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

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K

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

For the Fiscal Year Ended December 31, 1998         Commission File No.: 0-16182

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

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

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

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

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

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

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

                                   ----------

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

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

Aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on March 12, 1999, $45,465,000.

Common Stock outstanding at March 12, 1999: 4,007,135 shares.

                       Documents Incorporated by Reference

       Document                                             Form 10-K Reference
       --------                                             -------------------

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

================================================================================
<PAGE>

PART I
Item 1. BUSINESS

      The Company is a leading designer and manufacturer of high-performance
custom micro-positioning and precision optical components, subsystems and
systems for a variety of end-users in the defense, space, high-end digital
imaging and electronics capital equipment markets. The Company also designs,
manufactures and sells interconnect devices and distributes precision ball
bearings for use in a variety of industrial, commercial and consumer
applications. Axsys is incorporated in Delaware, and the Company's common stock
is traded on the NASDAQ National Market under the symbol "AXYS."

      The Company's products range from components and integrated assemblies to
turnkey systems. The Company utilizes high precision positioning and optical
technologies to develop products that enhance the accuracy, throughput and yield
of the end-user's equipment and processes. The Company sells its products to a
wide variety of original equipment manufacturers ("OEMs") who design
high-precision, performance and throughput equipment and end-users who require
such equipment.

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

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

            The Company has grown significantly in recent years through
acquisitions, increased market share and successful new product introductions.
Axsys has increased its capabilities in systems integration through its
acquisition in April 1996 of Precision Aerotech, Inc. ("PAI") and its
subsidiaries Speedring, Inc., a provider of precision machined specialty metals
such as beryllium, and Speedring Systems, Inc., a manufacturer of
high-performance laser scanners and optics. The Company further expanded its
market presence in precision machining with its acquisition of Lockheed Martin
Beryllium Corporation ("LMBC"), a supplier of precision-machined beryllium
components, in October 1996. In addition, the May 1997 acquisition of Teletrac
Inc. ("Teletrac"), a manufacturer of laser-based precision measurement systems
increased the Company's presence in the electronics capital equipment market.


                                       2
<PAGE>

Market Overview

      The Company's products are sold to a wide variety of customers in five
primary markets:

      Defense. The defense industry has historically been a large consumer of
high-performance components. Although overall defense spending has declined over
the past several years, the defense market for upgrading existing platforms,
including the development of "smart weapons," has grown during this time period.
The U.S. government's spending on upgrades of existing platforms include
state-of-the-art electronics, enhanced night vision systems, radar and guidance
systems, and missile seeker technologies, all of which incorporate
high-performance components provided by suppliers like the Company, including
precision metal optics, high performance motors and sensors, and
precision-machined structures.

      Space. The commercial space market has exhibited significant growth in
recent years as a result of the deployment of communications and navigational
satellites, as well as the increased demand for weather and scientific
monitoring. The growth of the commercial space market has caused increased
demand for light weight and high performance components, such as precision metal
optics, high-performance motors, sensors, actuation devices, inertial
stabilization components and beryllium components, each of which is supplied by
the Company. To some extent, sales into this market are dependent on the timing
of large satellite programs which can result in an uneven flow of orders and
sales.

      High-End Digital Imaging. The high-end digital imaging market consists of
film recording systems, including pre-press and printed circuit board layout
film recorders, as well as laser projection systems. In these products, laser
light is modulated, reflected off a mirror on a rotating opto-mechanical scanner
and swept across a media such as film to create an image. In recent years,
customers have demanded increased resolution and throughput capabilities in
these high-end systems, requiring the use of improved optics, higher speed
motors, airbearings and more sophisticated electronic controls. The Company
supplies a variety of critical components and subsystems to this market,
including high-performance motors, precision optics, high speed airbearing
scanners and imaging engines.

      Electronics Capital Equipment. The electronics capital equipment market
consists of equipment used to produce and test semiconductors, mass data storage
drives and flat panel displays. The electronics capital equipment market has
historically been cyclical in nature. For several years prior to 1998, the
market expanded significantly as a result of growth in the sales of
semiconductors, mass data storage drives and flat panel displays as well as the
rapid technological advances relating to their manufacturing and testing. In
1998, however, this market has experienced a downturn due primarily to the
difficult Asian economic environment. The Company believes that the key factors
for the historical and future growth in demand for high-performance components
and systems in the electronics capital equipment market are: (i) the
miniaturization of products, creating the need for smaller components and
precise tolerances; (ii) faster production cycles to meet product demand; (iii)
the need for higher production yields; and (iv) increased outsourcing of the
design and manufacture of electro-mechanical and electro-optical subsystems and
systems. High-performance components and systems provide electronics capital
equipment manufacturers with more precise testing and process control devices
which are designed to detect minute manufacturing deviations, to reduce
manufacturing costs, and to increase throughput and yield in the manufacturing
process.

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


                                       3
<PAGE>

Business Strategy

      The Company's primary objective is to maintain and enhance its position as
a leading provider of components, subsystems and systems that enhance throughput
and yield to OEMs and end-users requiring high-performance devices in their
equipment and quality assurance processes. The Company's business strategy is to
leverage its component manufacturing expertise, significant resources and
systems integration capabilities to develop higher-level subsystems and systems
by employing its well-established micro-positioning and precision optical
technologies, while maintaining and continuing to grow the bearing and
interconnect businesses of the Industrial Components Group. Key elements of this
business strategy include the following:

      Increase Subsystems and Systems Business. The Company intends to continue
its development of subsystems and systems by integrating its core component
technologies with its systems integration capabilities to provide customers with
high performance systems at competitive prices. For example, the Company
introduced a low cost head-stack assembly tester for disk drive manufacturers
which integrates technologies from its acquisitions of Teletrac and Speedring
Systems. In addition, the Company is currently developing a product which
integrates the scanning technology of Speedring Systems with the linear
positioning capabilities of Teletrac for use in high-end digital imaging
applications.

      Capitalize on Cross-Selling Opportunities. The Company recently
reorganized its sales force within the PSG in order to increase sales through
its existing distribution channels. In order to capitalize on the existing
relationships within its sales organization, the Company has created two
integrated sales and marketing organizations, one of which is focused on the
aerospace and defense markets and the other focused on the high-end commercial
markets. The Company believes that it can generate additional revenue by
cross-selling existing PSG products to existing customers as well as increasing
the level of value added it provides to its customers.

      Increase Investment in Engineering and Research and Development. The
Company believes that it enjoys a competitive advantage based on its significant
investment in optical, magnetic, mechanical, electronic and software engineering
resources and research & development in order to maintain and expand on the
Company's existing technologies and capabilities. In addition, the Company
continues to invest in sophisticated test equipment and state-of-the-art
manufacturing equipment, such as computer numerically controlled ("CNC") mills
and lathes, electrical discharge machines, diamond turning and lapping machines.
In 1998 and 1997, the Company invested approximately $5.6 million (or 4.8% of
sales) and $4.5 million (or 3.8% of sales) on engineering, research and
development, respectively.

      Enhance Market Position Through Acquisitions and Strategic Alliances. The
Company has significantly expanded its market presence and capabilities through
acquisitions, and the Company plans to continue to grow through acquisitions.
For example, the Company acquired PAI for its presence in the high-end digital
imaging market and its optics and airbearing technologies and Teletrac for its
market presence in the electronics capital equipment market and its systems
integration capabilities. In addition, the Company entered into a strategic
alliance with Westlake Technology Corporation ("WTC") in August 1998. This
strategic alliance enables the Company to integrate WTC's advanced electronics
into the test stands manufactured by Teletrac for the electronics capital
equipment market. Although the Company reviews and considers possible
acquisitions on an ongoing basis, no specific acquisitions are being negotiated
or planned as of the date of this filing.

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

Technologies, Products and Capabilities

      Precision Systems Group. The PSG has integrated several key technologies
and acquired or developed systems integration capabilities which has enabled
them to design and manufacture a wide variety of high-performance precision
optical and micro-positioning components, subsystems and systems. These key
technologies include:


                                       4
<PAGE>

      Magnetics. The Company designs, manufactures and sells high-performance
motors and precision resolvers using state-of-the-art magnetic technologies and
materials. Applications for these high-performance components include precision
semiconductor processing and inspection equipment, missile seeker systems,
guidance systems and satellite actuators.

      Precision Machining. The Company's capabilities, which allow for very
precise and exacting measurements, are applied in the precision machining of
various metals for precision optics applications, airbearings, heat sinks,
structural housings and gimbals. The Company's airbearings provide precision
positioning and high speeds, and are used in high speed scanners and weapons
guidance systems. The Company's heat sinks are used to dissipate heat in
high-performance avionics and satellite electronics, and the Company's gimbals
are used in various applications, including positioning optical sensors in
forward looking infrared ("FLIR") night vision systems. The Company also
precision machines optical substrates used by the Company and other
manufacturers in a variety of precision metal optics applications.

      Optics. The Company designs and manufactures a broad range of precision
metal optics components. Precision metal optics are used in applications where
performance requirements cannot be met with glass. The advantages of metal
include lighter weight and ease of mechanical interface with housing and
actuation devices. Precision metal optic components sold by the Company are used
in high speed electro-mechanical scanners, weapons fire control systems, FLIR
night vision weapons systems and high-performance spaceborne instruments used on
weather, mapping and scientific satellites.

      Electronics. The Company 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.
The Company's 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 used principally in the electronics capital
equipment market. Electronic controllers coordinate the positioning and speed of
electro-mechanical systems by interfacing with other motion control components.
Drives provide power to a motor based on input from the controller in order to
achieve a designated position or to achieve a specific speed. 

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

<TABLE>
<CAPTION>
============================================================================================
                                      PSG Technologies
--------------------------------------------------------------------------------------------
      MAGNETICS         PRECISION MACHINING     PRECISION OPTICS          ELECTRONICS
--------------------------------------------------------------------------------------------
<S>                     <C>                    <C>                   <C>    
o AC Motors             o Airbearing           o Scanning Optics     o Laser Interferometers
o Brush and Brushless     Components             - Polygon Mirros    o AC and DC motor
  DC Motors:            o Optical Substrates     - Monogon Mirrors     speed controls
  - Torque              o Structural           o Flat Optics         o Custom DSP Motion
  - Servo                 Housings               - Head Mirrors        Controllers
  - Limited Angle       o Gimbals & Yokes        - Fold Mirrors      o Motor Drives
o Resolvers             o Heat Sinks           o Aspherics
o Synchros                                       - Telescopes
                                                 - Collimators
============================================================================================
</TABLE>


                                       5

<PAGE>

      Systems Integration Capabilities. The Company has introduced products
integrating each of PSG's core technologies and systems integration capabilities
to provide high-performance subsystems and systems to its customers. The
Company's precision subsystems include X-Y positioning stages and rotary
positioning subsystems such as actuators, opto-mechanical laser scanners and
imaging subsystems as well as laser tracking autofocus subsystems, each of which
employs the Company's motion control or optics technologies. The X-Y stage
positioning subsystems are used in high-precision or high-performance
applications, such as semiconductor and flat panel display positioning
subsystems for use in processing or testing. The rotary positioning subsystems
are used in applications such as night vision systems for defense contractors
and cluster tool robotics in electronics capital equipment. The laser scanning
and imaging subsystems are used by pre-press equipment manufacturers and
semiconductor inspection equipment manufacturers. The laser autofocus, which is
used to automatically focus a microscope, is sold to OEMs which manufacture
automated optical inspection machines used in the electronics capital equipment
market.

