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

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 1997         Commission File No.: 0-16182

                            AXSYS TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

                 Delaware                                    11-1962029
      (State or other jurisdiction of                     (I.R.S. Employer
      incorporation or organization)                   Identification Number)

             910 Sylvan Avenue
       Englewood Cliffs, New Jersey                             07632
 (Address of principal executive offices)                    (Zip Code)

                                 (201) 871-1500
              (Registrant's telephone number, including area code)

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

                     Common Stock, par value $.01 per share
            $1.20 Cumulative Exchangeable Redeemable Preferred Stock,
                            par value $.01 per share

        Securities registered pursuant to Section 12(b) of the ACT: None

                                   ----------

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

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

Aggregate  market  value  of the  voting  stock  held by  non-affiliates  of the
registrant as of the close of business on March 20, 1998, $67,513,000.

Common Stock outstanding at March 20, 1998: 4,118,190 shares.

                       Documents Incorporated by Reference

              Document                                      Form 10-K Reference
              --------                                      -------------------
Portion of Axsys Technologies, Inc. Notice of Annual
  Meeting of Stockholders and Proxy Statement.             Part III, Items 10-13

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<PAGE>


PART I

Item 1.  BUSINESS

     The Company designs,  manufactures and sells custom  micro-positioning  and
precision  optical  components,  subsystems  and  systems  for  high-performance
markets,  such as defense,  space,  high-end  digital  imaging  and  electronics
capital equipment. The Company also designs, manufactures and sells interconnect
devices  and  distributes  precision  ball  bearings  for  use in a  variety  of
industrial, commercial and consumer applications.

     Through  its  Precision  Systems  Group  ("PSG"),  the  Company  offers its
capabilities in magnetics,  electronics, optics, precision machining and systems
integration to high-performance  Original Equipment  Manufacturers  ("OEMs") and
end-users,  enabling them to design and utilize  systems that meet  leading-edge
performance  requirements.  The PSG  designs,  manufactures  and sells  high-end
components such as precision sensors,  high-performance  motors, precision metal
optics and  airbearings.  These  products  enable  OEMs to  improve  measurement
precision,  positioning performance (speed and power), inspection throughput and
manufacturing  yields.  The PSG also designs,  manufactures and sells subsystems
which  integrate  several of the  Company's  components.  For example,  a rotary
positioning actuator, which is comprised of a direct drive motor and a resolver,
is a subsystem  used in cluster  tool  robotics  for  positioning  semiconductor
wafers. In addition,  PSG designs,  manufactures and sells systems, such as head
stack  assembly  ("HSA")  testers used to  dynamically  test computer disk drive
magnetic heads.

     Through its  Industrial  Components  Group  ("ICG"),  the Company  designs,
manufactures and sells interconnect  products.  It also distributes and services
precision ball bearings used by OEMs in a variety of commercial industries.  The
interconnect  products  include  safety  agency  (e.g.  U.L.)  approved  barrier
terminal  blocks and power  connectors  which are  primarily  used to  interface
industrial or process  control  computers to sensors,  motors,  and other signal
level and power devices.  The precision ball bearings distributed by the Company
are acquired  from various  domestic and  international  sources and are used in
machine tools, office automation,  semiconductor  manufacturing and other motion
control applications to provide for smooth and precise rotary motion.

     The Company's current business reflects a strategic shift that commenced in
1995. In that year,  the Company began to expand its PSG business to include not
only components for defense and military space applications but also value-added
subsystems and systems for a broad range of industrial  and commercial  markets.
This  shift  was  timed  to  take   advantage  of  the   increased   demand  for
high-performance  components,   subsystems  and  systems  in  these  markets  as
commercial  manufacturers  began to seek new methods to increase  throughput and
yield.

     In  furtherance  of its shift in  strategy,  the Company  acquired  various
synergistic  technologies  and  assets.  In April  1996,  the  Company  acquired
Precision   Aerotech,   Inc.  ("PAI").   PAI's   subsidiaries,   Speedring  Inc.
("Speedring")  and Speedring  Systems,  Inc.  ("Speedring  Systems") are leading
manufacturers  and suppliers of  high-performance  laser  scanners and optics as
well as suppliers of precision-machined  specialty materials,  such as beryllium
and quartz, for space and other high-technology  applications.  In October 1996,
the  Company  acquired  substantially  all  of the  assets  of  Lockheed  Martin
Beryllium  Corporation  ("LMBC"),  a supplier of  precision-machined  beryllium.
Components  made of  beryllium  are  significant  elements of space  telescopes,
weather and direct broadcast satellites,  and low-earth-orbit satellites used in
cellular  communication.  Most  recently,  in May  1997,  the  Company  acquired
Teletrac,  Inc.  ("Teletrac") which designs,  manufactures and sells laser-based
precision measurement systems as well as precision linear and rotary positioning
systems for use in the electronics capital equipment industry.


                                       2
<PAGE>


Market Overview

     Historically,  the principal  markets for  micro-positioning  and precision
optical  components  were the  defense  and  military  space  industries,  whose
performance  requirements  justified the high cost of components  and associated
electronic  controls.  In recent years,  however,  the Company believes that the
commercial manufacturers began to increase their requirements for throughput and
yield as a  result  of (i) the  demand  on  manufacturers  to  produce  smaller,
higher-performance  products with precise tolerances,  (ii) pressures imposed on
manufacturers  to  enhance  productivity  and  quality,  which in turn  required
integration  of  process  control  technology  directly  into the  manufacturing
process,  and (iii) the lowering of costs  associated with electronic  controls.
Concurrently,  OEMs increasingly began to rely on specialized  manufacturers for
fully integrated systems and subsystems. The Company believes that such reliance
was  caused  by the  general  desire  of  OEMs  to  concentrate  on  their  core
competencies,  coupled with the increased complexity of manufacturing  processes
and the desire of OEMs and  end-users to reduce the number of vendors upon which
they rely.

     Today, the Company addresses the following five markets:

     Defense .The defense  industry has  historically  been a large  consumer of
high-performance  components.  Over the last several years,  cutbacks in defense
spending by the U.S. Government have resulted in reductions in both troop levels
and  production of new weapons  systems  platforms.  At the same time,  however,
spending has  increased  and the market has grown for the  upgrading of existing
platforms,  including the development of "smart" weapons. These upgrades include
state-of-the-art electronics,  enhanced night vision systems, radar and guidance
systems,   and   missile   seeker   technologies,   all  of  which   incorporate
high-performance  components  such as precision metal optics,  high  performance
motors and sensors and precision-machined structures.

     Space.  As a result of the deployment of  communications  and  navigational
satellite  constellations,  as well as the  increased  demand  for  weather  and
scientific  monitoring,  the commercial  space market has exhibited  significant
growth in recent years.  With that growth,  there has been increased  demand for
light weight and  high-performance  components,  such as precision metal optics,
high-performance  motors,  sensors,  actuation devices,  inertial  stabilization
components  and beryllium  components.  These  high-performance  components  are
capable of functioning  within the extreme  operating  environment of space.  In
particular,  beryllium,  the lightest metal, is highly  effective at dissipating
heat and is able to maintain  its  structural  stability  over wide  temperature
ranges.

     High-End Digital  Imaging.  The high-end digital imaging market consists of
film recording systems, including pre-press, medical imaging and printed circuit
board  layout film  recorders,  as well as laser  projection  systems.  In these
products,  laser  light is  modulated  (pulsed),  reflected  off a  mirror  on a
rotating  opto-mechanical  scanner,  and swept  across a media such as film,  to
create  an  image.  In  recent  years,  there  has been a demand  for  increased
resolution and throughput capabilities in these high-end systems,  requiring the
use of improved optics, higher speed motors,  airbearings and more sophisticated
electronic  controls.  In 1994,  the highest speed scanners used in the high-end
digital  imaging market were rotating at  approximately  20,000  revolutions per
minute  ("RPM") with speed  regulation to 10 parts per million  ("ppm").  Today,
speeds  approach  60,000  RPM and must be  regulated  to 2 ppm.  Scanners  which
operate at these  high  rotational  speeds  must be highly  engineered  so as to
manage the heat generated by the  airbearing,  minimize  turbulence  through the
design of an aerodynamic  optical deflector,  control optical  deformation,  and
provide a highly efficient electronic speed controller.


                                       3
<PAGE>


     Electronics  Capital  Equipment.  The electronics  capital equipment market
consists of equipment used to produce and test semiconductors, mass data storage
drives and flat panel displays. The market has expanded as a result of growth in
the  sales  of  these  products,  as well as the  rapid  technological  advances
relating to their manufacturing and testing. The Company believes that increased
demand for  high-performance  components and systems in this market has resulted
from:  (i) the  miniaturization  of  products,  creating  the need  for  smaller
components and precise tolerances, (ii) faster production cycles to meet product
demand,  (iii)  the  need  for  higher  production  yields  and  (iv)  increased
outsourcing   of  the  design  and   manufacture   of   electro-mechanical   and
electro-optical subsystems and systems.  High-performance components and systems
provide  electronics  capital equipment  manufacturers with more precise testing
and process  control  devices which are designed to detect minute  manufacturing
deviations,  to reduce manufacturing costs, and to increase throughput and yield
in the manufacturing process.

     Industrial Automation.  The industrial automation market consists of a wide
range of industrial and commercial  products,  including machine tools,  process
controls and heating,  ventilation and air conditioning ("HVAC") systems,  which
the Company  primarily  serves through the ICG. OEMs in these markets  typically
purchase  commodity-type and standardized  products which must be delivered on a
short lead-time basis.

Business Strategy

     The  Company's  primary  goal is to be a leading  provider  of  components,
subsystems and systems that enhance throughput and yield to customers  requiring
high-performance   devices  in  their   equipment  and  to  end-users  in  their
manufacturing  and quality  assurance  processes.  The Company's  strategy is to
leverage its resources and capabilities to develop  higher-level  subsystems and
systems,  employing its  micro-positioning  and precision optical  technologies,
while  maintaining and continuing to grow the ICG. Key elements of this strategy
include:

     Integrating  Technologies.  The  Company  intends  to  integrate  the PSG's
recently acquired technologies to develop new subsystems and systems.  While the
PSG's  sales  at  the  present  time  consist   principally  of  components  and
subsystems,  the Company intends to increase the level of product integration it
offers,    through   the   development   and   sale   of   electro-optical   and
electro-mechanical  systems.  The Company  believes  that  development  of these
systems,  which build on the Company's  core  component  technologies,  will, if
successful,  provide  customers  with  high-performance  systems at  competitive
prices and enhance the Company's sales opportunities.  For example, Teletrac and
Speedring Systems have developed a low-cost HSA tester for the mass data storage
industry  which will use  Teletrac's  X-Y  positioning  and systems  integration
capabilities and Speedring  System's  airbearing  technology.  In addition,  the
Company is seeking to develop a product which integrates the scanning technology
of Speeding Systems with the linear positioning capabilities of Teletrac for use
in high-end digital imaging applications.

     Capitalizing  on  Cross-Selling  Opportunities.  Historically,  the PSG has
organized its sales force along  product  lines,  through four  product-specific
direct sales organizations as well as through manufacturers' representatives. To
capitalize  on existing  relationships  within  these sales  organizations,  the
Company has begun  training  its  personnel  within each sales  organization  to
identify  opportunities  to sell all of the PSG's products and  capabilities  in
their respective core markets.  The Company believes it can generate  additional
net sales by cross-selling  existing PSG products to existing  customers and has
already  identified a number of  opportunities to cross-sell among the Company's
target customer base. For example,  the direct drive motion control technologies
that the Company has been selling to the defense  market are now also being sold
to customers in the electronics  capital  equipment  industry for use in cluster
tool robotics. In addition, Speedring Systems is seeking to adapt its airbearing
technology, which has been used to serve the high-end digital imaging market, to
develop  products for the mass data storage segment of the  electronics  capital
equipment market. The Company  anticipates that this  cross-selling  effort will
result in increased  customer  awareness of the  Company's  capabilities  and an
increased ability to sell systems integration.  In addition, over the long term,
the  Company,  through use of the "Axsys"  name,  intends to develop a corporate
identity for its products,  as opposed to stressing the  individual  identity of
the separate corporate  entities,  thereby seeking to capitalize on the trend to
reduce the number of vendors and  becoming a recognized  supplier of  subsystems
and systems in a wide range of applications.


                                       4
<PAGE>


     Increasing Investment in Engineering and Manufacturing Infrastructure.  The
Company  offers a set of  technologies  which  include  precision  metal optics,
precision  machining,   magnetics,   electronics  and   electro-mechanical   and
electro-optical   systems   integration.   To  maintain   and  expand  on  these
technologies  and  capabilities,  the  Company  invests  in  optical,  magnetic,
mechanical,  electronic and software  engineering  resources.  In addition,  the
Company continues to invest in sophisticated test equipment and state-of-the-art
manufacturing  equipment,  such as computer numerically controlled ("CNC") mills
and lathes, electrical discharge machines, diamond turning and lapping machines.

     Expanding  Through   Acquisitions.   To  expand  and  develop  its  product
offerings,  technologies,  sales  channels and market  presence,  and to produce
integrated  systems,  the Company plans to continue to expand through  strategic
acquisitions.  For  example,  the Company  acquired  PAI for its presence in the
high-end  digital imaging market and its optics and airbearing  technologies and
Teletrac for its market presence in the electronics capital equipment market and
its systems integration capabilities. Although the Company reviews and considers
possible  acquisitions on an ongoing basis, no specific  acquisitions  are being
negotiated or planned as of the date of this filing.

     Expanding the Industrial  Components Group. The Company intends to increase
the ICG's sales of  interconnect  devices  and  precision  ball  bearings to the
industrial  and  commercial  automation  markets  through an increased  focus on
direct sales to strategic  accounts.  As part of this focus, the ICG attempts to
work with major customers to develop new interconnect products which can be sold
generally in the market place.


Technologies, Products and Capabilities

     Precision  Systems Group.  The key enabling  technologies  and capabilities
utilized  in the  custom  design,  manufacture  and sale of the PSG's  precision
optical and positioning components, subsystems and systems include:

     Optics.  Precision metal optics are used in applications  where performance
requirements  cannot be met with glass.  The advantages of metal are its lighter
weight and ease of mechanical interface with housings and actuation devices. The
Company's  metal optics are  fabricated  using CNC machines,  lathes and diamond
turning and planetary  lapping machines to machine and polish metal  substrates,
such as beryllium and aluminum,  to tolerances as precise as one millionth of an
inch.  Precision  metal  optics  sold by the PSG  include  monogon  and  polygon
mirrors, which the Company uses for high-speed electro-mechanical scanners, head
mirrors used in weapons fire control systems,  fold and aspheric mirrors used in
forward   looking   infrared   ("FLIR")  night  vision  weapons   systems,   and
high-performance space-borne instruments used on weather, mapping and scientific
satellites.

     Precision  Machining.  The  Company's  capabilities,  which  allow for very
precise and exacting  measurements,  are applied in the  precision  machining of
various  metals for  precision  optics  applications,  airbearings,  heat sinks,
housing and gimbals.  The PSG machines  beryllium,  quartz,  stainless steel and
other  metals for  various  applications  in the  space,  defense  and  selected
commercial  markets.  The Company's  airbearings provide precise positioning and
high  speeds,  and are  used in  high-speed  scanners,  components  for  weapons
guidance  systems,  magnetic  media disk test  spindles and  precision  position
stages used in semiconductor  processing and test equipment.  Its heat sinks are
used to dissipate heat in high-performance  avionics and satellite  electronics.
Its gimbals are used,  among other things,  to position  optical sensors in FLIR
night vision systems.


                                       5
<PAGE>


     Magnetics.  The Company designs,  manufactures  and sells  high-performance
motors and precision resolvers using state-of-the-art  magnetic technologies and
materials.  These motors  include AC motors,  brush and  brushless DC torque and
servo  motors.  The  Company's  magnetic  products  are  capable  of  rotational
positioning  to an accuracy  as precise as five  arc-seconds.  Applications  for
these high-performance components include precision semiconductor processing and
inspection  equipment,   missile  systems,  satellite  actuators  and  automated
industrial systems.

