do any of the foregoing, or 
enter into any contract, agreement, commitment or arrangement to do any of  
the foregoing.                                                              

7.2 NOTICE OF BREACH                                                            

Each party to this Agreement shall promptly give written notice to the other
party upon becoming aware of the occurrence or, to its Knowledge, impending or  
threatened occurrence, of any event which would cause any of its                
representations or warranties to be untrue on the Closing Date or cause a       
breach of any covenant contained or referenced in this Agreement and will use   
its best reasonable efforts to prevent or promptly remedy the same. Any such    
notification shall not be deemed an amendment of the Spectra Disclosure         
Schedule or the FLIR Disclosure Schedule.                                       

7.3 REASONABLE EFFORTS                                                          

Each party shall, and shall use all reasonable efforts to cause their       
respective Subsidiaries to: (a) seek to make all filings and obtain all         
Permits and Consents required with respect to the Transaction, and the parties  
will cooperate with each other with respect thereto; (b) use all reasonable     
efforts to promptly take, or cause to be taken, all other actions (including    
but not limited to the execution, delivery and filing of documents) and do, or  
cause to be done, all other things necessary, proper or appropriate to satisfy  
the conditions set forth in Article 8 and to consummate and make effective the  
Transaction on the terms and conditions set forth herein; and (c) not take any  
action which might reasonably be expected to impair the ability of the parties  
to consummate the Transaction (regardless of whether such action would          
otherwise be permitted or not prohibited hereunder).                            

7.4 OTHER TRANSACTIONS                                                          

Prior to the Closing, none of FLIR, the Spectra Companies, the AGEMA        
Companies nor any of their respective directors, officers, employees,           
representatives, agents or Affiliates will, directly or indirectly, encourage,  
solicit or engage in discussions or negotiations with any Person (other than    
the parties hereto) concerning any merger, consolidation, share exchange or     
similar transaction involving any of the FLIR Companies, the AGEMA Companies,   
or any purchase of all or a significant portion of the assets of or stock in    
any of the FLIR Companies or any of the AGEMA Companies, or any other           
transaction that would involve the transfer or potential transfer of control    
of any of the FLIR Companies or any of the AGEMA Companies, other than the      
Transaction. FLIR, the Spectra Companies and the AGEMA Companies will notify    
the other parties hereto immediately of any inquiries or proposals with         
respect to any such transaction that are received by, or any such negotiations  
or discussions that are sought to be initiated with, any of the FLIR            
Companies, the Spectra Companies or the AGEMA Companies. Until the Closing or   
the termination of this Agreement under Article 9, the parties shall suspend    
and not resume any discussions or negotiations described above which were       
initiated prior to the execution of this Agreement.                             

7.5 ACCESS TO INFORMATION                                                       

Subject to currently existing contractual and legal restrictions applicable 
to each of the parties (which each of the parties represent and warrant are     
not material) and upon reasonable notice, each of the parties shall during      
normal business hours throughout the period prior to the Closing Date or until  
this Agreement is terminated (a) afford to the other parties' Authorized        
Representatives access to the properties, books and records (including,         

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without limitation, the work papers of independent accountants of the           
parties); and (b) furnish promptly to the other parties' Authorized             
Representatives all information concerning its business, properties and         
personnel as may reasonably be requested, provided that no investigation        
pursuant to this Section shall affect or be deemed to modify any of the         
respective representations or warranties made by the parties. The use and       
protection of all information provided by one party to another pursuant to      
this Section shall be governed by Paragraph 9 of the Letter of Intent dated     
August 1, 1997 (the "Letter of Intent") among FLIR, Spectra and AGEMA. Section  
11.12 of this Agreement notwithstanding, Paragraph 9 of the Letter of Intent    
shall survive the execution and delivery of this Agreement and shall remain in  
full force and effect until the Closing. Notwithstanding the foregoing, the     
Spectra Companies shall be entitled to review all work papers of FLIR's         
accountants, Price Waterhouse LLP, in connection with the financial statements  
of FLIR included in the Proxy Statement.                                        

7.6 EMPLOYEE MATTERS                                                            

FLIR intends to review each Plan covering any of the AGEMA Companies or     
their Employees for compatibility with similar programs maintained by FLIR for  
its employees. FLIR may decide to have the AGEMA Companies continue in effect,  
amend, modify or terminate in their entirety any one or more of such Plans, or  
merge any of such Plans into a comparable program maintained by FLIR and        
adopted by the AGEMA Companies. Any such amendment, modification or             
termination shall not deprive any Person who is an Employee of the AGEMA        
Companies on the Closing Date ("Affected Employee") of any accrued benefit      
payment to which the Affected Employee has become entitled prior to the         
Effective Time.                                                                 

7.7 ACCESS TO RECORDS AND PERSONNEL AFTER CLOSING                               

7.7.1 For a period of six (6) years after the Closing Date, the Spectra     
Companies and the Spectra Companies' Authorized Representatives shall have      
access to all books and records of the AGEMA Companies, and to all Employees    
of the AGEMA Companies having knowledge with respect thereto, to the extent     
that such access may be required in connection with matters relating to         
matters as to which the Spectra Companies are required to provide               
indemnification under this Agreement. Such access shall be afforded by FLIR     
and the AGEMA Companies upon receipt of reasonable advance notice and during    
normal business hours, provided such access does not unduly disrupt such        
parties' normal business operations. The Spectra Companies shall be solely      
responsible for any costs or expenses incurred by the Spectra Companies         
pursuant to this Section. If FLIR or the AGEMA Companies shall desire to        
dispose of any of such books and records prior to the expiration of such six-   
year period, such party shall, prior to such disposition, give the Spectra      
Companies a reasonable opportunity, at its expense, to segregate and remove     
such books and records as the Spectra Companies may select.                     

7.7.2 For a period of six (6) years after the Closing Date, FLIR and its    
Authorized Representatives shall have access to all of the Spectra Companies    
books and records relating to the AGEMA Companies which the Spectra Companies,  
or any of its Authorized Representatives, may retain after the Closing Date.    
Such access shall be afforded by the Spectra Companies and its Authorized       
Representatives upon receipt of reasonable advance notice and during normal     
business hours. FLIR shall be solely responsible for any costs and expenses     
incurred by it pursuant to this Section. If the Spectra Companies shall desire  
to dispose of any of such books and records prior to the expiration of such     
six-year period, the Spectra Companies shall, prior to such disposition, give   
FLIR a reasonable opportunity, at FLIR's expense to segregate and remove such   
books and records as FLIR may select.                                           

7.8 PURCHASES OF FLIR COMMON STOCK                                              

During the twelve (12) month period following the Closing Date, the Spectra 
Companies agree that none of the Spectra Companies nor any of their Affiliates  
shall acquire or agree to acquire any interest in any FLIR Common Stock, other  
than the acquisition of FLIR Common Stock in connection with (i) a dividend     
on, subdivision of or other pro rata distribution in respect of, any security   
issued by FLIR, (ii) a merger, consolidation or other transaction, or (iii) an  
offering by FLIR to the extent necessary to allow Stockholders to               

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maintain the same percentage ownership in FLIR as Stockholders shall have       
immediately after delivery to Stockholders of the FLIR Stock as described in    
Section 2.5.1.                                                                  