      The Company is currently developing additional integrated systems, such as
an imaging engine for digital imaging pre-press applications, and expects that
additional integration opportunities will be identified as customers continue to
outsource the development of highly engineered precision electro-mechanical and
electro-optical subsystems and systems.

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

<TABLE>
<CAPTION>
============================================================================================
                              PSG TECHNOLOGIES AND CAPABILITIES
--------------------------------------------------------------------------------------------
 SUBSYSTEMS
     &                                      PRECISION
  SYSTEMS                 OPTICS            MACHINING        MAGNETICS        ELECTRONICS
--------------------------------------------------------------------------------------------
<S>                  <C>                   <C>            <C>               <C>
Laser Scanner        o Scanning Optics     o Airbearing   o Brushless DC    o Speed Control 
                                                            Servo Motor     o Motor Drive   
--------------------------------------------------------------------------------------------
                     o Scanning and Flat   o Airbearing   o Brushless DC    o Speed Control 
Laser Imager           Optics                               Servo Motor     o Motor Drive   
--------------------------------------------------------------------------------------------
                                                          o Brushless DC    o Position 
Laser Autofocus                                             Servo Motor       Controller    
                                                                            o Motor Drive 
--------------------------------------------------------------------------------------------
Rotary Positioning                                        o Brushless DC    o Position
     Actuator                                               Servo Motor       Controller    
                                                          O Resolver        o Motor Drive   
--------------------------------------------------------------------------------------------
                     o Flat Optics         o Airbearing   o Linear Motor    o Laser 
                                                                              Interferometer
    X-Y Stage                                                               o Position 
                                                                              Controller    
                                                                            o Motor Drive   
--------------------------------------------------------------------------------------------
                                           o Airbearing   o Brushless DC    o Laser 
     HGA/HSA                                                Limited Angle     Interferometer
     Testers                                                Motor           o Position     
                                                                              Controller
                                                                            o Motor Drive 
--------------------------------------------------------------------------------------------
Disk Test Spindle                          o Airbearing   o Brushless DC    o Speed Control 
                                                            Servo Motor     o Motor Drive   
============================================================================================
</TABLE>

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


                                       6
<PAGE>

      Terminal Blocks and Connectors. The Company provides a broad array of
terminal blocks and connectors for the industrial automation market. The core
product line is based on "U.S.-Style" terminal blocks, which have been the
mainstay of controls made by OEMs in the United States for several decades. The
Company has also developed a broad line of "Euro-Style" terminal blocks, which
were introduced by European manufacturers who began to enter the U.S. market in
the mid-1980s.

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

      Precision Ball Bearings. The Company distributes a wide range of precision
ball bearings varying in size, precision tolerance, lubrication and price. The
Company also provides certain value-added services, such as bearing
subassemblies, bearing relubrication, white room handling of products and
engineering consultation. The Company has developed distribution arrangements
with several foreign bearing manufacturers which has significantly increased the
Company's market presence and product breadth. 

Competition

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

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

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

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

Customers

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


                                       7
<PAGE>

      There is no customer or group of affiliated customers for which sales
during 1998 were in the aggregate 10% or more of the Company's consolidated net
sales, and, in the Company's opinion, there is no customer, the loss of which
would have a material adverse effect on the Company's operations taken as a
whole.

      In 1998 and 1997, the Company had aggregate sales, both military and
non-military, directly to the U.S. Government, including its agencies and
departments, of approximately $2.4 million and $3.5 million, respectively. These
sales accounted for approximately 2.1% and 3.0% of total net sales in 1998 and
1997, respectively. Approximately 21.5% of net sales in 1998 and 24.7% in 1997
were derived from subcontracts with U.S. Government contractors. The majority of
these contracts may be subject to termination at the convenience of the U.S.
Government, and certain contracts may also be subject to renegotiation.
Currently, the Company is not aware of any proposed termination or renegotiation
of such contracts which would have a material adverse effect on its business.

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

Sales, Marketing and Customer Support

      As of December 31, 1998, the Company employed 62 sales, marketing and
customer support personnel of whom 33 were involved with the PSG's product
offerings and 29 were involved with the ICG's product offerings. Historically,
the Company's sales organization has been organized along product lines with
four product-specific direct sales organizations in the PSG and two direct sales
organizations in the ICG. The Company recently reorganized its sales force
within the PSG in order to increase sales through its existing distribution
channels. In order to capitalize on the existing relationships within its sales
organization, the Company has created two integrated sales and marketing
organizations, one of which is focused on the aerospace and defense markets and
the other focused on the high-end commercial markets. The Company believes that
it can generate additional revenue by cross-selling existing PSG products to
existing customers as well as increasing the level of value added it provides to
its customers. There can be no assurance that these efforts will be successful
and lead to increases in the Company's sales or that the Company will recover
its additional costs in implementing this strategy.

      Also as of December 31, 1998, the PSG's direct sales organization included
9 direct sales field personnel, most of whom have engineering backgrounds, with
the remainder involved in inside sales, customer service, program management,
contract administration and applications engineering. The ICG's direct sales
organization included 11 direct sales field personnel, with the remainder
involved in inside sales, customer service, product management, contract
administration and applications engineering. The Company believes that its sales
effort is enhanced by having engineering-trained sales personnel available to
meet with customers' engineering personnel. In addition, the Company's
application and design engineers are used to enhance the sales process.

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

Domestic and Foreign Sales

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


                                       8
<PAGE>

Engineering, Research and Development

      The Company seeks to develop new component products, subsystems and
systems and improve existing products in order to keep pace with customers'
increasing performance requirements. The Company devotes significant resources,
a portion of which is reimbursed by customers, to development programs directed
at creating new products and product enhancements, as well as developing new
applications for existing products. Because the Company believes that its
ability to compete effectively depends in part on maintaining and enhancing its
expertise in applying new technologies and developing new products, the Company
dedicates substantial resources to engineering, research and development. At
December 31, 1998, the Company employed 88 individuals in its engineering,
research and development functions. There can be no assurance that the Company's
product development efforts will be successful in producing products that
respond to technological changes or new products introduced by others.

      The Company's cost associated with engineering and research and
development were $5.6 million, $4.5 million and $3.4 million in 1998, 1997 and
1996, respectively. During such periods, $3.6 million, $3.2 million and $2.4
million, respectively, were incurred in research and development. Of the
research and development amounts, the Company recovered from customers
approximately 11.0%, 9.5% and 15.3%, respectively. The Company intends to direct
its research and development activities to integrating its various technologies
and continuing to develop subsystems and systems. 

Raw Materials; Suppliers

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

Patents and Trademarks

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

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


                                       9
<PAGE>

Environmental Regulation

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

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

      The Company, pursuant to a remedial plan approved by the Ohio
Environmental Protection Agency ("Ohio EPA") in 1993, is in the process of
investigating soils and groundwater at a site formerly owned by a division of
the Company, and has conducted certain remedial work at this site. Costs to date
have not been material to the Company. In September 1997, however, the Company
determined to pursue a closure plan related to such site that is currently
expected to involve additional costs in the range of approximately $600,000 to
$1.5 million. This plan is subject to the approval of the Ohio EPA. Based on the
advice of its consultants, the Company increased its reserves relating to this
site to approximately $600,000, with a resulting charge to discontinued
operations in 1997 of $400,000, before a tax benefit of $156,000. At December
31, 1998 the remaining balance in this reserve was approximately $500,000. Based
on the advice of its environmental consultants, the Company believes that the
Ohio EPA is likely to allow use of the Company's proposed alternate plan. There
can be no assurance, however, that an alternate remedial plan will be approved
by the Ohio EPA. If such approval is not received, costs to the Company would
increase substantially. In addition, even if approval is received, the costs
actually incurred may exceed the reserves established. The Company anticipates
that actual expenditures will be incurred over a period of several years.

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

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

Employees

      As of December 31, 1998, the Company employed 820 persons in the United
States, including 589 in manufacturing, 62 in sales, 88 in engineering and 81 in
administration. The Company considers its relations with its employees to be
satisfactory. There has been no significant interruption of operations due to
labor disputes.


                                       10
<PAGE>

Item 2. PROPERTIES

      The Company leases its executive office, located at 910 Sylvan Avenue,
Englewood Cliffs, New Jersey. The principal plants and other materially
important properties at December 31, 1998 are:

                          Type of                      Square    Leased;
Location                  Facility                     Footage   Expiration
--------                  --------                     -------   ----------

Cullman, AL               Manufacturing, Engineering   110,000   Owned
Gilford, NH               Manufacturing, Engineering    84,250   Owned
Montville, NJ             Distribution                  76,200   Leased; 1999
San Diego, CA             Manufacturing, Engineering    63,100   Leased; 2000
Rochester Hills, MI       Manufacturing, Engineering    35,000   Leased; 1999
Santa Barbara, CA         Manufacturing, Engineering    13,800   Leased; 1999
Irvine, CA                Distribution                   7,800   Leased; 2000
Dallas, TX                Distribution                   2,950   Leased; 2002

      All of the facilities owned by the Company are subject to mortgages or
security interests which secure the Company's obligations under its revolving
credit facility or industrial development bonds (see Note 6 to the Consolidated
Financial Statements).

      Management believes that the Company's facilities are generally sufficient
to meet its current and reasonably anticipated manufacturing, distribution and
related requirements. The Company, however, periodically reviews its space
requirements to ascertain whether its facilities are sufficient to meet its
needs. The leases on the Company's facilities expire between 1999-2002. The
Company is currently evaluating its options for each of these facilities and
does not expect any disruption to its operations at the expiration of the
current lease.

Item 3. LEGAL PROCEEDINGS

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

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

      None during the quarter ended December 31, 1998.


                                       11
<PAGE>

                                    PART II

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

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

                                            1998                    1997        
                                     -------------------     -------------------
                                       High      Low           High      Low
                                     --------  ---------     --------  ---------
                                     
Fiscal Years Ended December 31:
      First Quarter                  $ 27 1/2   $ 17 3/8     $ 17 1/2   $ 10
      Second Quarter                   27 1/2     17 3/4       25 1/4     12
      Third Quarter                    21 7/8     10 9/16      37         22 1/4
      Fourth Quarter                   15          8 3/4       38         16 7/8
                             

      On March 12, 1999, the high and low sales price was $18 1/8.