     Electronics.  The Company's  electronics  control the speed and position of
electro-mechanical systems, such as precision motors, actuators, X-Y stages, and
laser scanners.  The Company  designs,  manufactures  and sells  opto-electronic
position sensors, including optical encoders and laser interferometers,  as well
as electronic  controllers  and drives and continues to invest in its electronic
design capability to maintain its expertise.  Optical encoders are used to sense
rotary  position  and  speed  in a  variety  of  applications,  including  laser
scanners,  industrial robots and defense systems. Laser  interferometers,  which
are designed to permit precise linear position sensing,  are used principally in
the electronics capital equipment market.  Electronic controllers coordinate the
positioning and speed of  electro-mechanical  systems by interfacing  with other
motion control  components.  Drives provide power to a motor based on input from
the  controller  in order to  achieve  a  designated  position  or to  achieve a
specific speed.

     The  following  table  summarizes  the  Company's  component  products  and
services by the technologies they incorporate:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                PSG Technologies
----------------------------------------------------------------------------------------------
      OPTICS          PRECISION MACHINING       MAGNETICS                ELECTRONICS
----------------------------------------------------------------------------------------------
<S>                   <C>                    <C>                      <C>
o Polygon Mirrors     o Airbearings          o AC Motors              o Optical Encoders
o Monogon Mirrors     o Custom Machining     o Brush and              o Laser Interferometers
o Head Mirrors          of Specialty           Brushless DC           o Speed Controls for AC
o Fold Mirrors          Materials:             Motors:                  and DC Motors
o Aspheric Mirrors      --Beryllium            --Torque Motors        o Position Controllers
o Plane Mirrors         --Beryllium-           --Servo Motors         o Motor Drives
                          aluminum             --Limited Angle
                        --Quartz                   Motors
                        --Titanium           o Resolvers
                        --Ceramics           o Synchros
----------------------------------------------------------------------------------------------
</TABLE>

     Systems   Integration.   The  Company  combines   various   components  and
capabilities  to offer  subsystems  and  systems  to its  customers.  The  PSG's
precision  subsystems  include  X-Y stages and  rotary  positioning  subsystems,
including actuators,  opto-mechanical laser scanners and imaging subsystems,  as
well as laser tracking  autofocus  subsystems.  These  subsystems  employ motion
control  or optics  technology  available  within the PSG.  The X-Y  positioning
subsystems are used in high-precision or high-performance applications,  such as
semiconductor  and  flat  panel  display  positioning   subsystems  for  use  in
processing  or  testing.   The  rotary   positioning   subsystems  are  used  in
applications  such as night vision systems for defense  contractors  and cluster
tool robotics in electronics  capital equipment.  The laser scanning and imaging
subsystems  are used by  pre-press  equipment  manufacturers  and  semiconductor
inspection  equipment  manufacturers.  The  laser  autofocus,  which  is used to
automatically  focus a  microscope,  is sold to OEMs who  manufacture  automated
optical inspection machines within the electronics equipment market.

     The PSG's systems are electro-mechanical systems, with application specific
software designed by the Company for the end-user. Historically, the Company has
sold these systems only to the electronics capital equipment industry,  where it
sells head gimbal assembly  ("HGA") and head stack assembly  ("HSA") testers for
disk drive manufacturers.


                                       6
<PAGE>


     The following table  illustrates how the PSG's  technologies,  products and
capabilities are integrated to develop subsystems and systems:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                      PSG TECHNOLOGIES AND CAPABILITIES
---------------------------------------------------------------------------------------------------------------
    SUBSYSTEMS
         &                                          PRECISION
      SYSTEMS                OPTICS                 MACHINING            MAGNETICS              ELECTRONICS
---------------------------------------------------------------------------------------------------------------
<S>                     <C>                      <C>                   <C>                   <C>
                        o Polygon or             o Airbearing          o Brushless DC        o Optical Encoder
   Laser Scanner          Monogon Mirror                                 Servo Motor         o Speed Control
                                                                                             o Motor Drive
---------------------------------------------------------------------------------------------------------------
                        o Polygon or             o Airbearing          o Brushless DC        o Optical Encoder
                          Monogon Mirror                                 Servo Motor         o Speed Control
   Laser Imager         o Fold Mirror                                                        o Motor Drive
                        o Aspheric Mirror
---------------------------------------------------------------------------------------------------------------
  Laser Autofocus                                                      o Brushless DC        o Position
                                                                         Servo Motor           Controller
                                                                                             o Motor Drive
---------------------------------------------------------------------------------------------------------------
                                                                       o Brushless DC        o Position
Rotary Positioning                                                       Servo Motor           Controller
     Actuator                                                            Resolver            o Motor Drive
---------------------------------------------------------------------------------------------------------------
                        o Plane Mirror(a)        o  Airbearing(a)      o Linear Motor(a)     o Laser
                                                                                               Interferometer
     X-Y Stage                                                                               o Position
                                                                                               Controller
                                                                                             o Motor Drive
---------------------------------------------------------------------------------------------------------------
                                                 o Airbearing(a)       o Brushless DC        o Laser
      HGA/HSA                                                            Limited Angle         Interferometer
      Testers                                                            Motor(a)            o Position
                                                                                               Controller
                                                                                             o Motor Drive
---------------------------------------------------------------------------------------------------------------
                                                 o Airbearing(a)       o Brushless DC        o Optical Encoder
Disk Test Spindle                                                        Servo Motor(a)      o Speed Control
                                                                                             o Motor Drive
---------------------------------------------------------------------------------------------------------------
</TABLE>

(a)  Currently  purchased  from  external  sources but are in various  stages of
     development by the Company.

     Industrial Components Group. The ICG designs, manufactures and sells a full
line of barrier terminal blocks,  connectors and interconnect  devices, and also
distributes a broad array of precision ball bearings.

     Terminal Blocks and Connectors.  The terminal blocks and connectors  market
is directly  related to the use of computer  controls in a variety of industrial
and commercial  applications,  such as machine controllers,  motor regulation or
security controls.  The terminal blocks provide a simple method for point of use
installation  and/or  interchangeability  of electronic  components  between the
computer  control's  printed  circuit  board and the device that the computer is
sensing (input) or driving (output).

     The ICG provides a broad array of terminal blocks. The core product line is
based on "U.S.-Style"  terminal blocks, which have been the mainstay of controls
made by OEMs  in the  United  States  for  several  decades.  The ICG  also  has
developed a broad line of  "Euro-Style"  terminal  blocks.  These  devices  were
introduced by European  manufacturers  who began to enter the U.S. market in the
mid  1980's.  In  addition,  the  ICG has  applied  attributes  associated  with
"Euro-Style" connectors to the "U.S.-Style" and vice versa.


                                       7
<PAGE>


     Precision  Ball  Bearings.  The ICG  distributes an array of precision ball
bearings varying in size,  precision  tolerance,  lubrication and price. Through
its distribution  arrangements with several foreign bearing  manufacturers,  the
ICG has  developed  a broad  product  offering.  The ICG also  provides  certain
value-added  services,  such as bearing  relubrication,  white room  handling of
products, and engineering consultation.

Competition

     The markets for the  Company's  products are  competitive.  In the PSG, the
Company  competes  primarily  on the basis of its ability to design and engineer
its products to meet performance  specifications  set by its customers,  most of
whom are OEMs who purchase  component parts or subsystems for inclusion in their
end-products.   Product  pricing  and  quality,  customer  support,  experience,
reputation and financial stability are also important competitive factors.

     There is a limited  number of  competitors  in each of the  markets for the
various types of precision  optical and  positioning  components and subsystems,
and electrical/electronic  terminal block and connector devices manufactured and
sold by the  Company.  These  competitors,  especially  those  in the  precision
optical and positioning product lines, are typically focused on a smaller number
of product  offerings than the Company,  and are often well entrenched.  Some of
these competitors have  substantially  greater  resources than the Company.  The
Company  believes,  however,  that the breadth of its  technologies  and product
offerings  provide it with a competitive  advantage  over certain  manufacturers
which supply only discrete  components  or are not  vertically  integrated  with
enabling technologies.

     There are numerous  competitors in markets to which the Company distributes
precision  ball  bearings.  These  competitors  vary in size and  include  other
bearing  manufacturers and  distributors.  In the Company's  opinion,  the ICG's
breadth and product  availability,  combined  with the  value-added  services it
supplies, provide competitive advantages for the ICG.

     The Company  expects its  competitors to continue to improve the design and
performance  of their  products.  There can be no assurance  that the  Company's
competitors  will  not  develop  enhancements  to,  or  future  generations  of,
competitive  products that will offer superior price or performance  features or
that new  processes or  technologies  will not emerge that render the  Company's
products less competitive or obsolete. Increased competitive pressure could lead
to lower prices for the  Company's  products,  thereby  adversely  affecting the
Company's business,  financial condition or results of operations.  There can be
no  assurance  that the  Company  will be able to  compete  successfully  in the
future.

Customers

     The  Company's  customers  include OEMs and end-users who design or utilize
high-precision,  performance and throughput  equipment.  The PSG's customers are
primarily  in the  defense,  space,  high-end  digital  imaging and  electronics
capital equipment  markets.  The ICG's customers are primarily in the industrial
automation  market.  The Company has an extensive  customer list which  includes
many of the major participants in each of the market segments it addresses.

     There is no  customer  or group of  affiliated  customers  for which  sales
during 1997 were in the aggregate 10% or more of the Company's  consolidated net
sales, and, in the Company's  opinion,  there is no customer,  the loss of which
would have a material  adverse  effect on the  Company's  operations  taken as a
whole.

     In 1997 and 1996,  the Company  had  aggregate  sales,  both  military  and
non-military,  directly  to the U.S.  Government,  including  its  agencies  and
departments, of approximately $4.6 million and $5.1 million, respectively. These
sales accounted for  approximately  3.7% and 5.6% of total net sales in 1997 and
1996,  respectively.  Approximately  24.3% of net  sales in 1997 and 22% in 1996
were derived from subcontracts with U.S. Government contractors. The majority of
these  contracts may be subject to  termination  at the  convenience of the U.S.
Government,  and  certain  contracts  may  also  be  subject  to  renegotiation.
Currently,  the Company is not aware of any termination or renegotiation of such
contracts which would have a material adverse effect on its business.


                                       8
<PAGE>


Because a substantial  part of the Company's  business is derived  directly from
contracts  with the U.S.  Government,  or agencies or  departments  thereof,  or
indirectly through subcontracts with U.S. Government contractors,  the Company's
results of operations could be materially affected by changes in U.S. Government
expenditures  for products  using  component  parts which the Company  produces.
However,  the Company believes that its exposure to such risk may be lessened by
the broad number and diversity of its product  applications  and the strength of
its engineering capabilities.

Sales, Marketing and Customer Support

     As of December  31,  1997,  the Company  employed 72 sales,  marketing  and
customer  support  personnel  of whom 42 were  involved  with the PSG's  product
offerings and 30 were involved with the ICG's product  offerings.  Historically,
the Company's  sales  organization  has been organized  along product lines with
four product-specific direct sales organizations in the PSG and two direct sales
organizations in the ICG. As part of its integration strategy, the Company is in
the process of increasing its  expenditures  for sales and customer  support and
realigning the sales  organizations in the PSG along market  segments:  defense,
space, high-end digital imaging and electronics capital equipment. To date, this
realignment has been limited to training of sales personnel in each of the PSG's
sales  organizations  to  identify  opportunities  to  sell  all  of  the  PSG's
capabilities  in its own core market and to making joint sales calls.  There can
be no assurance  that these efforts will be successful  and lead to increases in
the  Company's  sales or that the Company will recover its  additional  costs in
implementing this strategy.

     Also as of December 31, 1997, the PSG's direct sales organization  included
10 direct sales field personnel, most of whom have engineering backgrounds, with
the remainder involved in inside sales,  customer service,  program  management,
contract  administration  and applications  engineering.  The ICG's direct sales
organization  included  13 direct  sales  field  personnel,  with the  remainder
involved  in  inside  sales,  customer  service,  product  management,  contract
administration and applications engineering. The Company believes that its sales
effort is enhanced by having  engineering-trained  sales personnel  available to
meet  with  customers'  engineering   personnel.   In  addition,  the  Company's
application and design engineers are used to enhance the sales process.

     The  PSG  and  the  ICG  also  sell  their   products   through   over  200
manufacturer's sales  representatives and agents.  Although the Company believes
it has good relationships with these sales representatives and agents, there can
be no assurance that these  relationships  will continue to be  satisfactory  or
will continue at all.

Engineering, Research and Development

     The Company seeks to develop new component products, subsystems and systems
and improve existing  products in order to keep pace with customers'  increasing
performance  requirements.  The Company devotes significant resources, a portion
of which is  reimbursed  by  customers,  to  development  programs  directed  at
creating  new  products  and product  enhancements,  as well as  developing  new
applications  for  existing  products.  Because  the Company  believes  that its
ability to compete  effectively depends in part on maintaining and enhancing its
expertise in applying new technologies and developing new products,  the Company
dedicates  substantial  resources to engineering,  research and development.  At
December 31,  1997,  the Company  employed 88  individuals  in its  engineering,
research and development functions. There can be no assurance that the Company's
product  development  efforts  will be  successful  in producing  products  that
respond to technological changes or new products introduced by others.

     The Company's cost associated with engineering and research and development
were  $5.2  million,  $4.1  million  and $3.4  million  in 1997,  1996 and 1995,
respectively.  During such periods, $2.9 million, $2.2 million and $1.2 million,
respectively,  were incurred in research and development.  Of these amounts, the
Company  recovered  from  customers   approximately   10.7%,  17.0%  and  38.3%,
respectively.  The  Company  intends  to direct  its  research  and  development
activities to  integrating  its newly  acquired  technologies  with its existing
capabilities, and continuing to develop subsystems and systems.


                                       9
<PAGE>


Raw Materials; Suppliers

     Raw  materials  and  purchased  components  are  generally  available  from
multiple suppliers.  However, beryllium, a material used extensively by the PSG,
is only  available  from Brush  Wellman,  Inc.  ("Brush  Wellman") the sole U.S.
supplier.  Historically,  the  Company  and,  to the  Company's  knowledge,  its
predecessors' beryllium operations have had an excellent relationship with Brush
Wellman and have not  encountered  problems  in  obtaining  their  requirements.
However,  the  partial  or  complete  loss of Brush  Wellman  as a  supplier  of
beryllium,  or production  shortfalls or interruptions that otherwise impair the
supply of beryllium to the Company,  would have a material adverse effect on the
Company's  business,  financial  condition  or  results of  operations.  If such
conditions were to occur, it is uncertain whether  alternative  sources could be
developed.  In addition,  the Company  purchases a substantial  part of the ball
bearings  it  distributes  from a single  foreign  supplier.  While the  Company
believes that it could obtain alternate  sources of supply,  any interruption in
the flow of  products  from this  supplier,  or  increases  in the cost of these
products,  could have an adverse  effect on the  Company's  business,  financial
condition or results of operations.

Patents and Trademarks

     The  Company is not  dependent  upon any single  patent or  trademark.  The
Company  has  a  combination   of  patents,   trademarks   and  trade   secrets,
non-disclosure agreements and other forms of intellectual property protection to
protect  certain  of its  proprietary  technology  and has  patent  applications
pending  or  under  evaluation.  Although  it  believes  that  its  patents  and
trademarks  may have value,  the Company  believes that its future  success will
depend  primarily on the  innovation,  technical  expertise,  manufacturing  and
marketing abilities of its personnel. There can be no assurance as to the degree
of protection offered by these patents or as to the likelihood that patents will
be issued for  pending  applications.  There also can be no  assurance  that the
Company will be able to maintain  the  confidentiality  of its trade  secrets or
that its  non-disclosure  agreements will provide  meaningful  protection of the
Company's trade secrets,  know-how or other proprietary information in the event
of any unauthorized use,  misappropriation  or disclosure of such trade secrets,
know-how or other proprietary information.

     Competitors in the United States and foreign countries,  many of which have
substantially greater resources, may have applied for or obtained, or may in the
future apply for and obtain,  patents that will prevent, limit or interfere with
the  Company's  ability  to make and sell  some of its  products.  Although  the
Company  believes  that its  products  do not  infringe  on the patents or other
proprietary rights of third parties,  there can be no assurance that other third
parties  will not assert  infringement  claims  against the Company or that such
claims will not be successful.

