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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K
(Mark one)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the year ended December 31, 2000.

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-21918

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FLIR Systems, Inc.
(Exact name of Registrant as specified in its charter)

Oregon 93-0708501
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)

16505 S.W. 72nd Avenue, Portland, Oregon 97224
(Address of principal executive offices)

(503) 684-3731
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class of Stock

Common Stock, $0.01 par value
Preferred Stock Purchase Rights

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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or amendment to this Form 10-K [_]

As of March 15, 2001, the aggregate market value of the shares of voting
stock of the Registrant held by non-affiliates was $108,939,602.

As of March 15, 2001, there were 14,583,085 shares of the Registrant's
common stock, $0.01, par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

The Registrant has incorporated by reference into Part III of this Form 10-
K portions of its Proxy Statement for its 2001 Annual Meeting of Shareholders.

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FLIR SYSTEMS, INC.

FORM 10-K

ANNUAL REPORT

TABLE OF CONTENTS

PART I

Item 1 Business............................................................................... 1
Item 2 Properties............................................................................. 12
Item 3 Legal Proceedings...................................................................... 13
Item 4 Submission of Matters to a Vote of Security Holders.................................... 13

PART II

Item 5 Market for Registrant's Common Equity and Related Shareholder Matters.................. 13
Item 6 Selected Consolidated Financial Data................................................... 14
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.. 15
Item 7A Quantitative and Qualitative Disclosure about Market Risk.............................. 20
Item 8 Financial Statements and Supplementary Data............................................ 21
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.. 45

PART III

Item 10 Directors and Executive Officers of the Registrant..................................... 46
Item 11 Executive Compensation................................................................. 46
Item 12 Security Ownership of Certain Beneficial Owners and Management......................... 46
Item 13 Certain Relationships and Related Transactions......................................... 46

PART IV

Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 46

SIGNATURES..................................................................................... 49

FINANCIAL STATEMENT SCHEDULES.................................................................. 50

PART I

ITEM 1. BUSINESS

General

We are a world leader in the design, manufacture and marketing of thermal
imaging and stabilized camera systems for a wide variety of commercial,
industrial and government applications. Our products are produced in a variety
of configurations to suit specific customer needs. These include compact hand-
held systems for surveillance or inspection applications; sealed, autonomous
systems for fixed continuous monitoring installations; and stabilized gimbaled
systems for airborne and shipborne use. Our thermal imaging systems use
advanced infrared imaging technology that detects infrared radiation, or heat,
enabling the operator to measure minute temperature differences and to see
objects in total darkness and in all types of adverse conditions, including
through smoke, haze and most types of fog. Many of our products also
incorporate visible light cameras, laser range finders, laser illuminators,
image analysis software and gyro-stabilized gimbal technology. An example of a
gyro-stabilized gimbal is the ball-shaped object that you might see attached to
the nose of a television news station's helicopter. These balls, or gimbals,
contain broadcast quality cameras and, sometimes, thermal imaging cameras,
which allow news stations to cover breaking stories or provide a view to areas
which may normally be closed due to safety reasons.

Our products provide state-of-the-art imaging and stabilization technology,
innovative packaging and competitive pricing. Our modular product designs and
image analysis software tools increase our ability to provide products that are
specifically tailored to meet individual customer requirements. Our infrared
products incorporate two types of leading edge infrared detector technology.
Our high performance products utilize "cooled" detector technology, offering
the best sensitivity and resolution for long-range applications or those
requiring high measurement precision. Our mainstream temperature measurement
products incorporate "uncooled" detector technology, which can be produced in
high volumes at lower prices. This technology is also being used for commercial
applications and surveillance missions requiring low cost or continuous
operation cameras.

Industry Overview

Background

Infrared radiation is light that is not visible because its wavelength is
too long to be detected by the human eye. Unlike visible light, infrared
radiation is emitted directly by all objects and materials that have a
temperature above absolute zero. Thermal imaging systems are used to detect
this infrared radiation and convert it into an electronic signal, which is then
processed and formatted into a video signal and displayed on a common TV
monitor. These systems are distinguished from one another by their capability
to detect and resolve infrared radiation, the clarity of the image displayed,
detection range, system reliability, price and adaptability to a variety of
customer requirements. Thermal imaging systems, unlike night vision goggles,
enable the operator to see objects in total darkness and through obscurants
such as smoke, haze and most types of fog. Thermal imaging systems are not
adversely affected by the presence of light, so they can be used day or night
without regard to ambient lighting issues. Commercial thermal imaging systems
can also detect and measure minute temperature differences, a critical tool for
a variety of industrial applications.

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

An infrared detector, which absorbs infrared radiation and converts it into
an electronic signal, is the primary component of a thermal imaging system.
Until recently, thermal imaging systems relied on infrared detectors that
needed to be cooled to near absolute zero (-196(degrees)C) in order to operate.
This technology is sometimes referred to as "cooled" detector technology. In
the past, cooling these detectors was problematic, particularly in field
applications requiring battery power. Today, many of our applications are
served by a new generation of "uncooled" detectors that operate at room
temperature. This feature allows for less expensive, smaller, lighter, more
energy efficient, solid-state systems. These factors are expected to increase
the demand for such systems in existing market segments and create demand in
new market segments, such as fire fighting and machine vision. FLIR has
established a multi-year exclusive relationship for the supply of uncooled
detectors into certain key markets. This relationship allows us to obtain top
quality uncooled detectors from the leading supplier of this technology.
Despite the advantages of uncooled technology, cooled systems will continue to
play a significant role in military and certain commercial applications due to
the longer-range performance capabilities of these systems. FLIR has developed
it's own "micro-cooler" which efficiently cools these detectors under battery
power in almost any environment. The availability of the micro-cooler, coupled
with FLIR's purchasing volume for cooled detectors from multiple suppliers has
resulted in strategic advantages in addressing the military, law enforcement
and surveillance markets that we serve with products based on this technology.

Markets

The Company is divided into two divisions, according to the markets they
serve. These are "Thermography," where infrared cameras that provide precise
non-contact temperature measurement capabilities are used for a variety of
industrial applications, and "Imaging," where a range of medium and high
performance stabilized infrared and visual imaging systems are used in a
variety of vision enhancement applications.

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

The Thermography market primarily consists of the following market segments:

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

Product Development Because of its non-destructive analysis
capability, thermography systems are a useful
tool in a wide variety of research and
development applications. As industry is driven
to make smaller, lighter and more powerful
electronic products, the problem of dealing
with self-generated heat is becoming
increasingly difficult. Our systems provide the
ability to view thermal distribution in real
time for products as small as hybrid IC
circuits and as large as jet or rocket engines.
Common applications include product development
of cell phones, laptop computers,
telecommunications equipment, consumer
appliances, automotive components and aircraft
engines. The thermography systems that are
applied in research and development
applications typically require very high
imaging performance and measurement precision,
coupled with extensive analysis and reporting
software.

Manufacturing Process Control The ability to determine whether a
manufacturing process will produce acceptable
results at the earliest point in the production
cycle is critical to quality assurance and cost
reduction. Thermography systems allow for the
monitoring and control of heat, which is
necessary in virtually all industrial
processes. Thermography systems can identify
moisture and contaminants and help identify the
thickness of material as well as the integrity
of the bonding of composite materials.
Thermography applications for manufacturing
process control are varied and extensive,
including monitoring the quality of metal,
plastic and glass cast parts, which are highly
dependent upon the temperature distribution in
the mold, monitoring the quality of paper,
which is dependent upon proper and even
moisture distribution during the drying
process, and monitoring the quality of products
such as rubber gloves, which can be thermally
examined to locate abnormally warm or cool
spots, indicating non-uniform thickness that
may result in a quality defect.

Emerging Market Opportunities New market segments for thermography are
developing due to the availability, cost
effectiveness and enhanced performance
characteristics of uncooled detector
technology. As system prices decline, uncooled
thermography systems will provide cost
effective solutions for a wide variety of new
commercial applications. These may include such
applications as the monitoring of food
distribution, storage and preparation. Other
applications such as automotive engine
analysis, animal care, leak detection and non-
destructive testing may grow as uncooled
detector technology becomes more widespread.

Imaging Market. The Imaging market is comprised of a broad range of imaging
applications where temperature measurement is not required, but vision
enhancement is. However, with our infrared camera systems, differences in
temperature are used to create an image. The primary focus of this segment is
to provide enhanced vision capabilities to a wide variety of military and non-
military customers. Our systems typically provide the capability to detect an
object over long distances, day or night, through adverse weather conditions.
This capability can be realized from a wide variety of platforms, including
airborne, vehicle mounted, man portable and fixed installation. Although the
majority of our imaging applications require the use of cooled detector
technology due to their long-range nature, uncooled systems are also being used
for certain ground-based security and handheld observation applications.
Customers in the military and law enforcement market segments demand affordable
high performance systems that can be mounted on a variety of helicopters,
airplanes and ships, operate in demanding climatic conditions and perform a
variety of tasks requiring high image quality and stabilization. Software
capabilities within the systems typically address specific customer mission
requirements and aircraft instrument or network interfaces.

The Imaging market primarily consists of the following market segments:

Search and Rescue Imaging systems are used in a variety of
airborne and shipborne search and rescue
missions, including the rescue of individuals
in danger or distress or by providing emergency
or disaster response support for missing
persons or accident victims. Such systems are
in use today by the US Coast Guard, US Marines,
the Air Force Reserve and Air National Guard.

Federal Drug Interdiction Imaging systems enable government agencies to
expand their drug interdiction and support
activities by allowing greater surveillance and
detection capabilities. FLIR has already
supplied several systems as part of "Plan
Colombia," a $1.3 billion US government program
for drug interdiction support. Systems are
also in use by the US Customs Service, DEA and
the FBI in airborne, ground and maritime
applications.

Surveillance and Imaging systems are used in surveillance and
Reconnaissance reconnaissance applications for the precise
positioning of objects or people from
substantial distances and for enhanced
situational awareness, particularly at night or
in conditions of reduced or obscured
visibility. FLIR systems are in use today by
the US Army, US Air force, several
international organizations and many federal
law enforcement agencies.

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

Border and Maritime Patrol Imaging systems are used in airborne, shipborne
and fixed installation applications for border
and maritime surveillance, particularly at
night, to monitor borders and coastal waters,
to monitor national fishing boundaries and to
prevent smuggling. FLIR systems cameras are
currently deployed along US borders under a US
Immigration and Naturalization Service program
called "ISIS."

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

Perimeter Security Imaging systems are used for ground-based
surveillance and perimeter security of
government and military installations,
particularly at night. The US Air Force is
currently using our imaging systems extensively
for perimeter security of its foreign airbase
locations.

Electronic News Gathering The use of airborne observation and broadcast
systems has become a standard tool for
television stations and broadcast networks.
News stations with this capability have the
ability to provide close-up coverage of events,
disasters or safety restricted areas to their
viewing audiences. This market segment
typically requires very high performance
daylight cameras installed in highly stabilized
gimbal turrets for mounting on news
helicopters. Systems need to provide high
resolution, jitter-free video, which can be
down-linked to the production studio or command
center on a real-time basis.

Law Enforcement FLIR is a leader in the supply of stabilized
airborne imaging systems for federal, state and
local law enforcement agencies. Agencies with
this type of equipment have the ability to
track suspects, locate lost people and provide
situational awareness to officers on the
ground. Systems designed for this market
typically have both an infrared and a visible
light camera installed in a smaller,
lightweight gimbal. Systems must be reliable,
easy to use and have good imaging and recording
capabilities. Applications should increase as
system size and weight continue to decline,
enabling the use of systems on small and
weight-restricted helicopters. In addition, law
enforcement agencies have established thermal
imaging as a primary support tool and should
continue to take advantage of public support
for this type of law enforcement.

Technology

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

System Design and Radiometry Our extensive experience in stabilization,
packaging and systems integration allow us to
effectively combine a wide variety of
technologies to design and manufacture imaging
systems to suit our customers needs. We also
possess the specialized system design knowledge
required to produce imaging systems that can
accurately measure temperature--a critical tool
for many commercial and industrial
applications.

Software Development We recognize that software is the key to
customization and evolution of our products.
Each of our products utilizes a combination of
custom embedded and desktop software products.
Currently, we possess the capability to develop
and refine all types of software used in our
systems. We also develop and deploy software
that is used for testing and characterization
of our systems.

Optical Design and Fabrication We currently design and manufacture many of the
sophisticated optics that are required to
produce a thermal imaging system. This
capability allows us to significantly shorten
the product development cycle and avoid costs
and delays associated with a reliance on third-
party optics suppliers.

Electronic Design We design signal processing circuits that
interface directly with detector arrays to
convert detected infrared radiation into
electronic signals. We also design the
electronic image processing that is necessary
to convert the electronic signals into standard
video format. Our design expertise lies in the
areas of reliability, low power consumption and
extreme environmental survivability.

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

Products

Thermography Products. In the Thermography division, we manufacture products
that are sold to commercial, industrial, research and machine vision customers.
For industrial customers, we have developed thermography systems that feature
accurate temperature measurement, storage and analysis. These systems comprise
two categories: handheld cameras and fixed installation cameras. All systems
use a common-core imaging system, the majority of which incorporate proprietary
uncooled sensor technology. The handheld cameras look and function much like a
standard camcorder, utilizing off-the-shelf technologies for battery power,
data recording and image display. The fixed installation cameras are housed in
industrial enclosures and have connectivity capability with common factory
automation systems. The products have continued to be evolved on an annual
basis with new models being introduced to the market featuring enhancements in
functionality and performance responding to customer requests. This keeps the
product line up to date, competitive and continuing to generate follow-on
upgrade revenues.

Our strong market position is enhanced and maintained with the offering of
key post-processing software packages that are developed internally.
Approximately 100 different accessories are available to customize the product
to a wide range of imaging and measurement applications. Customers are
supported through our "Infrared Training Center" business unit, which provides
comprehensive training, certification and applications engineering from several
corporate locations or at the customer's site.

