Axsys Technologies (AXYS)

Market Overview

        Our products are sold to both end user communities and OEMs in a variety of markets that demand the precision and performance that our products and capabilities provide.

Surveillance Systems Group

        Military Surveillance, Reconnaissance and Targeting.    Surveillance, Reconnaissance and Targeting represents one of the largest growth sectors in the U.S. Department of Defense budget. This sector includes optical sensors and thermal imaging equipment. Militaries around the world are transforming themselves with the development of advanced platforms such as unmanned vehicles and remote weapons stations, and advanced optical sensors platforms are vital to this transformation. In addition, as terrorist threats mount, the military has an increasing need to "Own the Night" with thermal imaging equipment. We have a substantial heritage in this market and continue to focus on protecting and building upon this position. We are involved in many significant surveillance programs, in particular those serving the Air Force, Navy, Marines and Army.

        Homeland Security.    Government officials in the United States and internationally have increased their focus on designing plans to reduce the risk of terrorist attacks and prepare for the consequences of terrorist attacks. Many of the preventative efforts of these initiatives involve surveillance and imaging of people, baggage, cargo and vehicles. We are well positioned to participate in this emerging market with our imaging and infrared solutions and expect to benefit from spending on border security in the United States and abroad.

        Thermal Imaging.    Advancements in cooled and uncooled focal plane array technology have improved the quality of infrared images and drastically reduced the costs of producing thermal imaging camera systems. The development of uncooled focal plane array technology during the mid-1990s has

2

resulted in a pronounced reduction in the cost of infrared cameras. The market has responded with a number of infrared-related products designed for a variety of applications, including firefighting, surveillance, preventive maintenance and other commercial night vision needs. Furthermore, the availability of more moderately priced alternatives enables manufacturers to employ the same infrared systems or components for both commercial and military applications. The enhanced total market size accumulated thereby is sufficient to create the economies of scale that permit broad deployment. We have been at the forefront of developing both cooled and uncooled camera product offerings and, like much of the rest of the infrared market, we have experienced a broad increase in thermal imaging demand as the cost effectiveness of employing infrared capabilities has escalated.

        Non-Military Airborne Imaging.    The advancement of gyrostabilization technology and long-range, high-definition cameras has led to increased demand for airborne imaging systems from law enforcement agencies, electronic news gathering organizations and movie production companies. The advent of high-definition image capture, in particular, is leading customers in these markets to upgrade their existing helicopters with newer, high-performance camera platforms. In addition, the extreme long-range capabilities of these new systems provides law enforcement agencies with heightened surveillance capabilities. We are at the forefront of high-definition gyrostabilized camera system development and are increasingly recognized as a technology leader in this space.

Imaging Systems Group

        Military Surveillance, Reconnaissance and Targeting.    Surveillance Reconnaissance and Targeting represents one of the largest growth sectors in the U.S. Department of Defense budget. This sector includes optical sensors and thermal imaging equipment. Militaries around the world are transforming themselves with the development of advanced platforms such as unmanned vehicles and remote weapons stations, and advanced optical sensors platforms are vital to this transformation. We have a substantial heritage in this market and continue to focus on protecting and building upon this position.

        We are involved in many large-scale programs, including the MRAP vehicles, Apache Helicopter, Stryker, MIA2 Abrams, Bradley Fighting Vehicle, Thermal Weapons Site, CROWS and F-35 Joint Strike Fighter. Many of the applications with which we are involved include the continuing development of next-generation targeting, night vision, navigation and imaging systems. We are a major supplier of optical systems for night-vision optical systems, which are an important component of the U.S. Army's strategy to "Own the Night".

        Optical sensors and thermal imaging equipment are vitally necessary for the U.S. military to maintain its battlefield superiority. In addition, planned upgrades and improvements of optical and thermal imaging equipment is not dependent upon spending for new vehicles and platforms. Therefore, it is expected that government spending on sensor upgrades will continue to grow regardless of overall defense spending.

        National Missile Defense.    Restructuring the country's defense and deterrence capabilities to correspond to emerging threats remains a high priority for the United States. The deployment of missile defenses is an essential component of this effort. We are an integral member of the contractor teams involved in the rollout of key NMD programs from development to production, including EKV, THAAD, PAC-3, SBIRS-High and Airborne Laser.

