Exhibit 13

















                            Thermedics Detection Inc.

                        Consolidated Financial Statements

                                      1998


<PAGE>
<TABLE>
<CAPTION>

<S>                                                                       <C>         <C>        <C>      

Thermedics Detection Inc.                                                       1998 Financial Statements

                        Consolidated Statement of Income
                                       
(In thousands except per share amounts)                                        1998       1997         1996
------------------------------------------------------------------------- ----------- ---------- ----------

Revenues (Notes 6 and 8):
  Product revenues                                                         $ 74,754    $89,264    $  80,557
  Service revenues                                                           16,821     15,110       14,047
                                                                           --------    -------    ---------

                                                                             91,575    104,374       94,604
                                                                           --------    -------    ---------

Costs and Operating Expenses:
  Cost of product revenues (Note 6)                                          30,610     38,694       37,857
  Cost of service revenues                                                   11,641      7,701        7,753
  Selling, general, and administrative expenses (Note 6)                     26,744     28,515       31,198
  Research and development expenses                                           9,645      9,643        8,100
                                                                           --------    -------    ---------

                                                                             78,640     84,553       84,908
                                                                           --------    -------    ---------

Operating Income                                                             12,935     19,821        9,696
Interest Income                                                               1,536      2,072          229
Interest Expense, Related Party (Note 2)                                       (303)    (1,239)      (1,119)
Other Income (Expense), Net                                                      (1)        23           12
                                                                           --------    -------    ---------

Income Before Provision for Income Taxes                                     14,167     20,677        8,818
Provision for Income Taxes (Note 4)                                           5,496      8,171        3,519
                                                                           --------    -------    ---------

Net Income                                                                 $  8,671    $12,506    $   5,299
                                                                           ========    =======    =========

Basic and Diluted Earnings per Share (Note 9)                              $    .45    $   .67    $     .33
                                                                           ========    =======    =========

Weighted Average Shares (Note 9)
  Basic                                                                      19,317     18,721       16,236
                                                                           ========    =======    =========

  Diluted                                                                    19,321     18,732       16,253
                                                                           ========    =======    =========

















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


                                       2
<PAGE>

Thermedics Detection Inc.                                                       1998 Financial Statements

                           Consolidated Balance Sheet
(In thousands except share amounts)                                                         1998      1997
-------------------------------------------------------------------------------------- ---------- --------

Assets
Current Assets:
  Cash and cash equivalents (includes $24,682 and $40,043 under repurchase             $  32,906  $ 46,352
    agreement with affiliated company)
  Accounts receivable, less allowances of $1,149 and $1,127                               15,949    18,223
  Unbilled contract costs and fees                                                         1,705       836
  Inventories                                                                             17,167    16,819
  Prepaid income taxes (Note 4)                                                            2,884     3,595
  Prepaid expenses                                                                         1,496     1,439
                                                                                       ---------  --------

                                                                                          72,107    87,264
                                                                                       ---------  --------

Property, Plant, and Equipment, Net                                                        4,938     4,011
                                                                                       ---------  --------

Other Assets                                                                                 804     1,198
                                                                                       ---------  --------

Cost in Excess of Net Assets of Acquired Companies (Note 2)                               54,657    55,792
                                                                                       ---------  --------

                                                                                       $ 132,506  $148,265
                                                                                       =========  ========

Liabilities and Shareholders' Investment
Current Liabilities:
  Promissory note to parent company (Note 2)                                           $       -  $ 21,200
  Accounts payable                                                                         3,719     3,868
  Accrued payroll and employee benefits                                                    3,412     3,852
  Accrued income taxes                                                                         -     2,331
  Deferred revenue                                                                           972     1,689
  Accrued installation and warranty expenses                                               1,075     1,154
  Other accrued expenses                                                                   4,972     5,410
  Due to parent company and affiliated companies                                             336     1,415
                                                                                       ---------  --------

                                                                                          14,486    40,919
                                                                                       ---------  --------

Long-term Obligation                                                                         127         -
                                                                                       ---------  --------

Commitments (Note 5)

Shareholders' Investment (Notes 2, 3, and 7):
  Common stock, $.10 par value, 50,000,000 shares authorized; 19,316,684                   1,932     1,932
    pro forma shares issued and outstanding
  Capital in excess of par value                                                          95,022    93,755
  Retained earnings                                                                       21,877    13,206
  Accumulated other comprehensive items                                                     (938)   (1,547)
                                                                                       ---------  --------

                                                                                         117,893   107,346
                                                                                       ---------  --------
                                                                                       $ 132,506  $148,265
                                                                                       =========  ========

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


                                       3
<PAGE>

Thermedics Detection Inc.                                                       1998 Financial Statements

                      Consolidated Statement of Cash Flows
(In thousands)                                                                  1998      1997         1996
------------------------------------------------------------------------- ----------- ---------- ----------

Operating Activities
  Net income                                                                $  8,671   $12,506     $  5,299
  Adjustments to reconcile net income to net cash provided by
    operating activities:
      Depreciation and amortization                                            3,327     3,287        4,366
      Provision for losses on accounts receivable                                301       201          642
      Other noncash expense                                                    1,297       376        1,906
      Deferred income tax expense                                              1,084     1,148        1,020
      Changes in current accounts, excluding the effects of acquisitions: 
        Accounts receivable                                                    1,875    (1,134)      (2,570)
        Unbilled contract costs and fees                                        (834)     (549)         845
        Inventories                                                           (1,445)   (3,298)       2,283
        Other current assets                                                    (112)      (52)        (741)
        Accounts payable                                                        (134)     (884)        (552)
        Due to parent company and affiliated companies                        (1,140)    1,103         (211)
        Other current liabilities                                             (4,199)      990        1,816
                                                                            --------    ------     --------

         Net cash provided by operating activities                             8,691    13,694       14,103
                                                                            --------    ------     --------

Investing Activities
  Acquisitions (Note 2)                                                            -         -      (21,668)
  Acquisition of product line (Note 2)                                             -         -         (300)
  Purchases of property, plant, and equipment                                 (2,774)   (1,832)      (2,608)
  Proceeds from sale of property, plant, and equipment                           196        28          113
  Other                                                                            -        82            -
                                                                            --------    ------     --------

         Net cash used in investing activities                                (2,578)   (1,722)     (24,463)
                                                                            --------    ------     --------

Financing Activities
  Net proceeds from issuance of Company common stock (Note 7)                      -    28,078        6,964
  Proceeds from issuance of promissory note to parent company                      -         -       21,200
   (Note 2)
  Payment of promissory note to parent company                               (21,200)        -            -
  Additional capital contributions and transfers to parent                                   -          120
   company, net
  Orion transfers (to) from Thermedics                                         1,026    (7,845)      (5,924)
  Other                                                                          127       (61)        (174)
                                                                            --------    ------     --------

         Net cash provided by (used in) financing activities                $(20,047)  $20,172     $ 22,186
                                                                            --------   -------     --------

                                       4
<PAGE>


Thermedics Detection Inc.                                                       1998 Financial Statements

                Consolidated Statement of Cash Flows (continued)
(In thousands)                                                                  1998      1997         1996
------------------------------------------------------------------------- ----------- ---------- ----------

Exchange Rate Effect on Cash                                                $    488    $  (56)    $      1
                                                                            --------    ------     --------

Increase (Decrease) in Cash and Cash Equivalents                             (13,446)   32,088       11,827
Cash and Cash Equivalents at Beginning of Year                                46,352    14,264        2,437
                                                                            --------    ------     --------

Cash and Cash Equivalents at End of Year                                    $ 32,906   $46,352     $ 14,264
                                                                            ========   =======     ========

Cash Paid For
  Interest                                                                  $    305    $  609     $    596
  Income taxes                                                              $  5,474    $2,909     $  1,280

Noncash Activities (Note 2)
  Fair value of assets of acquired companies                                $      -    $    -     $ 24,328
  Cash paid for acquired companies                                                 -         -      (21,668)
                                                                            --------    ------     --------

    Liabilities assumed of acquired companies                               $      -    $    -     $  2,660
                                                                            ========    ======     ========































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

                                       5
<PAGE>

Thermedics Detection Inc.                                                       1998 Financial Statements

               Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands)                                                                 1998       1997         1996
------------------------------------------------------------------------- ----------- ---------- ----------

Comprehensive Income
Net Income                                                                 $  8,671   $ 12,506   $    5,299
                                                                           --------   --------   ----------

Other Comprehensive Items:
  Foreign currency translation adjustment                                       609     (1,158)        (220)
                                                                           --------    -------    ---------

                                                                           $  9,280    $11,348    $   5,079
                                                                           ========    =======    =========

Shareholders' Investment
Common Stock, $.10 Par Value:
  Balance at beginning of year                                             $  1,932    $ 1,664    $   1,596
  Net proceeds from issuance of Company common stock (Note 7)                     -        268           68
                                                                           --------    -------    ---------

  Balance at end of year                                                      1,932      1,932        1,664
                                                                           --------    -------    ---------

Capital in Excess of Par Value:
  Balance at beginning of year                                               93,755     67,043       60,349
  Issuance of stock under employees' and directors' stock plans                   -          6            -
   (Note 3)
  Tax benefit related to employees' and directors' stock plans                  241        305            -
  Net proceeds from issuance of Company common stock (Note 7)                     -     27,810        6,896
  Additional capital contributions                                                -          -          120
  Orion transfers (to) from parent company                                    1,026     (1,409)        (322)
                                                                           --------    -------    ---------

  Balance at end of year                                                     95,022     93,755       67,043
                                                                           --------    -------    ---------

Retained Earnings:
  Balance at beginning of year                                               13,206      7,136        7,439
  Net income                                                                  8,671     12,506        5,299
  Orion transfers to parent company                                               -     (6,436)      (5,602)
                                                                           --------    -------    ---------

  Balance at end of year                                                     21,877     13,206        7,136
                                                                           --------    -------    ---------

Accumulated Other Comprehensive Items:
  Balance at beginning of year                                               (1,547)      (389)        (169)
  Other comprehensive items, net                                                609     (1,158)        (220)
                                                                           --------    -------    ---------

  Balance at end of year                                                       (938)    (1,547)        (389)
                                                                           --------    -------    ---------

                                                                           $117,893    $107,346   $  75,454
                                                                           ========    ========   =========







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

                                       6
<PAGE>

Thermedics Detection Inc.                                                       1998 Financial Statements

                   Notes to Consolidated Financial Statements
1.    Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations
      Thermedics Detection Inc. (the Company) is comprised of businesses that
operate in two segments: Detection Instruments and Laboratory Products. The
Company's Detection Instruments segment develops, manufactures, and markets
high-speed detection and measurement systems that ensure the quality of a wide
variety of in-process and finished products. The Detection Instruments segment
also develops, manufactures, and markets security instruments for search,
screening, and forensic applications under the direction of police, border
police, transportation authorities, and carriers. The Company's Laboratory
Products segment develops, manufactures, and markets electrochemistry systems
that laboratories use to determine the quality of a broad range of substances by
measuring their pH, specific ion concentration, dissolved oxygen, and
conductivity.

