UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549-1004
                  ---------------------------------------------

                                    FORM 10-K

            /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  for the fiscal year ended September 30, 1999

                                       or

          / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   for the transition period from ____ to ____

                           Commission File No. 0-21820
                  ---------------------------------------------

                              KEY TECHNOLOGY, INC.
             (Exact name of Registrant as specified in its charter)

               OREGON                                93-0822509
       (State of Incorporation)        (I.R.S. Employer Identification No.)

  150 Avery Street, Walla Walla, Washington                     99362
   (Address of principal executive offices)                   (Zip Code)

                                 (509) 529-2161
              (Registrant's telephone number, including area code)
                  ---------------------------------------------

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

                                      None

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

                           Common Stock, no par value

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

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

     The aggregate market value of the Registrant's common stock held by
non-affiliates on December 15, 1999 (based on the last sale price of such
shares) was approximately $26,387,131.

     The number of shares of the Registrant's common stock outstanding on
December 15, 1999 was 4,713,995 shares of common stock, no par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Parts of Registrant's Proxy Statement dated January 24, 2000 prepared in
connection with the Annual Meeting of Shareholders to be held on February 23,
2000 are incorporated by reference into Part III of this Report.



<PAGE>



                              KEY TECHNOLOGY, INC.
                                 1999 FORM 10-K
                                TABLE OF CONTENTS

PART I                                                                      PAGE
                                                                            ----

     Item 1.      BUSINESS..................................................  1

     Item 2.      PROPERTIES................................................  9

     Item 3.      LEGAL PROCEEDINGS.........................................  9

     Item 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 10


PART II

     Item 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                  STOCKHOLDER MATTERS....................................... 10

     Item 6.      SELECTED FINANCIAL DATA................................... 11

     Item 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS....................... 12

     Item 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                  MARKET RISK............................................... 17

     Item 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 18

     Item 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE....................... 34


PART III

     Item 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 35

     Item 11.     EXECUTIVE COMPENSATION.................................... 35

     Item 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT............................................ 35

     Item 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 35


PART IV

     Item 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
                  FORM 8-K.................................................. 36

     SIGNATURES............................................................. 38

     EXHIBIT INDEX.......................................................... 39



<PAGE>



                                     PART I

     Certain statements set forth below may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements to differ from those expressed or implied by the forward-looking
statements. With respect to the Company, the following factors, among others,
could cause actual results or outcomes to differ materially from current
expectations: uncertainties relating to patents and proprietary information; the
potential for patent-related litigation expenses and other costs resulting from
claims asserted against the Company or its customers by third parties; the
expiration of certain patents and any resulting effect upon competition and
sales of related product lines; achievement of product performance
specifications and any related effect on product upgrade or warranty expenses;
the ability of new products to compete successfully in either existing or new
markets; the potential for adverse fluctuations in foreign currency exchange
rates; the effect of product or market development activities; availability and
future costs of materials and other operating expenses; competitive factors; the
risks involved in expanding international operations and sales; the costs or
expenditures associated with remediating potential Year 2000 issues; the
performance and needs of industries served by the Company and the financial
capacity of customers in these industries to purchase capital equipment; as well
as other factors discussed in Exhibit 99 hereto which is hereby incorporated by
reference. Given these uncertainties, readers are cautioned not to place undue
reliance on the forward-looking statements. The Company disclaims any obligation
subsequently to revise or update forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.



ITEM 1. BUSINESS.

GENERAL

     Key Technology, Inc. (the "Company") designs, manufactures, sells and
services process automation systems, primarily for the food processing industry,
that process product streams of discrete pieces to improve food safety and
quality. These systems integrate electro-optical automated inspection and
sorting systems, specialized conveying systems and process and preparation
systems.

     During fiscal 1999, the Company's net sales increased 28% to $68.0 million
compared to sales of $53.1 million in fiscal 1998. Net income for fiscal 1999
was $3.5 million, a 282% increase over the prior fiscal year. Earnings per share
increased to $0.75 in fiscal 1999 compared to $0.20 in 1998.

     The Company implemented a strategy in fiscal 1999 to respond to increasing
customer demand for "turn-key" systems. The objective of the strategy was to
sell more Company-manufactured systems by combining those systems with
third-party supplied equipment and design and installation services to provide
entire processing lines, all from one supplier. The success of this strategy was
a significant contributor to the growth in sales and profitability in 1999,
which was led by a 30% increase in sales of specialized conveying systems that
contributed 38% of the Company's total gross margin for the year.

     Sales of automated inspection systems grew modestly in fiscal 1999 over
1998. However, the gross margin resulting from these sales contributed 39% of
the Company's total gross margin. As a percent of automated inspection systems
sales in fiscal 1999, the gross margin for this product line increased six
percentage points while warranty costs decreased 41% from the previous fiscal
year.


                                       1

<PAGE>

     The Company considers the worldwide food processing industry to be a
significant opportunity, not only to solve existing food quality and safety
issues, but also to assist in providing safe processing technologies to
expanding global markets. Accordingly, the Company devoted increased resources
in fiscal 1999 to selling and marketing activities and to new product research
and development projects.

     The Company's domestic operations are headquartered in Walla Walla,
Washington and are organized into business units comprised of the Company's two
major product groups: Automated Inspection Systems (AIS) and Specialized
Conveying Systems (SCS). Both of these business units continue to serve
customers in the Company's primary market through common sales and distribution
channels.

     The Company's European business unit operations are conducted by its
indirect, wholly-owned European subsidiary, KEY/Superior B.V. KEY/Superior B.V.
is a manufacturer of specialized conveying systems sold primarily within Europe.
The Company also utilizes KEY/Superior B.V. as the primary sales and service
organization for its AIS products sold to European customers. KEY/Superior B.V.
is located in Beusichem, The Netherlands.


INDUSTRY BACKGROUND

FOOD PROCESSING INDUSTRY

     Historically, defect removal and quality control in the food processing
industry have been labor intensive and dependent upon and limited by the
variability of the work force. Food processors must process large quantities of
raw product through different stages, including sorting to remove defective
pieces and inspection for product quality and safety. The frequency and severity
of defects in the raw product is highly variable depending upon local factors
affecting crops. The industry has sought to replace manual methods with
automated systems that achieve higher yield, better product quality and safety
and reduced cost.

     The Company's strategy is to solve processing industry problems of high
labor costs, inadequate yields and inconsistent quality and safety by providing
automated inspection systems and specialized conveying systems. The Company's
automated inspection systems use advanced optical inspection technology to
improve product yield (more of the good product recovered) and quality (higher
percentage of defective product being removed) over the manual sorting and
defect removal methods historically used by food processors. In a typical
application, a single automated inspection system can replace 25 to 75
processing line employees, resulting in labor cost savings and improved yield
sufficient to pay for the system in less than one year, as well as providing
significant improvements in product quality.

PRODUCTS

     The Company has developed a modular family of product lines that can be
configured in a variety of ways and integrated to provide complete solutions for
specific applications. Advances in any one module can therefore benefit a number
of the Company's products that incorporate optical scanning and image analysis.
Despite the incorporation of sophisticated technology, the Company's products
can be operated by plant personnel with minimal specialized training and are
built to withstand the harsh environments found in processing plants.


                                        2

<PAGE>



     The following table sets forth sales by product category for the periods
indicated:

<TABLE>
<CAPTION>

                                                   FISCAL YEAR ENDED SEPTEMBER 30,
                                           ----------------------------------------------
                                               1999             1998             1997
                                           ------------     ------------     ------------
                                                           (IN THOUSANDS)
<S>                                           <C>              <C>              <C>
Automated inspection systems..........        $22,342          $21,388          $20,400

Specialized conveying systems.........         28,422           21,807           25,366

Processing and preparation systems....          5,528            1,687            4,068

Service/contracts and parts...........         11,736            8,251            7,434
                                           ------------     ------------     ------------
       Net sales......................        $68,028          $53,133          $57,268
                                           ============     ============     ============
</TABLE>

     The following table sets forth the percent of the total gross margin
contributed by each product category for the periods indicated:

<TABLE>
<CAPTION>

                                                   FISCAL YEAR ENDED SEPTEMBER 30,
                                           ----------------------------------------------
                                               1999             1998             1997
                                           ------------     ------------     ------------
<S>                                            <C>              <C>              <C>
Automated inspection systems..........          39%              44%              33%

Specialized conveying systems.........          38%              36%              45%

Processing and preparation systems....           3%               2%               5%

Service/contracts and parts...........          20%              18%              17%
                                           ------------     ------------     ------------
       Total gross margin.............         100%             100%             100%
                                           ============     ============     ============
</TABLE>

AUTOMATED INSPECTION SYSTEMS

     Automated inspection systems are used in processing applications to detect
and eliminate defects during raw product processing. The Company's systems
within this group include the ADR(R)and Tegra(R)systems, representing the
Company's third and fourth generation, respectively, of automated inspection
systems.

     All systems in this group use proprietary linear array charged coupled
device ("CCD") mono-chromatic (black and white), color or multi-spectral
cameras. Each of the cameras scan the product-streams, which move at five or ten
feet per second, at the rate of 1,500 or 4,000 times per second and can identify
defects as small as 1/16 of an inch (1.5 mm) in diameter. Systems with
monochromatic cameras generally are sold at lower price levels and are most
effective for product that has a marked disparity in shade between the defective
and the good product. Systems with color cameras are required when a variety of
defect and product colors occur simultaneously or when the difference in shading
between the defective and the good product is more subtle. In 1997, the Company
developed multi-spectral systems which utilize either infra-red or ultraviolet
technologies, individually or in combination with visible light, to identify
defects that may not be detectable by solely using visible light spectra.

     TEGRA AUTOMATED INSPECTION SYSTEM. In fiscal 1996, the Company introduced
its fourth generation of automated inspection system sorters. Named Tegra, this
generation of automated inspection systems incorporates a number of
technological and mechanical advances that result in significant improvements to
processing efficiency and product throughput with higher recovery and
defect-removal rates. Tegra was designed to provide a technology platform for
future product development and potential entry into applications and markets not
previously served by the Company. Certain present and potential applications for
Tegra systems include potato products, green beans, dried beans, corn, carrots,
peas, spinach and other leafy vegetables, peaches, pears, nuts, grains, coffee
and tobacco.

     During fiscal 1999, the Company sold Tegra optical sorter systems to coffee
processors in remote areas of Brazil, Colombia and the Ivory Coast of Africa.
Those systems will allow the processors to


                                       3

<PAGE>

produce consistent quality coffee to satisfy the discriminating tastes of global
customers such as specialty coffee retailers. In other markets, such as meat and
poultry processing and fresh-cut produce, the Company committed funds to
researching new technology that, if successful, could assist its customers in
assuring the quality and safety of their products.

     Tegra incorporates object-specific IntelliSort(TM) technology. IntelliSort
sorting technology recognizes not only color and size, but also shape. This
capability provides a solution to previously difficult sorting problems, such as
differentiation between green beans and green bean stems. Tegra cameras are
capable of high fidelity color-image processing to scan product at a rate of
over 4,000 times per second, offering a sensitivity to color subtleties beyond
human vision. Tegra also incorporates KeyWare(R) software that substantially
reduces operational complexity. KeyWare consists of application packages, each
specifically designed for a single product category that, together with the
system's computer hardware capability and networking software, support all
standard factory control and automation interfaces. These features allow Tegra
to establish data connectivity and communication with a processing plant's
computer network system.

     ADR SYSTEMS. The Company's ADR systems are used to transport, inspect and
remove defects from french fry potatoes. The Company believes its ADR system is
the principal optical inspection and defect removal system used in the french
fry processing market. The Company's full-capacity ADR systems can process up to
26,000 pounds of product per hour.

     As a result of product development activities in fiscal 1998 and 1999, the
Company expects to introduce a fourth generation of the ADR to the frozen french
fry industry during fiscal 2000. In addition to allowing processors to
automatically detect and trim defects from french fries, this new product will
also custom-cut the fries to meet customer demand for length distribution.
Selective length cutting of the french fries will also allow them to be packed
more densely. The denser packaging will reduce shipping expense, which is a
significant contributor to the cost of the delivered product.