        Other Space and Strategic Defense Opportunities.    In connection with the U.S. government's efforts to continually enhance aging weaponry, we have the opportunity to be involved in retrofitting the nuclear missile arsenal with advanced gas bearings. We were chosen as the U.S. Air Force's Center of Excellence for gas bearing production. We also have a long history of involvement with space-based telescopes for use in U.S.-based surveillance applications, as well as weather and astronomical research. We expect to benefit from the future growth in satellite programs.

3

        Graphic Arts.    We were a pioneer in the development of airbearing laser scanners used for digital imaging of film within the graphic arts market in the early 1990's. However, declining print advertising revenues have negatively impacted the graphic arts capital equipment market in the last decade. While we intend to continue our participation in this industry, we expect that this involvement will steadily decline along with the overall market.

Market Overview

        Our products are sold to both end user communities and OEMs in a variety of markets that demand the precision and performance
that our products and capabilities provide.

Surveillance Systems Group

        Military Surveillance, Reconnaissance and Targeting.    Surveillance, Reconnaissance and Targeting represents one of the largest growth
sectors in the
U.S. Department of Defense budget. This sector includes optical sensors and thermal imaging equipment. Militaries around the world are transforming themselves with the development of advanced
platforms such as unmanned vehicles and remote weapons stations, and advanced optical sensors platforms are vital to this transformation. In addition, as terrorist threats mount, the military has an
increasing need to "Own the Night" with thermal imaging equipment. We have a substantial heritage in this market and continue to focus on protecting and building upon this position. We are involved in
many significant surveillance programs, in particular those serving the Air Force, Navy, Marines and Army.

        Homeland Security.    Government officials in the United States and internationally have increased their focus on designing plans to
reduce the risk of
terrorist attacks and prepare for the consequences of terrorist attacks. Many of the preventative efforts of these initiatives involve surveillance and imaging of people, baggage, cargo and vehicles.
We are well positioned to participate in this emerging market with our imaging and infrared solutions and expect to benefit from spending on border security in the United States and abroad.

        Thermal Imaging.    Advancements in cooled and uncooled focal plane array technology have improved the quality of infrared images and
drastically
reduced the costs of producing thermal imaging camera systems. The development of uncooled focal plane array technology during the mid-1990s has

2

resulted
in a pronounced reduction in the cost of infrared cameras. The market has responded with a number of infrared-related products designed for a variety of applications, including firefighting,
surveillance, preventive maintenance and other commercial night vision needs. Furthermore, the availability of more moderately priced alternatives enables manufacturers to employ the same infrared
systems or components for both commercial and military applications. The enhanced total market size accumulated thereby is sufficient to create the economies of scale that permit broad deployment. We
have been at the forefront of developing both cooled and uncooled camera product offerings and, like much of the rest of the infrared market, we have experienced a broad increase in thermal imaging
demand as the cost effectiveness of employing infrared capabilities has escalated.

        Non-Military Airborne Imaging.    The advancement of gyrostabilization technology and long-range, high-definition
cameras has led to increased demand for airborne imaging systems from law enforcement agencies, electronic news gathering organizations and movie production companies. The advent of
high-definition image capture, in particular, is leading customers in these markets to upgrade their existing helicopters with newer, high-performance camera platforms. In
addition, the extreme long-range capabilities of these new systems provides law enforcement agencies with heightened surveillance capabilities. We are at the forefront of
high-definition gyrostabilized camera system development and are increasingly recognized as a technology leader in this space.

Imaging Systems Group

        Military Surveillance, Reconnaissance and Targeting.    Surveillance Reconnaissance and Targeting represents one of the largest growth
sectors in the
U.S. Department of Defense budget. This sector includes optical sensors and thermal imaging equipment. Militaries around the world are transforming themselves with the development of advanced
platforms such as unmanned vehicles and remote weapons stations, and advanced optical sensors platforms are vital to this transformation. We have a substantial heritage in this market and continue to
focus on protecting and building upon this position.

        We
are involved in many large-scale programs, including the MRAP vehicles, Apache Helicopter, Stryker, MIA2 Abrams, Bradley Fighting Vehicle, Thermal Weapons Site, CROWS and
F-35 Joint Strike Fighter. Many of the applications with which we are involved include the continuing development of next-generation targeting, night vision, navigation and
imaging systems. We are a major supplier of optical systems for night-vision optical systems, which are an important component of the U.S. Army's strategy to "Own the Night".

        Optical
sensors and thermal imaging equipment are vitally necessary for the U.S. military to maintain its battlefield superiority. In addition, planned upgrades and improvements of
optical and thermal imaging equipment is not dependent upon spending for new vehicles and platforms. Therefore, it is expected that government spending on sensor upgrades will continue to grow
regardless of overall defense spending.

