January 20, 1999

Dear Shareholders:

Fiscal year 1998 was a very challenging time for Datametrics Corporation.

As you know,  the current  management  of  Datametrics  Corporation  inherited a
poorly managed company total lacking in financial, operational or organizational
controls.   We  also  inherited   millions  of  dollars  of  binding  commercial
obligations,  legal expenses and unprofitably priced contracts.  We were obliged
to honor the terms and  conditions  of many of these  contracts at the same time
realizing that much of our excessive  overhead,  facilities and personnel  costs
could not be immediately  relieved.  As a result, we sustained  operating losses
for both fiscal year 1997 and fiscal year 1998. Our response has been threefold:
(1) restructure  operations,  (2) expand our marketing  focus, and (3) establish
alliances with global commercial partners.

Restructuring of DmC's Operations

In the summer of 1997, senior management, after extensive review and study, made
the  decision  that  nothing  less than the total  re-invention  of  Datametrics
Corporation  was  required if the  Company  were to  survive.  We  believed  and
continue to believe that the costs,  however painful, of a total  reorganization
of the  Company  in the  short run would be more  than  outweighed  by  enhanced
shareholder  value in the future. The recent  example of the complete  demise of
Hayes Modem is a poignant  lesson of what can occur when a company is  unwilling
to accept short-term pain to achieve long-term gains.

We  have  undertaken   significant  steps  to  restructure  and  streamline  our
operations while instituting  financial and  administrative  controls to support
the growth which we  anticipate  will occur.  First of all, in the  beginning of
fiscal year 1998, we relocated a segment of our engineering department to a much
smaller  and more  suitable  facility in  Calabasas,  California.  Secondly,  we
purchased a 43 thousand  square foot  building in Orlando,  Florida which houses
all of our  manufacturing  and  operations.  The  building in  Orlando,  Florida
expanded our manufacturing  capability by more than threefold with a significant
reduction  in  personnel  and  overhead  expenses.  Thirdly,  in April 1998,  we
relocated  our  executive,  finance and contracts  offices to New Jersey.  These
measures  both  reduced  expenses  and,  more  importantly,  placed us closer to
important customers and the financial and investor community.

We have  dramatically  upgraded  the  caliber of our  personnel  while  reducing
employee count by more than 44 percent  during the past 24 months.  More than 90
percent of the current  employees of Datametrics have been hired during the past
12 months.  These  employees bring to Datametrics a new spirit of enthusiasm and
pride in our Company.

The net result of these  efforts is a better  top to bottom  organization  and a
more than 70 percent  reduction  in the level of  revenues  required  to achieve
profitability.


<PAGE>



Expanding DmC's Marketing Efforts

The primary  marketing  focus of Datametrics  Corporation  has expanded from the
limited  defense  market to include  government,  defense,  and  commercial  and
industrial  application for our concurrent  thermal  transfer  printers.  We are
actively pursuing new opportunities in these areas and believe that our strategy
of  emphasizing  those  products in which we have a  distinctive  advantage  and
technological expertise will succeed.

We continue to make significant  strides toward capitalizing upon our experience
in the area of concurrent thermal transfer printing technology. As you all know,
DmC is the leader in concurrent  thermal transfer  technology.  In April 1997 we
successfully  completed a prototype  development program with 3M Company for the
Harrier(TM)  industrial print engine. In July 1997, we announced a new family of
five industrial and government/defense high-speed, full color concurrent thermal
transfer  printers.  Our new family of medium and wide format printers  includes
the  Harrier(TM),  the  Condor(TM)  I  and  the  Condor(TM)  II  for  industrial
customers,   and  the  Cobra(TM)  I  and  Cobra(TM)  II  for  government/defense
customers.

The  Harrier(TM),  Condor(TM)  series and Cobra(TM)  series of print engines are
robust,  rugged,  high-performance  printers  which  incorporate a wide range of
Datametrics'  newly-developed  technological capabilities in the area of thermal
transfer printing and once again establish Datametrics Corporation as the leader
in full color thermal transfer printing.

Strategics Partnerships

I believe that it would be helpful for our  shareholders to have some historical
perspective  of our business  strategy.  In our first  business plan in November
1996, we recognized the need to create long-term  strategic  relationships  with
companies that enjoyed leadership positions in our many target markets.

In June 1998,  we  announced a global  alliance  agreement  with 3M Company.  We
believe that this alliance with 3M represents a true milestone in the history of
Datametrics  Corporation  and are proud to be associated  with a company of 3M's
preeminent reputation and stature. This relationship  represents the cornerstone
of our  marketing  strategy  for our  Harrier(TM)  and the  Condor(TM) I thermal
transfer printers to the license plate  manufacturing and transportation  safety
industries.  The 3M global  alliance  agreement  represent  a major  step in our
business plans. We continue to work closely with 3M to ensure the success of the
alliance.

In January 1999, the Company  achieved a second major step in our business plans
with  the  announcement  of  a  North  American   strategic  alliance  with  the
International Imaging Materials, Inc., a subsidiary of Paxar Corporation.  IIMAK
is North America's leading manufacture of thermal transfer ribbons.  Datametrics
and  IIMAK  will  work  together  to  structure  and  utilize  a North  American
distribution  network  to serve  active  customers  in the sign  making and silk
screening industries under a DmC-designed  bailment program. We believe that the
superior  performance  characteristics  of our  thermal  transfer  printers  and
IIMAK's product  leadership in color thermal transfer ribbons will prove to be a
powerful force in the market place.

I am confident that future letters to our shareholders  will discuss  additional
strategic alliances.


<PAGE>




Financings and the Future

To finance our business  operations  and plans,  during fiscal year 1998 and the
beginning of fiscal year 1999 we  successfully  raised nearly $6 million through
private placement offerings of subordinated notes and common stock.

We look forward to fiscal year 1999 as a time when the  enormous  burdens of the
financial,  legal  and  contractual  obligations  of the  past  give  way to the
exciting opportunities which exist for Datametics  Corporation.  I would like to
thank our shareholders and employees for their continuing support and confidence
in our Company.

Sales for the year ended  October 26, 1998 were $7.742  million  versus  $16.797
million for fiscal  1997.  Net loss was ($3.270  million),  or ($0.22) per fully
diluted share,  for fiscal 1998,  compared with a loss of ($3.102  million),  or
($0.24) per fully diluted share, for fiscal 1997.

Our primary  goal is and will  continue  to be the  enhancement  of  shareholder
value. 

Sincerely yours,

/s/ Daniel P. Ginns

Daniel P. Ginns
Chairman of the Board
Chief Executive Officer


<PAGE>


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

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                               ------------------

                                    FORM 10-K
(Mark One)

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

     For the Fiscal Year Ended October 25, 1998
                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the Transition Period From-_________to-_________

                          Commission File Number 0-8567

                             DATAMETRICS CORPORATION
             (Exact name of Registrant as specified in its charter)

            Delaware                                          95-3545701
 (State or other jurisdiction of                           (I.R.S. Employer
 Incorporation or organization)                           Identification No.)

           25B Hanover Road, Suite 3305 Florham Park, New Jersey 07932
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (973) 377-3900

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

      Title of each class              Name of each exchange on which registered
      -------------------              -----------------------------------------
   Common Stock, .01  par value              American  Stock Exchange

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

                                      None

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

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  Registrant  (based on the  closing  price of such stock as  reported by the
American Stock Exchange) on January 5, 1999 was approximately $ 34,185,758

     The number of shares  outstanding of the  Registrant's  Common Stock, as of
the latest practicable date:

            17,122,879 shares of Common Stock as of January 5, 1999.


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


<PAGE>


                                     PART I

Item 1. Business.

     This  report  contains  certain  statements  of  a  forward-looking  nature
relating to future events or the future performance of the Company.  Prospective
investors are  cautioned  that such  statements  are only  predictions  and that
actual events or results may differ  materially.  In evaluating such statements,
prospective investors should specifically consider various factors identified in
this report,  including  that  Department  of Defense  contracts  are subject to
termination without cause, competitive factors and pricing pressures.

General

     Datametrics Corporation  ("Datametrics" or the "Company") designs, develops
and sells high-speed color printers, high-resolution non-impact printer/plotters
and ruggedized computers,  printers and workstations for  government/defense and
industrial  markets.  The Company is focused on the  manufacture and sale of its
core product line of  ruggedized  printers and the  continuing  development  and
manufacture of  high-performance,  high-reliability  concurrent thermal transfer
printers.

     On June 3, 1998, the Company announced a global alliance agreement with the
Traffic  Control  Materials  Division of 3M  Company.  This  long-term  alliance
encompasses  all markets  worldwide  served by 3M in the  transportation  safety
industry.  The agreement  provides for the Company to  manufacture,  service and
support  its  Condor(TM)  and  Harrier(TM)  industrial  print  engines  for  3M.
Initially,  the Condor(TM) and Harrier(TM)  industrial print engines will become
part of 3M's digital  imaging  system that 3M customers  use to produce  license
plates.  3M Company is the world's leading supplier of reflective  materials for
the  transportation  safety  industry.  The  global  alliance  agreement  covers
applications  in the vehicle  license plate market and other  potential  traffic
safety  applications.  The Company  believes that this  agreement will result in
significant revenues to the Company over the next several years.

     On January  20, 1999  Datametrics  Corporation  announced a North  American
Strategic Alliance with International Imaging Materials, Inc., a subsidiary of
Paxar Corporation.

     The  Company  was  incorporated  in  California  in  October  1962  and was
reincorporated  in Delaware in April 1987. The Company's  corporate  offices are
located at 25B Hanover Road, Suite 3305, Florham Park, New Jersey 07932.

Company Background

     The Company's current product line includes printers,  printer/plotters and
ruggedized  computers and workstations  with diverse  capabilities  ranging from
stringent military  specifications to varying commercial standards.  The Company
pioneered  the  development  of  high-speed,  non-impact  printers  for tactical
military applications. At present, ruggedized printers remain the Company's core
product line,  and the U.S.  government  (or the prime  contractors  to the U.S.
government) remains its largest source of revenue.  Building from this base, the
Company has developed and manufactured other high-performance,  high-reliability
electronics  communications  equipment for  aerospace,  defense,  industrial and
commercial markets.

     Over the past  several  fiscal  years,  the Company has been  significantly
impacted by market changes in the U.S. Department of Defense ("DoD"). DoD budget
forecasts  indicate  that  overall  funding  will  continue to decrease  for the
foreseeable  future.  The Company's  primary  response to these adverse  defense
market conditions has been to develop and aggressively pursue industrial


                                       2
<PAGE>


and  international  opportunities  for its  ruggedized  printers and  electronic
communications equipment, expand its core ruggedized product line and to explore
opportunities and strategic  alliances for its high-speed  digital color printer
products.

Defense Products

     The   Company   designs,   develops,   manufactures   and  sells   military
specification  ("mil-spec") and ruggedized computers,  workstations and printers
for use in DoD  applications.  Products sold by the Company into the DoD markets
can be  categorized  into three  basic  groups:  mil-spec  printers,  ruggedized
computers,  and ruggedized printers. For the fiscal year ended October 25, 1998,
approximately  71% of the  Company's  revenues  were derived from DoD  business,
which includes  contractors  with U.S.  government  contracts as well as the DoD
itself.

     Mil-spec products are designed  specifically to meet military  requirements
and must meet the stringent  requirements for operation in adverse environments,
including shock,  vibration,  extreme  temperatures and, in some cases,  nuclear
radiation. Being so designed, these products are more reliable and significantly
more expensive than  ruggedized or industrial  products  (products  designed for
benign environments as are experienced in commercial  applications).  Industrial
products can be used in selected  military  environments  and are  significantly
less expensive than the mil-spec  products.  The broader  intermediary  category
includes the ruggedized  products  which are generally  configured to operate in
some adverse environments but do not meet full mil-spec requirements.

     Military Printers.  The Company manufactures a wide range of printers which
are categorized as either mil-spec or ruggedized. These printers utilize thermal
printing,  impact printing and laser printing  technologies.  These printers are
purchased  and  utilized by the DoD as well as by  companies  and  organizations
which manufacture,  sell or use data processing or data  communications  systems
that require "hard copy" printouts. The Company's products are incorporated into
these  systems.  The  military  printers  are more  reliable  than  conventional
commercial   printers  and  are   designed  to  work  in  severe   environmental
applications. The design and component selection allow the Company's printers to
withstand  certain  adverse  effects  of dirt and  grime,  corrosion,  droppage,
bullets,  moisture,  extremes  in hot and cold  temperature,  and in some cases,
nuclear radiation.  In connection with the U.S.  government  military peripheral
standardization  programs,  the  DoD  has  approved  and  assigned  nomenclature
(military  identification)  to  standard  computer  peripherals  for its defense
systems.   Several  of  the  Company's  printers  have  been  included  in  this
standardization  program,  enabling the armed  services to select the  Company's
printers for new systems without incurring the expense of developing new printer
documentation  for each system.  The Company  believes that the inclusion of the
Company's  printers in this  standardization  program influenced the purchase of
its printers on several defense programs.

