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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

|(Mark One)                                                   |                                                                                         
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------
|ý                                                            | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the Fiscal Year ended December 31, 2002                 
|or                                                          
|o                                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                            to

Commission File No.: 0-16182

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

Delaware

11-1962029(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification Number)175 Capital Boulevard, Suite 103
Rocky Hill, Connecticut(Address of principal executive offices)

06067(Zip Code)(860) 257-0200(Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(g) of the Act:    Common 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  ý    No

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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  o.

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act).  o

Aggregate
market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the close of business June 28, 2002, $26,528,618.

Common
Stock outstanding at March 14, 2003: 4,655,611 shares.

Documents Incorporated by Reference

Document

Form 10-K ReferencePortion of Axsys Technologies, Inc. Notice
of Annual Meeting of Stockholders and Proxy Statement.

Part III, Items 10-13


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PART I

Item 1.    BUSINESS

Axsys Technologies, Inc. (together with its subsidiaries, unless the context suggests otherwise, "Axsys" or "we") is a leading designer and manufacturer of
precision opto-mechanical components and subassemblies found in high performance aerospace, defense and commercial equipment and systems. In addition, we distribute precision ball bearings
for use in a variety of industrial and commercial applications.

Axsys
was incorporated in the State of Delaware in 1968. Our common stock is traded on the Nasdaq Stock Market under the symbol "AXYS."

We
sell our components, subsystems and bearings to a variety of original equipment manufacturers ("OEM"s), serving the following markets:



We
are organized into three groups:



The
Aerospace and Defense Group designs, manufactures and sells high-end components such as precision position sensors, high-performance motors, precision metal
optics, precision machined light-weight structures and opto-mechanical and electro-mechanical subassemblies. Our products enable OEMs to improve imaging, positional performance
(accuracy, resolution, speed and power), and weight requirements in their systems. Principal markets for our products include OEMs serving the aerospace and defense markets. The Aerospace and
Defense Group is comprised of:



The
Commercial Products Group designs, manufactures and sells airbearing scanners, micro-positioning stages and laser-based distance measuring interferometers and autofocus. Our products
are sold to OEMs enabling them to increase the accuracy and throughput of their systems. Principal markets for our products include OEMs serving the graphic arts and semiconductor
capital equipment and recently, the medical imaging market. The Commercial Products Group is located in Rochester Hills, Michigan.

The
Distributed Products Group distributes precision ball bearings, spherical plain bearings and bushings, acquired from various domestic and international sources, to OEMs and
MRO distributors. The bearings and bushings are used in a variety of industrial automation and commercial markets. Additionally, our Distributed Products Group designs, manufactures and sells
mechanical-bearing subassemblies for a variety of customers. The Distributed Products group is comprised of AST Bearings division located in Montville, New Jersey with a distribution center in Irvine,
California.

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Market Overview

Axsys' products are sold to OEMs in a variety of markets, which demand the precision and performance of our products and capabilities.

Aerospace and Defense.The aerospace and defense market principally consists of OEMs that manufacture weapon
subsystems (for example, night vision and targeting pods and flight control systems) and complete systems (for example, aircraft air-to-air missiles and reconnaissance
satellites). In general, these OEMs are designing leading-edge products, the performance of which is enhanced through the use of one or more of our capabilities:



The
market for our products also includes direct sales to the U.S. and foreign defense agencies for spares requirements. In 2002, the market for Axsys products has been strong due to the
increased spending by the Department of Defense generally, as well as the increased use of electro-optical systems within the US and foreign government arsenals. These electro-optical systems are used
for thermal imaging, reconnaissance and weapons targeting. Defense applications include fixed- and rotary-winged aircraft, missile seeker heads, land and sea vehicles as well as reconnaissance
satellites. In addition, these products are used on research satellites and newly developed biological detection systems being employed for homeland security. All of these programs incorporate
high-performance components provided by suppliers like Axsys, such as precision metal optics, high performance motors and sensors and precision-machined structures.

High-performance graphic art and medical imaging capital equipment.The high-performance graphic art
and medical imaging capital equipment market for our products consists of OEMs who manufacture sophisticated equipment used to electronically image photo-sensitive media for, among others,
graphic arts, newspaper plate and medical radiography markets. Electronic imaging involves controlling the position of a modulated laser beam to expose photosensitive media. The position of this beam
can be
controlled by rotating a reflective optic by use of a high speed airbearing scanner under the laser beam or by precisely positioning the laser beam or the media under one another with an
X-Y micro-positioning stage. In recent years, our customers have demanded increased resolution and throughput capabilities in these high-end systems. With a view to achieving
these capabilities, we use reflective optics, high-speed motors, airbearings and sophisticated electronic controls.

Semiconductor and related electronic capital equipment.We sell products to OEMs in the semiconductor and related
electronic capital equipment markets that produce fabricating and test equipment for integrated circuits, reticles, flat panel displays and electronic components including printed circuit boards. Our
customers require accurate, precise and repeatable positioning of these devices for their equipment. We believe that as the density of circuits has increased, there has been increased requirement for
the airbearing and direct drive positioning technology produced by Axsys. We also supply a variety of components and subassemblies to these markets, including:



Industrial Automation.We sell our products to a wide range of applications in industrial and commercial markets, including
machine tools, motion control components and to OEMs for use in

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many types of automation equipment. We also sell to MRO distributors who supply replacement parts for older equipment. Our OEM and MRO customers principally purchase precision bearings and assemblies
that require short lead-times.

Business Strategy

We are a vertically integrated supplier of precision components and subassemblies for high-technology
applications. We design and manufacture components and subassemblies for OEMs of aerospace guidance, thermal imaging, graphic arts, medical imaging and semiconductor and
related electronic capital equipment. Our products are designed to increase the accuracy and throughput of equipment produced by OEMs. A focus of our business strategy is to utilize our
vertically integrated component
manufacturing experience and resources and our electro-mechanical and opto-mechanical integration capabilities in the design of higher-level subassemblies that employ our micro-positioning
and precision optical technologies. Other key elements of this business strategy include the following:

We plan to use our vertically integrated position to grow our subsystems business.Our strategy is to continue to develop subsystems by
integrating our core component technologies with our electro-mechanical and opto-mechanical integration capabilities. This strategy is designed to enable us to provide our customers with
high performance systems at competitive prices. We are currently investigating providing integration services for several of our OEM customers in other markets, including:



We also expect to enhance our market position through acquisitions and strategic alliances and divestures of non-core
businesses.We have historically expanded our market presence and capabilities through acquisitions. We have also divested operations that were not part of our core businesses.

In
early 2002, in response to the depressed market conditions that we anticipated would continue throughout the year, we began to evaluate our ongoing investment requirements in our data
storage and photonics equipment businesses in light of their potential returns. This led to the divestiture of our data storage test equipment subsidiary, Teletrac, Inc. ("Teletrac") and our
two photonic automation businesses ("Automation Group").



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We
review and consider possible acquisitions on an ongoing basis; however, no specific acquisitions are being negotiated as of the date of this report.

We will continue to focus on improving operating efficiencies.Our focus has been toward eliminating waste in all aspects of
the organization, measured in reduced cycle time, material costs, scrap and rework. By implementing this process, we have reduced, and expect to continue to reduce, our design and manufacturing lead
times as well as manufacturing costs in order to become more competitive in the marketplace.

We continue to evaluate new market and application opportunities to leverage our core capabilities.In order to grow our sales at a rate
in excess of the markets we serve, we continually evaluate new markets and applications that can benefit from our core capabilities. Examples include our success in developing an airbearing laser
scanner for use in a medical imaging application as well as the development of fast steering mirrors to serve the laser material marking and engraving market.

Technologies, Products, and Capabilities

We utilize several key manufacturing technologies and have developed software and systems integration capabilities that enable us to design and manufacture a wide
variety of high-performance precision optical and micro-positioning component systems. These core competencies include:

Magnetics.We design, manufacture and sell high-performance motors and precision resolvers using
state-of-the-art magnetic technologies and materials. Applications for these high-performance components include precision micro-positioning systems for
semiconductor processing and inspection equipment, pick and place robotic handlers, missile-seeker head systems, guidance systems and satellite actuators.

Precision Machining.Axsys manufactures precision-machined components made from beryllium, beryllium alloys and other
specialty materials. Applications include precision optics, airbearings, heat sinks, structural housings and gimbals. Our airbearings provide high-speed precision positioning and are used
in high-speed scanners for digital imaging and weapons guidance systems. Our heat sinks are used to dissipate heat in high-performance avionics and satellite electronics, and
our gimbals are used in various applications, including positioning optical sensors in FLIR night vision systems. We also manufacture optical substrates used internally and by our customers in a
variety of precision metal optical applications such as weapon fire control systems and space-borne instruments.

Precision Optics.We design and manufacture a broad range of precision metal optical components. Our precision optic products
are generally made from beryllium or aluminum and are used in applications where performance requirements cannot be met with glass optics. The advantages of our optics include lighter weight, thermal
stability and ease of mechanical interface with housing and actuation devices. We sell our precision metal optical components for use in high speed electro-mechanical scanners, weapons fire control
systems, FLIR night vision weapons systems and high-performance space-borne instruments used on weather, mapping and scientific satellites.

Electronics.Axsys designs and manufactures several key electronic components for the electronics capital equipment and
high-end digital imaging markets including laser interferometers and electronic controllers and drives. Our electronics components control the speed and position of electro-mechanical
systems, such as precision motors, actuators, X-Y positioning stages and laser scanners. Laser interferometers, which are designed to permit precise linear position sensing, are sold to
customers 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.

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The
following table summarizes the component products manufactured and services provided by Axsys, by the technologies they incorporate:

Core Manufacturing Technologies

|MAGNETICS                               |                    | PRECISION MACHINING        |                          | PRECISION OPTICS                                        |                            | ELECTRONICS                                
|--------------------------------------- | ------------------ | -------------------------- | ------------------------ | ------------------------------------------------------- | -------------------------- | -------------------------------------------
|    AC Motors                          |                    |     Airbearing Components |                          |     Scanning Optics                                    |                            |     Laser Interferometers                 
|    Brush and Brushless DC
    Motors: |                    |     Optical Substrates    |                          |     Polygon Mirrors                                    |                            |     AC and DC motor speed
        controls
|                                        |     Torque        |                            |     Structural Housings |                                                         |     Monogon Mirrors       |                                            
|                                        |     Servo         |                            |     Gimbals and Yokes   |                                                         |     Fast Steering Mirrors |                                            
|                                        |     Limited Angle |                            |     Heat Sinks          |                                                         |     Flat Optics           |                                            
|    Resolvers                          |                    |                            |                          |     Head Mirrors                                       |                            |                                            
|    Synchros                           |                    |                            |                          |     Fold Mirrors                                       |                            |                                            
|                                        |                    |                            |                          |     Aspherics
        Telescopes
        Collimators |                            |                                            

Integration Capabilities.We have introduced products integrating our core technologies and integration capabilities to
provide high-performance electro-mechanical and opto-mechanical subassemblies for our customers. Our precision subassemblies include X-Y micro-positioning stages
and rotary positioning subassemblies such as actuators, opto-mechanical laser scanners and imaging subsystems. We also produce laser tracking autofocus subassemblies that employ motion
control and optics technologies. The X-Y micro-positioning stage subassemblies are used in high-precision or high-performance applications, such as semiconductor
alignment positioning subsystems for use in manufacturing or inspection. The rotary positioning subassemblies are used in applications such as night vision systems for defense contractors and cluster
tool robotics in electronics capital equipment. Graphic art and medical imaging equipment manufacturers and semiconductor inspection equipment manufacturers use laser scanning and imaging
subassemblies. The laser autofocus is used to automatically focus a
microscope and is sold to OEMs that manufacture automated optical inspection machines used in the electronics capital equipment market.

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The
following table illustrates how our technologies, products and capabilities are integrated to develop subsystems and systems:

TECHNOLOGIES AND CAPABILITIES

|SUBSYSTEMS                      |  | OPTICS                            |  | PRECISION
MACHINING |  | MAGNETICS                         |  | ELECTRONICS                                                       
|------------------------------- |  | --------------------------------- |  | ------------------- |  | --------------------------------- |  | ------------------------------------------------------------------
|Laser Scanner                   |  |     Scanning Optics              |  |     Airbearing     |  |     Brushless DC
    Servo Motor |  |     Speed Control
    Motor Drive                               
|                                |  |                                   |  |                     |  |                                   |  |                                                                   
|Laser Imaging                   |  |     Scanning and Flat
    Optics |  |     Airbearing     |  |     Brushless DC
    Servo Motor |  |     Speed Control
    Motor Drive                               
|                                |  |                                   |  |                     |  |                                   |  |                                                                   
|Laser Autofocus                 |  |                                   |  |                     |  |     Brushless DC
    Servo Motor |  |     Position Controller
    Motor Drive                         
|                                |  |                                   |  |                     |  |                                   |  |                                                                   
|Rotary Positioning Actuator     |  |                                   |  |                     |  |     Brushless DC
    Servo Motor |  |     Position Controller                                          
|                                |  |                                   |  |                     |  |     Resolver                     |  |     Motor Drive                                                  
|                                |  |                                   |  |                     |  |                                   |  |                                                                   
|Micro-Positioning
    X-Y Stage |  |                                   |  |     Airbearing     |  |                                   |  |     Laser Inteferometer
    Position Controller
    Motor Drive

Precision
Ball Bearings. We distribute a wide range of precision ball bearings varying in size, precision tolerance, lubrication and price. We also provide certain value-added services,
such as bearing subassemblies, bearing relubrication, clean room handling of products and engineering consultation.

Competition

The markets for our products are competitive. We compete primarily on the basis of our ability to design and engineer products to meet performance specifications
set by our customers. Most of our customers are OEMs that purchase component parts or subassemblies, which they incorporate into their end products. Product pricing, quality, customer support,
experience, reputation and financial stability are also important competitive factors.

There
are a limited number of competitors in each of the markets for the various types of precision optical and positioning components and subassemblies that we manufacture and sell. Our
competitors, especially those in the precision optical product lines, typically sell a smaller number of products than we do and are often well entrenched. Some of these competitors have substantially
greater resources than we do. We believe that the breadth of our technologies and product offerings provides us with a competitive advantage over certain manufacturers that supply only discrete
components or are not vertically integrated with enabling technologies.

There
are numerous competitors in markets to which we distribute our precision ball bearings. These competitors vary in size and include other bearing manufacturers and distributors. We
believe that our product breadth and availability, combined with the value-added services we supply, provide competitive advantages.

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We
expect our competitors to continue to improve the design and performance of their products. We cannot assure you that our 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 our products less competitive or obsolete.
Increased competitive pressure could lead to lower prices for Axsys' products, thereby adversely affecting our business, financial condition and results of operations. We cannot assure you that we
will be able to compete successfully in the future.

Customers

Our customers include OEMs and end-users that design or utilize high-precision, performance and throughput equipment. We sell our
products primarily to OEM customers in the aerospace and defense, high-end graphic art and semiconductor capital equipment markets, and industrial automation markets.

There
is no customer or group of affiliated customers for whom sales during 2002 were in the aggregate 10% or more of consolidated net sales, and, in our opinion, there is no customer,
the loss of which would have a material adverse effect on our operations taken as a whole.