        National Missile Defense.    Restructuring the country's defense and deterrence capabilities to correspond to emerging threats remains a
high priority
for the United States. The deployment of missile defenses is an essential component of this effort. We are an integral member of the contractor teams involved in the rollout of key NMD programs from
development to production, including EKV, THAAD, PAC-3, SBIRS-High and Airborne Laser.

        Other Space and Strategic Defense Opportunities.    In connection with the U.S. government's efforts to continually enhance aging weaponry,
we have the
opportunity to be involved in retrofitting the nuclear missile arsenal with advanced gas bearings. We were chosen as the U.S. Air Force's Center of Excellence for gas bearing production. We also have
a long history of involvement with space-based telescopes for use in U.S.-based surveillance applications, as well as weather and astronomical research. We expect to benefit from the future growth in
satellite programs.

3

        Graphic Arts.    We were a pioneer in the development of airbearing laser scanners used for digital imaging of film within the graphic
arts market in
the early 1990's. However, declining print advertising revenues have negatively impacted the graphic arts capital equipment market in the last decade. While we intend to continue our participation in
this industry, we expect that this involvement will steadily decline along with the overall market.

Market Overview

        Our products are sold to both end user communities and OEMs in a variety of markets that demand the precision and performance that our products and capabilities provide.

Surveillance Systems Group

        Military Surveillance and Targeting.    Surveillance and Targeting represents one of the largest growth sectors in the U.S. Department of Defense budget. This sector includes optical sensors and thermal imaging equipment. Militaries around the world are transforming themselves with the development of advanced platforms such as unmanned vehicles and remote weapons stations, and advanced optical sensors platforms are vital to this transformation. In addition, as terrorist threats mount, the military has an increasing need to "Own the Night" with thermal imaging equipment. We have a substantial heritage in this market and continue to focus on protecting and building upon this position. We are involved in many significant surveillance programs in particular, serving the Air Force, Navy, Marines and Army.

        Homeland Security.    Government officials in the United States and internationally have increased their focus on designing plans to reduce the risk of terrorist attacks and prepare for the consequences of terrorist attacks. Many of the preventative efforts of these initiatives involve surveillance and imaging of people, baggage, cargo and vehicles. We are well positioned to participate in this emerging market with our imaging and infrared solutions and expect to benefit from the anticipated increase in spending on border security in the United States and abroad.

        Thermal Imaging.    Advancements in cooled and uncooled focal plane array technology have improved the quality of infrared images and drastically reduced the costs of producing thermal imaging camera systems. The development of uncooled focal plane array technology during the mid-1990s has

3

resulted in a pronounced reduction in the cost of infrared cameras. The market has responded with a number of infrared-related products designed for a variety of applications, including firefighting, surveillance, preventive maintenance and other commercial night vision needs. Furthermore, the availability of more moderately priced alternatives enables manufacturers to employ the same infrared systems or components for both commercial and military applications. The enhanced total market size accumulated thereby is sufficient to create the economies of scale that permit broad deployment. Axsys have been at the forefront of developing both cooled and uncooled camera product offerings and, like much of the rest of the infrared market, we have experienced a broad increase in thermal imaging demand as the cost effectiveness of employing infrared capabilities has escalated.

        Non-Military Airborne Imaging.    The advancement of gyrostabilization technology and long-range, high-definition cameras has led to increased demand for airborne imaging systems from law enforcement agencies, electronic news gathering organizations and movie production companies. The advent of high-definition image capture, in particular, is leading customers in these markets to upgrade their existing helicopters with newer, high-performance camera platforms. In addition, the extreme long-range capabilities of these new systems provides law enforcement agencies with heightened surveillance capabilities. Axsys is at the forefront of high-definition gyrostabilized camera system development and is increasingly recognized as a technology leader in this space.

Imaging Systems Group

        Military Surveillance and Targeting.    Surveillance and targeting represents one of the largest growth sectors in the U.S. Department of Defense budget. This sector includes optical sensors and thermal imaging equipment. Militaries around the world are transforming themselves with the development of advanced platforms such as unmanned vehicles and remote weapons stations, and advanced optical sensors platforms are vital to this transformation. We have a substantial heritage in this market and continue to focus on protecting and building upon this position.