     PHARMACEUTICAL INSPECTION SYSTEM. In fiscal 1996, the Company purchased
certain inventory, trademarks and patents related to a pharmaceutical inspection
product line, the I-300 Pharmaceutical Inspection System, from the Imaging
Division of Oncor, Inc. Using patented spatial color analysis technology, this
product line inspects solid-dose pharmaceuticals, including tablets, capsules
and softgels for broken or missing pieces, foreign products, discoloration or
coating defects, as well as the integrity of capsules. The pharmaceutical
inspection system also verifies labels and the presence of printing and detects
color, size, location and shape defects at processing rates over one million
pieces per hour. The Company expects sales of this product line will be a
moderate contributor to automated inspection system revenues during fiscal 2000.

SPECIALIZED CONVEYING SYSTEMS

     Conveying systems are utilized throughout the food industry, as well as
other industries, to move large quantities of product within a processing plant.
The Company's specialized conveying systems include the Iso-Flo(R)vibratory
conveyor systems, food pumping systems and belt conveyors. The acquisition of
Superior B.V. in fiscal 1996 added electromagnetic conveyor and spiral elevator
technologies to the Company's conveying systems product line.

     ISO-FLO VIBRATORY CONVEYING SYSTEMS. The Company's principal specialized
conveying system is its patented Iso-Flo vibratory conveyor system, which was
introduced in 1978. The Iso-Flo conveyor is a type of pan conveyor. Pan
conveyors are common throughout industries that process product streams of
discrete pieces, especially the food processing industry. Pan conveyors move
product pieces by vibrating


                                       4

<PAGE>

the pan at high frequency along a diagonal axis, upward and forward. This action
propels the product ahead in small increments and distributes it evenly for
close control of movement and presentation.

     Most Iso-Flo conveyors are custom designed and engineered by the Company to
customer specifications. Iso-Flo systems are used in a variety of processing
applications, including potato products, vegetables and fruits (green beans,
peas, carrots, corn, peaches, pears, cranberries and apples), snack foods,
cereals, pet foods, poultry, seafood and certain nonfood products.

     The Company's patent on its Iso-Flo vibratory conveyor system expired in
fiscal 1999. There can be no assurance that the expiration of the Iso-Flo patent
will not result in increased competition and decreased sales of the product
line.

     The Company considers its vibratory conveyor technology to be a proprietary
core competency. Consequently, investment in research and development activities
related to specialized conveying systems increased in fiscal 1999 compared to
1998. Research and development activities for this product group are expected to
increase moderately in fiscal 2000 compared to 1999. As a result of the
Company's research and development activities in fiscal 1999, it expects to
expand its family of vibratory conveyors with the introduction of three new
products in the first quarter of fiscal 2000. These products include the
Horizon(TM), the Impulse(TM)and the Marathon(TM)conveying systems.

     The Horizon is a horizontal motion vibratory conveyor that uses a gentle
conveying action to move fragile foods, such as snacks, cereals and
seasoned/coated products, through the processing stages. The design of the
Horizon eliminates vertical bounce of the processor's product. This feature
results in reduced costs to the processor due to minimized product damage,
reduced seasoning/coating loss and elimination of condiment build-up on the
conveyor bed.

     The Impulse is a line of electromagnetic conveyors which combine the
advantage of starting and stopping in milliseconds with precise metering
control. Additionally, the Impulse conveyor drive systems are oil free which
limits the potential for contamination and improves the safety of edible food
products. This conveyor system was developed for packaging applications in snack
food, dry ingredient, chemical and pharmaceutical processing.

     The Marathon is the Company's longest conveyor and moves product up to 100
feet or more on a single conveyor bed. This conveyor is targeted for use in high
volume applications such as corn, green beans and other bulk conveying markets
to maximize the processor's production efficiency.

     FOOD PUMPING SYSTEMS AND BELT CONVEYORS. The Company's hydro food pumping
systems are used to transport food items over distances and elevations in
processing plants. A typical pumping system consists of a stainless steel
contoured tank and food pump to propel the product, lengths of piping to reach
the destination, and a water removal/product spreading subsystem at the
destination. The systems can be configured so that food processing functions,
such as blanching, cooling and cutting, can also occur during pumping. The
Company also designs and manufactures belt conveyors using a variety of belt
materials.

PROCESS AND PREPARATION SYSTEMS

     The Company designs and manufactures raw food preparation systems to
prepare vegetables prior to freezing, canning or other processing. Products in
this group include blanchers, air cleaners, air coolers, froth flotation
cleaners, vegetable metering systems, and bulk handling equipment. These
products represent the Company's most mature product line. Sales of these
products over the years have formed a


                                       5

<PAGE>

customer base for sales of other Company products and are also establishing a
customer base in developing country markets.

     Process and preparation system revenues also include a variety of
third-party supplied equipment and installation services which are sold as
components of larger processing lines, for which the Company has assumed
turn-key sales responsibility. In fiscal 1999, these third-party supplied
products accounted for approximately $3.1 million of the $5.5 million in total
net sales of process and preparation systems

SERVICE/CONTRACTS AND PARTS

     The Company generates revenues from the sale of spare parts and post-sale
field and telephone-based repair services to support its customers' routine
maintenance requirements and seasonal equipment startup and winterization
processes. In response to increasing customer demand for maintenance and parts
services, the Company introduced a new multi-level service product offering
named UpTime(TM) in the first quarter of fiscal 1999. The UpTime program was a
principal contributor to a 52% increase in in maintenance service revenues in
fiscal 1999 compared to fiscal 1998. The Company considers its parts and
maintenance service sales to be important potential sources of future revenue
growth and expects to continue to devote additional resources in fiscal 2000 to
increase such sales. The Company also typically provides system installation
support services which are included in the sales price of certain of its
products, principally the AIS systems.

CUSTOMERS AND MARKETS

     The Company's primary market is the food processing industry. The largest
market segments for the Company's products have been potatoes, vegetables and
snack foods. The Company has also penetrated other food market segments,
including fruits, cereals and pet foods. The Company believes many additional
applications for its systems exist in both food and nonfood markets.

     The principal potato market served by the Company's systems is french
fries. French fries comprise approximately 90% of the over eight billion pounds
of frozen potato products processed annually in the United States. The expansion
of American-style fast food chains in foreign countries is resulting in parallel
development of the frozen french fry market overseas.

     The Company's products are used in the fruit and vegetable processing
market where field-harvested products are cleaned, graded, automatically sorted,
blanched and processed prior to freezing, canning or packaging for sale to
institutional and retail markets. Principal fruit and vegetable market segments
for the Company are green beans, corn, carrots, peas, onions, apples, pears,
cranberries and peaches. The Company also sells pharmaceutical systems, together
with other products, to pharmaceutical manufacturers in the United States,
Puerto Rico and Europe.

     In fiscal 1998, the Company expanded its addressable markets by introducing
Tegra-based product applications into the coffee and tobacco markets. During
fiscal 1999, the Company sold Tegra systems to coffee processors located in
Brazil and Colombia in South America and the Ivory Coast in Africa. Several
Tegra systems were also installed in fiscal 1999 on either rental or trial
placements in tobacco processing applications. Additionally, the Company expects
that the coffee and tobacco markets may provide opportunities for expanded sales
of specialized conveying systems. During fiscal 1999, the Company both hired new
employees and assigned existing personnel specifically to focus additional sales
and marketing resources on the coffee and tobacco industries.


                                       6

<PAGE>

     The acquisition of Superior B.V. in fiscal 1996 provided the Company with a
manufacturing base from which it can more rapidly manufacture and deliver
conveying systems to European customers. Export and international sales for the
fiscal years ended September 30, 1999, 1998 and 1997 accounted for 46%, 37% and
32% of net sales in each such year, respectively. Nearly all export sales of
products manufactured in the United States have been denominated in U.S.
dollars. Sales in Europe of spare parts and service, as well as products
manufactured in Europe, are generally denominated in European currencies. In its
export and foreign sales, the Company is subject to the risks of conducting
business internationally, including unexpected changes in regulatory
requirements; fluctuations in the value of the U.S. dollar, which could increase
the sales prices in local currencies of the Company's products in international
markets; tariffs and other barriers and restrictions; and the burdens of
complying with a variety of international laws. Additional information regarding
export and foreign sales is set forth in Note 11 to the Company's Consolidated
Financial Statements for the year ended September 30, 1999.

     The Company does not rely on annual recurring sales to particular
customers. However, the Company's customers often make periodic large purchases
of complete systems. Therefore, while in any given fiscal year sales to a single
customer might represent 10 percent or more of the Company's consolidated
revenues, the Company believes the loss of such customer would not have a
material adverse effect on the Company. During fiscal 1999, sales to one
customer amounted to approximately 11% of total net sales. No single customer
accounted for more than 10% of net sales during fiscal 1998 and 1997.

     The Company markets its products directly and through independent sales
representatives. In North America, the Company operates sales offices in Walla
Walla, Washington; Rockville, Maryland; and Beaver Dam, Wisconsin. The Company's
subsidiary, Key/Superior B.V., provides sales and service to European customers.
Sales in Australia and New Zealand are made through an independent distributor,
which the Company also licenses to manufacture certain of its products.

ENGINEERING, RESEARCH AND DEVELOPMENT

     At September 30, 1999, the Company's engineering departments had 92
technical and support employees who conduct new product research and
development, sustaining engineering for released products and project
engineering for custom systems. The department includes electronic, mechanical
and software engineers, mathematicians and technical support personnel.

     The Company's project engineering teams are responsible for engineering and
designing the details of each custom order. A document control team maintains
and controls product documentation and the product modeling database for the
development engineering and project engineering teams as well as the
manufacturing department.

     In fiscal 1999, the Company's engineering, research and development
expenses were approximately $4.3 million, compared to $4.8 million and $4.4
million in 1998 and 1997, respectively.

MANUFACTURING

     The Company maintains two domestic manufacturing facilities, both located
in Walla Walla, and a European manufacturing facility located in The
Netherlands. The Company's current manufacturing facilities and its product
design and manufacturing processes integrate Computer Aided Engineering (CAE),
Computer Aided Design (CAD), Computer Aided Manufacturing (CAM) and Computer
Integrated Manufacturing (CIM) technologies. Manufacturing activities include
process engineering; cutting, welding, fabrication and assembly of custom
designed stainless steel systems; camera and


                                       7

<PAGE>

electronics assembly; subsystem assembly; and system test and integration. The
Company manufactures products for its AIS business unit in a 150,000 square foot
facility constructed in 1990. In response to increased market demand for its
products, the Company increased its manufacturing capacity by leasinganother
100,000 square foot facility in Walla Walla in early 1996. The Company initiated
full-scale production operations for its SCS business unit in this facility
during early fiscal 1997. The Company also increased its manufacturing capacity
as a result of the acquisition in July 1996 of Superior B.V. During the fourth
quarter of fiscal 1998, the Company further expanded KEY/Superior B.V.'s
manufacturing capacity by leasing and occupying a 45,000 square foot facility
adjacent to its original 18,000 square foot building, which is now used for
other purposes.

     The Company manufactures certain of its products to Underwriters
Laboratories, United States Department of Agriculture and Occupational Safety
and Health Administration standards and its domestic manufacturing processes
became qualified in January 1995 for certification to the ISO-9001 quality
management and assurance standards. The merger of the Company's European
operations will require re-certification of that combined entity to the ISO-9001
standards, which is currently under review. The Company's products also comply
with the Canadian Standards Association (CSA) and European CE (Conformite
Europeene) safety standards.

     Certain components and subassemblies included in the Company's products are
obtained from single-source or sole-source suppliers. The Company attempts to
ensure that adequate supplies are available to maintain manufacturing schedules.
Although the Company seeks to reduce its dependence on sole and limited source
suppliers, the partial or complete loss of certain sources of supply could have
an adverse effect on the Company's results of operations and relations with
customers.