Relationship with Thermedics Inc. and Thermo Electron Corporation
      The Company operated as a division of Thermedics Inc. until its
incorporation as a Massachusetts corporation in December 1990. In connection
with the Company's incorporation, Thermedics transferred to the Company its TEA
Analyzer and certain other trace detection technologies in exchange for
10,000,000 shares of the Company's common stock. As of January 2, 1999,
Thermedics owned 16,185,945 shares of the Company's pro forma outstanding common
stock, representing 84% of such pro forma stock outstanding (as adjusted to
reflect 5,961,225 shares of the Company's common stock issuable to Thermedics
for the acquisition of Orion Research, Inc., Note 2). As of January 2, 1999,
Thermedics is a 74%-owned subsidiary of Thermo Electron Corporation. As of
January 2, 1999, Thermo Electron owned 882,450 shares of the Company's common
stock, representing 5% of such pro forma stock outstanding.
      During 1998, Thermo Electron announced a proposed reorganization involving
certain of Thermo Electron's subsidiaries, including the Company. As part of
this reorganization, Thermo Electron announced that the Company may be taken
private and become a wholly owned subsidiary of Thermo Electron (Note 10).

Principles of Consolidation
      The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.

Fiscal Year
      The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1998, 1997, and 1996 are for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively. Fiscal 1998 and 1996
each included 52 weeks; fiscal 1997 included 53 weeks.

Revenue Recognition
      The Company recognizes product revenues upon shipment of its products. The
Company provides a reserve for its estimate of warranty costs at the time of
shipment. The Company recognizes service revenues over the term of the contract.
Deferred revenue in the accompanying balance sheet consists of unearned revenue
on service contracts which is recognized over the life of the service contract.
Revenues and profits on long-term contracts are recognized using the
percentage-of-completion method. Revenues recorded under the
percentage-of-completion method, including revenues from long-term research and
development contracts, were $2,846,000, $1,376,000, and $1,758,000 in 1998,
1997, and 1996, respectively. The percentage of completion is determined by
relating the actual costs incurred to date to management's estimate of total
costs to be incurred on each contract. If a loss is indicated on any contract in
process, a provision is made currently for the entire loss. Contracts generally
provide for the billing of customers on a cost-plus-fixed-fee basis as costs are
incurred. Revenues earned on contracts in process in excess of billings are
classified as unbilled contract costs and fees in the accompanying balance
sheet. There are no significant amounts included in the accompanying balance
sheet that are not expected to be recovered from existing contracts at current
contract values, or that are not expected to be collected within one year,
including amounts that are billed but not paid under retainage provisions.

                                       7
<PAGE>

1.    Nature of Operations and Summary of Significant Accounting Policies (continued)

Stock-based Compensation Plans
      The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 3). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.

Income Taxes
      In the periods prior to its initial public offering, the Company was
included in Thermedics' consolidated federal and certain state income tax
returns. Subsequent to the Company's initial public offering in March 1997,
Thermedics' equity ownership of the Company fell below 80% and the Company filed
its own tax returns. Subsequently, in 1998, Thermedics' ownership percentage has
again exceeded 80% and, therefore, the Company intends to request permission
from the Internal Revenue Service (IRS) to be included in Thermedics'
consolidated federal tax return. Assuming the IRS grants the Company's request,
the Company will again be included in Thermedics' consolidated federal tax
return, effective as of the date Thermedics' ownership percentage exceeded 80%.
The tax allocation agreement between the Company and Thermedics provides that,
in years that the Company has taxable income, the Company will pay to Thermedics
amounts comparable to the taxes the Company would have paid if it had filed
separate tax returns.
      In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.

Earnings per Share
      Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. Diluted earnings
per share have been computed assuming the exercise of stock options, as well as
their related income tax effect.

Cash and Cash Equivalents
      At year-end 1998 and 1997, $24,682,000 and $40,043,000, respectively, of
the Company's cash equivalents were invested in a repurchase agreement with
Thermo Electron. Under this agreement, the Company in effect lends excess cash
to Thermo Electron, which Thermo Electron collateralizes with investments
principally consisting of corporate notes, U.S. government-agency securities,
commercial paper, money market funds, and other marketable securities, in the
amount of at least 103% of such obligation. The Company's funds subject to the
repurchase agreement are readily convertible into cash by the Company and have
an original maturity of three months or less. The Company's repurchase agreement
earns a rate based on the 90-day Commercial Paper Composite Rate plus 25 basis
points, set at the beginning of each quarter. At year-end 1998 and 1997, the
Company's cash equivalents also included investments in commercial paper and
short-term certificates of deposit of the Company's foreign operations, which
have an original maturity of three months or less. Cash equivalents are carried
at cost, which approximates market value.

Inventories
      Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market value and include materials, labor, and manufacturing overhead.
The components of inventories are:

(In thousands)                                                                              1998      1997
---------------------------------------------------------------------------------------- -------- ---------

Raw Material and Supplies                                                                $ 9,763  $  9,698
Work in Process                                                                            1,362     1,599
Finished Goods                                                                             6,042     5,522
                                                                                         -------  --------

                                                                                         $17,167  $ 16,819
                                                                                         =======  ========

                                       8
<PAGE>


1.    Nature of Operations and Summary of Significant Accounting Policies (continued)

Property, Plant, and Equipment
      The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings, 25 years; machinery and
equipment, two to ten years; and leasehold improvements, the lesser of the term
of the lease or the life of the asset. Property, plant, and equipment consists
of:

(In thousands)                                                                              1998      1997
---------------------------------------------------------------------------------------- -------- ---------

Land and Buildings                                                                       $   253  $    250
Machinery, Equipment, and Leasehold Improvements                                          12,252    10,447
                                                                                         -------  --------

                                                                                          12,505    10,697
Less:  Accumulated Depreciation and Amortization                                           7,567     6,686
                                                                                         -------  --------

                                                                                         $ 4,938  $  4,011
                                                                                         =======  ========

Cost in Excess of Net Assets of Acquired Companies
      The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method over 40 years. Accumulated
amortization was $4,156,000 and $3,021,000 at year-end 1998 and 1997,
respectively. The Company assesses the future useful life of this asset whenever
events or changes in circumstances indicate that the current useful life has
diminished. The Company considers the future undiscounted cash flows of the
acquired companies in assessing the recoverability of this asset. If impairment
has occurred, any excess of carrying value over fair value is recorded as a
loss.

Foreign Currency
      All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated Other Comprehensive Items" component of shareholders' investment.
Foreign currency transaction gains and losses are included in the accompanying
statement of income and are not material for the three years presented.

Comprehensive Income
      During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"other comprehensive items, net" which represents foreign currency translation
adjustments, reported as a component of shareholders' investment in the
accompanying balance sheet. At year-end 1998 and 1997, the balance of
accumulated other comprehensive items represents the Company's cumulative
translation adjustment.

Fair Value of Financial Instruments
      The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, due to parent company and
affiliated companies, and promissory note to parent company. Their respective
carrying amounts in the accompanying balance sheet approximate fair value due to
their short-term nature, except for, in 1997, the promissory note to parent
company. The carrying amount of the promissory note to parent company
approximated fair value due to its variable interest rate.

                                       9
<PAGE>

1.    Nature of Operations and Summary of Significant Accounting Policies (continued)

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

Presentation
      Certain amounts in 1997 and 1996 have been reclassified to conform to the
presentation in the 1998 financial statements.