Environmental Regulation

     The Company believes that it is in compliance with federal, state and local
laws and  regulations  governing the discharge of materials into the environment
or  otherwise  relating to the  protection  of the  environment  in all material
respects,  and that any  non-compliance  with such laws will not have a material
adverse effect upon its business,  financial condition or results of operations,
capital  expenditures,  earnings  or  competitive  position.  There  can  be  no
assurance,   however,  (i)  that  changes  in  federal,  state  or  local  laws,
regulations  or  regulatory  policy,  or the  discovery  of unknown  problems or
conditions will not in the future require substantial  expenditures,  or (ii) as
to the extent of the Company's  liabilities,  if any, for past failures, if any,
to comply with applicable  environmental laws,  regulations and permits,  any of
which  also  could have a material  adverse  effect on the  Company's  business,
financial condition or results of operations.

     The Company has been identified as a potentially  responsible party ("PRP")
under the Comprehensive  Environmental Response,  Compensation and Liability Act
("CERCLA") with respect to three  third-party waste disposal sites. In 1996, the
Company entered into a settlement  agreement and paid approximately  $1,000 with
respect to one of these  sites.  Although  liability  under  CERCLA is joint and
several,  meaning  that  liability  can exceed a PRP's pro rata share of cleanup
costs, based on currently available information, the Company believes that costs
associated with the two remaining sites will not have a material  adverse effect
on the Company.


                                       10
<PAGE>


     The Company, pursuant to a remedial plan approved by the Ohio Environmental
Protection Agency ("Ohio EPA") in 1993, is in the process of investigating soils
and  groundwater at a site formerly owned by a division of the Company,  and has
conducted  certain  remedial  work at this  site.  Costs  to date  have not been
material to the Company,  and until recently,  the Company  believed that future
costs similarly would not be material.  In September 1997, however,  the Company
was advised by its  environmental  consultants that the costs now anticipated to
carry out the 1993 plan would be substantially greater than previously expected,
but that the Company could pursue alternate plans which would involve additional
costs in the range of approximately $600,000 to $1.5 million.  However, any such
alternate  plans would be subject to the approval of the Ohio EPA.  Based on the
advice of its  consultants,  the Company has increased its reserves  relating to
this site to  approximately  $600,000,  with a resulting  charge to discontinued
operations  in the third  quarter of 1997 of  $400,000,  before a tax benefit of
$156,000. Based on the advice of its consultants,  the Company believes that the
Ohio EPA is likely to allow use of an alternate plan.  There can be no assurance
that an  alternate  remedial  plan will be  approved  by the Ohio  EPA.  If such
approval is not received, costs to the Company would increase substantially.  In
addition,  even if approval is received,  the costs actually incurred may exceed
the reserves established.  The Company anticipates that actual expenditures will
be incurred over a period of several years.

     In addition,  the current owner of a site formerly owned by a subsidiary of
PAI has asserted  that the  subsidiary  is  responsible  for  investigation  and
remediation  costs with  respect to this site.  No  litigation  has been brought
against the  Company,  and the Company has received no  correspondence  or other
communication  for  several  years with  respect to this site.  At this time the
Company is unable to assess the extent of its potential liability,  if any, with
respect  to  this  site  or to  form  a  judgment  as to  the  likelihood  of an
unfavorable outcome in the event litigation were to be commenced.

     The  Company  uses  or  generates  certain  hazardous   substances  in  its
manufacturing and engineering facilities. The Company believes that its handling
of such substances is in material  compliance with applicable  local,  state and
federal environmental, safety and health regulations at each operating location.
The Company invests in protective  equipment,  process  controls and specialized
training  to  minimize  risks  to  employees,  surrounding  communities  and the
environment due to the presence and handling of such hazardous  substances.  The
Company periodically  conducts employee physical  examinations and workplace air
monitoring  regarding such substances.  When exposure problems or potential have
been indicated,  corrective  actions have been  implemented and reoccurrence has
been  minimal  or  non-existent.   The  Company  does  not  carry  environmental
impairment insurance.

Employees

     As of December  31,  1997,  the Company  employed 980 persons in the United
States, including 745 in manufacturing, 72 in sales, 88 in engineering and 75 in
administration.  Approximately  74  employees  at the  St.  Petersburg,  Florida
facility are subject to a collective bargaining agreement. The Company considers
its  relations  with  its  employees  to be  satisfactory.  There  has  been  no
significant interruption of operations due to labor disputes.


                                       11
<PAGE>


Item 2.  PROPERTIES

     The Company  leases its  executive  office,  located at 910 Sylvan  Avenue,
Englewood  Cliffs,  New  Jersey.  The  principal  plants  and  other  materially
important properties at December 31, 1997 are:

<TABLE>
<CAPTION>
                            Type of                             Square             Leased;
Location                    Facility                            Footage            Expiration
--------                    --------                            -------            ----------
<S>                         <C>                                 <C>                <C>
Cullman, AL                 Manufacturing, Engineering          110,000            Owned
Gilford, NH                 Manufacturing, Engineering           84,250            Owned
Montville, NJ               Distribution                         76,200            Leased; 1999
San Diego, CA               Manufacturing, Engineering           63,100            Leased; 2000
St. Petersburg, FL          Manufacturing, Engineering           52,500            Owned
Rochester Hills, MI         Manufacturing, Engineering           35,000            Leased; 1999
Santa Barbara, CA           Manufacturing, Engineering           13,800            Leased; 1999
Irvine, CA                  Distribution                          7,800            Leased; 2000
Dallas, TX                  Distribution                          2,950            Leased; 2002
</TABLE>

     All of the  facilities  owned by the Company are  subject to  mortgages  or
security  interests which secure the Company's  obligations  under its revolving
credit  facility or  industrial  development  bonds (see Note 4 to the Financial
Statements).

     Management believes that the Company's  facilities are generally sufficient
to meet its current and reasonably anticipated  manufacturing,  distribution and
related  requirements.  The  Company,  however,  periodically  reviews its space
requirements  to ascertain  whether its  facilities  are  sufficient to meet its
needs.

Item 3.  LEGAL PROCEEDINGS

     The Company is a defendant in various  lawsuits,  none of which is expected
to have a material adverse effect on the Company's business, financial position,
or results of operations. See "Business--Environmental Regulations."

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

     On October 14, 1997 the Company held a Special Meeting of Stockholders (the
"Meeting") of Axsys  Technologies,  Inc. The purpose of the Meeting was to amend
the Certificate of Incorporation of the Company to increase the number of shares
of authorized  Common Stock to 30,000,000  shares;  to amend the  Certificate of
Incorporation  of the Company to delete a provision  limiting  ownership  of the
Company's  Common Stock for tax reasons no longer  applicable;  and to amend the
Vernitron Corporation Long-Term Stock Incentive Plan.

     The number of votes cast for the proposal to amend the authorized number of
shares  of  Common  Stock to  30,000,000  shares  was  approximately  2,792,000.
Approximately  36,000 votes were cast against and 2,000 abstained from the vote.
The  number  of  votes  cast  for the  proposal  to  amend  the  Certificate  of
Incorporation  of the Company to delete a provision  limiting  ownership  of the
Company's Common Stock was approximately  2,711,000.  Approximately  3,000 votes
were cast against and 3,000 abstained. The number of votes cast for the proposal
to  amend  the  Vernitron   Corporation   Long-Term  Stock  Incentive  Plan  was
approximately  2,287,000.  Approximately 9,000 votes were cast against and 4,000
abstained.


                                       12
<PAGE>


                                     PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

     The Company's  common stock trades on the Nasdaq  National Market under the
Symbol "AXYS" since December 11, 1996.  Prior to that time, it was traded on the
Nasdaq SmallCap Market. The following table sets forth the range of high and low
sales prices as reported by the Nasdaq  SmallCap  Market from January 1, 1996 to
December 10, 1996, and as reported on the Nasdaq  National  Market from December
11, 1996:

                                              1997                   1996
                                      ------------------      ------------------
                                        High       Low          High       Low
                                      -------    -------      -------    -------
Fiscal Years Ended December 31:
  First Quarter                       $17 1/2    $10          $ 5 5/8    $ 4 3/8
  Second Quarter                       25 1/4     12           11 7/8      4 3/8
  Third Quarter                        37         22 1/4       11 1/4      6 1/4
  Fourth Quarter                       38         16 7/8       11 1/2      9

     The prices shown above represent  quotations among securities  dealers,  do
not include  retail  markups,  markdowns or  commissions  and may not  represent
actual transactions.

     The information  presented above has been adjusted to reflect the July 1996
one-for-five reverse stock split (see Note 3 to the Financial Statements).

     On March 20,  1998,  the high and low sales prices were $27 1/4 and 25 3/4,
respectively.

     On March 20,  1998,  the  approximate  number of  holders  of record of the
Common Stock was 560.

Dividend Policy

     The  Company has  applied  and  currently  intends to continue to apply its
retained  and current  earnings  toward the  development  of its business and to
finance the growth of the  Company.  The Company  did not pay  dividends  on its
Common  Stock  during the three  years ended  December  31,  1997,  and does not
anticipate paying cash dividends in the foreseeable future. The Company's credit
facility prohibits the payment of cash dividends.


                                       13
<PAGE>


Item 6.  SELECTED FINANCIAL DATA

     The following  selected  financial data for the five fiscal years presented
below is derived  from the  audited  Consolidated  Financial  Statements  of the
Company as adjusted to reflect the  discontinuance of the Electronic  Components
group in 1994.  The data  should be read in  conjunction  with the  Consolidated
Financial Statements and the related Notes thereto included elsewhere herein.

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                             ------------------------------------------------------------------
                                                              1997(1)        1996(2)        1995          1994           1993
                                                             ---------      --------      --------      --------       --------
                                                                       (Dollars in thousands, except per share data)
<S>                                                          <C>            <C>           <C>           <C>            <C>
Statement of Operations Data:
Net sales...............................................     $ 123,816      $ 91,301      $ 65,213      $ 62,132       $ 58,649
Gross profit............................................        33,997        23,818        17,240        17,229         15,311
Income (loss) from continuing operations before
  extraordinary items...................................         5,487         2,855           884            27         (3,856)
Net income (loss).......................................         5,134         2,682           884         3,681         (4,526)
Preferred stock dividends...............................           102           847           574           355            375
Net income (loss) applicable to
  common shareholders...................................         5,032         1,835           310         3,326         (4,901)
Diluted net income (loss) per share from continuing
  operations before extraordinary items.................     $    1.53      $   0.74      $   0.12      $  (0.20)      $  (4.08)
Diluted net income (loss) per share applicable to
  common shareholders...................................     $    1.43      $   0.68      $   0.12      $   1.95       $  (4.75)
Weighted average common shares outstanding..............         3,513         2,688         2,511         1,702          1,037

<CAPTION>
                                                                                   Years Ended December 31,
                                                             ------------------------------------------------------------------
                                                                1997          1996          1995          1994           1993
                                                             ---------      --------      --------      --------       --------
<S>                                                          <C>            <C>           <C>           <C>            <C>
Balance Sheet Data:
Working capital.........................................     $  29,039      $ 24,794      $ 14,334      $ 11,538       $ 15,473
Total assets............................................        78,999        62,171        40,485        42,197         47,261
Long-term debt and capital lease obligations
    (less current portion) (3)..........................         8,629        23,324        11,047        11,921         25,270
Shareholders' equity (3)................................        47,317        19,165        14,745        13,269          5,076
</TABLE>

----------
(1)  In May 1997, the Company  acquired the stock of Teletrac.  This acquisition
     was accounted for under the purchase method of accounting and, accordingly,
     the results of  Teletrac's  operations  have been included in the Company's
     Consolidated  Statement of Operations  since the date of  acquisition.  See
     Note 2 to the Consolidated Financial Statements.

(2)  In April 1996, the Company  acquired the stock of PAI and, in October 1996,
     purchased  substantially all of the assets of LMBC. These acquisitions have
     been   accounted  for  under  the  purchase   method  of  accounting   and,
     accordingly,  the results of the continuing operations of PAI and LMBC have
     been included in the Company's  Consolidated  Statement of Operations since
     their  respective  dates of  acquisition.  See  Note 2 to the  Consolidated
     Financial Statements.

(3)  On July 20, 1994, the Company  purchased its senior bank debt at a discount
     and recorded a pretax gain of $9.6 million.


                                       14
<PAGE>


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

Results of Operations

The  following  table sets forth certain  financial  data as a percentage of net
sales for each of the past three years in the period  ended  December  31, 1997.
The Company  acquired the stock of Teletrac on May 30, 1997, the stock of PAI on
April 25, 1996, and  substantially all of the assets of LMBC on October 2, 1996.
These acquisitions, which are all part of the PSG, have been accounted for under
the purchase  method of accounting.  Accordingly,  the results of the continuing
operations  of  Teletrac,  PAI and LMBC  have  been  included  in the  Company's
Consolidated Statement of Operations since their respective dates of acquisition
(see Note 2 to the Consolidated Fancial Statements).

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                           ------------------------------------
                                                            1997           1996           1995
                                                           ------         ------         ------
<S>                                                         <C>            <C>            <C>
 Net sales:
   PSG .............................................         63.7%          53.2%          38.0%
   ICG .............................................         36.3           46.8           62.0
                                                           ------         ------         ------
                                                            100.0          100.0          100.0
 Cost of sales .....................................         72.5           73.9           73.6
                                                           ------         ------         ------

 Gross Profit ......................................         27.5           26.1           26.4
                                                           ------         ------         ------

 Operating expenses:
   Selling, general and administrative expenses ....         17.6           18.1           20.4
   Amortization of intangible assets ...............          0.3            0.2            0.3
                                                           ------         ------         ------
                                                             17.9           18.3           20.7
                                                           ------         ------         ------
 Operating income ..................................          9.6            7.8            5.7
   Interest expense ................................          2.2            2.6            3.1
   Other expense ...................................           --             --            0.4
                                                           ------         ------         ------

 Income from continuing operations before
   taxes and extraordinary items ...................          7.4            5.2            2.2
   Provision for taxes .............................          3.0            2.1            0.8
                                                           ------         ------         ------

 Income from continuing operations before
   extraordinary items .............................          4.4            3.1            1.4
   Loss on discontinued  operations, net of tax ....         (0.2)            --             --
                                                           ------         ------         ------

 Income before extraordinary items .................          4.2            3.1            1.4
   Extraordinary charges, net of tax ...............         (0.1)          (0.2)            --
                                                           ------         ------         ------

 Net income ........................................          4.1%           2.9%           1.4%
                                                           ======         ======         ======

Gross profit (as a percentage of related net sales):
   PSG .............................................         25.4%          21.9%          20.3%
   ICG .............................................         31.0           30.8           30.2
</TABLE>


                                       15
<PAGE>


Comparison of Years Ended December 31, 1997 and December 31, 1996

     Net Sales.  Net Sales  increased  by 35.6%,  or $32.5  million,  from $91.3
million in 1996 to $123.8 million in 1997.  The PSG's sales  increased by 62.3%,
or $30.3  million,  from $48.6 million in 1996 to $78.9 million in 1997. Of this
$30.3 million  increase,  approximately  $20.3 million was  attributable  to the
acquisitions of Teletrac,  PAI, and LMBC. The remaining  $10.0 million  increase
was the result of internal growth  primarily in the space,  electronics  capital
equipment and digital  imaging  markets.  The ICG's sales  increased by 5.2%, or
$2.2 million, from $42.7 million in 1996 to $44.9 million in 1997. This increase
was primarily due to higher sales of electronic  connectors  resulting  from new
product introductions to the industrial automation market.

     Gross  Profit.  The  Company's  gross profit  increased by 42.7%,  or $10.2
million,  from $23.8  million in 1996 to $34.0  million  in 1997.  Gross  profit
margin  increased  from  26.1% of net sales in 1996 to 27.5% in 1997.  The gross
margin  for the PSG  increased  from 21.9% of net sales in 1996 to 25.4% in 1997
and,  for the ICG,  increased  from 30.8% of net sales in 1996 to 31.0% in 1997.
The  improvement  in the PSG's gross margin was primarily due to the addition of
higher margin revenue from the acquisitions of Teletrac and PAI, as well as from
sales volume related operating efficiencies.