BACKLOG

     The Company's backlog as of September 30, 1999 and September 30, 1998 was
approximately $12.6 million and $11.1 million, respectively. Gross orders
exceeded shipments by $1.5 million in fiscal 1999, resulting in a corresponding
increase in backlog from the closing backlog in fiscal 1998. The Company
schedules production based on firm customer commitments and forecasted
requirements. The Company includes in backlog only those customer orders for
which it has accepted purchase orders. However, the Company believes that
backlog is not necessarily a meaningful indicator of future financial results as
it typically ships products ordered within eight to thirteen weeks from the date
of receipt of the order. Large multiple-unit system orders or orders for systems
in high demand may, however, result in longer delivery times.

COMPETITION

     The markets for automated inspection systems and specialized conveying
systems are highly competitive. Important competitive factors include price,
performance, reliability, and customer support and service. The Company believes
that it currently competes effectively with respect to these factors, although
there can be no assurance that existing or future competitors will not introduce
comparable or superior products at lower prices. Certain of the Company's
competitors may have substantially greater financial, technical, marketing and
other resources. The Company's principal competitors are believed to be the SRC
Vision subsidiary of Advanced Machine Vision Corporation, FMC Corporation,
Sortex Ltd., the Pulsarr B.V. and Elbicon N.V. subsidiaries of Barco N.V.,
Kiremko B.V., and Allen Machinery Co. . As the Company enters new markets, such
as coffee and tobacco, it expects to encounter new niche competitors such as
Satake ESM, Elexso and BEST B.V.


                                        8

<PAGE>


PATENTS AND TRADEMARKS

     The Company currently owns twenty-three outstanding United States patents
issued from 1982 through 1999 and twelve outstanding patents issued by foreign
countries, the first of which expires in late calendar 1999. As of December 15,
1999, seventeen United States and foreign patent applications had been filed and
are pending. The Company has twenty-three registered trademarks and an
application pending for one trademark.

     The Company also attempts to protect its trade secrets and other
proprietary information through proprietary information agreements with
employees and consultants and other security measures. The laws of certain
countries in which the Company's products are or may be manufactured or sold may
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States.

EMPLOYEES

     At September 30, 1999, the Company had 478 full-time employees, including
236 in manufacturing, 92 in engineering, research and development, 103 in
marketing, sales and service and 47 in general administration and finance. None
of the Company's employees in the United States are represented by a labor
union. The Company has never experienced a work stoppage, slowdown or strike.
The Company considers its employee relations to be excellent.


ITEM 2. PROPERTIES.

     The Company's corporate headquarters and the manufacturing and research and
development facilities for its AIS business unit are in a 150,000 square foot
building located on a 20-acre site in Walla Walla, Washington. This facility was
custom designed and built for the Company, with construction completed in
October 1990. The Company occupies the facility under a lease expiring in 2010.
The Company has the option to purchase the facility and related real property at
any time during the remaining lease term. The Company increased its
manufacturing capacity by occupying another 100,000 square foot facility in
Walla Walla beginning in 1996 under a lease expiring in 2005. The Company may
extend the lease until 2010. The Company manufactures the majority of its SCS
products in this facility. The Company also manufactures SCS products in a
45,000 square foot leased facility it occupied in 1998 in Beusichem, The
Netherlands. This facility also serves as the headquarters for the Company's
sales and service functions in Europe. The lease on the facility expires in
2008. In addition, the Company still owns an 18,000 square foot manufacturing
facility, located adjacent to its leased facility in The Netherlands, which it
vacated in 1998 but currently uses as warehouse space and intends to hold for
future expansion. The Company leases office space in the United States in
Rockville, Maryland and Beaver Dam, Wisconsin.


ITEM 3. LEGAL PROCEEDINGS.

     From time-to-time, the Company is named as a defendant in legal proceedings
arising out of the normal course of its business. As of December 15, 1999, the
Company was not a party to any material legal proceedings.


                                        9

<PAGE>


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

     None.


                                     PART II

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

     Shares of the Company's common stock are quoted on the Nasdaq National
Market System under the symbol "KTEC". The following table shows the high and
low bid prices per share of the Company's common stock for the two most recent
fiscal years ended September 30:

                                      High           Low
                                      ----           ---
               Fiscal 1999
               -----------
                 1st Quarter         $7.75          $5.25
                 2nd Quarter          9.50           6.125
                 3rd Quarter          9.375          4.75
                 4th Quarter         12.50           5.188


               Fiscal 1998
               -----------
                 1st Quarter        $16.25          $9.50
                 2nd Quarter         12.50           9.875
                 3rd Quarter         12.00          10.00
                 4th Quarter         10.875          6.00

     The sources of these bid price quotations for the Company's common stock
were Nasdaq's Summary of Activity(TM) reports and the Nasdaq OnlineSM Internet
site.

     The Company had approximately 2,100 beneficial owners of its common stock,
of which 176 are of record, as of December 15, 1999.

     The Company has not historically paid dividends on its common stock. The
Board of Directors does not anticipate payment of any dividends in the
foreseeable future and intends to continue its present policy of retaining
earnings for reinvestment in the operations of the Company. The current credit
facility with the Company's principal domestic bank restricts the payment of
dividends on its common stock, other than dividends payable in its stock, or the
retirement of any of the Company's outstanding shares or the alteration or
amendment of the Company's capital structure without the prior written consent
of the bank.


                                       10

<PAGE>


ITEM 6. SELECTED FINANCIAL DATA.

     The selected consolidated financial information set forth below for each of
the five years in the period ended September 30, 1999 has been derived from the
audited consolidated financial statements of the Company. The information below
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Company's Consolidated
Financial Statements and Notes thereto as provided in Item 7 and Item 8,
respectively.


<TABLE>
<CAPTION>
                                                                      FISCAL YEAR ENDED SEPTEMBER 30,
                                                  1999           1998           1997           1996           1995
                                              ------------   ------------   ------------   ------------   ------------
                                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF EARNINGS DATA:

<S>                                            <C>             <C>            <C>            <C>            <C>
Net sales...............................        $68,028         $53,133        $57,268        $54,341        $42,653
Cost of sales...........................         42,281          33,838         39,451         33,050         25,063
                                              ------------   ------------   ------------   ------------   ------------
Gross profit............................         25,747          19,295         17,817         21,291         17,590
Operating expenses......................         21,022          18,085         17,648         15,226         13,638
                                              ------------   ------------   ------------   ------------   ------------
Income from operations..................          4,725           1,210            169          6,065          3,952
Other income - net......................            436             179            450          1,061          1,175
                                              ------------   ------------   ------------   ------------   ------------
Earnings before income taxes............          5,161           1,389            619          7,126          5,127
Income tax expense......................          1,632             464            197          2,252          1,589
                                              ------------   ------------   ------------   ------------   ------------
Net earnings............................        $ 3,529        $    925       $    422       $  4,874       $  3,538
                                              ============   ============   ============   ============   ============

Earnings per share - Basic..............       $   0.75        $   0.20       $   0.09       $   1.05       $   0.76
                                              ============   ============   ============   ============   ============

Earnings per share - Diluted............       $   0.75        $   0.20       $   0.09       $   1.02       $   0.76
                                              ============   ============   ============   ============   ============
Shares used in per share calculation -
   Basic................................          4,707           4,692          4,674          4,652          4,639
                                              ============   ============   ============   ============   ============
Shares used in per share calculation -
   Diluted..............................          4,711           4,721          4,760          4,777          4,639
                                              ============   ============   ============   ============   ============

</TABLE>


<TABLE>
<CAPTION>
                                                                            SEPTEMBER 30,
                                                  1999           1998           1997           1996           1995
                                              ------------   ------------   ------------   ------------   ------------
                                                                           (IN THOUSANDS)
BALANCE SHEET DATA:
<S>                                           <C>             <C>            <C>             <C>             <C>
Cash and cash equivalents and short-term
  investments...........................      $  6,403        $  6,333       $  2,896        $  9,528        $13,699
Working capital.........................        22,973          18,949         17,308          17,736         18,783
Property, plant and equipment, net......         8,582           9,584          9,380           8,703          4,096
Total assets............................        44,420          39,357         39,441          45,252         31,556
Current portion of long-term debt.......           304             579            852             923            415
Long-term debt, less current portion....           722           1,103          1,293           1,467            825
Shareholders' equity....................        32,657          29,315         28,031          27,583         22,760

</TABLE>

                                       11

<PAGE>


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

INTRODUCTION

     The Company and its wholly-owned subsidiaries design, manufacture and sell
process automation systems, integrating electro-optical inspection and sorting,
specialized conveying and process and preparation equipment.

     The ownership structure of the Company's European operations is held
through its wholly-owned domestic subsidiary, Key Technology Holdings U.S.A.,
LLC. Suplusco Holding B.V. is a wholly-owned European subsidiary of Key
Technology Holdings U.S.A., LLC and in turn owns KEY/Superior B.V. In fiscal
1998, KEY/Superior B.V. was formed through the merger of Key Technology B.V. and
Superior B.V., Suplusco Holding B.V.'s former subsidiaries. Suplusco Holding
B.V. and its subsidiary are located in Beusichem, The Netherlands. Additionally,
the Company has a wholly-owned foreign sales corporation (FSC) subsidiary, Key
Technology FSC, Inc., through the maintenance of which a portion of the
Company's domestically originated foreign trade income is exempt from tax at the
corporate level.

RESULTS OF OPERATIONS

     For the fiscal years ended September 30, 1999, 1998 and 1997, the Company's
net sales were $68.0 million, $53.1 million, and $57.3 million, respectively.
Net sales in fiscal 1999 increased by 28% compared to fiscal 1998. The increased
sales in fiscal 1999 resulted principally from a $6.6 million or 30% increase in
specialized conveying systems followed by a 228% increase in process and
preparation systems and a 42% increase in service/contracts and parts. Sales of
automated inspection systems increased by 4% in fiscal 1999 compared to fiscal
1998. The increases in sales during fiscal 1999 for both the specialized
conveying systems and the process and preparation systems resulted principally
from sales of larger "turn-key" processing line systems. These turn-key
processing lines incorporate the Company's conveying and processing systems
together with other third-party supplied equipment into entire processing lines.
The increase in sales of service/contracts and parts in fiscal 1999 compared to
1998 was principally the result of the introduction early in fiscal 1999 of a
new multi-level service product offering named UpTime. The increase in sales of
automated inspection systems resulted principally from increased sales of
AccuScan(R) and ADR systems, partially offset by decreased sales of Tegra
systems. Sales of automated inspection systems to European and other
international customers increased by 77%.

     Net sales in fiscal 1998 decreased by 7% compared to fiscal 1997. The
decreased sales in fiscal 1998 resulted principally from a 14% decrease in
specialized conveying systems followed by a 59% decrease in process and
preparation equipment, partially offset by a 5% increase in automated inspection
systems and an 11% increase in service/contracts and parts sales. The decrease
in specialized conveying systems and other processing equipment occurred
principally from decreased sales of these products to domestic customers
compared to 1997. The increase in sales in 1998 of automated inspection systems
resulted principally from increased sales of ADR systems and, to a lesser
amount, increased sales of pharmaceutical systems partially offset by a decrease
in total Tegra sales for the period compared to fiscal 1997. The decrease in
total sales volume of the Company's Tegra automated inspection systems in fiscal
1998 was due principally to decreased sales of monochromatic Tegra systems,
which were partially offset by increased sales of color and multi-spectral
systems.

     The majority of the Company's Tegra sales are for systems configured with
color cameras, which the Company believes provides superior detection of defects
in most applications. The Company continues


                                       12

<PAGE>

to develop new applications utilizing the Tegra system as a technology platform.
It believes that systems configured with color and multi-spectral cameras will
result in growth in automated inspection system revenues in fiscal 2000 as the
advantages of this technology become more widely known and as sales to more
recently developed application market niches increase.

     Export and foreign sales accounted for 46%, 37% and 32% of total net sales
in fiscal 1999, 1998 and 1997, respectively. The largest market for such foreign
sales in each if the three fiscal years was to European customers. Sales in
fiscal 1999 to European customers and to customers in other foreign markets
increased by 47% and 82 %, respectively, over the prior year.