7.9 DIRECTORS                                                                   

Upon consummation of the Transaction, FLIR shall (i) cause one (1) of its   
existing members of its Board of Directors to resign, (ii) increase the size    
of such Board to a total of nine (9) members, (iii) appoint Leif Bergstrom to   
the Board of Directors of FLIR, and (iv) appoint three (3) designees of         
Spectra to become members of the Board of Directors of FLIR for a term          
expiring at the next annual meeting of the stockholders of FLIR. Thereafter,    
FLIR shall use its reasonable best efforts to cause the number of designees of  
Spectra who are serving on the Board of Directors of FLIR to be maintained at   
the number described below: (i) three (3) designees if on the date of mailing   
of the notice for the annual shareholder meeting where such directors shall be  
up for election and on the date the election is held, Stockholders hold of      
record and beneficially more than or equal to thirty percent (30%) of the then  
issued and outstanding shares of FLIR Common Stock, (ii) two (2) designees if   
on the date of mailing of the notice for the annual shareholder meeting where   
such directors shall be up for election and on the date the election is held,   
Stockholders hold of record and beneficially less than thirty percent (30%)     
but more than or equal to twenty percent (20%) of the then issued and           
outstanding shares of FLIR Common Stock, and (iii) one (1) designee if on the   
date of mailing of the notice for the annual shareholder meeting where such     
directors shall be up for election and on the date the election is held,        
Stockholders hold of record and beneficially less than twenty percent (20)%)    
but more than or equal to ten (10%) percent of the then issued and outstanding  
shares of FLIR Common Stock. If at some point in the future Stockholders hold   
of record and beneficially less than ten percent (10%) of the then issued and   
outstanding shares of FLIR Common Stock, Stockholders shall no longer be        
entitled to the rights described above in this Section. While he remains        
employed by FLIR as Vice Chairman, FLIR shall use its reasonable best efforts   
to cause Leif Bergstrom to be appointed to the Board of Directors of FLIR.      

7.10 AGEMA AND EUROPEAN SUBSIDIARIES STOCK                                      

Before Closing, Spectra shall cause Spectra Industri to transfer to Spectra 
100% of the issued and outstanding capital stock of AGEMA, so that before and   
at Closing, Spectra will be the record and beneficial owner of 100% of the      
issued and outstanding shares of capital stock of AGEMA. Before the Closing,    
Stockholders shall cause the European Subsidiaries Stock to be transferred to   
AGEMA, so that before and at Closing, the European Subsidiaries shall be        
wholly-owned subsidiaries of AGEMA. Before Closing, Spectra shall cause AGEMA   
to form AGEMA Italy as an Italian corporation and wholly-owned subsidiary of    
Spectra, into which Spectra shall contribute before Closing those assets and    
employees necessary to allow AGEMA Italy to conduct the business of design,     
manufacture and distribution of thermal imaging devices conducted by Spectra    
in Italy.                                                                       

7.11 TAX TREATMENT OF EXCHANGE OF AGEMA USA STOCK                               

Each party agrees to report the exchange of the AGEMA USA Stock for certain 
shares of FLIR Stock under Section 2.4 above on all tax returns and other       
filings as a tax-free reorganization under Section 368(b) of the Code except    
where, in the opinion of tax counsel to such party, there is not "substantial   
authority," as defined in Section 6662 of the Code, to support such a           
position.                                                                       

7.12 CONFIDENTIALITY                                                            

The Spectra Companies have had access to, and have gained knowledge with    
respect to the AGEMA Companies, and their trade secrets, financial results and  
information, processes and techniques, plans, research, designs, concepts,      
methods of doing business and information concerning customers and suppliers,   
and other valuable and confidential information, which is not generally known   
to the public (the "AGEMA Confidential Information"). The parties acknowledge   
that unauthorized disclosure or misuse of the Confidential Information          
following the date of this Agreement may cause irreparable damage to FLIR       
and/or the AGEMA Companies.                                                     

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The parties also agree that covenants by the Spectra Companies not to make      
unauthorized disclosures of the AGEMA Confidential Information are essential    
to the growth and stability of the AGEMA Companies. Accordingly, the Spectra    
Companies agree that the Spectra Companies shall not use or disclose directly   
or indirectly or cause or permit to be used or disclosed any AGEMA              
Confidential Information obtained by the Spectra Companies while they were      
Affiliates of the AGEMA Companies. Nothing in this Section 7.12 shall prevent   
the Spectra Companies from using or disclosing any such AGEMA Confidential      
Information as counsel to the Spectra Companies advises must be used or         
disclosed in connection with ongoing litigation or pursuant to applicable law,  
notice of which disclosure shall be promptly delivered to FLIR.                 

7.13 PROXY STATEMENT                                                            

As promptly as practical after the execution of this Agreement, FLIR and the
Spectra Companies shall prepare and FLIR shall file with the SEC the Proxy      
Statement. FLIR shall make all necessary filings with respect to the            
Transaction under the Securities Act and the Exchange Act and applicable rules  
and regulations thereunder.                                                     

7.14 STOCKHOLDERS' MEETING                                                      

FLIR shall call a meeting of its stockholders to be held as promptly as     
practicable after execution of this Agreement, however, in no event later than  
December 30, 1997, for the purpose of voting upon the issuance of shares of     
FLIR Stock pursuant to the Transaction.                                         

7.15 HSR ACT FILINGS                                                            

Each of the Spectra Companies and FLIR shall (i) promptly make or cause to  
be made the filings required of such party or any of its Affiliates under the   
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR      
Act") with respect to the Transaction and the other transactions provided for   
in this Agreement, (ii) comply at the earliest practicable date with any        
request under the HSR Act for additional information, documents or other        
material received by such party or any of its Affiliates from the Federal       
Trade Commission or the Department of Justice or other Governmental Authority   
in respect of such filings, the Transaction or such other transactions, and     
(iii) cooperate with the other party in connection with any such filing and in  
connection with resolving any investigation or other inquiry of any such        
agency or other Governmental Authority under any applicable law with respect    
to such filing, the Transaction or any such other transaction. Each party       
shall promptly inform the other party of any material communication with, and   
any proposed understanding, undertaking or agreement with, any Governmental     
Authority regarding any such filings, the Transaction or any such other         
transactions. Neither party shall participate in any meeting with any           
Governmental Authority in respect of any such filings, investigation or other   
inquiry without giving the other party notice of the meeting and, to the        
extent permitted by such Governmental Authority, the opportunity to attend and  
participate.                                                                    

7.16 TRANSFERRED LIABILITIES                                                    

The following shall constitute Indebtedness or other liabilities of the     
AGEMA Companies which may remain liabilities of the AGEMA Companies at and      
after the time of Closing (the "Transferred Liabilities"): (i) Indebtedness     
owed by AGEMA UK in an aggregate amount not to exceed 500,000 British Pounds;   
(ii) an aggregate amount of AGEMA Net Intercompany Indebtedness, and (iii) the  
aggregate pension liability of AGEMA's PRI--pension plan not to exceed SEK      
32,400,000 (the "Pension Liability"). If the AGEMA Net Intercompany             
Indebtedness at the time of Closing exceeds $1,000,000, then the Spectra        
Companies shall reimburse the AGEMA Companies fifty percent (50%) of the        
difference between such excess AGEMA Net Intercompany Indebtedness and          
$1,000,000, up to an amount not in excess of $1,000,000.                        