2.    Acquisitions

      On April 14, 1998, the Company announced its intention to acquire Orion
Research, a wholly owned subsidiary of Thermedics, in a merger in which
5,961,225 shares of the Company's common stock would be issued in exchange for
all of the outstanding shares of Orion Research. On May 6, 1998, the transaction
was completed, subject to shareholder approval of the issuance of the shares of
Company common stock to Thermedics in the merger. In January 1999, the Company's
shareholders approved the issuance of the shares to Thermedics. Orion Research
manufactures electrochemistry products that determine the quality of a wide
variety of substances by measuring components, such as pH, specific ion content,
dissolved oxygen, and conductivity. These products are used in the
environmental, biomedical research, food, chemical, pharmaceutical, and many
other industries.
      Because the Company and Orion Research were deemed for accounting purposes
to be under control of their common majority owner, Thermedics, the transaction
has been accounted for at historical cost in a manner similar to a pooling of
interests. Accordingly, all historical financial information presented has been
restated to include the acquisition of Orion Research. On January 11, 1999, the
shareholders approved the issuance of the 5,961,225 shares of the Company's
common stock and the shares will be issued to Thermedics immediately after the
listing on the American Stock Exchange of such shares. The shares have been
treated as outstanding for all periods presented for purposes of computing
earnings per share. Revenues and net income as previously reported for the
separate entities prior to the acquisition and as restated for the combined
Company are:

(In thousands)                                                                              1997      1996
-------------------------------------------------------------------------------------- ---------- ---------

Revenues:
  Historical                                                                           $  51,320  $ 43,750
  Orion Research                                                                          53,054    50,854
                                                                                       ---------  --------

                                                                                       $ 104,374  $ 94,604
                                                                                       =========  ========

Net Income:
  Historical                                                                           $   6,070  $    362
  Orion Research                                                                           6,436     4,937
                                                                                       ---------  --------

                                                                                       $  12,506  $  5,299
                                                                                       =========  ========
</TABLE>

      On January 25, 1996, the Company acquired the assets of Moisture Systems
Corporation and certain affiliated companies (collectively, Moisture Systems),
and the stock of Rutter & Co. B.V. (Rutter) for a total purchase price of
$21,668,000 in cash, which included the repayment of $700,000 of debt. Moisture
Systems and Rutter design, manufacture, and sell instruments that use
near-infrared spectroscopy to measure moisture and other product constituents,
in a variety of manufacturing processes, including fats, proteins, oils,
flavorings, solvents, adhesives, and

                                       10
<PAGE>

2.    Acquisitions (continued)

coatings. These systems are used in the food, pharmaceutical, chemical, pulp and
paper, and other industries. To finance these acquisitions, the Company borrowed
$21,200,000 from Thermedics pursuant to a promissory note bearing interest at
the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter. As of January 3, 1998, the interest rate on the
promissory note was 5.76%. The note was repaid at its maturity in March 1998. In
December 1996, the Company acquired certain moisture measurement product lines
for approximately $300,000 in cash. In addition, the Company has agreed to pay a
licensing fee on sales of these products through December 2000.
      These acquisitions, other than Orion Research, have been accounted for
using the purchase method of accounting and their results of operations have
been included in the accompanying financial statements from their respective
dates of acquisition. The aggregate cost of all of these acquisitions exceeded
the estimated fair value of the acquired net assets by $62,114,000, which is
being amortized over 40 years. Allocation of the purchase price for these
acquisitions was based on estimates of the fair value of the net assets
acquired.
      In connection with these acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The Company's restructuring
activities, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing
levels and the abandonment of excess facilities. In connection with these
restructuring activities, as part of the cost of the acquisitions, the Company
established reserves as detailed below, primarily for severance and excess
facilities. In accordance with EITF 95-3, the Company finalized its
restructuring plans no later than one year from the respective dates of the
acquisitions. A summary of the changes in accrued acquisition expenses is:

<TABLE>
<CAPTION>
                                                                               Abandonment
                                                                                 of Excess
(In thousands)                                                    Severance     Facilities         Total
------------------------------------------------------------- -------------- -------------- -------------

<S>                                                           <C>            <C>            <C>    
Balance at December 30, 1995                                       $    691       $      -       $   691
  Reserves established                                                  401            144           545
  Usage                                                                (584)           (36)         (620)
  Decrease due to finalization of restructuring plan,                     -            (36)          (36)
    recorded as a decrease to cost in excess of net
    assets of acquired companies                                   --------       --------       -------


Balance at December 28, 1996                                            508             72           580
  Usage                                                                (404)           (72)         (476)
  Decrease due to finalization of restructuring plan,                  (104)             -          (104)
    recorded as a decrease to cost in excess of net
    assets of acquired companies                                   --------       --------       -------

Balance at January 3, 1998 and January 2, 1999                     $      -       $      -       $     -
                                                                   ========       ========       =======

</TABLE>


                                       11
<PAGE>


2.    Acquisitions (continued)

      The following table presents selected financial information for the
Company, Moisture Systems, and Rutter on a pro forma basis, assuming the
companies had been combined since the beginning of 1996.
<TABLE>
<CAPTION>
<S>                                                                                               <C>     

(In thousands except per share amounts)                                                               1996
---------------------------------------------------------------------------------------- -------- ---------

Revenues                                                                                          $ 96,151
Net Income                                                                                           5,457
Basic and Diluted Earnings per Share                                                                   .34
</TABLE>

      The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisitions of Moisture
Systems and Rutter been made at the beginning of 1996.

3.    Employee Benefit Plans

Stock-based Compensation Plans

Stock Option Plan
      The Company has stock-based compensation plans for its key employees,
directors, and others, which permit the grant of a variety of stock and
stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. The option
recipients and the terms of options granted under this plan are determined by
the Board Committee. As of year-end 1998, only nonqualified stock options have
been granted by the Board Committee under these plans. Generally, options
granted to date are exercisable immediately, but are subject to certain transfer
restrictions and the right of the Company to repurchase shares issued upon
exercise of the options at the exercise price, upon certain events. The
restrictions and repurchase rights generally lapse ratably over a one- to
ten-year period, depending on the term of the option, which generally ranges
from five to twelve years. Nonqualified stock options may be granted at any
price determined by the Board Committee, although incentive stock options must
be granted at not less than the fair market value of the Company's common stock
on the date of grant. To date, all options have been granted at fair market
value.
      In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 256,000 shares at a weighted average exercise price of $10.85 per share
elected to participate in this exchange and, as a result, received options to
purchase 128,000 shares of Company common stock at $7.88 per share, which are
included in the 1998 grants in the table below. The other terms of the new
options are the same as the exchanged options except that the holders may not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.


                                       12
<PAGE>

3.    Employee Benefit Plans (continued)
<TABLE>
<CAPTION>

      A summary of the Company's stock option activity is:

<S>                                            <C>       <C>        <C>      <C>        <C>       <C>  
                                                       1998                1997                 1996
                                               -------------------  ------------------  ------------
                                                          Weighted            Weighted            Weighted
                                                           Average             Average             Average
                                                          Exercise            Exercise            Exercise
                                                             Price               Price               Price
                                                 Number              Number               Number
                                                     of                  of                   of
(Shares in thousands)                            Shares              Shares               Shares
---------------------------------------------- --------- ---------- -------- ---------- --------- ---------

Options Outstanding, Beginning of Year              656     $10.74      218     $10.41        25     $9.75
  Granted                                           830       9.17      550      10.94       207     10.45
  Exercised                                           -          -       (1)      9.75         -         -
  Forfeited                                         (93)     10.38     (111)     11.09       (14)     9.79
  Canceled due to exchange                         (256)     10.85        -          -         -         -
                                                  -----               -----                -----

Options Outstanding, End of Year                  1,137     $ 9.59      656     $10.74       218     $10.41
                                                  =====     ======    =====     ======     =====     ======

Options Exercisable                               1,137     $ 9.59      656     $10.74         -     $   -
                                                  =====     ======    =====     ======     =====     =====

Options Available for Grant                         296                 177                  116
                                                  =====               =====                =====
</TABLE>
<TABLE>
<CAPTION>

      A summary of the status of the Company's stock options at January 2, 1999,
is:
<S>                                            <C>                 <C>                  <C>   

                                                              Options Outstanding and Exercisable
                                                     ------------------------------------------------------
Range of Exercise Prices                                   Number             Weighted            Weighted
                                                               of              Average             Average
                                                           Shares            Remaining            Exercise
                                                   (In thousands)     Contractual Life               Price
---------------------------------------------- ------------------- -------------------- -------------------

$  7.56 - $  8.79                                             469          5.5 years              $ 7.77
   8.80 -   10.01                                             228          6.1 years                9.78
  10.02 -   11.24                                             239          6.8 years               10.95
  11.25 -   12.46                                             201          7.8 years               12.01
                                                             ----

$  7.56 - $ 12.46                                           1,137          6.3 years              $ 9.59
                                                            =====
</TABLE>

Employee Stock Purchase Program
      Substantially all of the Company's full-time U.S. employees are eligible
to participate in an employee stock purchase program sponsored by Thermedics and
Thermo Electron. Prior to the 1998 program year, the applicable shares of common
stock could be purchased at the end of a 12-month period at 95% of the fair
market value at the beginning of the period, and the shares purchased were
subject to a six-month resale restriction. Effective November 1, 1998, the
applicable shares of common stock may be purchased at 85% of the lower of the
fair market value at the beginning or end of the period, and the shares
purchased are subject to a one year resale restriction. Shares are purchased
through payroll deductions of up to 10% of each participating employee's gross
wages.

                                       13
<PAGE>

3.    Employee Benefit Plans (continued)

Pro Forma Stock-based Compensation Plans Expense
      In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB 25 in accounting
for its stock-based compensation plans. Had compensation cost for awards granted
after 1994 under the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
under SFAS No. 123, the effect on the Company's net income and earnings per
share would have been:
<TABLE>
<CAPTION>

(In thousands except per share amounts)                                             1998     1997      1996
------------------------------------------------------------------------------- --------- -------- ---------

Net Income:
<S>                                                                             <C>       <C>      <C>     
  As reported                                                                   $  8,671  $12,506  $  5,299
  Pro forma                                                                        7,722   11,794     4,908
Basic and Diluted Earnings per Share:
  As reported                                                                        .45      .67       .33
  Pro forma                                                                          .40      .63       .30
</TABLE>

      Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
      The weighted average fair value per share of options granted was $2.96,
$4.44, and $3.76 in 1998, 1997, and 1996, respectively. The fair value of each
option grant is estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
<S>                                                            <C>        <C>          <C>        <C>      

                                                                                 1998       1997       1996
--------------------------------------------------------------------------- ---------- ---------- ----------

Volatility                                                                        29%        28%          -
Risk-free Interest Rate                                                          4.9%       6.1%       6.4%
Expected Life of Options                                                    4.3 years  5.9 years  7.0 years

      The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

401(k) Savings Plan
      Substantially all of the Company's full-time U.S. employees are eligible
to participate in Thermo Electron's 401(k) savings plan. Contributions to the
401(k) savings plan are made by both the employee and the Company. Company
contributions are based upon the level of employee contributions. For this plan,
the Company contributed and charged to expense $302,000, $611,000, and $619,000
in 1998, 1997, and 1996, respectively.

