Forward-Looking Statements

This Quarterly Report on Form 10-Q (the "Report"), including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of FLIR Systems, Inc. and its consolidated subsidiaries ("FLIR" or the "Company") that are based on management's current expectations, estimates, projections, and assumptions about the Company's business. Words such as "expects," "anticipates," "intends," "plans," "believes," "sees," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors including, but not limited to, those discussed in the "Risk Factors" in Part II, Item 1A, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2, and elsewhere in this Report as well as those discussed from time to time in the Company's other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report, or for changes made to this document by wire services or Internet service providers. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

Results of Operations

Revenue. Revenue for the three months ended September 30, 2009 increased by 3.2 percent, from $276.7 million in the third quarter of 2008 to $285.6 million in the third quarter of 2009. Revenue for the nine months ended September 30, 2009 increased 7.9 percent, from $774.6 million in the first nine months of 2008 to $835.5 million in the first nine months of 2009. World-wide revenues for both the three and nine month periods were impacted by currency translation as the US dollar was stronger in 2009 compared to the same periods of 2008. The effects of exchange rates decreased our consolidated revenue for the third quarter and first nine months of 2009 by 1.9 percent and 5.0 percent, respectively, over the same periods of 2008.

Government Systems revenue increased $11.2 million, or 7.4 percent, from $151.7 million in the third quarter of 2008 to $163.0 million in the third quarter of 2009. Government Systems revenue for the nine months ended September 30, 2009 increased $88.5 million, or 22.3 percent, from $397.0 million in the first nine months of 2008 to $485.6 million in the first nine months of 2009. The increase in Government Systems revenue in the third quarter and the first nine months of 2009 compared to the same periods in 2008 was primarily due to an increase in unit sales of our large-gimbaled systems.

Thermography revenue decreased $9.2 million, or 11.7 percent, from $79.2 million in the third quarter of 2008 to $69.9 million in the third quarter of 2009. Thermography revenue for the nine months ended September 30, 2009 decreased $38.8 million, or 16.2 percent, from $239.4 million in the first nine months of 2008 to $200.6 million in the first nine months of 2009. The decrease in Thermography revenue in both the three and nine month periods was primarily due to lower demand for high-value products and currency translation. The effects of exchange rates decreased Thermography revenue for the third quarter and first nine months of 2009 by 1.7 percent and 6.7 percent, respectively, over the same periods of 2008.

Commercial Vision Systems revenue increased $6.8 million, or 14.8 percent, from $45.8 million in the third quarter of 2008 to $52.6 million in the third quarter of 2009. Commercial Vision Systems revenue for the nine months ended September 30, 2009 increased $11.1 million, or 8.0 percent, from $138.2 million in the first nine months of 2008 to $149.3 million in the first nine months of 2009. The increase in Commercial Vision Systems revenue in the third quarter and first nine months of 2009 compared to the same periods in 2008 was primarily due to increased unit sales in our cores and components product lines. The effects of exchange rates decreased Commercial Vision Systems revenue for the third quarter and first nine months of 2009 by 2.4 percent and 3.7 percent, respectively, over the same periods of 2008.

The timing of deliveries against large contracts, especially for our Government Systems and Commercial Vision Systems products, can give rise to quarter-to-quarter and year-over-year fluctuations in the mix of revenue. Consequently, year-over-year comparisons for any given quarter may not be indicative of comparisons using longer time periods. While we currently expect an overall increase in total annual revenue for 2009 of between 2 percent and 7 percent, the mix of revenue between our three business segments and within certain product categories in our business segments will vary from quarter to quarter.

As a percentage of revenue, international sales were 43.5 percent and 31.1 percent for the quarters ended September 30, 2009 and 2008, respectively, and 40.6 percent and 36.0 percent for the nine months ended September 30, 2009 and 2008, respectively. The increase in international revenue as a percentage of total revenue is primarily due to the weakened economic conditions in the United States in 2009 as compared to 2008. While the percentage of revenue from international sales will continue to fluctuate from quarter to quarter partially due to the timing of shipments under international and domestic government contracts, management anticipates that revenue from international sales will continue to comprise a significant percentage of total revenue.

At September 30, 2009, we had an order backlog of $608 million. Backlog in the Government Systems, Thermography and Commercial Vision Systems divisions was $487 million, $28 million and $93 million, respectively. Backlog is defined as orders received for products or services for which a sales agreement is in place and delivery is expected within twelve months.

Gross profit. Gross profit for the quarter ended September 30, 2009 was $162.8 million compared to $155.3 million for the same quarter last year. Gross profit for the nine months ended September 30, 2009 was $482.5 million compared to $432.7 million for the same period of 2008. As a percentage of revenue, gross profit increased from 56.1 percent in the third quarter of 2008 to 57.0 percent in the third quarter of 2009, and from 55.9 percent in the first nine months of 2008 to 57.7 percent in the first nine months of 2009. The increase in gross profit as a percentage of revenue for both the three and nine month periods in 2009 was primarily due to cost and production efficiencies related to increased volume, product mix and lower production costs in Sweden.