     Gross profit was 38%, 36% and 31% of sales in fiscal 1999, 1998 and 1997,
respectively. The gross margin improvement, as a percentage of net sales in
fiscal 1999 compared to fiscal 1998, benefited from improved margins in the
automated inspection and specialized conveying systems and in service contracts,
partially offset by decreased gross margins in process and preparation systems.
Automated inspection system gross margins, as a percent of sales, improved six
percentage points, principally the result of a 41% decrease in warranty costs.
Improved specialized conveying system gross margins benefited principally from a
decrease in manufacturing overhead resulting from increased production volumes
between the two comparable periods. The gross margins for service contracts also
improved principally as a result of decreased overhead expenses as a percentage
of revenues, which increased significantly in fiscal 1999 compared to 1998.
Process and preparation system revenues in fiscal 1999 included a variety of
third-party supplied equipment and installation services which were sold at very
low margins as components of larger processing lines. During fiscal 1999, the
third-party supplied products accounted for approximately $3.1 million of the
$5.5 million in total net sales of process and preparation systems and were the
principal cause of the decrease in gross margins for that product group. Sales
of this product group during 1998 were $1.7 million and included minimal
third-party supplied products. The improved gross profit margin, as a percentage
of net sales in fiscal 1998 compared to fiscal 1997, resulted principally from a
shift in product mix toward higher margin products combined with improved
margins in most product groups. The improved gross margin in 1998 also benefited
from decreased warranty and installation expenses and decreased manufacturing
labor and other manufacturing costs as percentages of sales.

     Operating expenses increased to $21.0 million in fiscal 1999 from $18.1
million in fiscal 1998 and from $17.6 million in fiscal 1997 and represented
31%, 34% and 31% of net sales in each such year, respectively. The Company
expects that, as a percentage of net sales, total operating expenses in fiscal
2000 should be reasonably close to that experienced in fiscal 1999.

     Selling and marketing expenses were $11.1 million in fiscal 1999, $8.0
million in fiscal 1998 and $8.1 million in fiscal 1997, and represented 16%, 15%
and 14% of net sales in each such year, respectively. In fiscal 1999, selling
and marketing expenses increased 39% compared to 1998, resulting principally
from increased commission expenses related to the higher level of product sales
combined with an increased volume and percentage of those sales sold through
outside representatives to whom the Company pays higher commission rates,
increased staffing costs and increased advertising and product promotion
expenses. Selling and marketing expenses in fiscal 1998 decreased compared to
fiscal 1997 principally as a result of decreased commission expenses related to
a lower level of product sales combined with a decreased volume and percentage
of those sales sold through outside representatives. The effect of the decreased
commission expenses were partially offset by increased product promotion and
advertising expenses in fiscal 1998 compared to 1997. The Company expects to
continue to devote additional resources in fiscal 2000 to expand its selling
efforts and market presence, both domestically and internationally.


                                       13

<PAGE>

     Research, development and engineering expenses decreased in fiscal 1999 to
$4.3 million from $4.8 million in fiscal 1998 and $4.4 million in fiscal 1997,
and represented 6%, 9% and 8% of net sales in each such year, respectively.
Research and development expenses in fiscal 1999 decreased by approximately 10%
compared to 1998 principally as a result of in increased level of engineering
costs charged to cost of sales as a direct result of the increased sales volume,
particularly in the Company's SCS business unit. However, research and
development expenses related to new product development projects increased by 7%
in fiscal 1999 compared to 1998 as a result of activities devoted to developing
a new fourth generation ADR product and new specialized conveying system
products. The increase in research and development expenses in fiscal 1998
compared to 1997 resulted from activities to extend the capabilities of Tegra
into other applications and markets, such as coffee and tobacco, and in the
development of a new product for the potato industry. Additional research and
development expenditures were incurred in 1998 in the development of an
adaptation of the Company's Vis/IR (multi-spectral) scanning cameras that
simultaneously uses visible and infrared illumination for detecting defects in
french fries while ignoring the potato skin. The Company expects that research
and development expenses in fiscal 2000 may increase moderately compared to
fiscal 1999. Activities in fiscal 2000 will focus on continuing to extend the
capabilities and applications of the technologies contained in Tegra, completing
the development of the fourth generation ADR product for the potato industry and
continuing to develop new specialized conveying system products. The Company
also expects to invest research funds in new technologies related to the quality
and safety of foods in the meat and poultry processing and fresh-cut produce
markets.

     General and administrative expenses increased to $5.6 million in fiscal
1999 from $5.2 million in fiscal 1998 and $5.1 million in fiscal 1997, and
represented 8%, 10% and 9% of net sales in each such year, respectively. During
fiscal 1999, general and administrative expenses increased approximately 6%
compared to fiscal 1998 due principally to increased incentive compensation
related to the Company's increased level of profitability and increased
consulting and professional service expenses, partially offset by decreased
costs for doubtful accounts receivable. General and administrative expenses
increased very modestly in fiscal 1998 compared to the prior fiscal year
principally as a result of expenses related to consulting and training services
to improve the Company's processes and product reliability. The Company expects
that general and administrative expenses in fiscal 2000 may increase moderately
compared to fiscal 1999.

     Other income and expense includes interest income and expense, royalty
income and other income from miscellaneous sources. Net interest income in
fiscal 1999 was $210,000 compared to $88,000 in fiscal 1998 and $34,000 in 1997.
Increased interest earnings on increased balances of funds invested in cash
equivalents and short-term investments and decreased long-term debt resulted in
the increased net interest income in fiscal 1999 compared to fiscal 1998 and
1997. During fiscal 1999, the Company received royalty payments of $77,000
compared to total royalty income of $62,000 in fiscal 1998. In fiscal 1997,
royalty income totaled $225,000, which included $125,000 as part of an agreement
to sell certain equipment to one customer, pursuant to which the Company may
receive royalty payments through 2001.

     The Company's effective income tax rate was 31.6%, 33.5%, and 32.0% for
fiscal 1999, 1998 and 1997, respectively.

     Net earnings after tax were $3.5 million in fiscal 1999 compared to
$925,000 in fiscal 1998 and $422,000 in fiscal 1997. Basic and diluted net
earnings per share were $0.75, $0.20 and $0.09 in fiscal years 1999, 1998 and
1997, respectively. The increase in net earnings in fiscal 1999 compared to 1998
resulted principally from the increased gross margins due to the increased level
of sales, decreased warranty expenses, and decreased manufacturing costs as a
percentage of sales. The increased gross


                                       14

<PAGE>

margin in fiscal 1999 was partially offset by increased selling and marketing
and general and administrative expenses compared to fiscal 1998. In spite of
decreased sales volume in fiscal 1998 compared to 1997, net earnings in fiscal
1998 improved over the prior year due to increases in gross margin resulting
principally from a shift in product mix toward higher margin products, improved
margins in most product groups, decreased warranty and installation expenses,
and decreased manufacturing labor and other manufacturing costs as percentages
of sales.

LIQUIDITY AND CAPITAL RESOURCES

     During fiscal 1999, net cash provided by operating activities totaled $1.9
million compared to $5.1 million provided by operating activities in fiscal 1998
and net cash used totaling $3.9 million in fiscal 1997. During fiscal 1999, cash
used due to an increase in accounts receivable totaled $3.8 million and resulted
principally from an increase in sales volume, compared to cash provided by a
decrease in accounts receivable totaling $1.6 million during fiscal 1998, due
principally to a decrease in sales volume and improved accounts receivable
management. Accounts receivable balances during fiscal 1997 increased, and cash
decreased, by $73,000. Operating activities during 1999 utilized $2.1 million in
cash to fund an increase in inventory compared to $1.2 million provided in 1998
from a decrease in inventories and the use of $360,000 to fund an increase in
inventories in 1997. Increases in trade accounts payable, accrued payroll
liabilities and accrued income taxes, partially offset by a decrease in accrued
customer support and warranty costs, provided cash during fiscal 1999 totaling
$2.0 million. By comparison, the Company used cash during fiscal 1998 and 1997
in the amounts of $846,000 and $4.0 million, respectively, to decrease trade
accounts payable balances and accrued customer support and warranty costs and to
pay accrued income taxes and certain accrued payroll liabilities which had been
accrued in previous fiscal years.

     Net cash resources from investing activities totaling $1.3 million, $2.0
million and $2.5 million were used to fund the acquisition of capital equipment
during 1999, 1998 and 1997, respectively. At September 30, 1999, the Company had
no material commitments for capital expenditures. During fiscal 1998, the
Company received net cash resources totaling $653,000 from the sale of a
previously vacated facility. Cash flows were used in 1999 to purchase short-term
investments in the net amount of $984,000 compared to no such investments in
1998 and compared to the liquidation of short-term investments in the net amount
of $6.1 million used to partially fund the Company's operating requirements in
fiscal 1997.

     The Company's cash flows from financing activities were affected by the
repayment of long-term debt during fiscal 1999, 1998 and 1997 totaling $539,000,
$904,000 and $1.6 million, respectively. Separately, cash flows from the
issuance of long-term debt totaled $409,000 and $1.3 million in fiscal 1998 and
1997, respectively. There were no such proceeds from the issuance of long-term
debt in fiscal 1999. Proceeds from the issuance of common stock under the
Company's employee stock option and stock purchase plans during fiscal 1999,
1998 and 1997 totaled $77,000, $137,000 and $239,000, respectively.

     The Company's facility with a domestic commercial bank provides for an
operating line of credit up to $4.0 million. The Company also maintains a credit
facility with a Dutch bank providing for operating lines of credit totaling up
to approximately $728,000, which are available to the Company's subsidiaries in
the Netherlands. At September 30, 1999, the Company had no borrowings under
either of these credit facilities.

     The Company's operating, investing and financing activities during fiscal
1999 resulted in decreases in cash and cash equivalents totaling $914,000
compared to increases totaling $3.4 million in 1998 and


                                       15

<PAGE>

decreases in 1997 totaling $562,000. The balance of cash and cash equivalents
totaled $5.4 million, $6.3 million and $2.9 million at the end of fiscal 1999,
1998 and1997, respectively. The Company believes that its cash and cash
equivalents, cash generated from operations and available borrowings under its
operating lines of credit will be sufficient to provide for its working capital
needs and to fund future growth.
YEAR 2000 CONVERSION

     The Company has substantially completed an enterprise-wide program to
prepare its computer systems, applications and products for the year 2000 date
conversion. The Company has incurred internal staff costs as well as consulting
expenses, investments in capital equipment and other remediation expenditures
related to enhancements necessary to achieve a year 2000 date conversion with no
effect on customers or disruption to business operations. The total cost of
compliance and its effect on the Compan s future results of operations continues
to be determined as a part of the detailed and on-going compliance-planning
program. Management currently believes that total expenditures for the Company's
year 2000 compliance program will range between $200,000 and $225,000, including
both capital equipment and operating expense. Expenditures through September 30,
1999 totaled approximately $183,000.

     The Company's year 2000 assessment program that addresses internal issues
for its domestic operations was substantially completed by January 1999. Based
on the assessment program, management believes that the year 2000 date
conversion related to internal issues poses only a low level of risk. The
Company's European operation's year 2000 assessment and compliance program was
substantially completed by September 30, 1999. The Company also expects to
continue its assessment of external issues related to suppliers, customers,
utilities and other third parties. These activities are expected to continue
throughout calendar 1999 and beyond, as applicable. The Company assigns a higher
level of risk to such issues since they are outside of its immediate control.

     The Company has identified its supplier base as a primary third-party risk
element. In that regard, management has assessed the year 2000 compliance status
of the sources of supply for its raw material and purchased component
inventories. This assessment has indicated that the Company may need to purchase
and stockpile selected inventory components, as a contingency measure, in
advance of their typical delivery lead times. Although the ultimate requirements
for, and value of, such advance inventory purchases will be subject to a number
of factors, management currently estimates that it has placed orders with its
vendors for inventory valued in a range of $650,000 to $750,000. Delivery of
these inventory items is expected during the first quarter of fiscal 2000 prior
to December 31, 1999. The Company also has issued purchase orders for additional
inventory in the approximate amount of $350,000 which will be stocked and
maintained by selected key vendors as buffer contingency stock.