     The Company's  high-resolution  thermal  printers  utilize a thermal direct
imaging method of printing. In the past, printers utilizing the thermal printing
process generally could not meet the specifications required in certain rigorous
environments.  Due to  technological  improvements,  thermal printers can now be
built to operate in adverse  environments  while  providing  quiet and  reliable
printing operations. The Company has developed a low cost impact printer as well
as a ruggedized  laser  printer  which are targeted at the low end of the severe
environment  market.  These ruggedized  products utilize commercial  components,
some industrial  (high-reliability,  military rated) components, and are encased
in a rugged case to withstand moderately severe environments.

     The  Company has  experienced  the highest  sales  volume of full  mil-spec
printers with its DmC 1600 printer/plotter. These printers are used for the U.S.
Navy's Tactical Flag Command Center ("TFCC").  The TFCC system provides the hard
copy data utilized by the Fleet  Commander when tactical  decisions are required
during  crisis  situations.  The TFCC system is proposed  for most of the Navy's
nuclear super aircraft  carriers and cruisers.  In addition,  the DmC 1600's are
used for the U.S. Navy standard  display consoles that are utilized on virtually
every  fighting  ship in the fleet.  This  printer is  qualified  for the Navy's
rigorous  environmental  standards. A special version of the DmC 1600 printer is
being used for the U.S. Army REGENCY NET secure communications systems, the U.S.
Navy's  on-board  anti-submarine  warfare  training  program,  and  the  MILSTAR
Communications Satellite Program, the DoD's global communications system.

     The Company's DmC 1900 Model, a high resolution color printer/plotter, also
is used by the U.S.  Navy.  This  product  line  utilizes  the thermal  transfer
process  to  produce  high-resolution,  full color  images on plain  paper.  The
thermal transfer  technology used in the DmC Series 1900 differs from the direct
imaging thermal  process in that it uses plain paper and a multi-colored  ribbon
instead of direct  imaging  paper.  These  products  provide  between 40,000 and
90,000 pixels  (picture  elements) per square inch and up to 16,000,000  colors,
shades or tones. This printer is used by the U.S. Navy for utilization  within a
number of Aegis  subsystems.  The military color printer market has been slow to
develop due to cost  considerations;  however,  the Company has  developed a new
lower cost ruggedized printer which it believes should enjoy higher sales.

     Ruggedized   Computers.   The   Company's   ruggedized   products   combine
environmental and mechanical  engineering technology with computer technology to
produce products that perform  identically to commercial  counterparts,  but are
able to operate in adverse environments.  The Company offers ruggedized versions
of computer devices and peripherals encased in


                                       3
<PAGE>


shock,  vibration and  temperature  resistant  housing for products of equipment
manufacturers  such as Digital Equipment  Corporation  ("DEC"),  Hewlett-Packard
Company,  Silicon  Graphics Inc., and Sun  Microsystems  Inc. This process often
requires the Company to design and manufacture cases,  controls,  backplanes and
power  supplies.  These products  require much shorter  development  and testing
periods than mil-spec  products.  As such,  these products allow the military to
deploy state-of-the-art  computer technology rapidly, at a price greatly reduced
from full mil-spec  systems.  These timing and price  factors are  responsive to
current U.S. government trends.

     A  substantial  portion of the  Company's  ruggedized  products  revenue is
derived  from  the sale of  workstations  into  the  international  marketplace.
Workstations  have been sold into the  Japanese  P-3  maritime  patrol  aircraft
program.  Other sales have been to France,  Italy and Israel.  This  marketplace
continues to be active for these products.

     International  Military.  The Company believes that  international  markets
offer promising growth  opportunities for the Company's high-end  monochrome and
color printers and ruggedized printer,  computers and workstations.  As the U.S.
government  funding continues to decrease,  other countries are increasing their
military budgets,  specifically in the Pacific Rim. These countries are assuming
more of the  burden of their  defense  roles as the U.S.  military  reduces  its
presence.   The  Company   continues  to  be  aggressive  in  the  international
marketplace, although there is greater inherent risk.

Significant Customers and Matters Concerning DoD Business

     Most of the  customers  for the  Company's  products  are the DoD and prime
contractors under programs funded by the DoD. For the fiscal years ended October
25,  1998,  October 26,  1997,  and October 27,  1996,  direct and  indirect DoD
business  represented  approximately  71%,  67%, and 61%,  respectively,  of the
Company's  revenues.  Because the Company's products are intended to function as
subsystems,  they  are sold to  customers  which  manufacture,  sell or use data
processing or data communication  systems which involve a processing,  printing,
recording or data entry  function for which the  Company's  products are suited.
While  the  Company  may be a  subcontractor  on a  government  program  with an
aggregate  budget of  billions of dollars  extending  over as much as a ten-year
period,  the  Company's  share of the budget for any major program is relatively
small.

     In the fiscal year ended  October 25, 1998,  the  Company's  three  largest
customers in sales, U.S.  government  23.7%,  Raytheon 22.3% and Lockheed Martin
18.9% accounted for an aggregate of 64.9% of toal Company sales. The loss of any
one of these  customers  could have a material  adverse impact on the results of
operations and financial condition of the Company.

     In the fiscal year ended  October 26,  1997,  the  Company's  five  largest
customers in sales,  Lockheed  Martin  (15.7%),  U.S.  government  (13.7%),  GTE
(12.5%),  Computing  Devices  Canada (10.9%) and Digital  Equipment  Corporation
(10.8%), accounted for an aggregate of 64% of total Company sales.

     Companies which are engaged primarily in supplying  equipment and services,
directly or  indirectly,  to the U.S.  government  are subject to special  risks
including  dependence on government  appropriations,  termination without cause,
contract renegotiation and competition for the available DoD business.  Over the
past  several  years,  the  Company  has been  significantly  impacted by market
changes in the DoD. DoD budget  forecasts  indicate  that  overall  funding will
continue to decrease for the foreseeable future.

     The  Company's  DoD  related  contracts  provide for the right to audit the
Company's  cost  records  and  are  subject  to  defective  pricing  regulation.
Management  does not believe that it has any  material  exposure of this sort on
any such contracts.  Accordingly,  no provisions have been made in the Company's
accounts in connection with defective pricing regulation.

High-Speed Color Digital Printer

     In fiscal  1994,  the  Company  began an  intensive  program  to  develop a
high-speed  color digital printer for the short-run  production  printer market.
After significant  development and marketing costs,  coupled with limited market
success,  the  Company  in  October  1996  idled  and  subsequently  ceased  all
manufacture  and marketing of its CYMax  product line to permit a  comprehensive
strategic and operational  feasibility study of its overall concurrent  transfer
imaging  ("CTI")  technology  and  its  potential  applications.  Following  the
completion of the  strategic  and  operational  feasibility  study,  the Company
introduced a new family of five  industrial  and  government/defense  high-speed
concurrent  thermal transfer printers on July 21, 1997. The Company's new family
of medium and wide format printers  includes the Harrier (TM), the Condor (TM) I
and the Condor (TM) II for industrial customers,  and the Cobra (TM) I and Cobra
(TM) II for government/defense customers.

     The Harrier (TM), Condor (TM) series and Cobra (TM) series of print engines
are robust, rugged,  high-performance printers which incorporate a wide range of
Datametrics'  newly-developed  technological capabilities in the area of thermal
transfer printing.


                                       4
<PAGE>


     On November 19, 1997,  Datametrics  announced a North  American  automobile
license plate partnership  agreement with Avery Dennison  Corporation to provide
Datametrics'   state-of-the-art   digital   imaging  system   solution  for  the
manufacture of vehicular license plates. Under the terms of the agreement, Avery
Dennison,  which manufactures reflective license plate sheeting, will market the
Company's  new Harrier (TM) single  station  industrial  print engine and Condor
(TM) I four station  industrial  print engine as part of a total system approach
to the  manufacture of vehicular  license  plates.  On June 1, 1998, the Company
notified  Avery Dennison of the  termination of this contract  effective May 31,
1999.

     On June 3, 1998, the Company announced a global alliance agreement with the
Traffic  Control  Materials  Division of 3M  Company.  This  long-term  alliance
encompasses  all markets  worldwide  served by 3M in the  transportation  safety
industry.  The agreement  provides for the Company to  manufacture,  service and
support  its  Condor(TM)  and  Harrier(TM)  industrial  print  engines  for  3M.
Initially,  the Condor(TM) and Harrier(TM)  industrial print engines will become
part of 3M's digital  imaging  system that 3M customers  use to produce  license
plates.  3M Company is the world's leading supplier of reflective  materials for
the  transportation  safety  industry.  The  global  alliance  agreement  covers
applications  in the vehicle  license plate market and other  potential  traffic
safety  applications.  The Company  believes that this  agreement will result in
significant revenues to the Company over the next several years.

Certain Market Considerations

     The markets served by the Company are characterized by rapid  technological
advances,  downward price pressure in the  marketplace as  technologies  mature,
changes in customer  requirements  and  frequent new product  introductions  and
enhancements.  The Company's  business requires ongoing research and development
efforts and  expenditures,  and its future success will depend on its ability to
enhance its current products, reduce product costs and develop and introduce new
products that keep pace with technological  developments in response to evolving
customer requirements. The Company's failure to anticipate or respond adequately
to  technological  developments  could  result in a loss of  anticipated  future
revenues and impair the Company's competitiveness.

Service

     Pursuant to maintenance  agreements,  repair orders or warranty provisions,
the Company  generally  services  its  printers  with its own  employees  at its
facility.  In-house,  non-warranty repairs and maintenance service provided 3.3%
and 4.9% of the Company's sales in fiscal 1998 and 1997, respectively.  For both
military and commercial  products,  the Company's  standard  warranty  period is
ninety days,  although longer warranty periods are available at customer request
for an additional charge.

     Sales of spare parts for the Company's products amounted to 18.1% and 17.8%
of  fiscal  1998  and  1997  revenue,   respectively.  The  Company  also  sells
documentation,  such as handbooks,  operational  manuals,  schematics  and other
technical data to assist its customers in maintaining their own equipment.

Backlog

     The  Company's  backlog of funded  orders not yet  recognized as revenue at
October 25,  1998,  October  26,  1997,  and October 27, 1996 was  approximately
$5,083,000,  $2,794,000,  and  $7,675,000,  respectively.  More  than 90% of the
October 25, 1998  backlog is  expected  to be  delivered  during the fiscal year
ending October 31, 1999.


                                       5
<PAGE>


Sources of Supply

     The Company is generally  not  dependent  upon any one supplier for any raw
material or component  which it purchases,  and there are available  alternative
sources  for such  raw  materials  and  components.  The  Company  is  currently
dependent,  however,  on  certain  OEM  suppliers  for  components  used  in its
ruggedized  computer  devices and  peripherals.  The  Company  has  year-to-year
renewable  supply  agreements  with  suppliers  which have been renewed in prior
years.  In the  event  any of these  contracts  are not  renewed,  however,  the
Company's  business  would be  materially  and  adversely  impacted  because the
Company  would have to  purchase  similar  components  upon  substantially  less
favorable terms and conditions.

Competition

     The Company competes in each of its target markets against other companies,
many of  which  have  substantially  greater  financial,  technical,  marketing,
distribution  and other  resources than the Company.  The principal  competitive
factors in the  markets in which the  Company  participates  are image  quality,
product performance and price.

     In domestic and  international  defense  markets,  the Company's  principal
competitors are DRS Technologies Inc., and Miltope Group Inc. In addition,  many
airborne  electronic data processing and  communications  prime contractors have
the capability of manufacturing military and airborne products, and several such
companies do presently  manufacture products performing functions similar to the
Company's  products.  In almost all cases,  these  companies have  substantially
greater  financial  and  technological  resources  than the Company.  In certain
applications,  the  Company's  printers  are  higher in price  than those of its
competitors, and many of its competitors have more experience in the markets for
lower-cost  military printers than the Company.  Management  believes,  however,
that the  Company's  printers  usually  perform at higher speed and with greater
reliability in extreme environments.

Intellectual Property Rights

     It is  the  Company's  policy  to  obtain  appropriate  proprietary  rights
protection for any potentially  significant new technology acquired or developed
by the Company. The Company has a trademark  registration covering its "DmC" (R)
logo and for the Harrier (TM) and the Condor (TM) products. The Company has been
granted  two U.S.  patents  relating to its  high-speed  color  digital  printer
technology.  The  Company  also has several  U.S.  patent  applications  pending
relating to its  high-speed  color digital  printer.  There can be no assurance,
however, that any patents will be granted pursuant to these various applications
in the U.S. and abroad.

     In  addition,  the Company  relies on  copyright  and trade  secret laws to
protect  its  proprietary  rights.  The  Company  attempts  to protect its trade
secrets and other proprietary  information through agreements with customers and
suppliers,  proprietary  information agreements with the Company's employees and
consultants and other similar measures. There can be no assurance, however, that
the  Company  will be  successful  in  protecting  its trade  secrets  and other
proprietary information.

