<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

                                  FORM 10-KSB

               Annual Report Pursuant to Section 13 or 15(d) of
                      The Securities Exchange Act of 1934

For Fiscal Year Ended                                  Commission File Number
 December 31, 1999                                               0-4671

                              ISOMET CORPORATION
                              ------------------

State of Incorporation                               IRS Employer Identification
    New Jersey                                               No. 22-1591074

                     Address of Principal Executive Offices
                              5263 Port Royal Road
                             Springfield, VA  22151

                   Company's Telephone Number: (703) 321-8301

          Securities Registered Pursuant to Section 12(b) of the Act:
                                      None

          Securities Registered Pursuant to Section 12(g) of the Act:
                          Common Stock Par Value $1.00

             1,927,590 Shares Were Outstanding on January 31, 2000


Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of The Securities Exchange Act of 1934 during
the preceeding 12 months (or for such shorter period the Company was required to
file such report(s)) and (2) has been subject to such filing requirements for
the past ninety (90) days.    Yes   x     No _____
                                  -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation SB is not contained herein and will not be contained, to the best
of registrant knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.     (x)

Revenues for most recent fiscal year $7,017,142

On January 31, 2000 the approximate aggregate market value of the voting stock
held by non-affiliates of the Company was $5,757,700.
<PAGE>

                   DOCUMENTS INCORPORATED HEREIN BY REFERENCE
                   ------------------------------------------



Portions of the Company's Annual Report to Stockholders for fiscal year 1999 are
incorporated by reference into Part II of this Form 10-KSB and portions of the
Company's definitive proxy statement for the annual meeting of stockholders to
be held on June 1, 2000, are incorporated by reference into Part III of this
Form 10-KSB.

                                      -2-
<PAGE>

                                    PART I


ITEM 1   DESCRIPTION OF BUSINESS

     (a) General Development of Business
         -------------------------------

Isomet Corporation (hereinafter referred to as "Isomet" or "Company") was
incorporated in 1956.  The Company is a manufacturer of laser control devices,
systems and equipment for color image reproduction and other applications.

     (b) Financial Information About Industry Segments
         ---------------------------------------------

See Note 10 (Segment Information) of the Notes to the Consolidated Financial
Statements.

     (c) Narrative Description of Business/Business Done and Intended
         -------------------------------------------------------------
         to be Done
         ----------

         (1)  Principal Products and Services

         (a)  Principal Products

Isomet's acousto-optic line is comprised of laser control devices and systems
for applications that make use of lasers to process or communicate information
through various forms of recorded images.  Acousto-optics is the interaction
between light and sound within a crystalline material that can be used to
manipulate laser light for practical purposes.  Acousto-optic technology and
devices are an essential element of image processing systems such as laser
printers, laser film recorders, phototypesetters and laser-based inspection
systems.  These products are also used in Dense Wavelength Division Multiplexing
(DWDM) components for application in the telecommunications industry.

Isomet's graphic arts systems product line consists of high resolution digital
color scanners, laser film recorders, laser plotters and specialized interface
software and electronics packages.

Isomet has one operating overseas subsidiary.  Isomet UK, Ltd. in Wales, UK
markets and services graphic arts equipment and laser control devices in Europe.
Through its subsidiary and a network of sales representatives, the Company
conducts business in most industrially developed countries.

                                      -3-
<PAGE>

The following table shows for each of the last three fiscal years the
approximate amount of total revenue attributable to the Company's product
lines:

<TABLE>
<CAPTION>
Revenue - Sales                     1999        1998        1997
----------------------------------------------------------------
<S>                                 <C>         <C>         <C>
Laser Control Components            $3,289,222  $4,310,194  $5,063,576
Systems                              3,613,866   5,015,360   3,569,043
                                    ----------  ----------  ----------

Total:                              $6,903,088  $9,325,554  $8,632,619
</TABLE>

     (b)  Method of Distribution
          ----------------------

The Company distributes its products domestically through its own sales staff
and to foreign customers primarily through independent agents or through its
foreign subsidiary.

     (2)  New Products
          ------------

New product development effort during 1999 was directed primarily to hardware
and software upgrades for existing products, new acousto-optic device designs
and expansion of process control techniques for acousto-optic materials.

     (3)  Sources and Availability of Raw Materials
          -----------------------------------------

Precious metals and various chemicals are raw materials essential to various
phases of the Company's business.  Precious metals and chemicals are readily
available and are obtained from domestic commercial suppliers, such as Johnson
Matthey and AAA Molybdenum.

     (4)  Patents, Trademarks, Licenses, Franchises and Concessions
          ---------------------------------------------------------

For its acousto-optic component product line, the Company holds several patents;
none of which materially affect its present business.  The Company protects many
of its crystal growing processes and acousto-optic device manufacturing
processes as trade secrets; they are important to the Company's competitive
market position.

                                      -4-
<PAGE>

     (5)  Seasonal Operations
          -------------------

The Company's business is not seasonal.

     (6)  Practices Re Certain Working Capital Items
          ------------------------------------------

None

     (7)  Customers
          ---------

In 1999, of $6,903,088 in total sales, one systems customer accounted for
$3,493,675 or approximately 51%.  In 1998, of $9,325,554 in total sales, one
systems customer accounted for $4,782,641 or approximately 51%.

     (8)  Backlog
          -------

Backlog of orders believed to be firm was $3,577,000 as of December 31, 1999 and
$3,327,000 as of December 31, 1998.  It is expected that all of the backlog
orders will be filled during fiscal years 2000 and 2001.

     (9)  Description of Material Business Subject to Renegotiation or
          ------------------------------------------------------------
          Termination
          -----------

The Company has no material business subject to renegotiation or termination.

     (10) Competitive Conditions and Competitive Position
          -----------------------------------------------

To its knowledge, the Company competes principally against two U.S. companies
and three foreign companies, two of which are substantially larger than the
Company in the manufacture and commercial sales of acousto-optic laser
components and sub-systems.  No single company dominates the market in the
Company's product line.  The Company competes with these companies on the basis
of price and product performance.  The Company is well known and has an
established position in the market for these products.

For the graphic arts pre-press equipment, the Company competes principally
against four foreign companies and two domestic companies, four of which are
substantially larger than the Company.  No single company dominates the market
for sales of this equipment.  The Company has an establisehd position in the
market for these products.