ThermaCAM(R) PM Series The ThermaCAM line of thermography systems set
the standard that all other manufacturers
follow. This product was the world's first
commercially available handheld radiometric
system incorporating uncooled infrared focal
plane array detector technology. The product is
now in its third generation with the models
695, 675, 545 and 515. The system provides for
accurate temperature measurement of objects
from -40(degrees)C to +2000(degrees)C. The
imager is packaged in a camcorder-like aluminum
housing weighing less than five pounds. The
system features numerous automated features,
offering one-hand, point and shoot operation.
The Model 695, which was introduced in the fall
of 2000, features a built-in visual camera for
simultaneous image capture in both the visible
and infrared spectrum, as well as several
innovative features promoting ease of use
including auto-focus, auto-report generation
and automatic measurement modes.

The ThermaCAM series cameras have applications
across all thermography market segments,
including predictive and preventive maintenance
of electrical, mechanical and building HVAC
systems, locating and repairing defective power
transmission components or electrical
connections, predicting the end of life of
bearings in rotating machinery, evaluating the
integrity or amount of insulation in a building
and locating roof leaks and related damage.

ThermaCAM SC Series The ThermaCAM SC series cameras are similar to
the PM series cameras except they typically
incorporate high-definition cooled focal plane
array sensors that offer an increased level of
sensitivity, image quality and measurement
precision. The SC series cameras are designed
primarily for high-end research and development
applications. These systems, originally
introduced in 1996, now comprise three models:
the SC1000, SC2000 and SC3000. The SC1000
utilizes a cooled platinum silicide detector
and is well suited for applications in the
glass, plastics and petroleum refining
industries. The SC2000 utilizes an uncooled
microbolometer detector and is well suited for
general research and

development applications such as product
thermal testing or PC board inspections. The
SC3000 is the world's first camera utilizing a
quantum well infrared photodetecor (QWIP) and
features extremely high sensitivity
(0.03(degrees)C) and long wave operation. This
camera is well suited for non-destructive
testing applications and certain medical
research applications. Also introduced in 2000
were two low cost research and development
cameras, based on uncooled detector technology.
The SC300 and SC500 products are packaged with
a Windows-based software package that connects
to the camera through a PCMCIA card interface.

ThermaCAM Researcher The ThermaCAM Researcher is a suite of Windows-
based analysis software and interconnect
hardware for the SC series cameras. First
introduced in the first quarter of 2000, this
software and hardware product allows design
engineers to evaluate static or dynamic thermal
events and data. Information is captured and
stored on standard PC memory devices and can be
analyzed either within the package or by using
third party software such as MatLAB(R). The
product is used in applications including
product development, failure analysis, pilot
production monitoring and thermal management.

ThermoVision IRMV(R) The ThermoVision IRMV, introduced in early
1998, is a line of uncooled thermography
cameras for manufacturing process control and
machine vision applications. "IRMV," or
Infrared Machine Vision, is being rapidly
accepted as an alternate means for factory
automation in applications where heat is a
factor. Operating as a remote controlled
"smart" sensor in supervised operation or
integrated into a complete control system, the
ThermoVision IRMV sensor transmits data on a
continuous real-time basis to factory
automation equipment. Using built-in
intelligence, the ThermoVision IRMV can process
multiple areas of interest, trigger alarms or
transmit control data. A variety of flexible,
high-speed and reliable digital cable, fiber-
optic and wireless transmission media allow for
flexible system integration with controllers,
computers and vision systems. Examples of
ThermoVision IRMV applications include
monitoring and controlling the manufacture of
metal, plastic or glass parts, where thermal
properties are critical to the final product.
ThermoVision IRMV sensors are used to provide
the real-time feedback to assure consistent
product quality.

ThermaCAM Reporter Suite The ThermaCAM Reporter Suite (formerly AGEMA
Report software), the latest release of which
was introduced in mid-2000, allows for review,
analysis and processing of captured images and
measurement data. The software is a Windows-
based program that is easy to use and
affordable. The software suite comprises three
basic products, a wizard driven report writer,
an Explorer-style image viewer and a stand-
alone report viewer. The software is typically
packaged with the ThermaCAM PM or SC series
cameras, though it is capable of operating with
data gathered from other imaging products as
well.

Imaging Products. In the Imaging division, we manufacture products that are
sold to military, para-military, law enforcement, news stations, surveillance
and security customers. Typically we provide "vision enhancement" capability to
people who need to see in the dark, through adverse environments, or from
mobile platforms. We address several key segments, including airborne, ground,
maritime, broadcast and fire service.

For airborne applications, we have developed highly stabilized turrets
(gimbals), which typically contain one or more of the following: an infrared
imaging system, a visual camera, a laser range finder, a laser illuminator and
a spotter scope. The systems typically have sophisticated embedded software
providing tracking, GPS and aircraft information. For ground applications, we
manufacture two types of products: handheld products and platform mounted
products. All ground systems have a high performance infrared camera coupled
with an infrared lens system. Some units have visual cameras on board and
integrated pan and tilt capabilities. Platform mounted units are typically
housed in a weather-tight enclosure and feature remote control capabilities.
Handheld ground products typically look like militarized camcorders and utilize
commercial battery and viewfinder components, but are highly ruggedized. For
maritime applications, we manufacture a mix of airborne and shipborne products.
The products are similar to inverted airborne gimbals, but have a high level of
customization for the marine environment. Enhancements include hermetic
sealing, on-board heaters, wipers and corrosion resistant coatings. Maritime
units typically incorporate infrared cameras, visual cameras and laser range
finders.

In the broadcast segment, we manufacture highly stabilized turret platforms
(gimbals) that house broadcast quality TV cameras. The product is typically
mounted to an aircraft, usually a helicopter, and operated by the use of a hand
controller which remotely directs the stabilized turret. The broadcast camera
inside the turret provides the video output that is then either recorded on a
video recorder or down-linked to a production studio for live broadcast. These
systems are widely used by television news stations and law enforcement
professionals.

In the law enforcement segment, we manufacture a variety of stabilized
gimbal systems that typically contain both infrared and visual cameras. These
systems provide high-resolution imagery, day or night, for covert surveillance,
public safety and search and rescue applications. The systems are typically
mounted to a helicopter and greatly enhance the capabilities of the officers
during night operations.

Star SAFIRE(R) First introduced in 1998, the Star SAFIRE is a
3-axis gyro-stabilized, 360(degrees) field of
view thermal imaging system incorporating third
generation focal plane array detector
technology. Manufactured to military standards
and using three fields of view, the system
provides extended detection range capability
and visually advanced imagery. The system
permits multiple optical payloads in addition
to the infrared detector, including a TV camera
with a zoom lens for daylight operations, laser
rangefinder, laser illuminator or laser
designator. Examples of Star SAFIRE
applications include the detection of vehicles,
ships or planes transporting illegal narcotics,
and search and rescue for individuals in danger
or distress, maritime patrol and reconnaissance
missions.

Star SAFIRE II(R) Introduced in 1999, the Star SAFIRE II is an
enhanced evolution on the Star SAFIRE. The
system features improved performance through
the use of a military qualified 5-axis gyro-
stabilized, gimbal and a micro-scanned indium
antimonide third generation focal plane array
detector. Featuring a 30% increase in infrared
magnification, the system provides an extended
detection range capability, offering greater
mission safety and effectiveness. The system
also permits multiple optical payloads in
addition to the infrared detector, including a
TV camera with a zoom lens for daylight
operations, laser rangefinder, laser
illuminator or laser designator. Examples of
Star SAFIRE applications include search and
rescue, maritime patrol, unmanned air vehicles
(UAV), reconnaissance missions, border and
coastal surveillance and target identification
and designation.

ThermoVision(R) 1000 The ground-based ThermoVision 1000 (formerly
AGEMA 1000), first introduced in 1992, is a
fixed or tripod mounted thermal imaging system
that can detect small objects up to several
kilometers away under extreme environmental
conditions, day or night. The system features
mission specific optical configurations and a
highly ruggedized enclosure. Capable of remote
operation, the system has on-board image
processing capabilities, which enhance target
detection and identification. The ThermoVision
1000 can also be integrated into a gimbal for
airborne applications. Examples of ThermoVision
1000 applications include perimeter security of
military bases and sensitive government
installations or buildings. The system is
currently deployed worldwide under the US
Government TASS program.

ThermoVision Sentry The ground-based ThermoVision Sentry, first
introduced in 1998, is the first fixed or
tripod mounted thermal imaging system featuring
uncooled detector technology. Using this
technology, this system can operate unattended
for very long periods of time without
maintenance. The system incorporates a
sophisticated pan and tilt mechanism that has
highly accurate, high speed pointing capability
and automated scanning functions. Designed for
automated perimeter or facility surveillance,
the system has on-board image alarm functions
and bi-directional remote communication
capabilities. Examples of ThermoVision Sentry
applications include perimeter security of high
value or high security environments, shipboard
navigation and coastal surveillance
applications.

SeaFLIR(R) The SeaFLIR, developed under the US Navy
"MarFLIR" contract and introduced in 1999, is
an inverted stabilized 9" gimbal infrared
imaging system designed specifically for the
marine environment. Able to withstand
significant shock, vibration, and sea-spray,
the SeaFLIR is hermetically sealed and contains
an on-board de-icing system. The system
incorporates a high performance indium
antimonide infrared focal plane array sensor
with a 10x continuous zoom lens, a laser range
finder and an auto-tracker. This system is
designed to be mounted on a mast, wheelhouse or
weapons platform. Examples of SeaFLIR
applications include, foul weather navigation,
anti-piracy, search and rescue, mine detection
and collision avoidance.

MilCAM(R) The MilCAM, introduced in 1997, is a high
performance handheld infrared imaging system
designed for tactical use by military, para-
military and law enforcement agencies engaged
in long range surveillance, target observation,
artillery observation/fire correction,
perimeter security and border surveillance. The
system offers high-resolution imaging in total
darkness, through smoke, haze and other
obscurants. Small and lightweight, the system
uses off-the-shelf batteries and weighs less
than 5 pounds. Currently available in three
models, the MilCAM LE, XP and Ranger, the
MilCAM line leads the market in small size, low
power and long-range capabilities. The MilCAM
LE features a cooled platinum silicide detector
and is designed for law enforcement
applications. The MilCAM Ranger is a fixed
installation or tripod mounted product that
offers very long-range performance and remote
control capabilities.

UltraMedia(R) III The UltraMedia III, introduced in 1999, is a
high resolution, high stabilization electronic
news gathering system for airborne use.
Utilizing the latest broadcast camera
technology, the UltraMedia III offers industry
leading magnification and stability. The
hermetically sealed gimbal is small and
lightweight and has been certified for use on
most commercial helicopters.

UltraMedia LE The UltraMedia LE, introduced in 1999, is a
compact digital lowlight surveillance system
that delivers similar performance to the
UltraMedia III systems, but also adds extreme
low-light imaging capability providing covert
surveillance capabilities at night. The product
was developed to meet the needs of federal,
state and local law enforcement agencies
desiring covert observation capabilities at
extreme standoff distances.

FireFLIR(R) The FireFLIR, introduced in 1999, is a
lightweight, hands-free, helmet-mounted thermal
imaging system for fire fighting applications.
Weighing about 4 pounds, the FireFLIR
incorporates an uncooled microbolometer
detector that delivers crisp, high-resolution
monochrome and color images. The system's
unique design allows it to be used as a hands-
free helmet mounted system or as a hand held
imaging system. The system features automated
capabilities for locating hot spots in walls
and determining the temperature of objects in
the scene. An optional microwave transmitter
sends the video signal to a remote location for
other crewmembers to view.

Ultra 7000(R) The Ultra 7000, introduced in 1999, is an
airborne gimbal-mounted, dual imaging system
incorporating a state-of-the-art indium
antimonide infrared imaging detector and a
color CCD TV camera. At 9" in diameter and 26
pounds, the Ultra 7000 is the smallest and
lightest high performance dual system
available. Industry-leading features include a
continuous zoom infrared lens, built-in auto-
tracking capability, GPS annotation and an
ergonomic hand controller. The system is
designed primarily for law enforcement
applications where the continuous zoom and
auto-tracker aid in keeping suspects in the
field of view. The system's small size and
light weight make it attractive for use on
smaller, less-expensive helicopters. The system
is also available with a reduced size
electronics set for use in unmanned aircraft
applications.

UltraForce II(R) The UltraForce II, introduced in the fourth
quarter of 2000, is a high performance multi-
sensor gyro-stabilized gimbal system designed
for law enforcement or para-military use. The
system incorporates a high performance, cooled
infrared imaging sensor, utilizing QWIP
technology, together with a high-resolution 3-
chip CCD TV camera capable of imaging in
moderately low light conditions. This product
represents the first longwave focal plane array
based gimbal in the market. Features include
triple infrared fields of view, 54X TV image
magnification and high magnification spotter
scope or laser range finder

Customers

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

Our customers are located around the world and are serviced by a global
distribution organization covering more than 60 countries. In the year 2000,
our sales were split almost equally between the US and international markets.
Many of our sales in the Imaging market represent the first deliveries of
multi-year contracts. Typically, once a product is chosen for use for a
specific aircraft or program, it will remain in use for future requirements
unless significantly better technology is introduced.

Sales, Distribution and Customer Service

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

We have distinct sales channels for industrial, airborne, ground, maritime,
broadcast and fire service customers. We sell our Thermography products
worldwide through a direct sales staff of more than 100 people and a network of
75 distributors (many with multiple offices) and representatives, each with an
exclusive right to sell our products in a defined geographic area. We sell our
Imaging products through more than 50 direct sales personnel and approximately
50 independent representatives and distributors covering all major markets
worldwide. Included in this total are technical and customer support staff in
the United States and Europe who provide technical training and operational
assistance to direct and indirect sales personnel as well as to customers.