     While management believes that the Company's  trademarks,  patents,  patent
applications,  and other proprietary  know-how have significant value,  changing
technology  makes the Company's  future success  dependent  principally upon its
employees' technical competence and creative skills for continuing innovation.

Research and Development Activities

     The Company is involved in both  Company-sponsored  and  customer-sponsored
research and development.  In the latter case,  customers  contract directly for
such  activities.  The  customer-sponsored  research and  development  primarily
consist of non-recurring  engineering costs relating to production contracts. In
addition  to  design  technology,   this  non-recurring   engineering   includes
development of  maintenance  and operator  manuals,  drawings,  reliability  and
maintainability  analysis,  technical design audits and data required to support
field repairs.  Such costs do not qualify as research and  development  costs as
defined  by  Financial   Accounting   Standards   Board  Statement  No.  2,  and
accordingly,  have  not  been  disclosed  as  such  in the  Company's  financial
statements.


                                       6
<PAGE>


     The Company expended  approximately  $544,000,  $343,000, and $5,557,000 on
research and development during the fiscal years ended October 25, 1998, October
26,  1997 and October 27,  1996,  respectively.  The  research  and  development
expenses incurred in fiscal 1996 related to product  development of a high-speed
color digital printer and a low-cost ruggedized black and white printer, as well
as enhancements to existing products.

Employees

     As of October  25,  1998,  the  Company  employed 87 persons on a full-time
basis,  compared to 95 persons on a full-time basis as of October 26, 1997. None
of the  Company's  employees  are  represented  by a union or are  subject  to a
collective  bargaining  agreement.  The Company believes that its relations with
its employees are good.

Other Matters

     The business of the Company is not seasonal.

     The  Company's  manufacturing  operations  are subject to various  federal,
state and local laws, including those restricting or regulating the discharge of
materials into the environment,  or otherwise  relating to the protection of the
environment.   The  Company  is  not  involved  in  any  pending  or  threatened
proceedings  which would  require  curtailment  of, or otherwise  restrict,  its
operations   because  of  such  regulations,   and  compliance  with  applicable
environmental  laws  has not had a  material  adverse  effect  on the  business,
financial condition or results of operations of the Company.

     In December  1997,  the Company  purchased a 43,000 square foot facility in
Orlando,  Florida for  $899,000.  In  connection  with the  acquisition  of this
property, the Company obtained a mortgage loan in the amount of $975,000,  which
included approximately $76,000 to be used for building improvements. The Company
completed its move to Florida during February 1998.

Item 2. Properties.

     The  Company's   operations   are  conducted  from  a  43,000  square  foot
manufacturing  facility  in Orlando  Florida,  which the  company  purchased  in
December 1997 (see Item 1. Other Matters).  A 6,600 square foot facility located
in Calabasas,  California was opened in November 1997.  This facility houses the
Company's  technology center. The lease is for a three year term through October
2000.  In April 1998,  the Company  leased a 5,400 square foot office in Florham
Park, New Jersey in which the Company's Corporate offices are located. The lease
provides for a five year term through March 2003.  Management  believes that its
facilities are suitable and adequate for the Company's current needs.

Item 3. Legal Proceedings.

      The Company is, from time to time, the subject of  litigation,  claims and
assessments  arising out of matters occurring during the normal operation of the
Company's business. In the opinion of management,  the liability,  if any, under
such current litigation,  claims and assessments would not materially affect the
financial  position or the results of the  operations  of the Company  except as
disclosed herein.

     Four  former  officers  of  the  Company  (the  "Former  Officers"),  whose
employment  relationships with the Company terminated in part as a result of the
Company's  restructuring  in October 1996,  sought  severance  benefits from the
Company.  On January 13, 1997,  three of the Former Officers sued the Company in
the Superior Court of the State of California for Los Angeles  County,  in order
to enforce payment of severance benefits under certain agreements, each dated as
of October 7, 1996,  between each Former Officer and the Company  (collectively,
the  "Severance  Agreements").  The fourth  Former  Officer  sued the Company in
response to the Company's  cross-complaint.  The Former  Officers sought damages
from the Company  based upon the  Severance  Agreements  and an alleged  implied
promise not to terminate the employment of the Former  Officers with the Company
without good cause.


                                       7
<PAGE>


     On September 28, 1998, a California trial court upheld the enforcability of
the former officer's severence agreements and the officer's requested entry of a
judgment in the approximate  amount of $1,200,000  plus interest and costs.  The
Company has appealed the judgment.  The Company has obtained a written guarantee
from a significant stockholder guaranteeing payment of the judgment,  should the
Company  lose on appeal.  The Company is unable to  estimate  the results of its
appeal and at October 25, 1998 nothing has been accrued for in the  consolidated
financial statements related to this litigation.

     In a separate matter  regarding  benefits under the Company's  Supplemental
Executive  Retirement  Plan (the "SERP"),  the Company entered into a settlement
agreement (the "Agreement") on February 10, 1998 with the Former Officers in the
total amount of $643,681.  The SERP was  terminated  when a cash  settlement was
distributed on October 2, 1998.

     In April 1998,  the owner of the  Woodland  Hills,  CA,  premises  formerly
occupied by the Company  sued for the balance of all rent due through the end of
the extant lease agreement plus damages of approximately $1,000,000. The Company
relocated from such premises after the owner had ignored repeated  notifications
of  unsafe  structural  conditions  as  cited  by Los  Angeles  County  building
inspectors.  Although it is presently too early to determine the outcome of this
litigation, the Company believes it has valid defenses in this case and has made
no accrual relating to this litigation.

Item 4. Submission of Matters to a Vote of Security Holders.

     None.


                                       8
<PAGE>


                        Executive Officers of the Company

     The following table sets forth certain information concerning the executive
officers of the Company as of October 25, 1998.


         Name                  Age                 Positions 
         ----                  ---                 ----------
Daniel P. Ginns............     48    Chairman of the Board of Directors since
                                        October 9, 1996; Chief Executive Officer
                                        since October 24, 1996; and Secretary
                                        since February 19, 1997. Mr. Ginns is
                                        also the President of Belmont Capital,
                                        Inc.

Adrien A. Maught, Jr.......     49    Chief Operating Officer since February
                                        11, 1998. President since January 3,
                                        1997 and Director since October 9, 1996.

Ronald A. Lefkon...........     58    Chief Financial Officer and Treasurer
                                        since May 18, 1998. Mr. Lefkon resigned
                                        from the Company in December 1998.

James D. Sturgeon, Jr......     65    Vice President, Marketing since February
                                        11, 1998; Chief Operating Officer from
                                        April 14, 1997 to February 11, 1997;
                                        Vice President, Manufacturing Operations
                                        from April 1, 1992 to April 14, 1997 and
                                        Vice President Operations from February
                                        27, 1989 to April 1, 1992.

     No family  relationship  exists between any of the individuals named above.
There were no arrangements or  understandings  between any officer and any other
person pursuant to which he was selected an officer.


                                       9
<PAGE>


                                     PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.

     Datametrics  Corporation's  common  stock has been  listed on the  American
Stock  Exchange  (Symbol DC) since July 26, 1988.  The high and low sales prices
for the common stock as reported by the American Stock Exchange are set forth in
the following table.

    Fiscal 1998 Quarter Ended                        High          Low
    -------------------------                        ----          ---

          January 25........................        $2 3/16       $2 1/16
          April 26..........................        $1 7/8        $1 7/8
          July 26...........................        $1 11/16      $1 5/8
          October 25........................        $1 15/16      $  3/4

    Fiscal 1997 Quarter Ended                        High          Low
    -------------------------                        ----          ---
          January 26........................        $1 9/16       $  7/8
          April 27..........................        $2 7/16       $1 1/4
          July 27...........................        $1 11/16      $1 1/8
          October 26........................        $2 1/4        $1 3/16


     There were approximately 789 stockholders of record as of October 25, 1998.

     No cash dividends have been paid to common  stockholders  since the Company
was founded, and the Company does not intend to do so in the foreseeable future.


Item 6. Selected Financial Data.

                  FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                           Fiscal Years Ended
                                                                --------------------------------------------------------------------
                                                                October 25,    October 26,   October 27,   October 29,   October 30,
                                                                   1998           1997          1996           1995          1994
                                                                --------------------------------------------------------------------
                                                                           (In thousands, except per share data)
<S>                                                             <C>            <C>            <C>            <C>            <C>     
Summary of Operations:
   Sales .................................................      $  7,742       $ 16,797       $ 19,246       $ 18,956       $ 25,211

   Net income (loss) .....................................      $ (3,270)      $ (3,101)      $(17,386)      $ (9,213)
                                                                                                                            $     31
   Net (loss) per share:
      Basic ..............................................      $  (0.22)      $  (0.24)      $  (1.39)      $  (0.84)      $     --
      Diluted ............................................      $  (0.22)      $  (0.24)      $  (1.39)      $  (0.84)      $     --
   Weighted average number of shares outstanding:
     Basic ...............................................        15,202         12,995         12,515         11,020          9,067
     Diluted .............................................        15,202         12,995         12,515         11,020          9,067
Other data:
   Total assets ..........................................      $ 12,719       $ 11,546       $ 15,940       $ 27,471       $ 19,886
   Long-term debt ........................................      $  3,463       $  1,019       $  1,032       $    919       $  1,134
   Stockholders' equity ..................................      $  4,008       $  3,522       $  5,013       $ 21,939       $ 13,661
</TABLE>

     During March and April 1994,  the Company sold  2,300,000  shares of common
stock in a public  offering.  The net proceeds  were  approximately  $5,138,000.
During June 1995, the Company sold 2,300,000  shares of common stock in a public
offering. The net proceeds were approximately $16,555,000.

     Net  loss  for  fiscal  1996  include  certain   non-recurring  charges  of
$5,518,000.


                                       10
<PAGE>


     During  February 1997, the Company sold 667,334 shares of common stock in a
private placement. The net proceeds were approximately $1,001,000.

     On October  27,  1997,  the Company had a private  placement  of  1,394,094
shares at $1.75 per share for proceeds of approximately $2,440,000.

     Several  additional  private  placements  through  June 19, 1998  totalling
630,000  shares at $1.25 to $1.75 per share  resulted in proceeds to the Company
of approximately $879,000.

     On July 24, 1998 and September 4, 1998, the Company  received  $982,500 and
$746,500 in net  proceeds  from the private  sale of  $1,000,000  and  $750,000,
respectively,  in aggregate  principal  amount of 7% Convertible  Debentures due
July 24, 2001.

     On December 30, 1998, the Company placed approximately $3.45 million of 10%
Subordinated  Notes due 2000 (the  "Subordinated  Notes")  and $1.55  million in
shares  of the  Company's  common  stock.  The  Subordinated  Notes,  which  are
unsecured  and callable  under  certain  conditions,  provide for the Company to
issue 5-year warrants  exercisable into the Company's common stock at a price fo
$1.50 per share.

     As part of the offering,  investors  holding $1.75 million of the Company's
Convertible  Debentures  issued earlier in the year exchanged their holdings for
the new  Subordinated  Notes. In addition,  holders of $500,000 of the Company's
Senior  Subordinated  Debentures  also  exchanged  their  debentures for the new
Subordinated  Notes. The net proceeds of approximately $2.75 million wll be used
for debt retirement and working capital purposes.

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations.

     This  report  contains  certain  statements  of  a  forward-looking  nature
relating to future events or the future performance of the Company.  Prospective
investors are  cautioned  that such  statements  are only  predictions  and that
actual events or results may differ materially.

Results of Operations

   Fiscal Year 1998 Compared With Fiscal Year 1997

     Sales for the year ended  October 25, 1998 were  $7,742,000,  a decrease of
$9,055,000 or 54%,  compared with sales of $16,797,000 in the prior fiscal year.
Sales of defense and defense related products decreased $8,594,000,  while other
sales  decreased by $461,000.  Sales for fiscal 1998 were adversely  impacted by
lower  than  anticipated  orders  from  the  Department  of  Defense  and  prime
contractors,  the  Company's  decision  not to accept  orders  for single or low
quantity orders with substantial  development  costs, the Company's  decision to
relocate its manufacturing  operations to Florida, and the time required for new
manufacturing  and  supervisory  personnel to learn to produce  efficiently  the
Company's products.

     Cost of sales for fiscal 1998 was $5,570,000 (72% of sales),  a decrease of
$7,831,000 or 58%, compared with $13,401,000 (80% of sales) for the prior fiscal
year. In the current year, cost of sales was favorablly impacted by lower direct
labor costs in the Company's  Florida  manufacturing  operation  compared to the
Company's former manufacturing operation in California.  In the prior year, cost
of sales as a percentage  of sales was  unfavorably  impacted by four  contracts
that were begun prior to October 1996 that lost $1,060,000, the $524,000 reserve
taken for excess and obsolete  inventory,  and $275,000 in severance benefits in
connection  with the  Company's  relocation of its  manufacturing  operations to
Florida.