     (11) Research and Development
          ------------------------

The following amounts were expended for Company sponsored research and
development for the fiscal years indicated:

          1999           $140,600
          1998           $  2,745
          1997           $    -0-


                                      -5-
<PAGE>

     (12) Compliance with Environmental Regulations
          -----------------------------------------

The Company's business is not materially affected by federal, state or local
laws regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment.

     (13) Employees
          ---------

On December 31, 1999 the Company employed fifty-one (51) full-time employees, of
whom five (5) were employed by the Company's foreign subsidiary.

     (d)  Financial Information About Foreign and Domestic Operations and
          ---------------------------------------------------------------
          Export Sales
          ------------

See Note 10 (Segment Information) of the Notes to the Consolidated Financial
Statements.


ITEM II   PROPERTIES

The Company leases 19,724 square feet at 5263 Port Royal Road, Springfield,
Virginia for corporate offices, manufacturing facilities and engineering
laboratories at an annual rental of $194,400, plus adjustments for increases or
decreases in real estate taxes and in the cost-of-living index.  This lease
expires on August 31, 2001 and provides for two successive three year renewal
periods at the same terms and conditions as the present lease.  Management
believes that the facilities are adequate for its present level of business.

In the United Kingdom, the Company leases 3,017 square feet for acousto-optic
products and scanner marketing and service activities.  The annual rental amount
is $20,651.  The lease expires in April 2000 and is expected to be renewed with
terms to be negotiated.


ITEM III  LEGAL PROCEEDINGS

There are no material legal proceedings pending against the Company.


ITEM IV   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the security holders in the fourth
quarter.

                                      -6-
<PAGE>

                                    PART II


ITEM V    MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
          SECURITY HOLDER MATTERS

Common stock market prices, dividends and related security holder matters set
forth in the Company's 1999 Annual Report to stockholders are hereby
incorporated by reference.


ITEM VI   SELECTED FINANCIAL DATA

Selected Financial Data set forth by the Company's 1999 Annual Report to
stockholders is hereby incorporated by reference.


ITEM VII  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Company's 1999 Annual Report to stockholders is
hereby incorporated by reference.


ITEM VIII FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See pages F-1 through F-23 of this Annual Report on Form 10-KSB.


ITEM IX   DISAGREEMENTS IN ACCOUNTING AND FINANCIAL DISCLOSURE

The Company has not had any disagreements on accounting or financial disclosure
with its accountants required to be reported hereunder.

                                      -7-
<PAGE>

                                   PART III

ITEM X    DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The information called for by this Item is incorporated by reference from the
Company's definitive proxy statement for the 2000 Annual Meeting of
Stockholders.


ITEM XI   MANAGEMENT/RENUMERATION

The information called for this Item is incorporated by reference from the
Company's definitive proxy statement for the 2000 Annual Meeting of
Stockholders.


ITEM XII  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

The information called for by this Item is incorporated by reference from the
Company's definitive proxy statement for the 2000 Annual Meeting of
Stockholders.

ITEM XIII CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by this Item is incorporated by reference from the
Company's definitive proxy statement for the 2000 Annual Meeting of
Stockholders.


                                    PART IV

ITEM XIV  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
     ON FORM 8-K

     (1)  Financial Statements
          --------------------

A Table of Contents to the Financial Statements appears on Page F-1.

     (2)  Exhibits
          --------

The exhibits, if any, filed with this report are listed on the Index to Exhibits
on page E-1.

     (3)  Reports on Form 8-K
          -------------------

No reports on Form 8-K were filed during the fourth quarter of the year ended
December 31, 1999.

                                      -8-
<PAGE>

                                  SIGNATURES


Pursuant to the requirement of The Securities and Exchange Act of 1934, the
Registrant has duly caused this Annual Report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                   ISOMET CORPORATION
                                   (Registrant)



Date:     March 24, 2000           By: /S/ Jerry W. Rayburn
    ---------------------             -----------------------
                                   Jerry W. Rayburn
                                   Executive Vice President, Finance
                                   Treasurer and Director



Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on this 24th day of March 2000.





/S/  Henry Zenzie        /S/  Leon Bademian       /S/  Lee R. Marks
-------------------      ------------------       -----------------
Henry Zenzie             Leon Bademian            Lee R. Marks
Director                 Director                 Director


                                      -9-
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
          TITLE                                                 PAGE
          -----                                                 ----
<S>                                                        <C>
INDEPENDENT AUDITOR'S REPORT...........................          F-2

AUDITED FINANCIAL STATEMENTS

  CONSOLIDATED BALANCE SHEETS..........................      F-3 - 4

  CONSOLIDATED STATEMENTS OF INCOME....................          F-5

  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME......          F-6

  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY......          F-7

  CONSOLIDATED STATEMENTS OF CASH FLOWS................      F-8 - 9

  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...........    F-10 - 23
</TABLE>

                                      F-1
<PAGE>

                  [LETTER HEAD OF ARONSON FETRIDGE & WEIGLE]




                         Independent Auditor's Report
                         ----------------------------



To the Stockholders and Board of Directors
ISOMET CORPORATION
Springfield, Virginia


We have audited the accompanying Consolidated Balance Sheets of ISOMET
CORPORATION AND SUBSIDIARIES as of December 31, 1999 and 1998, and the related
Consolidated Statements of Income, Comprehensive Income, Stockholders' Equity
and Cash Flows for the years then ended.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ISOMET
CORPORATION AND SUBSIDIARIES as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.