     The Company has developed contingency plans to assure the uninterrupted
date rollover and integrity of its computer information systems, the maintenance
of its facilities and equipment in the event of year 2000 utility outages or
severe weather conditions and the provision of emergency maintenance support
services to the Company's customers. The Company expects to implement other
contingency plans as the requirements for such plans are identified. The costs,
if any, for any additional contingency plans which the Company may identify are
expected to be incremental to the Company's estimated year 2000 compliance
program expenditures.


                                       16

<PAGE>

THE EURO CONVERSION

     On January 1, 1999, certain member countries of the European Union,
including the Netherlands, established fixed conversion rates between their
existing sovereign (legacy) currencies and the euro, leading to the adoption of
the euro by these countries as their common legal currency. The legacy
currencies are scheduled to remain legal tender in the participating countries
as denominations of the

euro from the date of adoption until January 1, 2002. The Company continues its
assessment of the effect, if any, that the adoption of the euro by these
countries will have upon its business.

     The terms of sales to European and other international customers of
products manufactured by the Company's domestic operations have typically been
denominated in U.S. dollars, although exceptions do occur on an individual case
basis. The Company expects that its standard terms of sales to international
customers, other than those in Europe, will continue substantially in their
present form. However the Company does expect to increasingly price and
denominate its products sold to European customers in euros. For sales
transactions between international customers and the Company's domestic
operations which are denominated in currencies other than U.S. dollars, the
Company assesses its currency exchange risk and may enter into a currency
hedging transaction to minimize such risk. At September 30, 1999, the Company
was not a party to any currency hedging transaction. The Company does not
believe that it should experience a material effect on its business as a result
of the euro conversion which would be inherently different than risks that
currently exist.

     The terms of sales to European customers by KEY/Superior, the Company's
European subsidiary, are typically denominated in either Dutch guilders or the
respective legacy currencies of its customers. KEY/Superior's information
systems software currently accommodates such multiple currency transactions and
is expected to integrate euro denominated transactions with relatively minor
difficulty. The Company's European subsidiary began implementing a conversion of
its business systems to the euro concurrent with the start of the Company's
fiscal 2000 year, well before the January 1, 2002 deadline.

     The Company's European subsidiaries maintain long-term credit facilities
with a Dutch bank and also long-term facility and equipment leases, all of which
currently specify periodic debt service or lease payments denominated in Dutch
guilders. It is the Company's current understanding that no modifications to
these agreements will be required since the guilder to euro conversion rate has
been fixed and no other changes are expected in the other terms of the
respective agreements.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     The Company has assessed its exposure to market risks for its financial
instruments and has determined that its exposures to such risks are not
material.


                                       17

<PAGE>

<TABLE>
<CAPTION>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Title                                                                          Page
         -----                                                                          ----

         <S>                                                                             <C>
         Independent Auditors' Report.............................................       19

         Consolidated Balance Sheets at September 30, 1999 and 1998...............       20

         Consolidated Statements of Earnings for the three years ended
            September 30, 1999....................................................       21

         Consolidated Statements of Shareholders' Equity for the three years
            ended September 30, 1999..............................................       22

         Consolidated Statements of Cash Flows for the three years ended
            September 30, 1999....................................................       23

         Notes to Consolidated Financial Statements...............................       25

         Supplementary Data.......................................................       34

</TABLE>


                                       18

<PAGE>



INDEPENDENT AUDITORS' REPORT





Board of Directors and Shareholders
Key Technology, Inc.
Walla Walla, Washington


We have audited the accompanying consolidated balance sheets of Key Technology,
Inc. and subsidiaries as of September 30, 1999 and 1998, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended September 30, 1999. The consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Key Technology, Inc. and
subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.


DELOITTE & TOUCHE LLP

Portland, Oregon
November 3, 1999


                                       19

<PAGE>
<TABLE>
<CAPTION>


KEY TECHNOLOGY, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARES)
--------------------------------------------------------------------------------------
ASSETS                                                            1999          1998

CURRENT ASSETS:
<S>                                                           <C>           <C>
 Cash and cash equivalents                                     $ 5,419       $ 6,333
 Short-term investments                                            984           -
 Trade accounts and notes receivable, net                       10,762         7,051
 Inventories                                                    14,618        12,683
 Deferred income taxes                                           1,182         1,205
 Prepaid expenses                                                1,049           616
                                                             -----------   -----------

           Total current assets                                 34,014        27,888

PROPERTY, PLANT, AND EQUIPMENT, Net                              8,582         9,584

DEFERRED INCOME TAXES                                              207            18

GOODWILL AND OTHER INTANGIBLES, Net                              1,617         1,867
                                                             -----------   -----------

TOTAL                                                          $44,420       $39,357
                                                             ===========   ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
 Accounts payable                                              $ 2,753       $ 2,471
 Accrued payroll liabilities and commissions                     3,801         2,146
 Accrued customer support and warranty costs                       797         1,043
 Income tax payable                                                507           279
 Other accrued liabilities                                       1,344         1,029
 Customers' deposits                                             1,535         1,392
 Current portion of long-term debt                                 304           579
                                                             -----------   -----------

          Total current liabilities                             11,041         8,939

LONG-TERM DEBT                                                     722         1,103

COMMITMENTS AND CONTINGENCIES (Note 7)                              -            -

SHAREHOLDERS' EQUITY:
 Preferred stock - no par value; 5,000,000 shares authorized;
   none issued and outstanding                                      -            -
 Common stock - no par value; 15,000,000 shares authorized;
   4,713,995 and 4,701,502 issued and outstanding
   1999 and 1998, respectively                                   9,183         9,106
 Retained earnings                                              23,938        20,409
 Accumulated comprehensive loss                                   (464)         (200)
                                                             -----------   -----------
   Total shareholders' equity                                   32,657        29,315
                                                             -----------   -----------

TOTAL                                                          $44,420       $39,357
                                                             ===========   ===========
</TABLE>


                 See notes to consolidated financial statements.
                                        20

<PAGE>
<TABLE>
<CAPTION>


KEY TECHNOLOGY, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------------------------------------

                                                       1999         1998         1997

<S>                                                 <C>          <C>          <C>
NET SALES                                           $68,028      $53,133      $57,268

COST OF SALES                                        42,281       33,838       39,451
                                                  -----------  -----------  -----------

     Gross profit                                    25,747       19,295       17,817
                                                  -----------  -----------  -----------

OPERATING EXPENSES:
 Selling                                             11,125        8,025        8,104
 Research and development                             4,347        4,846        4,417
 General and administrative                           5,550        5,214        5,127
                                                  -----------  -----------  -----------

      Total operating expenses                       21,022       18,085       17,648
                                                  -----------  -----------  -----------

INCOME FROM OPERATIONS                                4,725        1,210          169
                                                  -----------  -----------  -----------


OTHER INCOME (EXPENSE):
 Royalty income                                          77           62          225
 Interest income                                        318          227          280
 Interest expense                                      (108)        (139)        (246)
 Other, net                                             149           29          191
                                                  -----------  -----------  -----------

       Total other income - net                         436          179          450
                                                  -----------  -----------  -----------

Earnings before income taxes                          5,161        1,389          619

Income tax expense                                    1,632          464          197
                                                  -----------  -----------  -----------

NET EARNINGS                                        $ 3,529      $   925      $   422
                                                  ===========  ===========  ===========

EARNINGS PER SHARE - Basic                          $  0.75      $  0.20      $  0.09
                                                  ===========  ===========  ===========

EARNINGS PER SHARE - Diluted                        $  0.75      $  0.20      $  0.09
                                                  ===========  ===========  ===========

SHARES USED IN PER SHARE CALCULATION - Basic          4,707        4,692        4,674
                                                  ===========  ===========  ===========

SHARES USED IN PER SHARE CALCULATION - Diluted        4,711        4,721        4,760
                                                  ===========  ===========  ===========
</TABLE>


                 See notes to consolidated financial statements.
                                       21


<PAGE>

<TABLE>
<CAPTION>

KEY TECHNOLOGY, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------------------------------
                                               COMMON STOCK
                                           ----------------------              ACCUMULATED
                                                                    RETAINED  COMPREHENSIVE
                                               SHARES      AMOUNT   EARNINGS   INCOME (LOSS)  TOTAL
                                            -----------   --------  ---------    --------   ---------
<S>                                           <C>          <C>       <C>         <C>         <C>
Balance at October 1, 1999                    4,657,822    $8,730    $19,062     $ (209)     $27,583

Components of comprehensive income:
 Net earnings                                                            422                     422
 Comprehensive loss - foreign currency
  translation adjustment, net of tax                                               (213)        (213)
                                                                                            ---------

     Total comprehensive income                                                                  209
                                                                                            ---------

Issuance of common stock upon
 exercise of stock options                       20,425       149         -          -           149

Issuance of stock for Employee
 Stock Purchase Plan                              6,199        90         -          -            90
                                            -----------   --------  ---------    --------   ---------

Balance at September 30, 1997                 4,684,446     8,969     19,484       (422)      28,031

Components of comprehensive income:
 Net earnings                                                            925                     925
 Comprehensive income  - foreign currency
  translation adjustment, net of tax                                                222          222
                                                                                            ---------

     Total comprehensive income                                                                1,147
                                                                                            ---------

Issuance of common stock upon
 exercise of stock options                        6,475        51         -          -            51

Issuance of stock for Employee
 Stock Purchase Plan                             10,581        86         -          -            86
                                            -----------   --------  ---------    --------   ---------

Balance at September 30, 1998                 4,701,502     9,106     20,409       (200)      29,315

Components of comprehensive income:
 Net earnings                                                          3,529                   3,529
 Comprehensive loss - foreign currency
  translation adjustment, net of tax                                               (264)        (264)
                                                                                            ---------

     Total comprehensive income                                                                3,265
                                                                                            ---------

Issuance of common stock upon
 exercise of stock options                          100         1         -          -             1

Issuance of stock for Employee
 Stock Purchase Plan                             12,393        76         -          -            76
                                            -----------   --------  ---------    --------   ---------

Balance at September 30, 1999                 4,713,995    $9,183    $23,938      $(464)     $32,657
                                            ===========   ========  =========    ========   =========
</TABLE>


                 See notes to consolidated financial statements.
                                       22


<PAGE>
<TABLE>
<CAPTION>


KEY TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
-----------------------------------------------------------------------------------------------------

                                                                 1999          1998            1997

<S>                                                          <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net earnings                                                $  3,529       $    925       $    422
 Adjustments to reconcile net earnings to net cash
  provided by (used in) operating activities:
    Foreign exchange gain                                         (58)           (61)           (44)
    Depreciation and amortization                               2,371          2,187          2,145
    Deferred income taxes, net                                    (30)             7           (557)
    Deferred rent                                                  42             50             70
    Bad debt expense                                             (117)           156            181
 Changes in assets and liabilities:
  Trade accounts and notes receivable                          (3,768)         1,626            (73)
  Inventories                                                  (2,125)         1,230           (360)
  Prepaid expenses                                               (452)             1            106
  Goodwill and other intangibles                                 -                 6             83
  Accounts payable                                                354            (85)        (2,301)
  Accrued payroll liabilities and commissions                   1,665           (194)          (919)
  Accrued customer support and warranty costs                    (246)           (86)          (242)
  Income taxes payable                                            256           (481)          (562)
  Other accrued liabilities                                       280           (121)           (60)
  Customers' deposits                                             189            (64)        (1,648)
  Other liabilities                                              -              -              (121)
                                                           ------------   ------------   ------------

          Cash provided by (used in) operating activities       1,890          5,096         (3,880)
                                                           ------------   ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Maturities of short-term investments, net                       (984)          -             6,070
 Proceeds from sale of property                                  -               653           -
 Purchases of property, plant, and equipment, net              (1,338)        (2,032)        (2,526)
                                                           ------------   ------------   ------------