      On March 12, 1999, the approximate number of holders of record of the
Common Stock was 563.

Dividend Policy

      The Company has applied and currently intends to continue to apply its
retained and current earnings toward the development of its business and to
finance the growth of the Company. The Company did not pay dividends on its
Common Stock during the three years ended December 31, 1998, and does not
anticipate paying cash dividends in the foreseeable future. The Company's credit
facility prohibits the payment of cash dividends.


                                       12
<PAGE>

Item 6.  SELECTED FINANCIAL DATA

           The following selected financial data for the five fiscal years
presented below is derived from the audited Consolidated Financial Statements of
the Company as adjusted to reflect the discontinuance of the Sensor Systems
business segment in 1998 and the Electronic Components group in 1994. The data
should be read in conjunction with the Consolidated Financial Statements and the
related Notes thereto included elsewhere herein.

<TABLE>
<CAPTION>
                                                               Years Ended December 31,
                                                --------------------------------------------------------
                                                  1998       1997(1)     1996(2)      1995        1994
                                                --------    --------    --------    --------    --------
                                                         (In thousands, except per share data)
<S>                                             <C>         <C>         <C>         <C>         <C>     
Statement of Operations Data:
Net sales ..................................    $116,581    $117,294    $ 82,420    $ 55,871    $ 52,924
Gross profit ...............................      35,343      36,098      24,173      16,668      17,014
Income from continuing operations before
    extraordinary items ....................       8,525       5,562       2,342         701       1,211
Net income .................................       6,099       5,134       2,682         884       3,681
Preferred stock dividends ..................          --         102         847         574         355
Net income applicable to common shareholders       6,099       5,032       1,835         310       3,326
Diluted net income per share from continuing
    operations before extraordinary items ..    $   2.02    $   1.55    $   0.55    $   0.05    $   0.50
Diluted net income per share applicable to
    common shareholders ....................    $   1.45    $   1.43    $   0.68    $   0.12    $   1.95
Weighted average common shares outstanding .       4,212       3,513       2,688       2,511       1,702
</TABLE>

----------

<TABLE>
<CAPTION>
                                                               Years Ended December 31,
                                                --------------------------------------------------------
                                                  1998        1997        1996        1995        1994
                                                --------    --------    --------    --------    --------
<S>                                             <C>         <C>         <C>         <C>         <C>     
Balance Sheet Data:
Working capital ............................     $30,716     $24,947     $21,209     $11,559     $ 8,291
Total assets ...............................      76,211      78,694      61,757      39,630      40,682
Long-term debt and capital lease obligations                                                   
    (less current portion)(3) ..............       5,612       8,629      23,324      11,047      11,921
Shareholders' equity(3) ....................      52,128      47,317      19,165      14,745      13,269
</TABLE>

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

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

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


                                       13
<PAGE>

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

Results of Operations

The following table sets forth certain financial data as a percentage of net
sales for each of the past three years in the period ended December 31, 1998.
The Company acquired the stock of Teletrac on May 30, 1997, the stock of PAI on
April 25, 1996, and substantially all of the assets of LMBC on October 2, 1996.
These acquisitions, which are all part of the PSG, have been accounted for under
the purchase method of accounting. Accordingly, the results of the continuing
operations of Teletrac, PAI and LMBC have been included in the Company's
Consolidated Statement of Operations since their respective dates of acquisition
(see Note 2 to the Consolidated Financial Statements).

On September 16, 1998 the Company sold its Sensor Systems business segment. This
divestiture, which effective January 1, 1998 with the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 131, was treated as a separate
segment and has been accounted for as a discontinued operation. Accordingly, the
results of the operations of this business segment through the date of the sale
and the loss from the disposal are reflected in discontinued operations.

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                                          ---------------------------
                                                            1998      1997      1996
                                                          -------   -------   -------
<S>                                                         <C>       <C>       <C>  
Net sales:
  PSG .................................................      63.0%     61.7%     48.2%
  ICG .................................................      37.0      38.3      51.8
                                                          -------   -------   -------
                                                            100.0     100.0     100.0
Cost of sales .........................................      69.7      69.2      70.7
                                                          -------   -------   -------

Gross profit ..........................................      30.3      30.8      29.3
                                                          -------   -------   -------

Operating expenses:
  Selling, general and administrative expenses ........      17.7      17.6      18.7
  Research and development ............................       3.1       2.7       2.9
  Amortization of intangible assets ...................       0.4       0.3       0.2
                                                          -------   -------   -------
                                                             21.2      20.6      21.8
                                                          -------   -------   -------
Operating income ......................................       9.1      10.2       7.5
  Interest expense ....................................       0.8       2.2       2.8
  Other expense .......................................       0.1        --        --
                                                          -------   -------   -------

Income from continuing operations before
  taxes and extraordinary items .......................       8.2       8.0       4.7
  Provision for taxes .................................       0.9       3.2       1.8
                                                          -------   -------   -------

Income from continuing operations before
  extraordinary items .................................       7.3       4.8       2.9
  (Loss)/income on discontinued  operations, net of tax      (2.1)     (0.3)      0.6
                                                          -------   -------   -------

Income before extraordinary items .....................       5.2       4.5       3.5
  Extraordinary charges, net of tax ...................        --      (0.1)     (0.2)
                                                          -------   -------   -------

Net income ............................................       5.2%      4.4%      3.3%
                                                          =======   =======   =======

Gross profit (as a percentage of related net sales):
   PSG ................................................      30.4%     30.3%     26.9%
   ICG ................................................      30.2      31.5      31.5
</TABLE>


                                       14
<PAGE>

Comparison of Years Ended December 31, 1998 and December 31, 1997

      Net sales. Net sales decreased by 0.6%, or $0.7 million, from $117.3
million in 1997 to $116.6 million in 1998. The PSG's sales increased by 1.5%, or
$1.1 million, from $72.4 million in 1997 to $73.5 million in 1998. The PSG's
sales increased by approximately $4.0 million as a result of having a full year
of operations from Teletrac, which was acquired in May 1997, and as a result of
internal growth in the defense and digital imaging markets. These increases were
offset by a decline in revenues from the electronics capital equipment and space
markets. The decline in the electronics capital equipment market was the result
of the continuing difficulties in the Asian economy and specific weakness in the
data storage and semiconductor segments of that market. The decline in the space
market was primarily due to the winding down of two major satellite programs.
The ICG's sales decreased by 4.0%, or $1.8 million, from $44.9 million in 1997
to $43.1 million in 1998. Sales of electronic interconnect products grew 3.0%,
or $0.5 million over the prior year as a result of the introduction and
continuing acceptance of new product offerings. Sales of precision ball bearings
were down 8.5%, or $2.3 million over the prior year primarily due to the
weakness in the electronics capital equipment market and the manufacturing
segment in general.

      Gross profit. The Company's gross profit decreased by 2.1%, or $0.8
million, from $36.1 million in 1997 to $35.3 million in 1998. Gross profit
margin decreased from 30.8% of net sales in 1997 to 30.3% in 1998. The gross
margin for the PSG increased from 30.3% of net sales in 1997 to 30.4% in 1998
and, for the ICG, decreased from 31.5% of net sales in 1997 to 30.2% in 1998.
Gross profit margins in both the PSG and ICG were impacted by lower sales volume
related inefficiencies, increased spending on engineering and manufacturing
overhead, and higher depreciation expense. In the PSG, these inefficiencies were
offset by a favorable mix of higher margin sales revenue.

      Selling, general and administrative expenses. SG&A expenses of $20.7
million in 1998 were substantially the same as 1997 as the increase in expense
due to the inclusion of Teletrac for the full year was offset by lower incentive
expense in 1998. As a percentage of net sales, SG&A was 17.7% in 1998, compared
with 17.6% in 1997.

      Research and development expenses. R&D expenses increased by 14.7%, or
$0.4 million, from $3.2 million in 1997 to $3.6 million in 1998. The increase in
R&D expenses was primarily due to higher spending on new product development for
the electronics capital equipment market and the inclusion of Teletrac for the
full year.

      Interest expense. Interest expense decreased by 64.6%, or $1.7 million
from $2.6 million in 1997 to $0.9 million in 1998. The decrease in interest
expense was primarily due to lower average borrowings during 1998 resulting from
the Company's use of the net proceeds (approximately $19.5 million) from its
stock offering in late October of 1997 to repay indebtedness under the Company's
senior credit facility.

      Taxes. The Company's effective tax rate, decreased from 40.3% in 1997 to
11.1% in 1998. As discussed in Note 8 to the Consolidated Financial Statements,
beginning in the second quarter of 1998 the Company offset its normal continuing
operations tax provision by the reversal of a portion of its tax valuation
allowance. As of December 31, 1998, the remaining tax valuation allowance is
approximately $0.9 million. The Company will continue to assess the
realizability of its deferred tax assets in future periods.

      Discontinued operations. In September 1998, the Company sold its Sensor
Systems business segment and recorded a loss on the disposal of $2.5 million,
net of a tax benefit of $1.8 million. Results of operations from the
discontinued business have been reported separately from continuing operations
in all periods presented. In the third quarter of 1997, the Company recorded a
discontinued operation charge of $244,000, net of a tax benefit of $156,000, to
increase its environmental reserve for the remediation of a previously
discontinued operation site.

      Preferred Stock dividends. Preferred Stock dividends decreased from $0.1
million in 1997 to none in 1998. The decrease in Preferred Stock dividends was
due to the Company's exchange of Preferred Stock for Common Stock and subsequent
redemption of remaining Preferred Stock during 1997 (see Note 5 to the
Consolidated Financial Statements). As a result of such redemption, there is no
Preferred Stock outstanding and there are no accrued and unpaid dividends.


                                       15
<PAGE>

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

      Net sales. Net sales increased by 42.3%, or $34.9 million, from $82.4
million in 1996 to $117.3 million in 1997. The PSG's sales increased by 82.3%,
or $32.7 million, from $39.7 million in 1996 to $72.4 million in 1997. Of this
$32.7 million increase, approximately $20.3 million was attributable to the
acquisitions of Teletrac, PAI, and LMBC. The remaining $12.4 million increase
was the result of internal growth primarily in the space, electronics capital
equipment and digital imaging markets. The ICG's sales increased by 5.2%, or
$2.2 million, from $42.7 million in 1996 to $44.9 million in 1997. This increase
was primarily due to higher sales of electronic connectors resulting from new
product introductions to the industrial automation market.