     Research and development ("R&D") expenses were $544,000 for fiscal 1998, an
increase  of  $201,000 or 59%,  compared  with  $343,000  for fiscal  1997.  The
increase is primarily due to the continuing  development  costs of the Company's
new family of industrial printers.

     Selling,  general and administrative ("SG&A") expenses for fiscal 1998 were
$4,373,000  (56% of sales) a  decrease  of  $1,297,000,  or 23%,  compared  with
$5,670,000  (34% of sales) for the prior fiscal year.  The reduction in SG&A was
the result of lower defense-related marketing expenses, lower plant and facility
expenses and lower  administrative  and support staff  expenses  throughout  the
Company.  This reduction was partially  offset by an increase in audit and legal
fees for 1998.

     Net interest  expense  amounted to $518,000 for the year ended  October 25,
1998  compared  with net  interest  expense of $474,000  for fiscal  1997.  This
increase is due to higher outstanding borrowings.

     The net loss for the year ended  October 25, 1998 amounted to $3,270,000 an
increase of $169,000 or 5%,  compared with net loss of $3,101,000  for the prior
fiscal year.


                                       11
<PAGE>


     Management has determined  that, based on the Company's  historical  losses
from  recurring  operations,  the Company will most likely not recognize its net
deferred  tax assets at October  25,  1998.  Ultimate  recognition  of these tax
assets is dependent, to some extent, on future revenue levels and margins. It is
the intention of management  to assess the  appropriate  level for the valuation
allowance each quarter.

     The Company utilizes various computer software packages as tools in running
its accounting operations.  Management plans to replace the current Western Data
Systems  software with a software  package  better suited to support its current
and future business needs.  Management believes it will select and implement the
appropriate software package by June 1, 1999. The Company believes that it has a
prudent  approach in place to address these issues.  The approach  includes:  an
assessment  of  internal  programs  and  equipment;   communication  with  major
customers  and vendors with respect to the state of readiness of their  systems;
an evaluation of facility  related  issues and the  development of a contingency
plan. This approach is designed to maintain an uninterrupted supply of goods and
services  to/from the  Company.  The Company is  incorporating  the Y2K computer
programming  language into its choice of an appropriate  software  package.  The
Company does not believe the investment  required for its mainframe and critical
hardware equipment to be Y2K compliant will be significant.

     The  Company is in a  continuous  process of  communicating  with its major
customers  and  suppliers.   This  contact  is  designed  to  determine  systems
compatibility  and  compliance.  The  Company  has  been  assured  by its  major
suppliers  that  there  will be no  disruption  in the  delivery  of  goods  and
services.  The Company  believes that  adequate  resources are available for the
supply of its raw materials and facility related equipment will be operational.

     The Company  continues to assess the risks associated with program failures
and will develop a formal contingency plan with its business partners to address
specific risks. The failure to correct a material Y2K problem could result in an
interruption  in normal  business  activity.  The Company's  plan is expected to
significantly reduce the risk associated with the Y2K issue. However, due to the
inherent uncertainty of the Y2K issue and dependence on third-party  compliance,
no assurance can be given that potential Y2K failures will not adversely  effect
the Company's operations, liquidity and financial position.

     The  contract  process in which  products are offered for sale is generally
set before costs are  incurred,  and prices are based on estimates of the costs,
which include the anticipated impact of inflation.

   Fiscal Year 1997 Compared With Fiscal Year 1996

     Sales for the year ended  October 26, 1997 were  $16,797,000  a decrease of
$2,449,000 or 12.7% compared with sales of $19,246,000 in the prior fiscal year.
Sales from military and ruggedized  products  decreased  $2,608,000 and sales of
commercial color products increased $159,000.

     Cost of sales for fiscal 1997 was $13,401,000  (80% of sales) a decrease of
$7,767,000  from  cost of sales of  $21,168,000  (110% of  sales)  for the prior
fiscal  year.  Cost of sales as a percent  of sales was  primarily  impacted  by
$5,102,000 of  non-recurring  charges for  inventory  reserves and tooling costs
relative to the Company's high-speed color digital printer product.

     R&D expenses  were $343,000 in fiscal 1997, a decrease of $5,214,000 or 94%
compared with $5,557,000 for fiscal 1996.  Approximately  83% of the fiscal 1996
R&D  expenses  related to the  development  of the  Company's  high-speed  color
digital printer product.

     SG&A expenses for fiscal 1997 were $ 5,670,000 (34% of sales) a decrease of
$4,084,000  from  $9,754,000  (51% of sales)  from the prior  fiscal  year.  The
increase was due to heavy  spending on marketing  for the  Company's  high-speed
color  digital  printer  product and certain  non-recurring  charges of $416,000
primarily for severance and accelerated depreciation.

     Net interest  expense  amounted to $474,000 for the year ended  October 26,
1997  compared  to $80,000  for  fiscal  1996.  The change was due to  decreased
investment  income on the  remaining  proceeds  of the  Company's  common  stock
offering and payment of interest on increased borrowings. Amortization of excess
of acquired  net assets over cost was  $229,000  for the year ended  October 27,
1996.

     The net loss for the year ended  October  26, 1997  amounted to  $3,101,000
compared with a net loss of $17,386,000  for the same period in the prior fiscal
year.  The  loss  was  primarily  due to  continued  spending  on the  Company's
high-speed  digital color printer.  Cost of sales increased by $4,840,000,  SG&A
expenses  increased by $3,686,000,  net interest expense  increased by $176,000,
amortization  decreased by $75,000,  and taxes increased by $280,000.  This loss
was  partially  offset by an increase in sales of $290,000  and by a decrease in
R&D expenses of $594,000.


                                       12
<PAGE>


     In October  1996,  the Company idled the  manufacture  and marketing of its
CYMax series of high-speed color digital  printers.  This decision was made as a
result of the burdensome  development and selling expenses of the CYMax printers
which experienced an indifferent market reception.

     On October 8, 1996,  a new Board of  Directors  was  elected,  effecting  a
change in control of the Company.  This change in control was brought about by a
group of stockholders  who were  dissatisfied  with the strategic  direction and
financial performance of the Company. On October 24, 1996, the Company announced
that it had accepted the resignations of four senior  executives,  three members
of the Board of Directors and had reduced its work force by laying off 35 out of
a total of 151  employees.  These  measures were  undertaken  based upon the new
Board of Directors'  assessment of the Company's business performance during the
past several years,  the then financial and operational  position of the Company
and the  perceived  immediate  need to implement  new cost control  policies and
procedures.

     Primarily as a result of these changes,  the Company recorded the following
non-recurring  charges which totaled  $5,518,000 in the fourth quarter of fiscal
1996: $876,000 of accelerated depreciation on property and equipment relative to
the idled production  facilities for the former CYMax printer line;  $304,000 in
severance  payments  and  accruals  relating  to employee  and senior  executive
terminations;  $3,323,000  related to the writedown to estimated net  realizable
value for CYMax  inventory  purchased  during  fiscal  1996;  $542,000 for CYMax
material vendor claims;  and $473,000 for a write-down of other assets and other
liabilities.  As of October 27, 1996, $865,000 of the non-recurring charges were
accrued as liabilities.

Liquidity and Capital Resources

     The  Comany's  principal  capital  requirements  have been to fund  working
capital  needs,  capital  expenditures  and the  payment of long term debt.  The
Company has recently relied  primarily on internally  generated  funds,  private
placement  proceeds,  subordinated  debt and  other  bank debt to  finance  it's
operation.

     Net cash used in operations was $5 million, $1.6 million, and $10.5 million
in 1998, 1997 and 1996, respectively. The change from 1996 to 1997 was primarily
due to the larger net loss in 1996.  The change from 1997 to 1998 was  primarily
due to an increase in  inventory  in 1998 versus a decrease in inventory in 1997
and a greater reduction in accounts receivable in 1997 versus 1998.

     Net cash used in investing  activities  was $1.6 million,  $0.3 million and
$1.4 million in 1998, 1997 and 1996  respectively.  The change from 1996 to 1997
was  primarily  due to a  higher  level  of  equipment,  furniture  and  fixture
expenditures in 1996 versus 1997. The change from 1997 to 1998 was primarily the
result of the move of the Company's manufacturing and distribution facility from
California to Florida and the Company's finance and administrative  offices from
California to New Jersey.

     Net cash provided by financing  activities  was $6.6 million,  $1.8 million
and $2.7 million in 1998, 1997 and 1996,  respectively.  The change from 1996 to
1997 was primaily due to greater net payments  made on debt in 1997 versus 1996.
The change from 1997 to 1998 was  primarily  due to the issuance of common stock
and warrants and an increase in long-term borrowings in 1998.

     On December 30, 1998, the Company placed approximately $3.45 million of 10%
Subordinated  Notes due 2000 (the  "Subordinated  Notes")  and $1.55  million in
shares  of the  Company's  common  stock.  The  Subordinated  Notes,  which  are
unsecured  and callable  under  certain  conditions,  provide for the Company to
issue 5-year warrants  exercisable into the Company's common stock at a price fo
$1.50 per share.

     As part of the offering,  investors  holding $1.75 million of the Company's
Convertible  Debentures  issued earlier in the year exchanged their holdings for
the new  Subordinated  Notes. In addition,  holders of $500,000 of the Company's
Senior  Subordinated  Debentures  also  exchanged  their  debentures for the new
Subordinated  Notes. The net proceeds of approximately $2.75 million wll be used
for debt retirement and working capital purposes.

     The Company  remains in default of  approximately  $1.35  million of Senior
Subordinated  Notes.  The Company is currently  negotiating  a settlement on the
remaining amounts outstanding and expects to either issue new notes or repay the
amounts owed with a combination of stock and cash during fiscal 1999.

     The Company had, with a bank, a revolving line of credit  agreement,  which
at October 25, 1998,  the Company was in default of. The balance  outstanding of
approximately  $1.7 million at October 25, 1998 was paid in full on December 30.
1998.  The Company no longer has a line of credit with the bank.  The Company is
negotiating a new revolving line of credit agreement with several banks.

     Though the  Company has repaid its senior  indebtedness,  as of the date of
this filing it has not yet replaced such  indebtedness with a new credit line or
senior lending relationship.  In order to satisfy its short-term working capital
requirements,  the Company is actively  seeking  such  replacement  credit,  and
failure to do so could have a material adverse effect on the Company's continued
operations,  or require that it obtain  substitute  financing at higher cost, or
raise additional capital through the sale of other debt or equity securities.


                                       13
<PAGE>


     From October 1997 through August 1998, through several private  placements,
the Company raised approximately $3.3 million.

     On September 28, 1998, a California  trial court upheld the  enforceability
of former officers' severance agreements,  and the officers requested entry of a
judgement in the approximate amount of $1.2 million plus interest and costs. The
Company has appealed the judgement. The Company has obtained a written guarantee
from a significant stockholder guaranteeing payment of the judgement, should the
Company lose on appeal.

     The Company expects to finance it's capital  expenditure  requirements  and
other  commitments  with the  proceeds  from  the  various  private  placements,
subordinated notes and other sources of working capital.

Recent Accounting Standards

     In June 1997,  the  Financial  Accounting  Standards  Board  issued two new
disclosure  standards.  Results of  operations  and  financial  position will be
unaffected by implementation of these new standards.

     SFAS No. 130, "Reporting  Comprehensive  Income," establishes standards for
reporting and display of  comprehensive  income,  its components and accumulated
balances.  Comprehensive  income is  defined to  include  all  changes in equity
except those resulting from  investments by owners and  distributions to owners.
Among other disclosures,  SFAS No. 130 requires that all items that are required
to  be  recognized   under  current   accounting   standards  as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.

     SFAS No.  131,  "Disclosure  about  Segments of an  Enterprise  and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a  Business   Enterprise,"   establishes  standards  for  the  way  that  public
enterprises  report  information  about operating  segments in annual  financial
statements  and  requires  reporting  of selected  information  about  operating
segments  in  interim  financial  statements  issued  to  the  public.  It  also
establishes standards for disclosure regarding products and services, geographic
areas and major customers. SFAS No. 131 defines operating segments as components
of and enterprises about which separate financial  information is available that
is evaluated  regularly by management in deciding how to allocate  resources and
in assessing performance.

     Both SFAS Nos.  130 and 131 are  effective  for  financial  statements  for
periods  beginning after December 15, 1997 and require  comparative  information
for earlier  years to be  restated.  Both SFAS Nos 130 and 131 should not have a
material impact on the Company's financial statements and disclosures.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting  for Derivative  Instruments and Hedging  Activities."  SFAS No. 133
requires  companies to recognize all derivative  contracts at their fair values,
as either assets or liabilities on the balance sheet. If certain coniditions are
met, a derivative may be  specifically  designated as a hedge,  the objective of
which  is to  match  the  timing  of gain or loss  recognintion  on the  hedging
derivative  with the  recognition  of (1) the  changes  in the fair value of the
hedged asset or liability that are  attributable  to the hedged risk, or (2) the
earnings  effect of the hedged  forecasted  transaction.  For a  derivative  not
designated as a hedging instrument,  the gain or loss is recognized in income in
the  period of change,  SFAS No. 133 is  effective  for all fiscal  quarters  of
fiscal years beginning after June 15, 1999.