        We are involved in many large-scale programs, including the MRAP vehicles, Apache Helicopter, Stryker, MIA2 Abrams, Bradley Fighter Vehicle, Thermal Weapons Site, CROWS and F-35 Joint Strike Fighter. Many of the applications with which we are involved include the continuing development of next-generation targeting, night vision, navigation and imaging systems. We are a major supplier of optical systems for night-vision optical systems, which are an important component of the U.S. Army's strategy to "Own the Night".

        Optical sensors and thermal imaging equipment are vitally necessary for the U.S. military to maintain its battlefield superiority. In addition, planned upgrades and improvements of optical and thermal imaging equipment is not dependent upon spending for new vehicles and platforms. Therefore, it is expected that government spending on sensor upgrades will continue to grow regardless of overall defense spending.

        National Missile Defense.    Restructuring the country's defense and deterrence capabilities to correspond to emerging threats remains a high priority for the United States. The deployment of missile defenses is an essential component of this effort. We are an integral member of the contractor teams involved in the rollout of key NMD programs from development to production, including EKV, THAAD, PAC-3, SBIRS-High and Airborne Laser.

        Other Space and Strategic Defense Opportunities.    In connection with the U.S. government's efforts to continually enhance aging weaponry, we have the opportunity to be involved in retrofitting the nuclear missile arsenal with advanced gas bearings. We were chosen as the U.S. Air Force's Center of Excellence for gas bearing production. We also have a long history of involvement with space-based telescopes for use in U.S.-based surveillance applications, as well as weather and astronomical research. We expect to benefit from the future growth in satellite programs.

4

        Commercial Thermal Imaging.    The rapid advancement of uncooled infrared sensor technology has led to significant price reduction in commercial infrared cameras. As a result, thermal cameras are finding new uses in an increasingly broad array of industries such as industrial inspection, short-range commercial surveillance, roof inspection and energy conservation. Axsys is a leading supplier of infrared lenses to the camera manufacturers that serve these varied industries. It is expected that this market will continue to grow along with the evolution of infrared sensor technology and with the broader adoption of thermal imaging in commercial markets.

        Graphic Arts.    Axsys was a pioneer in the development of airbearing laser scanners used for digital imaging of film within the graphic arts market in the early 1990's. However, declining print advertising revenues have negatively impacted the graphic arts capital equipment market in the last decade. While we intend to continue our participation in this industry, we expect that this involvement will steadily decline along with the overall market.

Market Overview

        Our products are sold to both end user communities and OEMs in a variety of markets that demand the precision and performance that our products and
capabilities provide.

Surveillance Systems Group

        Military Surveillance and Targeting.    Surveillance and Targeting represents one of the largest growth sectors in the U.S.
Department of Defense budget. This sector includes optical sensors and thermal imaging equipment. Militaries around the world are transforming themselves with the development of advanced platforms
such as unmanned vehicles and remote weapons stations, and advanced optical sensors platforms are vital to this transformation. In addition, as terrorist threats mount, the military has an increasing
need to "Own the Night" with thermal imaging equipment. We have a substantial heritage in this market and continue to focus on protecting and building upon this position. We are involved in many
significant surveillance programs in particular, serving the Air Force, Navy, Marines and Army.

        Homeland Security.    Government officials in the United States and internationally have increased their focus on designing
plans to reduce the risk of terrorist attacks and prepare for the consequences of terrorist attacks. Many of the preventative efforts of these initiatives involve surveillance and imaging of people,
baggage, cargo and vehicles. We are well positioned to participate in this emerging market with our imaging and infrared solutions and expect to benefit from the anticipated increase in spending on
border security in the United States and abroad.

        Thermal Imaging.    Advancements in cooled and uncooled focal plane array technology have improved the quality of infrared
images and drastically reduced the costs of producing thermal imaging camera systems. The development of uncooled focal plane array technology during the mid-1990s has

3

resulted
in a pronounced reduction in the cost of infrared cameras. The market has responded with a number of infrared-related products designed for a variety of applications, including firefighting,
surveillance, preventive maintenance and other commercial night vision needs. Furthermore, the availability of more moderately priced alternatives enables manufacturers to employ the same infrared
systems or components for both commercial and military applications. The enhanced total market size accumulated thereby is sufficient to create the economies of scale that permit broad deployment.
Axsys have been at the forefront of developing both cooled and uncooled camera product offerings and, like much of the rest of the infrared market, we have experienced a broad increase in thermal
imaging demand as the cost effectiveness of employing infrared capabilities has escalated.