      Gross profit. The Company's gross profit increased by 49.3%, or $11.9
million, from $24.2 million in 1996 to $36.1 million in 1997. Gross profit
margin increased from 29.3% of net sales in 1996 to 30.8% in 1997. The gross
margin for the PSG increased from 26.9% of net sales in 1996 to 30.3% in 1997
and, for the ICG, remained constant at 31.5% of net sales. The improvement in
the PSG's gross margin was primarily due to the addition of higher margin
revenue from the acquisitions of Teletrac and PAI, as well as from sales volume
related operating efficiencies.

      Selling, general and administrative expenses. SG&A expenses increased by
34.0%, or $5.2 million, from $15.4 million in 1996 to $20.6 million in 1997. As
a percentage of net sales, however, SG&A decreased from 18.7% in 1996 to 17.6%
in 1997. The increase in SG&A expenses in absolute dollars was primarily due to
the acquisitions of Teletrac, PAI, and LMBC. The decrease as a percentage of net
sales was primarily attributable to the absorption of lower corporate overhead
expense, due to the elimination of certain costs related to the former PAI
corporate office, over a larger sales base. This favorable variance was
partially offset by higher incentive expense related to a three year performance
plan established for the former owners, and now employee managers, of Teletrac.

      Research and development expenses. R&D expenses increased by 34.3%, or
$0.8 million, from $2.4 million in 1996 to $3.2 million in 1997. The increase in
R&D expenses was primarily attributable to the acquisitions of Teletrac and PAI.

      Interest expense. Interest expense increased by 12.4%, or $0.3 million,
from $2.3 million in 1996 to $2.6 million in 1997. The increase in interest
expense was primarily due to higher average borrowings resulting from the
acquisitions of Teletrac during 1997 and, PAI and LMBC during 1996. This
increase was substantially offset by reductions of debt during 1997 from the
Company's stock offering in late October and cash generated from operations.

      Taxes. The Company's effective tax rate increased from 39.8% in 1996 to
40.3% in 1997, primarily due to a higher effective state tax rate.

      Preferred Stock dividends. Preferred Stock dividends decreased by 88.0%,
or $0.7 million, from $0.8 million in 1996 to $0.1 million in 1997. The decrease
in Preferred Stock dividends was due to the Company's exchange of Preferred
Stock for Common Stock and subsequent redemption of remaining Preferred Stock
(see Note 5 to the Consolidated Financial Statements). As a result of such
redemption, there is no Preferred Stock outstanding and there are no accrued and
unpaid dividends.

Backlog

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

      The Company's backlog of orders decreased by 6.3% or $3.3 million, from
$52.3 million at December 31, 1997 to $49.0 million at December 31, 1998. The
decrease in backlog was primarily due to a decline in orders from the
electronics capital equipment and space markets. The decline in the electronics
capital equipment market is due primarily to the continuing difficulties in the
Asian economy and specific weakness in the data storage and semiconductor
segments of that market. The decline in bookings from the space market is
primarily due to the timing of major satellite programs. Although the Company's
backlog of orders to the digital imaging market at December 31, 1998 is higher
than the prior year end, there has been a slowdown in the order rate during the
fourth quarter of 1998 which has continued into the early months of 1999. This
slowdown reflects a general softness in the digital imaging market.


                                       16
<PAGE>

      The Company believes that a substantial portion of the backlog of orders
at December 31, 1998 will be shipped over the next twelve months.

Liquidity and Capital Resources

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

      Net cash provided by operations for the years ended December 31, 1998,
1997 and 1996 was $6.4 million, $8.8 million and $1.8 million, respectively. The
decrease in cash provided by operations in 1998 from 1997 was primarily due to
an increase in working capital primarily as a result of decreases in accounts
payable and accrued expenses and other liabilities. The decrease in accounts
payable was primarily due to the timing of inventory receipts and cash payments.
The decrease in accrued expenses was primarily due to low accruals for incentive
compensation. The improvement in cash provided from operations from 1996 to 1997
was primarily due to increases in net income as adjusted for the realization of
tax loss carryforwards and non-cash amortization and depreciation.

      At December 31, 1998, the Company had approximately $0.3 million of tax
credits available to reduce future taxable income.

      The Company's working capital was $30.7 million and $24.9 million on
December 31, 1998 and 1997, respectively.

      Net cash (used in) provided by investing activities for the years ended
1998, 1997 and 1996 was ($1.1) million, ($10.2) million and $2.1 million,
respectively. During 1998, the Company increased its capital expenditures by
$0.7 million over 1997 primarily as a result of investments in new management
information systems some of which was related to Year 2000 compliance issues
(see Year 2000). In 1998 the Company also made a $1.1 million advance to
Westlake Technology Corporation ("WTC") (see Note 4 to the Consolidated
Financial Statements). Partially offsetting capital expenditures and the advance
to WTC were net proceeds from the sale of the Sensor Systems business segment of
$3.6 million in 1998, which includes a tax benefit of $1.8 million. During 1997,
the Company acquired Teletrac for cash consideration of $7.3 million. The cash
provided by investing activities in 1996 was generated primarily from the sale
of a subsidiary of PAI for cash consideration of $11.3 million. This cash source
was partially offset by the acquisitions of PAI and LMBC for cash consideration
of $4.7 million and $2.9 million, respectively (see Note 2 to the Consolidated
Financial Statements).

      Net cash used in financing activities for the years ended 1998, 1997 and
1996 was $5.8 million, $0.6 million and $1.4 million, respectively. During 1998,
in addition to payments under the Credit Facility, Industrial Revenue Bonds and
Capital Lease Obligations (see Note 6 to the Consolidated Financial Statements),
the Company expended $1.7 million to repurchase 119,500 shares of its Common
Stock in open market transactions (see Note 5 to the Consolidated Financial
Statements).

      The Company had no material commitments for capital expenditures as of
December 31, 1998. Based on an evaluation of available lease terms and other
factors, the Company may continue to finance a portion of its capital
expenditures through capital leases.

      The Company has an $11.0 million senior secured revolving credit facility
which expires on April 25, 2000 (the "Credit Facility"), of which $2.1 million
was outstanding as of December 31, 1998. The Credit Facility contains
restrictive covenants which, among other things, impose limitations with respect
to the incurrence of additional liens and indebtedness, mergers, consolidations
and specified sale of assets and requires the Company to meet certain financial
tests including minimum levels of earnings and net worth and various other
financial ratios. In addition, the Credit Facility prohibits the payment of cash
dividends. The Company believes that the remaining availability under the Credit
Facility and cash generated from operations will be sufficient to finance its
future capital expenditures, working capital requirements, and the purchase of
additional Company Common Stock for at least the next 12 months.


                                       17
<PAGE>

Year 2000

      The Company is continuously monitoring Year 2000 compliance issues
effecting its information technology ("IT") and non-IT systems. No significant
non-IT system Year 2000 compliance issues have been identified.

      As related to IT systems, the Company is in the process of implementing
new management information systems at three of its business units. While the
implementation of these new systems does address Year 2000 concerns, Year 2000
compliance was not the predominant justification supporting such investments.
These new IT systems are expected to enhance future operations through improved
operating management and efficiencies. It is anticipated that the new systems
will be fully operational by the end of the first quarter of 1999. The cost of
these new systems is projected to be approximately $1.3 million of which $1.0
million will be capitalized and depreciated over future periods. Approximately
$1.2 million has been spent through December 31, 1998, including $0.3 million
spent in 1997. Substantial progress has been made on the implementation of these
new management information systems and no unmanageable problems have been
identified. In addition, the projected completion date for these implementations
allows adequate time to identify and correct potential hardware or software
problems that may arise. As such, no further contingency plans have been
formulated.

      The Company is in the process of surveying material third parties such as
customers, vendors, banks and others to determine their Year 2000 readiness.
While it is not possible to fully assess the actual readiness of these third
parties, a majority of their responses indicate that they are or will be Year
2000 compliant. For those vendors who have not responded satisfactorily,
alternative sources will be identified.

Recently Issued Accounting Standards

      SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued in June 1998. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Management does not believe that the
implementation of the statement will have a material impact on the consolidated
financial position or consolidated results of operations of the Company.

      The Company adopted the new disclosure requirements of SFAS No. 132,
"Employers Disclosures about Pensions and Other Postretirement Benefits" (see
Note 10 to the Consolidated Financial Statements).

      The Company adopted the new disclosure requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (see Note
9 to the Consolidated Financial Statements).


                                       18
<PAGE>

Risk Factors

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

Substantial Variability of Quarterly Results of Operations

      Factors such as announcements of technological innovations or new products
by the Company or its competitors, domestic and foreign general economic
conditions and the cyclical nature of the industries served by the Company could
cause substantial variations in the Company's operating results. The defense,
space, high-end digital imaging, electronics capital equipment and industrial
automation markets, each of which represents a significant market for the
Company's products, have historically been subject to substantial economic
fluctuations due to changing demands for their products and services,
introduction of new products and product obsolescence. There can be no assurance
that such fluctuations will not reoccur and have an adverse impact on the
Company's business, financial condition or results of operations. The Company
has experienced and expects to continue to experience significant fluctuations
in its quarterly and annual operating results due to a variety of factors,
including market acceptance of new and enhanced versions of the Company's
products, timing and shipment of significant orders, mix of products sold,
length of sales cycles, plant openings and closings, the timing of acquisitions
or dispositions by the Company, delays in raw materials shipments, completion of
large projects, other manufacturing delays and disruptions, the level of backlog
of orders, domestic and foreign general economic conditions and cyclicality in
the markets the Company serves. To some extent, the Company's net sales and
operating results for a quarter will depend upon the Company generating orders
to be shipped in the same quarter in which the order is received. The failure to
receive anticipated orders or delays in shipments near the end of a particular
quarter, due, for example, to unanticipated rescheduling or cancellations of
shipments by customers or unexpected manufacturing difficulties, may cause net
sales in a particular quarter to fall significantly below the Company's
expectations, which would have a material adverse effect on the Company's
business, financial condition or results of operations for such quarter. See
"Business--Market Overview" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Results of Operations-Comparison
of Years Ended December 31, 1998 and December 31, 1997."

Technological Change and New Product Development

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


                                       19
<PAGE>

and services or their enhancements, if any, developed by the Company, will
achieve market acceptance. See "Business--Business Strategy" and
"Business--Engineering, Research and Development."