                                       14
<PAGE>

4.    Income Taxes

      The components of income before provision for income taxes are:

(In thousands)                                                                1998        1997        1996
----------------------------------------------------------------------- ----------- ----------- -----------

Domestic                                                                   $ 8,166     $15,051     $ 3,357
Foreign                                                                      6,001       5,626       5,461
                                                                           -------     -------     -------

                                                                           $14,167     $20,677     $ 8,818
                                                                           =======     =======     =======

      The components of the provision for income taxes are:

(In thousands)                                                                1998        1997        1996
----------------------------------------------------------------------- ----------- ----------- -----------

Currently Payable:
  Federal                                                                  $ 2,037     $ 4,280     $   465
  State                                                                        569       1,231         578
  Foreign                                                                    1,806       1,512       1,456
                                                                           -------     -------     -------

                                                                             4,412       7,023       2,499
                                                                           -------     -------     -------

Net Deferred (Prepaid):
  Federal                                                                    1,005         903         996
  State                                                                        143         129        (180)
  Foreign                                                                      (64)        116         204
                                                                           -------     -------     -------

                                                                             1,084       1,148       1,020
                                                                           -------     -------     -------

                                                                           $ 5,496     $ 8,171     $ 3,519
                                                                           =======     =======     =======

      The Company receives a tax deduction upon exercise of nonqualified stock
options by employees for the difference between the exercise price and the
market price of the Company's common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect $241,000
and $305,000 of such benefits that have been allocated to capital in excess of
par value in 1998 and 1997, respectively.
      The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 34% to income before provision for income taxes due to:

(In thousands)                                                                1998        1997        1996
----------------------------------------------------------------------- ----------- ----------- -----------

Provision for Income Taxes at Statutory Rate                               $ 4,817     $ 7,030     $ 2,998
Increases (Decreases) Resulting From:
  State income taxes, net of federal tax                                       470         891         258
  Amortization of cost in excess of net assets of acquired                     366         432         424
companies
  Foreign tax rate and tax law differential                                   (298)       (321)       (229)
  Tax benefit of foreign sales corporations                                   (120)       (289)       (141)
  Other, net                                                                   261         428         209
                                                                           -------     -------     -------

                                                                           $ 5,496     $ 8,171     $ 3,519
                                                                           =======     =======     =======

                                       15
<PAGE>


4.    Income Taxes (continued)

      Prepaid (deferred) income taxes in the accompanying balance sheet consist
of:

(In thousands)                                                                            1998        1997
----------------------------------------------------------------------------------- ----------- -----------

Prepaid (Deferred) Income Taxes:
  Reserves and other accruals                                                           $1,233      $1,934
  Inventory basis difference                                                             1,125       1,283
  Long-term assets                                                                           -         188
  Accrued compensation                                                                     310          56
  Depreciation and amortization                                                            494         364
  Tax loss and credit carryforwards                                                          -         884
  Other, net                                                                               216        (247)
                                                                                        ------      ------

                                                                                        $3,378      $4,462
                                                                                        ======      ======

      A provision has not been made for U.S. or additional foreign taxes on
$6,495,000 of undistributed earnings of foreign subsidiaries that could be
subject to taxation if remitted to the U.S. because the Company plans to keep
these amounts permanently reinvested overseas.

5.    Commitments

      The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $2,376,000, $1,984,000, and
$2,727,000 in 1998, 1997, and 1996, respectively, net of third-party sublease
income of $307,000 in 1998 and $181,000 in 1997. Total future minimum payments
due under noncancelable operating leases at January 2, 1999, are $927,000 in
1999; $718,000 in 2000; $684,000 in 2001; $658,000 in 2002; $645,000 in 2003;
and $1,771,000 in 2004 and thereafter. Total future minimum lease payments are
$5,403,000 and have not been reduced by minimum sublease rental income of
$976,000 due through 2004 under noncancelable operating subleases. See Note 6
for office and manufacturing space leased from a related party.

6.    Related-party Transactions

Corporate Services Agreement
      The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company currently pays Thermo Electron annually an amount equal to 0.8% of
the Company's revenues. In calendar 1997 and 1996, the Company paid an amount
equal to 1.0% of the Company's revenues. The fee is reviewed and adjusted
annually by mutual agreement of the parties. Management believes that the
service fee charged by Thermo Electron is reasonable and that such fees are
representative of the expenses the Company would have incurred on a stand-alone
basis. The corporate services agreement is renewed annually but can be
terminated upon 30 days' prior notice by the Company or upon the Company's
withdrawal from the Thermo Electron Corporate Charter (the Thermo Electron
Corporate Charter defines the relationship among Thermo Electron and its
majority-owned subsidiaries). In addition, the Company uses contract
administration services of a majority-owned subsidiary of Thermo Electron and is
charged based on actual usage. For these services, as well as the administrative
services provided by Thermo Electron, the Company was charged $733,000,
$1,044,000, and $947,000 in 1998, 1997, and 1996, respectively. For additional
items such as employee benefit plans, insurance coverage, and other identifiable
costs, Thermo Electron charges the Company based upon costs attributable to the
Company.

                                       16
<PAGE>

6.    Related-party Transactions (continued)

Research and Development Agreement
      Pursuant to a subcontract entered into in October 1993, which expired in
December 1998 and was extended to February 28, 1999, the Company performs
research and development services for Thermo Coleman Corporation, which is the
prime contractor under a contract with the U.S. Department of Energy. Thermo
Coleman is a majority-owned private subsidiary of Thermo Electron. Thermo
Coleman paid the Company $2,000, $533,000, and $619,000 for services rendered in
1998, 1997, and 1996, respectively.
      The Company purchases an X-ray source that is used as a component in its
InScan systems from Trex Medical Corporation, a publicly traded, majority-owned
subsidiary of ThermoTrex Corporation, which is itself a publicly traded,
majority-owned subsidiary of Thermo Electron. The Company paid Trex Medical
$406,000 and $285,000 for these products in 1998 and 1997, respectively.
      The Company entered into a funded research and development arrangement
with ThermoLase Corporation, a publicly traded, majority-owned subsidiary of
ThermoTrex, in December 1997 to develop a cryogenic cooling device for
ThermoLase. ThermoLase agreed to purchase five prototype devices for an
aggregate purchase price of $303,000. The Company shipped these devices in the
third quarter of 1998.

Distribution Agreement
      Pursuant to an international distributorship agreement, the Company
appointed Arabian Business Machines Co. (ABM) as its exclusive distributor of
the Company's security instruments in certain Middle Eastern countries. ABM is a
member of The Olayan Group. Ms. Hutham S. Olayan, a director of Thermo Electron,
is the president and a director of Olayan America Corporation, another member of
The Olayan Group, which is indirectly controlled by Suliman S. Olayan, Ms.
Olayan's father. Revenues recorded under this agreement totaled $248,000,
$480,000, and $652,000 in 1998, 1997, and 1996, respectively.

Other Related-party Transactions
      The Company purchases and sells products in the ordinary course of
business with other companies affiliated with Thermo Electron. Sales of products
to such affiliated companies totaled $77,000, $147,000, and $114,000 in 1998,
1997, and 1996, respectively.

Sublease Agreement
      The Company has subleased approximately 12,000 square feet of space in its
Chelmsford, Massachusetts, facility to Thermo Cardiosystems Inc., a
majority-owned publicly traded subsidiary of Thermedics, under a sublease
agreement expiring in December 1999. Under this sublease, Thermo Cardiosystems
paid the Company base rent of $50,000 and $40,000 in 1998 and 1997,
respectively, together with amounts equal to approximately $44,000 and $33,000,
representing Thermo Cardiosystems' pro rata allocations of the facility's
aggregate operating costs, real estate taxes, and utilities for these periods.

Repurchase Agreement
      The Company invests excess cash in a repurchase agreement with Thermo
Electron as discussed in Note 1.

7.    Common Stock

Sale of Common Stock
      In March 1997, the Company sold 2,671,292 shares of common stock in an
initial public offering at $11.50 per share, for net proceeds of $28,078,000.
      In November 1996, the Company sold 383,500 shares of its common stock in a
private placement at $10.75 per share, for net proceeds of $3,964,000.
      In March 1996, the Company sold 300,000 shares of its common stock in a
private placement at $10.00 per share, for net proceeds of $3,000,000.

                                       17
<PAGE>

7.    Common Stock (continued)

Reserved Shares
      At January 2, 1999, the Company had reserved 1,508,000 unissued shares of
its common stock for possible issuance under the stock-based compensation plans.

8.    Significant Customers, Business Segments, and Geographical Information

      Sales to two customers each accounted for 10% of the Company's total
revenues in 1998. Sales to another customer accounted for 13% and 11% of the
Company's total revenues in 1997 and 1996, respectively.
      The Company organizes and manages its business by principal product type.
The Company's principal businesses operate in two segments: Detection
Instruments and Laboratory Products. In classifying operational entities into a
particular segment, the Company aggregated businesses with similar economic
characteristics, products and services, production processes, customers, and
methods of distribution.
      The Company's Detection Instruments segment develops, manufactures, and
markets high-speed detection and measurement systems that ensure the quality of
a wide variety of in-process and finished products. The Detection Instruments
segment also develops, manufactures, and markets security instruments for
search, screening, and forensic applications under the direction of police,
border police, transportation authorities, and carriers. The Company's
Laboratory Products segment develops, manufactures, and markets electrochemistry
systems that laboratories use to determine the quality of a broad range of
substances by measuring their pH, specific ion content, dissolved oxygen, and
conductivity.
      Within the Detection Instruments segment, the Company derived revenues of
$11,065,000, $19,198,000, and $14,917,000 in 1998, 1997, and 1996, respectively,
from ALEXUS(R) systems and $12,245,000, $15,387,000, and $17,950,000 in 1998,
1997, and 1996, respectively, from near-infrared analyzers. In addition, this
segment derived revenues of $8,258,000, $10,337,000, and $7,149,000 in 1998,
1997, and 1996, respectively, from its EGIS(R) security systems.