ARONSON, FETRIDGE & WEIGLE

Rockville, Maryland
March 3, 2000

                                      F-2
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                          DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                    ASSETS
                                                                     1999              1998
                                                               ---------------   ---------------
<S>                                                            <C>               <C>
CURRENT ASSETS
 Cash and cash equivalents                                         $   173,236       $ 1,426,814
 Investments (Note 1)                                                2,016,300                 -
 Accounts and notes receivable (Note 5)
   Trade                                                             1,563,823         1,837,763
   Other                                                                13,258            39,701
 Refundable income taxes                                                     -           232,855
 Notes receivable - officers (Note 2)                                        -            45,000
 Precious metals                                                       235,857           187,727
 Inventories (Notes 3 and 5)                                         4,261,209         3,785,733
 Prepaid expenses and other                                             37,260            43,084
 Deferred income tax asset, net (Note 7)                               108,380           123,210
                                                               ---------------   ---------------

     Total current assets                                            8,409,323         7,721,887
                                                               ---------------   ---------------

PROPERTY AND EQUIPMENT, AT COST (NOTES 4 AND 5)                      2,422,850         2,625,753
 Accumulated depreciation and amortization                          (2,087,298)       (2,340,904)
                                                               ---------------   ---------------

     Net property and equipment                                        335,552           284,849
                                                               ---------------   ---------------

OTHER ASSETS
 Deposits                                                                7,357             7,357
                                                               ---------------   ---------------




TOTAL ASSETS                                                       $ 8,752,232       $ 8,014,093
                                                               ===============   ===============
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these Financial Statements.

                                      F-3
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998


<TABLE>
<CAPTION>
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                                1999             1998
                                                                           ---------------  ---------------
<S>                                                                        <C>              <C>
CURRENT LIABILITIES
 Notes payable (Note 5)                                                         $  177,931       $  339,265
 Accounts payable                                                                  656,002          813,771
 Accrued liabilities (Note 6)                                                      242,317          242,952
 Income taxes payable                                                              179,615           18,178
                                                                           ---------------  ---------------

     Total current liabilities                                                   1,255,865        1,414,166

LONG-TERM LIABILITIES
 Notes payable, net of current portion (Note 5)                                    209,605          387,543
                                                                           ---------------  ---------------

     Total liabilities                                                           1,465,470        1,801,709
                                                                           ---------------  ---------------

COMMITMENTS AND CONTINGENCIES (NOTE 8)

STOCKHOLDERS' EQUITY (NOTE 9)
 Common stock, par value $1 per share; 2,500,000 shares authorized,              1,927,590        1,927,590
  1,927,590 shares issued and outstanding
 Capital contributed in excess of par value                                      4,232,623        4,232,623
 Retained earnings                                                               1,096,027           29,328
 Accumulated other comprehensive income
   Foreign currency translation adjustment                                          30,522           22,843
                                                                           ---------------  ---------------

     Total stockholders' equity                                                  7,286,762        6,212,384
                                                                           ---------------  ---------------


TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $8,752,232       $8,014,093
                                                                           ===============  ===============
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these Financial Statements.

                                      F-4
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
                FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998


<TABLE>
<CAPTION>
                                                                                1999             1998
                                                                           ---------------  ---------------
<S>                                                                        <C>              <C>
REVENUE
 Sales                                                                          $6,903,088       $9,325,554
 Interest and other income                                                         114,054           86,985
                                                                           ---------------  ---------------

     Total revenue                                                               7,017,142        9,412,539
                                                                           ---------------  ---------------

EXPENSES (NOTES 4, 8, 9 AND 11)
 Cost of sales                                                                   3,943,135        6,211,351
 Selling expenses                                                                  244,288          267,518
 General and administrative                                                      1,084,691        1,052,702
 Product development                                                               140,600            2,745
 Interest expense                                                                   53,225           84,515
                                                                           ---------------  ---------------

     Total expenses                                                              5,465,939        7,618,831
                                                                           ---------------  ---------------

INCOME BEFORE INCOME TAXES                                                       1,551,203        1,793,708

INCOME TAX EXPENSE (NOTE 7)                                                        484,504          594,389
                                                                           ---------------  ---------------

NET INCOME                                                                      $1,066,699       $1,199,319
                                                                           ===============  ===============

NET INCOME PER SHARE OF COMMON STOCK (NOTE 12)
 Basic net income per share                                                     $      .55       $      .62
                                                                           ===============  ===============

 Diluted net income per share                                                   $      .55       $      .61
                                                                           ===============  ===============
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these Financial Statements.

                                      F-5
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                 FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                1999              1998
                                                                           ---------------  ----------------
<S>                                                                        <C>              <C>
NET INCOME                                                                      $1,066,699       $1,199,319

OTHER COMPREHENSIVE INCOME
 Foreign currency translation adjustment, net of tax of $4,440 and
  $1,648 in 1999 and 1998, respectively                                              7,679           (2,694)
                                                                           ---------------  ----------------

COMPREHENSIVE INCOME                                                            $1,074,378       $1,196,625
                                                                           ===============  ===============
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these Financial Statements.

                                      F-6
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998


<TABLE>
<CAPTION>
                                                                                1999              1998
                                                                           ---------------  ----------------
<S>                                                                        <C>              <C>
COMMON STOCK
 Shares issued and outstanding, beginning of year                                1,927,590        1,909,090
 Shares issued - exercise of incentive stock options                                     -           18,500
                                                                           ---------------  ---------------

 Shares issued and outstanding, end of year                                      1,927,590        1,927,590
                                                                           ===============  ===============

 Amount issued and outstanding at $1 par value, beginning of year               $1,927,590      $ 1,909,090
 Amount issued - exercise of incentive stock options                                     -           18,500
                                                                           ---------------  ---------------

 Amount issued and outstanding at $1 par value, end of year                      1,927,590        1,927,590
                                                                           ---------------  ---------------

CAPITAL CONTRIBUTED IN EXCESS OF PAR VALUE
 Balance, beginning of year                                                      4,232,623        4,223,003
 Capital contributed - exercise of incentive stock options                               -            9,620
                                                                           ---------------  ---------------

 Balance, end of year                                                            4,232,623        4,232,623
                                                                           ---------------  ---------------

RETAINED EARNINGS (ACCUMULATED DEFICIT)
 Balance, beginning of year                                                         29,328       (1,169,991)
 Net income                                                                      1,066,699        1,199,319
                                                                           ---------------  ---------------

     Balance, end of year                                                        1,096,027           29,328
                                                                           ---------------  ---------------

UNAMORTIZED DEFERRED COMPENSATION FROM STOCK OPTIONS (NOTE 9)
   Balance, beginning of year                                                            -          (32,500)
   Amortization of deferred compensation                                                 -           32,500
                                                                           ---------------  ---------------

     Balance, end of  year                                                               -                -
                                                                           ---------------  ---------------

ACCUMULATED OTHER COMPREHENSIVE INCOME
 Foreign currency translation adjustment
   Balance, beginning of year                                                       22,843           25,537
   Foreign currency translation adjustment                                           7,679           (2,694)
                                                                           ---------------  ---------------

     Balance, end of year                                                           30,522           22,843
                                                                           ---------------  ---------------

TOTAL STOCKHOLDERS' EQUITY                                                      $7,286,762      $ 6,212,384
                                                                           ===============  ===============
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these Financial Statements.