Industry Concentration; Cyclicality

      A significant portion of the Company's business and business development
efforts are concentrated in the defense and, to a lesser extent, electronics
capital equipment industries. The Company's business depends, in significant
part, upon the U.S. Government's continued demand in the area of defense for
high-end, high performance components and subsystems of the type manufactured by
the Company. Approximately 23.5% of net sales in 1998 and 27.7% of net sales in
1997 were derived directly from contracts with the U.S. Government, or agencies
or departments thereof, or indirectly from subcontracts with U.S. Government
contractors. The majority of these Government contracts are subject to
termination and renegotiation. As a result, the Company's business, financial
condition or results of operations may be materially affected by changes in U.S.
Government expenditures for defense. Additionally, the Company currently intends
to continue to develop the portion of its business dependent upon manufacturers
in the electronics capital equipment industry which provides equipment used in
the semiconductor, mass data storage and flat panel display industries. Such
business development will depend, in part, upon capital expenditures by
manufacturers of electronics capital equipment, which in turn depend upon the
current and anticipated market demand for semiconductor, mass data storage and
flat panel display devices. The semiconductor, mass data storage and flat panel
display industries have been highly volatile and historically have experienced
periods of oversupply, resulting in significantly reduced demand for capital
equipment. There can be no assurance that this volatility will not have a
material adverse effect on the Company's business in the electronics capital
equipment industry. See "Business--Market Overview;" "Customers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations-Comparison of Years Ended December 31, 1998 and
December 31, 1997."

Competition

      The markets for the Company's products are competitive. The Company
competes primarily on the basis of its ability to design and engineer its
products to meet performance specifications set by its customers, most of whom
are OEMs who purchase component parts or subsystems for inclusion in their
end-products. Product pricing and quality, customer support, experience,
reputation and financial stability are also important competitive factors. There
is a limited number of competitors in each of the markets for the various types
of precision optical and positioning components and subsystems and
electrical/electronic interconnect devices manufactured and sold by the Company.
These competitors, especially those in the precision optical and positioning
product lines, are typically focused on a smaller number of product offerings
than the Company, and are often well entrenched. Some of these competitors have
substantially greater resources than the Company. There can be no assurance that
the Company's competitors will not develop enhancements to or future generations
of competitive products that will offer superior price or performance features,
or that new processes or technologies will not emerge that render the Company's
products less competitive or obsolete. In addition, as a result of the
substantial investment required by a customer to integrate capital equipment
into a production line, or to integrate components and subsystems into a product
design, the Company believes that once a customer has selected certain capital
equipment or certain components or subsystems from a particular vendor, the
customer generally relies upon that vendor to provide equipment for the specific
production line or product application and may seek to rely upon that vendor to
meet other capital equipment or component or subsystem requirements.
Accordingly, the Company may be at a competitive disadvantage with respect to a
prospective customer if that customer utilizes a competitor's manufacturing
equipment or components or subsystems. Further, there are numerous competitors
in markets to which the Company distributes precision ball bearings. These
competitors, who vary in size, include other ball bearings distributors as well
as ball bearing manufacturers. There can be no assurance that the bases of
competition in the industries in which the Company competes will not shift or
that the Company will continue to compete successfully. See
"Business--Competition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Results of Operations-Comparison of Years
Ended December 31, 1998 and December 31, 1997."


                                       20
<PAGE>

Risks of International Sales and Purchases

      The Company's international sales accounted for approximately 14.8%,
11.2%, and 11.5% of the Company's net sales for 1998, 1997 and 1996,
respectively. In addition, certain of the Company's products are sold to
domestic customers who use them in products they sell to international markets.
Also, the Company purchases a substantial portion of its ball bearings products
from a single foreign supplier and certain other products from other foreign
suppliers. The Company's international sales and purchases are subject to a
number of risks generally associated with international operations, including
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.
There can be no assurance that any of these factors will not have a material
adverse effect on the Company's business, financial condition or results of
operations.

Management of Expanded Operations; Acquisitions

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

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

Dependence on Key Suppliers

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

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


                                       21
<PAGE>

Dependence on Key Personnel

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

Intellectual Property Rights

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

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

Environmental Regulation

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


                                       22
<PAGE>

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

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

Continued Investment Required to Maintain Manufacturing Capabilities

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

Control of Company by Existing Shareholder

      The Chairman of the Board and Chief Executive Officer of the Company owns
approximately 31% of the outstanding Common Stock as of December 31, 1998. As a
result, he will have the ability to exert significant influence with respect to
corporate actions, including the election of directors and certain sales or
mergers and acquisitions involving the Company. On November 20, 1998 the
Company's Chairman ("the Chairman") submitted a proposal to acquire the
outstanding shares of Common Stock not already owned by him at a price of $15
per share. The Chairman withdrew this proposal on January 13, 1999 after the
Company received an unsolicited proposal to acquire all of the outstanding
Common Stock at a price of $20 per share.

Possible Volatility of Share Price

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

      After receiving an unsolicited proposal to acquire the Company for $20 per
share in cash in January 1999, the Company's Board of Directors directed its
investment bankers to explore a potential sale of the Company. There can be no
assurance that a sale of the Company will result from this process. The outcome
of the sale process, however, could have a significant impact on the market
price of the Common Stock.


                                       23
<PAGE>

Effect of Certain Anti-Takeover Provisions

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

Absence of Dividends on Common Stock

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

Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company's market risk sensitive instruments do not subject the Company
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. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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


                                       24
<PAGE>

                                    PART III

      The information required by Part III is incorporated by reference to the
Company's definitive proxy statement in connection with its 1999 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days following the end of the Company's fiscal year ended December 31, 1998.
If such proxy statement is not so filed, such information will be filed as an
amendment to this Form 10-K within 120 days following the end of the Company's
fiscal year ended December 31, 1998.

                                     PART IV

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

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

      See accompanying index to consolidated financial statements and schedule.

(a)(3) Exhibits

      See accompanying index to Exhibits.

(b) Reports on Form 8-K

      None


                                       25
<PAGE>

                                   SIGNATURES

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

Dated:  March 25, 1999                  AXSYS TECHNOLOGIES, INC.
                                              (Registrant)


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

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated this 25th day of March, 1999.


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


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


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


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


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


                                       26
<PAGE>

                           ANNUAL REPORT ON FORM 10-K

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

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

                              FINANCIAL STATEMENTS

                          YEAR ENDED DECEMBER 31, 1998

                            AXSYS TECHNOLOGIES, INC.
<PAGE>

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

                            AXSYS TECHNOLOGIES, INC.

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

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

      Consolidated Balance Sheets -- December 31, 1998 and 1997 .............F-4

      Consolidated Statements of Operations -- For the years ended 
       December 31, 1998, 1997 and 1996 .....................................F-6

      Consolidated Statements of Cash Flows -- For the years ended 
       December 31, 1998, 1997 and 1996 .....................................F-7

      Consolidated Statements of Shareholders' Equity -- For the years 
       ended December 31, 1998, 1997 and 1996 ...............................F-8

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

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

      Schedule II -- Valuation and qualifying accounts .....................F-22

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


                                      F-2
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

      We have audited the accompanying consolidated balance sheets of Axsys
Technologies, Inc., a Delaware corporation, and its subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.

      We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Axsys Technologies, Inc. and
subsidiaries, as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

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

                                          ARTHUR ANDERSEN LLP

New York, New York
March 19, 1999


                                      F-3
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                           Consolidated Balance Sheets

                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                   -----------------
                                                                     1998      1997
                                                                   -------   -------
<S>                                                                <C>       <C>    
                                 ASSETS

CURRENT ASSETS:

  Cash .........................................................   $    69   $   573
  Accounts receivable, net of allowance for doubtful accounts of
  $507 in 1998 and $265 in 1997 ................................    16,877    17,603
  Inventories, net .............................................    27,028    26,003
  Other current assets .........................................     2,838       977
                                                                   -------   -------

     TOTAL CURRENT ASSETS ......................................    46,812    45,156

NET PROPERTY, PLANT AND EQUIPMENT ..............................    15,080    13,377

EXCESS OF COST OVER NET ASSETS ACQUIRED, net of accumulated
  amortization of $1,590 in 1998 and $1,162 in 1997 ............    12,216    12,729

NET ASSETS HELD FOR SALE .......................................       750     7,002

OTHER ASSETS ...................................................     1,353       430
                                                                   -------   -------

     TOTAL ASSETS ..............................................   $76,211   $78,694
                                                                   =======   =======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                           Consolidated Balance Sheets

                  (Dollars in thousands, except per share data)

                                                              December 31,
                                                          --------------------
                                                            1998        1997
                                                          --------    --------

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

  Accounts payable ....................................   $  7,867    $  9,437
  Accrued expenses and other liabilities ..............      7,050       9,868
  Current portion of long-term debt and capital
    lease obligations .................................      1,179         904
                                                          --------    --------

    TOTAL CURRENT LIABILITIES .........................     16,096      20,209

LONG-TERM DEBT AND CAPITAL LEASES, less current portion      5,612       8,629

OTHER LONG-TERM LIABILITIES ...........................      2,375       2,539

SHAREHOLDERS' EQUITY:

COMMON STOCK, $ .01 PAR VALUE:
  authorized 30,000,000 shares, issued 4,122,767 at
  December 31, 1998 and 4,113,190 shares at December 31,
  1997 ................................................         41          41

CAPITAL IN EXCESS OF PAR ..............................     40,761      40,409

RETAINED EARNINGS .....................................     12,966       6,867

TREASURY STOCK, at cost, 117,750 shares at
  December 31, 1998 and none at December 31, 1997 .....     (1,640)         --
                                                          --------    --------

    TOTAL SHAREHOLDERS' EQUITY ........................     52,128      47,317
                                                          --------    --------

    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........   $ 76,211    $ 78,694
                                                          ========    ========

          See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                      Consolidated Statements of Operations

                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                                   -----------------------------------------
                                                      1998           1997           1996
                                                   -----------    -----------    -----------
<S>                                                <C>            <C>            <C>        
NET SALES ......................................   $   116,581    $   117,294    $    82,420

Cost of sales ..................................        81,238         81,196         58,247
Selling, general and administrative expenses ...        20,666         20,621         15,390
Research and development expenses ..............         3,641          3,173          2,362
Amortization of intangible assets ..............           428            322            169
                                                   -----------    -----------    -----------

OPERATING INCOME ...............................        10,608         11,982          6,252

Interest expense ...............................           932          2,633          2,343
Other expense ..................................            88             25             18
                                                   -----------    -----------    -----------

INCOME FROM CONTINUING OPERATIONS BEFORE
 TAXES AND EXTRAORDINARY ITEMS .................         9,588          9,324          3,891
Provision for income taxes .....................         1,063          3,762          1,549
                                                   -----------    -----------    -----------

INCOME FROM CONTINUING OPERATIONS BEFORE
 EXTRAORDINARY ITEMS ...........................         8,525          5,562          2,342

Discontinued Operations:
  Income/(loss) from operations, net of tax
  (benefit)/expense of none in 1998, ($22)
  in 1997 and $342 in 1996 .....................            63            (75)           513
  Loss on disposal, net of tax benefit of $1,777
  in 1998 and $156 in 1997 .....................        (2,489)          (244)            --
                                                   -----------    -----------    -----------

INCOME BEFORE EXTRAORDINARY ITEMS ..............         6,099          5,243          2,855
Extraordinary charges, net of taxes of $70
in 1997 and $111 in 1996 .......................            --           (109)          (173)
                                                   -----------    -----------    -----------
NET INCOME .....................................         6,099          5,134          2,682