        Non-Military Airborne Imaging.    The advancement of gyrostabilization technology and long-range,
high-definition cameras has led to increased demand for airborne imaging systems from law enforcement agencies, electronic news gathering organizations and movie production companies. The
advent of high-definition image capture, in particular, is leading customers in these markets to upgrade their existing helicopters with newer, high-performance camera
platforms. In addition, the extreme long-range capabilities of these new systems provides law enforcement agencies with heightened surveillance capabilities. Axsys is at the forefront of
high-definition gyrostabilized camera system development and is increasingly recognized as a technology leader in this space.

Imaging Systems Group

        Military Surveillance and Targeting.    Surveillance and targeting represents one of the largest growth sectors in the U.S.
Department of Defense budget. This sector includes optical sensors and thermal imaging equipment. Militaries around the world are transforming themselves with the development of advanced platforms
such as unmanned vehicles and remote weapons stations, and advanced optical sensors platforms are vital to this transformation. We have a substantial heritage in this market and continue to focus on
protecting and building upon this position.

        We
are involved in many large-scale programs, including the MRAP vehicles, Apache Helicopter, Stryker, MIA2 Abrams, Bradley Fighter Vehicle, Thermal Weapons Site, CROWS and
F-35 Joint Strike Fighter. Many of the applications with which we are involved include the continuing development of next-generation targeting, night vision, navigation and
imaging systems. We are a major supplier of optical systems for night-vision optical systems, which are an important component of the U.S. Army's strategy to "Own the Night".

        Optical
sensors and thermal imaging equipment are vitally necessary for the U.S. military to maintain its battlefield superiority. In addition, planned upgrades and improvements of
optical and thermal imaging equipment is not dependent upon spending for new vehicles and platforms. Therefore, it is expected that government spending on sensor upgrades will continue to grow
regardless of overall defense spending.

        National Missile Defense.    Restructuring the country's defense and deterrence capabilities to correspond to emerging threats
remains a high priority for the United States. The deployment of missile defenses is an essential component of this effort. We are an integral member of the contractor teams involved in the rollout of
key NMD programs from development to production, including EKV, THAAD, PAC-3, SBIRS-High and Airborne Laser.

        Other Space and Strategic Defense Opportunities.    In connection with the U.S. government's efforts to continually enhance
aging weaponry, we have the opportunity to be involved in retrofitting the nuclear missile arsenal with advanced gas bearings. We were chosen as the U.S. Air Force's Center of Excellence for gas
bearing production. We also have a long history of involvement with space-based telescopes for use in U.S.-based surveillance applications, as well as weather and astronomical research. We expect to
benefit from the future growth in satellite programs.

4

        Commercial Thermal Imaging.    The rapid advancement of uncooled infrared sensor technology has led to significant price
reduction in commercial infrared cameras. As a result, thermal cameras are finding new uses in an increasingly broad array of industries such as industrial inspection, short-range commercial
surveillance, roof inspection and energy conservation. Axsys is a leading supplier of infrared lenses to the camera manufacturers that serve these varied industries. It is expected that this market
will continue to grow along with the evolution of infrared sensor technology and with the broader adoption of thermal imaging in commercial markets.

        Graphic Arts.    Axsys was a pioneer in the development of airbearing laser scanners used for digital imaging of film within the
graphic arts market in the early 1990's. However, declining print advertising revenues have negatively impacted the graphic arts capital equipment market in the last decade. While we intend to
continue our participation in this industry, we expect that this involvement will steadily decline along with the overall market.

Market Overview

Our products are sold mainly to OEMs in a variety of markets that demand the precision and performance that our products and capabilities provide.

Optical Systems Group

Military Surveillance and Targeting.   Surveillance and Targeting represents one of the largest growth sectors in the U.S. Department of Defense budget. This sector includes optical sensors and thermal imaging equipment. We have a substantial heritage in this market and continue to focus on protecting and building upon this position. We are involved in many large-scale programs including the F-16, F-18, Apache, Stryker MIA2 Abrams and Bradley Fighter Vehicle. Many of the applications with which we are involved include the continuing development of the next-generation targeting, night vision, navigation and imaging systems for military applications. We are a major supplier of optical systems for night-vision optical systems, which are an important component of the U.S. Army’s strategy to “Own the night”.