                                      F-7
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                 1999              1998
                                                                           ---------------   ---------------
<S>                                                                        <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                                                    $ 1,066,699        $1,199,319
 Adjustments to reconcile net income to net cash provided by operating
  activities
     Depreciation and amortization                                                  68,669            89,118
     Loss on disposal of property and equipment                                      4,282               371
     Amortization of deferred compensation                                               -            32,500
     (Increase) decrease in:
      Accounts, notes and other receivables                                        300,383          (353,468)
      Refundable income taxes                                                      232,855          (232,855)
      Notes receivable - officers                                                   45,000                 -
      Precious metals                                                              (48,130)           (1,444)
      Inventories                                                                 (475,476)         (404,562)
      Prepaid expenses and other current assets                                      5,824               380
      Deferred income tax asset                                                     14,830            66,356
     Increase (decrease) in:
      Accounts payable                                                            (157,769)          497,349
      Accrued liabilities                                                             (635)           24,721
      Income taxes payable                                                         161,437          (668,780)
      Deferred revenue                                                                   -           (10,000)
      Deferred rent payable                                                              -            (4,378)
                                                                           ---------------   ---------------

        Net cash provided by operating activities                                1,217,969           234,627
                                                                           ---------------   ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
 Purchase of property and equipment                                               (123,654)         (105,708)
 Proceeds from disposal of property and equipment                                        -             8,738
 Purchase of investments                                                        (2,016,300)                -
                                                                           ---------------   ---------------

        Net cash used by investing activities                                   (2,139,954)          (96,970)
                                                                           ---------------   ---------------

CASH FLOWS FROM FINANCING ACTIVITIES
 Repayments of debt                                                               (339,272)         (270,649)
 Proceeds from exercise of incentive stock options                                       -            28,120
 Effect of exchange rate changes on cash                                             7,679            (2,694)
                                                                           ---------------   ---------------

        Net cash used in financing activities                                     (331,593)         (245,223)
                                                                           ---------------   ---------------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these Financial Statements.

                                      F-8
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                 1999               1998
                                                                           ----------------   ---------------
<S>                                                                        <C>                <C>
NET DECREASE IN CASH AND CASH EQUIVALENTS                                        (1,253,578)         (107,566)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                      1,426,814         1,534,380
                                                                           ----------------   ---------------

CASH AND CASH EQUIVALENTS, END OF YEAR                                          $   173,236        $1,426,814
                                                                           ================   ===============


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 Cash paid for interest                                                         $    53,225        $   84,515
                                                                           ================   ===============

 Cash paid for income taxes                                                     $   308,237        $1,447,846
                                                                           ================   ===============
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these Financial Statements.

                                      F-9
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1999 AND 1998


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

     (A)  Organization

          Isomet Corporation and its Subsidiaries (the Company) produce and sell
     laser equipment, systems and laser accessory components for color image
     reproduction applications.  The Company also performs sponsored research
     and development in the general field of laser technology.

     (B)  Basis of consolidation

          The Company has a wholly owned subsidiary in Barbados which has
     elected to be a Foreign Sales Corporation, and has a wholly-owned
     subsidiary in the United Kingdom. The consolidated financial statements
     include the accounts of Isomet and these subsidiaries. All material
     intercompany accounts and transactions have been eliminated in
     consolidation.

     (C)  Revenue recognition

          The Company recognizes revenue at the time goods are shipped and title
     passes to the customer, including goods shipped under multiple delivery
     fixed-price contracts.

     (D)  Investments

          Investments consist of certificates of deposit and U.S. Treasury
     bills, all of which mature within one year. These investments are
     considered to be held-to-maturity as the Company has the intent and ability
     to hold these securities to maturity. These investments are stated at
     amortized cost which approximates their fair value.

     (E)  Inventories

          Inventories of parts are stated at cost determined on a first-in,
     first-out basis, which does not exceed market.  Work-in-process and
     finished goods are stated at the lower of standard costs (which approximate
     average costs) or market.

                                      F-10
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1999 AND 1998


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     (F)  Property and equipment

          Depreciation and amortization of property and equipment is recorded
     using the straight-line method over estimated useful lives as follows:

<TABLE>
<CAPTION>
                                                                   Years
                                                              ---------------
          <S>                                                 <C>
          Plant equipment                                           10
          Furniture                                                 10
          Transportation equipment                                 3-5
          Leasehold improvements                              Remaining term
                                                                 of lease
</TABLE>

     (G)  Foreign currency translation

          The assets and liabilities of the Company's foreign operations are
     translated at rates of exchange in effect at year end, and revenue,
     expenses, gains and losses are translated at the average rates of exchange
     for the year.  Gains and losses resulting from translation are accumulated
     as a separate component of stockholders' equity until the foreign entity is
     sold or liquidated.

     (H)  Income per share of common stock

          Basic net income per share of common stock has been computed on the
     weighted average number of shares of common stock outstanding during the
     period.  Diluted net income per share of common stock has been computed on
     the weighted average number of shares of common stock and common stock
     equivalents outstanding during the year.  The diluted net income per share
     in 1999 and 1998 includes stock options as common stock equivalents.

     (I)  Statements of cash flows

          The statements of cash flows are prepared on the basis of cash on hand
     and in banks which is subject to withdrawal on demand and items considered
     to be cash equivalents.  The Company considers all highly liquid
     instruments purchased with a maturity of three months or less to be cash
     equivalents.  At times during the year the Company has amounts on deposit
     with financial institutions that may exceed federally insured limits.  The
     Company does not believe that this results in any significant credit risk.

                                      F-11
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1999 AND 1998


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     (J) Fair value of financial instruments

         The fair market values of the financial instruments included in the
     consolidated financial statements approximate their carrying value.