Preferred stock dividends ......................            --            102            847
                                                   -----------    -----------    -----------

NET INCOME APPLICABLE TO COMMON
 SHAREHOLDERS ..................................   $     6,099    $     5,032    $     1,835
                                                   ===========    ===========    ===========

BASIC EARNINGS/(LOSS) PER SHARE:
  Income from continuing operations ............   $      2.04    $      1.66    $      0.59
  Discontinued operations ......................         (0.58)         (0.10)          0.20
  Extraordinary item ...........................            --          (0.03)         (0.07)
                                                   -----------    -----------    -----------
  Total ........................................   $      1.46    $      1.53    $      0.72
                                                   ===========    ===========    ===========

Weighted average common shares outstanding .....     4,182,676      3,281,092      2,547,329
                                                   ===========    ===========    ===========

DILUTED EARNINGS/(LOSS) PER SHARE:
  Income from continuing operations ............   $      2.02    $      1.55    $      0.55
  Discontinued operations ......................         (0.57)         (0.09)          0.19
  Extraordinary item ...........................            --          (0.03)         (0.06)
                                                   -----------    -----------    -----------
  Total ........................................   $      1.45    $      1.43    $      0.68
                                                   ===========    ===========    ===========

Weighted average common shares outstanding .....     4,211,702      3,513,302      2,688,270
                                                   ===========    ===========    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                      Consolidated Statements of Cash Flows

                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                                  --------------------------------
                                                                    1998        1997        1996
                                                                  --------    --------    --------
<S>                                                               <C>         <C>         <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income ..................................................   $  6,099    $  5,134    $  2,682
  Adjustments to reconcile net income to cash
    provided by operating activities:
      Extraordinary items, net of taxes .......................         --         109         173
      Loss on disposal of discontinued operations, net of taxes      2,489         244          -- 
      Deferred income taxes ...................................     (1,711)         --          --
      Realization of net operating loss carryforward ..........         --       3,093       1,435
      Depreciation and amortization ...........................      3,746       3,148       2,347
      Change in net assets of discontinued operation ..........        189        (472)       (574)
      Decrease (increase) in accounts receivable ..............        726      (3,402)         92
      Increase in inventories .................................     (1,025)     (3,136)       (632)
      Decrease in other current assets ........................        195         133         146
      (Decrease) increase in accounts payable, accrued expenses
        and other liabilities .................................     (4,359)      4,268      (2,088)
      Decrease in other long-term liabilities .................       (164)       (409)       (404)
      Other-net ...............................................        197         137      (1,411)
                                                                  --------    --------    --------

        NET CASH PROVIDED BY OPERATING ACTIVITIES .............      6,382       8,847       1,766
                                                                  --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures ........................................     (3,616)     (2,879)     (1,774)
  Net proceeds from sale of discontinued operations ...........      3,574          --          --
  Proceeds from sale of assets ................................         --          --      11,532
  Advance to third parties ....................................     (1,052)         --          --
  Acquisition of businesses, net of cash acquired .............         --      (7,335)     (7,611)
                                                                  --------    --------    --------

        NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ...     (1,094)    (10,214)      2,147
                                                                  --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from borrowings ....................................         --       7,000      31,300
  Net repayment of borrowings .................................     (4,177)    (25,522)    (32,304)
  Net proceeds from common stock offering .....................         --      19,521          --
  Purchases of Treasury Stock .................................     (1,664)         --          --
  Other .......................................................         49      (1,639)       (420)
                                                                  --------    --------    --------

        NET CASH USED IN FINANCING ACTIVITIES .................     (5,792)       (640)     (1,424)
                                                                  --------    --------    --------

        NET (DECREASE)  INCREASE IN CASH ......................       (504)     (2,007)      2,489

CASH AT BEGINNING OF YEAR .....................................        573       2,580          91
                                                                  --------    --------    --------

CASH AT END OF YEAR ...........................................   $     69    $    573    $  2,580
                                                                  ========    ========    ========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                 Consolidated Statements of Shareholders' Equity

                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                      
                                           Preferred Stock          Common Stock       Capital    Retained        Treasury Stock
                                        ---------------------   --------------------  In Excess   Earnings        --------------
                                          Shares      Amount      Shares     Amount    of Par     (Deficit)     Shares      Amount
                                        ---------   ---------   ---------  ---------  ---------   ---------   ---------   ---------
<S>                                       <C>       <C>         <C>        <C>        <C>         <C>          <C>        <C>      
Balance at December 31, 1995 .........    781,642   $       8   2,520,821  $      25  $  14,712   $      --          --   $      --
                                        ---------   ---------   ---------  ---------  ---------   ---------   ---------   ---------
     Net Income ......................         --          --          --         --         --       2,682          --          --
     Dividends .......................     27,611          --          --         --        847        (847)         --          --
     Contribution to 401(k) plan .....         --          --      47,671          1        311          --          --          --
     Realization of net operating loss
     carryforward ....................         --          --          --         --      1,345          --          --          --
     Odd-lot redemption ..............    (70,372)         (1)         --         --       (420)         --          --          --
     Issuance of warrants to purchase 
     Common Stock ....................         --          --          --         --        500          --          --          --
     Other ...........................         --          --         448         --          2          --          --          --
                                        ---------   ---------   ---------  ---------  ---------   ---------   ---------   ---------
Balance at December 31, 1996 .........    738,881           7   2,568,940         26     17,297       1,835          --          --
                                        ---------   ---------   ---------  ---------  ---------   ---------   ---------   ---------
     Net Income ......................         --          --          --         --         --       5,134          --          --
     Dividends .......................         --          --          --         --        102        (102)         --          --
     Contribution to 401(k) plan .....         --          --      13,981         --        150          --          --          --
     Preferred stock exchange ........   (538,008)         (5)    403,460          4        (66)         --          --          --
     Preferred stock redemption ......   (200,873)         (2)         --         --     (1,651)         --          --          --
     Realization of net operating loss
     carryforward ....................         --          --          --         --      2,867          --          --          --
     Common stock issued for
       acquisition ...................         --          --      53,000         --      2,166          --          --          --
     Common stock offering ...........         --          --   1,064,809         11     26,386          --          --          --
     Purchase of warrants ............         --          --          --         --     (6,876)         --          --          --
     Other ...........................         --          --       9,000         --         34          --          --          --
                                        ---------   ---------   ---------  ---------  ---------   ---------   ---------   ---------
Balance at December 31, 1997 .........         --          --   4,113,190         41     40,409       6,867          --          --
                                        ---------   ---------   ---------  ---------  ---------   ---------   ---------   ---------
     Net Income ......................         --          --          --         --         --       6,099          --          --
     Treasury stock acquired .........         --          --          --         --         --          --    (119,500)     (1,664)
     Contribution to 401(k) plan .....         --          --         577         --          5          --       1,750          24
     Realization of net operating loss
     carryforward ....................         --          --          --         --        313          --          --          --
     Other ...........................         --          --       9,000         --         34          --          --          --
                                        ---------   ---------   ---------  ---------  ---------   ---------   ---------   ---------
Balance at December 31, 1998 .........         --   $      --   4,122,767  $      41  $  40,761   $  12,966    (117,750)  ($  1,640)
                                        =========   =========   =========  =========  =========   =========   =========   =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-8
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

                  (Dollars in thousands, except per share data)

Note 1 - Summary of Significant Accounting Policies

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

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

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

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

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

      Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided primarily by the straight-line method
using estimated lives for buildings and improvements of 20 to 25 years and for
machinery and equipment using estimated useful lives ranging from 3 to 8 years.

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

      Basic earnings per share has been computed by dividing Net Income
Applicable to Common Shareholders by the weighted average number of common
shares outstanding. Diluted earnings per share has been computed by dividing Net
Income Applicable to Common Shareholders by the weighted average number of
common shares outstanding including the dilutive effects of warrants and stock
options of 29,026, 232,210 and 140,941 in 1998, 1997 and 1996, respectively.

      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.

Note 2 - Acquisitions and Divestiture

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

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


                                      F-9
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Acquisitions and Divestiture (cont'd)

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

      Summarized below are the unaudited pro forma results of operations of the
Company as if Teletrac had been acquired on January 1, 1997:

                                                                Pro Forma
                                                         Year Ended December 31,
                                                         -----------------------
                                                                  1997
                                                              ------------

Net sales .................................................   $   121,605
  Income from continuing operations before
  extraordinary items .....................................         5,651
  Net income ..............................................         5,223

Basic earnings per share:
  Income from continuing operations before
  extraordinary items .....................................          1.66
  Net income ..............................................          1.53

Diluted earnings per share:
  Income from continuing operations before
  extraordinary items .....................................          1.55
  Net income ..............................................          1.43

      The pro forma financial information presented is not necessarily
indicative of either the results of operations that would have occurred had the
acquisition of Teletrac taken place at the beginning of fiscal 1997 or the
future operating results of Teletrac.

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


                                      F-10
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 - Discontinued Operations

      On September 16, 1998, the Company sold its Sensor Systems business unit
("Sensor Systems") which manufactured position sensor devices such as
potentiometers, pressure transducers and encoders primarily for defense and
industrial automation applications, for $3,030, of which $1,030 was in the form
of a five year, 10% subordinated note. Sensor Systems' land and building were
not sold as part of this transaction, but are being marketed for sale by the
Company and are recorded as Net Assets Held for Sale on the December 31, 1998
Consolidated Balance Sheet at their estimated net realizable value.

      The disposal of Sensor Systems has been accounted for as a discontinued
operation and, accordingly, the related net assets and operating results have
been reported separately from continuing operations in all years presented. In
addition, the Company has reported separately a $2,489 loss on the sale of
Sensor Systems, which is net of a $1,777 tax benefit. Revenues applicable to the
discontinued operation during 1998, 1997 and 1996 were $4,774, $6,522 and
$8,881, respectively.

      In September 1997, the Company was advised by its environmental
consultants that the costs associated with the remediation of a previously
discontinued operation site were estimated to be higher than originally
anticipated. The estimates to remediate this site ranged from approximately $600
to $1,500. Actual costs may be different than these estimates. Based on this
information, the Company increased its reserve relating to this site in fiscal
1997 to approximately $600 by recording a discontinued operation charge of $400,
before a tax benefit of $156. At December 31, 1998, the balance in this reserve
was approximately $500.

Note 4 - Advance to Third Parties

      On August 12, 1998, the Company entered into an agreement with Westlake
Technology Corporation ("WTC") whereby the Company has the exclusive right to
market and sell WTC's electronic and electromechanical test equipment. In return
for these exclusive rights, the Company has agreed to provide loans of up to a
maximum of $1,400 to WTC. Outstanding loans bear interest at 10.5% and mature on
August 12, 2001. As of December 31, 1998, the outstanding loan balance, which is
recorded under "Other Assets" in the Condensed Consolidated Balance Sheet, was
$1,052.