(In thousands)                                                                  1998       1997        1996
------------------------------------------------------------------------- ----------- ---------- ----------

Business Segment Information

Revenues:
  Detection Instruments                                                    $  40,273   $ 51,320   $  43,750
  Laboratory Products                                                         51,302     53,054      50,854
                                                                           ---------   --------   ---------

                                                                           $  91,575   $104,374   $  94,604
                                                                           =========   ========   =========

Income Before Provision for Income Taxes:
  Detection Instruments                                                    $   2,671   $  9,623   $   1,908
  Laboratory Products                                                         11,080     11,257       8,738
  Corporate (a)                                                                 (816)    (1,059)       (950)
                                                                           ---------   --------   ---------

  Total operating income                                                      12,935     19,821       9,696
  Interest and other income (expense), net                                     1,232        856        (878)
                                                                           ---------   --------   ---------

                                                                           $  14,167   $ 20,677   $   8,818
                                                                           =========   ========   =========

                                       18
<PAGE>


8.    Significant Customers, Business Segments, and Geographical Information (continued)

(In thousands)                                                                  1998      1997         1996
------------------------------------------------------------------------- ----------- ---------- ----------

Total Assets:
  Detection Instruments                                                   $   44,785   $44,987    $  45,370
  Laboratory Products                                                         60,036    61,570       62,575
  Corporate (b)                                                               27,685    41,708        8,113
                                                                           ---------   -------    ---------

                                                                           $ 132,506  $148,265    $ 116,058
                                                                           =========  ========    =========

Depreciation and Amortization:
  Detection Instruments                                                    $   1,402   $ 1,522    $   2,364
  Laboratory Products                                                          1,925     1,765        2,002
                                                                           ---------   -------    ---------

                                                                           $   3,327   $ 3,287    $   4,366
                                                                           =========   =======    =========

Capital Expenditures:
  Detection Instruments                                                    $   1,655   $   775    $     766
  Laboratory Products                                                          1,119     1,057        1,842
                                                                           ---------   -------    ---------

                                                                           $   2,774   $ 1,832    $   2,608
                                                                           =========   =======    =========

Geographical Information

Revenues (c):
  United States                                                            $  79,768   $93,251    $  81,447
  Other                                                                       17,957    18,016       18,551
  Transfers among geographical areas (d)                                      (6,150)   (6,893)      (5,394)
                                                                           ---------   -------    ---------

                                                                           $  91,575   $104,374   $  94,604
                                                                           =========   ========   =========

Long-lived Assets (e):
  United States                                                            $   4,483   $ 3,433    $   3,287
  Other                                                                          472       591          760
                                                                           ---------   -------    ---------

                                                                           $   4,955   $ 4,024    $   4,047
                                                                           =========   =======    =========

Export Revenues Included in United States Revenues Above (f)               $  31,637   $42,930    $  32,087
                                                                           =========   =======    =========

(a)  Primarily general and administrative expenses.
(b)  Primarily cash and cash equivalents and prepaid taxes.
(c)  Revenues are attributed to countries based on selling location.
(d)  Transfers among geographical areas are accounted for at prices that are
     representative of transactions with unaffiliated parties.
(e)  Includes property, plant, and equipment, net and other long-term tangible
     assets. 
(f)  In general, export revenues are denominated in U.S. dollars.

                                       19
<PAGE>


9.    Earnings per Share

      Basic and diluted earnings per share were calculated as follows:

(In thousands except per share amounts)                                           1998      1997     1996
------------------------------------------------------------------------------ -------- --------- --------

Basic
Net Income                                                                     $ 8,671  $ 12,506  $ 5,299
                                                                               -------  --------  -------

Weighted Average Shares                                                         13,356    12,760   10,275
Shares Issuable in Connection With the Acquisition of Orion                      5,961     5,961    5,961
    Research, Inc. (Note 2)                                                    -------  --------  -------

Pro Forma Weighted Average Shares, as Adjusted                                  19,317    18,721   16,236
                                                                               -------  --------  -------

Basic Earnings per Share                                                       $   .45  $    .67  $   .33
                                                                               =======  ========  =======

Diluted
Net Income                                                                     $ 8,671  $ 12,506  $ 5,299
                                                                               -------  --------  -------

Pro Forma Basic Weighted Average Shares                                         19,317    18,721   16,236
Effect of Stock Options                                                              4        11       17
                                                                               -------  --------  -------

Pro Forma Weighted Average Shares, as Adjusted                                  19,321    18,732   16,253
                                                                               -------  --------  -------

Diluted Earnings per Share                                                     $   .45  $    .67  $   .33
                                                                               =======  ========  =======

      The computation of diluted earnings per share for each period excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of January 2, 1999, there were 1,136,737 of
such options outstanding, with exercise prices ranging from $7.56 to $12.46 per
share.

10.   Proposed Reorganization

      During 1998, Thermo Electron announced a proposed reorganization,
involving certain of Thermo Electron's subsidiaries, including the Company. As
part of this reorganization, Thermo Electron announced that Thermedics' equity
interest in the Company may be transferred to Thermo Electron in exchange for
shares of Thermedics common stock. Subsequently, the Company would be taken
private and become a wholly owned subsidiary of Thermo Electron. Shareholders of
the Company would receive cash in exchange for their shares of the Company's
common stock. The completion of these transactions is subject to numerous
conditions, including the establishment of prices and exchange ratios;
confirmation of anticipated tax consequences; the approval of the Board of
Directors of the Company, Thermedics, and Thermo Electron, including the
independent directors of the Company and Thermedics; the negotiation and
execution of definitive agreements; the receipt of fairness opinions from
investment banking firms on certain financial aspects of the transactions; and
clearance by the Securities and Exchange Commission of any necessary documents
regarding the proposed transactions.

                                       20
<PAGE>

11.   Unaudited Quarterly Information

(In thousands except per share amounts)

1998                                                               First     Second       Third      Fourth
-------------------------------------------------------------- ---------- ----------  ----------  ----------

Revenues                                                         $23,707    $23,957     $23,569     $20,342
Gross Profit                                                      12,708     13,217      13,061      10,338
Net Income                                                         2,050      2,235       2,667       1,719
Basic and Diluted Earnings per Share                                 .11        .12         .14         .09

1997                                                               First     Second       Third      Fourth
-------------------------------------------------------------- ---------- ----------  ----------   ---------

Revenues                                                         $25,532    $25,639     $26,232     $26,971
Gross Profit                                                      14,027     14,342      14,590      15,020
Net Income                                                         2,242      3,025       3,526       3,713
Basic and Diluted Earnings per Share                                 .13        .16         .18         .19




                                       21
<PAGE>

                    Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermedics Detection Inc.:

      We have audited the accompanying consolidated balance sheet of Thermedics
Detection Inc. (a Massachusetts corporation and 84%-owned subsidiary of
Thermedics Inc.) and subsidiaries as of January 2, 1999, and January 3, 1998,
and the related consolidated statements of income, cash flows, and comprehensive
income and shareholders' investment for each of the three years in the period
ended January 2, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
      We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide 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 Thermedics
Detection Inc. and subsidiaries as of January 2, 1999, and January 3, 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended January 2, 1999, in conformity with generally accepted
accounting principles.



                                                            Arthur Andersen LLP



Boston, Massachusetts
February 11, 1999

                                       22
<PAGE>
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations


      Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operation under
the heading "Forward-looking Statements."

Overview

      The Company is comprised of businesses that operate in two segments:
Detection Instruments and Laboratory Products. The Company's Detection
Instruments segment designs, manufactures, and markets ultratrace chemical
detectors, X-ray imaging, near-infrared spectroscopy, high-speed gas
chromatography, and other technologies for quality assurance of in-process or
finished products, primarily in the food, beverage, pharmaceutical, forest
products, chemical, and other consumer products industries. The Company's
ALEXUS(R) systems detect trace amounts of substances that would affect product
quality in refillable beverage containers. The Company's InScan(R) systems use
high-speed X-ray imaging to determine accurate fill volume, net volume, package
integrity, and other quality measures for a variety of products in cans,
bottles, boxes, and other containers. The Company's Flash-GC and EZ Flash
systems are designed to help customers conduct chemical analyses substantially
faster than if they used conventional gas chromatography equipment. In addition,
the Company's near-infrared analyzers measure moisture and other product
constituents, such as fats, proteins, oils, flavorings, solvents, adhesives, and
coatings, in a broad range of products as they move along manufacturing lines.
      The Company's Detection Instruments segment also makes
explosives-detection equipment that uses simultaneous trace particle- and
vapor-detection techniques based on its proprietary chemiluminescence and
high-speed gas chromatography technologies. Customers use these
explosives-detection systems to detect plastic and other explosives at airports
and border crossings, for other high-security screening applications, and for
forensic and search applications. The Company's Detection Instruments segment
also performs contract research and development services for government and
industry customers and earns service revenues through long-term contracts.
      During 1997, the Detection Instruments segment had strong operating
results due to large shipments to two customers discussed below in the results
of operations. The absence of these large shipments in 1998, together with lower
demand for certain other products, resulted in a significant decrease in this
segment's operating income in 1998 (Note 8).
      The Company's Laboratory Products segment designs, manufactures, and
markets, electrochemistry and other technologies for quality assurance and
regulatory compliance, primarily in the environmental, food, beverage, chemical,
pharmaceutical, and biomedical research industries. Through the Company's Orion
Research, Inc. subsidiary, the Laboratory Products segment is a worldwide
leading manufacturer of electrochemistry products that determine the quality of
various substances, from food and pharmaceuticals to water and wastewater, by
measuring their pH, specific ion concentration, dissolved oxygen, and
conductivity.