     (K) Financial statement estimates

         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 - NOTES RECEIVABLE - OFFICERS

     The Company held unsecured notes receivable from certain officers of the
Company in the amount of $45,000 that required interest at 6%.  These loans were
paid off in 1999.


NOTE 3 - INVENTORIES

     Inventories at December 31, 1999 and 1998 are summarized as follows:

<TABLE>
<CAPTION>
                                                                                1999             1998
                                                                           ---------------  ---------------
<S>                                                                        <C>              <C>
         Parts                                                                  $  563,185       $1,029,601
         Work-in-process                                                         3,169,833        2,262,973
         Finished goods                                                            528,191          493,159
                                                                           ---------------  ---------------

           Total                                                                $4,261,209       $3,785,733
                                                                           ===============  ===============
</TABLE>

                                      F-12
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1999 AND 1998


NOTE 4 - PROPERTY AND EQUIPMENT

     The following is a summary of property and equipment as of December 31,
1999 and 1998:

<TABLE>
<CAPTION>
                                                         1999                              1998
                                           --------------------------------  --------------------------------
                                                              Accumulated                       Accumulated
                                                             Depreciation                      Depreciation
                                                                  and                               and
                                                Cost         Amortization         Cost         Amortization
                                           ---------------  ---------------  ---------------  ---------------
<S>                                        <C>              <C>              <C>              <C>
 Plant equipment                                $1,817,973       $1,628,076       $2,044,524       $1,883,343
 Furniture                                         360,557          223,291          337,471          231,652
 Transportation equipment                           43,606           40,403           44,349           32,403
 Leasehold improvements                            200,714          195,528          199,409          193,506
                                           ---------------  ---------------  ---------------  ---------------

                                                $2,422,850       $2,087,298       $2,625,753       $2,340,904
                                           ===============  ===============  ===============  ===============
</TABLE>

     Depreciation and amortization of property and equipment charged to
operations amounted to $68,669 and $89,118 in 1999 and 1998, respectively.


NOTE 5 - NOTES PAYABLE

<TABLE>
<CAPTION>
                                                                                1999             1998
                                                                           ---------------  ---------------
<S>                                                                        <C>              <C>
         NationsBank - Promissory note with interest payable monthly at
          the Bank's prime rate plus .5%.  The rate in effect on
          December 31, 1999 was 9%.  The loan is payable in monthly
          installments of $12,000 plus interest, with final payment due
          June 1, 2002.  The collateral for this loan is a blanket lien
          on all assets.                                                          $353,604         $497,604

         NationsBank - Promissory note with interest due at the Bank's
          prime rate plus .5%.  The rate at December 31, 1999 was 9%.
          The loan is payable in monthly installments of $8,000 plus
          interest, with final payment due May 1, 2000.  The collateral
          for this loan is a blanket lien on all assets.                            30,497          126,497
</TABLE>

                                      F-13
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998


NOTE 5 - NOTES PAYABLE (Continued)

<TABLE>
<CAPTION>
                                                                                1999             1998
                                                                           ---------------  ---------------
<S>                                                                        <C>              <C>
         Lloyds Bank, United Kingdom - Overdraft line of credit with
          interest payable monthly at 4% above the bank's base rate.
          The rate in effect at December 31, 1999 was 9.5%.  Collateral
          for this loan is a blanket lien on the assets of the Company's
          wholly-owned United Kingdom subsidiary, and has a maximum
          borrowing base of 75,000 pounds sterling (approximately
          $121,000 at December 31, 1999)                                   $             -         $ 93,695

         Ford Motor Credit Corp. - Loan payable in monthly installments
          of $520 including interest at 10.25%, with final payment due
          August 28, 2000.  The collateral for the loan is a truck.                  3,435            9,012
                                                                           ---------------  ---------------
                                                                                   387,536          726,808
         Less:  Current portion                                                    177,931          339,265
                                                                           ---------------  ---------------
           Total                                                                  $209,605         $387,543
                                                                           ===============  ===============
</TABLE>

     The NationsBank loan agreements contain various covenants as to certain
financial ratios and limits borrowings to amounts outstanding on certain
receivables.  All loan covenants were met as of December 31, 1999.

     Future debt maturities are as follows:

<TABLE>
<CAPTION>
         Year Ending
         December 31                                                             Amount
        -------------                                                       ---------------
<S>                                                                         <C>
           2000                                                                    $177,931
           2001                                                                     144,000
           2002                                                                      65,605
                                                                            ---------------

              Total                                                                $387,536
                                                                            ===============
</TABLE>

     In 1998, the Company entered into a $750,000 revolving line of credit
agreement with NationsBank.  The agreement was renewed in April 1999 and is
available through June 30, 2000.  Interest is payable at the Eurodollar rate
plus 2.95%.  The Company made no draws against the line in 1999 or 1998.

                                      F-14
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1999 AND 1998



NOTE 6 - ACCRUED LIABILITIES

     A summary of accrued liabilities at December 31, 1999 and 1998 are as
follows:

<TABLE>
<CAPTION>
                                                                                1999             1998
                                                                           ---------------  ---------------
<S>                                                                        <C>              <C>
         Salaries and payroll taxes                                               $ 48,983         $ 66,874
         Compensated absences                                                      171,503          145,112
         Other                                                                      21,831           30,966
                                                                           ---------------  ---------------

           Total                                                                  $242,317         $242,952
                                                                           ===============  ===============
</TABLE>


NOTE 7 - INCOME TAXES

     The domestic and foreign components of income before income taxes for 1999
and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                                1999             1998
                                                                           ---------------  ---------------
<S>                                                                        <C>              <C>
         Domestic                                                               $1,412,115       $1,617,292
         Foreign                                                                   139,088          176,416
                                                                           ---------------  ---------------

         Income before income taxes                                             $1,551,203       $1,793,708
                                                                           ===============  ===============
</TABLE>

     The components of income tax expense are as follows:

<TABLE>
<CAPTION>
                                                                                1999             1998
                                                                           ---------------  ---------------
Current
<S>                                                                        <C>              <C>
           Domestic                                                               $469,454         $527,373
           Foreign                                                                     220              660
                                                                           ---------------  ---------------
             Total                                                                 469,674          528,033

         Deferred
           Domestic                                                                 14,830           66,356
                                                                           ---------------  ---------------