     Selling,  general and administrative  expenses.  SG&A expenses increased by
31.8%, or $5.2 million,  from $16.5 million in 1996 to $21.7 million in 1997. As
a percentage of net sales,  however,  SG&A decreased from 18.1% in 1996 to 17.6%
in 1997. The increase in SG&A expenses in absolute  dollars was primarily due to
the acquisitions of Teletrac, PAI, and LMBC. The decrease as a percentage of net
sales was primarily  attributable to the absorption of lower corporate  overhead
expense,  due to the  elimination  of  certain  costs  related to the former PAI
corporate  office,  over a  larger  sales  base.  This  favorable  variance  was
partially offset by higher incentive expense related to a three year performance
plan established for the former owners, and now employee managers, of Teletrac.

     Interest Expense.  Interest expense  increased by 12.4%, or $290,000,  from
$2.3 million in 1996 to $2.6 million in 1997.  The increase in interest  expense
was primarily due to higher average  borrowings  resulting from the acquisitions
of  Teletrac  during 1997 and,  PAI and LMBC  during  1996.  This  increase  was
substantially  offset by reductions of debt during 1997 from the Company's stock
offering in late October and cash generated from operations.

     Taxes.  The Company's  effective tax rate  increased  from 39.8% in 1996 to
40.5% in 1997, primarily due to a higher effective state tax rate.

     Preferred Stock Dividends. Preferred Stock dividends decreased by 88.0%, or
$745,000,  from $847,000 in 1996 to $102,000 in 1997.  The decrease in Preferred
Stock dividends was due to the Company's  exchange of Preferred Stock for Common
Stock and subsequent  redemption of remaining Preferred Stock (see Note 3 to the
Consolidated Financial Statements). As a result of such redemption,  there is no
Preferred Stock outstanding and there are no accrued and unpaid dividends.

Comparison of Years Ended December 31, 1996 December 31, 1995

     Net Sales.  Net Sales  increased  by 40.0%,  or $26.1  million,  from $65.2
million in 1995 to $91.3 million in 1996. The PSG's sales increased by 96.0%, or
$23.8  million,  from  $24.8  million  in 1995 to $48.6  million  in  1996.  The
acquisition  of PAI  accounted  for $23.1  million of the  increase in the PSG's
sales. The ICG's sales increased by 5.7%, or $2.3 million, from $40.4 million in
1995 to $42.7  million  in 1996.  In 1996,  sales  of  precision  ball  bearings
increased  by  9.0%  due  to  increased   sales  to  both   original   equipment
manufacturers and distributors for use in a variety of industries.

     Gross  Profit.  The  Company's  gross profit  increased  by 38.2%,  or $6.6
million,  from $17.2  million in 1995 to $23.8  million  in 1996.  Gross  profit
margin decreased from 26.4% of net sales in 1995 to 26.1% in 1996. This decrease
was  primarily due to the increase in sales by PSG.  Historically,  sales by the
PSG have resulted in lower margins than sales by the ICG.  PSG's sales increased


                                       16
<PAGE>

primarily as a result of the Company's  acquisition  of PAI. Gross profit margin
attributable  to the PSG  increased  from  20.3% in 1995 to  21.9% in 1996.  The
increase in the PSG's gross profit  margin was  primarily due to the increase in
sales  resulting from the acquisition of PAI. The gross profit margin on the PAI
sales,  while lower than the consolidated  gross profit margin,  was higher than
the gross profit margin on PSG sales prior to the PAI acquisition.  Gross profit
margin  attributable  to the ICG increased  from 30.2% in 1995 to 30.8% in 1996.
The  increase in the ICG gross  profit  margin was  primarily  due to  favorable
overhead spending and material  purchase price variances  partially offset by an
unfavorable sales mix of lower margin products.

     Selling,  general and administrative  expenses.  SG&A expenses increased by
23.7%, or $3.2 million, from $13.3 million in 1995 to $16.5 million in 1996, but
decreased from 20.4% to 18.1% of net sales,  respectively.  The increase in SG&A
expenses in absolute  dollars was primarily due to the  acquisitions  of PAI and
LMBC.  The  decrease  in  SG&A  expenses  as  a  percentage  of  net  sales  was
attributable,  in part, to the  absorption  of corporate  overhead over a larger
sales base.

     Interest Expense.  Interest expense  increased by 17.5%, or $349,000,  from
$2.0 million in 1995 to $2.3 million in 1996.  The increase in interest  expense
was primarily due to higher average  borrowings  resulting from the acquisitions
of PAI and LMBC.  This  increase was  substantially  offset by the  reduction of
interest expense attributable to net assets held for disposal (see Note 2 to the
Consolidated Financial Statements), the effect of lower interest rates resulting
from a lower prime rate and, more  favorable  terms under the  Company's  credit
agreement entered into on April 25, 1996.

     Preferred Stock Dividends. Preferred Stock dividends increased by 47.6%, or
$273,000,  from $574,000 in 1995 to $847,000 in 1996.  The increase in Preferred
Stock  dividends was due primarily to the  expiration,  on February 22, 1996, of
the period  during which the Company  paid  dividends  in  additional  shares of
Preferred Stock at an annual rate of 15% of the average bid and ask price of the
Preferred  Stock.  Subsequent to that date,  while it did not declare or pay any
dividends, the Company accrued dividends at $1.20 per share.

Backlog

     A  substantial  portion of the  Company's  business is of a  build-to-order
nature requiring various engineering, manufacturing, testing and other processes
to be performed  prior to shipment.  As a result,  the Company  generally  has a
significant backlog of orders to be shipped.

     The Company's  backlog of orders  decreased by 1.8%, or $1.0 million,  from
$56.4  million at December 31, 1996 to $55.4  million at December 31, 1997.  The
decrease  in backlog  was due  primarily  to the  timing of orders  which can be
uneven  and  comprised  of  multiple  delivery  dates  over a period of time,  a
reduction of past due orders in our  precision  machining  business and customer
program cancellations of $1.3 million.  These decreases were partially offset by
the addition of backlog from the acquisition of Teletrac. Backlog as of March 6,
1998 was $59.0 million.

     The Company  believes that a substantial  portion of the backlog  orders at
December 31, 1997 will be shipped over the next twelve months.

Liquidity and Capital Resources

     The Company  funds its  operations  primarily  from cash flow  generated by
operations and, to a lesser extent,  from  borrowings  under its credit facility
and through capital lease transactions.

     Net cash provided by (used in)  operations for the years ended December 31,
1997,  1996  and 1995  was  $9.1  million,  $2.0  million  and  $(1.0)  million,
respectively.  The improvement in cash provided from operations in both 1997 and
1996 was due  primarily to increases in net income,  non-cash  amortization  and
depreciation  and the amount of prior year net operating  losses carried forward
to offset current taxes. At December 31, 1997, the Company had approximately


                                       17

<PAGE>


$1.3 million of net operating  losses and $0.5 million of tax credits  available
to reduce future taxable income.

     The  Company's  working  capital  was $29.0  million  and $24.8  million on
December 31, 1997 and 1996, respectively.

     Net cash (used in)  provided by  investing  activities  for the years ended
1997,  1996  and  1995 was  $(10.5)  million,  $2.0  million  and $1.9  million,
respectively.  During the second quarter of 1997, the Company acquired the stock
of Teletrac.  The cash portion of the total purchase price for Teletrac was $7.3
million.  The cash  provided  by  investing  activities  in 1996  was  generated
primarily from the sale of a subsidiary of PAI for cash  consideration  of $11.3
million.  This cash source was partially  offset by the  acquisitions of PAI and
LMBC for cash consideration of $4.7 million and $2.9 million,  respectively (see
Note 2 to the Consolidated Financial Statements).

     The Company  had no material  commitments  for capital  expenditures  as of
December 31, 1997. It is  anticipated  that capital  expenditures  in 1998 could
range from $5.0 million to $7.0 million as compared to the $4.9 million expended
in 1997,  including assets acquired under capital leases of $1.7 million.  Based
on an evaluation  of available  lease terms and other  factors,  the Company may
continue  to finance a portion of these  capital  expenditures  through  capital
leases.

     The Company has an $11.0 million senior secured credit  facility  comprised
of a  revolving  debt  commitment  expiring  on  April  25,  2000  (the  "Credit
Facility"),  of which $5.1 million was  outstanding as of December 31, 1997. The
Credit Facility contains restrictive covenants which, among other things, impose
limitations with respect to the incurrence of additional liens and indebtedness,
mergers, consolidations and specified sale of assets and requires the Company to
meet certain  financial tests including minimum levels of earnings and net worth
and various other financial ratios. In addition,  the Credit Facility  prohibits
the  payment  of  cash  dividends.  The  Company  believes  that  the  remaining
availability  under the Credit  Facility and cash generated from operations will
be  sufficient  to meet its  future  capital  expenditure  and  working  capital
requirements for at least the next 12 months.

Year 2000

     The date change in the Year 2000 may present  potential  computer issues in
that certain early  programming used 2 digits rather than 4 to designate a year.
As the century date change occurs,  date-sensitive systems may experience system
failure or miscalculations leading to disruptions in a company's operations. The
Company has taken actions to address this potential problem.  Each business unit
has either  reviewed  or is in the  process of  reviewing  and  identifying  all
systems  which may be  impacted  at the start of the next  millennium.  Internal
systems and software with non-compliant codes are expected to be either upgraded
or replaced  with systems or software  that will  acknowledge  the change of the
millennium.  Additionally,  a review of our critical  suppliers and customers is
being made to assure that they are working toward Year 2000 compliance.

     The Company estimates that the total amount that will be spent to remediate
its Year 2000 issues is not expected to be material to its business, operations,
or financial condition.

Recently Issued Accounting Standards

     Statement of Financial Accounting Standards ("SFAS") No. 131,  "Disclosures
about  Segments of an  Enterprise  and Related  Information"  was issued in June
1997.  The  new  statement  establishes  standards  for the  way  that  business
enterprises  report  information  about operating  segments in annual  financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports.  It also establishes  standards
for related disclosures about products and services,  geographic areas and major
customers.  SFAS No. 131 is effective for periods  beginning  after December 15,
1997 and requires  restatement of all prior periods  presented.  Management does
not believe that the implementation of the statement will have a material impact
on the consolidated  financial position or consolidated results of operations of
the Company, but may require additional disclosures to be made.


                                       18
<PAGE>


Risk Factors

     This  filing  contains  forward-looking  statements  within the  meaning of
Section 21E of the  Securities  Exchange  Act of 1934,  as  amended,  including,
without limitation,  statements regarding the increasing  performance demands in
the defense, space, high-end digital imaging,  electronics capital equipment and
other  markets  served by the Company,  the  Company's  ability to integrate its
existing technologies and realign its direct sales organizations,  the Company's
ability to implement its strategy to develop and sell value-added  systems,  the
continuation of trends favoring  outsourcing of the design and  manufacturing of
subsystems  and systems by customers,  the receipt and shipment of orders by the
Company,  the Company's  objective to grow through  strategic  acquisitions  and
anticipated  expenditures for environmental  remediation.  Discussion containing
such  forward-looking  statements  is  found in the  material  set  forth  under
"Business" and "Management's  Discussion and Analysis of Financial Condition and
Results of  Operations,"  as well as within the filing  generally.  The  factors
discussed  below could cause actual  results and  developments  to be materially
different  from those  expressed in or implied in such  statements.  The Company
cautions the reader,  however,  that this list of factors may not be exhaustive.
The following  risk factors  should be  considered  carefully in addition to the
other information contained in this filing.


Management of Expanded Operations; Acquisitions

     In recent years, the Company has made several acquisitions of complementary
businesses which the Company is seeking to integrate.  This integration strategy
includes the  development  and sale of  value-added  systems  incorporating  the
Company's various technological capabilities. The development of such systems is
in its  early  stages.  There  can be no  assurance  that  the  Company  will be
successful in developing and selling such systems.

     In addition,  as part of the Company's business development  strategy,  the
Company plans to pursue  further  acquisitions  in order to expand the Company's
product  offerings,  add to or enhance its base of technical or sales personnel,
or provide  desirable  customer  relationships.  Such growth  could  result in a
significant strain on the Company's managerial, financial, engineering and other
resources.  The rate of the Company's future  expansion,  if any, in combination
with the complexity of the technologies involved in the Company's business,  may
demand an unusually  high level of  managerial  effectiveness  in  anticipating,
planning,  coordinating and meeting the operational needs of the Company as well
as the needs of its customers.  Additionally, there can be no assurance that the
Company will be able to acquire  complementary  businesses  on a  cost-effective
basis,  or integrate  acquired  operations  into its  organization  effectively,
retain and motivate key personnel,  or retain  customers of acquired firms.  The
Company competes for attractive  acquisition  candidates with other companies or
investors,  and such competition could have the effect of increasing the cost to
the  Company of pursuing  its  acquisition  strategy  or reducing  the number of
attractive candidates to be acquired. Although the Company reviews and considers
possible  acquisitions on an on-going basis, no specific  acquisitions are being
negotiated  or planned as of the date of this  filing.  See  "Business--Business
Strategy."

Technological Change and New Product Development

     The Company's  success will continue to depend in substantial part upon its
ability to introduce new products that keep pace with technological developments
and evolving industry  standards and to apply appropriate levels of engineering,
research   and   development   resources   necessary  to  keep  pace  with  such
developments.  In addition,  the  Company's  success will depend on how well the
Company  responds  to changes  in  customer  requirements  and  achieves  market
acceptance  for its  products  and  capabilities.  Any failure by the Company to
anticipate or respond  adequately  to  technological  developments  and customer
requirements  could have a material  adverse  effect on the Company's  business,
financial  condition or results of operations.  In order to develop new products
successfully,  the  Company  is  dependent  upon  close  relationships  with its
customers and their  willingness to share  proprietary  information  about their
requirements  and participate in collaborative  efforts with the Company.  There
can be no assurance  that the  Company's  customers  will continue to provide it
with timely access to such information or that the Company will be successful in
developing and marketing new products and services or their enhancements. In


                                       19
<PAGE>


addition,  there can be no assurance that the new products and services or their
enhancements,  if any, developed by the Company, will achieve market acceptance.
See  "Business--Business  Strategy"  and  "Business--Engineering,  Research  and
Development."

Substantial Variability of Quarterly Results of Operations

     Factors such as announcements of technological  innovations or new products
by the  Company or its  competitors,  and the cynical  nature of the  industries
served by the  Company  could  cause  substantial  variations  in the  Company's
operating results.  The defense,  space,  high-end digital imaging,  electronics
capital equipment and industrial  automation markets, each of which represents a
significant market for the Company's products, have historically been subject to
substantial economic fluctuations due to changing demands for their products and
services, introduction of new products and product obsolescence. There can be no
assurance that such  fluctuations will not reoccur and have an adverse impact on
the  Company's  business,  financial  condition  or results of  operations.  The
Company  has  experienced  and expects to  continue  to  experience  significant
fluctuations in its quarterly and annual  operating  results due to a variety of
factors,  including  market  acceptance  of new  and  enhanced  versions  of the
Company's  products,  timing and shipment of significant orders, mix of products
sold,  length of sales  cycles,  plant  openings  and  closings,  the  timing of
acquisitions or dispositions by the Company,  delays in raw materials shipments,
completion of large projects,  other manufacturing  delays and disruptions,  the
level of backlog of orders, and cyclically in the markets the Company serves. To
some extent,  the Company's  net sales and operating  results for a quarter will
depend upon the Company  generating  orders to be shipped in the same quarter in
which the order is received. The failure to receive anticipated orders or delays
in  shipments  near  the end of a  particular  quarter,  due,  for  example,  to
unanticipated  rescheduling  or  cancellations  of  shipments  by  customers  or
unexpected  manufacturing  difficulties,  may cause  net  sales in a  particular
quarter to fall significantly below the Company's expectations, which would have
a material  adverse  effect on the Company's  business,  financial  condition or
results of operations for such quarter. See "Business--Market Overview."