Results of Operations

1998 Compared With 1997
      Revenues decreased to $91.6 million in 1998 from $104.4 million in 1997,
primarily due to a decrease in revenues in the Detection Instruments segment.
Revenues in the Detection Instruments segment decreased to $40.3 million in 1998
from $51.3 million in 1997, due to a decline in revenues from industrial process
instruments to $30.1 million in 1998 from $39.2 million in 1997. This decrease
was primarily due to lower revenues from ALEXUS and near-infrared analyzers,
offset in part by an increase in InScan product sales and contract revenues.
Revenues in 1997 included $6.6 million from a mandated ALEXUS product-line
upgrade of The Coca-Cola Company's existing installed

                                       23
<PAGE>


1998 Compared With 1997 (continued)
base. Revenues from EGIS explosives-detection systems and related services
decreased to $8.2 million in 1998 from $10.3 million in 1997, primarily due to
lower shipments of security systems. During 1998, the Company completed
shipments under a contract to provide security systems to the Federal Aviation
Administration (FAA). Revenues under the contract totaled $2.6 million during
1998.
      The Company's total backlog decreased to $6.1 million at year-end 1998
from $9.4 million at year-end 1997, primarily due to completion of the FAA
contract.
      Revenues from the Laboratory Products segment decreased to $51.3 million
from $53.1 million in 1997, primarily due to lower worldwide demand for
titration and electrochemistry products.
      The gross profit margin decreased to 54% in 1998 from 56% in 1997. The
gross profit margin in the Detection Instruments segment decreased primarily due
to lower sales volume and, to a lesser extent, changes in product mix.
      Selling, general, and administrative expenses as a percentage of revenues
increased to 29% in 1998 from 27% in 1997, primarily due to a decrease in
revenues at the Detection Instruments segment. Selling, general, and
administrative expenses decreased to $26.7 million in 1998 from $28.5 million in
1997, primarily due to a reduction in selling expenses at the Company's Moisture
Systems subsidiary in an effort to reduce costs.
     Research and  development  expenses  remained  unchanged at $9.6 million in
1998 and 1997. Interest income decreased to $1.5 million in 1998 from $2.1
million in 1997, primarily due to lower average invested balances as a result of
the repayment of the Company's promissory note to Thermedics in March 1998.
Interest expense, related party, decreased to $0.3 million in 1998 from $1.2
million in 1997 due to the repayment of the promissory note to Thermedics.
      The effective tax rate was 39% in 1998 and 40% in 1997. The effective tax
rates exceeded the statutory federal income tax rate primarily due to the impact
of state income taxes and amortization of cost in excess of net assets of
acquired companies.

1997 Compared With 1996
      Total revenues increased to $104.4 million in 1997 from $94.6 million in
1996, primarily due to increased revenues in the Detection Instruments segment.
Detection Instruments segment revenues increased to $51.3 million from $43.8
million, primarily due to ALEXUS revenues of $6.6 million from the fulfillment
of a mandated existing product-line upgrade from The Coca-Cola Company to its
existing installed base and, to a lesser extent, increased shipments of InScan
systems, which were introduced in 1996. These increases were offset in part by a
decrease of $2.6 million in revenues from the Moisture Systems business,
acquired in January 1996, primarily due to a slowdown in product demand in
Europe. In addition, revenues from the Company's EGIS security systems and
related services increased to $10.3 million in 1997 from $7.1 million in 1996,
primarily due to $3.2 million of shipments under the Company's contract with the
FAA.
      Revenues from the Company's Laboratory Products segment increased to $53.1
million in 1997 from $50.9 million in 1996, primarily due to an increase in
international demand for pH and conductivity measurement products.
      The gross profit margin increased to 56% in 1997 from 52% in 1996,
primarily due to margin improvement at the Detection Instruments segment. The
gross profit margin for the Detection Instruments segment improved primarily due
to a change in sales mix to higher-margin revenues from The Coca-Cola Company's
mandated product-line upgrade and, to a lesser extent, from the inclusion of a
$0.8 million charge in 1996 as a result of obsolescence created by planned
product changes, as well as a decrease in overhead expenses. In addition,
Moisture Systems contributed to the improvement with increased field service
efficiencies and, to a lesser extent, a change in sales mix to higher-margin
service revenues.
      The gross profit margin in the Laboratory Products segment increased
primarily due to lower overhead expenses resulting from the relocation of its
principal domestic manufacturing facility in October 1996 and also from the
inclusion of a $0.8 million charge in 1996 as a result of obsolescence created
by planned product changes.
      Selling, general, and administrative expenses as a percentage of revenues
decreased to 27% in 1997 from 33% in 1996, primarily due to nonrecurring costs
of $1.5 million at the Detection Instruments segment in 1996 related to


                                       24
<PAGE>


1997 Compared With 1996 (continued)
moving expenses for the relocation of a domestic manufacturing facility and
reductions in personnel and leased space in response to a lower sales volume of
detection instruments and, to a lesser extent, an increase in revenues in 1997.
This decrease was offset in part by increased selling expenses as the Company
developed a sales force for its InScan and Flash-GC systems.
      Research and development expenses increased to $9.6 million in 1997 from
$8.1 million in 1996, primarily due to costs related to the improvement and
expansion of laboratory products, as well as internal development of enhanced
sensor technology at the Laboratory Products segment.
      Interest income increased to $2.1 million in 1997 from $0.2 million in
1996, primarily due to interest income earned on the invested proceeds from the
Company's March 1997 initial public offering (Note 7). Interest expense, related
party, of $1.2 million and $1.1 million in 1997 and 1996, respectively, reflects
the issuance of a $21.2 million promissory note to Thermedics in connection with
the January 1996 acquisitions of Moisture Systems and Rutter (Note 2).
      The effective tax rate was 40% in 1997 and 1996. The effective tax rate
exceeded the statutory federal income tax rate primarily due to the impact of
state income taxes and amortization of cost in excess of net assets of acquired
companies.

Liquidity and Capital Resources

      Consolidated working capital was $57.6 million at January 2, 1999,
compared with $46.3 million at January 3, 1998. Included in working capital are
cash and cash equivalents of $32.9 million at January 2, 1999, compared with
$46.4 million at January 3, 1998.
      During 1998, $8.7 million of cash was provided by operating activities.
During this period, $5.3 million of cash was used to reduce other current
liabilities, including $1.1 million due to parent company and affiliated
companies. In addition, cash of $1.4 million was used to fund an increase in
inventories, primarily relating to purchases for the production of the EZ Flash,
which began in May 1998. These uses of cash were offset in part by $1.9 million
provided by a decrease in accounts receivable primarily due to lower revenues.
      During 1998, the Company's investing activities included the expenditure
of $2.8 million for purchases of property, plant, and equipment. The Company
expects to spend $1.8 million on capital additions in 1999.
      The Company's financing activities used cash of $20.0 million in 1998.
This use of cash consisted primarily of the Company's March 1998 repayment of
its $21.2 million promissory note to Thermedics.
      The Company expects to have positive cash flow from its existing
operations. Although the Company does not presently intend to actively seek to
acquire additional businesses in the near future, it may acquire one or more
complementary businesses if they are presented to the Company on terms the
Company believes to be attractive. Such acquisitions may require significant
amounts of cash. The Company expects that it will finance any such acquisitions
through a combination of internal funds and/or short-term borrowings from Thermo
Electron, although it has no agreement with Thermo Electron to ensure that funds
will be available on acceptable terms or at all. The Company believes that its
existing resources are sufficient to meet the capital requirements of its
existing businesses for the foreseeable future.


                                       25
<PAGE>


Market Risk

      The Company is exposed to market risk from changes in foreign currency
exchange rates, which could affect its future results of operations and
financial condition. The Company manages its exposure to these risks through its
regular operating and financing activities.

Foreign Currency Exchange Rates
      The Company views its investment in its foreign subsidiaries as long-term.
The Company's investment in its foreign subsidiaries is sensitive to
fluctuations in foreign currency exchange rates. The effect of a change in
foreign exchange rates on the Company's net investment in its foreign
subsidiaries is recorded as a separate component of shareholders' investment. A
10% depreciation in fiscal year-end 1998 functional currencies, relative to the
U.S. dollar, would result in a $1.4 million reduction of the Company's
shareholders' investment.

Year 2000

      The Company continues to assess the potential impact of the year 2000 on
the Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading significant information
technology systems and facilities; (ii) testing and developing upgrades, if
necessary, for the Company's current products and certain discontinued products;
(iii) contacting key suppliers and vendors to determine their year 2000
compliance status; and (iv) developing a contingency plan.

The Company's State of Readiness
      The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company is currently in phase two of its
program, during which any noncompliant systems or facilities that were
identified during phase one are prioritized and remediated. The Company is
currently upgrading or replacing such noncompliant information technology
systems, and this process was approximately 80% complete as of January 2, 1999.
In many cases, such upgrades or replacements are being made in the ordinary
course of business, without accelerating previously scheduled upgrades or
replacements. The Company expects that all of its material information
technology systems and critical facilities will be year 2000 compliant by June
1999.
      The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products. The Company
has tested its older products for year 2000 compliance, and believes that all of
its material older products are year 2000 compliant.
      The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. The Company has started to follow-up and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company has substantially completed its
assessment of third party risk, and has determined the impact on the Company of
any third-party risk on the part of its suppliers and vendors to be minimal.