In
2002, 2001 and 2000, Axsys had aggregate sales, both military and non-military, directly to the U.S. Government, including its agencies and departments, of approximately
$4.6 million, $3.0 million and $1.9 million, respectively. These sales accounted for approximately 5.7% of total net sales in 2002, 3.4% in 2001 and 2.0% in 2000. Approximately
36.7% of net sales in 2002, 31.7% in 2001 and 25.6% in 2000 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, we are not aware of any proposed termination or renegotiation of such contracts that would
have a material adverse effect on our business.

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

Sales, Marketing and Customer Support

As of December 31, 2002, we employed 54 sales, marketing and customer support personnel throughout our organization, compared to 58 employees in similar
functions at the end of 2001. We organize our sales staff by market segments with a view to building on existing customer relationships and improving cross-selling opportunities. We utilize two OEM
components sales organizations, one focused on aerospace and defense customers and the other focused on high-performance commercial customers. We have a separate distributed products sales
force that is focused on selling ball bearings, bushings and assemblies, principally to commercial and industrial oriented OEMs as well as MRO distributors.

As
of December 31, 2002, our direct sales organization included 17 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. We believe that our sales effort is enhanced by having engineering-trained sales personnel available
to meet with customers' engineering personnel. Our application and design engineers are also involved in the sales process.

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We
also sell our products through a significant number of manufacturer's sales representatives and agents. Although we believe that we have satisfactory relationships with these sales
representatives and agents, we cannot assure you that these relationships will continue to be satisfactory or will continue at all.

Domestic and Foreign Sales

For information concerning our domestic and foreign net sales and identifiable assets from continuing operations, see Note 9 to the Consolidated Financial
Statements.

Research and Development

We seek to develop new component products and subsystems and improve existing products in order to keep pace with the increasing performance requirements of our
customers. We devote 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 we believe that our ability to compete effectively depends in part on maintaining and enhancing our expertise in applying new technologies and developing
new products, we dedicate substantial resources to engineering, research and development. At December 31, 2002, we employed 63 individuals in engineering, research and development functions. We
cannot assure you that our product
development efforts will be successful in producing products that respond to technological changes or new products introduced by others.

Our
costs associated with research and development expenses were $1.0 million in 2002, $1.7 million in 2001, and $3.3 million in 2000. These amounts are net of cost
reimbursements from our customers that were not material in relation to research and development expenditures in any period. We intend to direct our research and development activities toward
integrating our various technologies and continuing to develop subsystems.

Raw Materials; Suppliers

The raw materials and components that we purchase are generally available from multiple suppliers. However, beryllium, a material used extensively by the
Precision Machined Products operation of our Aerospace & Defense Group, is only available from Brush Wellman, Inc. ("Brush Wellman"), the sole U.S. supplier. Historically, we have had an
excellent relationship with Brush Wellman and have not encountered problems in obtaining our supply 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 Axsys, would have a material adverse effect on our business, financial condition and results of operations. If
such conditions were to occur, it is uncertain whether alternative sources could be developed.

In
addition, we purchase a substantial amount of ball bearings that we distribute from two foreign suppliers. While we believe that we could obtain alternate sources of supply, any
interruption in the flow of products from these suppliers, or significant increases in the cost of these products, could have an adverse effect on our business, financial condition and results of
operations.

Patents and Trademarks

We are not dependent upon any single patent or trademark. We have a combination of patents, trademarks and trade secrets, non-disclosure agreements
and other forms of intellectual property protection covering our proprietary technology. Although we believe that our patents and trademarks may have value, we believe that our future success will
depend primarily on the innovation, technical expertise, manufacturing and marketing abilities of our personnel. We cannot assure you as to the degree of protection offered by our patents. We cannot
assure you that we will be able to maintain the

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confidentiality of our trade secrets or that our non-disclosure agreements will provide meaningful protection of our trade secrets, know-how or other proprietary information
in the event of any unauthorized use, misappropriation or other disclosure.

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 our ability to make and sell some of our products. Although we believe that our products do not infringe on the patents or other proprietary rights
of third parties, we cannot assure you that third parties will not assert infringement claims against us or that such claims will not be successful.

Environmental Regulation

We believe that we are currently in compliance in all material respects 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 and that any non-compliance with such laws will not have a material adverse effect upon our business,
financial condition, results of operations, capital expenditures, earnings or competitive position. We cannot assure you, however, (a) 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 (b) as to the extent of our 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 our business, financial condition or results of
operations.

Axsys
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. Although liability under CERCLA is joint and several, meaning that liability can exceed a PRP'spro ratashare of
cleanup costs, we believe, based on currently available information, that costs associated with these sites will not have a material adverse effect on our business and financial condition. It is
possible, however, that our results of operations for a particular fiscal period could be materially affected.

Pursuant
to a remedial plan approved by the Ohio Environmental Protection Agency ("Ohio EPA") in 1993, we are continuing a process of investigating soils and groundwater at a site
formerly owned by a division of Axsys, and we have conducted certain remedial work at this site including soil removal. We have incurred approximately $600,000 to date. We have been pursuing an
alternate closure plan related to this site. This plan is subject to the approval of the Ohio EPA. Based on the advice of our consultants, we increased our accrued liabilities relating to this site to
approximately $744,000, with a resulting charge to discontinued operations in 2000 of $601,000, before a tax benefit of $235,000. Based on the advice of our environmental consultants, we believe that
the Ohio EPA is likely to allow use of our proposed alternate plan. We anticipate receiving approval of the plan from the Ohio EPA in mid-2003 and will reassess the estimated costs of
remediation of the site upon approval. We cannot assure you that the Ohio EPA will approve the alternate plan. If approval were not received, costs to Axsys could increase substantially. In addition,
even if approval is received, the costs actually incurred may exceed the accruals established. We anticipate that actual expenditures will be incurred over a period of several years.

During
1999, we sold the land and building of our previously discontinued Sensor Systems division in St. Petersburg, Florida. We have conducted investigations of soil and groundwater at
the former facility and received approval of our investigation plan from the Florida Department of Environmental Protection. We will continue to conduct additional soil and groundwater investigations
at the site. Based on the advice of our consultants, we increased our accrued liabilities relating to this site to approximately $854,000, with a resulting charge to discontinued operations in 2000 of
$657,000, before a tax benefit of $257,000. We have incurred approximately $280,000 to date.

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On
December 21, 2001, we received a letter from the United States Environmental Protection Agency ("EPA") notifying us that we are considered to be a potentially responsible party
at a site located in Prospect, Connecticut, which until 1978 was owned by a former subsidiary. The letter also demanded payment of approximately $25,000 in past response costs and unspecified future
costs. Although we may be obligated under CERCLA for contributions towards response costs incurred as a result of alleged releases of hazardous substances at the site, we are still investigating our
responsibilities to the site. In addition, it is our policy to accrue environmental cleanup related costs when those costs are believed to be probable and can be reasonably estimated. The
quantification of environmental exposure, if any, with respect to this site requires an assessment of many factors, including the quality of information available, the assessment stage of each
investigation, preliminary findings and the length of time involved in remediation. As we have not determined if any liability exists, we cannot estimate a meaningful range of exposure. We have
responded to the EPA's demand and are awaiting a response.

We
use or generate certain hazardous substances in our manufacturing and engineering facilities. We believe that our handling of these substances is in compliance with applicable local,
state and federal environmental, safety and health regulations at each operating location. We invest 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 these hazardous substances. We periodically conduct employee physical examinations and workplace air monitoring
regarding these substances. When exposure problems or potential have been indicated, we implement corrective actions. In general, re-occurrence has been minimal or
non-existent. We do not carry environmental impairment insurance.

Employees

As of December 31, 2002, we employed 557 persons, including 391 in manufacturing, 54 in sales, 63 in engineering and 49 in administration. Axsys considers
its relations with its employees to be satisfactory. There has been no significant interruption of operations due to labor disputes.

Item 2. PROPERTIES

Axsys leases its executive office, located at 175 Capital Boulevard in Rocky Hill, Connecticut.    The principal plants and other significant
properties at February 1, 2003 are:

Location

Type of Facility

Square Footage

Leased/Owned; ExpirationCullman, AL

Manufacturing, Engineering

100,000

OwnedSan Diego, CA

Manufacturing, Engineering

64,800

Leased; 2010Montville, NJ

Distribution

34,400

Leased; 2009Rochester Hills, MI

Manufacturing, Engineering

29,000

Leased; 2006Irvine, CA

Distribution

7,800

Leased; 2005


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

Item 3. LEGAL PROCEEDINGS

Axsys is a defendant in various lawsuits, none of which is expected to have a material adverse effect on Axsys' business or financial position. It is possible,
however, that our results of operations for a particular fiscal period could be materially affected. See "BusinessEnvironmental Regulations."

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

None during the quarter ended December 31, 2002.

PART II

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

Axsys' common stock trades on the Nasdaq National Market ("Nasdaq") under the Symbol "AXYS". The following table sets forth the range of high and low sales prices
as reported by Nasdaq:

|                                |                | 2002 |   | 2001  
|------------------------------- | -------------- | ---- | - | ------
|
|Fiscal Years Ended December 31: |                |      |   |       
|                                | First Quarter  |      | $ | 10.000
|                                | Second Quarter |      |   | 9.000 
|                                | Third Quarter  |      |   | 8.889 
|                                | Fourth Quarter |      |   | 8.030 

On
March 14, 2003, the high and low sales price were $7.25 and $7.05, respectively.

On
March 14, 2003, the approximate number of holders of record of Axsys' common stock was 539.

Dividend Policy

Axsys has applied and currently intends to continue to apply its retained and current earnings toward the development of its business and to finance its growth.
Axsys did not pay dividends on its common stock during the three years ended December 31, 2002, and does not anticipate paying cash dividends in the foreseeable future.

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Item 6.    SELECTED FINANCIAL DATA

The following selected financial data for the five fiscal years presented below is derived from Axsys' audited Consolidated Financial Statements as adjusted to
reflect the discontinuance of the Fiber Automation Division and Automation Engineering, Inc. in 2002 and Beau Interconnect and Sensor Systems business segments in 1999 and 1998, respectively.
The data should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto included elsewhere herein.

|                                                                                                                                                       |  | Years Ended December 31,
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------
|
|
|Statement of Operations Data:                                                                                                                          |  |                         
|Net sales                                                                                                                                              |  | $                       
|Gross margin                                                                                                                                           |  |                         
|(Loss) income from continuing operations before discontinued operations and cumulative effect of change in accounting principle                        |  |                         
|Net (loss) income                                                                                                                                      |  |                         
|Basic net (loss) earnings per share from continuing operations before discontinuing operations and cumulative effect of change in accounting principle |  | $                       
|Basic (loss) earnings per share                                                                                                                        |  | $                       
|Weighted average basic common shares outstanding                                                                                                       |  |                         
|Diluted (loss) earnings per share from continuing operations before discontinued operations and cumulative effect of change in accounting principle    |  | $                       
|Diluted (loss) earnings per share                                                                                                                      |  | $                       
|Weighted average diluted common shares outstanding                                                                                                     |  |                         

|                                    |  | At December 31,
|----------------------------------- |  | ---------------
|
|
|Balance Sheet Data:                 |  |                
|Working capital                     |  | $              
|Total assets                        |  |                
|Long-term capital lease obligations |  |                
|(less current portion)              |  |                
|Shareholders' equity                |  |                

---

13

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

Acquisitions and Divestitures

During the fourth quarter of 2002, we sold our Automation Group, comprised of the Fiber Automation Division ("FAD") and Automation Engineering, Inc.
("AEI").

On
November 5, 2002, we sold the net assets of FAD to Palomar Technologies, Inc. FAD designed and manufactured nano-positioning stages and fiber alignment test
tools. FAD has been accounted for as a discontinued operation and the related net assets and operating results have been reported separately from continuing operations in all years presented. Revenues
applicable to this discontinued operation were $0.4 million in 2002 and $0.6 million in 2001. There were no revenues in 2000.

On
October 28, 2002, we sold all of the stock of AEI, a wholly owned subsidiary, to an investor group. AEI designed and manufactured flexible automation systems for the photonics
market. AEI has been accounted for as a discontinued operation and the related net assets and operating results have been reported separately from continuing operations in all years presented.
Revenues applicable to this discontinued operation were $0.7 million in 2002, $2.5 million in 2001 and $1.4 million in 2000. AEI was merged with Axsys on October 18, 2000.

On
April 5, 2002, we sold all of the stock of our Teletrac, Inc. subsidiary to Storage Test Solutions ("STS") of Aurora, Colorado. Teletrac, which was based in Santa
Barbara, California, designed and manufactured high-performance spin stands that are used in the test and certification of data storage recording heads found in magnetic disk drives. As a
result of the sale, we closed our Santa Barbara manufacturing facility and relocated our micro-positioning stage, laser interferometer and autofocus product lines to our Imaging Systems division
located in Rochester Hills, Michigan. Axsys sold the stock of Teletrac in exchange for an interest-bearing $850,000 note, which provides for payments equal to ten percent of the revenues generated
from the sales of spin stands by STS with the balance, if any, due in five years. Because of the uncertain market conditions for data storage products and the terms of the note, Axsys has reserved the
entire value of this note and will record any principal and interest payments as ordinary income during the period received. As a result of this sale, an asset impairment and cost of sale charge of
$1.0 million has been included in Axsys' Consolidated Statement of Operations. Under applicable accounting principles, Teletrac has not been treated as a discontinued operation.

During
June of 2001, we closed a manufacturing support facility located in Manchester, Connecticut. The costs associated with closing the California and Connecticut operations are
included in continuing operations.

On
September 30, 2000, Teletrac acquired Westlake Technology Corporation ("Westlake"). This acquisition has been accounted for using the purchase accounting method. Accordingly,
the results of

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Westlake have been included in Axsys' Consolidated Statement of Operations since the date of acquisition.

On
March 17, 2000, Axsys sold the net assets of the Beau Interconnect division for $31.8 million in cash and recorded an after-tax gain of approximately
$14.1 million in the first quarter of 2000. Beau designed and manufactured interconnect-devices, barrier terminal blocks and connectors. Beau has been accounted for as a discontinued operation
and the related net assets and operating results have been reported separately from continuing operations. Revenues applicable to this discontinued operation during 2000 were $846,000.

Results of Operations

The following tables set forth selected financial data from continuing operations on a consolidated and segment basis for the years ended December 31,
2002, 2001, and 2000. The segment tables, shown below, exclude one-time charges, which are shown separately.

Consolidated Overview

(in thousands and as a percentage of sales)

|              |  | Years Ended December 31, |       
|------------- |  | ------------------------ | ------
|
|Sales         |  | $                        | 79,586
|Cost of sales |  |                          | 60,500
|              |  |                          |       
|Gross margin  |  | $                        | 19,086
|              |  |                          |       

Overall
sales from continuing operations for the year ended December 31, 2002 decreased compared to 2001 and 2000. As indicated below, the Aerospace and Defense segment has seen
modest growth over the prior two years while depressed markets have impacted the Commercial Products and Distributed Products segments.

Aerospace and Defense Segment

(in thousands and as a percentage of sales)

|              |  | Years Ended December 31, |       
|------------- |  | ------------------------ | ------
|
|Sales         |  | $                        | 45,869
|Cost of sales |  |                          | 36,994
|              |  |                          |       
|Gross margin  |  | $                        | 8,875 
|              |  |                          |       

Sales
in the Aerospace and Defense segment increased 6.9% for the year ended December 31, 2002 compared to 2001. In addition, sales in this segment increased 20.2% for the year
ended December 31,
2001 compared to 2000. The increases in revenue are primarily due to increased sales of our beryllium machined products and increased sales of our optical components to the aerospace and defense
market.