Optical sensors and thermal imaging equipment are vitally necessary for the U.S. military to maintain its battlefield superiority. Planned upgrade and improvement of such optical and thermal imaging equipment is not dependent upon spending on new platforms. Even as new platform spending is projected to be challenging over the next few years, we expect that spending to upgrade the sensors on existing platforms will continue to thrive.

We have the opportunity to provide value-added solutions by integrating our technologies into sophisticated optical systems. We have recently developed motorized pan and tilt gimbal systems, which are often used to support and position thermal cameras and other sensors.

Homeland Security.   Since September 11, 2001, government officials have increased their focus on designing plans to reduce the risk of terrorist attacks and prepare for the consequences of terrorist attacks. Many of the preventative efforts of these initiatives involve surveillance and imaging of people, baggage, cargo and vehicles. We are well positioned to participate in this emerging market with our imaging and infrared solutions, including the expected increase in spending on border security, as the U.S. Border Patrol upgrades and supplements existing systems on the nation’s borders to bolster homeland security efforts.

3

National Missile Defense.   Restructuring the country’s defense and deterrence capabilities to correspond to emerging threats remains a high priority for the United States. The deployment of missile defenses is an essential component of this effort. We are an integral member of the contractor teams involved in the rollout of key NMD programs from development to production, including EKV, THAAD, PAC-3, SBIRS-High and Airborne Laser.

Other Aerospace and Defense Opportunities.   In connection with the U.S. government’s efforts to continually enhance aging weaponry, we have the opportunity to be involved in retrofitting the nuclear missile arsenal with advanced gas bearings. We were chosen as the U.S. Air Force’s Center of Excellence for gas bearing production. We also have a long history of involvement with space-based telescopes for use in U.S.-based surveillance applications, as well as weather and astronomical research. We expect to benefit from the future growth in satellite programs.

Semiconductor Capital Equipment.   Our products are used in the precise inspection of semiconductor wafers. These products include complete auto-focus assemblies, motion control stages and precise distance measuring devices. We have the opportunity to expand our position in this industry by introducing new products and marketing to new customers.

Graphic Arts.   We were a pioneer in the development of airbearing laser scanners used for digital imaging of film within the graphic arts market in the early 1990’s. While declining advertising revenues have negatively impacted the graphic arts market, we have expanded our product offering to include marker engines, which can increase our average selling price to a customer over six-fold. Although we anticipate a moderate decline in the overall graphic arts market, we expect to mitigate some of this decline with the introduction of marker engines to our customer base.

Thermal Imaging.   Advancements in cooled and uncooled focal plane array technology have improved the quality of infrared images and drastically reduced the costs of producing thermal imaging camera systems. The development of uncooled focal plane array technology during the mid-1990s has resulted in a pronounced reduction in the cost of infrared cameras. The market has responded with a number of infrared related products designed for a variety of applications, including firefighting, surveillance, preventive maintenance and other commercial night vision needs. Furthermore, the availability of more moderately priced alternatives enables manufacturers to employ the same infrared systems or components for both commercial and military applications. The enhanced total market size accumulated thereby is sufficient to create the economies of scale that permit broad deployment. We have been at the forefront of developing both cooled and uncooled camera product offerings and, like much of the rest of the infrared market, we have experienced a broad increase in thermal imaging demand as the cost effectiveness of employing infrared capabilities has escalated.

Distributed Products Group

Ball Bearings.   The markets we serve include industrial automation, semi-conductor capital equipment, aerospace and defense and consumer products. The market for the distribution of ball bearings and related products generally follows worldwide economic trends. In order to position us for growth, we are introducing new products, lower cost products and value-added services.

Our products are sold mainly to OEMs in a variety of markets that demand the precision and performance that our products and capabilities provide.

Optical Systems Group

Defense Electronics.   Defense electronics represents one of the largest growth sectors in the Department of Defense budget. This sector includes the growing market for optical sensors and thermal imaging equipment. We have a substantial heritage in this market and continue to focus on protecting and building upon this position. We are involved in many large-scale programs including the F-16, F-18, Apache, Stryker MIA2 Abrams and Bradley Fighter Vehicle. Many of the applications with which we are involved include the continuing development of the next-generation targeting, navigation and imaging systems for fighter aircraft, helicopters, aircraft carriers and armored vehicles. We are also involved in contributing to the night vision capabilities of the U.S. military. Night vision devices enable warfighters to better operate at night, creating a distinct advantage over their enemies. To further enhance its advantage

3

in nighttime operations, the Department of Defense continues to upgrade its infrared equipment, as evidenced by our recent $12.8 million base-contract win on the Thermal Weapon Sight program to supply infrared objective lens assemblies to BAE Systems.