     Historically,  the Company has not entered into derivative contracts either
to hedge existing risks or for speculative  purposes.  Accordingly,  the Company
does not expect adoption of the new standard to effect its financial statements.

Forward Looking Statements--Cautionary Factors

     Except for the  historical  information  and  statements  contained in this
report,  the matters set forth in this report are "forward  looking  statements"
that involve uncertainties and risks, some of which are discussed at appropriate
points in this report and the  Company's  other SEC filings,  including the fact
that the  Company  is  engaged  in  supplying  equipment  and  services  to U.S.
government  defense  programs  which are  subject  to special  risks,  including
dependence on government  appropriations,  contract  termination  without cause,
contract  renegotiation  and  the  intense  competition  for  available  defense
business.


                                       14
<PAGE>


Item 8. Financial Statements and Supplementary Data.

     The  response  to this Item 8 is  submitted  as a separate  section of this
report (see Item 14).

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure.

     On November 3, 1997, the Company  changed its certifying  accountants  from
Ernst & Young LLP to  Deloitte & Touche LLP as filed on Form 8-K on  November 7,
1997.

     On February 18, 1998,  the  Company's  certifying  accountants,  Deloitte &
Touche LLP,  resigned as reported in the  Company's  Current  Report on Form 8-K
filed with the  Securities  and Exchange  Commission  on February 25, 1998.  The
Company  had  disagreements  with  its  certifying  accountants  concerning  the
classification  of certain  inventoried  parts as  long-term  and the  Company's
ability to continue as a going concern.

     Effective  April 23,  1998,  the Company  engaged BDO  Seidman,  LLP as its
certifying accountants, as reported in its Current Report on Form 8-K filed with
the Securities Exchange Commission on April 29, 1998.

                                    PART III

     The information  required to be set forth herein,  Item 10,  "Directors and
Executive Officers of the Registrant," Item 11, "Executive  Compensation,"  Item
12, "Security  Ownership of Certain  Beneficial Owners and Management," and Item
13, "Certain  Relationships and Related  Transactions," except for a list of the
Executive Officers which is provided in Part I of this Report,  will be included
in a proxy filing on February 1, 1999.

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)  1. Consolidated Financial Statements

     The Consolidated  Financial  Statements listed in the accompanying Index to
Consolidated  Financial  Statements and Financial Statement Schedule on page F-1
hereof are filed as part of this report.

     2. Consolidated Financial Statement Schedules

     The  Financial  Statement  Schedule  listed  in the  accompanying  Index to
Consolidated  Financial  Statements and Financial Statement Schedule on page F-1
hereof are filed as part of this report.

     3. Exhibits

     The exhibits listed in the accompanying  Exhibit Index on pages E-1 and E-2
hereof are filed as part of this report.

(b) Reports on Form 8-K:

     Please refer to Item 9.


                                       15
<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 in the City of Florham
Park, State of New Jersey, on the 25th day of January, 1999.

                                                       DATAMETRICS CORPORATION
                                                       (Registrant)


                                                        /S/ DANIEL P. GINNS
                                                        ------------------------
                                                            Daniel P. Ginns,
                                                         Chief Executive Officer

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

<TABLE>
<CAPTION>
           Signature                          Title                                  Date
           ---------                          -----                                  ----
<S>                                    <C>                                        <C>  
 /s/ DANIEL P. GINNS                   Chairman of the Board, Chief
----------------------------            Executive Officer and Director                             
     Daniel P. Ginns                    (Principal Executive Officer and          January 25, 1999
                                        Principal Financial and Accounting                        
                                        Officer)                                                  

 /s/ ADRIEN A. MAUGHT, JR.             President and Director                     January 25, 1999
----------------------------
     Adrien A. Maught,Jr.

 /s/ DOUGLAS S. FRIEDENBERG            Director                                   January 25, 1999 
-----------------------------
     Douglas S. Friedenberg
</TABLE>


                                       16
<PAGE>


                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULE

                                    Form 10-K

<TABLE>
<CAPTION>
                                                                                                             Page
                                                                                                             ----
<S>                                                                                                           <C>
Consolidated Financial Statements
Statement of Management Responsibility to the Stockholders of Datametrics Corporation.....................    F-2
Report of BDO Seidman, LLP, Independent Auditors..........................................................    F-3
Consolidated Balance Sheets as of October 25, 1998 and October 26, 1997...................................    F-4
Consolidated Statements of Operations for the fiscal  years ended October 25, 1998, 
     October 26, 1997 and October 27, 1996...............................................................     F-5
Consolidated Statements of Stockholders' Equity for the fiscal years ended October 25, 1998,
     October 26, 1997 and October 27, 1996................................................................    F-6
Consolidated Statements of Cash Flows for the fiscal years ended October 25, 1998, 
     October 26, 1997 and October 27, 1996................................................................    F-7
Notes to Consolidated Financial Statements................................................................    F-8

Financial Statement Schedule
Report of BDO Seidman, LLP, Independent Auditors..........................................................   F-20
II-Valuation and Qualifying Accounts......................................................................   F-21
</TABLE>

     All other schedules have been omitted since the required information is not
presented  in amounts  sufficient  to require  submission  of the  schedule,  or
because the  information  required is  included  in the  Consolidated  Financial
Statements and related notes.


                                      F-1
<PAGE>


    STATEMENT OF MANAGEMENT RESPONSIBILITY TO THE STOCKHOLDERS OF DATAMETRICS
                                  CORPORATION:


To the Board of Directors and Stockholders
Datametrics Corporation

     The   management  of  Datametrics   Corporation  is  responsible   for  the
preparation,  integrity and objectivity of the consolidated financial statements
and other  financial  information  presented  in this report.  The  accompanying
consolidated   financial  statements  have  been  prepared  in  conformity  with
generally  accepted  accounting  principles and properly  reflect the effects of
certain estimates and judgements made by management.

     The Company's  management maintains an effective system of internal control
that is designed to provide reasonable assurance that assets are safeguarded and
transactions are properly  recorded and executed in accordance with management's
authorization. The system is continuously monitored by direct management review,
the independent  accountants  and by internal  auditors who conduct an extensive
program of audits throughout the Company.

     The  Company's  consolidated  financial  statements as of and for the years
ended  October 25, 1998 and October 26, 1997 have been  audited by BDO  Seidman,
LLP, independent  accountants.  The Company's  consolidated financial statements
for the year  ended  October  27,  1996 have been  audited by Ernst & Young LLP,
independent  accountants.   Their  audits  were  conducted  in  accordance  with
generally  accepted  auditing  standards,  and  included  a review of  financial
controls  and tests of  accounting  records and  procedures  as they  considered
necessary in the circumstances.

     The Audit  Committee of the Board of Directors,  which  consists of outside
directors,  meets  regularly  with  management,  the  internal  auditors and the
independent accountants to review accounting,  reporting,  auditing and internal
control  matters.  The Committee has direct and private  access to both internal
and external auditors.

<TABLE>
<CAPTION>
         Signature                         Title                           Date
         ---------                         -----                           ----
<S>                              <C>                                <C>
    /s/ DANIEL P. GINNS          Chairman of the Board, Chief
-----------------------------     Executive Officer and Director    January 25, 1999
        Daniel P. Ginns          



         Signature                         Title                           Date
         ---------                         -----                           ----

    /s/ WILLIAM PANDOS            Chief Financial Officer           January 25, 1999
-----------------------------
        William Pandos
</TABLE>


                                      F-2
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To the Board of Directors and Stockholders
Datametrics Corporation

     We have audited the accompanying consolidated balance sheets of Datametrics
Corporation  and  Subsidiaries  as of October 25, 1998 and October 26, 1997, and
the related  consolidated  statements of operations,  stockholders'  equity, and
cash flows for the fiscal years then ended.  These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards. Those standards require that we plan and perform the audits 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 the report of a previous auditor on the 1997 financial statements, dated
January 30, 1998, that previous  auditor  expressed a qualified  opinion stating
that certain parts  inventory that would not be used within one year should have
been classified as a non-current  asset. As described in Note 4, parts inventory
not expected to be sold within one year have been  classified  as a  non-current
asset for all periods presented in the accompanying consolidated balance sheets.

     In our opinion,  the consolidated  financial  statements present fairly, in
all  material  respects,  the  consolidated  financial  position of  Datametrics
Corporation  and  Subsidiaries at October 25, 1998 and October 26, 1997, and the
results of their operations and their cash flows for the fiscal years then ended
in conformity with generally accepted accounting principles.



                                                       /s/   BDO SEIDMAN, LLP

New York, New York
January 7, 1999


                                      F-3
<PAGE>



                    DATAMETRICS CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             October 25,   October 26,
                                                                                 1998         1997
                                                                            ------------  ------------
                                                                        (In thousands, except for share data)
<S>                                                                            <C>         <C>     
                                 ASSETS (Note 6)
Current assets:
   Cash and cash equivalents ...............................................   $    228    $    200
   Accounts receivable, net (Notes 1 and 3) ................................      1,979       2,875
   Inventories, net (Note 4) ...............................................      4,140       3,377
   Prepaid expenses and other current assets ...............................         55         173
                                                                               --------    --------
          Total current assets .............................................      6,402       6,625
                                                                               --------    --------
Property and equipment, at cost:
   Land (Note 7) ...........................................................        420          --
   Building and improvements(Note 7) .......................................      1,042          --
   Machinery and equipment .................................................      3,312       3,717
   Furniture, fixtures and computer equipment ..............................      2,562       2,132
   Leasehold improvements ..................................................         71          --
                                                                               --------    --------
                                                                                  7,407       5,849
   Less: Accumulated depreciation and amortization .........................     (5,100)     (4,618)
                                                                               --------    --------
           Net property and equipment ......................................      2,307       1,231
   Inventoried parts (Note 4) ..............................................      3,200       2,619
   Other assets (Note 8) ...................................................        810       1,071
                                                                               --------    --------
                                                                               $ 12,719    $ 11,546
                                                                               ========    ========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Revolving line of credit (Note 6) .......................................   $  1,669    $    992
   Current maturities of capitalized lease obligations .....................         --           6
   Current maturities of long-term debt (Note 7) ...........................      1,871       1,974
   Accounts payable ........................................................      1,034       1,643
   Accrued commissions and payroll .........................................        225         639
   Accrued warranty ........................................................         30         100
   Other accrued expenses ..................................................        440       1,018
   Other current liabilities ...............................................         --         500
   Advance payments and progress payments on contracts .....................         --         133
                                                                               --------    --------
        Total current liabilities ..........................................      5,269       7,005
   Long-term debt, less current maturities (Note 7) ........................      2,696          --
   Loan payable (Note 8) ...................................................        746         696
  Other long-term liabilities ..............................................         --         323
                                                                               --------    --------
  Total liabilities ........................................................      8,711       8,024
                                                                               --------    --------
Commitments and contingencies (Notes 9 and 11)
 Stockholders' equity (Note 10):
   Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued         --          --
   Common stock, $.01 par value; 40,000,000 shares authorized;
   15,563,505 and 13,283,168 shares issued and outstanding in 1998 and
   1997, respectively ......................................................        156         133
   Additional paid-in capital ..............................................     37,910      34,177
   Accumulated deficit .....................................................    (34,058)    (30,788)
                                                                               --------    --------
     Total stockholders' equity ............................................      4,008       3,522
                                                                               --------    --------
                                                                               $ 12,719    $ 11,546
                                                                               ========    ========
</TABLE>

                             See accompanying notes.


                                      F-4
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                  Fiscal Years Ended
                                                         -------------------------------------
                                                         October 25,  October 26,  October 27,
                                                            1998         1997         1996
                                                         -----------  -----------  -----------
                                                        (In thousands, except per share data)
<S>                                                       <C>         <C>         <C>     
Sales (Note 1) ........................................   $  7,742    $ 16,797    $ 19,246
   Cost of sales (Note 2) .............................      5,570      13,401      21,168
   Research and development ...........................        544         343       5,557
   Selling, general and administrative (Note 2) .......      4,373       5,670       9,754
                                                          --------    --------    --------
   Loss from operations ...............................     (2,745)     (2,617)    (17,233)
Interest expense, net .................................       (518)       (474)        (80)
Amortization of excess of acquired net assets over cost         --          --         229
                                                          --------    --------    --------
   Loss before provision for income taxes .............     (3,263)     (3,091)    (17,084)
Provision for income taxes (Note 5) ...................          7          10         302
                                                          --------    --------    --------
Net loss ..............................................   $ (3,270)   $ (3,101)   $(17,386)
                                                          ========    ========    ========
   Loss per share of common stock:
   Basic and diluted ..................................   $  (0.22)   $  (0.24)   $  (1.39)
                                                          ========    ========    ========
Weighted Average Number of Shares Outstanding
   Basic and diluted ..................................     15,202      12,995      12,515
                                                          ========    ========    ========
</TABLE>

                             See accompanying notes.