Research and development expenses. Research and development expenses for the third quarter of 2009 totaled $21.3 million, compared to $21.6 million in the third quarter of 2008. Research and development expenses for the first nine months of 2009 and 2008 were $66.9 million and $68.3 million, respectively. The decrease in research and development expenses was due to cost containment efforts in response to current economic conditions and currency translation. As a percentage of revenue, research and development expenses were 7.5 percent and 7.8 percent for the three months ended September 30, 2009 and 2008, respectively, and 8.0 percent and 8.8 percent for the nine months ended September 30, 2009 and 2008, respectively.

Selling, general and administrative expenses. Selling, general and administrative expenses were $52.2 million for the quarter ended September 30, 2009, compared to $57.0 million for the quarter ended September 30, 2008. Selling, general and administrative expenses for the first nine months of 2009 and 2008 were $158.2 million and $167.9 million, respectively. The decrease in selling, general and administrative expenses was due to cost containment efforts in response to current economic conditions and currency translation. Selling, general and administrative expenses as a percentage of revenue were 18.3 percent and 20.6 percent for the quarters ended September 30, 2009 and 2008, respectively, and 18.9 percent and 21.7 percent for the nine months ended September 30, 2009 and 2008, respectively.

Interest expense. Interest expense for the third quarter and first nine months of 2009 was $1.2 million and $5.7 million, respectively, compared to $3.5 million and $10.9 million for the same periods of 2008. Interest expense is primarily attributable to the accrual of interest on the convertible notes that were issued in June 2003 and the amortization of the discounts recorded on the notes and the costs related to the issuance of the notes. The decrease in interest expense in 2009 compared to the same period of 2008 is primarily due to the conversion of some of our outstanding convertible notes in the fourth quarter of 2008 and the third quarter of 2009 and the exchange of a portion of the convertible notes pursuant to the Company's exchange offer in the first quarter of 2009.

Other income/expense. For the quarter and nine months ended September 30, 2009, we recorded other expense of $1.7 million and $1.7, respectively, compared to other income of $5.0 million and $8.6 million for the same periods of 2008. Other expense in 2009 and other income in 2008 primarily consist of interest income earned on short-term investments and foreign currency transaction gains and losses.

Income taxes. The income tax provision of $79.9 million for the nine months ended September 30, 2009, represents an effective tax rate of 32.0 percent for that period. We expect the annual effective tax rate for the full year of 2009 to be approximately 32 percent to 33 percent. The effective tax rate is lower than the US Federal tax rate of 35 percent because of foreign tax rates and the effect of federal, foreign and state tax credits.

Liquidity and Capital Resources

At September 30, 2009, we had cash and cash equivalents on hand of $403.3 million compared to $289.4 million at December 31, 2008. The increase in cash and cash equivalents was primarily due to cash provided from operations, offset by the purchase of shares of our outstanding common stock, capital expenditures and business acquisitions.

Cash used in investing activities of $44.2 million for the nine months ended September 30, 2009 primarily related to capital expenditures and the acquisition of Salvador. Cash used in investing activities of $108.7 million for the nine months ended September 30, 2008 includes the acquisitions of Cedip Infrared Systems and Ifara Tecnologias, S.L. for $79.3 million, capital expenditures and other investments.

Cash used in financing activities of $55.9 million for the nine months ended September 30, 2009 primarily related to the repurchase of 3.2 million shares of our common stock, partially offset by cash provided from our stock-based compensation plans. Cash used in financing activities of $12.4 million for the nine months ended September 30, 2008 primarily related to the repurchase of 1.4 million shares of our common stock and the repayment of borrowings under the Credit Agreement, partially offset by cash provided from our stock-based compensation plans.

On October 6, 2006, we entered into the Credit Agreement, which provides for a $300 million, five-year revolving line of credit. We have the right, subject to certain conditions including approval of additional commitments by qualified lenders, to increase the line of credit by an additional $150 million until October 6, 2011. The Credit Agreement includes a $100 million sublimit multicurrency option, permitting us and certain of our designated subsidiaries to borrow in Euro, Swedish Kronor, Sterling and other agreed upon currencies.

Under the Credit Agreement, borrowings will bear interest based upon the prime lending rate of the Bank of America or Eurodollar rates with a provision for a spread over Eurodollar rates based upon the Company's leverage ratio. The Eurodollar interest rate was 1.037 percent and the prime lending rate was 3.25 percent at September 30, 2009. These rates were 2.175 percent and 3.25 percent, respectively, at December 31, 2008. The Credit Agreement requires us to pay a commitment fee on the amount of unused credit at a rate, based on our leverage ratio, which ranges from 0.175 percent to 0.325 percent. At September 30, 2009 and December 31, 2008, the commitment fee rate was 0.175 percent. The Credit Agreement contains five financial covenants that require the maintenance of certain leverage ratios, in addition to minimum levels of EBITDA and consolidated net worth, a maximum level of capital expenditures and, commencing December 31, 2009, a minimum liquidity of cash and availability under the Credit Agreement. The Credit Agreement is collateralized by substantially all assets of the Company. At September 30, 2009 and December 31, 2008, we had no borrowings outstanding under the Credit Agreement and were in compliance with all of its financial covenants. We had $11.7 million and $12.5 million of letters of credit outstanding under the Credit Agreement at September 30, 2009 and December 31, 2008, respectively, which reduces the total available credit thereunder.