Additionally, we maintain service facilities at our factories in Portland,
Oregon; N. Billerica (Boston), Massachusetts; Danderyd (Stockholm), Sweden; and
West Malling (London), United Kingdom, and at our subsidiary locations in
Brussels, Belgium; Frankfurt, Germany; Toronto, Canada; Paris, France; and
Milan, Italy. Each of our service facilities has the capability to perform
calibrations required to service commercial thermal imaging systems. We employ
more than 30 people worldwide in our service organizations. We also maintain
limited service capability in three additional foreign locations under the
direction of our independent representatives or distributors. Our product
marketing involves Internet promotion, advertising, direct mail, press tours,
technical articles for publications and participation in approximately 100
trade shows per year.

Backlog

At December 31, 2000 we had an order backlog of approximately $66 million.
Backlog may not be indicative of revenue for any future periods because our
sales to Thermography customers are generally made pursuant to purchase orders
rather than long term contracts and, accordingly, the backlog at any given time
is for immediate shipments. In contrast, the backlog for the Imaging business
is heavily dependent upon the timing of receipt of government contracts that
may have multiple year delivery schedules. Furthermore, delivery schedules are
frequently revised to accommodate changes in customer needs. Although orders
received by us are generally subject to cancellation, in the case of most
orders included in backlog, the customer is obligated to pay certain costs
and/or penalties for cancellation. We do not include future options under
contracts in backlog until funded delivery orders are issued against those
options.

Manufacturing

We manufacture many of the critical components for our products, including
gimbals, optics, certain detectors and high-speed motors, which minimizes lead
times, facilitates prompt delivery of our products, controls costs and ensures
that these components satisfy our quality standards. We purchase other parts
pre-assembled, including detectors, coolers, circuit boards, cables, and wiring
harnesses. We purchase certain key components from sole or limited source
suppliers. Accordingly, we could experience late deliveries or a scarcity in
the supply of some of these components.

Our manufacturing operations are, from time to time, audited by certain of
our OEM customers, which include several major aircraft manufacturers, and have
been certified as meeting their quality standards. Our facilities in Sweden and
the U.K. are ISO 9000 certified. We are in the process of obtaining ISO 9000
certification in Portland and will proceed with the certification process with
our N. Billerica facility.

Competition

Competition in the market for thermal imaging equipment is significant. We
believe that the principal competitive factors in our market are performance,
cost, customer service, product reputation and effective marketing and sales
efforts. Our competitors are different in each market segment. In the
Thermography market, principal competitors include Raytheon Company, NEC San-
Ei, Nippon Avionics Co., Ltd. and Indigo Systems. In the Imaging market, we
compete with BAE Systems, Wescam Ltd., Lockheed Martin Corp., The Boeing
Company, El-Op, Sagem and Thales. Many of these competitors have substantially
greater financial, technical and marketing resources than we do.

Proprietary Rights

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

Employees

As of December 31, 2000, we had 454 employees in the United States and 233
employees outside of the United States. We have been generally successful in
attracting highly skilled technical, marketing and management personnel to
date. None of our employees in the United States are represented by a union or
other bargaining group. Employees in Sweden and Italy are represented by
unions. We believe our relationships with our employees and unions are good.

ITEM 2. PROPERTIES

We lease facilities under various operating leases that expire in 2001
through 2006. The leases calls for fixed monthly payments over their term. The
following summarizes our primary leased facilities:

Lease Expiration
Location Date Square Feet
-------- ---------------- -----------

FLIR Systems, Inc.--Portland, Oregon........ 2005 74,546
FLIR Systems AB--Danderyd, Sweden........... 2004 63,000
FLIR Systems Boston, Inc.--N. Billerica,
Massachusetts.............................. 2005 102,000
FSI Automation, Inc.--Edmonds, Washington... 2003 1,842
FLIR Systems International Ltd.--West
Malling, United Kingdom.................... 2006 14,300
FLIR Systems Ltd.--Toronto, Canada.......... 2002 4,161
FLIR Systems S.A.R.L. --Paris, France....... 2002 2,900
FLIR Systems GmbH--Frankfurt, Germany....... 2003 2,200
FLIR Systems s.r.l.--Milan, Italy........... 2004 2,200
FLIR Systems Belgium--Brussels, Belgium..... 2002 1,270

ITEM 3. LEGAL PROCEEDINGS

On July 24, 2000, a complaint consolidating five previously filed complaints
and alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder was filed against the Company, Robert P. Daltry, J.
Kenneth Stringer, III, and J. Mark Samper in the United States District Court
for the District of Oregon on behalf of a class of purchasers of the Company's
common stock between March 3, 1999 and March 6, 2000. On January 8, 2001, the
defendants in the action reached an agreement to settle the litigation for the
amount of $6.0 million, $5.5 million of which will be paid by the Company's
insurance carrier and $0.5 million by the Company. The settlement has received
preliminary court approval. A hearing on final court approval will be held on
April 3, 2001.

The Securities and Exchange Commission (the "SEC") is conducting an
investigation relating to the Company. The investigation is a non-public, fact-
finding inquiry to determine whether there have been any violations of the
federal securities laws. The Company is cooperating fully with the SEC
investigation.

The Company is involved in other litigation and various legal matters that
are being defended and handled in the ordinary course of business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter
ended December 31, 2000.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

The common stock of FLIR Systems, Inc. has been traded on the Nasdaq
National Market System since June 22, 1993, under the symbol "FLIR." The
following table sets forth, for the quarters indicated, the high and low sales
price for Common Stock reported on the Nasdaq National Market System.

2000 1999
------------ -------------
High Low High Low
------ ----- ------ ------

First Quarter................................... $18.63 $8.81 $23.53 $17.13
Second Quarter.................................. 10.25 5.25 18.81 11.75
Third Quarter................................... 9.13 5.50 18.00 12.63
Fourth Quarter.................................. 6.50 3.06 17.00 11.00

At December 31, 2000, there were approximately 300 holders of record of our
common stock and 14,548,370 shares outstanding. We have never paid cash
dividends on our common stock. We intend to retain earnings for use in our
business and, therefore, do not anticipate paying cash dividends in the
foreseeable future.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The financial data in the table has been restated and reclassified. See Note
15 and Note 16 to the Consolidated Financial Statements for information
concerning the Company's restatements and reclassifications of its financial
statements.

Year Ended December 31,
--------------------------------------------------
2000(1) 1999(2) 1998 1997(3) 1996
-------- ---------- ---------- -------- --------
(In thousands, except per share data)
(Restated) (Restated)

Statement of Operations
Data
Revenue.................... $186,357 $178,556 $177,254 $141,563 $110,198
Cost of goods sold......... 104,764 123,665 87,384 86,835 57,864
-------- -------- -------- -------- --------
Gross profit.............. 81,593 54,891 89,870 54,728 52,334
Operating expenses:
Research and development.. 28,502 29,006 26,958 17,607 13,574
Selling and other
operating costs.......... 63,916 62,899 53,045 37,854 28,402
Combination costs......... -- 9,301 -- 36,450 --
-------- -------- -------- -------- --------
Total operating costs.... 92,418 101,206 80,003 91,911 41,976
(Loss) earnings from
operations............. (10,825) (46,315) 9,867 (37,183) 10,358
Interest expense and
other..................... 11,504 5,771 4,471 3,553 212
-------- -------- -------- -------- --------
(Loss) earnings before
income taxes........... (22,329) (52,086) 5,396 (40,736) 10,146
Income tax provision
(benefit)................. 3,725 2,295 1,806 (11,548) 2,723
-------- -------- -------- -------- --------
Net (loss) earnings from
continuing operations.. (26,054) (54,381) 3,590 (29,188) 7,423
Discontinued operations,
net of taxes.............. -- -- -- -- (830)
-------- -------- -------- -------- --------
Net (loss) earnings..... $(26,054) $(54,381) $ 3,590 $(29,188) $ 6,593
======== ======== ======== ======== ========
Net (loss) earnings per
share:
Basic..................... $ (1.80) $ (3.82) $ 0.28 $ (3.69) $ 0.89
======== ======== ======== ======== ========
Diluted................... $ (1.80) $ (3.82) $ 0.27 $ (3.69) $ 0.86
======== ======== ======== ======== ========

Balance Sheet Data:
Working capital............ $ 65,869 $ 4,481 $ 70,011 $ 47,852 $ 58,596
Total assets............... 166,991 196,487 233,855 185,278 104,860
Short-term debt............ 18,819 82,331 42,638 32,706 8,529
Long-term debt, excluding
current portion........... 75,485 1,497 19,296 20,634 24,106
Total shareholders'
equity.................... 29,025 56,219 109,874 73,033 49,456

- --------
(1) During 2000, we recorded one-time pre-tax charges of $20.5 million
primarily related to streamlining our manufacturing and corporate
operations. The charges include $9.0 million related to eliminating older
or lower margin products, $8.8 million related to cost accumulations and
asset valuations that have been written off as a result of these
operational changes and $2.2 million for workforce reductions and related
costs. We also recorded a charge of $0.5 million related to the settlement
of the class action lawsuit. These charges are reflected in cost of goods
sold for $13.3 million, operating expenses for $7.0 million, and other
expenses of $0.2 million.

(2) In connection with the merger with Inframetrics, Inc., which was effective
on March 30, 1999, we recorded one-time pre-tax charges of $34.6 million.
The charges consisted of $25.3 million of inventories, which is included in
cost of goods sold, due to the elimination of duplicative product lines,
and $9.3 million of transaction related costs, which are reported as
combination costs. This merger was accounted for as a pooling of interests.

(3) In connection with the acquisition of AGEMA Infrared Systems AB, which was
effective on December 1, 1997, we recorded a one-time pre-tax charge of
$52.5 million. The charge consisted of $36.4 million of in-process research
and development and merger-related costs, which are included in combination
costs, and $16.1 million of inventories due to the creation of duplicative
product lines, which is included in cost of goods sold. This acquisition
was accounted for under the purchase method.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward Looking Statements

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

Overview

FLIR Systems was founded in 1978 and has become a world leader in the
design, manufacture and marketing of thermal imaging and stabilized camera
systems for a wide variety of commercial, industrial and government
applications. Our business is organized around two principal markets, Imaging
and Thermography. Through the acquisition of AGEMA Infrared Systems AB,
headquartered in Danderyd, Sweden, in 1997 and the pooling of interest merger
with Inframetrics, Inc., headquartered in N. Billerica, Massachusetts, in 1999,
the Company has experienced significant change in its structure and operations.
In the Thermography market where each of the three previously separate
companies competed, there was a significant transition as the Company phased
out products utilizing "cooled" technology and focused on the "uncooled"
products that are produced in Sweden. In the Imaging market, the merger with
Inframetrics brought a certain set of complimentary products to the previous
portfolio of products carried by the Company.

We continue to enhance our state-of-the-art products within both markets, as
well as develop products for new market applications that use advanced thermal
imaging technologies. "Uncooled" detector technology operates at room
temperature, allowing for systems that are less expensive, smaller, lighter,
and more energy efficient. Additionally, we have developed higher-margin image
analysis software tools that enhance the capability of our thermography
products. As hardware prices decline, the sophistication of image analysis
software and the incremental functionality provided by such analysis tools are
expected to become a more critical component of thermography systems.

During the course of 2000, the Company, under new management, has been
restructuring its operations to improve profitability. As a result, in 2000,
the Company recorded charges totaling $20.5 million primarily associated with
realigning its operations to focus on higher margin products, eliminating aged
or lower margin products, improving manufacturing efficiencies and reducing
production and distribution costs. These charges include $9.0 million to cost
of goods sold to adjust inventory reserves related to certain low margin
products and older products being phased out. In addition, $8.8 million related
to cost accumulation and asset valuations have been written off as a result of
these operational changes, $2.2 million was incurred associated with workforce
reductions and related costs, and $0.5 million was recorded related to the
settlement of the class action lawsuit.

International revenue accounted for approximately 48.4%, 50.2% and 47.6% of
our revenue in 2000, 1999 and 1998, respectively. We anticipate that
international sales will continue to account for a significant portion of
revenue. With the production and distribution of our thermography products in
Sweden contributing a

significant volume of sales denominated in foreign currencies, we have exposure
to foreign exchange fluctuations and changing dynamics of foreign
competitiveness based on variations in the value of the US dollar relative to
other currencies.

The Company typically experiences longer payment cycles on its international
sales, which can have an adverse impact upon the Company's liquidity. In
addition, substantial portions of the Company's operations are conducted
outside the United States, particularly in Sweden. International sales and
operations may be subject to risks such as the imposition of governmental
controls, export license requirements, restrictions on the export of critical
technology, political and economic instability, trade restrictions, labor union
activities, changes in tariffs and taxes, difficulties in staffing and managing
international operations, and general economic conditions.

The Company experiences fluctuations in orders and sales due to seasonal
variances and customer sales cycles, such as the seasonal pattern of
contracting by the US and certain foreign governments, the frequent requirement
by international customers to take delivery of equipment prior to the end of
December due to funding considerations, and the tendency of commercial
enterprises to fully utilize annual capital budgets prior to expiration. Such
events have resulted and could continue to result in certain fluctuations in
quarterly results in the future. As a result of such quarterly fluctuations in
operating results, the Company believes that quarter-to-quarter comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as indicators of future performance.

Restatements and Reclassifications

In March 2001, the Company determined that it was necessary to restate its
1999 and 1998 consolidated financial statements and its interim 2000 and 1999
consolidated financial statements. The restatements were effected after the
Company determined, based on a review of the specific terms and conditions
underlying certain sales transactions recorded in 1999 and 1998, that revenue
was recognized with respect to such transactions during periods or in amounts
that were not consistent with the Company's revenue recognition policy.
Accordingly, the restatements include the deferral of revenue from the
reporting period in which the revenue was originally recorded to the reporting
period in which the revenue would be properly recorded under the Company's
revenue recognition policy. The related cost of sales and certain operating
costs have also been restated as appropriate. The restatements also include a
revision in the accounting for certain assets recorded in connection with the
merger with Inframetrics, Inc. in 1999.