                                      F-5
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                Common Stock            
                                                        --------------------------      Additional                         Total
                                                        Number of                        Paid-in       Accumulated     Stockholders'
                                                          Shares          Amount         Capital         Deficit           Equity
                                                        ----------      ----------      ----------      ----------       ----------
                                                                          (In thousands, except share data)
<S>                                                     <C>             <C>             <C>             <C>              <C>       
Balances at October 29, 1995 .....................      12,031,582      $      120      $   32,120      $  (10,301)      $   21,939
Issuance of common stock .........................         232,826               3             457              --              460
Net loss .........................................              --              --              --         (17,386)         (17,386)
                                                        ----------      ----------      ----------      ----------       ----------
Balances at October 27, 1996 .....................      12,264,408             123          32,577         (27,687)           5,013
Issuance of common stock and warrants ............       1,018,760              10           1,600              --            1,610
Net loss .........................................              --              --              --          (3,101)          (3,101)
                                                        ----------      ----------      ----------      ----------       ----------
Balances at October 26, 1997 .....................      13,283,168             133          34,177         (30,788)           3,522
Issuance of common stock and warrants ............       2,280,337              23           3,733              --            3,756
Net loss .........................................              --              --              --          (3,270)          (3,270)
                                                        ----------      ----------      ----------      ----------       ----------
Balances at October 25, 1998 .....................      15,563,505      $      156      $   37,910      $  (34,058)      $    4,008
                                                        ==========      ==========      ==========      ==========       ==========
</TABLE>


                             See accompanying notes.


                                      F-6
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                                     Fiscal Years Ended
                                                                                            ----------------------------------------
                                                                                            October 25,   October 26,    October 27,
                                                                                               1998           1997           1996
                                                                                            -----------   -----------    -----------
<S>                                                                                          <C>            <C>            <C>      
Cash Flows from Operating Activities:
   Net loss ...........................................................................      $ (3,270)      $ (3,101)      $(17,386)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Amortization of excess of acquired net assets over cost ..........................            --             --           (229)
     Depreciation and amortization ....................................................           490          1,192          2,132
     (Gain) loss on disposal of assets ................................................            (3)           284            328
Changes in assets and liabilities:
   Accounts receivable ................................................................           896          2,860            843
   Inventories and parts ..............................................................        (1,344)           949          2,321
   Prepaid expenses and other current assets ..........................................           118            (20)           426
   Other assets .......................................................................           261           (607)        (2,687)
   Accounts payable ...................................................................          (609)        (1,885)         1,417
   Accrued commissions and payroll ....................................................          (414)          (356)           178
   Accrued warranty ...................................................................           (70)           (80)            55
   Other accrued expenses .............................................................          (578)            43            640
   Advance and progress payments from customers .......................................          (133)          (904)         1,023
   Other long-term liabilities ........................................................          (323)            (5)            --
   Income taxes .......................................................................            --             --            427
                                                                                             --------       --------       --------
         Net cash used in operating activities ........................................        (4,979)        (1,630)       (10,512)
                                                                                             --------       --------       --------
Cash Flows from Investing Activities:
   Capital expenditures for property and equipment ....................................        (1,574)          (356)        (1,377)
   Proceeds from sale of fixed assets .................................................            11             43             --
                                                                                             --------       --------       --------
         Net cash used in investing activities ........................................        (1,563)          (313)        (1,377)
                                                                                             --------       --------       --------
Cash Flows from Financing Activities:
   Borrowings on revolving line of credit .............................................         8,310         11,258          6,100
   Payments on revolving line of credit ...............................................        (7,633)       (12,816)        (3,550)
   Increase (decrease) in other current liabilities ...................................          (500)           500             --
   Redemption of Series B Preferred Stock .............................................            --            (87)          (383)
   Payments on capitalized lease obligations ..........................................            (6)           (72)           (98)
   Borrowings on long-term debt .......................................................         2,717          1,713            565
   Payments on long-term debt .........................................................          (124)          (480)          (420)
   Borrowings on loan payable .........................................................            50            131             --
   Proceeds from the issuance of common stock and warrants ............................         3,756          1,610            460
                                                                                             --------       --------       --------
        Net cash provided by financing activities .....................................         6,570          1,757          2,674
                                                                                             --------       --------       --------
Net increase (decrease) in cash and cash equivalents ..................................            28           (186)        (9,215)
Cash and cash equivalents at beginning of the year ....................................           200            386          9,601
                                                                                             --------       --------       --------
Cash and cash equivalents at end of the year ..........................................      $    228       $    200       $    386
                                                                                             ========       ========       ========
Supplemental Disclosures of Cash Flow Information:
   Interest, net ......................................................................      $    512       $    282       $     50
   Income taxes (refund) ..............................................................             7             10           (125)
</TABLE>

                             See accompanying notes.


                                      F-7
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

   Business

     Datametrics  Corporation,  a Delaware corporation,  is engaged primarily in
the  design,  development,   manufacture  and  sale  of  high-speed,  non-impact
printers; high-resolution, non-impact printer/plotters; and ruggedized computers
and computer workstations.

   Basis of Presentation and Consolidation

     The accompanying  consolidated financial statements include the accounts of
Datametrics  Corporation and  subsidiaries  (collectively,  the "Company").  All
significant  intercompany  accounts and  transactions  have been  eliminated  in
consolidation. The Company's fiscal year end is the last Sunday of each October.

   Revenue Recognition

     Revenues  include both product  sales and revenues  applicable to long-term
design and  production  contracts.  The majority of the Company's  revenues from
product sales and long-term contracts are measured using the "units-of-delivery"
method.   Revenues  applicable  to  certain  fixed-price,   long-term  contracts
(principally   design  and   development   contracts)  are  measured  using  the
"cost-to-cost" method, whereby revenue is measured by relating costs incurred to
total  estimated  costs.  Sales  under  cost-reimbursement-type   contracts  are
recorded  as  costs  are  incurred.  Applicable  estimated  profits  under  cost
reimbursement  type  contracts  are  included  in sales in the  proportion  that
incurred  costs  bear to  total  estimated  costs.  Any  anticipated  losses  on
contracts are charged to income when identified.

     The Company  provides an accrual for future  warranty  costs at the time of
revenue  recognition  based upon the  relationship of prior year sales to actual
warranty costs. The warranty for the Company's products generally covers defects
in  material  and  workmanship.  The  current  accrual  represents  the  average
outstanding warranty of approximately ninety days.

   Concentrations of Credit Risk and Major Customers

     As is customary in the industry, the Company grants uncollateralized credit
to its  clients,  which  include the U.S.  government  and large  multi-national
corporations operating in a broad range of industries.  In order to mitigate its
credit risk,  the Company  continually  evaluates  the credit  worthiness of its
major commercial clients,  and maintains  allowances for potential losses within
management expectations.

     Approximately  71%, 67% and 61% of the Company's  sales during fiscal years
1998,  1997 and 1996,  respectively,  were to various U.S.  government  agencies
under prime  contracts or to prime  contractors  having sales to such  agencies.
Export sales to foreign customers amounted to $ 4,533,000 ($1,922,000 to Canada,
$2,354,000  to Europe and the Middle  East,  and $257,000 to the Pacific Rim) or
27.0% of total  sales in fiscal  year 1997.  Export  sales in 1998 and 1996 were
immaterial.  The Company's three largest customers  accounted for 23.7%,  22.3%,
and 18.9% of the Company's sales for the fiscal year ended October 25, 1998. Its
five largest customers accounted for 15.7%, 13.7%, 12.5%, 10.9% and 10.8% of the
Company's  sales for the fiscal year ended  October 26, 1997.  Its three largest
customers accounted for 15.5%, 15.4% and 11.3% of the Company's sales for fiscal
year ended October 27, 1996.  Accounts  receivable from these customers totalled
$422,000 and $1,810,000 at October 25, 1998 and October 26, 1997,  respectively.
No other  customer  accounted  for more than 10  percent of total  revenues  for
fiscal 1998, 1997 and 1996.

   Cash and Cash Equivalents

     The Company  considers  securities  purchased  within three months of their
date of maturity to be cash equivalents.


                                      F-8
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Inventories

     Inventories, which primarily include purchased parts and subassemblies, are
stated at the lower of cost (first-in,  first-out) or market. Contract inventory
costs include  purchased  materials,  direct labor and  manufacturing  overhead.
General  and  administrative  costs are  expensed  in the period  incurred.  The
portion  of  inventoried  parts  not  expected  to be sold  within  one  year is
classified as noncurrent assets.

   Property and Equipment

     Depreciation  and amortization of property and equipment are provided using
the straight-line method over the following estimated useful lives:


 Building and improvements......................   39 years
 Machinery and equipment........................   2 to 5 years
 Furniture, fixtures and computer equipment.....   2 to 8 years
 Leasehold improvements.........................   Shorter of the remaining term
                                                   of the lease or the life of 
                                                   the asset

   Use of 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
disclosures  of contingent  assets and  liabilities at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. The more significant  estimates  affecting amounts reported in
the financial  statements relate to revenues and costs under long-term contracts
and  inventory  reserve  accruals.   Actual  results  could  differ  from  those
estimates.

Earnings per Share

      During 1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  per
Share," which provides for the calculation of "basic" and "diluted" earnings per
share.  This Statement,  effective for financial  statements  issued for periods
ending after December 15, 1997,  requires  restatement of all  prior-period  EPS
data presented. Basic earnings per share includes no dilution and is computed by
dividing income available to common  shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share reflect,
in periods in which they have a  dilutive  effect,  the effect of common  shares
issuable  upon  exercise  of stock  options.  All  periods  presented  have been
restated to comply  with the  provisions  of SFAS No. 128.  The effect of common
stock  equivalents  has been  excluded  from the diluted  calculation  since the
effect  would be  antidilutive.  The adoption of SFAS No. 128 did not effect the
financial statements.

   Fair Value of Financial Instruments

      The  carrying  values of  financial  instruments  including  cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to the relatively short maturities of these  instruments.  The carrying value of
long-term  debt  approximates  the fair value for similar  debt issues  based on
quoted  market  prices or current  rates  offered to the Company for debt of the
same maturities.

   Impairment of Long-Lived Assets

      In  accordance  with  SFAS No.  121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to be  Disposed  Of," the Company
evaluates  long-lived  assets  for  impairment  whenever  events or  changes  in
circumstances  indicate  that  the  carrying  value  of  an  asset  may  not  be
recoverable.  If the  estimated  future  cash flows  (undiscounted  and  without
interest  charges) from the use of an asset are less than the carrying  value, a
write-down  would be recorded to reduce the related asset to its estimated  fair
value.


                                       F-9
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Income Taxes

     Income taxes are calculated  using the liability  method  specified by SFAS
No.  109,  "Accounting  for Income  Taxes".  SFAS  No.109  requires a company to
recognize  deferred  tax  liabilities  and  assets for the  expected  future tax
consequences  of events  that  have been  recognized  in a  company's  financial
statements  or tax returns.  Under this method,  deferred  tax  liabilities  and
assets are determined  based on the difference  between the financial  statement
carrying amounts and tax basis of assets and liabilities using enacted tax rates
in effect  in the  years in which  the  differences  are  expected  to  reverse.
Deferred  tax  assets  are  reduced  by a  valuation  allowance  to  the  extent
realization is uncertain.

   Reclassifications

     Certain  reclassifications  were made to 1997 balances to conform with 1998
presentation.

    Recent Accounting Standards

     In June 1997,  the FASB  issued two new  disclosure  standards.  Results of
operations and financial  position will be unaffected by implementation of these
new standards.

     SFAS No. 130, "Reporting  Comprehensive  Income," establishes standards for
reporting and display of  comprehensive  income,  its components and accumulated
balances.  Comprehensive  income is  defined to  include  all  changes in equity
except those resulting from  investments by owners and  distributions to owners.
Among other disclosures,  SFAS No. 130 requires that all items that are required
to  be  recognized   under  current   accounting   standards  as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.

     SFAS No.  131,  "Disclosure  about  Segments of an  Enterprise  and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a  Business   Enterprise,"   establishes  standards  for  the  way  that  public
enterprises  report  information  about operating  segments in annual  financial
statements  and  requires  reporting  of selected  information  about  operating
segments  in  interim  financial  statements  issued  to  the  public.  It  also
establishes standards for disclosure regarding products and services, geographic
areas and major customers. SFAS No. 131 defines operating segments as components
of and enterprises about which separate financial  information is available that
is evaluated  regularly by management in deciding how to allocate  resources and
in assessing performance.

     Both SFAS Nos.  130 and 131 are  effective  for  financial  statements  for
periods  beginning after December 15, 1997 and require  comparative  information
for earlier  years to be restated.  Both SFAS Nos. 130 and 131 should not have a
material impact on the Company's financial statements and disclosures.