Gross
margin as a percent of sales for the year ended December 31, 2002 increased compared to the prior year. Operational improvements, including improved quality, material
procurement and facility management, have contributed to improved margins compared to 2001. Significant

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improvements in gross margin for the year ended December 31, 2001 compared to 2000 were primarily the result of a Cost Reduction Program implemented in June of 2001. (See Note 2 of the
Consolidated Financial Statements.)

Commercial Products Segment

(in thousands and as a percentage of sales)

|              |  | Years Ended December 31, |       
|------------- |  | ------------------------ | ------
|
|Sales         |  | $                        | 13,569
|Cost of sales |  |                          | 9,003 
|              |  |                          |       
|Gross margin  |  | $                        | 4,566 
|              |  |                          |       

Sales
in the Commercial Products segment declined 32.8% for the year ended December 31, 2002 as compared to 2001, while sales in 2001 were down 13.9% compared to 2000. On
April 5, 2002, we sold our data storage business in Santa Barbara, California, which had sales of $2.1 million in 2001 and $3.6 million in 2000. These sales are included in the
above table. Additionally, the decline in shipments is partially a result of a general downturn in the market for air bearing scanners, which began in the second quarter of 2001.

Gross
margin, as a percent of sales, increased during 2002 as compared to 2001, reflecting operational improvements including the closure of the Santa Barbara facility during the second
quarter of 2002 and the closure of a manufacturing support facility in Connecticut during the second quarter of 2001. (See Note 2 of the Consolidated Financial Statements.) The 3.3% decline in
gross margin from fiscal year 2001 compared to 2000 was primarily the result of a decline in data storage sales.

Distributed Products Segment

(in thousands and as a percentage of sales)

|              |  | Years Ended December 31, |       
|------------- |  | ------------------------ | ------
|
|Sales         |  | $                        | 20,148
|Cost of sales |  |                          | 14,367
|              |  |                          |       
|Gross margin  |  | $                        | 5,781 
|              |  |                          |       

Sales
in the Distributed Products segment declined 12.5% for the year ended December 31, 2002 as compared to 2001, while sales in fiscal year 2001 declined by 26.3% compared to
fiscal year 2000. The decline in revenue is driven primarily by the overall weakness in the U.S. economy. In 2001 and 2002, conditions were very weak in the industrial automation and commercial
markets for our precision ball bearings, including lower sales to electronic capital equipment markets, which had been particularly strong in 2000.

Gross
margin as a percent of sales decreased 2.6% in 2002 compared to 2001, primarily due to additional excess inventory reserves taken in 2002 as a result of lower sales volumes. Gross
margin, as a percentage of sales, decreased by 0.9% in fiscal year 2001 compared to fiscal year 2000, which was the result of decreased revenues.    Adjusting for the inventory reserve
adjustments in 2002, gross margin

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percentages have remained relatively stable despite decreased revenues, as we have reacted to the depressed market conditions by lowering overhead and reducing spending.

One- time Charges included in Cost of Sales (Non-allocated)

(in thousands and as a percentage of sales)

|                 |  | Years Ended December 31, |    
|---------------- |  | ------------------------ | ---
|
|One-time charges |  | $                        | 136
|                 |  |                          |    

During
2002, we recorded a one-time charge of $136 thousand for the elimination of some small product lines resulting from the closure of the California facility. During the second
quarter of 2001, in conjunction with the Cost Reduction Plan, we recorded a one-time charge of $7.7 million, which primarily included a $4.4 million charge for excess and
obsolete inventory disposals and $2.9 million charge for loss contract reserves for two long-term government contracts. During the first quarter of 2000, we recorded a
one-time charge of $2.6 million when we re-evaluated slow moving and potentially obsolete inventory as part of the Strategic Realignment Plan. These charges are included
in cost of sales but are not allocated to a particular segment. (See Note 2 of the Consolidated Financial Statements.)

Operating Expenses

(in thousands and as a percentage of sales)

|                                             |  | Years Ended December 31, |       
|-------------------------------------------- |  | ------------------------ | ------
|
|Selling, general and administrative expenses |  | $                        | 16,262
|Research and development expenses            |  |                          | 1,003 
|Restructuring and special charges            |  |                          | 1,854 

Selling, general and administrative expenses.Selling, general and administrative ("SG&A") expenses were $16.3 million
in 2002 compared to $18.5 million in 2001, a net decrease of $2.2 million. The decrease is primarily a result of the closure of the California and Connecticut facilities, which accounted
for savings of $1.0 million for 2002 compared to the prior year, lower incentive compensation as a result of lower revenues and lower overall spending. SG&A expenses were 13.0% lower in fiscal
year 2001 compared to fiscal year 2000 primarily as a result of the 2001 Cost Reduction Plan. (See Note 2 of the Consolidated Financial Statements.)

Research and development expenses.Research and development ("R&D") expenses were $1.0 million in 2002 compared to
$1.7 million in 2001. The decrease was primarily due to the closure of the California
and Connecticut facilities. The 48.3% reduction in R&D spending in 2001 as compared to 2000 is a result of the June 2001 closure of the Connecticut facility, which was primarily an R&D
facility. (See Note 2 to the Consolidated Financial Statements.)

Restructuring charges.Costs categorized as restructuring charges were $1.9 million in 2002, $1.4 million in
2001 and $1.8 million in 2000. (See Note 2 to the Consolidated Financial Statements.)

During
2002, restructuring charges included $0.3 million for termination expenses incurred in connection with the restructuring of the business, $1.0 million associated
with asset write-downs and severance expenses resulting from the sale of Teletrac and $0.6 million of costs relating to the relocation of some Commercial OEM product lines from Santa Barbara,
California to Rochester Hills, Michigan.

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During
2001, in conjunction with the Cost Reduction Plan, Axsys recorded restructuring charges of $1.4 million. The restructuring charges were recorded for severance pay and
benefits for sixty employees and exit costs relating to the closing of two facilities.

During
2000, in conjunction with the Strategic Realignment Plan, Axsys recorded a restructuring charge of $1.8 million for a workforce reduction of 50 employees and the relocation
or consolidation of two facilities.

Other Income and Expenses

Interest income and expense, net.Net interest expense was $22 thousand in the year ended December 31, 2002,
compared to net interest income of $153 thousand and $496 thousand in 2001 and 2000, respectively. The decline in interest income since 2000 is a result of lower prevailing interest
rates and lower average investment balances. In addition, interest income of $39 thousand in 2002, $64 thousand in 2001 and $96 thousand in 2000, from a note receivable, has
declined as the principal balance has been reduced.

Other income and expense, net.Net other income in 2002 was $10 thousand compared to other income of
$207 thousand in 2001 and $324 thousand in 2000. During 2002, we recorded a charge of $232 thousand for the disposal of fixed assets. We also received income of $298 thousand in
2002, $232 thousand in
2001 and $233 thousand in 2000, which was recovered from a fully reserved note from the 1998 sale of Sensor Systems.

Taxes.The consolidated effective tax rate for continued and discontinued operations was 2.6% for the year ended
December 31, 2002 compared to 37.0% in 2001 and 39.1% in 2000. The changes in the effective rates are primarily due to the establishment of a valuation allowance partially offset by an
anticipated capital loss carry back benefit relating to the sale of Teletrac, Inc. The effective tax rate for discontinued operations in 2002 is 37.8%. The tax provision for continuing
operations for 2002 was $3.0 million primarily as a result of two events. In accordance with the Statement of Financial Accounting Standards No. 109, in 2002 we established a
$4.6 million valuation allowance against our deferred tax asset. As we record income in the future, we will reduce this valuation allowance accordingly. The tax expense recorded as a result of
the valuation allowance was partially offset by a tax benefit resulting from a permanent book and tax basis difference on the sale of Teletrac, Inc. At December 31, 2002, we continued to
recognize a portion of our deferred tax asset as we have a prudent and feasible tax planning strategy, which we would implement before allowing any of our deferred tax benefits to expire.

Discontinued operations.During the third quarter of 2002, we decided to divest our Automation Group. We completed the
disposal of the Group in the fourth quarter of 2002. During 2002, we recorded a special charge of $1.7 million, net of taxes, which included $729 thousand for the impairment of assets
and $980 thousand of closing related expenses. These costs are discussed in more detail in Note 4 to the Consolidated Financial Statements. The loss, net of tax, from these operations
included in discontinued operations was $2.7 million in 2002 compared to $1.9 million in 2001 and $0.4 million in 2000. The remainder of the loss from discontinued operations in
2002 included a $203 thousand charge for an environmental related expense for a previously divested operation, which was partially offset by $24 thousand of income from the reversal of
unutilized reserves primarily associated with the sale of the Beau Interconnect division in 2000.

In
March 2000, we sold the Beau Interconnect division. Results of operations from the discontinued business have been reported separately from continuing operations in all periods
presented. The sale of Beau resulted in a gain of $22.5 million before a tax provision of $8.4 million. We also recorded a charge of $1.3 million, before a tax benefit of
$0.5 million, to increase environmental accruals for the remediation of two former operating sites. During 2000, our

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environmental consultants advised us to increase these accruals to better reflect the ongoing costs to complete the remediation of these sites. (See Note 4 to the Consolidated Financial
Statements.)

Net income.We had a net loss of $7.1 million in 2002, a new loss of $7.2 million in 2001 and net income of
$9.5 million in 2000. During 2002, we sold our Automation Group, which resulted in a net loss of $4.4 million including both operating losses and loss on the sale. In addition, we
recorded a tax provision of $2.9 million from continuing operations, which was primarily the result of the establishment of a valuation allowance to reduce our net deferrred tax assets. In
2001, we recorded a restructuring and special charge associated with our Cost Reduction Plan of $5.8 million, net of taxes. In addition, our Automation Group incurred a net loss of
$1.9 million. During 2000, we sold our Beau division,
which resulted in a net gain of $14.1 million and recorded a restructuring and special charge associated with our Strategic Realignment Plan of $3.3 million, net of taxes.

Liquidity and Capital Resources

Axsys funds its operations primarily from cash flow generated by operations, cash on hand and, to a limited extent, capital lease financing. As of
December 31, 2002, cash and cash equivalents totaled $9.9 million.

Net
cash provided by or (used in) operations was $1.8 million, ($1.8) million and ($9.0) million for the years ended December 31, 2002, 2001 and 2000, respectively. In
2002, Axsys' net loss of $7.1 million included a $4.6 million deferred tax valuation allowance, $2.7 million of depreciation and $856 thousand of losses on capital asset
disposals. In 2002, we received a $3.5 million federal income tax refund. We also incurred $4.0 million in cash costs related to our discontinued Automation Group. During 2002, we
collected $2.5 million in customer advances for our beryllium-based products offset by $1.4 million in increased inventories for these products.

In
2001, Axsys' net loss of $7.2 million was offset by depreciation and amortization of $2.9 million as well as working capital changes. Accounts receivable declined
$3.1 million, reflecting lower fourth quarter sales in 2001. Inventory levels declined by $3.8 million, including the effects of inventory write-downs taken with the 2001
Cost Reduction Plan. Current tax receivable increased by $3.6 million, due to an anticipated significant tax refund, which was received in 2002, for net operating losses generated in 2001.
Trade accounts payable declined by $2.5 million in response to lower production volume and reduced year-end capital spending compared to the prior year. Long-term
liabilities increased $1.8 million, which was primarily the result of a reserve for a loss on a long-term government contract.

In
2000, our net income of $9.5 million, which included the non-operating gain on the sale of Beau of $14.1 million, was offset by depreciation and amortization
of $3.1 million. Axsys made income tax payments of $4.9 million related to the gain on the sale of Beau. Accounts receivable balances increased by $2.2 million due to higher
billings at the end of the fourth quarter in 2000. This effect was partially offset by a decrease in inventories and other assets.

Net
cash (used in) or provided by investing activities was ($0.8) million, ($2.3) million and $28.0 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Investing activities in 2002 were principally related to capital spending of $1.5 million, which was lower than spending levels in 2001 and 2000. Significant investments in 2002
and 2001 were focused on upgrading precision machining capabilities and test and measurement equipment for imaging and motion control products. Capital spending in 2000 included an investment of
$1.3 million to expand the Motion Control manufacturing facility as well as investments in telecommunications infrastructure. In 2000, the major source of funds was the $31.8 million in
gross proceeds from the divestment of Beau in March 2000.

Net
cash (used in) financing activities was ($0.9) million, ($0.8) million and ($4.6) million for the years ended December 31, 2002, 2001 and 2000, respectively. In general, cash
used in financing

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activities is for the repayment of capital leases. In addition, in 2000, Axsys repaid the outstanding balance of $4.6 million on borrowings under an $11.0 million senior secured
revolving credit facility in conjunction with the sale of Beau on March 17, 2000. The credit facility was subsequently terminated.

As
of December 31, 2002, Axsys had no significant obligations or commitments for capital expenditures other than those arising in the ordinary course of business. Management
believes that the Company has sufficient funds on hand to finance its operations, capital expenditures, and working capital requirements for the foreseeable future.

The
following table reflects a summary of our contractual cash obligations and other commercial commitments as of December 31, 2002:

|                 |  | Payments Due by Period
|---------------- |  | ----------------------
|
|
|Operating leases |  | $                     
|Capital leases   |  |                       
|                 |  |                       
|Total            |  | $                     
|                 |  |                       

Backlog

A substantial portion of our 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, a significant portion of our annual sales is in our backlog of orders. Our backlog of orders increased by 26 percent or
$12.7 million, to $61.5 million at December 31, 2002 from $48.8 million at December 31, 2001. Strong bookings in the Aerospace and Defense segment during 2002 have
contributed to our increased backlog. We believe that a substantial portion of our backlog of orders at December 31, 2002 will be shipped over the next twelve months.

Critical Accounting Policies

Our significant accounting policies and methods used in the preparation of our Consolidated Financial Statements are described in Note 1 to the
Consolidated Financial Statements. The following is a brief discussion of the more significant accounting policies and methods used by us.

General.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 the disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to inventory valuation and the adequacy of allowances for doubtful
accounts, inventory valuation, long-term loss contract reserves and environmental contingencies. Actual amounts could differ significantly from these estimates.

Allowance for doubtful accounts.We periodically review the aging of our accounts receivable over ninety days to identify
potentially uncollectible accounts and establish reserves based on experience and discussion with customers. Actual write-offs could differ from our allowance for doubtful accounts. If
circumstances change, (i.e., higher than expected defaults or an unexpected material adverse change in a customers ability to meet its financial obligations) our estimates of recoverability of amounts
due to us could be reduced by a material amount.

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Inventory valuation.We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or
the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess or obsolete inventory based on current requirements and
historical usage. As demonstrated during 2002, demand for our products can fluctuate. A significant increase in the demand for our products could result in a short-term increase in the
cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess or obsolete inventory quantities on hand. In addition, some of our industries are
characterized by rapid technological change or frequent new product development that could result in an increase in the amount of obsolete inventory on hand. Additionally, our estimates of future
product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess or obsolete inventory.    In the future, if our inventory
were determined to be overvalued, we would be required to recognize those costs in our cost of goods sold at the time of such determination. Likewise, if our inventory is undervalued, we may have
over-reported our costs of goods sold in previous periods and would be required to recognize additional operating income at the time of sale. Therefore, although we make every effort to
ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our
inventory and our reported operating results.