                                       26
<PAGE>

Year 2000 (continued)

Contingency Plan
      The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required.

Estimated Costs to Address the Company's Year 2000 Issues
      The Company had incurred expenses to third parties (external costs)
related to year 2000 issues of approximately $473,000 as of January 2, 1999, and
the total external costs of year 2000 remediation are expected to be
approximately $700,000. All of the external costs incurred as of January 2,
1999, were spent on testing and upgrading information technology systems. The
Company's year 2000 costs have been funded from working capital. All internal
costs and related external costs other than capital additions related to year
2000 remediation have been and will continue to be expensed as incurred. The
Company does not track the internal costs incurred for its year 2000 compliance
project. Such costs are principally the related payroll costs for its
information systems group.

Risks of the Company's Year 2000 Issues
      While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. If any of the Company's material suppliers or
vendors experience business disruptions due to year 2000 issues, the Company
might also be materially adversely affected. There is expected to be a
significant amount of litigation relating to the year 2000 issue and there can
be no assurance that the Company will not incur material costs in defending or
bringing lawsuits. In addition, if any year 2000 issues are identified, there
can be no assurance that the Company will be able to retain qualified personnel
to remedy such issues. Any unexpected costs or delays arising from the year 2000
issue could have a significant adverse impact on the Company's business,
operations and financial condition in amounts that cannot be reasonably
estimated at this time.



                                       27
<PAGE>

                           Forward-looking Statements

      In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in 1999 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.

      Uncertainty of Market Acceptance of New Products. Certain of the Company's
products represent alternatives to traditional detection and analytical methods.
As a result, such products may be slow to achieve or may not achieve market
acceptance, as customers may seek further validation of the efficiency and
efficacy of the Company's technology, particularly where the purchase of the
product requires a significant capital commitment. The Company believes that, to
a significant extent, its growth prospects depend on its ability to gain
acceptance of the efficiency and efficacy of the Company's innovative
technologies by a broader group of customers. The Company is currently devoting
significant resources toward the enhancement of its existing products and the
development of new products and technologies, including its derivative products
of the Company's Flash-GC high-speed gas chromatography system; a more portable
EGIS; and EGIS II (formerly named Rampart), a lower-cost EGIS unit for use in
airport screening of carry-on baggage. There can be no assurance that the
Company will be successful in obtaining such broad acceptance or that, if
obtained, such acceptance will be sustained. The failure of the Company to
obtain and sustain such broad acceptance could have a material adverse effect on
the Company's business, financial condition, and results of operations.

      Ongoing Product Development Efforts Required by Rapid Technological
Change. The markets for the Company's products are characterized by changing
technology, evolving industry standards, and new product introductions. The
Company's future success will depend in part upon its ability to enhance its
existing products and to develop and introduce new products and technologies to
meet changing customer requirements. There can be no assurance that the Company
will successfully complete the enhancement and development of these products in
a timely fashion or that the Company's current or future products will satisfy
the needs of its markets.

      Dependence of Security Instruments Market on Government Regulation and
Airline Industry. The Company's sales of its explosives-detection systems for
use in airports has been and will continue to be dependent on governmental
initiatives to require, or support, the screening of baggage, carry-on items,
and people with advanced explosives-detection equipment. Substantially all of
such systems have been installed at airports in countries in which the
applicable government or regulatory authority overseeing the operations of the
airport has mandated such screening. Such mandates are influenced by many
factors outside of the control of the Company, including political and budgetary
concerns of governments, airlines, and airports. Of the more than 600 commercial
airports worldwide, more than 400 are located in the United States. Accordingly,
the Company believes that the size of the market for explosives-detection
equipment is, and will increasingly be, significantly influenced by United
States government regulation. In the United States, the Aviation Security
Improvement Act of 1990 directed the Federal Aviation Administration (FAA) to
develop a standard for explosives-detection systems and required airports in the
United States to deploy systems meeting this standard in 1993. To date, no
system has demonstrated that it meets all FAA standards under realistic airport
operating conditions. As a result, the FAA has not mandated the installation of
automated explosives-detection systems, and only a limited number of these
systems have been deployed in the United States. The FAA first certified a
computed X-ray tomography system for checked luggage in December 1994. The
Company's systems are trace detectors for which no FAA certification process for
checked baggage, carry-on, or personal screening exists to date. The Company has
received approval at the FAA laboratories for the Company's EGIS and EGIS II
systems for use by airlines in screening carry-on electronic items and luggage
searches. The EGIS II system is currently undergoing FAA airport testing as a
final step (which the EGIS system has already passed) before deployment in use
at airports. There can be no assurance that the final step in the approval
process, as it relates to EGIS II, will be successfully completed. Each airline
must seek such approvals for each application. Although the FAA has provided
significant funding to the Company in connection with the development of its
explosives-detection technology, there can be no assurance that any of the
Company's systems will ever meet all United States certification standards. Any
product utilizing a technology ultimately recommend or required by the FAA will
have a significant

                                       28
<PAGE>

competitive advantage in the market for explosives-detection devices. Unless the
FAA takes action with respect to a particular explosives-detection product or
technology, airlines will not be required to purchase or upgrade their security
systems, including upgrading existing metal-detection equipment. Earnings of
U.S. air carriers tend to fluctuate significantly from time to time. Any
depression in the financial condition of such carriers would likely result in
lower capital spending for discretionary items. Moreover, there can be no
assurance that additional countries will mandate the implementation of effective
explosives screening for airline baggage, carry-on items, or people, or that, if
mandated, the Company's systems will meet the certification or other
requirements of the applicable government authority. Even if the Company's
systems were to meet the applicable requirements, there can be no assurance that
the Company would be able to market its systems effectively.
      In October 1996, the United States enacted legislation which includes a
$144.2 million allocation to purchase explosives-detection systems and other
advanced security equipment, including trace detection equipment such as the
systems manufactured by the Company, for carry-on and checked baggage screening.
The FAA has made purchases of, or placed orders for the purchase of, security
equipment under this legislation, including an order to purchase $5.8 million of
the Company's EGIS systems. There can be no assurance, however, that this
legislation will not be modified to reduce the funding for advanced explosives
equipment, that the necessary appropriations will be made to fund further
purchases of advanced explosives-detection equipment contemplated by the
legislation, that trace-detection equipment such as the systems manufactured by
the Company will be mandated, or that, even if further appropriations are made
and such equipment is mandated, any of the Company's explosives-detection
systems will be purchased for installation at any airports in the United States.
Further, there can be no assurance that the U.S. will mandate the widespread use
of these systems after completion of the initial purchases.

      Significance of Certain Customers. Sales of process detection instruments
and services to bottlers licensed by The Coca-Cola Company (Coca-Cola Bottlers)
were $6,199,000, $13,939,000, and $10,641,000 in 1998, 1997, and 1996,
respectively, or 7%, 13%, and 11% of the Company's revenues, respectively,
during such periods. In 1997, the Company completed the fulfillment of a
mandated product-line upgrade for the Coca-Cola Bottlers. Although the Company
anticipates that it will continue to derive revenues from the sale of upgrades
and new systems to new plants, as well as services to the Coca-Cola Bottlers,
the Company does not expect that revenues derived from these customers will
continue at a rate comparable to prior years. Further, the Company intends to
continue to develop and introduce new process detection products for the food,
beverage and other markets, however, there can be no assurance that the Company
will be successful in the introduction of new process detection products or that
any sales of these products will be sufficient to maintain a rate of growth
equivalent to prior years.

      Competition; Technological Change. The Company encounters, and expects to
continue to encounter, competition in the sale of its current and future
products. Many of the Company's competitors and potential competitors have
substantially greater resources, manufacturing and marketing capabilities,
research and development staff, and production facilities than those of the
Company. Some of these competitors have large existing installed bases of
products with substantial numbers of customers. In addition, other major
corporations have recently announced their intention to enter certain of the
Company's markets, including the security screening market. The Company believes
that many of its products are successful because they are technologically
superior to alternative products offered by some of the Company's competitors.
In order to continue to be successful, the Company believes that it will be
important to maintain this technological advantage. No assurance can be given
that the Company will be able to maintain such an advantage or that competitors
of the Company will not develop technological innovations that will render
products of the Company obsolete. For example, the Company's EGIS system
competes against other trace explosives detection systems as well as systems
utilizing dual energy X-ray or computed X-ray tomography imaging technologies.
There can be no assurance that such technologies will not be enhanced to a
degree that would impair the Company's ability to market its explosives
detection systems.


                                       29
<PAGE>

      Potential for Product Liability Claims. The Company's business involves
the risk of product liability claims inherent to the explosives detection
business, as well as the food, beverage, and other industries. There are many
factors beyond the control of the Company that could result in the failure of
the Company's products to detect explosives or contaminants in food or beverage
containers, such as the reliability of a customer's operators, the ongoing
training of such operators, and the maintenance of the Company's products by its
customers. For these and other reasons, there can be no assurance that the
Company's products will detect all explosives or contaminants. The failure to
detect explosives or contaminants could give rise to product liability claims
and result in negative publicity that could have a material adverse effect on
the Company's business, financial condition, and results of operations. The
Company currently maintains both aviation and general product liability
insurance in amounts the Company believes to be commercially reasonable. There
can be no assurance that this insurance will be sufficient to protect the
Company from product liability claims, or that product liability insurance will
continue to be available to the Company at a reasonable cost, if at all.