Industry Concentration

     A significant  portion of the Company's  business and business  development
efforts are  concentrated  in the defense and, to a lesser  extent,  electronics
capital equipment  industries.  The Company's  business depends,  in significant
part,  upon the U.S.  Government's  continued  demand in the area of defense for
high-end, high performance components and subsystems of the type manufactured by
the  Company.  Approximately  28% of net sales in 1997 and 27.6% of net sales in
1996 were derived directly from contracts with the U.S. Government,  or agencies
or departments  thereof,  or indirectly from subcontracts  with U.S.  Government
contractors.   The  majority  of  these  Government  contracts  are  subject  to
termination and renegotiation.  As a result, the Company's  business,  financial
condition or results of operations may be materially affected by changes in U.S.
Government expenditures for defense. Additionally, the Company currently intends
to continue to develop the portion of its business  dependent upon manufacturers
in the electronics  capital equipment  industry which provides equipment used in
the  semiconductor,  mass data storage and flat panel display  industries.  Such
business  development  will  depend,  in  part,  upon  capital  expenditures  by
manufacturers of electronics  capital  equipment,  which in turn depend upon the
current and anticipated market demand for  semiconductor,  mass data storage and
flat panel display devices. The semiconductor,  mass data storage and flat panel
display  industries have been highly volatile and historically  have experienced
periods of  oversupply,  resulting in  significantly  reduced demand for capital
equipment.  There  can be no  assurance  that  this  volatility  will not have a
material  adverse effect on the Company's  business in the  electronics  capital
equipment industry. See "Business--Market Overview" and "Business--Customers."

Competition

     The  markets  for the  Company's  products  are  competitive.  The  Company
competes  primarily  on the basis of its  ability  to design  and  engineer  its
products to meet performance  specifications set by its customers,  most of whom
are OEMs who  purchase  component  parts or  subsystems  for  inclusion in their
end-products.   Product  pricing  and  quality,  customer  support,  experience,
reputation and financial stability are also important competitive factors. There
is a limited  number of competitors in each of the markets for the various types
of  precision   optical  and   positioning   components   and   subsystems   and
electrical/electronic interconnect devices manufactured and sold by the Company.


                                       20
<PAGE>


These  competitors,  especially  those in the precision  optical and positioning
product lines,  are typically  focused on a smaller number of product  offerings
than the Company, and are often well entrenched.  Some of these competitors have
substantially greater resources than the Company. There can be no assurance that
the Company's competitors will not develop enhancements to or future generations
of competitive products that will offer superior price or performance  features,
or that new processes or technologies  will not emerge that render the Company's
products  less  competitive  or  obsolete.  In  addition,  as a  result  of  the
substantial  investment  required by a customer to integrate  capital  equipment
into a production line, or to integrate components and subsystems into a product
design,  the Company  believes that once a customer has selected certain capital
equipment or certain  components or  subsystems  from a particular  vendor,  the
customer generally relies upon that vendor to provide equipment for the specific
production line or product  application and may seek to rely upon that vendor to
meet  other   capital   equipment  or   component  or  subsystem   requirements.
Accordingly,  the Company may be at a competitive disadvantage with respect to a
prospective  customer if that  customer  utilizes a  competitor's  manufacturing
equipment or components or subsystems.  Further,  there are numerous competitors
in markets to which the  Company  distributes  precision  ball  bearings.  These
competitors,  who vary in size, include other ball bearings distributors as well
as ball  bearing  manufacturers.  There  can be no  assurance  that the bases of
competition  in the  industries in which the Company  competes will not shift or
that   the    Company    will    continue   to   compete    successfully.    See
"Business--Competition."

Dependence on Key Suppliers

     A significant portion of the Company's precision machining business related
to the  commercial  space  market  depends on the  adequate  supply of specialty
metals,  such as beryllium,  at competitive  prices and on reasonable terms. The
Company  currently  procures all of its beryllium from Brush  Wellman,  the sole
U.S. supplier,  and the Company expects to continue to rely on Brush Wellman for
beryllium for the foreseeable  future.  Although the Company has not experienced
significant  problems with this supplier in the past,  there can be no assurance
that such relationship will continue or that the Company will continue to obtain
such supplies at cost levels that would not adversely affect the Company's gross
margins.  The  partial  or  complete  loss of Brush  Wellman  as a  supplier  of
beryllium,  or production  shortfalls or interruptions that otherwise impair the
supply of beryllium to the Company,  would have a material adverse effect on the
Company's  business,  financial  condition  or  results  of  operations.  It  is
uncertain  whether  alternative  sources of supply could be developed  without a
material  disruption in the Company's ability to provide  beryllium  products to
its customers.

     Although  the Company has not  experienced  significant  problems  with its
other suppliers in the past,  there can be no assurance that such  relationships
will continue or that, in the event of a termination of its  relationships  with
such other suppliers,  it would be able to obtain alternative  sources of supply
without a material  disruption in the Company's  ability to provide  products to
its customers. In addition, the Company purchases a substantial part of the ball
bearings it distributes from a single foreign supplier.  Any material disruption
in the Company's  supply of products would have a material adverse effect on the
Company's  business,   financial   condition  or  results  of  operations.   See
"Business--Raw Materials; Suppliers."

Risks of International Sales and Purchases

     The Company's international sales accounted for approximately 11.2%, 11.4%,
and 12.0% of the  Company's  net sales  for 1997,  1996 and 1995,  respectively.
Also, the Company purchases a substantial  portion of its ball bearings products
from a single  foreign  supplier and certain  other  products from other foreign
suppliers.  The  Company's  international  sales and  purchases are subject to a
number of risks generally  associated with international  operations,  including
import and export duties and  restrictions,  currency  fluctuations,  changes in
regulatory  requirements,  tariffs and other  barriers,  political  and economic
instability and potentially adverse tax consequences.  There can be no assurance
that  any of  these  factors  will not have a  material  adverse  effect  on the
Company's business, financial condition or results of operations.


                                       21
<PAGE>


Dependence on Key Personnel

     The  Company's  success  depends to a  significant  extent on the continued
services of its key executive officers,  including its Chairman of the Board and
Chief Executive Officer, and other senior management personnel.  The loss of the
services of one or more of these  individuals may have a material adverse effect
on the Company's  business,  financial  condition or results of operations.  The
Company  maintains,  and is the beneficiary  of, a life insurance  policy on the
life of its Chairman of the Board and Chief Executive  Officer.  The face amount
of such policy is $5.0  million.  The  Company  does not  maintain  key man life
insurance on its other  executive  officers.  In addition,  since the  continued
success  of the  Company  is  largely  dependent  upon its  ability  to  design,
manufacture  and  sell  high-performance   components  and  subsystems  for  the
high-performance  technology market, the Company is particularly  dependent upon
its  ability to  identify,  attract,  motivate  and retain  qualified  technical
personnel,  including engineers,  with the requisite educational  background and
industry  experience,  as well as skilled  precision  machining  personnel.  The
Company's employees may voluntarily  terminate their employment with the Company
at any time, and competition for such personnel is intense.  Accordingly,  there
can be no  assurance  that the  Company  will be  successful  in  retaining  its
existing  personnel.  The loss of the  services of a  significant  number of the
Company's  technical or skilled  personnel,  or the future  inability to attract
such personnel,  could have a material adverse effect on the Company's business,
financial condition or results of operations.

Intellectual Property Rights

     The Company's  ability to compete  effectively  with other  companies  will
depend,  in part,  on its  ability to  maintain  the  proprietary  nature of its
technology.  The Company  relies upon a combination  of patents,  trademarks and
trade  secrets,  non-disclosure  agreements  and  other  forms  of  intellectual
property  protection to safeguard certain of its proprietary  technology.  There
can be no assurance as to the degree of  protection  offered by these patents or
as to the likelihood that patents will be issued for pending applications. There
also  can be no  assurance  that  the  Company  will  be able  to  maintain  the
confidentiality of its trade secrets or that its non-disclosure  agreements will
provide meaningful protection of the Company's trade secrets,  know-how or other
proprietary  information in the event of any unauthorized use,  misappropriation
or disclosure of such trade secrets, know-how or other proprietary information.

     Competitors in the United States and foreign countries,  many of which have
substantially  greater  resources  and  have  made  substantial  investments  in
competing  technologies,  may have applied for or obtained, or may in the future
apply for and obtain,  patents that will  prevent,  limit or interfere  with the
Company's  ability to make and sell some of its  products.  Although the Company
believes  that its  existing  products  do not  infringe on the patents or other
proprietary  rights of third  parties,  there  can be no  assurance  that  third
parties  will not assert  infringement  claims  against the Company or that such
claims will not be successful. See "Business--Patents and Trademarks."

Environmental Regulation

     The Company is subject to a variety of federal, state and local laws, rules
and  regulations  relating  to the  use,  storage,  discharge  and  disposal  of
hazardous  chemicals used during its  engineering,  research and development and
manufacturing  activities.  Failure  to  comply  with  applicable  environmental
requirements could result in substantial liability to the Company, suspension or
cessation of the Company's operations,  restrictions on the Company's ability to
expand  its  operations  or  requirements  for  the  acquisition  of  additional
equipment  or other  significant  expense,  any of which  could  have a material
adverse  effect on the  Company's  business,  financial  condition or results of
operations.  In addition, there can be no assurance (i) that changes in federal,
state or local laws,  regulations  or  regulatory  policy,  or the  discovery of
unknown  problems  or  conditions,  will not in the future  require  substantial
expenditures, or (ii) as to the extent of the Company's liabilities, if any, for
past failures, if any, to comply with applicable environmental laws, regulations
and  permits,  any of which also could  have a  material  adverse  effect on the
Company's business, financial condition or results of operations.


                                       22
<PAGE>


     In the third quarter of 1997, the Company recorded a charge to discontinued
operations of $400,000, before a tax benefit of $156,000,  relating to increases
in reserves for certain  environmental  costs  associated with a  formerly-owned
property.  The  reserve  established  assumes  that  certain  approvals  will be
received from state regulatory  authorities.  However, there can be no assurance
that such approvals will be received. If such approvals are not received,  costs
would increase substantially.  In addition, even if such approvals are received,
the  costs  actually   incurred  may  exceed  the  reserves   established.   See
"Business--Environmental Regulation."

     The  Company  has made and  continues  to make  investments  in  protective
equipment,  process controls,  manufacturing procedures and training in order to
minimize the risks to employees, surrounding communities and the environment due
to the presence and  handling of  hazardous  materials.  The failure to properly
handle such  materials  could lead to harmful  exposure to  employees  or to the
discharge of certain hazardous waste materials,  and, since the Company does not
carry environmental  impairment  insurance,  to a material adverse effect on the
Company's business,  financial condition or results of operations.  There can be
no assurance  that  environmental  problems will not develop in the future which
would  have a  material  adverse  effect on the  Company's  business,  financial
condition or results of operations. See "Business---Environmental Regulation."

Continued Investment Required to Maintain Manufacturing Capabilities

     The  Company  has  invested,   and  intends  to  continue  to  invest,   in
state-of-the-art  equipment in order to increase, expand, update or relocate its
manufacturing capabilities and facilities. Changes in technology or sales growth
beyond currently  established  manufacturing  capabilities  will require further
investment.  There can be no assurance that the Company will generate sufficient
funds from  operations to finance any required  investment or that other sources
of funding  will be  available on terms  acceptable  to the Company,  if at all.
Furthermore,  there can be no  assurance  that any  further  expansion  will not
negatively  impact the  Company's  business,  financial  condition or results of
operations. See "Business--Facilities and Manufacturing."

Control of Company by Existing Shareholder

     The Chairman of the Board and Chief  Executive  Officer of the Company owns
approximately 30% of the outstanding  Common Stock as of December 31, 1997. As a
result, he will have the ability to exert significant  influence with respect to
the election of all of the members of the Company's Board of Directors and other
corporate actions.

Possible Volatility of Share Price

     The price of the Common Stock may be subject to  significant  fluctuations.
That price  volatility  may be  attributable,  at least in part,  to the limited
number of shares generally available for sale in the public market. In addition,
factors  such as actual  or  anticipated  quarterly  fluctuations  in  financial
results,   changes  in  recommendations  or  earnings  estimates  by  securities
analysts,  announcements of technological innovations or new commercial products
or services and the timing of  announcements  of acquisitions or dispositions by
the Company or its competitors,  as well as conditions in the Company's  markets
generally,  may have a  significant  adverse  effect on the market  price of the
Common  Stock.  Furthermore,  the  stock  market  historically  has  experienced
volatility  which has  particularly  affected the market prices of securities of
many  technology  companies  and  which  sometimes  has  been  unrelated  to the
operating performances of such companies.

Effect of Certain Anti-Takeover Provisions

     The Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"),  the Company's By-Laws (the "By-Laws") and the Delaware General
Corporation Law ("DGCL") contain certain  provisions which could delay or impede
the  removal of  incumbent  directors  and could make more  difficult  a merger,
tender offer or proxy contest involving the Company,  even if such a transaction
would be beneficial to the interests of the shareholders,  or could discourage a
third party from attempting to acquire control of the Company. The Company


                                       23
<PAGE>

     has authorized  4,000,000 shares of its Preferred Stock,  none of which are
currently  outstanding,  and which  the  Company  could  issue  without  further
shareholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The Company
has no  current  plans  to  issue  any  Preferred  Stock.  The  By-Laws  include
provisions  establishing  advance notice  procedures with respect to shareholder
proposals and director nominations, and permitting the calling of special
shareholder  meetings only by the written consent of three-quarters of the Board
of Directors  or the Chairman of the Board.  The  Certificate  of  Incorporation
provides  that in lieu of a meeting,  action may be taken by written  consent of
the Company's  shareholders  only by unanimous  consent.  These provisions could
have the effect of delaying,  deterring or preventing a change in control of the
Company,  and may  adversely  affect the  voting and other  rights of holders of
Common  Stock.  In  addition,  the Company is subject to section 203 of the DGCL
which,  subject  to  certain  exceptions,  restricts  certain  transactions  and
outstanding  voting stock (an  "interested  shareholder")  for a period of three
years from the date the  shareholder  becomes an interested  shareholder.  These
provisions  may have the effect of delaying or preventing a change of control of
the Company without action by the shareholders and,  therefore,  could adversely
affect  the price of the  Company's  Common  Stock.  In the event of a change of
control of the  Company,  the vesting of  outstanding  options  issued under the
Company's Long-Term Stock Incentive Plan may be accelerated at the discretion of
the Committee or may be required to be accelerated  under certain  circumstances
provided for in each incentive agreement.

Absence of Dividends on Common Stock

The Company  does not  anticipate  paying  dividends  on its Common Stock in the
foreseeable  future. The Company's Credit Facility prohibits it from paying cash
dividends on its Common Stock.

Item 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable as of December 31, 1997.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The response to this Item is included in Item 14(a) of this Report.

Item 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None. See Item 14(b) of this Report.


                                       24
<PAGE>


                                    PART III

     The  information  required by Part III is  incorporated by reference to the
Company's  definitive proxy statement in connection with its 1998 Annual Meeting
of Stockholders to be filed with the Securities and Exchange  Commission  within
120 days following the end of the Company's fiscal year ended December 31, 1997.
If such proxy statement is not so filed,  such  information  will be filed as an
amendment to this Form 10-K within 120 days  following  the end of the Company's
fiscal year ended December 31, 1997.

                                     PART IV

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

(a)(1) and (2) Financial Statements

     See accompanying index to consolidated financial statements and schedule.

(a)(3) Exhibits

     See accompanying index to Exhibits.

(b)  Reports on Form 8-K

     None


                                       25
<PAGE>


                                   SIGNATURES

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

Dated:  March 27, 1998                  AXSYS TECHNOLOGIES, INC.
                                             (Registrant)

                                        By   /s/ STEPHEN W. BERSHAD
                                             ----------------------------------
                                             Stephen W. Bershad
                                             Chairman of the Board of Directors
                                             and Chief Executive Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities indicated this 27th day of March, 1998.


  /s/  Stephen W. Bershad                   Chairman of the Board of
  --------------------------------          Directors and Chief Executive
       Stephen W. Bershad                   Officer


  /s/  Raymond F. Kunzmann                  Vice President - Finance, Controller
  --------------------------------          and Chief Financial Officer
       Raymond F. Kunzmann


  /s/  Anthony J. Fiorelli, Jr.                  Director
  --------------------------------
       Anthony J. Fiorelli, Jr.