As a result of the restatements, previously reported revenue for the year
ended December 31, 1998 was reduced by $11.1 million, previously reported
revenue for the year ended December 31, 1999 was increased by $0.7 million, and
revenue for the year ended December 31, 2000 was increased by $8.1 million. As
a result of the restatements, the previously reported net earnings for the year
ended December 31, 1998 was reduced by $6.2 million, the previously reported
net loss for the year ended December 31, 1999 was reduced by $0.3 million, and
the net loss for the year ended December 31, 2000 was reduced by $5.6 million.

There have also been reclassifications made in 1998 and 1999 to report
results on a consistent basis with that of 2000. These reclassifications had no
impact on net earnings for the years presented. See Notes 15 and 16 to the
Consolidated Financial Statements for information concerning these restatements
and reclassifications. All of the information presented in the Management
Discussion and Analysis reflect the impact of these restatements and
reclassifications.

Results of Operations

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

Year Ended December 31,
-----------------------------
2000(1) 1999(2) 1998
------- ---------- ---------
(Restated) (Restated)

Revenue.................................... 100.0 % 100.0 % 100.0%
Cost of goods sold......................... 56.2 69.3 49.3
----- ----- -----
Gross profit............................. 43.8 30.7 50.7
Operating expenses:
Research and development.................. 15.3 16.2 15.2
Selling and other operating costs......... 34.3 35.2 29.9
Combination costs......................... -- 5.2 --
----- ----- -----
Total operating expenses................. 49.6 56.6 45.1
(Loss) earnings from operations......... (5.8) (25.9) 5.6
Interest expense........................... 6.5 4.4 1.8
Other (income) and expenses, net........... (0.3) (1.1) 0.7
----- ----- -----
(Loss) earnings before income taxes..... (12.0) (29.2) 3.1
Income tax provision....................... 2.0 1.3 1.0
----- ----- -----
Net (loss) earnings........................ (14.0)% (30.5)% 2.1%
===== ===== =====

- --------
(1) Excluding the one-time charges in connection with the 2000 charges related
to streamlining our manufacturing and corporate operations, cost of goods
sold, gross profit, operating expenses, loss before taxes and net loss
would have been 49.1%, 50.9%, 45.8%, (1.0)%, and (3.0)%, respectively.

(2) Excluding the one-time charges of $34.6 million in connection with the
acquisition of Inframetrics, cost of goods sold, gross profit, loss from
operations and net loss in 1999 would have been 55.1%, 44.9%, (6.6)% and
(11.1)%, respectively.

Years ended December 31, 2000, 1999 and 1998

Revenue. Revenue increased 4.4% from $178.6 million in 1999 to $186.4
million in 2000. The increase was due to higher volumes in the Imaging business
as revenue in that business segment increased 10.3% from $89.9 million in 1999
to $99.2 million in 2000. The increase in Imaging revenue was experienced
across most of the product segments. Revenue for Thermography in 1999 and 2000
amounted to $88.6 million and $87.1 million, respectively. Revenue for
Thermography remained relatively constant, as revenue from an increase in units
delivered was offset by approximately $4.9 million associated with the decline
in the value of foreign currencies to the US dollar during the revenue period.

Revenue in 1998 was $177.3 million compared to revenue in 1999 of $178.6
million. In 1999, revenue from the Imaging business increased by $8.8 million,
or 10.9%, while revenue from the Thermography business decreased by $7.5
million, or 7.8%. The increase in Imaging revenue was due to increased demand
in both the governmental and commercial market segments. The decrease in
Thermography revenue was primarily due to the loss of market share as a result
of the consolidation of the business base after the acquisition of AGEMA (1997)
and the merger with Inframetrics (1999). The loss of market share resulted from
the Company's focus on the consolidation of operations and distribution
channels, the elimination of duplicative or overlapping product lines and the
reaction of the market to those changes.

International revenue in 2000 was $90.2 million, representing 48.4% of
revenue. This compared to 1999 international revenue of $89.6 million, or 50.2%
of revenue, and 1998 international revenue of $84.4 million, or 47.6% of
revenue.

Gross profit. As a percentage of revenue, gross profit in 2000 was 43.8%
compared to 30.7% in 1999. One-time charges of $13.3 million and $25.3 million
were recorded in 2000 and 1999, respectively. Without

these one-time charges, gross profit would have been 50.9% in 2000 and 44.9% in
1999. This improvement in margin is partially attributable to the decrease in
manufacturing costs that has resulted from the streamlining of operations that
took place in 2000.

As a percentage of revenue, gross profit in 1998 was 50.7% compared to 44.9%
in 1999, excluding the impacts of the one-time charges recorded in that year.
The gross profit in 1999 was negatively impacted by excess manufacturing costs,
partially as a result of the merger and before certain consolidation activities
occurred.

Research and development. As a percentage of revenue, research and
development expense decreased slightly to 15.3% in 2000, from 16.2% in 1999.
Research and development expense for 2000 included $2.9 million related to cost
accumulations and asset valuations that have been written off as a result of
operational changes and charges totaling $0.2 million associated with workforce
reductions and related costs. Without these charges, research and development
expense would have been 13.6% of revenue.

As a percentage of revenue, research and development expense increased
slightly to 16.2% in 1999 from 15.2% in 1998. Research and development expense
increased in 1999 to facilitate the introduction of new products including the
ThermaCAM 595, SC3000, MarFLIR, FireFLIR, Ultra7000, UltraMedia III, Star
SAFIRE and Star SAFIRE II.

Selling and other operating costs. Selling and other operating costs
increased 1.6%, from $62.9 million in 1999 to $63.9 million in 2000. The
increase in selling and other operating costs were due to one-time charges in
2000 of $3.9 million principally related to workforce reductions, the
settlement of the class action lawsuit and write offs of demonstration
equipment, as well as additional legal and audit fees incurred during 2000,
partially offset by cost savings generated in 2000 as a result of streamlining
activities initiated during the year. As a percentage of revenue, selling and
other operating costs were 34.3% and 35.2% in 2000 and 1999, respectively.
Without these one-time charges, selling and other operating costs would have
been $60.0 million or 32.2% of revenue in 2000.

Selling and other operating costs increased 18.6% in 1999 from $53.0 million
in 1998 to $62.9 million in 1999. The $9.9 million increase in selling and
other operating costs in 1999 in absolute dollar terms was due to a variety of
factors including expense increases due to anticipated higher volumes of
business that were not fully realized, implementation costs for an Enterprise
Resource Planning System, higher commission expense, increased bad debt expense
and higher costs from our UK operations.

Interest expense. Interest expense was $12.0 million, $7.8 million and $3.2
million for the years ended 2000, 1999 and 1998, respectively. The increase in
expense was primarily due to increased debt levels and increased interest
rates. The increased interest rates were due to the application of default
rates for most of 2000 under the Company's Credit Agreement resulting in the
average borrowing rate of 7.86% at December 31, 1999 increasing to a rate of
12.25% as of December 31, 2000. The increase in expense was also due to the
fair value adjustment of $1.3 million on the interest rate swap agreements.

Income taxes. The Company's income tax provision was $3.7 million, $2.3
million and $1.8 million in 2000, 1999 and 1998, respectively. The mix in
taxable income or loss between the Company's US and foreign operations in each
of these years significantly impacted the recording of the tax provision. The
tax provisions in 2000 and 1999 primarily reflect taxes provided on income
generated in the Company's foreign subsidiaries, principally Sweden. The
substantial losses generated in the United States, however, have not been
benefited in those years due to inability to carry such losses back to prior
years and valuation allowances recorded against the resulting deferred tax
assets.

acquired in-process research and development recorded in connection with the
AGEMA acquisition. The realization of this deferred tax asset is dependent upon
the ability of foreign subsidiaries to remit earnings to the US parent.
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" (SFAS 109) requires that the tax benefits described above be recorded as
an asset to the extent that management assesses the utilization of such assets
to be "more likely than not." Otherwise, a valuation allowance is required to
be recorded. Based on this guidance, management has recorded a substantial
valuation allowance amounting to $24.1 million against such deferred tax
assets. Management believes, primarily as a result of the significant
operational restructuring in the third quarter of 2000, that the net deferred
tax asset of $23.7 million reflected on the December 31, 2000 consolidated
balance sheet, is realizable based on future forecasts of taxable income. In
addition, the Company is planning to implement various tax planning strategies
to assist in the utilization of such deferred tax assets.

Future levels of taxable income are dependent upon general economic
conditions, including but not limited to continued growth of the Thermography
and Imaging markets, competitive pressures on sales and gross margins,
successful implementation of tax planning strategies, and other factors beyond
the Company's control. No assurance can be given that sufficient taxable income
will be generated for full utilization of the unreserved deferred tax assets.
Accordingly, the Company may be required to record an additional valuation
allowance against the deferred tax assets in future periods if its future
forecasts of taxable income and/or tax planning strategies are not achieved.

Liquidity and Capital Resources

At December 31, 2000, the Company had short-term borrowings net of cash on
hand of $5.9 million compared to $77.0 million at December 31, 1999. The
decrease in short-term borrowings during the year was principally due to the
reclassification of $74.9 million to long-term debt as a result of an amendment
to the Company's Credit Agreement in January 2001.

Cash provided by operating activities in 2000 was $3.9 million, compared to
net cash used by operating activities in 1999 of $16.1 million. Cash provided
by operating activities was principally due to reductions in accounts
receivable and inventories offset by the net loss for the year, net of non-cash
charges, and a reduction in accounts payable and accrued liabilities.

At December 31, 2000, the Company had accounts receivable in the amount of
$39.7 million compared to $56.8 million at December 31, 1999. The Company has
increased its collection efforts and tightened its credit policies. Days sales
outstanding decreased from 116 at December 31, 1999 to 78 at December 31, 2000.
The timing of sales, particularly the recording of large system sales, can
significantly impact the calculation of days sales outstanding at any point in
time.

At December 31, 2000, the Company had inventories on hand of $55.8 million
compared to $65.1 million at December 31, 1999. The decrease was primarily due
to inventory reduction initiatives and write-offs of certain inventories in
connection with restructuring our operations in 2000.

The Company had accounts payable of $16.2 million at December 31, 2000,
compared to a balance of $22.1 million on December 31, 1999. The decrease in
accounts payable was primarily attributable to the lower operating expenses and
inventory purchases during the fourth quarter of 2000 compared to earlier
periods and to the increase in the availability of cash to settle trade
accounts.

At December 31, 2000, the Company had accrued payroll and other current
liabilities of $19.2 million compared to $27.2 million on December 31, 1999.
The decrease is principally due to the reduction of deferred revenue that arose
in 1999 in connection with the timing of revenue recognition on shipments made
in that year.

The Company's investing activities have consisted primarily of expenditures
for fixed assets, which totaled $7.3 million and $7.5 million for the years
ended December 31, 2000 and 1999, respectively.

The Company entered into a Credit Agreement with a number of lender banks as
of December 16, 1999. This Credit Agreement was amended and is effective as of
January 23, 2001. The Credit Agreement, as amended, provides the Company with a
borrowing facility to a maximum of $93.4 million. As of December 31, 2000, the
Company had $89.9 million of borrowings in addition to $0.8 million of standby
letters of credit, with $2.7 million of financing available to the Company. At
December 31, 2000, the interest rate under the Amended Credit Agreement was
12.25%.

The Amended Credit Agreement provides that the maximum borrowing facility
will be permanently reduced by 50% of the first $5.0 million of principal
payment and at which time the financing availability will be fixed at an amount
not to exceed $5.2 million. Principal payments exceeding $5.0 million will
permanently reduce the maximum borrowing facility on a dollar-for-dollar basis.

The interest rate on the borrowings under the Amended Credit Agreement as of
December 31, 2000 and January 23, 2001 was the prime rate of the primary lender
for domestic borrowings plus 2.75%. The interest rate on borrowings decline as
certain principal payments are made. A reduction of 25 basis points is provided
after the payment of $7.5 million and an additional 25 basis point reduction
after each $5.0 million principal reduction thereafter, subject to a total
reduction of 100 basis points.

The Amended Credit Agreement requires minimum cumulative principal payments
totaling not less than $2.5 million on or before March 31, 2001, $5.0 million
on or before June 30, 2001, $9.0 million on or before September 30, 2001, $15.0
million on or before December 31, 2001, $20.0 million on or before March 31,
2002, and $25.0 million on or before June 30, 2002. The Amended Credit
Agreement expires on July 15, 2002.

The Amended Credit Agreement includes one financial covenant related to the
Company achieving certain levels of profitability beginning with the quarter
ending March 31, 2001. The Amended Credit Agreement is collateralized by
substantially all of the assets of the Company.

Additionally, the Company, through one of its subsidiaries, has a 40,000,000
Swedish Kronar (approximately $4.2 million) line of credit at 4.3% at December
31, 2000. At December 31, 2000, the Company had $2.7 million outstanding on
this line. This credit line is secured primarily by accounts receivable and
inventories of the subsidiary and is subject to automatic renewal on an annual
basis.

We believe that our existing cash, cash generated by operating activities,
available credit facilities and financing available from other sources,
combined with our continuing efforts to control costs, to improve the
collections of accounts receivable and better manage our inventory levels will
be sufficient to meet our cash requirements for the foreseeable future. At the
present, we do not have any significant capital commitments for the coming
year.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company's exposure to market risk for changes in interest rates relates
primarily to its short-term and long-term debt obligations. The debt
obligations are at variable rates. The Company has not historically utilized
interest rate swap or similar hedging arrangements to fix interest rates, but
in March 2000, the Company entered into interest rate swap agreements with one
of its lender banks for a notional amount of $40.0 million. A change in
interest rates on the debt obligations impacts the interest incurred and cash
flows. A change in interest rates related to the swap agreements impacts
interest incurred, cash flows and the fair value of the instrument.

The sensitivity analysis related to the Company's debt obligation assumes a
change of 10% in the variable interest rates from their levels of December 31,
2000 with all other variables held constant. A 10% increase in market interest
rates would result in an increase in interest expense of $0.9 million for the
year ended December 31, 2000. A 10% decrease in market interest rates would
result in a decrease in interest expense of $0.9 million for the year ended
December 31, 2000.