Long-term loss contract reserves:Two long-term contracts are covered by a loss contract reserve. We
accrued for these contracts based on the contract price and the current cost structure. To the extent future manufacturing costs (i.e., labor rates and material costs) change, our loss contract
reserves will be impacted.

Environmental contingencies.We are currently involved in several environmental remediation projects. We accrue for
environmental contingencies when (1) responsibility for clean-up is determined and (2) costs are probable and reasonably estimatable. When costs are not probable and
reasonably estimatable, no accrual is made. As discussed in Note 4 to the Consolidated Financial Statements, we have accrued our estimate of the probable costs for the resolution of these
claims. These estimates have been developed in consultation with outside environmental consultants handling these matters and are based upon an analysis of the anticipated remediation plans. We do not
anticipate these projects will have a material adverse effect on our consolidated financial position. It is possible, however, that future results of operations could be materially affected by changes
in our assumptions.

Recently Issued Accounting Standards

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146), which addresses
financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity, including Certain Costs Incurred in a Restructuring" (EITF 94-3). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. In addition, SFAS No. 146 establishes
that fair value is the basis for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The effect of adoption of
SFAS 146 is dependent on our activities subsequent to adoption.

In
December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 148, "Accounting for Stock-Based
CompensationTransition and Disclosure". SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition

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guidance and annual disclosure requirements are effective for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions for this Form 10-K.
The Company will continue to account for stock-based compensation under the provisions of APB Opinion No. 25 "Accounting for Stock Issued to Employees" using the "intrinsic value" method.
Accordingly, the adoption of SFAS 148 is not anticipated to have a material effect on the Company's financial position, results of operations, or cash flows.

Cautionary Factors That May Affect Future Results

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 our ability to reduce design and manufacturing lead times and manufacturing costs, our ability to integrate existing technologies, our ability to implement our
strategy to develop and sell, among other things, higher level subsystems, the changes to be achieved from our cost reduction efforts, our objective to grow through strategic acquisitions and
anticipated expenditures for environmental remediation. One can identify these forward-looking statements by the use of the words such as "expect," "anticipate," "plan," "may," "will," "estimate" or
other similar expressions. 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. One should understand that many factors could cause actual results to differ from those expressed or implied in the forward-looking
statements. These factors include those discussed below as well as inaccurate assumptions. Axsys cautions the reader, however, that this list of factors may not be exhaustive.

Risk Factors

The following risk factors should be considered carefully in addition to the other information contained in this filing.

The Aerospace and Defense industry, which represents the majority of our sales, is subject to economic cycles.A significant
portion of our business and business development efforts is concentrated in the aerospace and defense industry. Our 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 that we manufacture. Approximately 42% of our net sales in 2002, 35% of net sales in 2001 and
28% in 2000 were derived directly from contracts with the U.S. Government, or its agencies or departments, or indirectly from subcontracts with U.S. Government contractors. The majority of these
Government contracts are subject to termination and renegotiation. As a result, our business, financial condition and results of operations may be materially affected by changes in U.S. Government
expenditures for defense. In addition, we cannot assure you that current and future Government programs will continue to use our products.

Our operating results may vary substantially due to factors that are difficult to forecast.Factors such as announcements of
technological innovations or new products by Axsys or our competitors, domestic and foreign general economic conditions and the cyclical nature of the industries that we serve could cause substantial
variations in our operating results. The defense, aerospace, semiconductor, electronics capital equipment, high-performance graphic art, medical imaging capital equipment, industrial
automation OEM and MRO markets, each of which represents a significant market for our 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. Any future fluctuations arising from these or other conditions could have an adverse impact on our business, financial
condition or results of operations. We have experienced, and expect to continue to experience,

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significant fluctuations in our quarterly and annual operating results due to a variety of factors, including:



To
some extent, primarily in our bearing distribution division, our net sales and operating results for a specific quarter will depend upon 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 our customers or unexpected manufacturing difficulties, may cause our net sales in a particular quarter to fall significantly below expectations, which could have a
material adverse effect on our business, financial condition and results of operations for such quarter.

The rapid pace of technological change will require continuous new product development.Our success will continue to depend
in substantial part upon our 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 these developments. In addition, our success will depend on how well we respond to changes in customer requirements and achieve market acceptance
for our products and capabilities. Any failure by Axsys to anticipate or respond adequately to technological developments and customer requirements could have a material adverse effect on our
business, financial condition and results of operations. In order to develop new products successfully, we are dependent upon close relationships with our customers and their willingness to share
proprietary information about their requirements and participate in collaborative efforts with us. We cannot assure you that our customers will continue to provide us with timely access
to information or that we will be successful in developing and marketing new products and services or their enhancements. In addition, we cannot assure you that the new products and services or their
enhancements, if any, that we develop, will achieve market acceptance.

Our markets are extremely competitive.We compete primarily on the basis of our ability to design and engineer our products
to meet performance specifications set by our 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
are a limited number of competitors in each of the markets for the various types of precision optical and positioning components and subsystems that we sell. Our competitors,
especially those in the precision optical and positioning product lines, are typically focused on a smaller number of product offerings than we are, and they are often well entrenched. Some of our
competitors have

23

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substantially greater resources than we do. Our competitors could develop enhancements to or future generations of competitive products that will offer superior price or performance features to ours.
In addition, new processes or technologies could emerge that render our products less competitive or obsolete.

In
addition, a substantial investment is required by an existing or potential customer to integrate components and subsystems into their product design. We believe that once a customer
has selected particular components or subsystems from one vendor, the customer generally relies upon that vendor to provide equipment for the specific product application and may seek to rely upon
that vendor to meet other component or subsystem requirements. Accordingly, Axsys may be at a competitive disadvantage with respect to a prospective customer that chooses to utilize a competitor's
components or subsystems.

Further,
there are numerous competitors in markets to which we distribute precision ball bearings. Our competitors, who vary in size, include other ball bearings distributors as well as
ball bearing manufacturers.

The
bases of competition in the industries in which we compete could shift and we may not be able to compete successfully.

Our levels of international sales and purchases could pose risks to our operating results.Our international sales from
continuing operations accounted for approximately 18.1% of net sales in 2002, 21.0% in 2001, and 19.7% in 2000. In addition, our products are sold to domestic customers who use them in products they
sell to international markets. Also, we purchase a substantial portion of our ball bearing products from two foreign suppliers and certain other products from other foreign suppliers. Our
international sales and purchases are subject to a number of risks generally associated with international operations, including general economic conditions, 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. Any of these factors could have a
material adverse effect on our business, financial condition and results of operations.

We may not be able to successfully manage expanded operations and acquisitions.As part of our business development strategy,
we plan to pursue acquisitions in order to expand our product offerings, add to or enhance our base of technical and sales personnel or provide desirable customer relationships. This growth could
result in a significant strain on our managerial, financial, engineering and other resources. The rate of our future expansion, if any, in combination with the complexity of the technologies involved
in our businesses, may demand an unusually high level of managerial effectiveness in anticipating, planning, coordinating and meeting our operational needs as well as the needs of our customers.
Additionally, we cannot assure you that Axsys will be able to acquire complementary businesses on a cost-effective basis, integrate acquired operations into our organization effectively,
retain and motivate key personnel, or retain customers of acquired firms. We compete for attractive acquisition candidates with other companies or investors, and that competition could increase the
cost of pursuing our acquisition strategy or reduce the number of attractive candidates to be acquired. Although Axsys reviews and considers possible acquisitions on an on-going basis, no
specific acquisitions are being negotiated or planned as of the date of this report.

Many key product components come from single source suppliers.A significant portion of our precision machining business
depends on the adequate supply of specialty metals, such as beryllium, at competitive prices and on reasonable terms. We currently procure all of our beryllium from Brush Wellman, the sole U.S.
supplier, and expect to continue to rely on Brush Wellman for beryllium for the foreseeable future. Although we have not experienced significant problems with our supplier in the past, we cannot
assure you that such relationship will continue or that we will continue to obtain such supplies at cost levels that would not adversely affect our gross margins. The partial or complete loss of

24

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Brush Wellman as a supplier of beryllium, or production shortfalls or interruptions that otherwise impair our supply of beryllium, would have a material adverse effect on our business, financial
condition and results of operations. It is uncertain whether alternative sources of supply could be developed without a material disruption in our ability to provide beryllium products to our
customers.

Although
we have not experienced significant problems with our other suppliers in the past, we cannot assure you that such relationships will continue or that, in the event of a
termination of our relationships with those other suppliers, we would be able to obtain alternative sources of supply without a material disruption in our ability to provide products to our customers.
In addition, we purchase a substantial amount of ball bearings that we distribute from two foreign suppliers. Any material disruption in our supply of products would have a material adverse effect on
our business, financial condition or results of operations.

Our future success depends on our ability to retain key personnel.Axsys' success depends to a significant extent on the
continued services of our key executive officers and senior management personnel. The
loss of the services of one or more of these individuals may have a material adverse effect on our business, financial condition and results of operations. We do not maintain key man life insurance on
our executive officers. In addition, since our continued success is largely dependent upon our ability to design, manufacture and sell high-performance components and subsystems for the
high-performance technology market, we are particularly dependent upon our ability to identify, attract, motivate and retain qualified technical personnel, including engineers and skilled
machinists, with the requisite educational background and industry experience. Our employees may voluntarily terminate their employment with us at any time, and competition for personnel is intense.
Accordingly, we cannot assure that we will be successful in retaining our existing personnel. The loss of the services of a significant number of our technical or skilled personnel, or the future
inability to attract technical or skilled personnel, could have a material adverse effect on our business, financial condition and results of operations.

We must protect our intellectual property rights.The patents of competitors could impact our business. Our ability to
compete effectively with other companies will depend, in part, on our ability to maintain the proprietary nature of our technology. We rely upon a combination of patents, trademarks and trade secrets,
non-disclosure agreements and other forms of intellectual property protection to safeguard our proprietary technology. We cannot assure you as to the degree of protection offered by these
patents. We also cannot assure you that we will be able to maintain the confidentiality of our trade secrets or that our non-disclosure agreements will provide meaningful protection of our
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 than we do 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 our ability to make and sell some of our products. Although we believe that
our existing products do not infringe on the patents or other proprietary rights of third parties, third parties could assert infringement claims against us and such claims could be successful.

We must comply with strict environmental regulations; both compliance and non-compliance could result in material liabilities or
costs.We are 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 our engineering, research and development and manufacturing activities. Failure to comply with applicable environmental requirements could result in substantial liability to
Axsys, suspension or cessation of our operations, restrictions on our ability to expand our operations or requirements for the acquisition of additional equipment or other significant expense, any of
which could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot

25

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assure you (a) 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 (b) as to the extent of our 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 our business, financial condition and results of operations.

During
2000, Axsys recorded a charge to discontinued operations of $1.3 million, before a tax benefit of $0.5 million, relating to increases in reserves for certain
environmental costs associated with formerly owned properties. The current accruals of $1.2 million associated with these sites assume that various approvals will be received from state
regulatory authorities. However, we cannot assure you that we will receive these approvals. If these approvals are not received, our costs could increase substantially. In addition, even if such
approvals are received, the costs actually incurred may exceed the reserves established.

During
December 2001, we received a letter from the United States Environmental Protection Agency ("EPA") notifying us that we are considered to be a potentially responsible party
at a site located in Prospect, Connecticut, which until 1978 was owned by a former subsidiary. It is our policy to accrue environmental cleanup related costs only when those costs are believed to be
probable and can be reasonably estimated. The quantification of environmental exposure with respect to this site, if any, requires an assessment of many factors, including the quality of information
available, the assessment stage of each investigation, preliminary findings and the length of time involved in remediation. In 2002, Axsys recorded a charge to discontinued operations of
$203 thousand, net of taxes relating to attorney fees for researching our connection to the site and our response to the EPA.

We
have made and continue to make investments in protective equipment, process controls, manufacturing procedures and training in order to minimize the risks to our employees,
surrounding communities and the environment due to the presence and handling of hazardous materials. The failure to properly handle these materials could lead to harmful exposure for employees or to
the discharge of certain hazardous waste materials. Since Axsys does not carry environmental impairment insurance, such a failure could lead to a material adverse effect on our business, financial
condition and results of operations. Also, environmental problems could develop in the future which would have a material adverse effect on our business, financial condition and results of operations.

We must continue to invest significant resources to maintain and upgrade our manufacturing capabilities.We have invested,
and intend to continue to invest, in state-of-the-art equipment in order to increase, expand, update or relocate our manufacturing capabilities and facilities.
Changes in technology or sales growth beyond currently established manufacturing capabilities would require that we make further investment. We cannot assure you that we will generate sufficient funds
from operations to finance any required investment or that other sources of funding will be available on terms acceptable to us, if at all. In addition, any further expansion could negatively impact
our business, financial condition or results and operations.

One shareholder controls a significant block of Axsys stock and this concentration could affect important operating
decisions.The Chairman of the Board and Chief Executive Officer of Axsys owns approximately 27% of the outstanding common stock as of December 31, 2002. As
a result, he will have the ability to exert influence with respect to corporate actions, including the election of directors and certain sales or mergers and acquisitions.

Our stock price has been volatile and may continue to fluctuate substantially.The price of our 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 our financial results, changes in recommendations or earnings estimates by securities analysts, announcements of technological

26

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innovations or new commercial products or services and the timing of announcements of acquisitions or dispositions by Axsys or our competitors, as well as conditions in our markets generally, may
have a significant adverse effect on the market price of our 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.

Certain anti-takeover provisions could cause harm to our shareholders.Our Certificate of Incorporation, as
amended (the "Certificate of Incorporation"), our By-Laws (the "By-Laws") and the Delaware General Corporation Law ("DGCL") contain various provisions which
could delay or impede the removal of incumbent directors and could make a merger, tender offer or proxy contest involving Axsys more difficult, 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 Axsys.

We
have authorized 4,000,000 shares of our preferred stock, none of which is currently outstanding, and which we could issue without further shareholder approval and upon terms and
conditions, and having rights, privileges and preferences, as the Board of Directors may determine. We have 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 our shareholders only by unanimous consent. These provisions could have the effect of delaying, deterring or preventing a change in control of Axsys, and may
adversely affect the voting and other rights of holders of common stock.

In
addition, we are subject to section 203 of the DGCL, which, among other things and subject to various exceptions, restricts certain business transactions between a corporation
and a shareholder owning 15% or more of the corporation's 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 Axsys without action by the shareholders and, therefore, could adversely affect the price of our
common stock. In the event of a change of control of Axsys, the vesting of outstanding options issued under our long-term stock incentive plan may be accelerated at the discretion of the
committee administering the plan or may be required to be accelerated under certain circumstances provided for in incentive agreements.

Absence of Dividends on Common Stock.

Axsys does not anticipate paying dividends on its common stock in the foreseeable future.

Item 7a.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Axsys' market risk sensitive instruments do not subject Axsys to material market risk exposures.

Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

No
reference is necessary since the information was previously reported.

27

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PART III

The information required by items 10, 11, 12 and 13 of Part III, other than the table required by Item 201(d) of Regulation S-K, is
incorporated by reference to Axsys' definitive proxy statement for its 2003 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days following the
end of Axsys' fiscal year ended December 31, 2002. If such proxy statement is not so filed, that information will be filed as an amendment to this Form 10-K within
120 days following the end of Axsys' fiscal year ended December 31, 2002.