         Income tax expense                                                       $484,504         $594,389
                                                                           ===============  ===============
</TABLE>

                                      F-15
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998


NOTE 7 - INCOME TAXES (CONTINUED)

     Significant items attributable to the calculation of the deferred income
tax asset are as follows:

<TABLE>
<CAPTION>
                                                                                1999             1998
                                                                           ---------------  ---------------
<S>                                                                        <C>              <C>
         Difference in the timing of expenses for tax and financial               $295,795         $324,579
          reporting purposes
</TABLE>

     A reconciliation of income taxes computed at the statutory Federal rate and
the effective income tax expense is as follows:

<TABLE>
<CAPTION>
                                                                                 1999              1998
                                                                           ----------------  ----------------
<S>                                                                        <C>               <C>
         Federal income taxes at statutory rate                                   $527,409          $609,861
         Increases (decreases) in taxes from:
           State income taxes, net of federal benefit                               41,162            49,551
           Change in valuation allowance for UK taxes                              (50,881)          (66,717)
           Difference in expense recognition                                       (33,186)            1,694
                                                                           ---------------   ---------------

             Tax expense                                                          $484,504          $594,389
                                                                           ===============   ===============
</TABLE>

     The components of the deferred tax asset at December 31, 1999 and 1998 are
as follows:

<TABLE>
<CAPTION>
                                                                                 1999              1998
                                                                           ----------------  ----------------
Deferred tax assets (liabilities)
<S>                                                                        <C>               <C>
           Depreciation differences                                               $(35,366)         $(14,782)
           Inventory capitalization adjustment                                      48,572            49,406
           Other inventory adjustments                                              21,975            22,767
           Vacation pay differences                                                 62,838            55,085
           Allowance for doubtful accounts                                           2,071             2,145
           Capital loss carryforwards                                                8,290             8,589
                                                                           ---------------   ---------------

             Total                                                                $108,380          $123,210
                                                                           ===============   ===============
</TABLE>

     The Company has net operating loss carryforwards for tax reporting purposes
of approximately 594,500 pounds sterling ($960,000) in the United Kingdom.
These losses may be carried forward indefinitely.  The Company has provided an
allowance for 100% of the tax benefit related to this loss because of the
uncertainty of realization.

                                      F-16
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998


NOTE 8 - COMMITMENTS AND CONTINGENCIES

     The Company leases its plant and office facilities under various long-term
operating leases which expire in 2001.  The leases require minimum annual rental
payments plus additional amounts based upon future increases in property taxes
and the consumer price index.  The Company has two three-year renewal options
under one lease with the same terms.

     Following is a schedule of future minimum rental payments required under
operating leases that have initial or remaining noncancellable lease terms in
excess of one year as of December 31, 1999:

<TABLE>
<CAPTION>
           Year Ending
           December 31                                                           Amount
          -------------                                                     ---------------
<S>                                                                         <C>
              2000                                                                 $201,283
              2001                                                                  129,600
                                                                            ---------------

                  Total                                                            $330,883
                                                                            ===============
</TABLE>

     Total rent expense for all operating leases amounted to $228,398 and
$220,734 in 1999 and 1998, respectively.

     The Company is contingently liable for severance pay under employment
agreements with certain officers.


NOTE 9 - COMMON STOCK

     During 1988, the Company granted options to certain officers and directors
to purchase 97,500 shares of the Company's common stock at $1.75 per share.  To
the extent not previously exercised, the options terminate in ten years.
Options under the agreement may be exercised only upon the occurrence of certain
specified events.  Since exercise of the options is contingent upon the
occurrence of a future event, the difference between the option price and the
market price at the date the options were granted was recorded as deferred
compensation in stockholders' equity and amortized ratably over the ten year
life of the options.  These options expired in 1998.  The total amount of
deferred compensation amortized to expense during 1998 as a result of the above
described options was $32,500.

     In 1992, the Company adopted a stock option plan covering up to 275,000
shares of the Company's stock, which includes all previously issued options, and
has a term of ten years.  Isomet's Board of Directors shall determine the number
of shares and to whom options are to be granted.  Options granted under the plan
are exercisable at an exercise price to be determined by the board and terminate
ten years from the date the options are granted.

                                      F-17
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1999 AND 1998


NOTE 9 - COMMON STOCK (CONTINUED)

     In January 1993, the Company granted incentive stock options under the plan
to employees covering 46,000 shares at a price of $1.52 per share.  Prior to
1998, options for 3,500 shares were exercised and options for 3,000 shares were
terminated.  In 1998, a total of 18,500 incentive stock options were exercised
at a price of $1.52 per share.  A summary of activity under the plan during 1998
and 1999 follows:

<TABLE>
<CAPTION>
                                                                               Option            Option
                                                                                Price            Shares
                                                                           ---------------  ----------------

<S>                                                                        <C>              <C>
         Outstanding at December 31, 1997                                            $1.52           39,500
                                                                                      1.75           97,500
                                                                                            ---------------
           Total                                                                                    137,000

         Options exercised during 1998                                                1.52          (18,500)
         Options expired during 1998                                                  1.75          (97,500)
                                                                           ---------------  ---------------

         Outstanding at December 31, 1998                                             1.52           21,000
         Options granted during 1999                                                  2.00          157,500
                                                                           ---------------  ---------------

         Outstanding at December 31, 1999                                            $1.52           21,000
                                                                                      2.00          157,500
                                                                                            ---------------

           Total                                                                                    178,500
                                                                                            ===============
</TABLE>

     At December 31, 1999, there are 15,000 of the $2.00 options that are non-
qualified and the remainder of 163,500 options are qualified incentive options
under the plan.  As of December 31, 1999, there are 74,500 shares available to
be issued under the plan.