A Sweden subsidiary has a 30 million Swedish Kronor (approximately $4.3 million) line of credit with an interest rate at 0.95 percent at September 30, 2009. At September 30, 2009, the Company had no amounts outstanding on this line of credit. The 30 million Swedish Kronor line of credit is secured primarily by accounts receivable and inventories of the Sweden subsidiary and is subject to automatic renewal on an annual basis.

In June 2003, we issued $210 million of 3.0 percent senior convertible notes due in 2023 in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the issuance were approximately $203.9 million. Issuance costs are being amortized over a period of seven years. Interest is payable semiannually on June 1 and December 1 of each year. The holders of the notes may convert all or some of their notes into shares of our common stock at a conversion rate of 90.1224 shares per $1,000 principal amount of notes prior to the maturity date in certain circumstances. We may redeem for cash all or part of the notes on or after June 8, 2010. The convertible notes are eligible for conversion at the option of the note holders.

On February 5, 2009, we commenced an exchange offer for any and all of the outstanding convertible notes. The offer was made pursuant to an Offer to Exchange and related documents, each dated February 5, 2009, and the completion of the offer was subject to conditions described in the offer documents. Holders who elected to exchange their notes in this offer and whose notes were accepted for exchange by us received 90.1224 shares of our common stock and a cash payment of $20 per $1,000 principal amount of notes. The offer expired on March 9, 2009. Notes with an aggregate principal amount of $99.9 million were exchanged pursuant to the exchange offer for approximately 9.0 million shares of the Company's common stock and approximately $2.0 million in cash.

In addition, in July 2009, convertible notes with an aggregate principal amount of $30.1 million were converted into 2.7 million shares of the Company's common stock.

As of September 30, 2009, notes with an aggregate principal value of $148.5 million have been converted into 13.4 million shares of the Company's common stock.

On January 1, 2009, we adopted the provisions of the Financial Accounting Standards Board Accounting Standards Codification Subtopic 470-20, "Debt with Conversion and Other Options" ("ASC Subtopic 470-20"). ASC Subtopic 470-20 requires that issuers of convertible debt instruments that may be settled in cash should separately account for the liability and equity components in a manner that reflects the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. ASC Subtopic 470-20 was effective for financial statements issued for fiscal years beginning after December 15, 2008 with retrospective application.

Accordingly, we have retrospectively applied the provisions of ASC Subtopic 470-20 to our financial statements beginning in 2003. The retrospective application includes the separation of the liability and equity components of the convertible notes, the reallocation of the $6.1 million of issuance costs between the liability and equity components, an increase in interest expense for periods subsequent to issuance to reflect the estimated nonconvertible borrowing rate, and the related tax effects.

We believe that our existing cash combined with the cash we anticipate to generate from operating activities and our available credit facilities and financing available from other sources will be sufficient to meet our cash requirements for the foreseeable future. We do not have any significant capital commitments for the current year nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity.

New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Codification Topic 105, "Generally Accepted Accounting Principles" ("ASC Topic 105"), which establishes the FASB Accounting Standards CodificationTM (the "Codification") as the source of authoritative U.S. generally accepted accounting principles ("GAAP") recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became nonauthoritative. The Company has adopted ASC Topic 105, which is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, "Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force" ("ASU 2009-13"), which provides amendments to the criteria in Subtopic 605-25, "Revenue Recognition - Multiple-Element Arrangements," for separating consideration in multiple-deliverable arrangements and expands the disclosures related to multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Accordingly, the Company will adopt ASU 2009-13 on January 1, 2011. The Company's adoption of ASU 2009-13 is not expected to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-14, "Software (Topic 985): Certain Revenue Arrangements That Include Software Elements - a consensus of the FASB Emerging Issues Task Force" ("ASU 2009-14"), which changes the accounting model for revenue arrangements that include both tangible products and software elements. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Accordingly, the Company will adopt ASU 2009-13 on January 1, 2011. The Company's adoption of ASU 2009-13 is not expected to have a material impact on its consolidated financial statements.

Critical Accounting Policies and Estimates

The Company reaffirms the critical accounting policies and our use of estimates as reported in our Form 10-K for the year ended December 31, 2008. As described in Note 1 to the Consolidated Financial Statements included in the Form 10K, the determination of fair value for stock-based compensation awards requires the use of management's estimates and judgments.

Contractual Obligations

As of September 30, 2009, our contractual obligations on our long-term debt were
as follows (in thousands):



                                                   Payments Due by Period
                                              Less than     1 - 3     3 - 5     More than
                                   Total       1 Year       Years     Years      5 Years
     Long-term debt               $ 61,525   $        20   $    16   $    -    $    61,489
     Interest on long-term debt     26,133         1,845     3,689     3,689        16,909

There have been no other material changes to our contractual obligations outside the ordinary course of our business since December 31, 2008.