7.17 INTERIM FINANCIAL STATEMENTS                                               

As soon as practical, the Spectra Companies shall deliver to FLIR year-to-  
date combined unaudited interim balance sheets of the AGEMA Companies as of,    
and statements of income, stockholders' equity and cash flows                   

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of the AGEMA Companies for the nine-month period ending, September 30, 1997.    
Upon delivery such interim financial statements shall automatically become and  
be deemed to be AGEMA Combined Financial Statements for purposes of this        
Agreement.                                                                      

7.18 FURTHER ASSURANCES                                                         

Both before and after the Closing Date, each party will cooperate in good   
faith with each other party and will take all appropriate action and execute    
any agreement, instrument or other writing of any kind which may be reasonably  
necessary or advisable to carry out and confirm the transactions contemplated   
by this Agreement (including, but not limited to, obtaining Consents from any   
Person from whom a Consent is not obtained on or before the Closing).           

ARTICLE 8 

CONDITIONS PRECEDENT  

8.1 CONDITIONS TO OBLIGATIONS OF FLIR                                           

The obligation of FLIR to consummate the Transaction is subject to the      
fulfillment at or prior to the Closing Date of each of the following            
conditions, any or all of which may be waived in whole or part by FLIR to the   
extent permitted by applicable law.                                             

8.1.1 Representations and Warranties True                                   

The representations and warranties of the Spectra Companies contained in    
this Agreement (or otherwise required hereby to be made after the date hereof   
in a writing expressly referred to herein by or on behalf of the Spectra        
Companies or the AGEMA Companies pursuant to this Agreement) shall have been    
true in all material respects when made and shall be true in all material       
respects on and as of the Closing Date as if made on and as of such date        
(except to the extent they relate to the date of this Agreement or any other    
particular date).                                                               

8.1.2 Performance                                                           

The Spectra Companies and the AGEMA Companies shall have each performed or  
complied in all material respects with all agreements and conditions contained  
herein required to be performed or complied with by each such party prior to    
or at the time of Closing, including, but not limited to, execution and/or      
delivery of the documents specified in Section 3.2.                             

8.1.3 No Material Adverse Change                                            

There shall have been no changes since the date of this Agreement in the    
business, operations, prospects, condition (financial or otherwise),            
properties, assets or liabilities of the AGEMA Companies (regardless of         
whether or not such events or changes are inconsistent with the                 
representations and warranties given herein by the Spectra Companies), except   
changes contemplated by this Agreement and changes in the ordinary course of    
business which would not be considered to have individually an AGEMA Material   
Adverse Effect.                                                                 

8.1.4 Bring-Down Certificate                                                

The Spectra Companies shall have delivered to FLIR a certificate, dated the 
Closing Date, signed by an authorized officer of each of the Spectra            
Companies, certifying as to the fulfillment of the conditions specified in      
Sections 8.1.1, 8.1.2 and 8.1.3 ("Spectra's Bring-Down Certificate").           

8.1.5 Corporate Actions                                                     

All action necessary under applicable law, NASD bylaws and rules and the    
applicable articles of incorporation, bylaws and similar organizational         
documents to approve the consummation of the Transaction shall have been taken  
by the Spectra Companies, the AGEMA Companies, and FLIR, including but not      
limited to the approval of this Agreement and the Transaction and the issuance  
by FLIR of the shares of FLIR Stock                                             

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described in Sections 2.1, 2.2, 2.3 and 2.4 by the Board of Directors and       
shareholders of the Spectra Companies and FLIR.                                 

8.1.6 No Order or Proceeding                                                

No Order shall be outstanding, and no Proceeding shall be pending or        
threatened (which threat (i) shall constitute the recommendation that a         
Proceeding be commenced (and not the mere request for data) and (ii) shall be   
immediately communicated to, and is subject to confirmation by, the other       
party) against any of the FLIR Companies, AGEMA Companies, Spectra Companies    
or their respective Affiliates, officers, directors or employees which would    
restrain, prohibit, invalidate or attempt to restrain or enjoin, or materially  
adversely affect, the Transaction.                                              

8.1.7 Permits and Consents                                                  

All Permits and Consents, including, but not limited to, all filings with   
and notifications to all Governmental Authorities, necessary for the            
consummation by the Spectra Companies and the AGEMA Companies and FLIR of the   
Transaction, including, but not limited to, those described in Spectra          
Disclosure Schedule with reference to Section 4.2.6 shall have been obtained    
or effected, other than routine post closing notifications or filings.          

8.1.8 Termination of All Agreements Between the Spectra Companies and the   
AGEMA Companies                                                                 

Except for those agreements described on Schedule 8.1.8 hereto which shall  
remain in full force and effect after the Closing, all agreements between or    
among any of the Spectra Companies or any of their Affiliates (other than the   
AGEMA Companies), on the one hand, and the AGEMA Companies, on the other hand,  
including, but not limited to, all tax sharing or tax allocation agreements,    
all cash pooling agreements and all forward rate agreements, shall have been    
terminated, and there will be no liability to any party under any such          
terminated agreements following the Effective Time.                             

8.1.9 No Liens or Indebtedness                                              

Except for the Transferred Liabilities and the other Indebtedness and Liens 
described on Schedule 8.1.9 hereto, all Liens on the assets of the AGEMA        
Companies shall be terminated prior to Closing at the expense of the Spectra    
Companies and at Closing none of the AGEMA Companies shall have any             
Indebtedness. FLIR shall have received appropriate documentation evidencing     
such termination, in form and substance satisfactory to FLIR.                   

8.1.10 AGEMA Minimum Share Capital                                          

FLIR shall have received evidence satisfactory to FLIR that the minimum     
registered share capital of AGEMA has been increased to SEK 100,000 in          
satisfaction of the requirements under Swedish law.                             

8.1.11 Other Agreements and Documents                                       

FLIR shall have received the agreements and documents described in Section  
3.2.                                                                            

8.2 CONDITIONS TO OBLIGATIONS OF STOCKHOLDERS                                   

The obligations of Stockholders to consummate the Transaction are subject to
the fulfillment at or prior to the Closing Date of each of the following        
conditions, any or all of which may be waived in whole or in part by            
Stockholders to the extent permitted by applicable law.                         

8.2.1 Representations and Warranties True                                   

The representations and warranties of FLIR contained in this Agreement (or  
otherwise required hereby to be made after the date hereof in a writing         
expressly referred to herein by or on behalf of FLIR pursuant to this           
Agreement) shall have been true in all material respects when made and shall    
be true in all material respects on and as of the Closing Date as if made on    
and as of such date (except to the extent they relate to the date of this       
Agreement or any other particular date).                                        

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8.2.2 Performance                                                           

FLIR shall have performed or complied in all material respects with all     
agreements and conditions contained herein required to be performed or          
complied with by FLIR prior to or at the time of the Closing including, but     
not limited to, execution and/or delivery of the documents specified in         
Section 3.3.                                                                    

8.2.3 No Material Adverse Change                                            

There shall have been no changes since the date of this Agreement in the    
business, operations, prospects, condition (financial or otherwise),            
properties, assets or liabilities of the FLIR Companies (regardless of whether  
or not such events or changes are inconsistent with the representations and     
warranties given herein by FLIR), except changes contemplated by this           
Agreement and changes in the ordinary course of business which would not be     
considered to have individually a FLIR Material Adverse Effect.                 