The sensitivity analysis related to the Company's swap agreements assumes a
change of 10% in the variable interest rates from their levels of December 31,
2000 with all other variables held constant. A 10% increase in market interest
rates would result in a decrease in interest expense of $0.9 million for the
year ended December 31, 2000 and a decrease in the fair value of the
obligations of $0.6 million. A 10% decrease in market interest rates would
result in an increase in interest expense of $0.9 million for the year ended
December 31, 2000 and an increase in the fair value of the obligation of $0.6
million.

The foreign subsidiaries of the Company generally use their local currency
as the functional currency. The Company does not currently enter into any
foreign exchange forward contracts to hedge certain balance sheet exposures and
intercompany balances against future movements in foreign exchange rates. To
date, such exposure has been immaterial. The Company does maintain cash
balances denominated in currencies other than the US Dollar.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

This item includes the following financial information:

Statement Page
--------- ----

Report of Arthur Andersen LLP, Independent Public Accountants............ 22

Report of PricewaterhouseCoopers LLP, Independent Accountants............ 23

Consolidated Statement of Operations for the Years Ended December 31,
2000, 1999 and 1998..................................................... 24

Consolidated Balance Sheet as of December 31, 2000 and 1999.............. 25

Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998........................................ 26

Consolidated Statement of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998..................................................... 27

Notes to the Consolidated Financial Statements........................... 28

Quarterly Financial Data (Unaudited)..................................... 44

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheet of FLIR Systems,
Inc. (an Oregon corporation) and subsidiaries as of December 31, 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted 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 audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FLIR
Systems, Inc. and subsidiaries as of December 31, 2000, and the results of
their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States.

/s/ Arthur Andersen LLP

Portland, Oregon
March 2, 2001

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, based on our audits and the report of other auditors, the
consolidated balance sheet as of December 31, 1999 and the related consolidated
statements of operations, of shareholders' equity and of cash flows for each of
the two years in the period ended December 31, 1999 present fairly, in all
material respects, the financial position, results of operations and cash flows
of FLIR Systems, Inc. and its subsidiaries at December 31, 1999 and for each of
the two years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Inframetrics Inc., a
wholly-owned subsidiary, which statements reflect total revenues of $53,785,000
for the year ended December 31, 1998. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for
Inframetrics, Inc., is based solely on the report of the other auditors. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion. We have not audited the
consolidated financial statements of FLIR Systems, Inc. for any period
subsequent to December 31, 1999.

As described in Note 15, the financial statements as of and for the years
ended December 31, 1998 and 1999 have been restated.

/s/ PricewaterhouseCoopers LLP

Portland, Oregon
April 14, 2000, except as to Note 15, which is as of March 23, 2001

FLIR SYSTEMS, INC.

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

Year Ended December 31,
-------------------------------
2000 1999 1998
-------- ---------- ----------
(Restated) (Restated)

Revenue......................................... $186,357 $178,556 $177,254
Cost of goods sold.............................. 104,764 123,665 87,384
-------- -------- --------
Gross profit................................ 81,593 54,891 89,870

Operating expenses:
Research and development...................... 28,502 29,006 26,958
Selling and other operating costs............. 63,916 62,899 53,045
Combination costs............................. -- 9,301 --
-------- -------- --------
Total operating costs....................... 92,418 101,206 80,003

(Loss) earnings from operations............. (10,825) (46,315) 9,867

Interest expense................................ 12,022 7,843 3,162
Other (income) and expenses, net................ (518) (2,072) 1,309
-------- -------- --------

(Loss) earnings before income taxes......... (22,329) (52,086) 5,396

Income tax provision............................ 3,725 2,295 1,806
-------- -------- --------
Net (loss) earnings............................. $(26,054) $(54,381) $ 3,590
======== ======== ========
Net (loss) earnings per share:
Basic......................................... $ (1.80) $ (3.82) $ 0.28
======== ======== ========
Diluted....................................... $ (1.80) $ (3.82) $ 0.27
======== ======== ========

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

FLIR SYSTEMS, INC.

CONSOLIDATED BALANCE SHEET
(in thousands, except for share data)

December 31,
---------------------
2000 1999
--------- ----------
(Restated)
ASSETS
------

Current assets:
Cash and cash equivalents............................... $ 11,858 $ 4,255
Accounts receivable, net................................ 39,663 56,788
Inventories............................................. 55,844 65,074
Prepaid expenses and other current assets............... 3,030 6,040
Deferred income taxes................................... 11,943 7,216
--------- --------
Total current assets................................... 122,338 139,373
Property and equipment, net.............................. 15,407 20,854
Deferred income taxes.................................... 11,772 16,499
Intangible assets, net................................... 16,635 17,932
Other assets............................................. 839 1,829
--------- --------
$ 166,991 $196,487
========= ========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------

Current liabilities:
Notes payable........................................... $ 17,716 $ 81,247
Accounts payable........................................ 16,247 22,128
Accrued payroll and other liabilities................... 19,186 27,226
Accrued income taxes.................................... 2,217 3,207
Current portion of capital lease obligations............ 1,103 1,084
--------- --------
Total current liabilities.............................. 56,469 134,892
Long-term debt........................................... 75,485 1,497
Pension and other long-term liabilities.................. 6,012 3,879

Commitments and contingencies (Notes 8 and 9)

Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued at December 31, 2000 or
1999................................................... -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized, 14,548,370 and 14,388,600 shares issued at
December 31, 2000 and 1999, respectively............... 145 144
Additional paid-in capital.............................. 144,118 143,318
Accumulated deficit..................................... (110,798) (84,744)
Accumulated other comprehensive loss.................... (4,440) (2,499)
--------- --------
Total shareholders' equity............................. 29,025 56,219
--------- --------
$ 166,991 $196,487
========= ========

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

FLIR SYSTEMS, INC.

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

Accumulated
Preferred Stock Common Stock Additional Other Annual
----------------- ----------------- Paid-in Accumulated Comprehensive Comprehensive
Shares Amount Shares Amount Capital Deficit (Loss) Total Earnings (Loss)
---------- ------ ---------- ------ ---------- ----------- ------------- -------- ---------------

Authorized........... 10,000,000 $0.01* 30,000,000 $0.01*
========== ====== ========== ======
Balance, December 31,
1997................. -- -- 11,835,265 $ 119 $107,278 $ (33,953) $ (411) $ 73,033 $ --
Net earnings for the
year (restated)..... -- -- -- -- -- 3,590 -- 3,590 3,590
Common stock options
exercised........... -- -- 188,508 1 1,681 -- -- 1,682 --
Common stock issued
pursuant to stock
option plans........ -- -- 111,130 1 1,181 -- -- 1,182 --
Common stock
issued.............. -- -- 1,998,500 20 32,656 -- -- 32,676 --
Cost of stock
issuance............ -- -- -- -- (627) -- -- (627) --
Translation
adjustment.......... -- -- -- -- -- -- (1,662) (1,662) (1,662)
---------- ------ ---------- ------ -------- --------- ------- -------- --------
Balance, December 31,
1998 (restated)...... -- -- 14,133,403 141 142,169 (30,363) (2,073) 109,874

Comprehensive
earnings, year ended
December 31, 1998
(restated)........... $ 1,928
========

Net (loss) for the
year (restated)..... -- -- -- -- -- (54,381) -- (54,381) $(54,381)
Common stock options
exercised........... -- -- 237,528 3 950 -- -- 953 --
Common stock issued
pursuant to stock
compensation plans.. -- -- 17,669 -- 199 -- -- 199 --
Translation
adjustment.......... -- -- -- -- -- -- (426) (426) (426)
---------- ------ ---------- ------ -------- --------- ------- -------- --------
Balance, December 31,
1999 (restated)...... -- -- 14,388,600 144 143,318 (84,744) (2,499) 56,219

Comprehensive (loss),
year ended December
31, 1999 (restated).. $(54,807)
========

Net (loss) for the
year................ -- -- -- -- -- (26,054) -- (26,054) $(26,054)
Common stock options
exercised........... -- -- 60,535 -- 241 -- -- 241 --
Common stock issued
pursuant to employee
stock purchase
plans............... -- -- 99,235 1 559 -- -- 560 --
Translation
adjustment.......... -- -- -- -- -- -- (1,941) (1,941) (1,941)
---------- ------ ---------- ------ -------- --------- ------- -------- --------
Balance, December 31,
2000................. -- $ -- 14,548,370 $ 145 $144,118 $(110,798) $(4,440) $ 29,025
========== ====== ========== ====== ======== ========= ======= ========

Comprehensive (loss),
year ended December
31, 2000............. $(27,995)
========

- -----
* Par value

The accompanying notes are an integral part of these financial statements

FLIR SYSTEMS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

Year Ended December 31,
-------------------------------
2000 1999 1998
-------- ---------- ----------
(Restated) (Restated)

CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Net (loss) earnings........................... $(26,054) $(54,381) $ 3,590
Income charges not affecting cash:
Depreciation................................. 8,119 6,944 6,065
Amortization................................. 1,600 2,952 2,412
Disposal and write-offs of property and
equipment................................... 4,407 5,131 43
Fair value adjustment of swap agreements..... 1,282 -- --
Deferred income taxes........................ -- (1,012) (4,231)
Changes operating assets and liabilities:
Decrease (increase) in accounts receivable... 15,174 22,568 (14,824)
Decrease (increase) in inventories........... 8,300 8,031 (25,276)
Decrease (increase) in prepaid expenses and
other current assets........................ 2,893 (68) (2,624)
Decrease (increase) in other assets.......... 680 (1,052) (83)
(Decrease) increase in accounts payable...... (5,443) (1,761) 3,398
(Decrease) in accounts payable to related
parties..................................... -- -- (6,228)
(Decrease) increase in accrued payroll and
other liabilities........................... (7,276) (2,785) 5,004
(Decrease) increase in accrued income taxes.. (854) (629) 2,646
Increase (decrease) in pension and other
long-term liabilities....................... 1,082 (7) 346
-------- -------- --------
Cash provided (used) by operating activities... 3,910 (16,069) (29,762)
-------- -------- --------
CASH USED BY INVESTING ACTIVITIES:
Additions to property and equipment........... (7,279) (7,470) (13,182)
Increase in intangible assets................. -- -- (2,880)
Software development costs.................... -- -- (239)
-------- -------- --------
Cash used by investing activities.............. (7,279) (7,470) (16,301)
-------- -------- --------
CASH PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from notes payable............... 11,369 41,289 13,400
Proceeds from long-term debt.................. 12 1,538 1,570
Repayments of long-term debt, including
current portion.............................. (905) (20,933) (6,376)
Common stock issued........................... -- -- 32,676
Cost of common stock issuance................. -- -- (627)
Proceeds from exercise of stock options and
shares issued pursuant to incentive stock
option plans................................. 241 1,152 2,864
Proceeds from shares issued pursuant to
employee stock purchase plan................. 560 -- --
-------- -------- --------
Cash provided by financing activities.......... 11,277 23,046 43,507
-------- -------- --------
Effect of exchange rate changes on cash........ (305) (45) (196)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... 7,603 (538) (2,752)
Cash and cash equivalents, beginning of year... 4,255 4,793 7,545
-------- -------- --------
Cash and cash equivalents, end of year......... $ 11,858 $ 4,255 $ 4,793
======== ======== ========

The accompanying notes are an integral part of these financial statements

FLIR SYSTEMS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Significant Accounting Policies

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

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.

Foreign currency translation

The assets and liabilities of the Company's foreign operations are
translated into US dollars at current exchange rates, and revenues and expenses
are translated at average exchange rates for the year. Resulting translation
adjustments are reflected as other comprehensive earnings or loss within
shareholders' equity. Transaction gains and losses that arise from exchange
rate fluctuations on transactions denominated in currency other than the
functional currency, are included in the results of operations as incurred.

Recognition of revenue

Revenue is generally recognized upon delivery of the product to the
customer, passage of title to the customer as indicated by the shipping terms
and fulfillment of all significant obligations, pursuant to guidance provided
by Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101), issued by the Securities and Exchange Commission. A
provision for the estimated cost of warranty is recorded when revenue is
recognized. Provisions for estimated losses on sales or related receivables are
recorded when identified. Revenue is stated net of representative commissions.
Service revenue is deferred and recognized over the contract period or as
services are provided.

Research and Development

Expenditures for research and development activities are expensed as
incurred.

Cash and cash equivalents

The Company considers short-term investments that are highly liquid, readily
convertible into cash and have original maturities of less than three months to
be cash equivalents.

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 1. Nature of Business and Significant Accounting Policies--(Continued)

Inventories

Inventories are stated at the lower of average cost or market and include
materials, labor, and manufacturing overhead. Cost is determined based on a
currently-adjusted standard basis which approximates actual cost on a first-in,
first-out basis. The Company periodically reviews its inventories for obsolete
or slow-moving items.

Property and equipment

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

Repairs and maintenance are charged to operations as incurred.

Long-lived Assets

Long-lived assets are reviewed for impairment when circumstances indicate
that the carrying amount may not be recoverable. Impairment exists when the
carrying value is greater than the expected undiscounted future cash flows
expected to be provided by the asset. If impairment exists, the asset is
written down to its fair value.

Earnings per share

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

December 31,
--------------------
2000 1999 1998
------ ------ ------

Weighted average number of common shares outstanding.. 14,472 14,252 12,983
Assumed exercise of stock options net of shares
assumed reacquired under the treasury stock method... -- -- 527
------ ------ ------
Diluted shares outstanding............................ 14,472 14,252 13,510
====== ====== ======

The dilutive effect of stock options for the years ended December 31, 2000
and 1999 that aggregated 2,131,966 and 1,494,490, respectively, have been
excluded for purposes of diluted earnings per share since the effect would have
been anti-dilutive.

Restatements

The Company's consolidated financial statements as of December 31, 1999 and
1998 and for the years then ended have been restated. See Note 15 to the
Consolidated Financial Statements for a description of the restatements.