Optical sensors and thermal imaging equipment are vitally necessary for the U.S. military to maintain its battlefield superiority. Planned upgrade and improvement of such optical and thermal imaging equipment is not dependent upon spending on new platforms. Even as new platform spending is projected to be challenging over the next few years, we expect that spending to upgrade the sensors on existing platforms will continue to thrive. In addition, we expect to participate in providing heat sinks, structures, optics and opto-mechanical subassemblies on the next generation of defense communications and surveillance satellites that will support the ground- and air-based network-centric warfare platforms.

We have the opportunity to provide value-added solutions by integrating our technologies into sophisticated optical systems. Our integration capabilities would create value for the prime contractors by reducing the number of suppliers and collapsing the supply chain. We believe we are strategically positioned to design, develop and manufacture these systems for stabilized optical platforms.

In addition, we have designed our entire line of thermal cameras using a consistent architecture and are therefore able to easily construct exactly the combination of product features that best meet a customer’s needs. For example, we essentially use the same electronics processing architecture and optics across our suite of different cameras. The common design elements of our thermal imagers permit us to offer a wide variety of thermal cameras to satisfy specific customer demand. This approach has allowed us to adapt cutting edge focal plane array technologies for both high-end and low-end market opportunities.

Additionally, our software engineering team has made significant strides in proprietary designs that drive our complex thermal camera integration and allow us to respond to a variety of customer requirements.

Homeland Security.   Since September 11, 2001, government officials have increased their focus on designing plans to reduce the risk of terrorist attacks and prepare for the consequences of terrorist attacks. Many of the preventative efforts of these initiatives involve surveillance and imaging of people, baggage, cargo and vehicles. We are well positioned to participate in this emerging market with our imaging and infrared solutions, including the expected increase in spending on border security, as the U.S. Border Patrol upgrades and supplements existing systems on the nation’s borders to bolster homeland security efforts.

National Missile Defense.   Restructuring the country’s defense and deterrence capabilities to correspond to emerging threats remains a high priority for the United States. The deployment of missile defenses is an essential component of this effort. We are an integral member of the contractor teams involved in the rollout of key NMD programs from development to production, including EKV, THAAD, PAC-3, SBIRS-High and Airborne Laser.

Other Aerospace and Defense Opportunities.   In connection with the U.S. government’s efforts to continually enhance aging weaponry, we have the opportunity to be involved in retrofitting the nuclear missile arsenal with advanced gas bearings. We were chosen as the U.S. Air Force’s Center of Excellence for gas bearing production. We also have a long history of involvement with space-based telescopes for use in U.S.-based surveillance applications, as well as weather and astronomical research. We expect to benefit from the future growth in satellite programs.

Health Imaging.   We believe we have positioned ourselves as a key supplier to the medical imaging sector with an industry leading airbearing scanner solution. The airbearing scanner that we developed has enabled our customer to reach the highest level of design and performance of any medical imaging systems available on the market. We have the opportunity to continue expanding our position in the sector as the market moves to develop new systems that require the most advanced imaging technology.

4

Semiconductor Capital Equipment.   Our products are used in the precise inspection of semiconductor wafers. These products include complete auto-focus assemblies, motion control stages and precise distance measuring devices. We have the opportunity to expand our position in this industry by introducing new products and marketing to new customers.

Graphic Art.   We were a pioneer in the development of airbearing laser scanners used for digital imaging of film within the graphic arts market in the early 1990’s. While declining advertising revenues have negatively impacted the graphic arts market, we have expanded our product offering to include marker engines, which can increase our average selling price to a customer over six-fold. Although we anticipate a moderate decline in the overall graphic arts market, we expect to mitigate this decline with the introduction of marker engines to our customer base.

Thermal Imaging.   Advancements in cooled and uncooled focal plane array technology have improved the quality of infrared images and drastically reduced the costs of producing thermal imaging camera systems. The development of uncooled focal plane array technology during the mid-1990s has resulted in a pronounced reduction in the cost of infrared cameras. The market has responded with a number of infrared related products designed for a variety of applications, including firefighting, surveillance, preventive maintenance and other commercial night vision needs. Furthermore, the availability of more moderately priced alternatives enables manufacturers to employ the same infrared systems or components for both commercial and military applications. The enhanced total market size accumulated thereby is sufficient to create the economies of scale that permit broad deployment. We have been at the forefront of developing both cooled and uncooled camera product offerings and, like much of the rest of the infrared market, we have experienced a broad increase in thermal imaging demand as the cost effectiveness of employing infrared capabilities has escalated.