8.2.4 FLIR's Bring-Down Certificate                                         

FLIR shall have delivered to Stockholders a certificate, dated the Closing  
Date, signed by an authorized officer of FLIR certifying as to the fulfillment  
by FLIR of the conditions specified in Sections 8.2.1, 8.2.2 and 8.2.3          
("FLIR's Bring-Down Certificate").                                              

8.2.5 Corporate Actions                                                     

All action necessary under applicable law, NASD bylaws and rules and the    
applicable articles of incorporation, bylaws and similar organizational         
documents to approve the consummation of the Transaction shall have been taken  
by the Spectra Companies, the AGEMA Companies, and FLIR, including but not      
limited to the approval of this Agreement and the Transaction and the issuance  
by FLIR of the shares of FLIR Stock described in Sections 2.1, 2.2, 2.3 and     
2.4 by the Board of Directors and shareholders of the Spectra Companies and     
FLIR.                                                                           

8.2.6 No Order or Proceeding                                                

No Order shall be outstanding, and no Proceeding shall be pending or        
threatened (which threat (i) shall constitute the recommendation that a         
Proceeding be commenced (and not the mere request for data) and (ii) shall be   
immediately communicated to, and is subject to confirmation by, the other       
party) in writing against any of FLIR, the AGEMA Companies, the Spectra         
Companies or their respective Affiliates, officers, directors or employees      
which would restrain, prohibit, invalidate or attempt to restrain or enjoin,    
or materially adversely affect, the Transaction.                                

8.2.7 Permits and Consents                                                  

All Permits and Consents, including, but not limited to, all filings with   
and notifications to all Governmental Authorities, necessary for the            
consummation by the Spectra Companies, the AGEMA Companies and FLIR of the      
Transaction, including, but not limited to, those described in the FLIR         
Disclosure Schedule with reference to Section 5.2.6 shall have been obtained    
or effected, other than routine post closing notifications or filings.          

8.2.8 Employment Agreements                                                 

FLIR shall amend the Employment Agreements in a form satisfactory to the    
Spectra Companies so that the Transaction does not constitute a Change of       
Control (as defined therein), provided, however, that if the Spectra Companies  
and their Affiliates ownership of FLIR Stock exceeds forty-five percent (45%)   
of the total issued and outstanding FLIR Stock at any time as a result of       
purchases of FLIR Stock by the Spectra Companies or their Affiliates (other     
than the FLIR Stock issued under Section 2.5 above), such amendment by its      
terms shall become immediately and automatically null and void.                 

8.2.9 Director Resignation                                                  

FLIR shall have received a letter of resignation from one (1) of the members
of the Board of Directors of FLIR, such resignation to be effective upon        
consummation of the Closing.                                                    

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8.2.10 Increase in Size of Board                                            

The Board of Directors of FLIR shall have adopted resolutions increasing the
size of such Board from six (6) to nine (9) members and electing to fill        
vacancies created thereby and pursuant to Section 8.2.9 above with the          
nominees of Spectra previously provided to the Board, such actions to be        
effective upon consummation of the Closing.                                     

8.2.11 Release of Guarantees                                                

The Spectra Companies and their affiliates shall have received releases, in 
form and substance satisfactory to the Spectra Companies, releasing such        
companies and their affiliates from any and all obligations as guarantors       
under (i) the banking facility with Midland Bank of the United Kingdom and      
(ii) AGEMA'S PRI-pension plan; provided, however, that if any of such releases  
are not obtained by FLIR on or before Closing after the exercise by FLIR of     
reasonable best efforts to obtain the same, FLIR covenants to obtain such       
releases within sixty (60) days after the Closing, and FLIR shall indemnify     
the Spectra Companies and their affiliates for any demand made during such      
sixty (60) day period for payments with respect to the banking facility with    
Midland Bank of the United Kingdom or AGEMA'S PRI-pension plan                  

8.2.12 Other Agreements and Documents                                       

Stockholders shall have received the agreements and documents described in  
Section 3.3.                                                                    

ARTICLE 9 

TERMINATION, AMENDMENT AND WAIVER 

9.1 TERMINATION                                                                 

This Agreement may be terminated at any time prior to the Closing Date:     

9.1.1 By mutual consent of the Board of Directors of FLIR and the Board of  
Directors of Spectra;                                                           

9.1.2 By either FLIR or the Spectra if Closing of the Transaction shall not 
have occurred on or before March 31, 1998 (provided the terminating party is    
not otherwise in material breach of its representations, warranties, covenants  
or agreements under this Agreement);                                            

9.1.3 By FLIR if any of the conditions specified in Section 8.1 has not been
met or waived by FLIR at such time as such condition is no longer capable of    
satisfaction (provided FLIR is not otherwise in material breach of its          
representations, warranties, covenants or agreements under this Agreement,      
which breach is the direct and proximate cause of the failed condition);        

9.1.4 By Spectra if any of the conditions specified in Section 8.2 has not  
been met or waived by Stockholders at such time as such condition is no longer  
capable of satisfaction (provided none of the Spectra Companies is otherwise    
in material breach of its respective representations, warranties, covenants or  
agreements under this Agreement, which breach is the direct and proximate       
cause of the failed condition);                                                 

9.1.5 By FLIR if there has been a material breach on the part of the Spectra
Companies of any representation, warranty, covenant or agreement by the         
Spectra Companies set forth in this Agreement, which breach, if capable of      
cure, has not been cured within fifteen (15) business days following receipt    
by Spectra of written notice of such breach;                                    

9.1.6 By Spectra if there has been a material breach on the part of FLIR of 
any representation, warranty, covenant or agreement by FLIR set forth in this   
Agreement, which breach, if capable of cure, has not been cured within fifteen  
(15) business days following receipt by FLIR of written notice of such breach;  

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9.1.7 By either FLIR or Spectra upon written notice given in compliance with
Section 11.3 below if any Governmental Authority of competent jurisdiction      
shall have issued a final permanent Order enjoining or otherwise prohibiting    
the consummation of the Transaction and, in any such case the time for appeal   
or petition for reconsideration of such Order shall have expired without such   
appeal or petition being granted.                                               

9.2 EFFECT OF TERMINATION                                                       

In the event of termination of this Agreement by either FLIR or Spectra as  
provided above, this Agreement shall forthwith become void and, except for      
termination pursuant to Section 9.1.5 or 9.1.6, there shall be no liability on  
the part of FLIR or the Spectra Companies or their respective officers or       
directors; provided that Sections 4.19 and 5.16, the penultimate sentence of    
Section 7.5, this Section 9.2 and the provisions of Article 11 shall survive    
the termination.                                                                

9.3 AMENDMENT                                                                   

This Agreement may not be amended except by an instrument in writing signed 
on behalf of each of the parties hereto.                                        