  /s/  Eliot M. Fried                            Director
  --------------------------------
       Eliot M. Fried


  /s/  Richard V. Howitt                         Director
  --------------------------------
       Richard V. Howitt


                                       26
<PAGE>


                           ANNUAL REPORT ON FORM 10-K

                  ITEM 8, ITEM 14(a)(1) and (2) and ITEM 14(d)

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

                              FINANCIAL STATEMENTS

                          YEAR ENDED DECEMBER 31, 1997

                            AXSYS TECHNOLOGIES, INC.


<PAGE>


                FORM 10-K -- ITEM 14(a)(1) and (2) and Item 14(d)

                            AXSYS TECHNOLOGIES, INC.

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE





The following consolidated financial statements of Axsys Technologies, Inc.,
are included in Item 8:

  Consolidated Balance Sheets -- December 31, 1997 and 1996.................F-4

  Consolidated Statements of Operations -- For the years ended
    December 31, 1997, 1996 and 1995........................................F-6

  Consolidated Statements of Cash Flows -- For the years ended
    December 31, 1997, 1996 and 1995........................................F-7

  Consolidated Statements of Shareholders' Equity -- For the years
    ended December 31, 1997, 1996 and 1995..................................F-8

  Notes to consolidated financial statements................................F-9

     The  following   consolidated   financial   statement   schedule  of  Axsys
Technologies, Inc., is included in Item 14(d):

  Schedule II -- Valuation and qualifying accounts..........................F-20

     All  other  schedules  for  which  provision  is  made  in  the  applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related  instructions or are inapplicable  and,  therefore,  have been
omitted.


                                      F-2
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors of
Axsys Technologies, Inc.:

     We have  audited  the  accompanying  consolidated  balance  sheets of Axsys
Technologies,  Inc., a Delaware corporation, and its subsidiaries as of December
31,  1997 and 1996,  and the  related  consolidated  statements  of  operations,
shareholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 1997. These financial statements and the schedule referred to
below are the responsibility of the Company's management.  Our responsibility is
to express an opinion on these  financial  statements  and schedule 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 financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material respects, the financial position of Axsys Technologies, Inc. and
subsidiaries,  as of  December  31,  1997 and  1996,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.

     Our  audits  were made for the  purpose  of forming an opinion on the basic
financial  statements  taken as a whole.  The  schedule  listed  in the index to
financial  statements and financial statement schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic  financial  statements.  This  schedule  has been  subjected to the
auditing procedures applied in our audits of the basic financial statements and,
in our opinion,  fairly  states in all  material  respects  the  financial  data
required to be set forth therein in relation to the basic  financial  statements
taken as a whole.


                                        ARTHUR ANDERSEN LLP

New York, New York
March 20, 1998


                                      F-3
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                           Consolidated Balance Sheets

                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                    ------------------
                                                                      1997       1996
                                                                    -------    -------
                                     ASSETS
<S>                                                                 <C>        <C>
CURRENT ASSETS:
  Cash .........................................................    $   575    $ 2,691
  Accounts receivable, net of allowance for doubtful accounts of
  $345 in 1997 and $385 in 1996 ................................     18,643     13,801
  Inventories, net .............................................     29,324     24,454
  Other current assets .........................................      1,011        850
                                                                    -------    -------

        TOTAL CURRENT ASSETS ...................................     49,553     41,796

NET PROPERTY, PLANT AND EQUIPMENT ..............................     15,074     13,456

EXCESS OF COST OVER NET ASSETS ACQUIRED, net of accumulated
  amortization of $1,408 in 1997 and $1,045 in 1996 ............     13,942      6,415

OTHER ASSETS ...................................................        430        504
                                                                    -------    -------
       TOTAL ASSETS ............................................    $78,999    $62,171
                                                                    =======    =======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                           Consolidated Balance Sheets

                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                        December 31,
                                                                     ------------------
                                                                       1997       1996
                                                                     -------    -------

                      LIABILITIES AND SHAREHOLDERS' EQUITY
<S>                                                                  <C>        <C>
CURRENT LIABILITIES:
  Accounts payable ..............................................    $ 9,631    $ 6,881
  Accrued expenses and other liabilities ........................      9,979      7,290
  Current portion of long-term debt and capital lease obligations        904      2,831
                                                                     -------    -------
     TOTAL CURRENT LIABILITIES ..................................     20,514     17,002

LONG-TERM DEBT AND CAPITAL LEASES, less current portion .........      8,629     23,324

OTHER LONG-TERM LIABILITIES .....................................      2,284      2,293

DEFERRED INCOME .................................................        255        387

SHAREHOLDERS' EQUITY:

$1.20 CUMULATIVE EXCHANGEABLE REDEEMABLE
  PREFERRED STOCK, $.01 PAR VALUE: authorized 4,000,000
  shares, issued and outstanding none and 738,881 shares at
  at December 31, 1997 and 1996 .................................         --          7

COMMON STOCK, $.01 PAR VALUE:
  authorized 30,000,000 shares, issued and outstanding
  4,113,190 and 2,568,940 shares at December 31, 1997 and 1996 ..         41         26

CAPITAL IN EXCESS OF PAR ........................................     40,409     17,297

RETAINED EARNINGS ...............................................      6,867      1,835
                                                                     -------    -------
     TOTAL SHAREHOLDERS' EQUITY .................................     47,317     19,165
                                                                     -------    -------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................    $78,999    $62,171
                                                                     =======    =======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                      Consolidated Statements of Operations

                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                                          -------------------------------------------
                                                              1997            1996            1995
                                                          -----------     -----------     -----------
<S>                                                       <C>             <C>             <C>
NET SALES ............................................    $   123,816     $    91,301     $    65,213

Cost of sales ........................................         89,819          67,483          47,973
Selling, general and administrative expenses .........         21,749          16,501          13,336
Amortization of intangible assets ....................            363             210             209
                                                          -----------     -----------     -----------
OPERATING INCOME .....................................         11,885           7,107           3,695

Interest expense .....................................          2,633           2,343           1,994
Other expense ........................................             25              18             252
                                                          -----------     -----------     -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
 TAXES AND EXTRAORDINARY ITEMS .......................          9,227           4,746           1,449
Provision for income taxes ...........................          3,740           1,891             565
                                                          -----------     -----------     -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
 EXTRAORDINARY ITEMS .................................          5,487           2,855             884
Loss on discontinued operations, net of taxes of $156            (244)             --              --
                                                          -----------     -----------     -----------
INCOME BEFORE EXTRAORDINARY ITEMS ....................          5,243           2,855             884
Extraordinary charges, net of taxes of $70 and $111 in
  1997 and 1996 ......................................           (109)           (173)             --
                                                          -----------     -----------     -----------
NET INCOME ...........................................          5,134           2,682             884

Preferred stock dividends ............................            102             847             574
                                                          -----------     -----------     -----------
NET INCOME APPLICABLE TO COMMON
 SHAREHOLDERS ........................................    $     5,032     $     1,835     $       310
                                                          ===========     ===========     ===========
BASIC EARNINGS PER SHARE:
  Income from continuing operations ..................    $      1.64     $      0.79     $      0.12
  Discontinued operations ............................          (0.08)             --              --
  Extraordinary item .................................          (0.03)          (0.07)             --
                                                          -----------     -----------     -----------
  Total ..............................................    $      1.53     $      0.72     $      0.12
                                                          ===========     ===========     ===========
Weighted average common shares outstanding ...........      3,281,092       2,547,329       2,511,074
                                                          ===========     ===========     ===========
DILUTED EARNINGS PER SHARE:
  Income from continuing operations ..................    $      1.53     $      0.74     $      0.12
  Discontinued operations ............................          (0.07)             --              --
  Extraordinary item .................................          (0.03)          (0.06)             --
                                                          -----------     -----------     -----------
  Total ..............................................    $      1.43     $      0.68     $      0.12
                                                          ===========     ===========     ===========

Weighted average common shares outstanding ...........      3,513,302       2,688,270       2,511,074
                                                          ===========     ===========     ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                      Consolidated Statements of Cash Flows

                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                              Years Ended December 31,
                                                                                         ----------------------------------
                                                                                           1997         1996         1995
                                                                                         --------     --------     --------
<S>                                                                                      <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income ........................................................................    $  5,134     $  2,682     $    884
  Adjustments to reconcile net income to cash
    provided by (used in) operating activities:
      Extraordinary items, net of taxes .............................................         109          173           --
      Loss on disposal of discontinued operations, net of taxes .....................         244           --           --
      Realization of net operating loss carryforward ................................       3,093        1,435          519
      Depreciation and amortization .................................................       3,494        2,722        1,622
      (Increase) decrease in accounts receivable ....................................      (3,400)          13          768
      Increase in inventories .......................................................      (3,631)        (831)      (2,017)
      Decrease (increase) in other current assets ...................................         119          166         (183)
      Increase (decrease) in accounts payable, accrued expenses and other liabilities       4,159       (2,564)      (1,324)
      Decrease in other long-term liabilities .......................................        (409)        (404)        (882)
      Other-net .....................................................................         139       (1,411)        (343)
                                                                                         --------     --------     --------
          NET CASH PROVIDED BY (USED IN)
            OPERATING ACTIVITIES ....................................................       9,051        1,981         (956)
                                                                                         --------     --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures ..............................................................      (3,192)      (1,878)      (1,026)
  Proceeds from sale of assets ......................................................          --       11,532        2,896
  Acquisition of businesses, net of cash acquired ...................................      (7,335)      (7,611)          --
                                                                                         --------     --------     --------
          NET CASH (USED IN) PROVIDED BY
            INVESTING ACTIVITIES ....................................................     (10,527)       2,043        1,870
                                                                                         --------     --------     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from borrowings ..........................................................       7,000       31,300           --
  Net repayment of borrowings .......................................................     (25,522)     (32,304)        (850)
  Net proceeds from common stock offering ...........................................      19,521           --           --
  Other .............................................................................      (1,639)        (420)          --
                                                                                         --------     --------     --------
          NET CASH USED IN FINANCING ACTIVITIES .....................................        (640)      (1,424)        (850)
                                                                                         --------     --------     --------
          NET (DECREASE)  INCREASE IN CASH ..........................................      (2,116)       2,600           64

CASH AT BEGINNING OF YEAR ...........................................................       2,691           91           27
                                                                                         --------     --------     --------
CASH AT END OF YEAR .................................................................    $    575     $  2,691     $     91
                                                                                         ========     ========     ========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                 Consolidated Statements of Shareholders' Equity

                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                  Preferred Stock              Common Stock          Capital       Retained
                                              -----------------------     ----------------------    In Excess      Earnings
                                                Shares        Amount        Shares       Amount      of Par       (Deficit)
                                              ---------     ---------     ---------    ---------    ---------     ---------
<S>                                            <C>          <C>           <C>          <C>          <C>           <C>
Balance at December 31, 1994 .............      672,344     $       7     2,507,602    $      25    $  14,082     $    (845)
                                              ---------     ---------     ---------    ---------    ---------     ---------
  Net Income .............................           --            --            --           --           --           884
  Dividends ..............................      109,298             1            --           --          573          (574)
  Transfer to Capital in Excess of Par (a)           --            --            --           --         (535)          535
  Contribution to 401(k) plan ............           --            --        11,619           --           67            --
  Realization of net operating loss
  carryforward ...........................           --            --            --           --          519            --
  Other ..................................           --            --         1,600           --            6            --
                                              ---------     ---------     ---------    ---------    ---------     ---------
Balance at December 31, 1995 .............      781,642             8     2,520,821           25       14,712            --
                                              ---------     ---------     ---------    ---------    ---------     ---------
  Net Income .............................           --            --            --           --           --         2,682
  Dividends ..............................       27,611            --            --           --          847          (847)
  Contribution to 401(k) plan ............           --            --        47,671            1          311            --
  Realization of net operating loss
  carryforward ...........................           --            --            --           --        1,345            --
  Odd-lot redemption .....................      (70,372)           (1)           --           --         (420)           --
  Issuance of warrants to purchase
  Common Stock ...........................           --            --            --           --          500            --
  Other ..................................           --            --           448           --            2            --
                                              ---------     ---------     ---------    ---------    ---------     ---------
Balance at December 31, 1996 .............      738,881             7     2,568,940           26       17,297         1,835
                                              ---------     ---------     ---------    ---------    ---------     ---------
  Net Income .............................           --            --            --           --           --         5,134
  Dividends ..............................           --            --            --           --          102          (102)
  Contribution to 401(k) plan ............           --            --        13,981           --          150            --
  Preferred stock exchange ...............     (538,008)           (5)      403,460            4          (66)           --
  Preferred stock redemption .............     (200,873)           (2)           --           --       (1,651)           --
  Realization of net operating loss
  carryforward ...........................           --            --            --           --        2,867            --
  Common stock issued for acquisition ....           --            --        53,000           --        2,166            --
  Common stock offering ..................           --            --     1,064,809           11       26,386            --
  Purchase of warrants ...................           --            --            --           --       (6,876)           --
  Other ..................................           --            --         9,000           --           34            --
                                              ---------     ---------     ---------    ---------    ---------     ---------
Balance at December 31, 1997 .............           --     $      --     4,113,190    $      41    $  40,409     $   6,867
                                              =========     =========     =========    =========    =========     =========
</TABLE>

(a)  Represents  transfer  of the  excess  of  Preferred  Stock  dividends  over
     Retained Earnings.

          See accompanying notes to consolidated financial statements.


                                      F-8
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 1997

                  (Dollars in thousands, except per share data)


Note 1 -- Summary of Significant Accounting Policies

     The accompanying  consolidated financial statements include the accounts of
Axsys  Technologies,  Inc. and its wholly-owned  subsidiaries  (collectively the
"Company").  All  material  intercompany  transactions  and  balances  have been
eliminated in consolidation.

     Revenue is  recognized  upon the  shipment of product or when  services are
rendered.

     Inventories  are  priced  at  the  lower  of  cost  (principally  first-in,
first-out, or average) or market.

     Deferred  financing  costs  are  amortized  ratably  over  the  life of the
corresponding debt or commitment.

     The excess of cost over net assets acquired is being amortized over periods
ranging  from  30 to 35  years  using  the  straight-line  method.  The  Company
continually  reviews goodwill to assess  recoverability  from future  operations
using  undiscounted  cash flows.  Impairments  would be  recognized in operating
results if a permanent diminution in value occurred.

     Property,  plant  and  equipment  are  stated  at  cost,  less  accumulated
depreciation.  Depreciation is provided  primarily by the  straight-line  method
using  estimated  lives  for  buildings  and  improvements  of 20 years  and for
machinery and equipment using estimated useful lives ranging from 3 to 8 years.

     Certain  items  in  the  1996  and  1995  financial  statements  have  been
reclassified to conform to the 1997 presentation.

     Effective  December 31, 1997,  the Company  adopted  Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings per Share" which requires a dual
presentation of basic and diluted  earnings per share.  Basic earnings per share
has been computed by dividing Net Income  Applicable to Common  Shareholders  by
the weighted average number of common shares  outstanding.  Diluted earnings per
share has been computed by dividing Net Income Applicable to Common Shareholders
by the  weighted  average  number of common  shares  outstanding  including  the
dilutive  effects of warrants and stock options of 232,210,  140,941 and none in
1997, 1996 and 1995, respectively. Diluted earnings per share for 1996 and 1995,
as  calculated  under SFAS No. 128, are the same as  previously  reported  fully
diluted earnings per share.

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


                                      F-9
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 2 -- Acquisitions and Divestiture

     On May 30, 1997,  the Company  acquired  Teletrac,  Inc.  ("Teletrac")  for
$9,926,  including the issuance of 153,000 shares of Axsys Common Stock,  53,000
of which  shares  were  issued at closing  and  100,000 of which  shares will be
issued pursuant to a Stockholder  Agreement entered into as of May 30, 1997 with
certain selling  shareholders  and employees of Teletrac.  Teletrac  designs and
manufactures  laser-based  precision  measurement  systems and  state-of-the-art
precision linear and rotary positioning servo systems for use in the electronics
capital equipment market.

