2004 LTIP Plan Rules : FLIR

APPROVAL OF AMENDMENT OF 2002 STOCK INCENTIVE PLAN

The Board of Directors has approved, and recommends shareholder adoption of, an amendment to the 2002 Stock Incentive Plan (the "2002 Plan") that would increase from 3,000,000 shares to 6,000,000 shares the number of shares of Common Stock that are reserved for issuance upon the exercise of stock options granted under the 2002 Plan. As of the date of this Proxy Statement, stock options representing 2,617,510 shares out of the 3,000,000 shares of Common Stock currently reserved for issuance under the 2002 Plan have been granted. The Board of Directors has also approved amendments to the 2002 Plan that (1) clarify that nonqualified stock options shall be granted at a per share exercise price no less than one hundred percent (100%) of the fair market value per share on the date of the grant, and (2) prohibit changes in the exercise price of any outstanding stock options in the event that the exercise price is above the current fair market value of the Company's Common Stock. The purpose of the 2002 Plan is to promote the interests of the Company and its shareholders by strengthening the Company's ability to attract and retain the best personnel for positions of substantial responsibility, to provide additional incentives to the employees of the Company and to promote business. The following is a summary of the Plan and should be read together with the full text of the Plan.

The 2002 Plan, which was approved by the Company's shareholders on April 24, 2002 provides for grants of both "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, (the "Code") and "non-qualified stock options," which are not qualified for treatment under Section 422 of the Code, and for direct stock grants and sales to employees or consultants (including Directors) of the Company. The 2002 Plan is administered by the Compensation Committee of the Board of Directors. As of March 3, 2004, approximately 1,100 persons were eligible to participate in the 2002 Plan. Because the officers and employees of the Company who may participate in the 2002 Plan and the amount of their options will be determined by the Compensation Committee at its discretion, it is not possible to state the names or positions of, or the number of options that may be granted to, the Company's officers and employees.

The term of each option granted under the Plan will be ten years from the date of grant, or such shorter period as may be established at the time of the grant. An option granted under the 2002 Plan may be exercised at such times and under such conditions as determined by the Compensation Committee. If a person who has been granted an option ceases to be an employee or consultant of the Company, such person may exercise that option only during the three month period after the date of termination, and only to the extent that the option was exercisable on the date of termination. No option granted under the 2002 Plan is transferable other than at death, and each option is exercisable during the life of the optionee only by the optionee. In the event of the death of a person who has received an option, the option generally may be exercised by a person who acquired the option by bequest or inheritance during the twelve month period after the date of death to the extent that such option was exercisable at the date of death.

The exercise price of options granted under the 2002 Plan may not be less than the fair market value of a share of Common Stock on the date of grant of the option. The consideration to be paid upon exercise of an option, including the method of payment, will be determined by the Compensation Committee and may consist entirely of cash, check, promissory note, shares of Common Stock or any combination of such methods of payment as permitted by the Compensation Committee.

Certain options authorized to be granted under the 2002 Plan are intended to qualify as incentive stock options for federal income tax purposes. Under federal income tax law currently in effect, the optionee will recognize no income upon grant or upon a proper exercise of an incentive stock option. If an employee exercises an incentive stock option and does not dispose of any of the option shares within two years following the date of grant and within one year following the date of exercise, then any gain realized upon subsequent disposition of the shares will be treated as income from the sale or exchange of a capital asset. If an employee disposes of shares acquired upon exercise of an incentive stock option before the expiration of either the one-year holding period or the two-year waiting period, any amount realized will be taxable as ordinary compensation income in the year of such disqualifying disposition to the extent that the lesser of the fair market value of the shares on the

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exercise date or the fair market value of the shares on the date of disposition exceeds the exercise price. The Company will not be allowed any deduction for federal income tax purposes at either the time of the grant or

Certain options authorized to be granted under the 2002 Plan will be treated as non-qualified stock options for federal income tax purposes. Under federal income tax law presently in effect, no income is realized by the grantee of a non-qualified stock option pursuant to the 2002 Plan until the option is exercised. At the time of exercise of a non-qualified stock option, the optionee will realize ordinary compensation income, and the Company will be entitled to a deduction, in the amount by which the market value of the shares subject to the option at the time of exercise exceeds the exercise price. Upon the sale of shares acquired upon exercise of a non-qualified stock option, the excess of the amount realized from the sale over the market value of the shares on the date of exercise will be taxable.

An employee who receives stock in connection with the performance of services will generally realize taxable income at the time of receipt unless the shares are substantially nonvested for purposes of Section 83 of the Code, and no Section 83(b) election is made. If the shares are not vested at the time of receipt, the employee will realize taxable income in each year in which a portion of the shares substantially vest, unless the employee elects under Section 83(b) within 30 days after the original transfer. The Company will be entitled to a tax deduction in the amount includable as income by the employee at the same time or times as the employee recognizes income with respect to the shares.

The 2002 Plan will continue in effect until April 24, 2012, unless earlier terminated by the Board of Directors, but such termination will not affect the terms of any options outstanding at that time. The Board of Directors may amend, terminate or suspend the 2002 Plan at any time, provided that no amendment regarding amount, price or timing of the grants may be made more than once every six months other than to comport with changes in certain Securities Exchange Act and Internal Revenue Code requirements. Amendments that would materially increase the number of shares that may be issued, materially modify the requirements as to eligibility for Plan participation, or materially increase the benefits to Plan participants must be approved by shareholders.

Recommendation of Board of Directors

The Board of Directors unanimously recommends a vote FOR this proposal. If a quorum is present, this proposal will be approved if a majority of the votes cast on the proposal are voted in favor of approval. Abstentions and broker non-votes are counted for purposes of determining whether a quorum exists at the Annual Meeting but will not be counted and will have no effect in determining whether the proposal is approved. The proxies will be voted for or against the proposal, or as an abstention, in accordance with the instruction specified on the proxy form. If no instructions are given, proxies will be voted for approval of the amendment to the 2002 Plan.