          Cash provided by (used in) investing activities      (2,322)        (1,379)         3,544
                                                           ------------   ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of common stock                            77            137            239
 Payments on long-term debt                                      (539)          (904)        (1,608)
 Proceeds from issuance of long-term debt                        -               409          1,312
                                                           ------------   ------------   ------------

          Cash used in financing activities                      (462)          (358)           (57)
                                                           ------------   ------------   ------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                           (20)            78           (169)
                                                           ------------   ------------   ------------

NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                                                 $   (914)        $3,437          ($562)
</TABLE>


                                                                     (Continued)

                 See notes to consolidated financial statements.
                                       23


<PAGE>
<TABLE>
<CAPTION>


KEY TECHNOLOGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED SEPTEMBER 30, 1999
(AMOUNTS IN THOUSANDS)
----------------------------------------------------------------------------------------------------

                                                                1999           1998           1997

<S>                                                           <C>            <C>            <C>
NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                                                  $ (914)        $3,437         $ (562)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                   6,333          2,896          3,458
                                                          ------------   ------------   ------------

CASH AND CASH EQUIVALENTS, END OF YEAR                        $5,419         $6,333         $2,896
                                                          ============   ============   ============

SUPPLEMENTAL DISCLOSURES OF CASH
 FLOW INFORMATION:
  Cash paid during the year for interest                      $  148         $  256         $  240
  Cash paid during the year for income taxes                   1,408            800          1,266

SUPPLEMENTAL DISCLOSURE OF NONCASH
 INVESTING AND FINANCING ACTIVITIES
  Equipment obtained through capital leases                   $  -           $  -           $   51

</TABLE>


                                                                     (Concluded)


                 See notes to consolidated financial statements.
                                       24


<PAGE>


KEY TECHNOLOGY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------------

1.    THE COMPANY

      Key Technology, Inc. and its wholly-owned subsidiaries (the "Company")
      design, manufacture, and sell process automation systems, integrating
      electro-optical inspection and sorting, specialized conveying and product
      preparation equipment. The consolidated financial statements include the
      accounts of Key Technology, Inc. and its wholly-owned subsidiaries, Key
      Technology Holdings U.S.A., LLC, and Key Technology FSC, Inc., a foreign
      sales corporation (FSC). Suplusco Holding B.V., a wholly-owned European
      subsidiary of Key Technology Holdings U.S.A., LLC includes the accounts of
      Key Technology B.V. and Superior B.V. During 1998, Key Technology B.V. was
      merged with and into Superior B.V. to form KEY/Superior B.V. All
      significant intercompany accounts and transactions have been eliminated.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      REVENUE RECOGNITION - Sales revenue net of allowances is generally
      recognized at the time equipment is shipped to customers or when title
      passes. Upon receipt of an order, the Company generally receives a deposit
      which is recorded as customers' deposits. The Company makes periodic
      evaluations of the creditworthiness of its customers and generally does
      not require collateral. An allowance for credit losses is provided based
      upon historical experience and anticipated losses.

      CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
      investments with original maturities of 90 days or less at date of
      acquisition to be cash equivalents. The Company invests from time-to-time
      in short-term investments which consist primarily of bankers acceptances
      and commercial paper with original maturities of greater than 90 days and
      less than one year. These short-term investments are typically held to
      maturity and the carrying value approximates fair value.

      INVENTORIES are stated at the lower of cost (first-in, first-out method)
      or market.

      PROPERTY, PLANT, AND EQUIPMENT are recorded at cost and depreciated over
      estimated useful lives on the straight-line method. The range in lives for
      the assets is as follows:
                                                                          YEARS
                                                                         -------

          Buildings and improvements                                     7 to 40
          Manufacturing equipment                                        7 to 10
          Office equipment, furniture, and fixtures                       3 to 7

      GOODWILL AND OTHER INTANGIBLES - Goodwill is amortized over 10 years.
      Patent costs are amortized over the estimated useful lives of the related
      patents or 17 years, whichever is shorter. Management periodically
      evaluates the recoverability of goodwill and other intangibles based upon
      current and anticipated net income and undiscounted future cash flows.
      Amortization of goodwill and other intangibles was $237,000, $237,000, and
      $244,000 for the years ended September 30, 1999, 1998, and 1997,
      respectively.

      ACCRUED CUSTOMER SUPPORT AND WARRANTY COSTS - The Company provides
      customer support services consisting of installation and training to its
      customers. The Company also provides a warranty on its products for one
      year following the date of shipment. Management establishes the reserve
      for customer support and warranty costs based upon the types of products
      shipped, customer support and product warranty experience and estimates
      such costs for related new products where


                                       25

<PAGE>

      experience is not available. The provision of customer support and
      warranty costs is charged to cost of sales at the time such costs are
      known or estimable.

      INCOME TAXES - Deferred income taxes are provided for the effects of
      temporary differences arising from differences in the reporting of
      revenues and expenses for financial statement and income tax purposes
      under the asset and liability method using currently enacted tax rates.

      FOREIGN CURRENCY TRANSLATION - Assets and liabilities denominated in a
      foreign currency are translated to U.S. dollars at the exchange rate on
      the balance sheet date. Translation adjustments are shown separately in
      shareholders' equity. Revenues, costs, and expenses are translated using
      an average rate. Realized and unrealized foreign currency transaction
      gains and losses are included in the consolidated statement of earnings
      and are not material.

      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 reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from
      those estimates.

      FINANCIAL INSTRUMENTS - Statement of Financial Accounting Standards
      ("SFAS") No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
      requires disclosure of the estimated fair value of financial instruments.
      The carrying value of the Company's cash, receivables, trade payables, and
      other accrued liabilities approximates their estimated fair values due to
      the short maturities of those instruments.

      EARNINGS PER SHARE - Basic earnings per share ("EPS") has been computed by
      dividing net income by the weighted average number of shares outstanding
      during each period. Diluted EPS has been computed by dividing net income
      by the weighted average common and common equivalent shares outstanding
      during each period using the treasury stock method, if the common
      equivalent shares were not antidilutive. The difference between the basic
      and diluted weighted average shares is due to common stock equivalent
      shares resulting from outstanding stock options and warrants. Net income
      for the calculation of both basic and diluted EPS is the same for each
      period presented. The calculation of the weighted average outstanding
      shares is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                1999        1998        1997

         <S>                                                   <C>         <C>         <C>
         Weighted average shares outstanding - basic           4,707       4,692       4,674
         Common stock options and warrants                         4          29          86
                                                             -------     -------     -------

         Weighted average shares outstanding - diluted         4,711       4,721       4,760
                                                             =======     =======     =======
</TABLE>


      Options to purchase 509,183 shares were outstanding as of September 30,
      1999, but were not included in the computation of diluted EPS for the year
      then ended because the options' exercise prices were greater than the
      average market price of the common stock. These options expire on dates
      beginning February 2003 through May 2009.

      For the years ended September 30, 1998 and 1997, options for 467,250 and
      172,100 shares, respectively, of common stock were not included in the
      computation of diluted EPS because the options' exercise prices were
      greater than the average market price of the common stock.


      FUTURE ACCOUNTING CHANGES - In June 1998, the Financial Accounting
      Standards Board ("FASB") issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
      INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting
      and reporting standards for derivative instruments and hedging activities.
      It requires that an entity recognize all derivatives as either assets or
      liabilities in the statement of financial position and measure those
      instruments at fair value. The implementation of this statement


                                       26

<PAGE>

      has been postponed by SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
      AND HEDGING ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT
      NO. 133. SFAS No. 137, has postponed implementation of SFAS No. 133 until
      fiscal year ending September 30, 2002. Currently, this statement is not
      applicable under the Company's current operating condition.

3.    TRADE ACCOUNTS AND NOTES RECEIVABLE

      Trade accounts and notes receivable consist of the following (in
      thousands):

<TABLE>
<CAPTION>
                                                                                         SEPTEMBER 30,
                                                                                 --------------------------
                                                                                     1999           1998

         <S>                                                                       <C>             <C>
         Trade accounts and notes receivable                                       $11,098         $7,657
         Allowance for doubtful accounts                                              (336)          (606)
                                                                                 -----------    -----------
            Total trade accounts and notes receivable, net                         $10,762         $7,051
                                                                                 ===========    ===========

4.    INVENTORIES

      Inventories consist of the following (in thousands):

                                                                                         SEPTEMBER 30,
                                                                                 --------------------------
                                                                                     1999           1998

         Purhased components and raw materials                                     $ 6,202         $4,726
         Sub-assemblies                                                              1,851          2,054
         Work-in-process                                                             3,481          3,299
         Finished goods                                                              3,084          2,604
                                                                                 -----------    -----------

                 Total inventories                                                 $14,618        $12,683
                                                                                 ===========    ===========

5.    PROPERTY, PLANT, AND EQUIPMENT

      Property, plant, and equipment consist of the following (in thousands):

                                                                                         SEPTEMBER 30,
                                                                                 --------------------------
                                                                                     1999           1998

         Land                                                                      $   230       $    252
         Buildings and improvements                                                  3,233          2,422
         Manufacturing equipment                                                     9,223          8,956
         Office equipment, furniture, and fixtures                                   8,012          7,022
         Building improvements and equipment purchases in process                      106          1,178
                                                                                 -----------    -----------
                                                                                    20,804         19,830
         Accumulated depreciation                                                  (12,222)       (10,246)
                                                                                 -----------    -----------

                Total property, plant, and equipment - net                         $ 8,582        $ 9,584
                                                                                 ===========    ===========

</TABLE>


                                       27

<PAGE>


6.    FINANCING AGREEMENTS

      The Company has a domestic credit accommodation with a commercial bank
      which provides for an unsecured operating line up to $4,000,000, at the
      bank's prime interest rate (8.25% at September 30, 1999) less 1/4%. This
      accommodation expires February 1, 2000. At September 30, 1999 and 1998,
      the Company had no borrowings under the domestic operating line. The
      domestic credit accommodation contains covenants which require certain
      levels of tangible equity and working capital and ratios of current assets
      to current liabilities and debt to equity. The Company was in compliance
      with all such covenants.

      The Company also maintains a credit facility with a Dutch bank which
      provides for operating lines of credit up to 1.5 million guilders or
      approximately $728,000 at an interest rate of 4.75%. Collateral for this
      credit facility is certain receivables and inventories of the Company's
      Dutch subsidiaries and a guarantee provided by the Company. At September
      30, 1999 and 1998, there were no borrowings outstanding.

<TABLE>
<CAPTION>
      Long-term debt consists of the following (in thousands):
                                                                                                 SEPTEMBER 30,
                                                                                          ---------------------------
                                                                                              1999           1998
     <S>                                                                                    <C>           <C>
     Note payable, interest rate of 6%, due in quarterly principal
       and interest installments through October 2006, secured by certain
       land and buildings.                                                                  $  563        $   702

     Note payable, interest rate of 5.625%, due in quarterly principal and
       interest installments through October 2001, secured by receivables.                     218            345

     Note payable, interest rate of 7%, due in annual principal and interest
       installments through July 1999, secured by letter of credit.                            -              218

     Unsecured borrowing through assignment of lease with limited
       recourse through July 2001.                                                             222            332

     Equipment note payable, interest rate of 4.9%, due in monthly
       principal and interest installments through April 1999, secured by
       certain office equipment.                                                               -               48

     Other capital leases, interest rates of 6% and 11%, due in monthly
       principal and interest installments through December 2001 and March
       2002, respectively, secured by certain office equipment.                                 23             37
                                                                                          ----------     ----------

                                                                                             1,026          1,682
     Current portion                                                                          (304)          (579)
                                                                                          ----------     ----------

          Total long-term debt                                                              $  722        $ 1,103
                                                                                          ==========     ==========
</TABLE>

     Principal payments on long-term debt are as follows (in thousands):

<TABLE>
<CAPTION>
          YEAR ENDING
         SEPTEMBER 30,
         -------------

             <S>                                                                                          <C>
             2000                                                                                         $   304
             2001                                                                                             286
             2002                                                                                             106
             2003                                                                                              78
             2004                                                                                              78
          Thereafter                                                                                          174

                     Total                                                                                $ 1,026
</TABLE>


                                       28

<PAGE>

      Based on the borrowing rates currently available to the Company for loans
      with similar terms and average maturities, the fair value of long-term
      debt at September 30, 1999 approximates carrying value.