     The Company follows Accounting Principles Board Opinion No. 25 in
accounting for stock options.  Accordingly, no compensation cost associated with
the 1999 options has been recognized.  Had compensation cost for the 1999
options been recognized in accordance with Financial Accounting Standards Board
Statement No. 123, net income for 1999 would have been reduced to the pro forma
amounts indicated below:

<TABLE>
<S>                                                        <C>                   <C>
         Net income                                        As reported           $1,066,699
                                                           Pro forma             $1,042,009

         Primary net income per share                      As reported           $      .55
                                                           Pro forma             $      .54

         Diluted net income per share                      As reported           $      .55
                                                           Pro forma             $      .54
</TABLE>

                                      F-18
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1999 AND 1998


NOTE 10 - SEGMENT INFORMATION

     The Company is a manufacturer of laser control devices, systems and
equipment for color image reproduction applications.  The Company has two
reportable segments, identified as systems and components.  The systems segment
produces high resolution digital color scanners, laser film recorders, laser
plotters and specialized interface software and electronics packages.  The
components segment produces laser control devices for applications that make use
of lasers to process or communicate information through various forms of
recorded images.

     The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.  The Company evaluates
performance based on the gross profit of each segment.

     The Company's reportable segments are units that offer different product
lines.  They are managed separately because the products under each unit require
different manufacturing processes and there are no significant intersegment
sales or transfers.

     The Company's operations by reporting segment for 1999 and 1998 are as
follows:

<TABLE>
<CAPTION>
                                                                                  1999
                                                           --------------------------------------------------
                                                               Systems        Components          Total
                                                           ---------------  ---------------  ----------------
<S>                                                        <C>              <C>              <C>
          Sales                                                 $3,613,866       $3,289,222      $ 6,903,088
          Cost of sales                                          2,744,940        1,198,195        3,943,135
                                                           ---------------  ---------------  ---------------

          Gross profit                                          $  868,926       $2,091,027        2,959,953
                                                           ===============  ===============

          General corporate:
             Interest income and other revenue                                                       114,054
             Selling expenses                                                                       (244,288)
             General and administrative                                                           (1,084,691)
             Product development                                                                    (140,600)
             Interest expense                                                                        (53,225)
                                                                                             ---------------

          Net income before income taxes                                                         $ 1,551,203
                                                                                             ===============
</TABLE>

                                      F-19
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1999 AND 1998


NOTE 10 - SEGMENT INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                                  1998
                                                             ------------------------------------------------
                                                                Systems        Components           Total
                                                             -------------    -------------     -------------
<S>                                                          <C>              <C>               <C>
          Sales                                              $   5,015,360    $   4,310,194     $  9,325,554
          Cost of sales                                          3,924,600        2,286,751        6,211,351
                                                             -------------    -------------     -------------

          Gross profit                                       $   1,090,760    $   2,023,443        3,114,203
                                                             =============    =============

          General corporate:
             Interest income and other revenue                                                        86,985
             Selling expenses                                                                       (267,518)
             General and administrative                                                           (1,052,702)
             Product development                                                                      (2,745)
             Interest expense                                                                        (84,515)
                                                                                                ------------

          Net income before income taxes                                                        $  1,793,708
                                                                                                ============
</TABLE>

     The Company's assets at December 31, 1999 and 1998 by reporting segment are
as follows:

<TABLE>
<CAPTION>
                                                                           1999
                                            ------------------------------------------------------------------
                                                                                  General
                                                Systems        Components        Corporate          Total
                                            ---------------  ---------------  ---------------  ---------------
<S>                                         <C>              <C>              <C>              <C>
          Accounts and notes receivable          $  916,793       $  647,030  $             -       $1,563,823
          Precious metals                                 -          235,857                -          235,857
          Inventories                             1,153,180        3,108,029                -        4,261,209
          Other                                      33,555          268,442        2,389,346        2,691,343
                                                 ----------       ----------       ----------       ----------

             Total assets                        $2,103,528       $4,259,358       $2,389,346       $8,752,232
                                                 ==========       ==========       ==========       ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                           1998
                                            ------------------------------------------------------------------
                                                                                  General
                                                Systems        Components        Corporate          Total
                                            ---------------  ---------------  ---------------  ---------------
<S>                                         <C>              <C>              <C>              <C>
          Accounts and notes receivable          $1,298,230       $  539,533  $  -                  $1,837,763
          Precious metals                                 -          187,727                -          187,727
          Inventories                             1,207,717        2,578,016                -        3,785,733
          Other                                      28,485          227,879        1,946,506        2,202,870
                                            ---------------  ---------------  ---------------  ---------------

             Total assets                        $2,534,432       $3,533,155       $1,946,506       $8,014,093
                                            ===============  ===============  ===============  ===============
</TABLE>

                                      F-20
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1999 AND 1998


NOTE 10 - SEGMENT INFORMATION (CONTINUED)

     The Company's operations in different geographic areas were as follows:

<TABLE>
<CAPTION>
                                                                                 1999              1998
                                                                           ----------------  ----------------
<S>                                                                        <C>               <C>
         Sales to unaffiliated customers
           North America                                                       $ 5,376,267       $ 6,869,938
           Europe                                                                  979,974         1,610,317
           Far East                                                                546,847           845,299
                                                                           ----------------  ----------------
             Total sales                                                         6,903,088         9,325,554

         Transfers between geographic areas
           United States                                                           650,534         1,132,584
           Europe                                                                  361,754           303,255
           Eliminations                                                         (1,012,288)       (1,435,839)
                                                                           ----------------  ----------------

             Total sales                                                       $ 6,903,088       $ 9,325,554
                                                                           ===============   ===============

         Operating profit
           United States                                                       $ 1,465,560       $ 1,689,427
           United Kingdom                                                          138,868           188,796
           Eliminations                                                                  -                 -
                                                                           ----------------  ----------------
             Total operating profit                                              1,604,428         1,878,223
         Interest expense                                                           53,225            84,515
                                                                           ----------------  ----------------

         Income before income taxes                                            $ 1,551,203       $ 1,793,708
                                                                           ===============   ===============

         Identifiable assets
           United States                                                       $ 5,902,473       $ 5,918,306
           United Kingdom                                                          721,131           698,553
           Eliminations                                                            (60,908)          (74,580)
                                                                           ----------------  ----------------
             Total identifiable assets                                           6,562,696         6,542,279
         General corporate assets                                                2,189,536         1,471,814
                                                                           ----------------  ----------------

           Total assets                                                        $ 8,752,232       $ 8,014,093
                                                                           ===============   ===============

         Liabilities
           United States                                                       $ 1,384,763       $ 1,635,718
           United Kingdom                                                          432,108           760,162
           Eliminations                                                           (351,401)         (594,171)
                                                                           ----------------  ----------------

             Total liabilities                                                 $ 1,465,470       $ 1,801,709
                                                                           ===============   ===============
</TABLE>

                                      F-21
<PAGE>

                     ISOMET CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1999 AND 1998


NOTE 10 - SEGMENT INFORMATION (CONTINUED)

     Transfers between geographic areas are accounted for on a cost plus mark-up
basis.  Expenses directly identified with an area are used to determine
operating profit by geographic areas.