     On April 25, 1996, the Company  acquired all of the  outstanding  shares of
Precision Aerotech,  Inc. ("PAI") for $4,728, net of cash acquired. In addition,
the Company  repaid  $12,000 of  borrowings  under PAI term loans.  PAI designs,
manufactures   and  markets  laser  scanners,   precision  metal  optics,   high
performance  air bearings and precision  machined  parts sold  predominantly  in
commercial markets.

     The  acquisitions of Teletrac and PAI were accounted for under the purchase
method of accounting and, accordingly, the results of operations of Teletrac and
PAI have been included in the  accompanying  consolidated  financial  statements
since the dates of their respective  acquisition.  The costs of the acquisitions
were allocated on the basis of the fair market value of the assets  acquired and
liabilities  assumed.  The purchase  price  allocations  for Teletrac  have been
completed on a preliminary  basis.  Management  does not believe that changes in
the allocation will be material. During the PAI acquisition process, the Company
determined that L&S Machine Company, Inc. ("L&S"), a wholly-owned  subsidiary of
PAI which manufactures structural components for the aerospace industry, did not
fit its long-term  strategy and would be subsequently sold. As a result, L&S was
accounted for as a net asset held for disposal as of the PAI  acquisition  date.
The portion of the PAI acquisition cost allocated to this asset  represented the
net proceeds  realized upon sale. In December  1996,  the Company  completed the
sale of L&S for an aggregate purchase price of approximately  $13,000. The price
included the assumption of approximately $1,800 in long-term capitalized leases.

     Summarized  below are the  unaudited pro forma results of operations of the
Company as if Teletrac  and PAI had been  acquired  on January 1, 1996:

                                                          Pro Forma
                                                   Year Ended December 31,
                                                ----------------------------
                                                    1997             1996
                                                -----------      -----------
Net sales ................................      $   128,127      $   108,759
  Income from continuing operations before
  extraordinary items ....................            5,576            3,322
  Net income .............................            5,223            3,149

Basic earnings per share:
  Income from continuing operations before
  extraordinary items ....................             1.64             0.92
  Net income .............................             1.53             0.85

Diluted earnings per share:
  Income from continuing operations before
  extraordinary items ....................             1.53             0.87
  Net income .............................             1.43             0.81


                                      F-10
<PAGE>



                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 2 -- Acquisitions and Divestiture (cont'd)

     The pro forma financial information presented is not necessarily indicative
of  either  the  results  of  operations   that  would  have  occurred  had  the
acquisitions  of Teletrac and PAI taken place at the beginning of fiscal 1996 or
the future operating results of the combined companies.

     On October 2, 1996, the Company acquired substantially all of the assets of
Lockheed Martin Beryllium  Corporation  ("LMBC") for $2,883.  LMBC's  operations
consisted  primarily  of  precision  machining  of  beryllium  and other  exotic
material  components.  This  acquisition  has also been  accounted for under the
purchase  method of accounting  and,  accordingly,  the results of operations of
LMBC have been included in the accompanying  consolidated  financial  statements
since the date of acquisition.  The cost of the acquisition was allocated on the
basis of the fair market value of the assets acquired and liabilities assumed.

Note 3 -- Shareholders' Equity

Common Stock --

     On October 15, 1997, the Company amended its  Certificate of  Incorporation
to increase the authorized number of shares of Common Stock to 30,000,000.

     On October 21, 1997, the Company completed an underwritten  public offering
of 1,064,809 shares of its Common Stock at a public offering price of $27.00 per
share (the "offering").  Of the  approximately  $26,400 of net proceeds from the
offering,  approximately  $6,900 was used to repurchase  outstanding warrants to
purchase the  Company's  Common Stock and the remaining net proceeds to prepay a
portion of the Company's outstanding bank debt.

     On July 25, 1996, the Company completed a one-for-five  reverse stock split
of its $0.01 par value Common Stock.  The stated par value of each share was not
changed  from $0.01.  All share and per share data  presented in this report has
been restated to reflect the reverse stock split.

Preferred Stock --

     The Company paid quarterly  dividends on its $1.20 Cumulative  Exchangeable
Redeemable  Preferred Stock in additional  shares at an annual rate of 15% based
on the shares  outstanding  from August  1991  through  February  22,  1996.  On
February 22, 1996, the Company's right to pay dividends in additional  shares of
Preferred Stock expired. From February 22, 1996 to June 4, 1997, the Company did
not declare or pay any dividends on the Preferred Stock, although they continued
to accumulate.

     On February  14,  1997,  the Company  commenced  an offer to exchange  0.75
shares of its Common Stock for each outstanding share of its Preferred Stock. On
March 17,  1997,  the Exchange  Offer  terminated  and the Company  accepted for
exchange  all  shares of  Preferred  Stock  validly  tendered  as of that  time.
Approximately 538,000 shares of Preferred Stock were exchanged for approximately
403,500  shares of Common Stock.  Holders of shares of Preferred  Stock accepted
for exchange did not receive any  separate  payment in respect of dividends  not
paid subsequent to February 22, 1996, the last date on which dividends were paid
on the Preferred Stock.

     On June 4, 1997,  the  Company  redeemed  all the  remaining  approximately
200,900  outstanding  shares of its Preferred  Stock.  The redemption  price was
$7.70 per  share,  including  accrued  and unpaid  dividends  of $1.54 per share
through the redemption date.


                                      F-11
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 4 -- Long-Term Debt


                                                   1997           1996
                                                  -------        --------
     Credit Facility...........................   $ 5,067        $ 22,285
     Industrial Revenue Bonds..................     1,620           1,870
     Capital Lease Obligations.................     2,846           2,000
                                                  -------        --------
                                                    9,533          26,155
     Less current portion......................       904           2,831
                                                  -------        --------

                                                  $ 8,629        $ 23,324
                                                  =======        ========

     As of December 31, 1997, the Company had an $11,000  Credit  Facility which
was  comprised  of a  revolving  debt  commitment  expiring  on April 25,  2000.
Borrowings  under the Credit Facility through December 31, 1997 bore interest at
a fluctuating rate per annum equal to the rate of interest publicly announced by
Chase  Manhattan  Bank,  N.A.  as its  prime  rate (the  prime  rate was 8.5% at
December 31,  1997),  plus a margin  ranging from 1.75% to 2.25%,  or the London
Interbank  Offered Rate ("LIBOR"),  plus a margin ranging from 3.25% to 3.75%. A
commitment  fee of 0.5% is payable on any unused amount of the Credit  Facility.
The Credit Facility contains certain  restrictive  covenants which,  among other
things,  impose  limitations  with respect to the incurrence of additional liens
and  indebtedness,  mergers,  consolidations  and  specified  sale of assets and
requires the Company to meet certain financial tests including minimum levels of
earnings and net worth and various  other  financial  ratios.  In addition,  the
Credit Facility  prohibits the payment of cash dividends.  Borrowings  under the
Credit  Facility are secured by  substantially  all of the assets of the Company
and its subsidiaries. Effective January 1, 1998, the Credit Facility was amended
to, among other changes, reduce the Company's borrowing rates to prime, or LIBOR
plus a margin  ranging  from  0.75% to 1.50%,  based on the  Company's  level of
indebtedness.  Had this  amendment  been  effective as of December 31, 1997, the
LIBOR margin would have been 1.0%.

     The Company had outstanding at December 31, 1997,  industrial revenue bonds
(the "Bonds") in the amount of $1,620 secured by its Gilford,  NH  manufacturing
facility which has a net carrying  amount of  approximately  $2,100.  The Bonds,
which bear  interest at a fixed rate of 13%, are payable in 2005.  The Bonds are
redeemable in whole in 1998,  1999,  2000 and 2001 at a premium to the principal
value of 106%, 103%, 102% and 101%, respectively. On and after December 1, 2002,
the bonds are redeemable at principal  value. In addition,  the Company may make
optional prepayments of $250 annually at principal value.

     The Company has financed the acquisition of certain machinery and equipment
with capital lease  obligations.  As of December 31, 1997,  outstanding  capital
lease obligations bear interest ranging from 7.75% to 12.25%.

     The Company recorded  extraordinary  non-cash charges, net of tax benefits,
of $109 and $173 in 1997 and 1996, respectively,  in connection with prepayments
of indebtedness.

     Scheduled debt  maturities of long-term debt  obligations  are $904 (1998),
$948 (1999), $5,765 (2000), $296 (2001), and $1,620 (2005).


                                      F-12
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 5 -- Balance Sheet Information

     The details of certain balance sheet accounts are as follows:

                                                         1997           1996
                                                       --------       --------
Inventories:
  Raw materials....................................    $ 10,799       $  8,033
  Work-in-process..................................      12,455         12,942
  Finished goods...................................      11,425         10,118
                                                       --------       --------
                                                         34,679         31,093
  Less reserves....................................       5,355          6,639
                                                       --------       --------
                                                       $ 29,324       $ 24,454
                                                       ========       ========

     Work-in-process  inventory at December 31, 1997 and 1996 is recorded net of
progress payments received from customers on uncompleted contracts of $1,064 and
$1,576, respectively.

Net property, plant and equipment:
  Land.............................................    $    891       $    891
  Buildings and improvements.......................       6,721          5,994
  Machinery and equipment..........................      17,868         14,029
                                                       --------       --------
                                                         25,480         20,914
  Less accumulated depreciation and amortization...      10,406          7,458
                                                       --------       --------
                                                       $ 15,074       $ 13,456
                                                       ========       ========
Accrued expenses and other liabilities:
  Compensation and related benefits................     $ 5,504       $  3,741
  Other............................................       4,475          3,549
                                                       --------       --------
                                                        $ 9,979       $  7,290
                                                       ========       ========

Note 6 -- Income Taxes

     At December 31, 1997, the Company had net operating loss  carryforwards  of
approximately $1,300 which expire in the years 2006 through 2009 and alternative
minimum tax credit carryforwards of approximately $500. In addition, the Company
had approximately  $9,200 of previously  unrecognized tax benefits,  principally
related to inventories.  As the portion of the loss  carryforwards  and deferred
tax benefits  originating prior to the Company's 1991  quasi-reorganization  are
realized,  the corresponding tax effect will be credited to Capital in Excess of
Par under  quasi-reorganization  accounting  principles rather than reducing the
Provision for Income Taxes. In 1997 and 1996,  $2,867 and $1,345,  respectively,
were credited to Capital in Excess of Par  representing  the utilization of such
pre  quasi-reorganization tax benefits to offset current year tax expense. As of
December 31, 1997, $300 of the pre  quasi-reorganization  tax effected  benefits
remain  unutilized.  The utilization and  realization of the  carryforwards  and
future tax  benefits  will  reduce  the amount of cash taxes  payable on taxable
income in the future.


                                      F-13
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 6 -- Income Taxes (cont'd)

     The  provision  for  taxes on  income  from  continuing  operations  before
extraordinary items consists of:

<TABLE>
<CAPTION>
                                                        1997       1996       1995
                                                       ------     ------     ------
<S>                                                    <C>        <C>        <C>
Current taxes - charge in lieu of taxes and taxes:
  Federal .........................................    $3,014     $1,579     $  454
  State and local .................................       726        312        111
                                                       ------     ------     ------
                                                        3,740      1,891        565
                                                       ------     ------     ------
Deferred taxes:
  Federal .........................................      --         --         --
                                                       ------     ------     ------
                                                       $3,740     $1,891     $  565
                                                       ======     ======     ======
</TABLE>

     The reasons for the  difference  between  the  provision  for taxes and the
amount computed by applying the statutory federal income tax rate to Income from
Continuing Operations Before Taxes and Extraordinary Items are as follows:

<TABLE>
<CAPTION>
                                                        1997       1996       1995
                                                       ------     ------     ------
<S>                                                    <C>        <C>        <C>
Federal statutory rate ............................        34%        34%        34%
Computed expected tax provision ...................    $3,137     $1,614     $  493
Increase (decrease) in taxes resulting from:
  State and local taxes, net of federal tax benefit       479        206         72
  Amortization of goodwill ........................       124         71         71
  Other ...........................................      --         --          (71)
                                                       ------     ------     ------
Actual tax provision ..............................    $3,740     $1,891     $  565
                                                       ======     ======     ======
</TABLE>

   Deferred  income  taxes  reflect  the net  federal  and state tax  effects of
temporary differences between the carrying amounts of assets and liabilities for
financial  reporting  purposes  and the  amounts  used for income tax  purposes.
Significant  components of the Company's deferred tax assets and liabilities are
as follows:

                                                          December 31,
                                                       -----------------
                                                        1997       1996
                                                       ------     ------
Tax net operating loss carryforwards...............    $1,007     $4,240
Inventory valuation differences....................     2,503      2,296
Percentage of completion method....................       914        543
Other, net.........................................       171        125
                                                       ------     ------
                                                        4,595      7,204
Valuation allowance................................    (4,595)    (7,204)
                                                       ------     ------
Total deferred taxes...............................    $   --     $   --
                                                       ======     ======

     The net change in the  valuation  allowance in 1997 and 1996 was a decrease
of $2,609 and $1,917, respectively.


                                      F-14
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 7 -- Loss on Discontinued Operations

     In September 1997, the Company was advised by its environmental consultants
that the costs  associated  with the  remediation  of a previously  discontinued
operation site are now estimated to be higher than originally  anticipated.  The
current  estimates to remediate this site now range from  approximately  $600 to
$1,500. Actual costs may be different than the current estimates.  Based on this
information,  the  Company  increased  its  reserve  relating  to  this  site to
approximately $600 by recording a discontinued  operation charge of $400, before
a tax benefit of $156.

Note 8 -- Pension Arrangements

     The Company has two pension plans for which benefits and participation have
been frozen.  Pension  benefits under these plans are generally based upon years
of service and  compensation.  The  Company's  funding  policy is to  contribute
amounts to these plans  sufficient to meet the minimum funding  requirements set
forth  in the  Employee  Retirement  Income  Security  Act of  1974,  plus  such
additional  amounts as the Company may determine to be appropriate  from time to
time.

     A summary  of  components  of net  periodic  pension  cost for the  defined
benefit  plans and the total  contribution  charged to pension  expense  for the
multi-employer plans follows:

                                                     1997      1996      1995
                                                     -----     -----     -----
Defined benefit plans:
Service cost-benefits earned during the period..     $--       $--       $--
Interest cost on projected benefit obligation...        76        71        74
Actual return on plan assets ...................       (99)      (46)      (25)
Net amortization and deferral ..................       107        26        17
                                                     -----     -----     -----
Total pension expense...........................     $  84     $  51     $  66
                                                     =====     =====     =====

     Assumptions  used in  accounting  for the defined  benefit  plans as of the
plans' measurement dates were:

                                                      1997      1996      1995
                                                      -----     -----     -----
Weighted-average discount rate .................       7.5%      7.5%      7.5%
Expected long-term rate of return on assets ..         6.0%      6.0%      6.0%


                                      F-15
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 8 -- Pension Arrangements, (cont'd)

     The following  table sets forth the funded status and amount  recognized in
the consolidated balance sheets for the Company's defined benefit pension plans:

<TABLE>
<CAPTION>
                                                             1997       1996       1995
                                                            ------     ------     ------
<S>                                                         <C>        <C>        <C>
Actuarial present value of benefit obligations:
Vested benefit obligation .............................     $1,090     $1,053     $1,116
                                                            ======     ======     ======

Accumulated benefit obligation ........................     $1,090     $1,053     $1,116
                                                            ======     ======     ======

Projected benefit obligation ..........................     $1,090     $1,053     $1,116
Less plan assets at fair market value .................        674        451        231
                                                            ------     ------     ------
Projected benefit obligation in excess of plan assets..        416        602        885
Unrecognized net gain .................................        215        151         98
                                                            ------     ------     ------
Net pension liability recognized in the balance sheet..     $  631     $  753     $  983
                                                            ======     ======     ======
</TABLE>

     Unrecognized  net gains and losses are  amortized  over the average  future
service lives of participants.  Plan assets are invested in a managed  portfolio
consisting primarily of equity securities.