Reclassifications

Certain reclassifications, including those described in Note 16 to the
Consolidated Financial Statements, have been made to prior years' data to
conform to the current year's presentation. These reclassifications had no
impact on previously reported results of operations or shareholders' equity.

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 1. Nature of Business and Significant Accounting Policies--(Continued)

Statement of cash flows

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

Year ended December 31,
------------------------
2000 1999 1998
-------- ------- -------

Cash paid for:
Interest......................................... $ 10,438 $ 5,013 $ 3,930
Taxes............................................ $ 4,114 $ 2,941 $ 3,812

Fair value of financial assets and liabilities

The Company estimates the fair value of its monetary assets and liabilities
based upon comparison of such assets and liabilities to the current market
values for instruments of a similar nature and degree of risk. The Company
estimates that the recorded value of all of its monetary assets and liabilities
approximates fair value as of December 31, 2000. The Company has interest rate
swap agreements which are accounted for on a fair value basis.

Stock-based compensation

The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 allows companies to choose whether to account for stock-based
compensation under the method prescribed in Accounting Principles Board Opinion
No. 25 (APB 25) or use the fair value method described in SFAS No. 123. The
Company follows the provisions of APB 25 and related interpretations in
accounting for its employee stock option plans. (see Note 12).

Concentration of risk

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

The Company maintains cash deposits with major banks which from time to time
may exceed federally insured limits. The Company periodically assesses the
financial condition of the institutions and believes that the risk of any loss
is minimal.

Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Significant estimates and judgments made by management of the
Company include matters such as collectibility of accounts receivable,
realizability

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 1. Nature of Business and Significant Accounting Policies--(Continued)

of inventories and recoverability of deferred tax assets. Actual results could
differ from those estimates. The Company believes that the estimates used are
reasonable.

Comprehensive (loss) earnings

The cumulative translation adjustment represents the Company's only other
comprehensive income item. The translation adjustment represents unrealized
gains/losses resulting from the translation of the financial statements of the
Company's subsidiaries in accordance with SFAS No. 52, "Foreign Currency
Translation."

Recent accounting pronouncements

In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities-an amendment of FASB Statement No. 133" ("SFAS 138"). In June 1999,
the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 137").
SFAS 137 is an amendment to Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 137
and 138 establish accounting and reporting standards for all derivative
instruments. SFAS 137 and 138 are effective for fiscal years beginning after
June 15, 2000. The Company adopted the pronouncements in the first quarter of
2001 and did not have a material impact on its financial position or results of
operations.

Note 2. Accounts Receivable

Accounts receivable are net of an allowance for doubtful accounts of $2.6
million and $4.8 million at December 31, 2000 and 1999, respectively.

Note 3. Inventories

Inventories consist of the following (in thousands):

December 31,
---------------
2000 1999
------- -------

Raw material and subassemblies............................ $29,546 $32,452
Work-in-progress.......................................... 14,139 15,261
Finished goods............................................ 12,159 17,361
------- -------
$55,844 $65,074
======= =======

Note 4. Property and Equipment

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

December 31,
------------------
2000 1999
-------- --------

Machinery and equipment................................ $ 32,845 $ 30,598
Office equipment and other............................. 22,439 28,124
-------- --------
55,284 58,722
Less accumulated depreciation.......................... (39,877) (37,868)
-------- --------
$ 15,407 $ 20,854
======== ========

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 4. Property and Equipment--(Continued)

Property and equipment includes the cost of equipment held by the Company
under capital lease agreements. Such cost and related accumulated depreciation
aggregated $2.9 million and $2.6 million, respectively, at December 31, 2000,
and $2.9 million and $2.4 million respectively, at December 31, 1999.

Note 5. Notes Payable

The interest rate on the borrowings under the Amended Credit Agreement as of
December 31, 2000 and January 23, 2001 was the prime rate of the primary lender
for domestic borrowings plus 2.75%. The interest rates on borrowings decline as
certain principal payments are made. A reduction of 25 basis points is provided
after the payment of $7.5 million and an additional 25 basis point reduction
after each $5.0 million principal reduction thereafter, subject to a total
reduction of 100 basis points.

The Amended Credit Agreement includes one financial covenant related to the
Company achieving certain levels of profitability beginning with the quarter
ending March 31, 2001. The Credit Agreement is collateralized by substantially
all of the assets of the Company.

At December 31, 2000, the Company had $89.9 million outstanding against the
Amended Credit Agreement of which $15.0 million is classified as short term.
Standby letters of credit totaling $0.8 million were outstanding at December
31, 2000.

In March, 2000, the Company entered into interest rate swap agreements to
minimize its exposure to fluctuations in interest rates under the original
Credit Agreement. At December 31, 2000, the fair value of these agreements is
$1.3 million and is included in other long-term liabilities. The change in fair
value of these agreements and interest rate differential to be paid or received
under these agreements, which have a notional amount totaling $40.0 million,
are recognized as incurred and are included in interest expense.

Additionally, the Company, through one of its subsidiaries, has a 40,000,000
Swedish Kronar (approximately $4.2 million) line of credit at 4.3% at December
31, 2000. At December 31, 2000, the Company had $2.7 million outstanding on
this line. This line of credit is secured primarily by accounts receivable and
inventories of the subsidiary and is subject to automatic renewal on an annual
basis.

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 6. Long-Term Debt

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

December 31,
-----------------
2000 1999
-------- -------

Amended Credit Agreement (Note 5)....................... $ 89,900 $ --
Capital leases.......................................... 1,688 2,581
-------- -------
91,588 2,581
Less current portion.................................... (16,103) (1,084)
-------- -------
$ 75,485 $ 1,497
======== =======

Note 7. Pension Plans

The Company previously offered most of the employees outside the United
States participation in a defined benefit pension plan. A summary of the
components of the net periodic pension expense for the benefit obligation and
fund assets plan is as follows (in thousands):

2000 1999
------ ------

Change in benefit obligation:
Projected benefit obligation at beginning of the
period.............................................. $3,627 $3,595
Service costs........................................ -- --
Interest costs....................................... 167 162
Actuarial (gain) loss................................ (27) 42
Benefits paid........................................ (63) (54)
Foreign currency exchange changes.................... (658) (118)
------ ------
Projected benefit obligation at December 31.......... 3,046 3,627
------ ------
Fair value of plan assets at January 1................. $ -- $ --
Unfunded status........................................ 3,046 3,627
Unrecognized net loss.................................. (73) (110)
Unrecognized transition obligation..................... 296 362
------ ------
Pension liability recognized........................... $3,269 $3,879
====== ======

Assumptions used for the defined benefit pension plans were as follows:

2000 1999
---- ----

Weighted average discount rate................................. 7.5% 7.5%
Rates of increase in compensation levels....................... N/A 3.0%

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

2000 1999 1998
---- ---- ----

Interest costs......................................... $167 $162 $278
Amortization of transition costs....................... (30) (34) (35)
---- ---- ----
Net periodic pension costs............................. $137 $128 $243
==== ==== ====

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 7. Pension Plans--(Continued)

The Company has a 401(k) Savings and Retirement Plan (the "Plan") to provide
for voluntary salary deferral contributions on a pre-tax basis for employees
within the United States in accordance with Section 401(k) of the Internal
Revenue Code of 1986, as amended. The Plan allows for contributions by the
Company. The Company made and expensed matching contributions of $1.2 million,
$1.1 million and $1.1 million for the years ended December 31, 2000, 1999 and
1998, respectively. The Company also has an unfunded retirement obligation to a
former executive officer which has been recorded and is reported in other long-
term liabilities.

Note 8. Commitments

The Company leases its primary facilities under various operating leases
that expire in 2001 through 2006. Total rent expense for the years ended
December 31, 2000, 1999 and 1998 amounted to $4.2 million, $4.2 million and
$3.6 million, respectively.

Minimum rental payments required under all non-cancelable leases for
equipment and facilities at December 31, 2000 are as follows (in thousands):

Capital Operating
leases leases
------- ---------

2001.................................................. $1,203 $ 2,609
2002.................................................. 605 2,495
2003.................................................. 1 2,307
2004.................................................. 2,159
2005.................................................. 950
Thereafter............................................ 226
------ -------
Total minimum lease payments.......................... 1,809 $10,746
=======
Less amount representing interest..................... (121)
------
Present value of lease payments....................... $1,688
======

Note 9. Litigation

On July 24, 2000, a complaint consolidating five previously filed complaints
and alleging violations of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder was filed against the Company, Robert P. Daltry, J.
Kenneth Stringer, III, and J. Mark Samper in the United States District Court
for the District of Oregon on behalf of a class of purchasers of the Company's
common stock between March 3, 1999 and March 6, 2000. On January 8, 2001, the
defendants in the action reached an agreement to settle the litigation for the
amount of $6.0 million, $5.5 million of which will be paid by the Company's
insurance carrier and $0.5 million by the Company, which was accrued as of
December 31, 2000. The settlement has received preliminary court approval. A
hearing on final court approval will be held on April 3, 2001.

The Company is involved in other litigation and various legal matters that
are being defended and handled in the ordinary course of business.

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 9. Litigation--(Continued)

While the ultimate results of the matters described above cannot presently
be determined, management does not expect that they will have a material
adverse effect on the Company's results of operations or financial position.
Therefore, no adjustments have been made to the accompanying financial
statements relative to these matters.

Note 10. Income Taxes

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

Pre-tax (loss) income by significant geographical location is as follows (in
thousands):

Year ended December 31,
------------------------------
2000 1999 1998
-------- ---------- ---------
(Restated) (Restated)

United States.............................. $(34,183) $(64,670) $(3,248)
Foreign.................................... 11,854 12,584 8,644
-------- -------- -------
$(22,329) $(52,086) $ 5,396
======== ======== =======

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

Year ended December 31,
--------------------------
2000 1999 1998
------- -------- -------

Current tax expense:
Federal..................................... $ -- $ 510 $ 2,209
State....................................... 165 12 68
Foreign..................................... 2,984 2,785 1,931
------- -------- -------
3,149 3,307 4,208
------- -------- -------
Deferred tax expense (benefit):
Federal..................................... (1,709) (14,342) (1,801)
State....................................... (201) (2,337) (210)
Foreign..................................... 576 10 --
------- -------- -------
(1,334) (16,669) (2,011)
------- -------- -------
Increase (decrease) in valuation allowance.... 1,910 15,657 (391)
------- -------- -------
Total provision............................... $ 3,725 $ 2,295 $ 1,806
======= ======== =======

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 10. Income Taxes--(Continued)

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

December 31,
------------------
2000 1999
-------- --------

Allowance for doubtful accounts........................ $ 680 $ 1,536
Warranty reserve....................................... 707 389
Inventory basis differences............................ 8,693 4,149
Accrued liabilities.................................... 1,689 1,142
Other.................................................. 174 --
-------- --------
Net current deferred tax assets........................ $ 11,943 $ 7,216
======== ========

Acquired in-process research and development........... $ 10,143 $ 10,995
Net operating loss carryforwards....................... 31,356 24,271
Credit carryforwards................................... 3,186 3,367
Depreciation........................................... (181) 110
Unremitted foreign earnings............................ (8,667) (1,515)
Merger costs capitalized for tax purposes.............. -- 1,414
Other.................................................. -- 12
-------- --------
Gross long-term deferred tax asset..................... 35,837 38,654
Deferred tax asset valuation allowance................. (24,065) (22,155)
-------- --------
Net long-term deferred tax asset....................... $ 11,772 $ 16,499
======== ========

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

Year ended December 31,
---------------------------
2000 1999 1998
------- ------- -------

Statutory federal tax rate....................... (34.0)% (34.0)% 34.0 %
Increase (decrease) in rates resulting from:
State taxes...................................... (3.0) (4.5) 3.5
Foreign sales corporation benefit................ -- 4.6 (6.5)
Utilization of research and development credits.. -- (1.3) (22.6)
Increase (decrease) in valuation allowance....... 8.6 30.1 (7.2)
Non-deductible expenses.......................... 2.1 2.5 36.7
Correction of prior year estimates............... 14.0 -- --
Unremitted foreign earnings...................... 32.0 -- --
Other............................................ (3.0) 7.0 (4.4)
------- ------- -------
Effective tax rate............................... 16.7 % 4.4 % 33.5 %
======= ======= =======

At December 31, 2000, the Company had US and United Kingdom tax net
operating loss carryforwards (NOLs) totaling approximately $80.8 million and
$0.6 million, respectively, which expire in the years 2005 through 2020.
Additionally, the Company has various US tax credits available aggregating $3.2
million which expire in the years 2007 through 2019. The Company also has a
$10.1 million deferred tax asset related to acquired in-process research and
development recorded in connection with the AGEMA acquisition. The realization
of this deferred tax asset is dependent upon the ability of foreign
subsidiaries to remit earnings to the US parent. Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes"

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 10. Income Taxes--(Continued)

(SFAS 109) requires that the tax benefits described above be recorded as an
asset to the extent that management assesses the utilization of such assets to
be "more likely than not." Otherwise, a valuation allowance is required to be
recorded. Based on this guidance, management has recorded a substantial
valuation allowance amounting to $24.1 million and $22.2 million at December
31, 2000 and 1999, respectively, against such deferred tax assets. Management
believes, primarily as a result of the significant operational restructuring in
the third quarter of 2000, that the net deferred tax asset of $23.7 million
reflected on the December 31, 2000 consolidated balance sheet, is realizable
based on future forecasts of taxable income. In addition, the Company is
planning to implement various tax planning strategies to assist in the
utilization of such unreserved deferred tax assets.

Future levels of taxable income are dependent upon general economic
conditions, including but not limited to continued growth of the Thermography
and Imaging markets, competitive pressures on sales and gross margins,
successful implementation of tax planning strategies, and other factors beyond
the Company's control. No assurance can be given that sufficient taxable income
will be generated for full utilization of the deferred tax assets. Accordingly,
the Company may be required to record an additional valuation allowance against
the deferred tax assets in future periods if its future forecasts of taxable
income and/or tax planning strategies are not achieved.