     In 1999, of $6,903,088 in total sales, one systems customer accounted for
$3,493,675, or approximately 51%.  In 1998, of $9,325,554 in total sales, one
systems customer accounted for $4,782,641, or approximately 51%.

     The Company does not normally require its customers to provide collateral
for outstanding balances.  The Company maintains insurance for collection of
accounts receivable on its ten largest domestic customers.

     The Company's products are sold principally in North America, Europe and
the far east.  Accounts and notes receivable from sales in these areas of the
world at December 31, 1999 and 1998, were as follows:

<TABLE>
<CAPTION>
                                                                                1999             1998
                                                                           ---------------  ---------------
<S>                                                                        <C>              <C>
         North America                                                          $1,215,205       $1,604,755
         Europe                                                                    300,615          202,988
         Far East                                                                   48,003           30,020
                                                                           ---------------  ---------------

           Total                                                                $1,563,823       $1,837,763
                                                                           ===============  ===============
</TABLE>

     The accounts receivable in North America at December 31, 1999 and 1998,
were due from 42 and 39 different unrelated customers, of which two customers
accounted for $1,073,591 and $1,440,183, respectively.  The amount due from
these customers is expected to be collected in the normal course of business.

     The accounts receivable in Europe at December 31, 1999 and 1998, were due
from nine and eleven different unrelated customers, of which one and two
customers accounted for $187,364 and $158,066, respectively.  All such debts are
expected to be collected in the normal course of business.


NOTE 11 - RETIREMENT PLANS

     One subsidiary maintains a defined contribution retirement plan which is
available to all employees of the subsidiary.  The plan is funded through the
purchase of a group annuity insurance policy.  Employer contributions are
discretionary.  Employees may contribute to the plan in an amount that does not
exceed 15% of the employee's annual compensation and vest 100% in their own
contributions.  Vesting in the employer contributions does not occur until the
participant's normal retirement date, as defined.  The plan is cancelable upon
thirty days notice.  Pension expense was $7,775 and $7,070 for the years ended
December 31, 1999 and 1998, respectively.

                                      F-22
<PAGE>

                      ISOMET CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1999 AND 1998


NOTE 11 - RETIREMENT PLANS (CONTINUED)

     The parent company maintains a contributory plan pursuant to Section 401(k)
of the Internal Revenue Code.  The Plan is available to all employees of the
parent company who have completed one year of service.  Participants may elect
to make contributions to the Plan in an amount not to exceed the lesser of 15%
of annual compensation or the maximum amount specified by law.  The Company
matches employee contributions in an amount not to exceed 2% of annual
compensation.  The Company may make additional contributions at its discretion.
All contributions are held by a trustee and invested at the participant's
direction under the options available.  Participants are vested 100% in their
contributions.  Vesting in employer contributions is 20% per year with 100%
vesting after five years.  Pension expense related to this plan totaled $37,687
and $34,701 for the years ended December 31, 1999 and 1998, respectively.


NOTE 12 - NET INCOME PER SHARE

     The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share computations for 1999 and 1998:

<TABLE>
<CAPTION>
                                                                                           1999
                                                                 ---------------------------------------------------------
                                                                       Income              Shares            Per Share
                                                                    (Numerator)        (Denominator)          Amount
                                                                 -----------------   -----------------   -----------------
<S>                                                              <C>                 <C>                 <C>
         Net income                                                     $1,066,699
                                                                 -----------------

         Basic net income per share
           Income available to stockholders                              1,066,699           1,927,590                $.55
                                                                                                         =================

         Effect of dilutive securities
           Stock options                                                         -              16,596
                                                                 -----------------   -----------------

         Diluted net income per share                                   $1,066,699           1,944,186                $.55
                                                                 =================   =================   =================
</TABLE>

<TABLE>
<CAPTION>
                                                                                           1998
                                                                 ---------------------------------------------------------
                                                                       Income              Shares            Per Share
                                                                    (Numerator)        (Denominator)          Amount
                                                                 ------------------  ------------------  -----------------
<S>                                                              <C>                 <C>                 <C>
         Net income                                                     $1,199,319
                                                                 -----------------

         Basic net income per share
           Income available to stockholders                              1,199,319           1,921,715                $.62
                                                                                                         =================

         Effect of dilutive securities
           Stock options                                                         -              48,656
                                                                 -----------------   -----------------

         Diluted net income per share                                   $1,199,319           1,970,371                $.61
                                                                 =================   =================   =================
</TABLE>

                                      F-23
<PAGE>

                               INDEX TO EXHIBITS

3.1  Certificate of Incorporation of Registrant filed May 9, 1956. *

3.2  Certificate of Amendment of Certificate of Incorporation of Registrant
     filed April 8, 1959. *

3.3  Certificate of Amendment of Certificate of Incorporation of Registrant
     filed February 8, 1961. *

3.4  Certificate of Amendment of Certificate of Incorporation of Registrant
     filed June 15, 1966. *

3.5  Certificate of Amendment of Certificate of Incorporation of Registrant
     filed December 28, 1967. *

3.6  Certificate of Amendment of Certificate of Incorporation of Registrant
     filed April 7, 1969. *

3.7  Certificate of Incorporation of Registrant (Restated) filed April 7,
     1969. *

3.8  Certificate of Amendment of Certificate of Incorporation of Registrant
     (Restated) filed June 22, 1988. **

3.9  By-laws of Registrant. *

3.10 Subsidiaries of the Company. ***


27   Financial Data Schedule

*    Incorporated by reference to Exhibits to the Registrant Report on Form 10-K
     for the year ended December 31, 1987.

**   Incorporated by reference to Exhibits to the Registrant Report on Form 10-K
     for the year ended December 31, 1988.

***  Incorporated by reference to Exhibits to the Registrant Report on Form 10-K
     for the year ended December 31, 1990.

                                      E-1