     The Company also sponsors  401(k) plans under which eligible  employees may
elect to  contribute a  percentage  of their  earnings.  The Company has matched
employee contributions to these plans in amounts ranging from 3% up to 5% of the
employees' gross earnings over the three years ended December 31, 1997.  Company
matching contributions were $984 in 1997, $709 in 1996 and $325 in 1995.

Note 9 -- Supplemental Cash Flow Information

     Supplemental  cash flow  information for the years ended December 31, 1997,
1996 and 1995 is summarized as follows:

                                                       1997      1996      1995
                                                      ------    ------    ------

Cash paid during the year for:
  Interest.........................................   $2,554    $2,586    $1,989
  Income tax payments..............................      315       441        52

Noncash investing activities:
  Equipment acquired under capital leases..........   $1,726    $  786    $   --
  Common stock issued for acquisition .............    2,166        --        --


                                      F-16
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 10 -- Stock Options and Warrants

Stock Options-

     The Company's  Long-Term  Stock Incentive Plan (the "Plan") was approved by
shareholders in 1991.  Shareholders  approved an amendment to and restatement of
the Plan in October 1997,  which,  among other  things,  increased the number of
shares of Common Stock authorized for grant from 79,400 to 400,000.  The Plan is
administered  by the Stock  Incentive  Plan  Committee of the Board of Directors
(the  "Committee").   The  Committee  selects   participants  from  among  those
executives  and  other  employees  of  the  Company  and  its  subsidiaries  who
materially  contribute to the success of the Company and determines the amounts,
times,  forms,  terms and  conditions  of  grants.  Grants may be in the form of
options  to  purchase  shares  of  Common  Stock,  stock  appreciation   rights,
restricted stock and performance units (collectively,  "Stock Incentives"). Each
Stock Incentive is exercisable upon vesting.

     A summary of Plan transactions are presented in the table below:

                                                                     Weighted
                                                    Stock             Average
                                                   Options        Exercise Price
                                                  --------            ------
Outstanding at December 31, 1995 ..........         38,600            $ 3.88
                                                  --------            ------
Outstanding at December 31, 1996 ..........         38,600            $ 3.88
                                                  --------            ------
    Granted ...............................        169,000             25.59
    Forfeited .............................         (3,500)            13.71
    Exercised .............................         (9,000)             3.75
                                                  --------            ------
Outstanding at December 31, 1997 ..........        195,100            $22.52
                                                  ========            ======
Exercisable at December 31, 1997 ..........         26,560            $ 5.56
                                                  ========            ======

     The following table summarizes  information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
                                               Options Outstanding                      Options Exercisable
                                  ---------------------------------------------       -----------------------
                                                     Weighted          Weighted                      Weighted
                                                     Average            Average                       Average
Range of                          Number of        Remaining           Exercise       Number of      Exercise
Exercise Prices                    Options       Contractual Life       Price          Options        Price
---------------                   ---------      ----------------      --------       ---------      --------
<S>                                <C>               <C>                <C>            <C>            <C>
$ 3.75 to $ 4.15                    27,600            3 Years           $ 3.93         22,560         $ 3.88
$15.00 to $17.75                    21,000            7 Years            15.67          4,000          15.00
$27.00                             146,500           10 Years            27.00           --             --
-------------------------------------------------------------------------------------------------------------

$ 3.75 to $27.00                   195,100            9 Years           $22.52         26,560         $ 5.56
-------------------------------------------------------------------------------------------------------------
</TABLE>


                                      F-17
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 10 -- Stock Options and Warrants (cont'd)

     The Company has adopted  the  disclosure-only  provisions  of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for grants under the Plan. Pro forma  information  regarding net
income and net income per share is required  by SFAS No. 123 for awards  granted
in  fiscal  years  beginning  after  December  15,  1994 as if the  Company  had
accounted for such awards under the fair value method. Had compensation cost for
the  Company's  Stock-Incentive  grants in 1997 been  determined  using the fair
value method, the Company would have reported the following results:

                                                                   1997
                                                                  -------
     Pro forma income from continuing operations before
     extraordinary items ....................................     $ 5,359
     Pro forma net income ...................................       5,006

     Pro forma basic earnings per share:
       Income from continuing operations before
       extraordinary items ..................................        1.60
       Net Income ...........................................        1.49

     Pro forma diluted earnings per share:
       Income from continuing operations before
       extraordinary items ..................................        1.50
       Net Income ...........................................        1.40

     There were no Stock  Incentives  granted to employees in 1996 and 1995 and,
accordingly,  no pro forma disclosure is provided. The fair value of each option
granted  in 1997 was  estimated  on the date of grant  using  the  Black-Scholes
option-pricing model with the following assumptions: expected volatility of 50%;
risk-free  interest rate of 5.8%;  expected  lives of 6 years;  and, no dividend
yield.  Using this model,  the weighted  average  fair value of options  granted
during 1997 is $13.11.  For pro forma purposes,  the estimated fair value of the
Company's  Stock  Incentive  awards to employees is amortized  over the options'
vesting period which, for the 1997 awards, is generally five years.  Because the
SFAS No. 123 method of accounting has not been applied to options  granted prior
to  January  1,  1995,  the  resulting  pro forma  compensation  cost may not be
representative of that to be expected in future years. The Black-Scholes  option
valuation  model was developed  for use in  estimating  the fair value of traded
options  which  have no  vesting  restrictions  and are fully  transferable.  In
addition,  the  Black-Scholes  model  requires  the input of  highly  subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based  awards to employees 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  model does not  necessarily  provide a reliable  single
measure of the fair value of its Stock Incentive awards to employees.

Warrants--

     At December 31,  1996, a warrant to acquire up to 133,263  shares of Common
Stock at an  exercise  price of $.05 per share and  warrants  to  acquire  up to
175,278  shares of Common  Stock at an exercise  price of $6.25 per share,  were
outstanding.  These warrants were  purchased in  conjunction  with the Company's
public  offering on October 21, 1997 (see Note 3). At December 31,  1997,  there
were no warrants outstanding.


                                      F-18
<PAGE>


                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 11 -- Commitments and Contingencies

     Future minimum payments under noncancellable operating leases (exclusive of
property  expenses and net of sublease rental income),  as of December 31, 1997,
are as follows:

     1998......................................................    $1,759
     1999 .....................................................     1,567
     2000 .....................................................       324
     2001 .....................................................       172
     2002 .....................................................       159
     2003 and thereafter ......................................       246
                                                                   ------
                                                                   $4,227
                                                                   ======

     Rent expense under such leases, net of sublease rental income,  amounted to
$1,721, $1,589 and, $1,539 in 1997, 1996 and 1995, respectively.

     In  February  1990,  the  Company  sold  and  leased  back  its San  Diego,
California facility under an operating lease. The Company has a deferred gain as
of December 31, 1997 on this  transaction of $255,  which is being  amortized to
income over the ten year lease term as a reduction of annual rent expense.

     The  Company has  various  lawsuits,  claims,  commitments  and  contingent
liabilities arising from the ordinary conduct of its business; however, they are
not  expected  to have a  material  adverse  effect on the  Company's  financial
position or results of operations.


                                      F-19
<PAGE>


                            AXSYS TECHNOLOGIES, INC.

                  SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

                             (Dollars in thousands)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
COL. A                              COL. B         COL. C         COL. D        COL. E           COL. F
----------------------------------------------------------------------------------------------------------
                                                         Additions
                                                 -------------------------
                                  Balance at    Charged to      Charged to
                                  Beginning      Costs and         Other                      Balance at
     Classification               of Period       Expenses        Accounts    Deductions     End of Period
     --------------               ----------     ----------     ----------    ----------     -------------
Allowance for doubtful accounts

<S>                                  <C>            <C>           <C>           <C>               <C>
Year ended December 31, 1997:        $385           $166          $  4(a)       $210(b)           $345
Year ended December 31, 1996:        $233           $ 93          $100(a)       $ 41(b)           $385
Year ended December 31, 1995:        $345           $106                        $218(b)           $233
</TABLE>

----------
(a)  Includes $4, in 1997, and $100, in 1996, associated with the acquisition of
     businesses.
(b)  Uncollectible accounts written off, net of recoveries.


                                      F-20
<PAGE>


                                  EXHIBIT INDEX

Exhibit
 Number                             Description
 ------                             -----------
3(1)      Certificate of Incorporation of the Company (filed as Exhibit 1 to the
          Company's  Form  8-A,  dated  August  8,  1991  (the  "Form  8-A") and
          incorporated herein by reference).

3(2)      Amendment to Certificate of  Incorporation  (filed as Exhibit 3 to the
          Company's  Form  10-QA-1,  dated  December  20,  1996,  for the fiscal
          quarter ended  September 30, 1996 (the "September 30, 1996 Form 10-Q")
          and incorporated herein by reference).

3(3)      Amendment to  Certificate of  Incorporation  (filed as Exhibit 3(i) to
          the Company's  Form 8-K,  dated  December 23, 1996 (the  "December 23,
          1996 Form 8-K") and incorporated herein by reference).

3(4)      Restated Certificate of Incorporation of the Company (filed as Exhibit
          3(4) to the  Company's  Form S-1/A,  dated October 17, 1997 (the "Form
          S-1") and incorporated herein by reference).

3(5)      By-Laws  of the  Company  (filed  as  Exhibit  2 to the  Form  8-A and
          incorporated herein by reference).

4(1)      Stockholder  Agreement,  (filed  as  Exhibit  4(6) to the Form S-1 and
          incorporated  herein by  reference)  dated as of May 30, 1997,  by and
          between the Company and David Barker,  Richard Howitt,  William Hurst,
          William Kingsbury and Barton Norton.

10(1)     Indenture of Trust by and between the Industrial Development Authority
          of the State of New  Hampshire and Laconia  Peoples  National Bank and
          Trust   Company  for   $3,000,000   principal   amount  of  Industrial
          Development  Authority  of the State of New  Hampshire  Floating  Rate
          Monthly Demand Industry Facility Bonds (filed as Exhibit 10(18) to the
          Company's  Annual  Report  on Form  10-K  for the  fiscal  year  ended
          December 28, 1985, (the "1985 Form 10-K") and  incorporated  herein by
          reference).

10(2)     Loan  Agreement by and among the Industrial  Development  Authority of
          the State of New  Hampshire,  the Company and V Land  Corporation  for
          $3,000,000 principal amount of Industrial Development Authority of the
          State of New Hampshire  Floating Rate Monthly Demand Industry Facility
          Bonds (filed as Exhibit 10(19) to the 1985 Form 10-K and  incorporated
          herein by reference).


                                      E-1
<PAGE>


Exhibit
 Number                             Description
 ------                             -----------
10(3)     Credit Agreement,  dated April 25, 1996, between the Company,  various
          banks named  therein and Banque  Paribas,  as Agent  (filed as Exhibit
          10(1) to the Company's  Form 8-K,  dated May 7, 1996 (the "May 7, 1996
          Form 8-K") and incorporated herein by reference).

10(4)     Security Agreement, dated April 25, 1996, between the Company, various
          subsidiaries  of the Company and Banque Paribas,  as Collateral  Agent
          (filed as  Exhibit  10.2 to the May 7, 1996 Form 8-K and  incorporated
          herein by reference).

10(5)     Pledge Agreement,  dated April 25, 1996, between the Company,  various
          subsidiaries  of the Company and Banque  Paribas as  Collateral  Agent
          (filed as  Exhibit  10.3 to the May 7, 1996 Form 8-K and  incorporated
          herein by reference).

10(6)     Subsidiaries  Guaranty,  dated April 25, 1996, by various subsidiaries
          of the Company  (filed as Exhibit 10.4 to the May 7, 1996 Form 8-K and
          incorporated herein by reference).

10(7)     First  Amendment  to  Credit  Agreement  (filed as  Exhibit  10 to the
          September 30, 1996 Form 10-Q and incorporated herein by reference).

10(8)     Second  Amendment  to Credit  Agreement  (filed as  Exhibit  10 to the
          Company's  Quarterly  Report on Form 10-Q for the fiscal quarter ended
          June 30, 1997 (the "June 30, 1997 Form 10-Q") and incorporated  herein
          by reference).

10(9)     Third Amendment to Credit  Agreement  (filed as Exhibit 10 to the June
          30, 1997 Form 10-Q and incorporated herein by reference).

10(10)    Fourth  Amendment to Credit  Agreement (filed as Exhibit 10(10) to the
          Form S-1 and incorporated herein by reference).

10(11)    Stock Purchase  Agreement by and between the Company,  Teletrac,  Inc.
          and David Barker,  Richard Howitt,  William Hurst,  William Kingsbury,
          Barton  Norton,  John Van Dyke and Mary Erdahl  (filed as Exhibit 2 to
          the Company's Form 8-K, dated May 30, 1997 and incorporated  herein by
          reference).

10(12)    Agreement and Plan of Merger,  dated as of February 16, 1996,  between
          the Company, PA Acquisition  Corporation and Precision Aerotech,  Inc.
          (filed  as  Exhibit  10(40)  to  Company's  Form  10-K for the  fiscal
          year-ended December 31, 1995 and incorporated herein by reference).


                                      E-2
<PAGE>


Exhibit
 Number                             Description
 ------                             -----------
10(13)    Stock  Purchase  Agreement,  dated as of November 26, 1996, as amended
          December 11, 1996, between the Company, Precision Aerotech, Inc., Tru-
          Circle  Corporation  and  Tru-Circle  Manufacturing,  Inc.  (filed  as
          Exhibit 2 to the December 23, 1996 Form 8-K and incorporated herein by
          reference).

10(14)    Form of  Indemnification  Agreement  (filed as  Exhibit  10(16) to the
          Company's  Form 10-K for the fiscal year ended  December 30, 1990 (the
          "1990 Form 10-K") and incorporated herein by reference).

10(15)    Severance  Agreement  between the Company and Mr. Kunzmann dated as of
          June  10,  1996  (filed  as  Exhibit   10(15)  to  the  Form  S-1  and
          incorporated herein by reference).

10(16)    Severance Agreement between the Company and Mr. Stern dated as of June
          10,  1996  (filed as Exhibit  10(16) to the Form S-1 and  incorporated
          herein by reference).

10(17)    Vernitron  Corporation  Long-Term Stock Incentive Plan  (superseded by
          Exhibit   10(26)  (filed  as  Exhibit  10(17)  to  the  Form  S-1  and
          incorporated herein by reference).

10(18)    Employment Agreement between Richard Howitt and Teletrac,  dated as of
          May 30, 1997 (filed as Exhibit 10(18) to the Form S-1and  incorporated
          herein by reference).

10(19)    Non-Competition  Agreement  between  Richard  Howitt and the  Company,
          dated as of May 30, 1997 (filed as Exhibit  10(19) to the Form S-1 and
          incorporated herein by reference).

10(20)    Form of Stock Option Agreement,  dated as of September 30, 1991 (filed
          as Exhibit 10(17) to the Company's  Annual Report on Form 10-K for the
          fiscal  year  ended  December  30,  1991 and  incorporated  herein  by
          reference).

10(21)    Teletrac,  Inc.  Management  Incentive  Compensation  Plan  (filed  as
          Exhibit 10(21) to the Form S-1 and incorporated herein by reference).

10(22)    Summary of Annual  Incentive Plan (filed as Exhibit 10(22) to the Form
          S-1 and incorporated herein by reference).

10(23)    Supplemental Revenue Growth Incentive Plan (filed as Exhibit 10(23) to
          the Form S-1 and incorporated herein by reference).

10(24)    Assumption Agreement, dated as of May 30, 1997, made by Teletrac, Inc.
          (filed as Exhibit  10(24) to the Form S-1 and  incorporated  herein by
          reference).


                                      E-3
<PAGE>


Exhibit
 Number                             Description
 ------                             -----------
10(25)    Fifth  Amendment to Credit  Agreement  (filed as Exhibit 10(25) to the
          Form S-1 and incorporated herein by reference).

10(26)    Axsys  Technologies,  Inc.  Long-Term  Stock  Incentive Plan (filed as
          Exhibit C to the Company's  Proxy  Statement  dated September 23, 1997
          and incorporated herein by reference).

10(27)    Sixth Amendment to Credit Agreement.

21        Subsidiaries of the Registrant.

23        Consent of Arthur Andersen LLP.

27        Financial Data Schedule.


                                      E-4