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

Except for the information concerning equity compensation plans, the information required by this item is incorporated by reference from our 2003 Proxy Statement
under the caption, "Securities Ownership of Directors and Officers." The following table gives information about our equity securities that may be issued under equity compensation plans as of
December 31, 2002. Those securities are shares of common stock that can be issued under our existing Long-Term Stock Incentive Plan.

|Plan category                                              |       | Number of shares of
common stock to be issued
upon exercise of
outstanding options,
warrants and rights
(a) |         | Weighted-average exercise
price of outstanding price of
options, warrants and rights
(b) |       | Number of shares of common
stock remaining available for
further issuance under equity
compensation plans (excluding
securities reflected in column (a))
(c)
|---------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------------------- | ------- | ---------------------------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders     |       | 516,735                                                                                                     |         | $                                                                                        | 14.90 |                                                                                                                                                             
|Equity compensation plans not approved by security holders |       |                                                                                                            |         |                                                                                          |      |                                                                                                                                                             
|                                                           |       |                                                                                                             |         |                                                                                          |       |                                                                                                                                                             
|                                                           | Total |                                                                                                             | 516,735 |                                                                                          | $     | 14.90                                                                                                                                                       
|                                                           |       |                                                                                                             |         |                                                                                          |       |                                                                                                                                                             

Item 14.    CONTROLS AND PROCEDURES

Within the 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's chief executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, the chief executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings.

Subsequent
to the date the Company carried out its evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly
affect these internal controls.

28

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PART IV

Item 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

See accompanying index to consolidated financial statements and schedule.

(a)(3)Exhibits

|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                        
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(1)           |  | Restated Certificate of Incorporation of the Company (filed as Exhibit 3(4) to the Company's Amendment No. 2 to Registration Statement on Form S-1, dated October 17, 1997 (File No. 333-36027) (the "Form S-1") and
incorporated herein by reference).                                            
|3(2)           |  | By-Laws of the Company (filed as Exhibit 2 to the Form 8-A dated August 8, 1991 and incorporated herein by reference).                                                                                                                                                                             
|10(1)          |  | Severance Agreement between the Company and Kenneth F. Stern dated as of June 10, 1996 (filed as Exhibit 10(16) to the Form S-1 and incorporated herein by reference).                                                                                                                             
|10(2)          |  | 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(3)          |  | Severance Protection Agreement between the Company and Stephen W. Bershad dated as of February 11, 1999 (filed as Exhibit 10(1) to the Company's Form 10-Q, dated May 11, 1999, for the fiscal quarter ended March 31, 1999 (the "March 31, 1999 Form
10-Q") and incorporated herein by reference).
|10(4)          |  | Severance Protection Agreement between the Company and Kenneth F. Stern dated as of February 11, 1999 (filed as Exhibit 10(4) to the March 31, 1999 Form 10-Q and incorporated herein by reference).                                                                                               
|10(5)          |  | Amendment to Axsys Technologies, Inc. Long-Term Stock Incentive Plan (filed as Exhibit A to the Company's Proxy Statement dated April 24, 2000 and incorporated herein by reference).                                                                                                              
|10(6)          |  | Employment Agreement, dated as of October 18, 2000, between the Company, and Stephen W. Bershad (filed as Exhibit 10(27) to the December 31, 2000 Form 10-K and incorporated herein by reference).                                                                                                 
|10(7)          |  | Form of Indemnification Agreement for all Directors and Officers of the Company (filed as Exhibit 10(30) to the December 31, 2001 Form 10-K and incorporated herein by reference).                                                                                                                 
|10(8)          |  | Letter Agreement between David A. Almeida and the Company dates as of November 14, 2001 (filed as Exhibit 10(31) to the December 31, 2001 Form 10-K and incorporated herein by reference).                                                                                                         
|10(9)          |  | Change in registrant's certifying accountant (filed as Exhibit 16 to the May 23, 2002 Form 8-K and incorporated herein by reference).                                                                                                                                                              
|10(10)         |  | Letter Agreement between Stephen W. Bershad and the Company dated November 12, 2002, extending term of initial period of his Employment Agreement.                                                                                                                                                 
|10(11)         |  | Summary of Management Incentive Plan.                                                                                                                                                                                                                                                              
|21             |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                     
|               |  |                                                                                                                                                                                                                                                                                                    

29

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|22    |  | Consent of Ernst and Young LLP                                                                                                                  
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|99(1) |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer
|99(2) |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief Financial Officer

(b)  Reports on Form 8-K

None during the quarter ended December 31, 2002.

30

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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 24, 2003

| |  | AXSYS TECHNOLOGIES, INC.
(Registrant)
| |  | -------------------------------------
| |  | By:                                  

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 the 24th day of March 2003.

|                                                    |  |                                                                |  | 
|--------------------------------------------------- |  | -------------------------------------------------------------- |  | 
|/s/STEPHEN W. BERSHADStephen W. Bershad             |  | Chairman of the Board of Directors and Chief Executive Officer |  | 
|/s/DAVID A. ALMEIDADavid A. Almeida                 |  | Vice President, Chief Financial Officer, Treasurer & Secretary |  | 
|/s/ANTHONY J. FIORELLI, JR.Anthony J. Fiorelli, Jr. |  | Director                                                       |  | 
|/s/ELIOT M. FRIEDEliot M. Fried                     |  | Director                                                       |  | 
|/s/RICHARD F. HAMM, JR.Richard F. Hamm, Jr.         |  | Director                                                       |  | 
|/s/ROBERT G. MCCONNELLRobert G. McConnell           |  | Director                                                       |  | 

31

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CERTIFICATION

I,
Stephen W. Bershad, certify that:





|March 24, 2003                                                   |  | 
|---------------------------------------------------------------- |  | 
|                                                                 |  | 
|/s/ Stephen W. BershadStephen W. Bershad
Chief Executive Officer |  | 

32

---

CERTIFICATION

I,
David A. Almeida, certify that:





|March 24, 2003                                               |  | 
|------------------------------------------------------------ |  | 
|                                                             |  | 
|/s/ David A. AlmeidaDavid A. Almeida
Chief Financial Officer |  | 

33

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ANNUAL REPORT ON FORM 10-K

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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2002

AXSYS TECHNOLOGIES, INC.

---

FORM 10-KITEM 14(a)(1) and (2) and Item 14(d)    AXSYS TECHNOLOGIES, INC.    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

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

|Report of Independent Auditors                                                                                  |  | F-2 
|--------------------------------------------------------------------------------------------------------------- |  | ----
|Consolidated Balance SheetsDecember 31, 2002 and 2001                                                          |  | F-3 
|Consolidated Statements of OperationsFor the years ended December 31, 2002, 2001 and 2000                      |  | F-4 
|Consolidated Statements of Cash FlowsFor the years ended December 31, 2002, 2001 and 2000                      |  | F-5 
|Consolidated Statements of Shareholders' EquityFor the years ended December 31, 2002, 2001 and 2000            |  | F-6 
|Notes to consolidated financial statements                                                                      |  | F-7 
|The following consolidated financial statement schedule of Axsys Technologies, Inc., is included in Item 14(d): |  |     
|Schedule IIValuation and qualifying accounts                                                                   |  | F-23

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-1

---



REPORT OF INDEPENDENT AUDITORS

To
the Shareholders 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, 2002 and 2001, and
the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial
statement schedule listed in the Index at Item 14(d). These financial statements and the schedule 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Axsys Technologies, Inc. and
subsidiaries, at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the information set forth therein.

As
discussed in Note 1 to the Consolidated Financial Statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets".



Hartford,
Connecticut
February 28, 2003

F-2

---



AXSYS TECHNOLOGIES, INC.    Consolidated Balance Sheets  (Dollars in thousands, except per share data)

|                                                                                                           |                                            | December 31, |       
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------ | ------
|
|ASSETS                                                                                                     |                                            |              |       
|Current Assets:                                                                                            |                                            |              |       
|Cash and cash equivalents                                                                                  |                                            | $            | 9,920 
|Accounts receivable, net of allowance for doubtful accounts of $509 in 2002 and $654 in 2001               |                                            |              | 10,068
|Inventories                                                                                                |                                            |              | 22,080
|Income taxes  deferred and current                                                                        |                                            |              | 4,077 
|Other current assets                                                                                       |                                            |              | 1,046 
|                                                                                                           |                                            |              |       
|                                                                                                           | Total Current Assets                       |              |       
|                                                                                                           |                                            |              |       
|Property, plant and equipment, net                                                                         |                                            |              | 11,263
|Excess of cost over net assets acquired, net of negative goodwill in 2001                                  |                                            |              | 3,600 
|                                                                                                           | Other Assets                               |              |       
|                                                                                                           |                                            |              |       
|                                                                                                           | Total Assets                               |              | $     
|                                                                                                           |                                            |              |       
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                       |                                            |              |       
|Current Liabilities                                                                                        |                                            |              |       
|Accounts payable                                                                                           |                                            | $            | 3,108 
|Accrued expenses and other liabilities                                                                     |                                            |              | 9,285 
|Deferred income                                                                                            |                                            |              | 3,115 
|Current portion of long-term capital lease obligations                                                     |                                            |              | 1,055 
|                                                                                                           |                                            |              |       
|                                                                                                           | Total Current Liabilities                  |              |       
|                                                                                                           |                                            |              |       
|Capital leases, less current portion                                                                       |                                            |              | 1,191 
|Other long-term liabilities                                                                                |                                            |              | 5,525 
|Commitments and Contingencies
Shareholders' Equity                                                         |                                            |              |       
|Common Stock, $.01 par value:                                                                              |                                            |              |       
|authorized 30,000,000 shares, issued 4,792,674 at December 31, 2002 and 2001                               |                                            |              | 47    
|Capital in excess of par                                                                                   |                                            |              | 39,587
|Retained earnings                                                                                          |                                            |              | 752   
|Treasury Stock, at cost, 138,988 and 96,876 shares at December 31, 2002 and December 31, 2001 respectively |                                            |              | (1,293
|                                                                                                           |                                            |              |       
|                                                                                                           | Total Shareholders' Equity                 |              |       
|                                                                                                           |                                            |              |       
|                                                                                                           | Total Liabilities and Shareholders' Equity |              | $     
|                                                                                                           |                                            |              |       

See
accompanying notes to consolidated financial statements.

F-3

---



AXSYS TECHNOLOGIES, INC.    Consolidated Statements of Operations  (Dollars in thousands, except per share data)

|                                                                                                     |                                                                                                                                  | Years Ended December 31, |          
|---------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ---------
|
|Sales                                                                                                |                                                                                                                                  | $                        | 79,586   
|Cost of sales                                                                                        |                                                                                                                                  |                          | 60,500   
|                                                                                                     |                                                                                                                                  |                          |          
|Gross margin                                                                                         |                                                                                                                                  |                          | 19,086   
|Selling, general and administrative expenses                                                         |                                                                                                                                  |                          | 16,262   
|Research and development expenses                                                                    |                                                                                                                                  |                          | 1,003    
|Restructuring and special charges                                                                    |                                                                                                                                  |                          | 1,854    
|Amortization of intangible assets                                                                    |                                                                                                                                  |                          |         
|                                                                                                     |                                                                                                                                  |                          |          
|OPERATING LOSS                                                                                       |                                                                                                                                  |                          | (33      
|Interest expense                                                                                     |                                                                                                                                  |                          | (212     
|Interest income                                                                                      |                                                                                                                                  |                          | 190      
|Other income                                                                                         |                                                                                                                                  |                          | 10       
|                                                                                                     |                                                                                                                                  |                          |          
|LOSS FROM CONTINUING OPERATIONS BEFORE TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |                                                                                                                                  |                          | (45      
|(Provision for) benefit from income taxes                                                            |                                                                                                                                  |                          | (2,969   
|                                                                                                     |                                                                                                                                  |                          |          
|LOSS FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE           |                                                                                                                                  |                          | (3,014   
|Discontinued Operations:                                                                             |                                                                                                                                  |                          |          
|                                                                                                     | (Loss) income from discontinued operations, net of tax benefit of $2,787 in 2002, $1,108 in 2001 and provision of $8,041 in 2000 |                          |          
|Cumulative effect of change in accounting principle                                                  |                                                                                                                                  |                          | 535      
|                                                                                                     |                                                                                                                                  |                          |          
|NET (LOSS) INCOME                                                                                    |                                                                                                                                  | $                        | (7,061   
|                                                                                                     |                                                                                                                                  |                          |          
|BASIC AND DILUTED (LOSS) EARNINGS PER SHARE:                                                         |                                                                                                                                  |                          |          
|                                                                                                     | Continuing operations                                                                                                            |                          | $        
|                                                                                                     | Discontinued operations                                                                                                          |                          |          
|                                                                                                     | Cumulative effect of change in accounting principle                                                                              |                          |          
|                                                                                                     |                                                                                                                                  |                          |          
|                                                                                                     | Total                                                                                                                            |                          | $        
|                                                                                                     |                                                                                                                                  |                          |          
|Weighted average basic and diluted common shares outstanding                                         |                                                                                                                                  |                          | 4,691,621

See
accompanying notes to consolidated financial statements.

F-4

---



AXSYS TECHNOLOGIES, INC.    Consolidated Statements of Cash Flows  (Dollars in thousands)

|                                                                                               |                                                     | Years Ended December 31,                            |       
|---------------------------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                          |                                                     |                                                     |       
|Net (loss) income                                                                              |                                                     | $                                                   | (7,061
|Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities: |                                                     |                                                     |       
|                                                                                               | Impairment of assets                                |                                                     |       
|                                                                                               | Cumulative effect of change in accounting principle |                                                     |       
|                                                                                               | Depreciation and amortization                       |                                                     |       
|                                                                                               | Restructuring and special charges                   |                                                     |       
|                                                                                               | Loss on disposal of capital equipment               |                                                     |       
|                                                                                               | Deferred income taxes, net                          |                                                     |       
|Changes in operating assets and liabilities:                                                   |                                                     |                                                     |       
|                                                                                               | Accounts receivable                                 |                                                     |       
|                                                                                               | Inventories                                         |                                                     |       
|                                                                                               | Current income tax receivable                       |                                                     |       
|                                                                                               | Other current assets                                |                                                     |       
|                                                                                               | Accounts payable                                    |                                                     |       
|                                                                                               | Accrued expenses and other liabilities              |                                                     |       
|                                                                                               | Deferred income                                     |                                                     |       
|                                                                                               | Long-term liabilities                               |                                                     |       
|                                                                                               | Other-net                                           |                                                     |       
|                                                                                               |                                                     |                                                     |       
|Net cash provided by (used in) continuing operations                                           |                                                     |                                                     | 1,015 
|Net cash provided by (used in) discontinued operations                                         |                                                     |                                                     | 743   
|                                                                                               |                                                     |                                                     |       
|                                                                                               |                                                     | NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |       
|                                                                                               |                                                     |                                                     |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                          |                                                     |                                                     |       
|                                                                                               | Capital expenditures                                |                                                     |       
|                                                                                               | Net proceeds from sale of discontinued operations   |                                                     |       
|                                                                                               |                                                     |                                                     |       
|                                                                                               |                                                     | NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES |       
|                                                                                               |                                                     |                                                     |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                          |                                                     |                                                     |       
|                                                                                               | Repayment of borrowings                             |                                                     |       
|                                                                                               | Other                                               |                                                     |       
|                                                                                               |                                                     |                                                     |       
|                                                                                               |                                                     | NET CASH USED IN FINANCING ACTIVITIES               |       
|                                                                                               |                                                     |                                                     |       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                           |                                                     |                                                     | 21    
|                                                                                               |                                                     |                                                     |       
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                 |                                                     |                                                     | 9,899 
|                                                                                               |                                                     |                                                     |       
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                                       |                                                     | $                                                   | 9,920 
|                                                                                               |                                                     |                                                     |       

See
accompanying notes to consolidated financial statements.