     In June 1998,  the FASB  issued SFAS No. 133,  "Accounting  for  Derivative
Instruments  and  Hedging  Activities."  SFAS  No.  133  requires  companies  to
recognize  all  derivative  contracts at their fair values,  as either assets or
liabilities  on the balance sheet.  If certain  conditions are met, a derivative
may be  specifically  designated as a hedge,  the objective of which is to match
the  timing  of gain or loss  recognition  on the  hedged  derivative  with  the
recognition  of (1) the  changes  in the  fair  value  of the  hedged  asset  or
liability that are  attributable  to the hedged risk, or (2) the earnings effect
of the hedged  forecasted  transaction.  For a derivative  not  designated  as a
hedging  instrument,  the gain or loss is  recognized in income in the period of
change.  SFAS No. 133 is  effective  for all  fiscal  quarters  of fiscal  years
beginning after June 15, 1999.

Historically,  the Company has not entered into derivative  contracts  either to
hedge existing risks or for speculative purposes.  Accordingly, the Company does
not expect adoption of the new standard to affect its financial statements.

Note 2. Non-recurring Charges

     In connection with its relocation to Florida,  the Company incurred certain
non-recurring charges totaling  approximately  $745,000 during the quarter ended
October 26, 1997. The components of the  non-recurring  charges were $275,000 in
severance payments and accruals related to employee terminations,  $320,000 from
the  abandonment of leasehold  improvements  at the Woodland  Hills,  California
facility and $150,000 for moving expenses.


                                      F-10
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     On October 8, 1996,  a new Board of  Directors  was  elected,  effecting  a
change in control of the  Company.  This change was brought  about by a group of
stockholders who were  dissatisfied  with the strategic  direction and financial
performance of the Company.  On October 24, 1996, the Company  announced that it
had accepted the  resignations of four senior  executives,  three members of the
Board of  Directors,  had  reduced its work force at all levels by laying off 35
out of a total of 151 employees,  and discontinued  the CYMAX  operation.  These
measures were  undertaken  based upon the new Board of Directors'  assessment of
the  Company's  business  performance  during the past several  years,  the then
financial and  operational  position of the Company and the perceived  immediate
need to implement new cost control policies and procedures. As a result of these
changes, the Company recorded  non-recurring charges of $5,518,000 in the fourth
quarter of 1996.  The components of the  non-recurring  charges were $304,000 in
severance  payments  and  accruals  relating  to employee  and senior  executive
terminations,  $876,000 resulting from the accelerated  depreciation  charges on
CYMax property and equipment,  $3,323,000 related to the write-down to estimated
net realizable value for CYMax inventory  purchased during fiscal 1996, $542,000
for CYMax customer and materials  vendor claims and $473,000 for a write-down of
other assets and other liabilities related to CYMax.

Note 3. Accounts Receivable

     Accounts receivable consist of the following:

                                                               1998       1997
                                                              -------   -------
                                                                (In thousands)
     U.S. government or its prime contractors amounts billed  $ 1,009   $ 2,373
     Foreign, commercial and other .........................    1,165       550
                                                              -------   -------
                                                                2,174     2,923
     Less allowance for possible losses ....................     (195)      (48)
                                                              -------   -------
                                                              $ 1,979   $ 2,875
                                                              =======   =======

Note 4. Inventories

     Inventories consist of the following:

                                                          1998        1997
                                                        --------    --------
                                                            (In thousands)

     Stockroom inventories ..........................   $ 10,630    $  9,465
     Contracts in process ...........................      1,117         529

     Finished goods .................................        421         224
                                                        --------    --------
                                                          12,168      10,218
     Less inventories classified as non-current asset     (3,200)     (2,619)
     Less reserve for obsolescence ..................     (4,828)     (4,222)
                                                        --------    --------
                                                        $  4,140    $  3,377
                                                        ========    ========


     Inventories consist primarily of materials used by the Company for existing
and anticipated  contracts and materials and finished  assemblies which are held
to satisfy spare parts requirements of the Company's customers.  Those parts not
expected to be sold within one year are classified as a non-current  asset.  The
Company  does  not  amortize  its  non-current  inventory,  rather  the  Company
evaluates  all  inventory  for  obsolescence  on a  periodic  basis and  records
estimated reserves.


                                      F-11
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 5. Income Taxes

     The primary  components of the Company's net deferred income tax assets are
as follows:

                                                            1998        1997
                                                          --------    --------
                                                              (In thousands)

     Net operating loss carryforwards .................   $ 12,336    $ 10,880
     General business credit carryforwards ............        372         372
     Inventory accounting methods .....................      1,991       1,729
     Deferred compensation accounting methods .........         --         269
     Book over tax depreciation .......................         40          79
     Other  non-deductible accruals and allowances ....        127         244
                                                          --------    --------
          Total deferred income tax assets ............     14,866      13,573
     Valuation allowance for deferred income tax assets    (14,866)    (13,573)
                                                          --------    --------
     Net deferred income tax assets ...................   $     --    $     --
                                                          ========    ========


     Net operating loss and tax credit carryforwards of $30,840,000 and $372,000
respectively,  for federal  income tax  purposes  will  expire at various  times
between 1999 and 2013.

     The provision for income taxes is composed of the following:

                                               1998       1997      1996
                                             -------    -------    -------
                                                     (In thousands)
     Current:

          Federal ........................   $    --    $    --         --
          State ..........................         7         10         29
     Deferred:
          Federal ........................    (1,105)    (1,186)    (4,436)
          State ..........................      (188)      (199)    (1,395)
     Increase in valuation allowance .....     1,293      1,385      6,104
                                             -------    -------    -------
                                             $     7    $    10    $   302
                                             =======    =======    =======


                                      F-12
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     Based upon  management's  judgment and the continued losses incurred by the
Company,  the valuation allowance  represents 100% of the Company's net deferred
income tax assets.  The following is a reconciliation of the difference  between
the actual provision for income taxes and the provision computed by applying the
federal statutory tax rate on loss before income taxes:

<TABLE>
<CAPTION>
                                                                     1998       1997       1996
                                                                   -------    -------    -------
                                                                           (In thousands)
<S>                                                                <C>        <C>        <C>     
     Federal income tax benefit computed at statutory rate .....   $(1,109)   $(1,051)   $(5,809)
     State income tax expense (benefit), net of federal benefits      (195)      (185)        19
     Goodwill amortization .....................................        --         --        (78)
     Change in valuation allowance .............................     1,293      1,385      6,104
     Other, net ................................................        18       (139)        66
                                                                   -------    -------    -------
                                                                         7         10        302
                                                                   =======    =======    =======
</TABLE>

Note 6. Revolving Line of Credit

     The Company had, with a bank, a revolving line of credit  agreement,  which
at October 25, 1998 the  Company was in default of. The balance  outstanding  of
approximately $ 1.7 million at October 25, 1998. This amount was paid in full on
December  30,  1998 (see Note 13).  The  Company  no longer has a line of credit
agreement with the bank.

Note 7. Long-Term Debt

     Long-term debt consists of the following:

                                                           1998       1997
                                                          ------     ------
                                                            (In thousands)

     Loans payable(a) ...............................     $   --     $  124
     Senior Subordinated Secured Debentures(b) ......      1,850      1,850
     Convertible Debentures(c) ......................      1,750         --
      Mortgage - South Trust Bank(d) ................        967         --
                                                          ------     ------
      Subtotal ......................................      4,567      1,974
      Less current maturities of long-term debt .....      1,871      1,974
                                                          ------     ------
                                                          $2,696     $   --
                                                          ======     ======

(a)  The Company had borrowed approximately $1,311,000 at interest rates ranging
     from 10.03% to 10.80%,  payable in monthly  installments  of  approximately
     $42,000, including interest, over a three-year period. The final payment on
     these loans was made in April 1998.


                                      F-13
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(b)  During November 1996, the Company issued $1,850,000 of Senior  Subordinated
     Secured  Debentures  with a  maturity  date of May 25,  1998 and an  annual
     interest rate of 10% (effective interest is 10.8% based upon original issue
     discount).  The proceeds from the sale of the Senior  Subordinated  Secured
     Debentures  were used to reduce the line of credit and fund working capital
     requirements.  The Senior  Subordinated  Secured Debenture holders received
     warrants to purchase a total of 616,679  shares of common  stock at a price
     of $1.50 for each share in connection with the financing.  The warrants are
     subject to call by the Company if the closing market price of the Company's
     common stock is $3.00 or greater for twenty  consecutive days. The warrants
     expire  November  25,  2001.  As of October  25,  1998,  the Company was in
     default  of  its   principal  and  interest   obligations   on  the  Senior
     Subordinated Secured Debentures.

     In December 1998, the Company placed  approximately  $5.0 million of common
     stock and debt (see Note  13),  $ 500,000  of which was used to reduce  the
     amount owed under the Senior Subordinated  Secured Debentures.  The Company
     is currently  negotiating a settlement on the remaining amount  outstanding
     and  expects  to either  issue new notes or repay the  amounts  owed with a
     combination of stock and cash during fiscal 1999.

(c)  On July 24, 1998,  the Company  received  $982,500 in net proceeds from the
     private  sale  of  $1,000,000  in  the  aggregate  principal  amount  of 7%
     Convertible  Debentures  due July 24, 2001.  Additionally,  on September 4,
     1998, the Company  received  $746,500 in net proceeds from the private sale
     of $750,000 in the aggregate principal amount of 7% Convertible  Debentures
     due July 24, 2001. The  debentures  are  convertible to common shares in an
     amount equal to the face value of the debenture. The conversion price shall
     be equal to the  lesser of $ 2.125 (2 1/8) per share or 80% of the  average
     closing  bid  prices of the  common  stock for the ten day  trading  period
     immediately preceding the conversion date.

     In December 1998, the 7% Convertible Debentures were exchanged for new debt
     (see Note 13).

(d)  In December  1997,  the Company  purchased a 43,000 square foot facility in
     Orlando,  Florida for $899,000.  In connection with the acquisition of this
     property,  the Company  obtained a mortgage  loan in the amount of $975,000
     from South Trust Bank. The loan matures on March 9, 2008. Interest is based
     on 8.02% per annum  through  March 9,  2003 and is then  adjusted  to equal
     2.25% in excess of the weekly average yield on United States Treasury Notes
     adjusted  to a constant  maturity  of five years as made  available  by the
     Federal Reserve Board.

     Maturities of the mortgage loan debt at October 25, 1998 are as follows:

                                                 (In thousands)
                      1999 .......................   $ 21
                      2000 .......................     23
                      2001 .......................     24
                      2002 .......................     26
                      2003 .......................     29
                      Thereafter .................    844
                                                     ----
                      Total Maturities ...........    967
                      Less:  Current maturities of     21
                                 long-term debt      ----
                                                      946
                                                     ====

Note 8. Loan Payable

     During 1998, the Company  borrowed $50,000 against the cash surrender value
of its key-man life  insurance  policy.  At October 25, 1998,  the balance owed,
which  approximates  the cash  surrender  value  included in other  assets,  was
$746,000 at 7.8% per annum.


                                      F-14
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 9. Leases

     The Company  currently  leases its facilities and various  equipment  under
operating  leases.  The building  leases  expire  through 2004 and the equipment
leases  expire   through  2002.   Minimum   future  rental   commitments   under
noncancelable operating leases are as follows:

                                               (In thousands)
                  1999 .....................       $  917
                  2000 .....................          943
                  2001 .....................          830
                  2002 .....................          794
                  2003 .....................          688
                  Thereafter ...............          478
                                                   ------
                                                   $4,650
                                                   ======

     Property and equipment  under capital leases have a cost of $251,000 and an
accumulated  depreciation of $74,000 and $71,000 at October 25, 1998 and October
26, 1997,  respectively.  Rental  expenses  charged to operations were $321,000,
$652,000 and $780,000 for the fiscal years 1998, 1997 and 1996, respectively.


                                      F-15
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 10. Stock Option Plans and Warrants

   Stock Options

     The Company has several  stock option plans which  provide for the granting
of options to employees or  directors at prices and terms as  determined  by the
Board of  Directors.  Such options vest over a period of one to four years.  All
options  issued by the Company to date have exercise  prices which were equal to
the market value of the Company's common stock at the date of grant.