      Uncertainties Associated With International Operations. In 1998, 1997, and
1996, international sales accounted for 47%, 52%, and 46%, respectively, of the
Company's revenues, and the Company anticipates that international sales will
continue to account for a significant percentage of the Company's revenues.
International revenues are subject to a number of uncertainties, including the
following: agreements may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system; foreign customers may have
longer payment cycles; foreign countries may impose additional withholding taxes
or otherwise tax the Company's foreign income, impose tariffs or adopt other
restrictions on foreign trade; fluctuations in exchange rates may affect product
demand and adversely affect the profitability in U.S. dollars of products and
services provided by the Company in foreign markets where payment for the
Company's products and services is made in the local currency; U.S. export
licenses may be difficult to obtain; and the protection of intellectual property
in foreign countries may be more difficult to enforce. Moreover, many foreign
countries have their own regulatory approval requirements for sales of the
Company's products. As a result, the Company's introduction of new products into
international markets can be costly and time-consuming, and there can be no
assurance that the Company will be able to obtain the required regulatory
approvals on a timely basis, if at all. There can be no assurance that any of
these factors will not have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not attempt to
minimize currency and exchange rate risks through material hedging activities.

      Limited Protection of Proprietary Technology and Risks of Third-party
Claims. Proprietary rights relating to the Company's products will be protected
from unauthorized use by third parties only to the extent that they are covered
by valid and enforceable patents or are maintained in confidence as trade
secrets. There can be no assurance, however, that any patents now or hereafter
owned by the Company will afford protection against competitors, or as to the
likelihood that patents will issue from pending patent applications. Proceedings
initiated by the Company to protect its proprietary rights could result in
substantial costs to the Company. Although the Company believes that its
products and technology do not infringe any existing proprietary rights of
others, there can be no assurance that third parties will not assert such claims
against the Company in the future or that such future claims will not be
successful. The Company could incur substantial costs and diversion of
management resources in connection with the defense of any claims relating to
proprietary rights, which could have a material adverse effect on the Company's
business, financial condition, and results of operations. Furthermore, parties
making such claims could secure a judgment awarding substantial damages, as well
as injunctive or other equitable relief, which could effectively block the
Company's ability to make, use, sell, distribute, or market its products and
services in the U.S. or abroad. Such a judgment could have a material adverse
effect on the Company's business, financial condition, and results of
operations. In the event that a claim relating to proprietary technology or
information is asserted against the Company, the Company may seek licenses to
such intellectual property. There can be no assurance, however, that such a
license could be obtained on commercially reasonable terms, if at all, or that
the terms of any offered licenses will be acceptable to the Company. The failure
to obtain the necessary licenses or other rights could preclude the sale,
manufacture or distribution of the

                                       30
<PAGE>

Company's products and, therefore, could have a material adverse effect on the
Company's business, financial condition and results of operations. The cost of
responding to any such claim may be material, whether or not the assertion of
such claim is valid. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate to prevent
misappropriation of its technology or independent development by others of
similar technology. In addition, the laws of some jurisdictions do not protect
the Company's proprietary rights to the same extent as the laws of the U.S.
There can be no assurance that these protections will be adequate.

      Risks Associated with Acquisition Strategy. The Company's strategy
includes the acquisition of businesses and technologies that complement or
augment the Company's existing product lines. Promising acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory approvals,
including antitrust approvals. Any acquisitions completed by the Company may be
made at substantial premiums over the fair value of the net assets of the
acquired companies. There can be no assurance that the Company will be able to
complete future acquisitions or that the Company will be able to successfully
integrate any acquired businesses. In order to finance such acquisitions, it may
be necessary for the Company to raise additional funds through public or private
financings. Any equity or debt financing, if available at all, may be on terms
which are not favorable to the Company and, in the case of equity financing, may
result in dilution to the Company's stockholders.

      Potential Fluctuations in Quarterly Performance. Significant annual and
quarterly fluctuations in the Company's results of operations may be caused by,
among other factors, the overall demand for, and market acceptance of, the
Company's products; the timing of regulatory approvals for certain of the
Company's products; government initiatives to promote the use of explosives
detection systems such as those manufactured and sold by the Company; the timing
of the announcement, introduction and delivery of new products and product
enhancements by the Company and its competitors; variations in the Company's
product mix and component costs; timing of customer orders; adjustments of
delivery schedules to accommodate customers' programs; the availability of
components from suppliers; the timing and level of expenditures in anticipation
of future sales; the mix of products sold by the Company; and pricing and other
competitive conditions. Because certain of the Company's products require
significant capital expenditures and other commitments by its customers, the
Company has experienced extended sales cycles. Delays in anticipated purchase
orders could have a material adverse effect on the Company's business, financial
condition, and results of operations. Customers may also cancel or reschedule
shipments, and product difficulties could delay shipments. Because the Company's
operating expenses are based on anticipated revenue levels and a high percentage
of the Company's expenses are fixed for the short term, a small variation in the
timing of recognition of revenue can cause significant variations in operating
results from quarter to quarter. There can be no assurance that any of these
factors will not have a material adverse impact on the Company's business and
results of operations.

      Dependence Upon OEM Relationships. A portion of the Company's sales are
through OEM arrangements. The Company's sales depend, in part, on the
continuation of these OEM arrangements and the level of end-user sales by such
OEMs. There can be no assurance that the Company will be able to maintain its
existing, or establish new, OEM relationships.

      Potential Impact of Year 2000 on Processing Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations, or
financial condition. While the Company expects that upgrades to its internal
business systems will be completed in a timely fashion, there can be no
assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware.

                                       31
<PAGE>


If any of the Company's material suppliers or vendors experience business
disruptions due to year 2000 issues, the Company might also be materially
adversely affected. There is expected to be a significant amount of litigation
relating to the year 2000 issue and there can be no assurance that the Company
will not incur material costs in defending or bringing lawsuits. In addition, if
any year 2000 issues are identified, there can be no assurance that the Company
will be able to retain qualified personnel to remedy such issues. Any unexpected
costs or delays arising from the year 2000 issue could have a significant
adverse impact on the Company's business, operations, and financial condition in
amounts that cannot be reasonably estimated at this time.
</TABLE>


                                       32
<PAGE>
<TABLE>
<CAPTION>

<S>                                                    <C>       <C>        <C>        <C>       <C>     

                         Selected Financial Information
(In thousands except per share amounts)                    1998    1997(a)    1996(b)   1995(c)       1994
------------------------------------------------------ --------- ---------- ---------- --------- ----------

Statement of Income Data
Revenues                                                $91,575   $104,374   $ 94,604   $32,943   $ 50,343
Gross Profit                                             49,324     57,979     48,994    15,491     25,437
Net Income                                                8,671     12,506      5,299     2,173      6,380
Basic and Diluted Earnings per Share                        .45        .67        .33       .21        .63

Balance Sheet Data
Working Capital                                         $57,621   $ 46,345   $ 32,315   $19,369   $  6,116
Total Assets                                            132,506    148,265    116,058    84,595     17,793
Long-term Obligations                                         -          -     21,200         -          -
Shareholders' Investment                                117,893    107,346     75,454    69,215      9,208

(a) Reflects the March 1997 initial public offering of the Company's common
    stock for net proceeds of $28.1 million.
(b) Reflects the January 1996 acquisition of Moisture Systems and Rutter and the
    March and November 1996 private placements of the Company's common stock for
    aggregate net proceeds of $7.0 million.
(c) Reflects the December 1995 acquisition of Orion by Thermedics.
</TABLE>


                                       33
<PAGE>


Common Stock Market Information
      The Company's common stock is traded on the American Stock Exchange under
the symbol TDX. The following table sets forth the high and low sale prices of
the Company's common stock since February 24, 1997, the date the Company's
common stock began trading on that exchange, as reported in the consolidated
transaction reporting system.
<TABLE>
<CAPTION>

<S>                                                             <C>        <C>        <C>        <C>   

                                                                         1998                  1997
                                                                --------------------  -------------------
Quarter                                                              High        Low       High         Low
--------------------------------------------------------------- ---------- ---------- ---------- -----------

First                                                           $ 11 5/8   $  8 5/8   $ 12 1/8   $  10 7/8
Second                                                            11 11/16    7 7/8     12 7/8       9 3/4
Third                                                              9 9/16     6 1/16    12 3/8       9 3/16
Fourth                                                             8 3/16     6         11 11/16     8 3/4
                                                                                      
</TABLE>

      As of January 29, 1999, the Company had 266 holders of record of its
common stock. This does not include holdings in street or nominee names. The
closing market price on the American Stock Exchange for the Company's common
stock on January 29, 1999, was $8 3/8 per share.

Shareholder Services
      Shareholders of Thermedics Detection Inc. who desire information about the
Company are invited to contact the Investor Relations Department, Thermedics
Detection Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts
02454-9046, (781) 622-1111. A mailing list is maintained to enable shareholders
whose stock is held in street name, and other interested individuals, to receive
quarterly reports, annual reports, and press releases as quickly as possible.
Distribution of printed quarterly reports is limited to the second quarter only.
All material is available through the Internet from Thermo Electron's Internet
site (http://www.thermo.com/subsid/tdx1.html).

Stock Transfer Agent
      American Stock Transfer & Trust Company is the stock transfer agent and
maintains shareholder activity records. The agent will respond to questions on
issuance of stock certificates, change of ownership, lost stock certificates,
and change of address. For these and similar matters, please direct inquiries
to:

      American Stock Transfer & Trust Company
      Shareholder Services Department
      40 Wall Street, 46th Floor
      New York, New York 10005
      (718) 921-8200

Dividend Policy
      The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Company's Board of Directors and will depend upon, among other
factors, the Company's earnings, capital requirements, and financial condition.

Form 10-K Report
      A copy of the Annual Report on Form 10-K for the fiscal year ended January
2, 1999, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, Thermedics
Detection Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts
02454-9046.

Annual Meeting
The annual meeting of shareholders will be held on Thursday, May 27, 1999, at 
11 a.m. at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.


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