F-5

---



AXSYS TECHNOLOGIES, INC.    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY  (Dollars in thousands, except per share data)

|                                      |  | Common Stock |   |   |    |  |   | Treasury |  
|------------------------------------- |  | ------------ | - | - | -- |  | - | -------- | -
|
|
|Balance at December 31, 1999          |  | 4,789,434    |   | $ | 47 |  | $ | 39,448   |  
|                                      |  |              |   |   |    |  |   |          |  
|Net income                            |  |             |   |   |   |  |   |         |  
|Treasury stock issued                 |  |             |   |   |   |  |   | 179      |  
|Common stock issued                   |  | 4,000        |   |   |   |  |   | 15       |  
|Contribution to 401(k) plan           |  | (760         | ) |   |   |  |   | 33       |  
|                                      |  |              |   |   |    |  |   |          |  
|Balance at December 31, 2000          |  | 4,792,674    |   |   | 47 |  |   | 39,675   |  
|                                      |  |              |   |   |    |  |   |          |  
|Net loss                              |  |             |   |   |   |  |   |         |  
|Treasury stock issued                 |  |             |   |   |   |  |   | (70      | )
|Treasury stock received               |  |             |   |   |   |  |   |         |  
|Contribution to 401(k) plan           |  |             |   |   |   |  |   | 16       |  
|                                      |  |              |   |   |    |  |   |          |  
|Balance at December 31, 2001          |  | 4,792,674    |   |   | 47 |  |   | 39,621   |  
|                                      |  |              |   |   |    |  |   |          |  
|Net loss                              |  |             |   |   |   |  |   |         |  
|Shares received from sale of business |  |             |   |   |   |  |   |         |  
|Contribution to 401(k) plan           |  |             |   |   |   |  |   | (34      | )
|                                      |  |              |   |   |    |  |   |          |  
|Balance at December 31, 2002          |  | 4,792,674    |   | $ | 47 |  | $ | 39,587   |  
|                                      |  |              |   |   |    |  |   |          |  

See
accompanying notes to consolidated financial statements.

F-6

---



AXSYS TECHNOLOGIES, INC.    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Dollars In Thousands, Except Per Share Data)        December 31, 2002

Note 1Summary of Significant Accounting Policies

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

Axsys
is a global leader in the design, manufacturing and distribution of precision components and systems for high technology markets. In addition, Axsys distributes precision ball
bearings for use in a variety of industrial and commercial applications.

Revenue
is recognized in accordance with SEC Staff Accounting Bulletin No. 101. SAB 101 requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is
reasonably assured. Shipping & handling costs, such as freight to customers, are classified in cost of sales. Revenue under most government long-term fixed-price contracts is
recognized as deliveries are made. Provisions, for estimated losses, on contracts are recorded when losses become evident.

New accounting standards.In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") 148, "Accounting for Stock-Based CompensationTransition and Disclosure". SFAS 148 amends SFAS 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123
to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure requirements are effective for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions for this
Form 10-K. The Company will continue to account for stock-based compensation under the provisions of APB Opinion No. 25 "Accounting for Stock Issued to Employees" using the
"intrinsic value" method. Accordingly, the adoption of SFAS 148 is not anticipated to have a material effect on the Company's financial position, results of operations, or cash flows. (See
Note 12 of Consolidated Financial Statements.) The following table illustrates the effect on net income/(loss) and income/(loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123:

2002

2001

2000Reported net (loss) income

$
(7,061
)
$
(7,152
)
$
9,523Stock option related employee compensation expense


(1,339
)

(1,021
)

(736
)Pro forma net (loss) income


(8,400
)

(8,173
)

8,787Pro forma basic and diluted income(loss) per share

$
(1.79
)
$
(1.74
)
$
1.89Weighted average basic and diluted common shares outstanding


4,691,621


4,688,307


4,656,581


In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146), which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity, including Certain Costs Incurred in a Restructuring" (EITF 94-3). SFAS146 requires companies to

F-7

---

recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. In addition, SFAS No. 146 establishes
that fair value is the basis for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The effect of adoption of
SFAS 146 is dependent on our activities subsequent to adoption.

SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued in August 2001. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company adopted this new standard in the first quarter of 2002. During the third quarter of 2002, the Company recorded impairment charges on the net
assets held for sale related to the sale of the Automation Group. During the first quarter of 2002, the Company recorded an impairment charge on the net assets related to the Teletrac transaction.

Cash and cash equivalents.Cash and cash equivalents include highly liquid investments with an original maturity of three
months or less at the date of purchase.

Accounts receivable.Accounts receivable, which includes only trade accounts receivables, are recorded at fair value. Credit
is extended to customers typically on net 30-day terms with periodic reviews of the aging of accounts receivable to identify potentially uncollectible accounts and establish reserves based
on experience and discussion with customers. The Company does not require collateral.

Research and development.Significant costs are incurred each year in connection with research and development ("R&D")
programs that are expected to contribute to future earnings. Such costs are charged to income as incurred.

Inventory.Inventory values include all costs directly associated with manufacturing products: materials, labor and
manufacturing overhead. These values are stated at the lower of cost or market with cost generally determined using the first-in, first-out method.

Property, plant and equipment.Property, plant and equipment are stated at cost, less accumulated depreciation, which
includes the amortization of assets recorded under capital leases. Depreciation is provided primarily by the straight-line method using estimated lives for buildings and improvements of 20
to 25 years and from 3 to 8 years for machinery and equipment.

Excess of Cost over Net Assets Acquired.In 2001 and 2000, the excess of cost over net assets acquired ("Goodwill") was
amortized over periods ranging from 5 to 35 years using the straight-line method. In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets", was issued and
was adopted by the
Company in the first quarter of 2002. In accordance with the adoption of SFAS No. 142, the Company ceased amortizing goodwill in 2002. For the year ended December 31, 2001, goodwill
amortization of $140 was offset by negative amortization of $143. For the year ended December 31, 2000, goodwill amortization of $141 was offset by negative amortization of $36. If the Company
had applied the provisions of this statement in 2001 and 2000, earnings per share would not have been different from the amounts reported. In accordance with the adoption of SFAS No. 142, the
Company's negative goodwill of $535 as of December 31, 2001 was reversed as a cumulative effect of a change in accounting principle in the first quarter of 2002. The Company has completed its
impairment

F-8

---

testing and the remaining goodwill of $3.6 million is determined not to be impaired as of December 31, 2002. Axsys annually reviews goodwill to assess recoverability from future
operations using undiscounted cash flows. Impairments are recognized in operating results when a permanent diminution in value occurs.

Environmental contingencies.Environmental contingencies are accrued for when responsibility for cleanup is determined and
when costs are probable and reasonably estimatable.

Earnings per share.Basic earnings per share have been computed by dividing net income/(loss) by the weighted average number
of common shares outstanding. When there is a loss from continuing operations, the computation of the dilutive net loss per share is based on the weighted average basic shares outstanding. The
dilutive effect of stock options on the weighted average number of common shares would have been 16,766 in 2002, 36,364 in 2001 and 84,499 in 2000 if the effect were not anti-dilutive.

Other income.Other income includes principal payments of $298 in 2002, $232 in 2001 and $233 in 2000 for a fully reserved
note received from the 1998 sale of Sensor Systems.

Estimates and assumptions.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.

Certain
amounts in previously issued annual financial statements were reclassified to conform to the 2002 presentation.

Note 2Restructuring and Special Charges

Relocation of OEM Product Lines:During the second quarter of 2002, Axsys closed its Santa Barbara, California facility and
relocated various commercial product lines to Rochester Hills, Michigan. The total pre-tax cost of $1,053 associated with the relocation and facility closure included a charge of $436 for
thirty terminated employees and a charge of $123 for the disposal of excess furniture and fixtures. A charge of $136 was incurred as a result of the write-off of certain inventory related
to the termination of certain minor product lines. Other costs of $358 associated with the relocation included costs for the equipment relocation, employee training and recruitment and facility
upgrades in Michigan, which were expensed as incurred.

Sale of Teletrac, Inc.:On April 5, 2002, Axsys sold all of the stock of its Teletrac, Inc. ("Teletrac")
subsidiary to Storage Test Solutions ("STS") of Aurora, Colorado. In connection with the sale of Teletrac, the Company, in the first quarter of 2002, recorded a pretax charge of $1,009 associated with
asset write-downs, severance payments and legal expenses. This pretax charge is recorded in restructuring and other special charges.

Segment Reorganization:In March 2002, Axsys announced a reorganization of the Company's market segments into three
major groups. The strategic realignment resulted in a change in the

F-9

---

composition of Axsys' reportable segments. This plan resulted in a restructuring charge of $286 pre-tax for the termination of three salaried employees in the former Automation Group,
which has been included in the loss from discontinued operations. (See Note 4 of the Consolidated Financial Statements.) In addition, as part of the segment reorganization, the Company incurred
a charge of $286 for the termination of the Company President.

During
2002, Axsys recorded the following amounts as restructuring and special charges in the Consolidated Statement of Operations related to the 2002 Restructuring and Special Charge:

|                            |  | Cost of Sales |     | Selling, General &
Administrative Expense |   | Restructuring
Charge |  | Total
|--------------------------- |  | ------------- | --- | ----------------------------------------- | - | -------------------- |  | -----
|Relocation of product lines |  | $             | 136 |                                           | $ | 358                  |  | $    
|Sale of Teletrac            |  |               |    |                                           |   |                     |  |      
|Segment Reorganization      |  |               |    |                                           |   |                     |  |      
|                            |  |               |     |                                           |   |                      |  |      
|Total                       |  | $             | 136 |                                           | $ | 358                  |  | $    
|                            |  |               |     |                                           |   |                      |  |      
|Anticipated cash costs      |  |               |    |                                           |   | 358                  |  |      
|Anticipated non-cash costs  |  |               | 136 |                                           |   |                     |  |      

Through
December 31, 2002, the Company has spent $1,390 in connection with the 2002 restructuring and special charges. The Company anticipates the cash costs in relation to these
charges will be fully expended by June 30, 2003. Total cost savings associated with the 2002 Restructuring and Special Charges are estimated to be $2.8 million annually.

The
following table shows the balance sheet activity for the restructuring accrual account as of December 31, 2002 in conjunction with the 2002 restructuring activities:

Restructuring
Accrual2002 Charges

$
1,8542002 Activity


(1,734
)Balance at December 31, 2002

$
120


2001 Cost Reduction Plan:During the second quarter of 2001, the Company adopted a major cost reduction program (the "Cost
Reduction Plan"), which resulted in a pretax charge to earnings of approximately $9,208, or $5,801 after-tax. In 2002, an additional charge of $20 was accrued for rent expense at the
Manchester facility. The total cash cost of the plan is expected to be approximately $1,482 of which $1,459 had been spent through December 31, 2002.

The
Company closed a small manufacturing facility in Manchester, Connecticut and consolidated its activities into the Imaging Systems unit in Rochester Hills, Michigan. The Company
closed a small, satellite facility in Newbury Park, California, and consolidated it into the facility in Santa Barbara, California. Pre-tax charges associated with these shutdowns were
$138 for facility exit costs. The Company reduced its workforce at five locations by 59 people or 9% of the total workforce. The

F-10

---

Company has accrued $992 for all severance and outplacement costs. The Company accrued $250 to cover any legal expenses related to the cost reduction program.

The
Company reviewed its inventory and other assets. The Company recorded a charge of $2,943 to cover expected losses on two long-term defense contracts. The earnings charge
also includes an increase in reserves for excess and obsolete inventories of approximately $4,425. The obsolete and excess inventory was disposed of during 2001 and 2002.

Other
costs associated with the Cost Reduction Plan include the write-off of $293 in tooling and $85 in software costs. The Cost Reduction Plan reduced expenses by
approximately $2,000 in the second half of 2001, with cost reductions reaching an annualized rate of approximately $4,300.

Through
December 31, 2002, Axsys recorded the following amounts in the Consolidated Statement of Operations in connection with the 2001 Cost Reduction Plan:

Cost of Sales

Selling, General &
Administrative Expense

Restructuring
Charge

TotalInventory write-downs

$
4,425

$


$


$
4,425Loss contract reserves


2,943








2,943Work force reductions








1,242


1,242Fixed asset write-downs


293


85





378Facilities





20


118


138Other





102





102Total

$
7,661

$
207

$
1,360

$
9,228Anticipated cash





122


1,360


1,482Anticipated non-cash


7,661


85





7,746


The
following table shows the balance sheet activity for the restructuring accrual account, which includes the costs associated with the restructuring charge and the fixed asset write
downs as of December 31, 2002:

Restructuring
Accrual2001 Charges

$
1,7382001 Activity


(1,080
)Balance at December 31, 2001


6582002 Activity


(593
)Balance at December 31, 2002

$
65Cash expenditures

$
1,459


Cash
expenditures include other costs directly related to the Cost Reduction Plan, such as relocation and other integration costs. These costs were not eligible for recognition at the
commitment

F-11

---

date and were expensed as incurred. The Company incurred $102 of these costs through December 31, 2001. There were no charges incurred during 2002 related to the 2001 Cost Reduction Plan. The
Company anticipates the cash costs for the plan will be fully expended by June 2003.

2000 Strategic Realignment:On February 11, 2000, Axsys announced a restructuring plan to improve efficiency and
enhance competitiveness to better serve its markets and customers (the "Strategic Realignment"). This plan resulted in a non-recurring charge of $5,398, pre-tax, a workforce
reduction of 50 employees from various locations, relocation or consolidation of two of its facilities, and the write down of fixed assets and obsolete inventory.

In
2000, Axsys recorded the following amounts in the Consolidated Statement of Operations in connection with the Strategic Realignment:

Cost of Sales

Selling, General &
Administrative Expense

Restructuring
Charge

TotalWork force reductions

$


$


$
915

$
915Lease and other facility costs


260


392


740


1,392Inventory write-downs


2,301








2,301Fixed asset write-downs








158


158Other costs





632





632Total

$
2,561

$
1,024

$
1,813

$
5,398Cash Costs


135


1,024


1,655


2,814Non-Cash Costs


2,426





158


2,584


Below
is a reconciliation of accrued charges to the timing of cash expended:

Restructuring
AccrualQ1 2000 charges

$
1,862Q2 2000 charges


297Total accrued charges


2,159Cash expended in 2000


(1,407
)Balance at December 31, 2000

$
752Cash expended in 2001


(752
)Balance at December 31, 2001

$



Other
costs directly related to the Strategic Realignment, which were not eligible for recognition at the commitment date, such as relocation and other integration costs, were expensed
as incurred. During 2000, Axsys incurred $941 of these other costs.

The
Strategic Realignment was completed during the fourth quarter of 2001. During 2001 and 2000, the Company disposed of obsolete inventory and tooling related to the Strategic
Realignment.

F-12

---

For
the Strategic Realignment, total cash expended was $2,814, of which approximately $1,873 had been accrued for during the first half of 2000 and $941 was expensed as incurred.