7.    LEASES

      The Company has agreements with the Port of Walla Walla to lease two
      operating facilities which expire in 2010. The Company currently has the
      option to purchase the land and plant under one of the agreements. The
      purchase price is determined by reducing the original plant construction
      costs of approximately $8,800,000 by one thirty-fifth for each lease year
      prior to the exercise of the option and adding $600,000 for the land,
      subject to further reductions if exercised after the fifteenth year of the
      lease. The Company has leased an operating facility in The Netherlands,
      which expires in 2008.

      Rental expense for the Company's operating leases referred to above was
      $1,133,000 for the year ended September 30, 1999, $1,061,000 for the year
      ended September 30, 1998, and $925,000 for the year ended September 30,
      1997.

      The following is a schedule of future minimum rental payments required
      under the operating leases and future rental expense (in thousands):


           YEAR ENDING                              RENTAL          RENTAL
          SEPTEMBER 30,                            PAYMENTS         EXPENSE
          -------------                           ---------        --------

             2000                                 $  1,088         $  1,120
             2001                                    1,087            1,114
             2002                                    1,098            1,114
             2003                                    1,122            1,114
             2004                                    1,148            1,114
          Thereafter                                 6,759            6,278
                                                  ---------        --------

                        Total                     $ 12,302         $ 11,854
                                                  =========        ========

8.    INCOME TAXES

      The provision for income taxes consists of the following (in thousands):

                                               YEAR ENDED SEPTEMBER 30,
                                        -------------------------------------
                                             1999         1998         1997

              Current:
               Federal                    $ 1,520        $ 415        $ 680
               State                          142           42           74
                                        -----------   ----------   ----------

                                            1,662          457          754
                                        -----------   ----------   ----------

              Deferred:
               Federal                        (32)           8         (505)
               State                            2           (1)         (52)
                                        -----------   ----------   ----------

                                              (30)           7         (557)
                                        -----------   ----------   ----------

                     Total                $ 1,632        $ 464        $ 197
                                        ===========   ==========   ==========


                                       29

<PAGE>

      The tax effects of temporary differences that give rise to significant
      portions of deferred tax assets and deferred tax liabilities are as
      follows (in thousands):

                                                              SEPTEMBER 30,
                                                         -----------------------
                                                           1999           1998
         Deferred tax asset:
          Reserves and accruals                           $1,659         $1,510
         Deferred tax liability:
          Accumulated depreciation                          (270)          (287)
                                                         ---------     ---------

                Net deferred tax asset                    $1,389        $ 1,223
                                                         =========     =========



         Deferred tax:
          Current asset                                   $1,182        $ 1,205
          Long-term asset                                    207             18
                                                         ---------     ---------

                Net deferred tax asset                    $1,389        $ 1,223
                                                         =========     =========


      Income tax expense is computed at rates different than statutory rates.
      The reconciliation between effective and statutory rates is as follows:

<TABLE>
<CAPTION>
                                                                         YEAR ENDED SEPTEMBER 30,
                                                                 ------------------------------------
                                                                     1999         1998        1997

         <S>                                                         <C>          <C>        <C>
         Statutory rates                                             34.0%        34.0%       34.0%
         Increase (reduction) in income taxes resulting from:
           FSC commissions                                           (5.0)        (6.8)       (3.7)
           FSC tax                                                    1.7          2.4         1.9
           R&D credit                                                 -            -         (11.3)
           State income taxes, net of federal benefit                 1.8          1.9         2.4
           Other permanent differences                                0.8          2.5         6.9
           Other                                                     (1.7)        (0.5)        1.8
                                                                 ----------   ----------   ----------

                  Income tax combined effective rate                 31.6%        33.5%       32.0%
                                                                 ==========   ==========   ==========
</TABLE>

9.    SHAREHOLDERS' EQUITY

      EMPLOYEE STOCK PURCHASE PLAN - Effective February 6, 1996, the Company
      adopted an Employee Stock Purchase Plan (the "Plan"). Most employees are
      eligible to participate in the Plan. Shares are not available to employees
      who already own 5% or more of the Company's stock. Employees can withhold,
      by payroll deductions, up to 5% of their regular compensation to purchase
      shares. The purchase price is 85% of the fair market value of the common
      stock on the purchase date. There were 500,000 shares reserved for
      purchase under the Plan. During the years ended September 30, 1999, 1998
      and 1997, the Company issued 12,393, 10,581, and 6,199 shares,
      respectively, under the Plan.

      EMPLOYEES' STOCK OPTION PLAN - Under the 1996 Employees' Stock Option Plan
      (the "1996 Plan"), eligible employees may receive either incentive stock
      options or nonstatutory stock options and such options may be exercised
      only after an employee has remained in continuous employment for one year
      after the date of grant. Thereafter, the options become exercisable as
      stipulated by the individual option agreements, generally 25% per year on
      the anniversary date of the grant. The option price is determined to be
      fair market value at date of grant. The following table summarizes
      activity under this Plan:



                                       30

<PAGE>


                                                      OUTSTANDING OPTIONS
                                                --------------------------------
                                                                      WEIGHTED
                                                                       AVERAGE
                                                   NUMBER OF            PRICE
                                                    SHARES            PER SHARE


         Balance at September 30, 1996              336,683             $15.37
           Options granted                          148,450             $17.20
           Options exercised                        (20,425)             $7.28
           Options forfeited                         (1,375)            $14.52
                                                --------------

         Balance at September 30, 1997              463,333             $16.31
           Options granted                          156,200             $11.77
           Options exercised                         (6,475)             $7.79
           Options forfeited                        (10,275)            $17.92
                                                --------------

         Balance at September 30, 1998              602,783             $15.19
           Options granted                           45,000              $8.23
           Options exercised                           (100)             $7.00
           Options forfeited                        (91,700)            $16.09
                                                --------------

         Balance at September 30, 1999              555,983             $14.48
                                                ==============

      At September 30, 1999, the total of number shares reserved for option
      exercises was 698,983, of which 143,000 were available for grant. At
      September 30, 1999, options for 320,780 shares were exercisable at prices
      from $7.00 to $23.25 per share. At September 30, 1998, the total number of
      shares reserved for option exercises was 699,083, of which 96,300 were
      available for grant. At September 30, 1998, options for 240,568 shares
      were exercisable at prices from $7.00 to $23.25 per share. At September 30
      1997, options for 137,308 shares were exercisable at prices from $7.00 to
      $23.25 per share.

      During 1995, FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
      COMPENSATION, which defines a fair value based method of accounting for
      employee stock options and similar equity instruments and encourages all
      entities to adopt that method of accounting for all of their employee
      stock compensation plans. However, it also allows an entity to continue to
      measure compensation cost for those plans using the method of accounting
      prescribed by Accounting Principles Board Opinion No. 25 ("APB 25").
      Entities electing to remain with the accounting in APB 25 must make pro
      forma disclosures of net income and, if presented, earnings per share, as
      if the fair value based method of accounting defined in SFAS No. 123 has
      been adopted.

      The Company has elected to account for its stock-based compensation plans
      under APB 25. The Company has computed, for pro forma disclosure purposes,
      the value of all stock and stock options granted under the Employee Stock
      Purchase Plan and the 1996 Employees' Stock Option Plan during 1999, 1998,
      and 1997 using the Black-Scholes option pricing model as prescribed by
      SFAS No. 123 using the following weighted average assumptions for the
      years ended September 30, 1999, 1998, and 1997:
                                                     1999      1998       1997

         Risk-free interest rate                     5.0 %     5.0 %      5.5 %
         Expected dividend yield                       0 %       0 %        0 %
         Expected lives                             6 years   6 years    6 years
         Expected volatility                          66 %      62 %       61 %

      Using the Black-Scholes methodology, the total value of stock options
      granted during 1999, 1998, and 1997 was $225,000, $1,097,000, and
      $1,525,000, respectively, which would be amortized on a pro forma basis
      over the vesting period of the options (typically five years). The
      weighted average


                                       31

<PAGE>

      fair value of options granted under the 1996 Employees' Stock Option Plan
      during 1999, 1998, and 1997 was $5.28 per share, $7.27 per share, and
      $10.64 per share, respectively.

      The total compensatory value of stock purchased under the Employee Stock
      Purchase Plan during 1999, 1998, and 1997 was $13,000, $15,000, and
      $16,000, respectively. The weighted average fair value of the stock
      purchased during 1999, 1998, and 1997 was $1.08 per share, $1.42 per
      share, and $2.63 per share, respectively.

      If the Company had accounted for its 1996 Plan and Employee Stock Purchase
      Plan in accordance with SFAS No. 123, the Company's net earnings and
      earnings per share would approximate the pro forma disclosures below (in
      thousands, except per share amounts):


<TABLE>
<CAPTION>
                                                YEAR ENDED                    YEAR ENDED                     YEAR ENDED
                                            SEPTEMBER 30, 1999            SEPTEMBER 30, 1998             SEPTEMBER 30, 1997
                                       ---------------------------    ---------------------------    ---------------------------
                                         AS REPORTED   PRO FORMA        AS REPORTED   PRO FORMA        AS REPORTED   PRO FORMA

        <S>                                <C>          <C>               <C>          <C>               <C>          <C>
        Net earnings (loss)                $ 3,529      $ 2,633           $  925       $  186            $  422       $  (104)
        Earnings (loss) per share -
           basic and diluted               $  0.75      $  0.56           $ 0.20       $ 0.04            $ 0.09       $ (0.02)
</TABLE>

      The effects of applying SFAS No. 123 in this pro forma disclosure are not
      indicative of future amounts. SFAS No. 123 does not apply to awards prior
      to October 1, 1995, and additional awards are anticipated in future years.

      The following table summarizes information about stock options outstanding
      at September 30, 1999:

<TABLE>
<CAPTION>
                            OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
     -----------------------------------------------------------------   --------------------------
                                             WEIGHTED
                                              AVERAGE        WEIGHTED                    WEIGHTED
          RANGE OF                           REMAINING        AVERAGE     NUMBER OF       AVERAGE
          EXERCISE             NUMBER       CONTRACTUAL      EXERCISE      SHARES        EXERCISE
           PRICES           OUTSTANDING     LIFE (YEARS)      PRICE      EXERCISABLE       PRICE

<S>   <C>                     <C>                <C>        <C>            <C>           <C>
      $ 7.00 - $10.00         150,433            5.1        $  8.37        115,433       $  8.41
      $10.01 - $15.00         149,500            8.3          11.70         44,872         11.54
      $15.01 - $20.00         136,250            7.5          17.17         70,625         17.13
      $20.01 - $23.25         119,800            6.6          22.55         89,850         22.55
     ------------------   ---------------   ------------   -----------   ------------   -----------

      $ 7.00 - $23.25         555,983            6.9        $ 14.48        320,780       $ 14.73
     ==================   ===============   ============   ===========   ============   ===========
</TABLE>


10.   EMPLOYEE BENEFIT PLANS

      The Company has a 401(k) profit sharing plan which covers substantially
      all employees. The Company is required to match 50% of employee
      contributions up to 2% of each participating employee's compensation. The
      Company contributed $200,000, $222,000, and $247,000 in matching funds to
      the plan for the years ended September 30, 1999, 1998, and 1997,
      respectively.

      The 401(k) plan also permits the Company to make discretionary profit
      sharing contributions to all employees. Discretionary profit sharing
      contributions are determined annually by the Board of Directors. Profit
      sharing plan expense was $506,000 for the year ended September 30, 1999.
      There was no profit sharing plan expense for the years ended September 30,
      1998 and 1997.

      The Company had a phantom stock plan for certain key employees and the
      Company's estimated purchase price of the phantom stock units was included
      in other liabilities. No additional awards of phantom stock units could
      occur and final settlement occurred in fiscal 1998. The Company paid


                                       32

<PAGE>

      zero, $46,000, and $75,000 in settlement of certain phantom stock unit
      awards during the years ended September 30, 1999, 1998, and 1997,
      respectively.