9.4 WAIVER                                                                      

At any time prior to the Closing Date, the parties hereto may (i) extend the
time for the performance of any of the obligations or other acts of the other   
parties hereto, (ii) waive any inaccuracies in the representations and          
warranties of any other party contained herein or in any documents delivered    
pursuant hereto by any other party and (iii) waive compliance with any of the   
agreements or conditions contained herein. Any agreement on the part of a       
party hereto to any such extension or waiver shall be valid only if set forth   
in an instrument in writing signed on behalf of such party. Any such extension  
or waiver shall be effective only in the particular instance in which it is     
given.                                                                          

ARTICLE 10  

SURVIVAL AND INDEMNIFICATION  

10.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS          

10.1.1 All representations and warranties by the Spectra Companies contained
in this Agreement shall survive the Closing Date for the duration of the        
Claims Period, except that the representations and warranties in the following  
Sections shall survive until the expiration of the applicable statue of         
limitations or for six (6) years from the Closing Date, whichever is longer:    
4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.8, 4.19 and 4.22.                               

10.1.2 All covenants and agreements by the Spectra Companies contained in   
this Agreement including, without limitation, the indemnification obligations   
contained in this Article, shall survive the Closing Date until fully           
performed or discharged.                                                        

10.1.3 All representations and warranties by FLIR contained in this         
Agreement shall survive the Closing Date for the duration of the Claims         
Period, except that the representations and warranties in the following         
Sections shall survive until the expiration of the applicable statute of        
limitations or for six (6) years from the Closing Date, whichever is longer:    
5.1, 5.2, 5.3, 5.4, 5.16 and 5.19.                                              

10.1.4 All covenants and agreements by FLIR contained in this Agreement     
including, without limitation, the indemnification obligations contained in     
this Article, shall survive the Closing Date until fully performed or           
discharged.                                                                     

10.1.5 Any claim by the Spectra Companies, FLIR or the AGEMA Companies with 
respect to representations, warranties, covenants and agreements must be        
initiated during the Claims Period or such other                                

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applicable period as is specified above in this Section 10.1 by submission of   
a written demand in accordance with the provisions of Section 10.4.1.           

10.1.6 All statements contained in the Spectra Disclosure Schedule or in any
certificate or other instrument delivered by or on behalf of the Spectra        
Companies pursuant to or in connection with the Transaction shall be deemed     
representations, warranties and covenants by the Spectra Companies hereunder.   
All statements contained in the FLIR Disclosure Schedule or in any certificate  
or other instrument delivered by or on behalf of FLIR pursuant to or in         
connection with the Transaction shall be deemed representations, warranties     
and covenants by FLIR hereunder.                                                

10.2 INDEMNIFICATION BY THE SPECTRA COMPANIES                                   

The Spectra Companies, jointly and severally, hereby agree to defend,       
indemnify and hold harmless FLIR (before and after the Closing) and the AGEMA   
Companies (after the Closing) from, against and in respect to any Loss          
suffered or incurred by FLIR or any of the AGEMA Companies by reason of (i) a   
breach of any representation or warranty by the Spectra Companies contained in  
this Agreement, (ii) the nonfulfillment of any covenant or agreement by the     
Spectra Companies contained in this Agreement, or (iii) any of the matters      
described in Section 4.11 of the Spectra Disclosure Schedule to the extent      
that the Losses to FLIR and/or the AGEMA Companies exceed $90,000 in the        
aggregate, and (iv) all Proceedings incident to any of the foregoing.           

10.3 INDEMNIFICATION BY FLIR                                                    

FLIR hereby agrees to defend, indemnify and hold harmless the Spectra       
Companies (before and after the Closing) from, against and in respect of any    
Loss suffered or incurred by the Spectra Companies after the Closing by reason  
of (i) a breach of any representation or warranty by FLIR contained in this     
Agreement, (ii) the nonfulfillment of any covenant or agreement by FLIR         
contained in this Agreement, or (iii) any of the matters described in Section   
5.8 of the FLIR Disclosure Schedule to the extent that the Losses to the        
Spectra Companies exceed $90,000 in the aggregate, and (iv) all Proceedings     
incident to any of the foregoing.                                               

10.4 NOTIFICATION AND DEFENSE OF CLAIMS OR ACTIONS                              

10.4.1 As used in this Section, any party seeking indemnification pursuant  
to this Section is referred to as an "Indemnified Party" and any party from     
whom indemnification is sought pursuant to this Section is referred to as an    
"Indemnity Obligor." An Indemnified Person which proposes to assert the right   
to be indemnified under this Article shall, pursuant to the notice provisions   
of this Agreement, submit a written demand for indemnification setting forth    
in summary form the facts as then known which form the basis for the claim for  
indemnification. The parties agree that, for purposes of indemnification        
claims arising under this Article after Closing, FLIR shall be authorized to    
act on behalf of the AGEMA Companies.                                           

10.4.2 With respect to claims based on actions by third parties, an         
Indemnified Party shall, within twenty (20) days after the receipt of notice    
of the commencement of any Proceeding against it in respect of which a claim    
for indemnification is to be made against an Indemnity Obligor, notify the      
Indemnity Obligor in writing of the commencement of such Proceeding, enclosing  
a copy of all papers served; provided, however, that the failure to so notify   
the Indemnity Obligor of any such Proceeding shall not relieve the Indemnity    
Obligor from any liability which it may have to the Indemnified Party, except   
to the extent that the Indemnity Obligor is prejudiced thereby. Thereafter,     
the Indemnified Party shall deliver to the Indemnity Obligor, within twenty     
(20) days after receipt by the Indemnified Party, copies of all further         
notices relating to such claim.                                                 

10.4.3 If a third-party claim is made for which an Indemnified Party is     
entitled to indemnification pursuant to this Article, the Indemnity Obligor     
will be entitled to participate in the defense of such claim and, if it so      
chooses, and provided that it acknowledges its obligation to indemnify the      
Indemnified Party, to assume primary responsibility for the defense of such     
claim with counsel selected by the Indemnity Obligor and not reasonably         
objected to by the Indemnified Party. Should the Indemnity Obligor assume the   
defense of such claim, the                                                      

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Indemnity Obligor will not be liable to the Indemnified Party for any legal     
expenses subsequently incurred by the Indemnified Party in connection with the  
defense of such claim.                                                          

10.4.4 If the Indemnity Obligor assumes the defense of a third-party claim  
as set forth in Section 10.4.3, then (i) in no event will an Indemnified Party  
admit any liability with respect to, or settle, compromise or discharge, any    
such claim without the Indemnity Obligor's prior written consent and (ii) each  
Indemnified Party shall be entitled to participate in, but not control, the     
defense of such claim with its own counsel at its own expense. If the           
Indemnity Obligor does not assume the defense of any such claim, an             
Indemnified Party may defend such claim in a manner as it may deem appropriate  
(including, but not limited to, settling such claim, after giving twenty (20)   
days prior written notice of such settlement to the Indemnity Obligor, on such  
terms as the Indemnified Party may deem appropriate).                           