Note 3Acquisitions

On September 30, 2000, Teletrac, a subsidiary of Axsys, acquired Westlake Technology Corporation ("Westlake"). Westlake designed and manufactured
electronics used to test magnetic media and recording heads. This acquisition was accounted for under the purchase accounting methodology and, accordingly, the operating results have been included in
the Company's Consolidated Financial Statements since the date of acquisition. The acquisition did not have a material proforma impact on the operations of 2000. The fair value of assets acquired in
the Westlake transaction over the purchase
price resulted in negative goodwill of $713, which was being amortized over five years. The remaining negative goodwill of $535 as of December 31, 2001 was reversed as a cumulative effect of a
change in accounting principle in the first quarter of 2002 as required by SFAS No. 142.

On
October 18, 2000, Axsys merged with Automation Engineering, Inc ("AEI") in exchange for 666,667 shares of Axsys' common stock. AEI designed and manufactured flexible automation
systems. This merger was accounted for under the pooling of interests method of accounting and, accordingly, the results of Axsys' operations include the accounts and operations of AEI from
January 1, 2000. The Company incurred $460 of merger-related costs during 2000.

Note 4Discontinued Operations

During the third quarter of 2002, the Company decided to sell its Automation Group, which consisted of the Fiber Automation division in Pittsburgh, Pennsylvania
and its AEI subsidiary in Wilmington, Massachusetts. On November 5, 2002, the Company sold the net assets of its Fiber Automation Division. On October 28, 2002, the Company sold the
stock of AEI. The Automation Group was included in the Company's Commercial Products Group segment.

In
conjunction with the sale of the Automation Group, the Company recorded, in 2002, a loss from discontinued operations of $1,709, net of taxes. This loss included a charge of $729 for
the impairment of assets and $980 of closing related expenses. The operating loss, net of tax, from discontinued operations for 2002 was $2,692. The Automation Group generated an after-tax
loss of $1,886 during 2001 and $372 in 2000. Revenues from the Automation Group were $1,177 in 2002 compared to $3,079 in 2001 and $1,420 in 2000. For the Automation Group, as of December 31,
2001, the carrying amount of assets, which is included in other current assets, was $2,688 and the carrying amount of liabilities, which is included in accrued expenses and other liabilities, was
$1,048.

On
December 21, 2001, Axsys received a letter from the United States Environmental Protection Agency ("EPA") notifying the Company that it is considered to be a potentially
responsible party for a site located in Prospect, Connecticut, which until 1978 was owned by a former subsidiary. The letter also demanded payment of approximately $25 in past response costs and
unspecified future costs. In November of 2002, the Company filed a response to the EPA challenging its liability for this site. Currently, the Company is awaiting a response from the EPA. In 2002, a
charge to discontinued

F-13

---

operations was recorded for $203, net of taxes, related to attorney fees in connection with researching the Company's connection to the site and response to the EPA.

On
March 17, 2000, Axsys sold the net assets of its Beau Interconnect division ("Beau") for $31,800 in cash and recorded an after-tax gain of approximately $14,080 in
the first quarter of 2000. Beau designed and manufactured interconnect devices, barrier terminal blocks and connectors. Beau has been
accounted for as a discontinued operation and accordingly, the operating results and the gain on sale have been reported separately from continuing operations in 2000. Revenues applicable to this
discontinued operation were $846 during 2000. A portion of the proceeds from the sale was used to pay off a credit facility of $4,200.

During
2000, Axsys' environmental consultants advised that the costs associated with the remediation of two sites, which were previously part of a discontinued operation were estimated
to be higher than originally anticipated. The estimates to remediate these sites ranged from approximately $1,200 to $1,900. Actual costs may be different than these estimates. Based on this
information, Axsys increased its accrual relating to these sites in fiscal 2000 by $1,258 to a total of $1,598, which is included in the 2000 results from discontinued operations.

Note 5Shareholders' Equity

Common Stock

On October 18, 2000, Axsys issued 666,667 shares of common stock in connection with the merger of Automation Engineering, Inc.

Treasury Stock

During 2001, Axsys accepted 3,304 shares of stock in lieu of cash for the exercise of a stock option grant.    During 2002, Axsys took back 51,856
shares of stock in connection with the sale of Automation Engineering, Inc. Axsys uses these shares for general corporate purposes, including the satisfaction of commitments under its employee
benefit plans.

Note 6Long-Term Debt and Capital Leases

2002

2001Capital lease obligations


2,246


2,239Less current portion


1,055


847$
1,191

$
1,392


Axsys
has financed the acquisition of certain machinery and equipment with capital lease obligations. During 2001, the Company established a $3,000 capital lease line of credit. The
capital lease line of credit was utilized to purchase $762 of equipment in 2001 and $905 of equipment in 2002 before it expired in October 2002. The weighted average interest rates on capital
leases were 6.1% and 6.7% at December 31, 2002 and 2001, respectively.

F-14

---

Minimum
annual lease payments, including interest, on capital leases for the years 2003 to 2006 are $1,163, $663, $440 and $156, respectively and $3 thereafter. All capital lease
obligations mature by the end of 2007.

F-15

---

Note 7Balance Sheet Information

The details of certain balance sheet accounts are as follows:

|             |                 | 2002 |        | 2001  
|------------ | --------------- | ---- | ------ | ------
|Inventories: |                 |      |        |       
|             | Raw materials   |      | $      | 3,267 
|             | Work-in-process |      |        | 11,315
|             | Finished goods  |      |        | 7,498 
|             |                 |      |        |       
|             |                 | $    | 22,080 |       
|             |                 |      |        |       

|                               |                                                | 2002 |        | 2001    |  
|------------------------------ | ---------------------------------------------- | ---- | ------ | ------- | -
|Property, plant and equipment: |                                                |      |        |         |  
|                               | Land                                           |      | $      | 291     |  
|                               | Buildings and improvements                     |      |        | 4,338   |  
|                               | Machinery and equipment                        |      |        | 19,611  |  
|                               |                                                |      |        |         |  
|                               |                                                |      | 24,240 |         |  
|                               | Less accumulated depreciation and amortization |      |        | (12,977 | )
|                               |                                                |      |        |         |  
|                               |                                                | $    | 11,263 |         | $
|                               |                                                |      |        |         |  

|                                             |                                         | 2002 |       | 2001 
|-------------------------------------------- | --------------------------------------- | ---- | ----- | -----
|Accrued expenses and other liabilities:      |                                         |      |       |      
|                                             | Compensation and related benefits       |      | $     | 3,153
|                                             | Liabilities for discontinued operations |      |       | 1,674
|                                             | Income taxes payable                    |      |       | 766  
|                                             | Stock redemption                        |      |       | 674  
|                                             | Warranty reserve                        |      |       | 672  
|                                             | Environmental  short-term              |      |       | 500  
|                                             | Loss contracts  short-term             |      |       | 433  
|                                             | Accrued professional fees               |      |       | 426  
|                                             | Restructuring accrual  2002 and 2001   |      |       | 185  
|                                             | Other                                   |      |       | 802  
|                                             |                                         |      |       |      
|Total accrued expenses and other liabilities |                                         | $    | 9,285 |      
|                                             |                                         |      |       |      

|                                  |                                              | 2002 |       | 2001 
|--------------------------------- | -------------------------------------------- | ---- | ----- | -----
|Other long-term liabilities:      |                                              |      |       |      
|                                  | Loss contract reserve  long-term            |      | $     | 2,000
|                                  | Deferred tax liability                       |      |       | 1,310
|                                  | Defined benefit pension and health insurance |      |       | 903  
|                                  | Environmental reserve  long-term            |      |       | 674  
|                                  | Workers' compensation                        |      |       | 422  
|                                  | Other                                        |      |       | 216  
|                                  |                                              |      |       |      
|Total other long-term liabilities |                                              | $    | 5,525 |      
|                                  |                                              |      |       |      

F-16

---

Note 8Income Taxes

The
income tax (benefit) provision from continuing operations consists of:

|                               |                 | 2002 |        | 2001   |   | 2000   |       
|------------------------------ | --------------- | ---- | ------ | ------ | - | ------ | ------
|Current taxes:                 |                 |      |        |        |   |        |       
|                               | U.S. Federal    |      | $      | (1,595 | ) | $      | (2,553
|                               | State and local |      |        | 300    |   |        | 130   
|                               |                 |      |        |        |   |        |       
|                               |                 |      | (1,295 | )      |   | (2,423 | )     
|                               |                 |      |        |        |   |        |       
|Deferred taxes:                |                 |      |        |        |   |        |       
|                               | U.S. Federal    |      |        | 3,910  |   |        | (613  
|                               | State and local |      |        | 354    |   |        | (56   
|                               |                 |      |        |        |   |        |       
|                               |                 |      | 4,264  |        |   | (669   | )     
|                               |                 |      |        |        |   |        |       
|Total tax provision (benefit): |                 | $    | 2,969  |        | $ | (3,092 | )     
|                               |                 |      |        |        |   |        |       

The
difference between the provision for taxes and the amount computed by applying the statutory federal income tax rate to Loss from Continuing Operations Before Taxes and Cumulative
Effect of Change in Accounting Principle are as follows:

|                                             |                                                   | Years Ended December 31, |      
|-------------------------------------------- | ------------------------------------------------- | ------------------------ | -----
|
|Federal statutory rate                       |                                                   |                          | 35   
|Computed expected tax benefit                |                                                   | $                        | (16  
|Increase (decrease) in taxes resulting from: |                                                   |                          |      
|                                             | State and local taxes, net of federal tax benefit |                          |      
|                                             | Tax basis adjustment  sale of subsidiary         |                          |      
|                                             | Adjustment to tax accrual                         |                          |      
|                                             | Net change in valuation allowance                 |                          |      
|                                             | Tax exempt interest                               |                          |      
|                                             | Other                                             |                          |      
|                                             |                                                   |                          |      
|Actual tax provision (benefit):              |                                                   | $                        | 2,969
|                                             |                                                   |                          |      

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.

F-17

---

Significant
components of the Axsys' deferred taxes are as follows:

|                                  |                                       | December 31, |  
|--------------------------------- | ------------------------------------- | ------------ | -
|
|Deferred tax asset:               |                                       |              |  
|                                  | Inventories                           |              | $
|                                  | Net operating loss carry-forward      |              |  
|                                  | Tax credit carry-forward              |              |  
|                                  | Loss contract reserve                 |              |  
|                                  | Exit costs of discontinued operations |              |  
|                                  | Note receivable  Sensor Systems      |              |  
|                                  | Note receivable  STS                 |              |  
|                                  | Allowance for doubtful accounts       |              |  
|                                  | Other, net                            |              |  
|                                  |                                       |              |  
|                                  | Total deferred tax asset              |              |  
|                                  | Valuation allowance                   |              |  
|                                  |                                       |              |  
|                                  | Net deferred tax asset                |              | $
|                                  |                                       |              |  
|Long-term deferred tax liability: |                                       |              |  
|                                  | Property, plant and equipment         |              | $
|                                  |                                       |              |  

Axsys
plans to carry-back part of its net operating loss generated in 2002 to the December 31, 2000 income tax year and has recorded a corresponding
current receivable of $1,605. The Company has a net operating loss carryforward of approximately $3.4 million, which expires in the 2022. Axsys also has credit carryforwards of approximately
$1.0 million, which expire at various times between 2018 and 2021. In accordance with the Statement of Financial Accounting Standards No. 109, the Company recognized a valuation
allowance, during 2002, in the amount of $4,361 to offset a portion of the recorded deferred tax asset. Available and prudent tax planning strategies support the deferred tax asset currently recorded
on the books. A valuation allowance was not established in 2001 as the Company could apply net operating losses to prior years, where sufficient income had been generated, and had available prudent
tax plannng strategies.

Note 9Segment Data

In 2002, Axsys announced a strategic realignment whereby the Company is organized by market segment in three major groups. The strategic realignment has resulted
in a change in the composition of Axsys' reportable segments and, accordingly, all periods reported have been restated. Axsys classifies its businesses under three major groups, the Aerospace and
Defense Group, Commercial Products Group and Distributed Products Group.

The
Aerospace and Defense Group designs, manufactures and sells high-end components such as precision position sensors, high-performance motors, precision metal
optics, precision machined light-weight structures and opto-mechanical and electro-mechanical subassemblies. These products enable Original Equipment Manufacturers ("OEMs") to improve
imaging, positional performance (accuracy, resolution, speed and power), and weight requirements in their systems. Principal markets for these products include OEMs serving the aerospace and
defense markets.

The
Commercial Products Group designs, manufactures and sells airbearing scanners, micro-positioning stages and laser-based distance measuring interferometers and autofocus. These
products are sold to OEMs enabling them to increase the accuracy and throughput of their systems. Principal

F-18

---

markets for these products include OEMs serving the graphic arts, semiconductor capital equipment and medical imaging markets.

The
Distributed Products Group distributes precision ball bearings, acquired from various domestic and international sources, to OEMs and Maintenance Repair Operations ("MRO")
distributors. The ball bearings are used in a variety of industrial automation and commercial markets. Additionally, the Distributed Products Group designs, manufactures and sells mechanical-bearing
subassemblies for a variety of customers.

As
discussed in Note 4, Axsys sold its Fiber Automation Division and Automation Engineering, Inc. subsidiary, which were previously included in the Commercial Products
Group. These businesses have been accounted for as discontinued operations and, accordingly, the related operating results have been reported separately from continuing operations. Segment data below
excludes these discontinued businesses.

The
following tables present financial data for each Axsys segment:

|                                                          |                                              | Years Ended December 31,            |  
|--------------------------------------------------------- | -------------------------------------------- | ----------------------------------- | -
|
|Net sales from continuing operations:                     |                                              |                                     |  
|                                                          | Aerospace and Defense Group                  |                                     | $
|                                                          | Commercial Products Group                    |                                     |  
|                                                          | Distributed Products Group                   |                                     |  
|                                                          |                                              |                                     |  
|                                                          |                                              | Total sales                         |  
|                                                          |                                              |                                     |  
|Income (loss) from continuing operations before taxes:    |                                              |                                     |  
|                                                          | Aerospace and Defense Group                  |                                     | $
|                                                          | Commercial Products Group                    |                                     |  
|                                                          | Distributed Products Group                   |                                     |  
|                                                          | Non-allocated expenses                       |                                     |  
|                                                          |                                              |                                     |  
|                                                          | Loss from continuing operations before taxes |                                     | $
|                                                          |                                              |                                     |  
|Capital expenditures from continuing operations:          |                                              |                                     |  
|                                                          | Aerospace and Defense Group                  |                                     | $
|                                                          | Commercial Products Group                    |                                     |  
|                                                          | Distributed Products Group                   |                                     |  
|                                                          | Corporate                                    |                                     |  
|                                                          |                                              |                                     |  
|                                                          |                                              | Total capital expenditures          |  
|                                                          |                                              |                                     |  
|Depreciation and amortization from continuing operations: |                                              |                                     |  
|                                                          | Aerospace and Defense Group                  |                                     | $
|                                                          | Commercial Products Group                    |                                     |  
|                                                          | Distributed Products Group                   |                                     |  
|                                                          | Corporate                                    |                                     |  
|                                                          |                                              |                                     |  
|                                                          |                                              | Total depreciation                  |  
|                                                          | Amortization of goodwill                     |                                     |  
|                                                          |                                              |                                     |  
|                                                          |                                              | Total depreciation and amortization |  
|                                                          |                                              |                                     |  

|                     |                             | December 31,
|-------------------- | --------------------------- | ------------
|
|Identifiable assets: |                             |             
|                     | Aerospace and Defense Group |             
|                     | Commercial Products Group   |             
|                     | Distributed Products Group  |             
|                     | Non-allocated assets        |             
|                     |                             |             
|                     |                             | Total assets
|                     |                             |             

F-19

---



Included in non-allocated expenses are the following: restructing and special charges, general corporate expense, interest expense, amortization of goodwill and other income
and expense. Identifiable assets by segment consist of those assets that are used in the segments' operations. Non-allocated assets are comprised primarily of cash and cash equivalents,
corporate assets and net deferred tax assets.