Note 11. Capital Stock

On July 6, 1998, the Company completed a secondary public offering of
2,399,130 shares of common stock, including 1,638,630 shares of common stock
issued and sold by the Company. Additionally, on July 24, 1998, the
underwriters exercised the over-allotment option related to the secondary
offering and the Company issued and sold an additional 359,870 shares of common
stock. The net proceeds of $32.0 million were utilized to repay in full a
payable to a related party, which aggregated approximately $5.0 million, and to
reduce amounts outstanding under the Company's lines of credit.

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

Note 12. Stock Options

The Company has stock incentive plans for employees, consultants, and
directors of the Company. Under the plans, 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

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 12. Stock Options--(Continued)

stock on the date of grant. The options generally become exercisable over a 3-
year period beginning 1 year after date of grant and expire 10 years from the
date of grant. The plans terminate in 2003. In 1998, the Company increased the
number of shares of common stock reserved for future issuance pursuant to its
incentive stock plans to 4,269,400.

The Company has elected to account for its employee stock-based compensation
under APB 25; however, as required by SFAS No. 123, the Company has computed
for pro forma disclosure purposes the value of options granted during 2000,
1999 and 1998 using the Black-Scholes option pricing model. The weighted
average assumptions used for stock option grants for 2000, 1999 and 1998 were a
risk-free interest rate of 6.1%, 5.5% and 5.7%, respectively; an expected
dividend yield of 0%; an expected life of three years; and an expected
volatility of 77.9%, 49.5% and 48.4%, respectively.

Options were assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting. For the
years ended December 31, 2000, 1999 and 1998, the total value of the options
granted was computed to be $9.4 million, $3.4 million and $2.4 million,
respectively, which would be amortized on a straight-line basis over the
vesting period of the options.

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

Year Ended December 31,
-------------------------------
2000 1999 1998
-------- ---------- ----------
(Restated) (Restated)

Net (loss) earnings--as reported............. $(26,054) $(54,381) $3,590
Net (loss) earnings--pro forma............... $(28,995) $(56,744) $2,243
(Loss) earnings per share:
Basic--as reported......................... $ (1.80) $ (3.82) $ 0.28
Diluted--as reported....................... $ (1.80) $ (3.82) $ 0.27
(Loss) earnings per share:
Basic--pro forma........................... $ (2.00) $ (3.98) $ 0.17
Diluted--pro forma......................... $ (2.00) $ (3.98) $ 0.17

The effects of applying SFAS No. 123 for providing pro forma disclosure for
2000, 1999 and 1998 are not likely to be representative of the effects on
reported net earnings and earnings per share for future years, since options
vest over several years and additional awards may be made.

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 12. Stock Options--(Continued)

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

Weighted Average
Shares Exercise Price
--------- ----------------

Balance at December 31, 1997..................... 1,339,528 $10.09
Granted........................................ 386,309 16.67
Exercised...................................... (188,508) 8.92
Terminated..................................... (116,935) 12.47
--------- ------
Balance at December 31, 1998..................... 1,420,394 11.84
Granted........................................ 511,600 17.14
Exercised...................................... (237,528) 4.12
Terminated..................................... (199,976) 17.28
--------- ------
Balance at December 31, 1999..................... 1,494,490 14.15
Granted........................................ 1,366,700 6.86
Exercised...................................... (60,535) 3.68
Terminated..................................... (668,689) 13.20
--------- ------
Balance at December 31, 2000..................... 2,131,966 $10.11
========= ======

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 of options outstanding and exercisable as of
December 31, 2000:

Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted Average
Exercise Price Number of Weighted Average Remaining Number of Weighted Average
Range Shares Exercise Price Contractual Life Shares Exercise Price
- -------------- --------- ---------------- ---------------- --------- ----------------

$ 0.38--$ 5.23 76,305 $ 4.75 2.1 70,305 $ 4.82
$ 5.94--$ 6.16 624,800 6.16 9.7 207,901 6.16
$ 6.75--$ 7.50 581,500 7.45 9.6 296,507 7.41
$ 8.38--$14.63 370,454 12.46 5.1 356,625 12.52
$15.00--$17.25 357,407 16.94 7.6 193,748 16.86
$18.00--$21.86 121,500 19.36 7.8 72,003 19.71
--------- ------ --- --------- ------
2,131,966 $10.11 8.1 1,197,089 $10.83
========= ====== === ========= ======

Options available for grant at December 31, 2000 totaled 1,115,427 shares.

Note 13. Segment Information

The Company has determined its operating segments to be the Thermography and
Imaging market segments. The Thermography market is comprised of a broad range
of commercial and industrial applications utilizing infrared cameras to provide
precise temperature measurement. The Imaging market is comprised of a broad
range of applications that is focused on providing enhanced vision capabilities
where temperature measurement is not required, although differences in
temperature are used to create an image. The Imaging market also includes high
performance daylight imaging applications.

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 13. Segment Information--(Continued)

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

Previously, the Company reported its operating segments to be the commercial
and government market segments. The information below for 1999 and 1998 has
been reclassified to be consistent with the reporting for the Thermography and
Imaging market segments in 2000.

Operating segment information for revenue is as follows (in thousands):

Year ended December 31,
-----------------------------
2000 1999 1998
-------- ---------- ---------
(Restated) (Restated)

Thermography.............................. $ 87,139 $ 88,628 $ 96,164
Imaging................................... 99,218 89,928 81,090
-------- -------- --------
$186,357 $178,556 $177,254
======== ======== ========

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

Year ended December 31,
------------------------------
2000 1999 1998
-------- ---------- ----------
(Restated) (Restated)

United States............................. $ 96,140 $ 88,971 $ 92,843
Europe.................................... 47,668 51,539 39,572
Other foreign............................. 42,549 38,046 44,839
-------- -------- --------
$186,357 $178,556 $177,254
======== ======== ========
Major customers:
US government........................... $ 33,902 $ 35,493 $ 31,240
======== ======== ========

Long-lived assets by significant geographical location is as follows (in
thousands):

2000 1999
------- -------

United States............................................ $13,052 $18,886
Europe................................................... 19,829 21,729
------- -------
$32,881 $40,615
======= =======

Note 14. Inframetrics Merger

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

The shares of capital stock of Inframetrics outstanding immediately prior to
the effective time were converted into and exchanged for a total of 2,107,552
shares of the Company's common stock (including

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 14. Inframetrics Merger--(Continued)

210,755 shares of the Company's common stock held in escrow to secure the
indemnification obligations of the stockholders of Inframetrics until September
26,1999). In addition, all employee stock options to purchase Inframetrics
common stock that were outstanding immediately prior to the effective time were
assumed by the Company. A total of 192,439 shares of the Company's common stock
are issuable upon the exercise of the stock options assumed by the Company in
the Merger.

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

In conjunction with the merger, the Company recorded in 1999 a one-time
charge of $34.6 million consisting of a reserve for duplicative inventories of
$25.3 million, transaction related costs of $3.2 million and cost to exit
activities of $6.1 million.

The inventory reserve relates to duplicative product lines created by the
merger and is included in cost of goods sold. The transaction related costs
consisted of investment advisor fees, legal and accounting fees and other
direct transaction costs. Such costs are included in combination costs, a
separate line item in operating expenses. The cost to exit activities amount
relates to estimated shut down costs related to duplicative sales offices in
the United Kingdom, Germany and France. As of December 31, 2000, the Company
has written off and disposed of substantially all of the inventory and has paid
all of the transaction related costs and the cost to exit activities.

The following reconciles revenue and net earnings for the impacts of the
merger to the information presented in the consolidated financial statements:

1998
--------

Revenues:
Previously reported, as restated (Note 15) and reclassified
(Note 16).................................................... $123,469
Inframetrics, as reclassified (Note 16)....................... 53,785
--------
$177,254
========
Net earnings:
Previously reported, as restated (Note 15).................... $ 3,068
Inframetrics.................................................. 522
--------
$ 3,590
========

Note 15. Restatements

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 15. Restatement--(Continued)

Additional information regarding the impact of the restatements, before
reclassifications, is set forth in the table below (in thousands, except per
share amounts):

Results of Operations

Year Ended Year Ended
December 31, 1999 December 31, 1998
------------------- -------------------
Previously As Previously As
Reported Restated Reported Restated
---------- -------- ---------- --------

Revenue........................... $186,448 $187,160 $196,865 $185,750
Cost of goods sold................ 123,666 123,665 92,260 87,384
-------- -------- -------- --------
Gross profit.................... 62,782 63,495 104,605 98,366
Research and development.......... 29,006 29,006 26,958 26,958
Selling and other operating
costs............................ 71,046 71,503 61,541 61,541
Combination costs................. 9,301 9,301 -- --
-------- -------- -------- --------
Total operating expenses........ 109,353 109,810 88,499 88,499
(Loss) earnings from
operations................... (46,571) (46,315) 16,106 9,867
Interest expense.................. 7,843 7,843 3,162 3,162
Other (income) and expenses, net.. (2,072) (2,072) 1,309 1,309
-------- -------- -------- --------
(Loss) earnings before income
taxes........................ (52,342) (52,086) 11,635 5,396
Income tax provision.............. 2,295 2,295 1,806 1,806
-------- -------- -------- --------
Net (loss) earnings............... $(54,637) $(54,381) $ 9,829 $ 3,590
======== ======== ======== ========
Net (loss) earnings per share:
Basic........................... $ (3.83) $ (3.82) $ 0.76 $ 0.28
======== ======== ======== ========
Diluted......................... $ (3.83) $ (3.82) $ 0.73 $ 0.27
======== ======== ======== ========

Financial Position

December 31, 1999
-------------------
Previously As
Reported Restated
---------- --------

Accounts receivable............... $ 57,777 $ 56,788
Inventory......................... 64,374 65,074
Total current assets.............. 139,662 139,373
Property and equipment, net....... 20,796 20,854
Total assets...................... 196,718 196,487
Accrued payroll and other
liabilities...................... 21,474 27,226
Total current liabilities......... 129,140 134,892
Accumulated deficit............... (78,761) (84,744)
Total shareholders' equity........ 62,202 56,219
Total liabilities and
shareholders' equity............. 196,718 196,487

FLIR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 16. Reclassifications

Reclassifications have been made to the consolidated statement of operations
for the reporting of representative commissions incurred by the Company. These
commissions, which were previously recorded as a portion of selling and other
operating costs, have been reclassified to a reduction of revenue to be
consistent with current reporting presentations.

The consolidated statement of operations were modified as follows (in
thousands):

Year Ended Year Ended
December 31, 1999 December 31, 1998
--------------------- ---------------------
As As As As
Restated Reclassified Restated Reclassified
-------- ------------ -------- ------------

Revenue........................ $187,160 $178,556 $185,750 $177,254
Gross profit................... 63,495 54,891 98,366 89,870
Selling and other operating
costs......................... 71,503 62,899 61,541 53,045
Total operating expenses....... 109,810 101,206 88,499 80,003

QUARTERLY FINANCIAL DATA (UNAUDITED)

FLIR SYSTEMS, INC.
(In thousands, except per share data)

Q1 Q2 Q3
------------------- ------------------- -------------------
As As As As As As
Reported Restated* Reported Restated* Reported Restated* Q4
-------- --------- -------- --------- -------- --------- -------

2000
Revenue................. $35,828 $36,678 $52,891 $52,560 $ 38,539 $ 39,912 $57,207
Gross profit............ 19,650 19,158 23,977 22,699 11,112 10,698 29,038
Net (loss) earnings .... (5,507) (3,906) (7,263) (6,575) (18,595) (18,149) 2,576
Net (loss) earnings per
share:
Basic................. $ (0.38) $ (0.27) $ (0.50) $ (0.45) $ (1.28) $ (1.25) $ 0.18
Diluted............... $ (0.38) $ (0.27) $ (0.50) $ (0.45) $ (1.28) $ (1.25) $ 0.18

Q1 Q2 Q3 Q4
------------------- ------------------ ------------------- -------------------
As As As As As As As As
Reported Restated* Reported Restated* Reported Restated* Reported Restated*
-------- --------- -------- --------- -------- --------- -------- ---------

1999
Revenue................. $ 38,821 $ 39,038 $46,316 $45,890 $47,007 $45,569 $ 54,304 $ 48,059
Gross profit............ (6) (400) 24,745 23,331 25,431 24,187 12,612 7,773
Net (loss) earnings .... (26,902) (26,183) 930 1,738 (39) 193 (28,626) (30,129)
Net (loss) earnings per
share:
Basic................. $ (1.90) $ (1.85) $ 0.07 $ 0.12 $ 0.00 $ 0.01 $ (1.99) $ (2.10)
Diluted............... $ (1.90) $ (1.85) $ 0.06 $ 0.12 $ 0.00 $ 0.01 $ (1.99) $ (2.10)

- --------
* Includes reclassifications. See Note 15 and Note 16 to the Consolidated
Financial Statements regarding the basis of the above restatement and
reclassifications.

The sum of the quarterly earnings (loss) per share does not equal the annual
loss per share as a result of the computation of quarterly versus annual
average shares outstanding.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

On May 2, 2000, the Company dismissed PricewaterhouseCoopers, LLP
("PricewaterhouseCoopers") as its independent auditors. The action was approved
by the Board of Directors and the Audit Committee of the Board of Directors.
The audit reports of PricewaterhouseCoopers on the consolidated financial
statements of the Company and its subsidiaries as of and for the years ended
December 31, 1998 and 1999, did not contain any adverse opinion or disclaimer
of opinion, nor were they qualified or modified as to uncertainty, audit scope
or accounting principles, except that the report on the financial statements
for the year ended December 31, 1999 included an emphasis of a matter paragraph
referring to the restatement of the 1998 financial statements, as described in
the notes thereto.

In connection with the audits for the two years ended December 31, 1999 and
1998, and the subsequent interim period through May 2, 2000, there were no
disagreements with PricewaterhouseCoopers on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which if not resolved to the satisfaction of PricewaterhouseCoopers,
would have caused it to make a reference to the subject matter of the
disagreement in connection with its report.