10.4.5 In the event that any claim for indemnification is made with respect 
to any third-party claim pursuant to this Article, (i) the party assuming       
primary responsibility for the defense of such claim shall at all times keep    
the other party informed as to the status of such claim and (ii) the party not  
primarily responsible for the defense of such claim shall cooperate fully with  
the other party in connection with such defense.                                

10.5 RELIANCE                                                                   

No disclosure by any party ("Disclosing Party") to this Agreement nor any   
investigation made by or in behalf of another party with respect to the         
Disclosing Party shall be deemed to affect the other party's reliance on the    
respective representations and warranties contained in this Agreement and       
shall not effect a waiver of that party's rights to indemnity as herein         
provided for the breach of any of said representations and warranties;          
provided, however, to the extent that as a result of any such investigation,    
an officer or director of the non-Disclosing Party has actual knowledge that    
any representation or warranty is untrue and the Disclosing Party does not      
have Knowledge that such representation or warranty is untrue, the Disclosing   
Party shall have no liability with respect to such breach of representation or  
warranty.                                                                       

ARTICLE 11  

GENERAL PROVISIONS  

11.1 EXPENSES                                                                   

The AGEMA Companies shall bear all expenses incurred by the AGEMA Companies 
or the Spectra Companies in connection with the Transaction, including the      
fees and expenses of any attorneys, accountants, or other Persons engaged by    
the AGEMA Companies or the Spectra Companies; provided, however, that the       
Spectra Companies shall bear all brokerage, finder's or other fees or           
commission or related expenses, if any, incurred by the Spectra Companies or    
the AGEMA Companies, including the fees and expenses of any broker, finder or   
investment banker engaged by the Spectra Companies or the AGEMA Companies.      
FLIR shall bear all expenses incurred by FLIR in connection with the            
Transaction, including the fees and expenses of any attorneys, accountants,     
investment bankers, brokers, finders or other intermediaries or other Persons   
engaged by FLIR.                                                                

11.2 PUBLIC ANNOUNCEMENTS                                                       

No announcement, discussion, press release or other publication of this     
Agreement or the negotiations and discussions among the Spectra Companies, the  
AGEMA Companies and FLIR may be made or issued by one party without the         
written authorization of the other party, except that each party may seek the   
advice of its counsel, accountants and other advisors with respect thereto.     
Notwithstanding the foregoing, Neither Spectra nor FLIR shall be prohibited     
from making any disclosure which is required in order to fulfill the            
disclosure obligations imposed upon it by applicable law. If either party       
proposes to make such disclosure, it will first notify the other party in       
writing and both parties will use their best efforts to reach agreement on the  
form and substance of the disclosure to be made. If the Closing does not        
occur, the obligations of the parties under this Section 11.2                   

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shall be binding upon the parties and remain in effect for a period of six (6)  
months following termination of this Agreement. The Spectra Companies and FLIR  
are aware and will advise their respective Affiliates and representatives who   
are informed of the matters that are the subject of this Agreement of the       
restrictions imposed by the United States and Swedish securities laws on the    
purchase or sale of securities by any person who has received material, non-    
public information from the issuer of such securities and on the communication  
of such information to any other Person when it is reasonably foreseeable that  
such other Person is likely to purchase or sell such securities in reliance     
upon such information.                                                          

11.3 NOTICES, ETC.                                                              

All notices, requests, demands or other communications required by or       
otherwise with respect to this Agreement shall be in writing and shall be       
deemed to have been duly given to any party when delivered personally (by       
courier service or otherwise), when delivered by facsimile and confirmed by     
return facsimile, or seven days after being mailed by first-class mail,         
postage prepaid and return receipt requested in each case to the applicable     
addresses set forth below:                                                      

If to the Spectra Companies:             With a Copy to:                  

Spectra-Physics AB                       Dechert Price & Rhoads 4000 Bell 
Box 5226                                 Atlantic Towers 1717 Arch Street 
S-102 45                                 Philadelphia, PA 19103           
Stockholm, Sweden                        Attn: Christopher G. Karras      
Attn: Lars Spongberg                     Telephone: 215-994-2412          
Telephone: 46-8-783 07 25                Facsimile: 215-994-2222          
Facsimile: 46-8-660 92 26                                                 

If to FLIR (and the AGEMA                                                 
Companies after Closing):                With a Copy to:                  

James A. Fitzhenry                       Gregory E. Struxness Ater Wynne  
Vice President                           Hewitt Dodson & Skerritt 222     
and General Counsel                     S.W. Columbia, Suite 1800       
FLIR Systems, Inc.                       Portland, OR 97201               
16505 S.W. 72nd Avenue                   Telephone: (503) 226-1191        
Portland, OR 97224                       Facsimile: (503) 226-0079        
Telephone: (503) 684-3731                                                 
Facsimile: (503) 684-4188                                                 

or to such other address as such party shall have designated by notice so       
given to each other party.                                                      

11.4 ATTORNEYS' FEES                                                            

If a Proceeding is filed by any party to enforce this Agreement or otherwise
with respect to the subject matter of this Agreement, the prevailing party or   
parties shall be entitled to recover reasonable attorneys' fees incurred in     
connection with such Proceeding as fixed by the trial court, and if any appeal  
is taken from the decision of the trial court, reasonable attorneys' fees as    
fixed by the appellate court.                                                   

11.5 SEVERABILITY                                                               

If any one or more of the provisions contained in this Agreement shall be   
invalid, illegal or unenforceable in any respect for any reason, the validity,  
legality and enforceability of any such provision in every other respect and    
of the remaining provisions of this Agreement shall not be in any way           
impaired.                                                                       

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11.6 REMEDIES                                                                   

11.6.1 In addition to any other remedies which FLIR may have at law or in   
equity, including money damages, the Spectra Companies hereby agree that FLIR   
shall have the right to have all obligations, undertakings, agreements,         
covenants and other provisions of this Agreement specifically performed by the  
Spectra Companies, as the case may be, and that subject to any provisions of    
this Agreement relating to venue, FLIR shall have the right to obtain an order  
or decree of such specific performance in any of the courts of the United       
States or of any state or other political subdivision thereof.                  

11.6.2 In addition to any other remedies which the Spectra Companies, and   
the AGEMA Companies (prior to Closing), may have at law or in equity,           
including money damages, FLIR hereby agree that the Spectra Companies, and the  
AGEMA Companies (prior to Closing), shall have the right to have all            
obligations, undertakings, agreements, covenants and other provisions of this   
Agreement specifically performed by FLIR, and that subject to any provisions    
of this Agreement relating to venue, the Spectra Companies, and the AGEMA       
Companies (prior to Closing), shall have the right to obtain an order or        
decree of such specific performance in any of the courts of the United States   
or of any state or other political subdivision thereof.                         

11.6.3 Except as expressly provided herein, all rights, powers and remedies 
provided under this Agreement or otherwise available in respect hereof at law   
or in equity shall be cumulative and not alternative, and the exercise or       
beginning of the exercise of any right, power of remedy by any party shall not  
preclude the simultaneous or later exercise of any other such right, power or   
remedy by such party.                                                           

11.7 NO THIRD-PARTY BENEFICIARIES                                               

Subject to Section 11.10.2 below, this Agreement is not intended to be for  
the benefit of and shall not be enforceable by any Person who or which is not   
a party hereto other than the AGEMA Companies, which shall have the right to    
enforce the provisions of Article 10 as if they were parties hereto.            