The
following table presents sales from continuing operations by geographic region. Substantially all of the Company's assets are located within the United States.

Years Ended December 31,2002

2001

2000United States

$
65,179

$
68,036

$
72,615Europe


10,951


14,178


13,558Other foreign


3,456


3,917


4,248Total sales

$
79,586

$
86,131

$
90,421


Note 10Pension Arrangements

Axsys 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. There is a non-funded plan with an annual payout of approximately $100. The funding policy for the other plan is to contribute amounts sufficient to meet the minimum
funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as may be determined to be appropriate from time to time. The Company intends to
liquidate the funded plan in 2003.

The
following table summarizes the components of net periodic pension cost for the defined benefit plans:

Years Ended December 31,2002

2001

2000Interest cost on projected benefit obligation

$
86

$
82

$
80Expected return on plan assets


(54
)

(43
)

(41
)Recognized net actuarial loss


43


52


49Effect of special events


(48
)




Total pension expense

$
27

$
91

$
88


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

2002

2001

2000Weighted Average discount rate

7.0
%
7.5
%
7.5
%Expected long-term rate of return on assets

6.0
%
6.0
%
6.0
%


F-20

---

The
following table sets forth the change in benefit obligation, change in plan assets and the funded status recognized in the consolidated balance sheets for the Axsys' defined benefit
pension plans:

2002

2001Change in benefit obligation:Benefit obligation at beginning of year

$
1,179

$
1,151Interest cost


86


82Actuarial loss


258


49Benefits/settlements paid


(337
)

(103
)Benefit obligation at end of year

$
1,186

$
1,179Change in plan assets:Fair value of plan assets at beginning of year

$
989

$
713Actual return


80


258Employer contribution


105


121Benefits/settlements paid


(337
)

(103
)Fair value of plan assets at end of year

$
837

$
989Funded status

$
361

$
190Unrecognized net actuarial gain


146


384Accrued benefit cost at December 31

$
507

$
574


Unrecognized
net gains and losses are amortized over the average future service lives of participants. Plan assets for the fully funded plan are invested in a managed portfolio
consisting primarily of equity securities, real estate and bonds.

Axsys
also sponsors a 401(k) plan under which eligible employees may elect to contribute a percentage of their earnings. The Company matched employee contributions to this plan in
amounts ranging from 3% to 5% of the employees' gross earnings over the three years ended December 31, 2002. Company matching contributions from continuing operations were $720 in 2002, $811 in
2001, and $864 in 2000.

Note 11Supplemental Cash Flow Information

Supplemental cash flow information from continuing operations for the years ended December 31, 2002, 2001 and 2000 is summarized as follows:

2002

2001

2000Cash (received)/paid during the year for:Interest income  net

$
(32
)
$
(341
)
$
(386
)Income tax (refunds)/payments  net


(3,095
)

(1,522
)

5,897Non-cash investing activities:Equipment acquired under capital leases

$
905

$
762

$
490Common stock issued for AEI








667Purchase of assets from an acquisition








(685
)Stock proceeds from sale of AAE


356





Treasury stock issued for defined contribution plans


104


71


51


F-21

---

Note 12Stock Options

In 1991, Axsys shareholders approved the Axsys' Long-Term Stock Incentive Plan (the "Plan"). Shareholders approved amendments to and restatement of
the Plan in May 2000 and May 2001, which, among other things, increased the number of shares of common stock authorized for issuance under the Plan by 200,000 each year. As of
December 31, 2002, the total number of shares of common stock authorized for issuance under the Plan was 800,000 shares, of which 217,115 shares of common stock remain available for grant under
the Plan. The Stock Incentive Plan Committee of the Board of Directors (the "Committee") administers the Plan. The Committee selects participants from among those executives and other employees of
Axsys 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"). Generally, each Stock Incentive vests 20 percent per year
for five years, is exercisable upon vesting and expires in ten years.

A
summary of all outstanding stock options is presented in the table below:

Stock
Options

Weighted Average
Exercise PriceOutstanding at December 31, 2000

366,290

$
20.12Granted

233,825


15.47Forfeited

(53,750
)

(16.85
)Exercised

(8,400
)

(4.15
)Outstanding at December 31, 2001

537,965

$
18.84Granted

172,620


6.91Forfeited/Cancelled

(193,850
)

(18.77
)Outstanding at December 31, 2002

516,735

$
14.90Exercisable at December 31, 2002

202,401

$
20.81


The following table summarizes information about stock options outstanding at December 31, 2002:

|                 |  | Options Outstanding |  | Options Exercisable
|---------------- |  | ------------------- |  | -------------------
|
|$0.00 to $10.00  |  | 195,620             |  | 9.1                
|$10.01 to $15.00 |  | 141,285             |  | 5.8                
|$15.01 to $20.00 |  | 57,440              |  | 5.1                
|$20.01 to $25.00 |  | 17,500              |  | 3.3                
|$25.01 to $30.00 |  | 71,350              |  | 4.5                
|$30.01 to $41.00 |  | 33,540              |  | 3.6                
|                 |  |                     |  |                    
|$8.65 to $41.00  |  | 516,735             |  | 6.6                
|                 |  |                     |  |                    

Axsys
has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("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

F-22

---

December 15, 1994 as if Axsys had accounted for such awards under the fair value method. Had compensation costs for the Stock Incentive grants in 2002, 2001 and 2000 been determined using the
fair value method, Axsys would have reported the following results:

2002

2001

2000Pro forma (loss) from continuing operations before cumulative effect of a change in accounting principle

$
(4,353
)
$
(6,287
)
$
(4,668
)Pro forma net (loss)/income


(8,400
)

(8,173
)

8,787Pro forma basic and diluted (loss) per share:Loss from continuing operations before cumulative effect of a change in accounting principle


(0.93
)

(1.34
)

(1.00
)Net (loss) income


(1.79
)

(1.74
)

1.89


The
fair value of each option granted in 2002, 2001 and 2000 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: expected
volatility of 68% in 2002, 71% in 2001 and 70% in 2000; risk-free interest rate of 5.0% in 2002, 5.0% in 2001 and 5.1% in
2000; expected lives of 6 years; and no dividend yield. Using this model, the weighted average fair value of options granted was $4.53 during 2002, $9.95 during 2001, and $15.12 during 2000.
For pro forma purposes, the estimated fair value of the Axsys' Stock Incentive awards to employees is amortized over the options' vesting period, which 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 stock-based awards to Axsys 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.

Note 13Commitments and Contingencies

Future minimum payments under non-cancelable operating leases (exclusive of property expenses and net of sublease rental income), as of
December 31, 2002, are as follows:

2003

$
1,4352004


1,4562005


1,3282006


9732007


9432008 and thereafter


1,990$
8,125


Rent
expense under such leases, net of sublease rental income, amounted to $1,517 in 2002, $1,608 in 2001, and $1,544 in 2000. The Company anticipates receiving an aggregate of $65 in
future sublease rental income. Axsys has two letters of credit totaling $231 opened in 2001 as security deposits on building leases in Wilmington, Massachusetts and Pittsburgh, Pennsylvania. These
letters of credit are renewed annually for the term of the lease.

F-23

---

Axsys
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 business and financial condition. It is possible, however, that the results of operations for a particular fiscal period could be materially affected.

On
May 30, 1997, an action was filed in the Court of Chancery in the State of Delaware against the Company and three of the directors on behalf of a purported class of persons who
purchased the Company's preferred stock. The plaintiff has challenged the decision of the Company to redeem all of its outstanding shares of the preferred stock. The plaintiff claimed that the
defendants (1) breached fiduciary duties in setting the redemption price too low and unfairly seeking to advantage holders of common stock and (2) breached contractual duties as set
forth in the Certificate of Designation governing the preferred stock, as well as an implied covenant of good faith and fair dealing. In March 1998, the Court dismissed the plaintiff's claim of
breach of fiduciary duties but declined to dismiss the plaintiff's claims concerning the purported breach of contract and implied covenant of good faith and fair dealing. In January of 2001, the
plaintiff filed an amended complaint asserting the same causes of action raised in the original complaint. The Company filed an answer, in January of 2001, denying the material substantive allegations
of the amended complaint and asserting, as affirmative defenses, the failure to state a claim and the defense that plaintiff is not an adequate class representative. It is the Company's policy to
accrue litigation costs when those costs are believed to be probable and can be reasonably estimated. The potential outcome is currently deemed to be immaterial to the consolidated financial
statements taken as a whole.

Note 14Selected Quarterly Financial Data

Selected quarterly financial data for the years ended December 31, 2002 and 2001 is summarized as follows:

Quarters Ended (Unaudited) (1)(2)March
2002

June
2002

September
2002

December 2002(In thousands, except per share data)Statement of Operations Data:Net sales

$
19,092

$
20,586

$
19,086

$
20,822Gross margin


4,114


4,963


4,740


5,269Income (loss) from continuing operations before cumulative effect of a change in accounting principle


(1,861
)

(1,234
)

(791
)

872Net (loss) income


(2,225
)

(2,093
)

(3,299
)

556Diluted net income (loss) per share from continuing operations before cumulative effect of a change in accounting principle

$
(0.40
)
$
(0.26
)
$
(0.17
)
$
0.19Diluted net (loss) income per share applicable to common shareholders

$
(0.47
)
$
(0.45
)
$
(0.70
)
$
0.12Diluted weighted average common shares outstanding


4,697


4,699


4,703


4,667


F-24

---

Quarters Ended (Unaudited) (2):March
2001

June
2001

September
2001

December 2001(In thousands, except per share data)Statement of Operations Data:Net sales

$
23,454

$
22,903

$
20,319

$
19,455Gross margin


5,429


(2,165
)

4,943


4,636(Loss) income from continuing operations before cumulative effect of a change in accounting principle


(50
)

(5,756
)

251


289Net (loss) income


(337
)

(6,425
)

(72
)

(318
)Diluted net (loss) income per share from continuing operations before cumulative effect of a change in accounting principle

$
(0.01
)
$
(1.23
)
$
0.05

$
0.06Diluted net (loss) income per share applicable to common shareholders

$
(0.07
)
$
(1.37
)
$
0.02

$
(0.07
)Diluted weighted average common shares outstanding


4,685


4,686


4,688


4,695


---

F-25

---

AXSYS TECHNOLOGIES, INC.  SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS    (Dollars in thousands)

|COL. A                             |  | COL. B |       | COL. C |   | COL. D |  | COL. E |   | COL. F
|---------------------------------- |  | ------ | ----- | ------ | - | ------ |  | ------ | - | ------
|
|
|Year ended December 31, 2002:      |  |        |       |        |   |        |  |        |   |       
|Allowance for Doubtful Accounts    |  | $      | 654   |        | $ | 113    |  | $      |  |       
|Cost Reduction Program Accrual     |  | $      | 658   |        | $ | 20     |  | $      |  |       
|Relocation of Product Line Accrual |  | $      |      |        | $ | 1,053  |  | $      |  |       
|Sale of Teletrac Accrual           |  | $      |      |        | $ | 1,009  |  | $      |  |       
|Segment Reorganization             |  | $      |      |        | $ | 286    |  | $      |  |       
|Environmental Accrual              |  | $      | 1,449 |        | $ |       |  | $      |  |       
|Year ended December 31, 2001:      |  |        |       |        |   |        |  |        |   |       
|Allowance for Doubtful Accounts    |  | $      | 497   |        | $ | 228    |  | $      |  |       
|Cost Reduction Program Accrual     |  | $      |      |        | $ | 1,738  |  | $      |  |       
|Strategic Realignment Accrual      |  | $      | 752   |        | $ |       |  | $      |  |       
|Environmental Accrual              |  | $      | 1,598 |        | $ |       |  | $      |  |       
|Year ended December 31, 2000:      |  |        |       |        |   |        |  |        |   |       
|Allowance for Doubtful Accounts    |  | $      | 503   |        | $ | 256    |  | $      |  |       
|Strategic Realignment Accrual      |  | $      |      |        | $ | 1,862  |  | $      |  |       
|Environmental Accrual              |  | $      | 712   |        | $ | 1,258  |  | $      |  |       

---

F-26

---

EXHIBIT INDEX

|Exhibits Number |  | Description                                                                                                                                                                                                                                                                                        
|--------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(1)            |  | Restated Certificate of Incorporation of the Company (filed as Exhibit 3(4) to the Company's Amendment No. 2 to Registration Statement on Form S-1, dated October 17, 1997 (File No. 333-36027) (the
"Form S-1") and incorporated herein by reference).                                            
|3(2)            |  | By-Laws of the Company (filed as Exhibit 2 to the Form 8-A dated August 8, 1991 and incorporated herein by reference).                                                                                                                                                                             
|10(1)           |  | Severance Agreement between the Company and Kenneth F. Stern dated as of June 10, 1996 (filed as Exhibit 10(16) to the Form S-1 and incorporated herein by reference).                                                                                                                             
|10(2)           |  | 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(3)           |  | Severance Protection Agreement between the Company and Stephen W. Bershad dated as of February 11, 1999 (filed as Exhibit 10(1) to the Company's Form 10-Q, dated May 11, 1999, for the fiscal quarter ended March 31, 1999 (the
"March 31, 1999 Form 10-Q") and incorporated herein by reference).
|10(4)           |  | Severance Protection Agreement between the Company and Kenneth F. Stern dated as of February 11, 1999 (filed as Exhibit 10(4) to the March 31, 1999 Form 10-Q and incorporated herein by reference).                                                                                               
|10(5)           |  | Amendment to Axsys Technologies, Inc. Long-Term Stock Incentive Plan (filed as Exhibit A to the Company's Proxy Statement dated April 24, 2000 and incorporated herein by reference).                                                                                                              
|10(6)           |  | Employment Agreement, dated as of October 18, 2000, between the Company, and Stephen W. Bershad (filed as Exhibit 10(27) to the December 31, 2000 Form 10-K and incorporated herein by reference).                                                                                                 
|10(7)           |  | Form of Indemnification Agreement for all Directors and Officers of the Company (filed as Exhibit 10(30) to the December 31, 2001 Form 10-K and incorporated herein by reference).                                                                                                                 
|10(8)           |  | Letter Agreement between David A. Almeida and the Company dates as of November 14, 2001 (filed as Exhibit 10(31) to the December 31, 2001 Form 10-K and incorporated herein by reference).                                                                                                         
|10(9)           |  | Change in registrant's certifying accountant (filed as Exhibit 16 to the May 23, 2002 Form 8-K and incorporated herein by reference).                                                                                                                                                              
|10(10)          |  | Letter Agreement between Stephen W. Bershad and the Company dated November 12, 2002, extending term of initial period of the Employment Agreement.                                                                                                                                                 
|10(11)          |  | Summary of Management Incentive Plan                                                                                                                                                                                                                                                               
|21              |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                     
|22              |  | Consent of Ernst and Young LLP                                                                                                                                                                                                                                                                     
|99(1)           |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Chief Executive Officer                                                                                                                                                     
|99(2)           |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Chief Financial Officer                                                                                                                                                     

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