In connection with the audit of the Company's consolidated financial
statements for the year ended December 31, 1999, PricewaterhouseCoopers had
delivered to the Company its Report to the Audit Committee--Results of 1999
Audit (the "Report"). The Report stated that, in the course of
PricewaterhouseCoopers' audit of the Company's consolidated financial
statements for the year ended December 31, 1999, PricewaterhouseCoopers noted
certain matters involving the internal control structure of its operations that
it considered to be material weaknesses. The Report identified material
weaknesses in internal controls in three areas: (i) lack of follow-up by
personnel independent from the inventory costing system, (ii) the use of manual
entries to general ledger account balances for sales, cost of sales, accounts
receivable, inventory and intercompany receivables and payables and the lack of
regular and timely follow-up of the related accounts, and (iii) the lack of
regular and timely reconciliation of intercompany receivable and payable
accounts and follow-up of the related accounts. The Report also stated that, as
a result of the material weaknesses in internal controls identified in the
Report, PricewaterhouseCoopers has determined that it would be unable to
perform a review of the Company's March 31, 2000 interim financial statements
and that PricewaterhouseCoopers believed that the material weaknesses raised
questions about the Company's ability to prepare interim consolidated financial
information that was both timely and accurate. The Company authorized
PricewaterhouseCoopers to respond fully to questions from any successor
auditors regarding this matter. The Company believes that it has corrected the
deficiencies identified by PricewaterhouseCoopers.

The Company requested that PricewaterhouseCoopers furnish it with a letter
addressed to the Securities and Exchange Commission stating whether or not it
agrees with the statements contained herein. A copy of such letter dated May 9,
2000 was filed as Exhibit 16.1 to the Current Report on Form 8-K, dated May 9,
2000.

On July 13, 2000, the Company engaged Arthur Andersen LLP ("Arthur
Andersen") as its independent auditors for the fiscal year ended December 31,
2000. The engagement of Arthur Andersen was approved by the Company's Board of
Directors.

During the two most recent fiscal years and the interim period through May
2, 2000, the date Arthur Andersen was retained to conduct the First Quarter SAS
71 Review, neither the Company nor any person on its behalf consulted Arthur
Andersen regarding (i) the application of accounting principles to a specified
transaction, either completed or proposed, (ii) the type of audit opinion that
might be rendered on the Company's financial statements, or (iii) any matter
than was either the subject of a disagreement (as defined in paragraph
304(a)(1)(iv) of the Regulation S-K) or a reportable event (as described in
paragraph 304(a)(1)(v) of Regulation S-K).

In the ordinary course of the First Quarter SAS 71 Review, the Company
discussed various accounting and financial reporting matters with Arthur
Andersen. The Company also provided Arthur Andersen with a copy of the Report
issued by PricewaterhouseCoopers and discussed such Report with Arthur
Andersen. Arthur Andersen discussed the Report with PricewaterhouseCoopers and
has advised the Company that it considered the Report and these discussions in
conducting the First Quarter SAS 71 Review. The Company also informed
PricewaterhouseCoopers of its discussions with Arthur Andersen of these
matters.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to directors and executive officers of the Company
is included under "Election of Directors," "Management--Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement for its 2001 Annual Meeting of Shareholders and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to executive compensation is included under
"Executive Compensation" in the Company's definitive proxy statement for its
2001 Annual Meeting of Shareholders and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to security ownership of certain beneficial owners
and management is included under "Stock Owned by Management and Principal
Shareholders" in the Company's definitive proxy statement for its 2001 Annual
Meeting of Shareholders and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements

The financial statements are included in Item 8 above.

(a)(2) Financial Statement Schedules

The following schedule is filed as part of this Report:

Schedule II--Valuation and Qualifying Accounts

Report of Independent Accountants on Financial Statement Schedule

No other schedules are included because the required information is
inapplicable, not required or are presented in the financial statements or the
related notes thereto.

(a)(3) Exhibits

Number Description
------ -----------

2.1 Merger Agreement dated as of March 19, 1999 by and among FLIR
Systems, Inc., Inframetrics, Inc., Irabu Acquisition Corporation and
the shareholders of Inframetrics, Inc. (incorporated by reference to
Current Report on Form 8-K filed on April 14, 1999).

3.1 Second Restated Articles of Incorporation of the FLIR Systems, Inc.
(incorporated by reference to Exhibit 3.1 to Registration Statement
on Form S-1 (File No. 33-62582)).

3.2 First Amendment to Second Restated Articles of Incorporation of FLIR
Systems, Inc. (incorporated by reference to Exhibit 1.1 to
Registration Statement on Form 8-A filed on June 11, 1999).

3.3 First Restated Bylaws of the FLIR Systems, Inc. (incorporated by
reference to Exhibit 3.2 to Registration Statement on Form S-1 (File
No. 33-62582)).

4.1 Rights Agreement dated as of June 2, 1999 (incorporated by reference
to Exhibit 1.1 to the Registration Statement on Form 8-A filed on
June 11, 1999).

10.1 Form of Indemnity Agreement between the FLIR Systems, Inc. and each
member of its Board of Directors (incorporated by reference to
Exhibit 10.1 to Registration Statement on Form S-1 (File No. 33-
62582)). (1)

10.2 1984 Incentive Stock Option Plan and Amendments (incorporated by
reference to Exhibit 10.2 to Registration Statement on Form S-1
(File No. 33-62582)). (1)

10.3 1992 Stock Incentive Plan (incorporated by reference to Exhibit 10.3
to Registration Statement on Form S-1 (File No. 33-62582)). (1)

10.4 1993 Stock Option Plan for Non-employee Directors (incorporated by
reference to Exhibit 10.4 to Registration Statement on Form S-1
(File No. 33-62582)). (4)

10.5 Lease Dated February 11, 1985, as amended, by and among the FLIR
Systems, Inc. and Pacific Realty Association, L.P. (incorporated by
reference to Exhibit 10.6 to Registration Statement on Form S-1
(File No. 33-62582)).

10.6 Combination Agreement, Dated October 6, 1997, Among FLIR Systems,
Inc., Spectra-Physics AB, Spectra-Physics Holding S.A., Spectra-
Physics Holdings GmbH, Spectra-Physics Holdings PLC, and Pharos
Holdings, Inc. (incorporated by reference to Exhibit 2.0 to Current
Report on Form 8-K filed on October 24, 1997).

10.7 Form of Executive Employment Agreement dated as of May 5, 1997 (James
A. Fitzhenry) (incorporated by reference to Exhibit 10.2 to Current
Report on Form 8-K filed on October 24, 1997). (1)

10.8 Form of Agreement amending Executive Employment Agreement dated as of
December 1, 1997 for James A. Fitzhenry (incorporated by reference
to Exhibit 10.1 to Current Report on Form 8-K filed on December 15,
1997). (1)

10.9 Form of Agreement amending Executive Employment Agreement dated as of
January 20, 1999 amending Executive Employment Agreement of James A.
Fitzhenry and Arne Almerfors (incorporated by reference to Exhibit
10.2 to Quarterly Report on Form 10-Q filed on August 16, 1999). (1)

10.10 Registration Rights Agreement dated as of December 1, 1997 by and
among FLIR Systems, Inc., Spectra-Physics AB, Spectra-Physics
Holdings PLC and Pharos Holdings (incorporated by reference to
Exhibit 10.2 to Current Report on Form 8-K filed on December 15,
1997).

10.11 Contract for the Supply of Uncooled Imaging Modules, dated January
15, 1997 (incorporated by reference to Exhibit 10.1 to Form 10-Q/A
filed May 28, 1998). (2)

Number Description
------ -----------

10.12 Contract for the Supply of Uncooled Imaging Modules, dated March 4,
1998 (incorporated by reference to Exhibit 10.1 to Form 10-Q/A filed
May 28, 1998). (2)

10.13 Inframetrics, Inc. Shareholders Agreement dated as of March 19, 1999
by and among FLIR, Inframetrics and the shareholders of Inframetrics
(incorporated by reference to Exhibit 10.1 to Current Report on Form
8-K filed on April 14, 1999).

10.14 Amendment to Inframetrics, Inc. Shareholders Agreement dated as of
October 27, 1999 by and among FLIR, Inframetrics, and the former
shareholders of Inframetrics (incorporated by reference to Exhibits
to Registration Statement on Form S-1 (File No. 333-90717)).

10.15 FLIR Systems, Inc. 1999 Employee Stock Purchase Plan (incorporated by
reference to Exhibit A to the Company's Proxy Statement dated April
30, 1999). (1)

10.16 Contract for the Supply of Uncooled Imaging Modules, dated August 8,
1999 (incorporated by reference to Exhibit 10.1 to Form 10-Q/A filed
December 2, 1999). (2)

10.17 Form of Credit Agreement among FLIR Systems, Inc. and Bank of America
N.A. and certain other financial institutions dated as of December
16, 1999 (incorporated by reference to Exhibits to Registration
Statement on Form S-1 (File No. 333-90717)).

10.18 Form of Pledge Agreement dated as of December 16, 1999 by FLIR
Systems, Inc. in favor of Bank of America N.A. as Agent
(incorporated by reference to Exhibits to Registration Statement on
Form S-1 (File No. 333-90717)).

10.19 Form of Security Agreement dated as of December 16, 1999 between FLIR
Systems, Inc. and Bank of America N.A. as Agent (incorporated by
reference to Exhibits to Registration Statement on Form S-1 (File
No. 333-90717)).

10.20 Amendment to Credit Agreement among FLIR Systems, Inc. and Bank of
America N.A. and certain other financial institutions dated as of
January 23, 2001.

10.21 Amendment to Security Agreement dated as of January 23, 2001 between
FLIR Systems, Inc. and Bank of America N.A. as Agent.

10.22 Executive Employment Agreement dated as of November 1, 2001 between
FLIR Systems, Inc. and Earl R. Lewis. (1)

21.0 Subsidiaries of FLIR Systems, Inc.

23.0 Consent of Arthur Andersen LLP.

23.1 Consent of PricewaterhouseCoopers LLP.

99.0 Report of Ernst & Young, LLP.

99.1 Consent of Ernst & Young, LLP.

- --------
(1) This exhibit constitutes a management contract or compensatory plan or
arrangement.

(2) Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment under 17 C.F.R. (s) 240.24b 2.

(b) During the quarter ended December 31, 2000, the Company filed the
following reports on Form 8-K.

1. The Company filed a current report on Form 8-K, dated November 16,
2000, reporting under Item 5 and 7 its financial results for the
quarter ended September 30, 2000.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 2nd day of
April 2001.

FLIR SYSTEMS, INC.
(Registrant)

/s/ Stephen M. Bailey
By: _________________________________
Stephen M. Bailey
Sr. Vice President, Finance and
Chief Financial Officer (Principal
Accounting and Financial Officer
and Duly Authorized Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on April 2, 2001.

Signature Title
--------- -----

/s/ Earl R. Lewis Chairman of the Board of Directors,
______________________________________ President and Chief Executive Officer
Earl R. Lewis

/s/ John C. Hart Director
______________________________________
John C. Hart

/s/ W. Allen Reed Director
______________________________________
W. Allen Reed

/s/ Ronald L. Turner Director
______________________________________
Ronald L. Turner

/s/ Steven E. Wynne Director
______________________________________
Steven E. Wynne

SCHEDULE II

FLIR SYSTEMS, INC.

VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

Column A Column B Column C Column D Column E
-------- ----------- --------------------- ---------- -----------
Additions
---------------------
Charged To
Balance at Charges to Other Write-offs Balance
Beginning Costs and Accounts-- Net of at the End
of the Year Expenses Described Recoveries of the Year
----------- ---------- ---------- ---------- -----------

Year ended December 31,
2000
Allowance for Doubtful
Accounts............. $ 4,772 $ 1,122 $ 0 $(3,286) $ 2,608
======= ======= === ======= =======
Allowance for Deferred
Tax Assets........... $22,155 $ 1,910 $ 0 $ 0 $24,065
======= ======= === ======= =======

Year ended December 31,
1999
Allowance for Doubtful
Accounts............. $ 3,216 $ 5,221 $ 0 $(3,665) $ 4,772
======= ======= === ======= =======
Allowance for Deferred
Tax Assets........... $ 6,498 $15,657 $ 0 $ 0 $22,155
======= ======= === ======= =======

Year ended December 31,
1998
Allowance for Doubtful
Accounts............. $ 2,639 $ 417 $ 0 $ 160 $ 3,216
======= ======= === ======= =======
Allowance for Deferred
Tax Assets........... $ 6,889 $ (391) $ 0 $ 0 $ 6,498
======= ======= === ======= =======

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

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

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements, as of and for the year ended December
31, 2000 included in FLIR Systems, Inc. and subsidiaries' Form 10-K, and have
issued our report thereon dated March 2, 2001. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
Valuation and Qualifying Accounts Schedule is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic
financial statements. The 2000 Valuation and Qualifying Accounts Schedule has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statement taken as a whole.

/s/ Arthur Andersen LLP

Portland, Oregon
March 2, 2001

REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of FLIR Systems, Inc.

Our audits of the consolidated financial statements referred to in our
report dated April 14, 2000, except as to Note 15, which is as of March 23,
2001, appearing in the 2000 Annual Report on Form 10-K of FLIR Systems, Inc.
also included an audit of the financial statement schedule for the years ended
December 31, 1999 and 1998 listed in Item 14(a)(2) of this Form 10-K. We did
not audit the financial statement schedule of Inframetrics, Inc., a wholly
owned subsidiary, for the year ended December 31, 1998. That schedule was
audited by other auditors whose report thereon has been furnished to us, and
our opinion expressed herein, insofar as it relates to the amounts included for
Inframetrics, Inc., is based solely on the report of the other auditors. In our
opinion, based on our audit and the report of other auditors, the financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. We have not audited the financial statement schedule of
FLIR Systems, Inc. for any period subsequent to December 31, 1999.

/s/ PricewaterhouseCoopers LLP

Portland, Oregon
April 14, 2000