11.8 GOVERNING LAW                                                              

This Agreement and all disputes hereunder shall be governed by and construed
and enforced in accordance with the internal laws of the State of Oregon,       
without regard to principles of conflict of laws.                               

11.9 JURISDICTION                                                               

Each party hereby irrevocably submits to the exclusive jurisdiction of the  
United States District Court for the Western District of Washington or, if      
such court does not have jurisdiction over such matter, to the applicable       
state court in King County, Washington, in any Proceeding arising in            
connection with this Agreement and agrees that any such Proceeding shall be     
brought only in such court (and waives any objection based on forum non         
conveniens or any other objection to venue therein); provided, however, that    
such consent to jurisdiction is solely for the purpose referred to in this      
Section and shall not be deemed to be a general submission to the jurisdiction  
of said courts or the State of Oregon other than for such purpose. Each party   
hereto consents to service of process in any Proceeding through the procedures  
provided for notice in this Agreement.                                          

11.10 ASSIGNMENT AND BINDING EFFECT                                             

11.10.1 The Spectra Companies, the AGEMA Companies and FLIR shall not assign
this Agreement, in whole or in part, whether by operation of law or otherwise,  
without the prior written consent of the other parties hereto, and any such     
assignment contrary to the terms hereof shall be null and void and of no force  
and effect. In no event shall the assignment by the Spectra Companies, the      
AGEMA Companies or FLIR of its respective rights or obligations under this      
Agreement, whether before or after the Closing, release the Spectra Companies,  
the AGEMA Companies or FLIR from its respective liabilities and obligations     
hereunder.                                                                      

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11.10.2 Subject to any provisions hereof restricting assignment, this       
Agreement shall be binding upon and shall inure to the benefit of the parties   
hereto and their respective successors, legal representatives and assigns.      

11.11 JOINT AND SEVERAL OBLIGATIONS                                             

Each of the obligations and liabilities of the Spectra Companies and/or     
Stockholders under this Agreement shall be joint and several obligations of     
all of the Spectra Companies.                                                   

11.12 ENTIRE AGREEMENT                                                          

This Agreement (including the exhibits and schedules hereto and the         
documents and instruments referred to herein) constitutes the entire agreement  
and supersedes all other prior agreements and understandings, both written and  
oral, among the parties, or any of them, with respect to the subject matter     
hereof (other than as provided in the Confidentiality Agreement).               

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11.13 COUNTERPARTS                                                              

This Agreement may be executed in any number of counterparts (including     
counterparts delivered by facsimile), each of which shall be deemed to be an    
original, but all of which together shall constitute one instrument. Each       
counterpart may consist of a number of copies, each signed by less than all,    
but together signed by all, the parties hereto.                                 

IN WITNESS WHEREOF, this Agreement has been executed and delivered by the   
parties set forth below.                                                        

FLIR:                                   FLIR SYSTEMS, INC.                  

                                          /s/ Robert P. Daltry
                                         By___________________________________
                                      ROBERT P. DALTRY, Chairman and
                               Chief Executive Officer

SPECTRA COMPANIES:                      SPECTRA-PHYSICS AB                  

                                          /s/ Lars Spongberg
                                         By___________________________________
                                         LARS SPONGBERG, President and CEO

                                           /s/ Lennart Rappe
                                         By___________________________________
                                  LENNART RAPPE, Senior Vice
                                     President and Chief Operating
               Officer

                                 SPECTRA-PHYSICS HOLDINGS S.A.

                                          /s/ Erik Aspinal
                                         By___________________________________
                                       ERIK ASPINAL, President and CEO

                                 SPECTRA-PHYSICS HOLDINGS GMBH

                                           /s/ Lennart Rappe
                                         By___________________________________
                                        LENNART RAPPE, President and CEO

                                SPECTRA-PHYSICS HOLDINGS PLC

                                           /s/ Lennart Rappe
                                         By___________________________________
                                        LENNART RAPPE, President and CEO

                         PHAROS HOLDINGS, INC.

                                          /s/ John D. Carney
                                         By___________________________________
                                         JOHN D. CARNEY, President and CEO

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                                                                    APPENDIX B

September 23, 1997                                                              

Board of Directors                                                              
FLIR Systems, Inc.                                                              
16505 SW 72nd Ave.                                                              
Portland, OR 97224                                                              

Gentlemen:                                                                      

We understand that FLIR Systems, Inc. ("FLIR" or the "Company") intends to  
enter into a Combination Agreement, substantially similar to the draft dated    
as of September 22, 1997, (the "Combination Agreement") which provides, among   
other things, for the acquisition from Spectra-Physics AB ("Spectra-Physics")   
of Agema Infrared Systems AB, Agema Infrared Systems LTD, Agema Infrared        
Systems Limited, and Agema Infrared Systems, Inc. (these companies are jointly  
referred to herein as "Agema" or the "Agema Companies".) Pursuant to the        
Combination Agreement FLIR will i) issue 4,162,000 shares of its common stock   
in exchange for all the outstanding stock of each of the Agema Companies; and   
ii) assume, subject to a reduction of up to $1.0 million under specified        
conditions, the outstanding debt of the Agema Companies which stood at $8.3     
million as of June 30, 1997 (together referred to herein as the                 
"Transaction"). The terms of the Transaction are set forth more fully in the    
Combination Agreement. You have requested our opinion as to whether the         
consideration to be paid by FLIR pursuant to the Combination Agreement is       
fair, from a financial point of view, to the holders of FLIR common stock.      

In connection with rendering our opinion, Ragen MacKenzie Incorporated      
("Ragen MacKenzie") i) reviewed the most current draft of the Combination       
Agreement; ii) reviewed certain other documents including the Draft Proxy       
Statement relating to the Special Meeting of Shareholders of FLIR to be held    
in connection with the Combination Agreement relating to the Combination; iii)  
reviewed the Annual Reports to Shareholders and the Annual Reports to           
Shareholders on Form 10-K for the years 1993 through 1996 and certain interim   
reports to shareholders and Quarterly Reports on Form 10-Q of FLIR; iv)         
reviewed with the Management of FLIR its operations, historical financial       
performance, financial condition and future prospects; v) reviewed certain      
financial results provided by Agema and the Management of Agema and FLIR and    
certain other relevant financial and operating data of Agema and FLIR made      
available from the internal records of Agema and FLIR; vi) reviewed certain     
financial analyses and forecasts for FLIR and Agema prepared by their           
respective managements; vii) Reviewed share price and trading volume for        
FLIR's shares from June 22, 1993 to September 12, 1997; viii) reviewed and      
discussed with FLIR and Agema management analyses and forecasts of certain      
operating efficiencies and financial synergies expected to be achieved as a     
result of the Combination; ix) compared certain publicly available financial    
data of companies whose securities are publicly traded, which Ragen MacKenzie   
deemed generally comparable to the business of Agema, to similar data for       
Agema; x) reviewed the financial terms, to the extent publicly available, of    
certain other business combinations that Ragen MacKenzie deemed generally       
relevant; and xi) performed and/or considered such other information,           
financial studies, analyses, inquiries, investigations, market and economic     
criteria as Ragen MacKenzie deemed appropriate.                                 