Note 5 - Shareholders' Equity

Common Stock -

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

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

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


                                      F-11
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Shareholders' Equity (cont'd)

Preferred Stock -

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

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

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

Treasury Stock -

      In August 1998, the Company's Board of Directors authorized the
repurchase, from time to time, on the open market or otherwise, of up to 200,000
shares of the Company's Common Stock at prevailing market prices or at
negotiated prices. The Company plans to use the repurchased shares for general
corporate purposes, including the satisfaction of commitments under its employee
benefit plans. As of December 31, 1998 the Company has repurchased 119,500
shares for an aggregate purchase price of $1,664, of which 1,750 shares were
used to satisfy commitments under its employee benefit plans.

Note 6 - Long-Term Debt

                                                          1998             1997
                                                         ------           ------

Credit Facility ..............................           $2,131           $5,067
Industrial Revenue Bonds .....................            1,370            1,620
Capital Lease Obligations ....................            3,290            2,846
                                                         ------           ------
                                                          6,791            9,533
Less current portion .........................            1,179              904
                                                         ------           ------

                                                         $5,612           $8,629
                                                         ======           ======

      As of December 31, 1998, the Company had an $11,000 Credit Facility which
was comprised of a revolving debt commitment expiring on April 25, 2000.
Borrowings under the Credit Facility through December 31, 1998 bore interest at
a fluctuating rate per annum equal to the rate of interest publicly announced by
Chase Manhattan Bank, N.A. as its prime rate (the prime rate was 7.75% at
December 31, 1998), or the London Interbank Offered Rate ("LIBOR"), plus a
margin ranging from 0.75% to 1.50%. A commitment fee of 0.375% is payable on any
unused amount of the Credit Facility. The Credit Facility contains certain
restrictive covenants which, among other things, impose limitations with respect
to the incurrence of additional liens and indebtedness, mergers, consolidations
and specified sale of assets and requires the Company to meet certain financial
tests including minimum levels of earnings and net worth and various other
financial ratios. In addition, the Credit Facility prohibits the payment of cash
dividends. Borrowings under the Credit Facility are secured by substantially all
of the assets of the Company and its subsidiaries.


                                      F-12
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 - Long Term Debt (cont'd)

      The Company had outstanding at December 31, 1998, industrial revenue bonds
(the "Bonds") in the amount of $1,370 secured by its Gilford, NH manufacturing
facility which has a net carrying amount of approximately $2,000. The Bonds,
which bear interest at a fixed rate of 13%, are payable in 2005. The Bonds are
redeemable in whole or in part on or after December 1, 1998, 1999 and 2000 at a
premium to the principal value of 103%, 102% and 101%, respectively. On and
after December 1, 2001, the bonds are redeemable at principal value. In
addition, the Company may make optional prepayments of $250 annually at
principal value.

      The Company has financed the acquisition of certain machinery and
equipment with capital lease obligations. As of December 31, 1998, outstanding
capital lease obligations bear interest ranging from 6.3% to 13.7%.

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

      Scheduled debt maturities of long-term debt obligations are $1,179 (1999),
$3,110 (2000), $585 (2001), $309 (2002), $238 (2003) and $1,370 (2005).

Note 7 - Balance Sheet Information

      The details of certain balance sheet accounts are as follows:

                                                        1998              1997
                                                       -------           -------
Inventories:
      Raw materials ........................           $ 9,401           $ 8,654
      Work-in-process ......................             8,665             9,628
      Finished goods .......................            12,642            11,127
                                                       -------           -------
                                                        30,708            29,409
      Less reserves ........................             3,680             3,406
                                                       -------           -------
                                                       $27,028           $26,003
                                                       =======           =======

      Work-in-process inventory at December 31, 1998 and 1997 is recorded net of
progress payments received from customers on uncompleted contracts of $484 and
$1,064, respectively.

                                                                1998      1997
                                                              -------    -------
Net property, plant and equipment:
      Land ...............................................    $   291    $   291
      Buildings and improvements .........................      5,793      5,778
      Machinery and equipment ............................     20,527     15,810
                                                              -------    -------
                                                               26,611     21,879
      Less accumulated depreciation and amortization .....     11,531      8,502
                                                              -------    -------
                                                              $15,080    $13,377
                                                              =======    =======

Accrued expenses and other liabilities:
      Compensation and related benefits ..................    $ 3,504    $ 5,472
      Commissions ........................................        524        700
      Other ..............................................      3,022      3,696
                                                              -------    -------
                                                              $ 7,050    $ 9,868
                                                              =======    =======


                                      F-13
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Income Taxes

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

                                                    1998       1997      1996
                                                   -------    -------   -------
Current taxes - charge in lieu of taxes and taxes:
    U.S. Federal ...............................   $ 1,668    $ 3,030   $ 1,293
    State and local ............................       360        732       256
                                                   -------    -------   -------
                                                     2,028      3,762     1,549
                                                   -------    -------   -------

Deferred taxes:
    U.S. Federal ...............................      (821)        --        --
    State and local ............................      (144)        --        --
                                                   -------    -------   -------
                                                      (965)        --        --
                                                   -------    -------   -------
                                                   $ 1,063    $ 3,762   $ 1,549
                                                   =======    =======   =======

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

<TABLE>
<CAPTION>
                                                           1998        1997       1996
                                                         -------     -------    -------
<S>                                                      <C>         <C>        <C>    
Federal statutory rate ...............................        34%         34%        34%
Computed expected tax provision ......................   $ 3,260     $ 3,170    $ 1,323
Increase (decrease) in taxes resulting from:
     State and local taxes, net of federal tax benefit       510         483        169
     Amortization of goodwill ........................       146         109         57
     Reversal of deferred tax valuation allowance ....    (2,853)         --         --
                                                         -------     -------    -------

Actual tax provision .................................   $ 1,063     $ 3,762    $ 1,549
                                                         =======     =======    =======
</TABLE>

      Deferred income taxes reflect the net federal and state tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The
Company has determined, based upon the level of its current taxable income, it
is more likely than not that it will realize the benefit of a portion of its
deferred tax assets which previously had been fully reserved with a valuation
allowance. Consequently, beginning in the second quarter of 1998, the Company
has reversed a portion of its tax valuation allowance equal to the amount it
would have recorded as a tax provision on income from continuing operations
before taxes during the period. As a result, the Company reduced its tax
provision from continuing operations and increased its net deferred tax asset by
$2,853 for the year ended December 31, 1998. Excluding the effect of the tax
valuation allowance reversal, income from continuing operations for 1998 would
have been $5,672 or $1.35 per diluted share. In addition, the Company reversed
$572 of its valuation allowance related to net deferred tax assets of its
discontinued operations with the corresponding tax benefit included in the loss
on disposal of discontinued operations. The Company also reversed $313 of its
valuation allowance and credited Capital in Excess of Par representing the
realization of tax benefits originating prior to the Company's 1991
quasi-reorganization. In 1997 and 1996, $2,867 and $1,345 of the Company's tax
provision, respectively, were credited to Capital in Excess of Par representing
the realization of tax benefits to offset current tax expense in those years.


                                      F-14
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Income Taxes (cont'd)

      Significant components of the Company's deferred tax assets and
liabilities are as follows:

                                                              December 31,
                                                          ---------------------
                                                           1998          1997
                                                          -------       -------

Tax net operating loss/credit carryforwards ........      $   318       $ 1,007
Inventory valuation differences ....................        1,990         2,503
Other, net .........................................          693         1,085
                                                          -------       -------

                                                            3,001         4,595
Valuation allowance ................................         (897)       (4,595)
                                                          -------       -------

Net deferred taxes .................................      $ 2,104       $    -- 
                                                          =======       =======

Note 9 - Segment Data

      Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which requires disclosure of information on
the segments of a business based on the way management organizes the segments of
its business for making operating decisions and assessing performance. The
Company classifies its businesses under two major groups, the Precision Systems
Group ("PSG") and the Industrial Components Group ("ICG"). The PSG designs and
manufactures micro-positioning and precision optical components and systems
primarily for defense, space, electronics capital equipment and digital imaging
applications. The ICG is comprised of the Precision Ball Bearings segment, which
distributes and services precision miniature ball bearings, and the Electronic
Interconnect Products segment, which designs and manufactures interconnect
devices, barrier terminal blocks and connectors. The products of both the ICG
segments are used in a variety of commercial and industrial applications.

As discussed in Note 3, the company sold its Sensor Systems segment during the
third quarter of 1998. The disposal of Sensor Systems, which previously was part
of the PSG, has been accounted for as a discontinued operation and, accordingly,
their related operating results have been reported separately from continuing
operations and the segment data below has been restated to exclude the Sensor
Systems segment.


                                      F-15
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 - Segment Data (cont'd)

The following tables present financial data for each of the Company's segments.

<TABLE>
<CAPTION>
                                                     Years Ended December 31,
                                                     ------------------------
                                                  1998         1997         1996
                                                ---------    ---------    ---------
<S>                                             <C>          <C>          <C>      
Net sales from continuing operations:
  PSG .......................................   $  73,462    $  72,367    $  39,698
                                                ---------    ---------    ---------
  Precision Ball Bearings ...................      25,097       27,426       26,684
  Electronic Interconnect Products ..........      18,022       17,501       16,038
                                                ---------    ---------    ---------
    Total ICG ...............................      43,119       44,927       42,722
                                                ---------    ---------    ---------
      Total Sales ...........................   $ 116,581    $ 117,294    $  82,420
                                                =========    =========    =========
Earnings from continuing operations before
amortization, interest and taxes:
  PSG .......................................   $   8,230    $   8,663    $   3,070
                                                ---------    ---------    ---------
  Precision Ball Bearings ...................       3,233        3,948        4,104
  Electronic Interconnect Products ..........       2,865        3,093        2,906
                                                ---------    ---------    ---------
    Total ICG ...............................       6,098        7,041        7,010
  Non-allocated expenses                           (4,740)      (6,380)      (6,189)
                                                ---------    ---------    ---------
      Income from continuing operations
      before taxes ..........................   $   9,588    $   9,324    $   3,891
                                                =========    =========    =========
Capital Expenditures from continuing
operations:
  PSG .......................................   $   3,878    $   3,274    $   1,755
                                                ---------    ---------    ---------
  Precision Ball Bearings                             459          103           33
  Electronic Interconnect Products                    613        1,189          759
                                                ---------    ---------    ---------
    Total ICG ...............................       1,072        1,292          792
  Corporate .................................          86           39           13
                                                ---------    ---------    ---------
      Total Capital Expenditures ............   $   5,036    $   4,605    $   2,560
                                                =========    =========    =========
Depreciation and Amortization from continuing
operations:
  PSG .......................................   $   2,365    $   2,049    $   1,492
                                                ---------    ---------    ---------
  Precision Ball Bearings ...................         101           54           49
  Electronic Interconnect Products ..........         823          698          602
                                                ---------    ---------    ---------
    Total ICG ...............................         924          752          651
  Corporate .................................          29           25           35
                                                ---------    ---------    ---------
      Total Depreciation ....................   $   3,318    $   2,826    $   2,178
  Amortization of Goodwill                            428          322          169
                                                ---------    ---------    ---------
      Total Depreciation and Amortization ...   $   3,746    $   3,148    $   2,347
                                                =========    =========    =========
</TABLE>


                                      F-16
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 - Segment Data (cont'd)

                                                   December 31,     December 31,
                                                      1998             1997
                                                     -------          -------
Identifiable assets:                                                
  PSG .............................................  $38,585          $37,135
                                                     -------          -------
                                                                    
  Precision Ball Bearings .........................   13,653           12,475
  Electronic Interconnect Products ................    8,351            8,679
                                                     -------          -------
    Total ICG .....................................   22,004           21,154
                                                                    
  Non-allocated assets ............................   14,872           13,403
  Net assets held for sale ........................      750            7,002
                                                     -------          -------
    Total assets ..................................  $76,211          $78,694
                                                     =======          =======
                                                                    

Included in non-allocated expenses are the following: 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 goodwill
and net deferred tax assets.