Distributed Products Group

Ball Bearings.   The markets we serve include industrial automation, semi-conductor capital equipment, aerospace and defense and consumer products. The market for the distribution of ball bearings and related products generally follows worldwide economic trends.  In order to position us for growth, we are introducing new products, lower cost products and value-added services.

Market Overview

Our Company’s products are sold mainly to OEMs in a variety of markets that demand the precision and performance that our products and capabilities provide.

Optical Systems Group

Defense Electronics:   Defense electronics represents one of the largest growth sectors in the Department of Defense (“DoD”) budget. This sector includes the growing market for optical sensors and thermal imaging equipment. Our Company has a substantial heritage in this market and continues to focus on protecting and building upon this position.  We are involved in many large-scale programs including the continuing development of next generation forward looking infrared (“FLIR”) systems for fighter aircraft, helicopters and armored vehicles including the F-16, F-18, Apache, MIA2 Abrams, Bradley Fighter Vehicle and Stryker.

Optical sensors and thermal imaging equipment are vitally necessary for the U.S. military to maintain its battlefield superiority. Planned upgrade and improvement of such optical and thermal imaging equipment is not dependent upon spending on new platforms. In fact, even as new platform spending is projected to be challenging over the next few years, spending to upgrade the sensors on existing platforms will continue to thrive. In addition, we expect to participate in providing heat sinks, structures, optics and opto-mechanical subassemblies on the next generation of defense communications and surveillance satellites that will support the ground-and air-based network-centric warfare platforms.

Homeland Security:   Since September 11, 2001, government officials have designed plans to reduce the risk of terrorist attacks and prepare for the consequences of terrorist attacks. Many of the preventative efforts of these initiatives involve surveillance and imaging of people, baggage, cargo and vehicles. We are well positioned to participate in this emerging market with our imaging and infrared solutions.

National Missile Defense (“NMD”):   Restructuring the country’s defense and deterrence capabilities to correspond to emerging threats remains a high priority for the United States. The deployment of missile defenses is an essential component of this effort. We are an integral member of the contractor teams involved in the rollout of key NMD programs from development to production, including EKV, THAAD, PAC-3, SBIRS-High and Airborne Laser.

Other Aerospace and Defense Opportunities:   In connection with the U.S. government’s efforts to continually enhance aging weaponry, we have the opportunity to be involved in retrofitting the nuclear missile arsenal with advanced gas bearings. Our Company was chosen as the U.S. Air Force’s Center of Excellence for gas bearing production. We also have a long history of involvement with space-based

3

telescopes for use in U.S.-based surveillance applications, as well as weather and astronomical research. We expect to benefit from the future growth in satellite programs.

Technology Integration:   Our Company has the opportunity to provide value-added solutions by integrating our technologies into sophisticated optical systems. The integration capabilities would create value for the prime contractors by reducing the number of suppliers and collapsing the supply chain. We believe we are strategically positioned to design, develop and manufacture these systems for stabilized optical platforms.

Health Imaging:   We have positioned ourselves as a key supplier to the medical imaging sector with an industry leading airbearing scanner solution. The airbearing scanner that we developed has enabled our customer to reach the highest level of design and performance of any medical imaging systems available on the market. We have the opportunity to continue expanding our position in the sector as the market moves to develop new systems that require the most advanced imaging technology.

Semiconductor Capital Equipment:   Our products are used in the precise inspection of semiconductor wafers.  These products include complete auto-focus assemblies, motion control stages and precise distance measuring devices. We have the opportunity to expand our position in this industry by introducing new products and marketing to new customers.

Graphic Arts:   We pioneered the development of airbearing laser scanners used for digital imaging of film within the graphic arts market in the early 1990’s. While declining advertising revenues have negatively impacted the graphic arts market, we have expanded our product offering to include marker engines, which can increase our average selling price to a customer over six-fold. Although we anticipate a moderate decline in the overall graphic arts market, we expect to mitigate this decline with the introduction of marker engines to our customer base.

Distributed Products Group

Ball Bearings:   The markets we serve include industrial automation, semi-conductor capital equipment, aerospace and defense and consumer products. The market for the distribution of ball bearings and related products generally follows worldwide economic trends. In order to position us for growth, we are introducing new products, lower cost products and value-added services.