We have assumed and relied upon without independent verification the        
accuracy and completeness of the information reviewed by us for the purposes    
of this opinion and we have not assumed any responsibility of independent       
verification of such information. With respect to the financial projections     
supplied to us, we have assumed, with your permission, that they have been      
reasonably prepared on bases reflecting the best currently available estimates  
and judgments of management as to the future financial performance of FLIR and  
Agema. We have not made, requested or received any independent valuation or     
appraisal of the assets (including properties and facilities) or liabilities    
(contingent or otherwise) of FLIR or Agema, nor have we been furnished with     
any such evaluations or appraisals. Our opinion is necessarily based on         
economic, market and other conditions as in effect on, and the information      
made available to us as of, the date hereof.                                    

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Our opinion as expressed below does not imply any conclusion as to the      
likely trading range for FLIR Common Stock following the consummation of the    
transaction, which may vary depending upon, among other factors, changes in     
interest rates, exchange rates, market conditions, general economic conditions  
and other factors that generally influence the price of securities. Our         
opinion does not address FLIR's underlying business decision to effect the      
Transaction. Our opinion is directed only to the fairness, from a financial     
point of view, of consideration to be paid by FLIR to Spectra-Physics and does  
not constitute a recommendation concerning how holders of FLIR Common Stock     
should vote with respect to the Combination Agreement.                          

Ragen MacKenzie, as part of its investment banking business is engaged in   
the valuation of businesses and their securities in connection with mergers     
and acquisitions, negotiated underwritings, secondary distributions of          
securities, private placements and valuations. Ragen MacKenzie makes a market   
in the securities of FLIR and provides research coverage on FLIR. In the        
ordinary course of business, we may actively trade the securities of FLIR for   
our own account and for the accounts of customers and, accordingly, may at any  
time hold a long or short position in such securities. We have acted as a       
financial advisor to FLIR in the preparation of this opinion and will receive   
a fee for our services upon consummation of the Transaction. In addition, FLIR  
has agreed to indemnify us to certain liabilities arising out of the rendering  
of this opinion.                                                                

This letter and the opinion expressed herein are provided at the request and
for the information of the Board of Directors of FLIR and may not be referred   
to, quoted or used for any purpose without our prior written consent, except    
that this letter may be disclosed in connection with a Proxy Statement used in  
connection with the Transaction.                                                

Based upon and subject to the foregoing, it is our opinion that, as of the  
date hereof, the consideration being paid by FLIR to Spectra-Physics pursuant   
to the Combination Agreement is fair, from a financial point of view, to the    
holders of FLIR Common Stock.                                                   

Very truly yours,                                                               

/s/ Ragen MacKenzie Incorporated                                                
__________________________________                                              
Ragen MacKenzie Incorporated                                                    

B-2 

DEFM14A
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FLIR SYSTEMS  
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS 

   The undersigned shareholder of FLIR Systems, Inc., an Oregon corporation (the
"Company"), hereby appoints Robert P. Daltry and J. Kenneth Stringer III, or    
either of them, with full power of substitution in each, as proxies to cast all 
votes which the undersigned shareholder is entitled to cast at the Special      
Meeting of Shareholders (the "Special Meeting") to be held at 2:00 p.m. on      
Monday, December 1, 1997 at the Multnomah Athletic Club, 1849 S.W. Salmon       
Avenue, Portland, Oregon 97205 and any adjournment or postponements thereof upon
the following matters.                                                          

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED  
HEREIN BY THE UNDERSIGNED SHAREHOLDER, UNLESS DIRECTION IS GIVEN, THIS PROXY    
WILL BE VOTED "FOR" PROPOSAL 1 AND IN ACCORDANCE WITH THE RECOMMENDATIONS OF A  
MAJORITY OF THE BOARD OF DIRECTORS AS TO OTHER MATTERS. The undersigned hereby  
acknowledges receipt of the Company's Proxy Statement and hereby revokes any    
proxy or proxies previously signed.                                             

PLEASE SIGN, DATE AND RETURN THIS PROXY CARD TODAY, USING THE ENCLOSED    
ENVELOPE.                                                                       
                          (continues and to be signed and dated on reverse side)

DEFM14A
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                                                       Please mark
                                                           your votes  [X]
                                                        as indicated

                                     FOR   AGAINST ABSTAIN
1. The issuance of a total of 4,162,000         [ ]     [ ]     [ ]             
shares of FLIR Common Stock in exchange                                   
for all of the outstanding shares of                                      
capital stock of AGEMA Infrared Systems AB,                               
a corporation organized under the laws of                                 
Sweden, AGEMA Infrared Systems Limited, a                                 
corporation organized under the laws of                                   
the United Kingdom, AGEMA Infrared Systems                                
Ltd., a corporation organized under the                                   
laws of Canada, and AGEMA Infrared Systems,                               
Inc., a Delaware corporation.                                             

2. In their discretion, the proxies are authorized to vote upon such other      
matters as may properly come before the meeting or any adjournments or    
postponements thereof.                                                    

                                               ---------------------------------
                                      Typed of Printed name(s)

                                               ---------------------------------
                                  Authorized Signature

                                               ---------------------------------
                                               Title or authority, if applicable

                                               ---------------------------------
                  Date

                  Please sign exactly as your name appears on this
                   Proxy Card. If shares are registered in more than
                       one name, all such person should sign.  A corporation
                  should sign in its full corporate name by a duly
                      authorized officer, stating his/her title. Trustees,
                        guardians, executors and administrators shouls sign in
                     their official capacity, giving their full title as
                        such. If a partnership, please sign in the partnership
name by authorized person(s). 

If you receive more than one Proxy Card,  
please sign and return all such cards in the accompanying envelope. 

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘DEFM14A’ Filing		Date		First		Last			Other Filings
		7/30/01		74
		12/31/98		99					10-K405,  NT 10-K
		3/31/98		10		144			10-K,  10-Q,  10-Q/A
		12/30/97		140
		12/15/97		54
		12/1/97		2		154			PREM14A
		11/26/97		116
		11/24/97		21
Filed on:		11/12/97
		11/10/97		2		16
		11/7/97		15		30
		10/24/97		3		30			8-K
		10/9/97		30
		10/6/97		2		109			8-K
		9/30/97		47		141			10-Q
		9/23/97		9		152
		9/22/97		152
		9/12/97		22		152
		8/22/97		22
		8/4/97		20
		8/1/97		15		138
		7/14/97		20
		7/6/97		20
		7/1/97		19
		6/30/97		12		152			10-Q
		6/12/97		19
		5/9/97		19
		5/5/97		29		111
		5/1/97		19
		3/31/97		20		53			10-K405,  10-Q
		2/25/97		63
		2/12/97		61
		2/7/97		61					SC 13G/A
		12/31/96		12		132			10-K405
		6/30/96		12		103			10-Q
		1/1/96		69
		12/31/95		49		120
		12/31/94		13		120
		2/7/94		60
		12/31/93		13		86
		6/22/93		22		152
		12/31/92		13		128
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