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

                                                Years Ended December 31,
                                        ----------------------------------------
                                          1998            1997            1996
                                        --------        --------        --------
United States ..................        $ 99,283        $104,099        $ 72,920
Europe .........................           9,709           7,527           6,436
Other foreign ..................           7,589           5,668           3,064
                                        --------        --------        --------
      Total Sales ..............        $116,581        $117,294        $ 82,420
                                        ========        ========        ========

Note 10 - Pension Arrangements

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

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

                                                        Years Ended December 31,
                                                        -----------------------
                                                         1998     1997     1996
                                                         ----     ----     ----

Service cost-benefits earned during the period ......    $ --     $ --     $ --
Interest cost on projected benefit obligation .......      76       76       71
Expected return on plan assets ......................     (38)     (30)     (18)
Recognized net actuarial loss (gain) ................      40       38       (2)
Settlement gain .....................................     (24)      --       --
                                                         ----     ----     ----

Total pension expense ...............................    $ 54     $ 84     $ 51
                                                         ====     ====     ====


                                      F-17
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 - Pension Arrangements, (cont'd)

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

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

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

      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 Company's defined benefit pension plans:

                                                             1998         1997
                                                           -------      -------
Change in benefit obligation:
  Benefit obligation at beginning of year ............     $ 1,090      $ 1,053
    Interest cost ....................................          76           76
    Actuarial loss ...................................          84           43
    Benefits paid ....................................         (87)         (82)
    Settlement .......................................         (82)          --
                                                           -------      -------
  Benefit obligation at end of year ..................     $ 1,081      $ 1,090
                                                           -------      -------

Change in plan assets:
  Fair value of plan assets at beginning of year .....     $   674      $   451
    Actual return ....................................          54           99
    Employer contribution ............................          88          206
    Benefits paid ....................................         (87)         (82)
    Settlement .......................................         (82)          --
                                                           -------      -------
  Fair value of plan assets at end of year ...........     $   647      $   674
                                                           -------      -------

Funded status ........................................         434          416
Unrecognized net actuarial gain ......................         164          215
                                                           -------      -------
Accrued benefit cost at December 31 ..................     $   598      $   631
                                                           -------      -------

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

      The Company also sponsors 401(k) plans under which eligible employees may
elect to contribute a percentage of their earnings. The Company has matched
employee contributions to these plans in amounts ranging from 3% up to 5% of the
employees' gross earnings over the three years ended December 31, 1998. Company
matching contributions were $913 in 1998, $932 in 1997 and $668 in 1996.


                                      F-18
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 - Supplemental Cash Flow Information

      Supplemental cash flow information for the years ended December 31, 1998,
1997 and 1996 is summarized as follows:

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

Cash paid during the year for:
     Interest .......................................   $  872   $2,554   $2,586
     Income tax payments ............................    1,213      315      441

Noncash investing activities:
     Equipment acquired under capital leases ........   $1,420   $1,726   $  786
     Common stock issued for acquisition ............       --    2,166       --
     Treasury stock issued for defined benefit plans        24       --       --

Note 12 - Stock Options and Warrants

Stock Options-

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

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

                                                   Stock        Weighted Average
                                                  Options       Exercise Price
                                                  --------      ----------------

Outstanding at December 31, 1996 ............       38,600      $           3.88
                                                  --------      ----------------
                                                                           
    Granted .................................      169,000                 25.59
    Forfeited ...............................       (3,500)                13.71
    Exercised ...............................       (9,000)                 3.75
                                                  --------      ----------------
                                                                           
Outstanding at December 31, 1997 ............      195,100                 22.52
                                                  --------      ----------------
                                                                           
    Granted .................................       80,700                 25.50
    Forfeited ...............................      (18,400)                25.44
    Exercised ...............................       (9,000)                 3.75
                                                  --------      ----------------
                                                                           
Outstanding at December 31, 1998 ............      248,400      $          23.95
                                                  ========      ================
                                                                           
Exercisable at December 31, 1998 ............       51,180      $          17.18
                                                  ========      ================
                                                                           


                                      F-19
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 - Stock Options and Warrants (cont'd)

The following table summarizes information about stock options outstanding at
December 31, 1998:

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

$ 3.75 to $ 4.15    18,600        2 Years         $ 4.02     16,080      $ 4.00
$15.00 to $18.75    23,600        8 Years          16.11     11,400       15.49
$25.69 to $28.26   206,200        9 Years          26.64     23,700       26.94
--------------------------------------------------------------------------------

$ 3.75 to $28.26   248,400        8 Years         $23.95     51,180      $17.18
--------------------------------------------------------------------------------

      The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for grants under the Plan. Pro forma information regarding net
income and net income per share is required by SFAS No. 123 for awards granted
in fiscal years beginning after December 15, 1994 as if the Company had
accounted for such awards under the fair value method. Had compensation cost for
the Company's Stock-Incentive grants in 1998 and 1997 been determined using the
fair value method, the Company would have reported the following results:

                                                             1998        1997
                                                           ---------   ---------

Pro forma income from continuing operations before
extraordinary items ....................................   $   7,906   $   5,399
Pro forma net income ...................................       5,480       4,971

Pro forma basic earnings per share:
  Income from continuing operations before
  extraordinary items ..................................        1.89        1.61
  Net Income ...........................................        1.31        1.48

Pro forma diluted earnings per share:
  Income from continuing operations before
  extraordinary items ..................................        1.88        1.51
  Net Income ...........................................        1.30        1.39

      There were no Stock Incentives granted to employees in 1996 and,
accordingly, no pro forma disclosure is provided. The fair value of each option
granted in 1998 and 1997 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: expected
volatility of 50%; risk-free interest rate of 5.0% in 1998 and 5.8% in 1997;
expected lives of 6 years; and, no dividend yield. Using this model, the
weighted average fair value of options granted during 1998 and 1997 was $13.56
and $13.11, respectively. For pro forma purposes, the estimated fair value of
the Company's Stock Incentive awards to employees is amortized over the options'
vesting period which, for the 1998 and 1997 awards, is generally five years.
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In
addition, the Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its Stock Incentive awards to employees.


                                      F-20
<PAGE>

                            AXSYS TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 - Commitments and Contingencies

      Future minimum payments under noncancellable operating leases (exclusive
of property expenses and net of sublease rental income), as of December 31,
1998, are as follows:

                 1999 ................................  $1,538
                 2000 ................................     310
                 2001 ................................     170
                 2002 ................................     159
                 2003 ................................      62
                 2004 and thereafter..................     184
                                                        ------
                                                        $2,423
                                                        ======
                                    

      Rent expense under such leases, net of sublease rental income, amounted to
$1,756, $1,672 and, $1,536 in 1998, 1997 and 1996, respectively.

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

Note 14 - Potential Sale of the Company

      On November 20, 1998, the Company's Chairman and CEO ("the Chairman") and
the owner of approximately 31% of the Company's common stock, submitted an offer
to purchase all of the common stock not owned by him for $15.00 per share in
cash (the "Chairman's Proposal"). Shortly thereafter, the Company's Board of
Directors formed a Special Committee to evaluate the Chairman's Proposal. On
January 11, 1999, the Company received an unsolicited offer to purchase the
Company for $20.00 per share in cash. In response to this unsolicited offer, the
Chairman withdrew his proposal, and on January 13, 1999, the Company's Board of
Directors dissolved the Special Committee. On January 14, 1999, the Company
engaged investment bankers to explore various strategic alternatives, including
the potential sale of the Company. On January 29, 1999, the Company publicly
announced that the Board of Directors had instructed its investment bankers to
explore the potential sale of the Company.


                                      F-21
<PAGE>

                            AXSYS TECHNOLOGIES, INC.

                  SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

                             (Dollars in thousands)

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

Year ended December 31, 1998:      $265        $309          $ --        $ 67(b)       $507
Year ended December 31, 1997:      $305        $166          $  4(a)     $210(b)       $265
Year ended December 31, 1996:      $196        $ 50          $100(a)     $ 41(b)       $305
</TABLE>

----------

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


                                      F-22
<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number                                 Description
------                                 -----------

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

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

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

3(4)          Restated Certificate of Incorporation of the Company (filed as
              Exhibit 3(4) to the Company's 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(5)          By-Laws of the Company (filed as Exhibit 2 to the Form 8-A and
              incorporated herein by reference).

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

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

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


                                      E-1
<PAGE>

Exhibit
Number                                 Description
------                                 -----------

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

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

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

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

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

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

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

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

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

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


                                      E-2
<PAGE>

Exhibit
Number                                 Description
------                                 -----------

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

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

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

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

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

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

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

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

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

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

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

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


                                      E-3
<PAGE>

Exhibit
Number                                 Description
------                                 -----------

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

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

10(27)        Sixth Amendment to Credit Agreement (filed as Exhibit 10(27) to
              the Company's Form 10-K for the year ended December 31,1997 and
              incorporated herein by reference).

10(28)        Expense Reimbursement Agreement dated as of November 24, 1998,
              between Stephen W. Bershad and the Company (filed as Exhibit 4 to
              Amendment No. 3 to Schedule 13D of Stephen W. Bershad and SWB
              Holding Corporation with respect to the Common Stock of the
              Company on November 25, 1998 and incorporated herein by
              reference).

21            Subsidiaries of the Registrant (filed as Exhibit 21(1) to the Form
              S-1 and incorporated herein by reference).

23            Consent of Arthur Andersen LLP.

27(1)         Financial Data Schedule.

27(2)         Restated Financial Data Schedule.


                                      E-4