11.   SEGMENT  INFORMATION

      The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
      ENTERPRISE AND RELATED INFORMATION, as of the fiscal year ended September
      30, 1999. The Company's business units serve customers in its primary
      market - the food processing and agricultural products industry - through
      common sales and distribution channels. Therefore, the Company reports on
      one segment. The following is information about products and services (in
      thousands).

<TABLE>
<CAPTION>
                                                                         YEAR ENDED SEPTEMBER 30,
                                                               ---------------------------------------
                                                                   1999           1998           1997

       <S>                                                       <C>            <C>            <C>
       Net sales by product category:
         Automated inspection systems                            $22,342        $21,388        $20,400
         Specialized conveying systems                            28,422         21,807         25,366
         Process and preparation systems                           5,528          1,687          4,068
         Service/contracts and parts                              11,736          8,251          7,434
                                                               ----------     ----------     ----------

            Total net sales by product category                  $68,028        $53,133        $57,268
                                                               ==========     ==========     ==========


      The following is information about geographic areas:
                                                                         YEAR ENDED SEPTEMBER 30,
                                                               ---------------------------------------
                                                                   1999           1998           1997

       Net sales:
         Domestic                                                $37,026        $33,306        $39,196
         International                                            31,002         19,827         18,072
                                                               ----------     ----------     ----------

            Total net sales                                      $68,028        $53,133        $57,268
                                                               ==========     ==========     ==========

       Long-lived assets
         Domestic                                                $ 6,192        $ 6,852        $ 7,708
         International                                             4,007          4,599          3,774
                                                               ----------     ----------     ----------

            Total long-lived assets                              $10,199        $11,451        $11,482
                                                               ==========     ==========     ==========
</TABLE>

      During 1999, net sales to one major customer amounted to approximately 11%
      of total net sales. No single customer accounted for more than 10% of net
      sales during the years ended September 30, 1998 and 1997.

      During 1999, net sales to various customers in Canada accounted for
      approximately 11% of total net sales. During 1998, net sales to various
      customers in The Netherlands accounted for approximately 11% of total net
      sales. No single international country accounted for more than 10% of net
      sales during the year ended September 30, 1997. Location of the customer
      is the basis for identification of net sales.

      International long-lived assets are located in The Netherlands.



                                       33

<PAGE>






12.   ROYALTY INCOME

      As part of a settlement agreement entered into during 1997, the Company
      may receive royalty payments through 2001 related to the sale of certain
      equipment to a selected market. The payment may be reduced by a percentage
      of the purchases of equipment from the Company by the other party. The
      Company recognized royalty income from this agreement of $26,000, $7,000,
      and $125,000 during the years ended September 30, 1999, 1998, and 1997,
      respectively.

                                   * * * * * *



SUPPLEMENTARY DATA

      QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

      The following is a summary of operating results by quarter for the years
      ended September 30, 1999 and 1998 (in thousands, except per share data):

<TABLE>
<CAPTION>
       1999 QUARTER ENDED                DECEMBER 31,   MARCH 31,    JUNE 30,   SEPTEMBER 30,   TOTAL

       <S>                                 <C>          <C>          <C>           <C>        <C>
       Net sales                           $14,819      $15,676      $15,836       $21,697    $68,028
       Gross profit                          5,390        5,752        6,874         7,731     25,747
       Net earnings                            424          547        1,196         1,362      3,529
       Net earnings per share - basic
         and diluted                          0.09         0.12         0.25          0.29       0.75


       1998 QUARTER ENDED                DECEMBER 31,   MARCH 31,    JUNE 30,   SEPTEMBER 30,   TOTAL

       Net sales                           $12,758      $13,187      $14,431       $12,757    $53,133
       Gross profit                          4,556        5,040        5,497         4,202     19,295
       Net earnings (loss)                     174          346          621          (216)       925
       Net earnings (loss) per share -
         basic and diluted                    0.04         0.07         0.13         (0.05)      0.20
</TABLE>



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

     None.


                                       34

<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     There is hereby incorporated by reference the information under the
captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed
with the Securities and Exchange Commission within 120 days after the end of
Registrant's fiscal year ended September 30, 1999.


ITEM 11. EXECUTIVE COMPENSATION.

     There is hereby incorporated by reference the information under the caption
"Executive Compensation" in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed
with the Securities and Exchange Commission within 120 days after the end of
Registrant's fiscal year ended September 30, 1999.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     There is hereby incorporated by reference the information under the caption
"Principal Shareholders" in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed
with the Securities and Exchange Commission within 120 days after the end of
Registrant's fiscal year ended September 30, 1999.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     None.

                                       35


<PAGE>


                                     PART IV

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

                                                                            PAGE
                                                                            ----
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:


      1. FINANCIAL STATEMENTS:

         Reference is made to Part II, Item 8, for a listing of required
         financial statements filed with this report.......................  18

      2. FINANCIAL STATEMENT SCHEDULES:

         Financial statement schedules are omitted because they are not
         applicable or the required information is included in the accompanying
         consolidated financial statements or notes thereto.

      3. EXHIBITS:

         (3)    Articles of Incorporation and Bylaws

                (3.1)     Restated Articles of Incorporation (filed as Exhibit
                          3.1 to the Registration Statement on Form S-1
                          (Registration No. 33-63194) filed with the Securities
                          and Exchange Commission on May 24, 1993 and
                          incorporated herein by reference)
                (3.2)     Restated Bylaws, as amended (filed as Exhibit 3.2 to
                          the Quarterly Report on Form 10-Q for the quarterly
                          period ended December 31, 1993 and incorporated herein
                          by reference)

         (10)   Material contracts

                (10.1)    Construction and Lease Agreement dated October 17,
                          1989 between the Port of Walla Walla and Registrant
                          (filed as Exhibit 10.1 to the Registration Statement
                          on Form S-1 (Registration No. 33-63194) filed with the
                          Securities and Exchange Commission on May 24, 1993 and
                          incorporated herein by reference)
                (10.2)    Indenture of Trust dated as of February 1, 1993
                          between Port of Walla Walla Public Corporation and Key
                          Bank of Washington, as Trustee (filed as Exhibit 10.2
                          to the Registration Statement on Form S-1
                          (Registration No. 33-63194) filed with the Securities
                          and Exchange Commission on May 24, 1993 and
                          incorporated herein by reference)
                (10.3)    Loan Agreement dated February 1, 1993 between Port of
                          Walla Walla Public Corporation and Registrant (filed
                          as Exhibit 10.3 to the Registration Statement on Form
                          S-1 (Registration No. 33-63194) filed with the
                          Securities and Exchange Commission on May 24, 1993 and
                          incorporated herein by reference)
                (10.4)    Pledge and Security Agreement dated as of February 1,
                          1993 between Registrant and U.S. Bank of Washington,
                          N.A. (filed as Exhibit 10.4 to the Registration
                          Statement on Form S-1 (Registration No. 33-63194)
                          filed with the Securities and Exchange Commission on
                          May 24, 1993 and incorporated herein by reference)


                                       36

<PAGE>

                (10.5)*   Registrant's 1989 Employees' Stock Option Plan, as
                          amended (filed as Exhibit 10.5 to the Registration
                          Statement on Form S-1 (Registration No. 33-63194)
                          filed with the Securities and Exchange Commission on
                          May 24, 1993 and incorporated herein by reference)
                (10.6)*   Registrant's 401(k) Profit Sharing Plan dated May 11,
                          1992 (filed as Exhibit 10.6 to Amendment No. 1 to Form
                          S-1 (Registration No. 33-63194) filed with the
                          Securities and Exchange Commission on May 24, 1993 and
                          incorporated herein by reference)
                (10.7)*   Registrant's Restated Phantom Stock Plan, as amended
                          (filed as Exhibit 10.7 to the Registration Statement
                          on Form S-1 (Registration No. 33-63194) filed with the
                          Securities and Exchange Commission on May 24, 1993 and
                          incorporated herein by reference)
                (10.8)    License Agreement effective July 1, 1992 between
                          Registrant and Simco/Ramic Corporation (filed as
                          Exhibit 10.8 to the Registration Statement on Form S-1
                          (Registration No. 33-63194) filed with the Securities
                          and Exchange Commission on May 24, 1993 and
                          incorporated herein by reference)
                (10.9)*   Registrant's Restated 1989 Employees' Stock Option
                          Plan, as amended (filed as Exhibit 10.1 to the Form
                          10-Q filed with the Securities and Exchange Commission
                          on May 12, 1995 and incorporated herein by reference)
               (10.10)*   Registrant's 1996 Employees' Stock Option Plan (filed
                          as Exhibit 10.1 to the Form 10-Q filed with the
                          Securities and Exchange Commission on May 2, 1996 and
                          incorporated herein by reference)
               (10.11)*   Registrant's 1996 Employees Stock Purchase Plan (filed
                          as Exhibit 10.2 to the Form 10-Q filed with the
                          Securities and Exchange Commission on May 2, 1996 and
                          incorporated herein by reference)
               (10.12)    Lease Agreement dated April 18, 1996 between the Port
                          of Walla Walla and Registrant (filed as Exhibit 10.1
                          to the Form 10-Q filed with the Securities and
                          Exchange Commission on August 7, 1996 and incorporated
                          herein by reference)
               (10.13)    Business Loan Agreement dated as of January 25, 1999
                          between Registrant and U.S. Bank National Association
                          (filed as Exhibit 10.1 to the Form 10-Q filed with the
                          Securities and Exchange Commission on May 14, 1999 and
                          incorporated herein by reference)




          (21)    List of Subsidiaries

          (23)    Consent of Deloitte & Touche LLP

          (99)    Forward-Looking Statement Risk and Uncertainty Factors


          ---------------------------
          *    Management contract or compensatory plan or arrangement.

(B) REPORTS ON FORM 8-K

     No reports on Form 8-K were filed by the Registrant during the last quarter
     of the fiscal year ended September 30, 1999.


                                       37

<PAGE>


                                   SIGNATURES

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


                                  KEY TECHNOLOGY, INC.

                              By:  /s/  Thomas C. Madsen
                                 -----------------------------------------------
                                   Thomas C. Madsen
                                   President and Chief Executive Officer

                              By:  /s/  Steven D. Evans
                                 -----------------------------------------------
                                   Steven D. Evans
                                   Vice President of Finance and Administration
                                   and Chief Financial Officer
                                   (Principal Financial and Accounting Officer)

December 16, 1999


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>

<S>                                                                        <C>
/s/  Harold R. Frank                                                       December 16, 1999
--------------------------------------------------------------------
Harold R. Frank, Director

/s/  Thomas C. Madsen                                                      December 16, 1999
--------------------------------------------------------------------
Thomas C. Madsen, Director, President and Chief Executive Officer

/s/  John E. Pelo                                                          December 16, 1999
--------------------------------------------------------------------
John E. Pelo, Director

/s/  Edfred L. Shannon, Jr.                                                December 16, 1999
--------------------------------------------------------------------
Edfred L. Shannon, Jr. Director

/s/  Peter H. van Oppen                                                    December 16, 1999
--------------------------------------------------------------------
Peter H. van Oppen, Director

/s/  Gordon Wicher                                                         December 16, 1999
--------------------------------------------------------------------
Gordon Wicher, Director

/s/  Steven D. Evans                                                       December 16, 1999
--------------------------------------------------------------------
Steven D. Evans, Vice President of Finance and Administration and
                 Chief Financial Officer (Principal Financial and
                 Accounting Officer)
</TABLE>



                                       38

<PAGE>


                              KEY TECHNOLOGY, INC.
                                    FORM 10-K
                                  EXHIBIT INDEX

EXHIBIT
 NUMBER                                                                     PAGE
 ------                                                                     ----

  21.1     List of Subsidiaries..........................................    40

  23.1     Consent of Deloitte & Touche LLP..............................    41

  27       Financial Data Schedule.......................................    42

  99.1     Forward-Looking Statement Risk and Uncertainty Factors........    43


                                       39