     The  following  table  sets forth  summarized  information  concerning  the
Company's stock options:

<TABLE>
<CAPTION>
                                                                                            Number of             Exercise
                                                                                              Shares             Price Range
                                                                                              ------             -----------
                                                                                          (In thousands)
<S>                                                                                            <C>              <C>           
     Options outstanding for shares of common stock at
      October 29, 1995 ............................................................            1,072            $0.7500-8.2500
        Granted ...................................................................              657            $1.2500-8.3750
        Canceled or expired .......................................................             (886)           $1.2500-8.3750
        Exercised .................................................................             (208)           $0.7500-5.7500
                                                                                              ------            --------------
     Options outstanding for shares of common stock at
      October 27, 1996 ............................................................              635            $1.2500-7.8750
        Granted ...................................................................              173            $1.4375-1.6250
        Canceled or expired .......................................................             (614)           $1.2500-7.8750
        Exercised .................................................................               --                        --
                                                                                              ------            --------------
     Options outstanding for shares of common stock at
      October 26, 1997 ............................................................              194            $1.2500-7.8750
         Granted ..................................................................               85            $ 1.8150
         Canceled or expired ......................................................              (38)           $1.2500-7.8750
         Exercised ................................................................               --                        --
                                                                                              ------            --------------
     Options outstanding for shares of common stock at
      October 25, 1998 ............................................................              241            $1.2500-7.8750
                                                                                              ======            ==============

            Shares reserved for issuance at October 25, 1998 ......................            1,534
                                                                                               =====
</TABLE>

     Weighted average option exercise price information was as follows:

                                                      1998      1997      1996
                                                      ----      ----      ----
     Outstanding at beginning of year .......        $2.47     $3.53     $2.82
     Granted during the year ................        $1.82     $1.50     $6.42
     Exercised during the year ..............           --        --     $1.70
     Canceled, terminated and expired .......        $2.23     $3.78     $5.23
     Exercisable at year end ................        $2.02     $2.47     $3.09
                                                                     

                                      F-16
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


     Significant  option  groups  outstanding  at October  25,  1998 and related
weighted average price and life information were as follows:

<TABLE>
<CAPTION>
                                                                    Weighted Average                                  Weighted
                                                    Number             Remaining     Weighted Average   Number         Average
Exercise Price Range                              Outstanding      Contractual Life   Exercise Price  Exercisable   Exercise Price
--------------------                              -----------      ----------------   --------------  -----------   --------------
                                                 (In thousands)                                     (In thousands)
<S>                                                  <C>                   <C>           <C>            <C>            <C>    
$1.2500 ................................              40                   0.36          $1.2500         40             $1.2500
$1.5000-5.7500 .........................              46                   2.82          $2.1758         25             $2.6327
$7.8750 ................................              10                   2.13          $7.8750          7             $7.8750
$1.2500 ................................              60                   2.95          $1.2500         30             $1.2500
$1.8150 ................................              85                   3.52          $1.8150         11             $1.8150
-------                                              ---                                                ---                    
                                                     241                   2.66          $1.9003        113             $2.0028
                                                     ===                                                ===                     
</TABLE>


     The Company applies Accounting Principles Board Opinion No. 25, "Accounting
For Stock Issued To Employees," and selected  interpretations  in accounting for
its stock-based  compensation  plans.  Accordingly,  as all options and warrants
have been  granted at exercise  prices equal to fair market value on the date of
grant, no compensation  expense has been recognized by the Company in connection
with its stock-based  compensation  plans. Had  compensation  cost for the stock
options and warrants been determined based upon the fair value at the grant date
for awards under these plans  consistent with the methodology  prescribed  under
SFAS No. 123, "Accounting For Stock-Based  Compensation," the Company's net loss
and loss per share would have been increased by approximately $199,000, $387,000
and  $913,000  or  $.01,  $.12,  and $.07 per  share  in  1998,  1997 and  1996,
respectively.  The  weighted  average  fair value of the  options  and  warrants
granted during 1998 , 1997 and 1996 is estimated at $.65,  $.87 and $4.00 on the
date of grant (using  Black-Scholes  option  pricing  model) with the  following
weighted average assumptions for both 1998, 1997 and 1996:  volatility of 46.5%,
46.5% and  103%,  risk-free  interest  rate of 6.20%,  6.20% and  5.12%,  and an
expected life of two to five years in 1998 , 1997 and 1996.

   Warrants

     There are  200,000  shares of  common  stock  reserved  for  issuance  upon
exercise of  warrants  sold for $0.001 per  warrant to the  underwriters  of the
Company's June 21, 1995 offering of common stock.  The warrants are  exercisable
for a period of five years beginning June 21, 1996 and have a per-share exercise
price equal to $9.60 (120% of the initial public offering price of $8.00). There
were 616,679  shares of common stock  reserved  for  issuance  upon  exercise of
warrants  issued in  conjunction  with the  Company's  November  25, 1996 Senior
Subordinated  Debt Offering.  The warrants are  exercisable for a period of five
years beginning  November 25, 1996 and have a per-share exercise price of $1.50.
There were 337,000  warrants  outstanding at October 25, 1998. There are 200,000
shares of common stock reserved for issuance upon exercise of warrants issued in
conjunction  with a  commitment  to raise up to  $3,000,000  in capital  for the
Company.  The  warrants  are  exercisable  for a period of five years  beginning
February  5,  1997 and have a  per-share  exercise  price of  $2.00.  There  are
1,200,000 shares of common stock reserved for issuance upon exercise of warrants
issued to two executive  officers  issued in  conjunction  wth their  employment
agreements  (see Note 11).  The warrants  are  exercisable  for a period of five
years beginning November 13, 1996 and have a per-share exercise price of $ 2.00.


Note 11. Commitments and Contingencies

   Employment Agreements

     The  Company  has   employment   agreements   with  two  of  its  executive
officers/directors  which expire December 31, 2002. The agreements automatically
renew on an annual basis unless notified by July 1. Such agreements  provide for
minimum salary levels,  adjusted annually for cost-of-living changes, as well as
for incentive bonuses which are payable if specified management


                                      F-17
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


goals are attained.  The aggregate commitment for future salaries at October 25,
1998,  excluding bonuses,  was approximately  $2,641,000.  These agreements also
provide  severance pay benefits upon  termination of the executive's  employment
with the Company as follows:

     (a)  Company-Initiated  Termination  Without Cause--the  executive shall be
          entitled to one  payment of the Base Salary for a period  equal to the
          greater of (i) one year from the date of termination, or the remainder
          of the employment term; and (ii) the Company shall continue to provide
          the executive and the members of the executive's  immediate family all
          benefits  provided  by the  employment  agreement.  If  any  of  these
          benefits terminate by operation of law, the Company will reimburse the
          executive for the costs of replacing  those benefits for the remainder
          of such period.  As security for all of the Company's  obligations  to
          make any  payments  to the  executives,  the  Company  granted  to the
          executives  a  subordinated  security  interest  in all  assets of the
          Company now owned or hereafter acquired.

     (b)  Company-Initiated   Termination   in  Connection   with  a  Change  in
          Control--the  executives  shall be entitled to a cash payment equal to
          the lesser of three  years' base salary or the  maximum  amount  which
          would not result in any  portion of the payment  being  subject to the
          excise tax under Section 4999 of the Internal Revenue Code. "Change in
          Control"  shall  mean:  (i) a merger  or  consolidation  in which  the
          Company is not the surviving  corporation;  (ii) a reverse merger;  or
          (iii)  the  acquisition  by any  person,  entity or group  within  the
          meaning of Section  13(d) or 14(d) of the  Securities  Exchange Act of
          1934,  as amended,  of the  beneficial  ownership of securities of the
          Company  representing  at least fifty  percent of the combined  voting
          power entitled to vote in the election of directors.

   Legal Proceedings

     The Company is, from time to time,  the subject of  litigation,  claims and
assessments  arising out of matters occurring during the normal operation of the
Company's business. In the opinion of management,  the liability,  if any, under
such current litigation,  claims and assessments would not materially affect the
financial  position or the results of the  operations  of the Company  except as
disclosed herein.

     Four  former  officers  of  the  Company  (the  "Former  Officers"),  whose
employment  relationships with the Company terminated in part as a result of the
Company's  restructuring  in October 1996,  sought  severance  benefits from the
Company.  On January 13, 1997,  three of the Former Officers sued the Company in
the Superior Court of the State of California for Los Angeles  County,  in order
to enforce payment of severance benefits under certain agreements, each dated as
of October 7, 1996,  between each Former Officer and the Company  (collectively,
the  "Severance  Agreements").  The fourth  Former  Officer  sued the Company in
response to the Company's  cross-complaint  described below. The Former Officers
sought  damages  from the Company  based upon the  Severance  Agreements  and an
alleged  implied  promise not to terminate the employment of the Former Officers
with the Company without good cause.

     On September 28, 1998, a California  trial court upheld the  enforceability
of the Former Officers' severance  agreements and the Former Officers' requested
entry of a judgment in the  approximate  amount of $1,200,000  plus interest and
costs..  The Company has  appealed  the  judgement.  The Company has  obtained a
written  guarantee from a significant  stockholder  guaranteeing  payment of the
judgement  should the Company lose on appeal.  The Company is unable to estimate
the results of the appeal and at October  25,1998,  nothing has been  accrued in
the financial statements related to this litigation.

     In a separate matter  regarding  benefits under the Company's  Supplemental
Executive  Retirement  Plan (the "SERP"),  the Company entered into a settlement
agreement (the "Agreement") on February 10, 1998 with the Former Officers in the
total  amount of  $643,681.  The amount  was  accrued  for in fiscal  year ended
October 26, 1997. The SERP was terminated when a cash settlement was distributed
on October 2, 1998.

     In April  1998,  the owner of the  Woodland  Hills,  CA  premises  formerly
occupied by the Company  sued for the balance of all rent due through the end of
the extant lease agreement plus damages of approximately $1,000,000. The Company
relocated from such premises after the owner had ignored repeated  notifications
of  unsafe  structural  conditions  as  cited  by Los  Angeles  County  building
inspectors.  Although it is presently too early to determine the outcome of this
litigation, the Company believes it has valid defenses in this case and has made
no accrual relating to this litigation.


                                      F-18
<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 12. Employee Benefit Plans

     The  Company  sponsors a defined  contribution  401(k)  plan,  as  amended,
covering a majority of its  employees.  The plan allows  eligible  employees  to
contribute up to 14% of their gross salary.  Company contributions are voluntary
and at  the  discretion  of the  Board  of  Directors.  There  were  no  Company
contributions  in fiscal years 1998,  1997 and 1996.  Employees  vest in Company
contributions based upon their years of vesting service, as defined.

     During  November  1994, the Company  established a SERP, a defined  benefit
pension  plan  covering  certain  officers to whom the plan is  offered.  Normal
retirement  age is 65, but  provision is made for earlier  retirement.  Benefits
under  the  plan  are  generally  payable  for  up  to  fifteen  years  after  a
participant's retirement.  However, the participant may elect a lump-sum payment
equal to 90% of the net present value of the benefit amount at the participant's
retirement  date.  As discussed in Note 11, the SERP was  terminated  in October
1998.

Note 13. Subsequent Events

     On  December  29,  1998,  the  Company   closed  a  private   placement  of
approximately  $3.45  million  of  10%  Subordinated  Notes  due  in  2000  (the
"Subordinated Notes") and $1.55 million in shares of the Company's common stock.
The  Subordinated   Notes,  which  are  unsecured  and  callable  under  certain
conditions,  provide for the Company to issue 5-year warrants  exercisable  into
the  Company's  common  stock  at a price  of $1.50  per  share.  As part of the
offering,   investors  holding  $1.75  million  of  the  Company's   Convertible
Debentures  issued  earlier in the year  exchanged  their  holdings  for new 10%
Subordinated  Notes.  In addition,  holders of $500,000 of the Company's  Senior
Subordinated  Debentures  also  exchanged  their  Debentures  for  the  new  10%
Subordinated  Notes.  The net proceeds of  approximately  $2.75 million from the
sale of Subordinated Notes and common stock will be used for debt retirement and
working capital purposes.



                                      F-19
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Datametrics Corporation

The audits  referred  to in our report  data  January  7, 1999  relating  to the
consolidated  financial statements of Datametrics  Corporation and subsidiaries,
which is contained in Item 8 of Form 10-K,  included the audits of the financial
statement  schedule listed in the accompanying index for the years ended October
25,  1998  and  October  26,  1997.  The  financial  statement  schedule  is the
responsibility of management. Our responsibility is to express an opinion on the
financial statement schedule based upon our audits.

In our opinion,  such  financial  statement  schedule  presents  fairly,  in all
material respects, the information set forth therein.



                                BDO Seidman, LLP



New York, New York
January 7, 1999




                                      F-20

<PAGE>


                    DATAMETRICS CORPORATION AND SUBSIDIARIES

                 SCHEDULE II--Valuation And Qualifying Accounts

                    For Each Of The Three Fiscal Years In The
                          Period Ended October 25, 1998

<TABLE>
<CAPTION>
                               Classification                                           1998               1997               1996
                               --------------                                          -------            -------            -------
                                                                                                     (In Thousands)
<S>                                                                                    <C>                <C>                <C>    
Reserve for possible losses:
Balance at beginning of period ............................................            $    48            $    68            $    47
Add-provision charged to operations .......................................                147                  2                 21
Less-recovery of bad debt .................................................                 --                  3                 --
Less-reserve applied during the year ......................................                 --                 19                 --
                                                                                       -------            -------            -------
Balance at end of period ..................................................            $   195            $    48            $    68
                                                                                       =======            =======            =======
Reserve for warranty:
Balance at beginning of period ............................................            $   100            $   180            $   125
Add-provision charged to operations .......................................                 --                142                221
Less-reserve applied during the year ......................................                 70                222                166
                                                                                       -------            -------            -------
Balance at end of period ..................................................            $    30            $   100            $   180
                                                                                       =======            =======            =======
Reserve for inventory obsolescence:
Balance at beginning of period ............................................            $ 4,222            $ 5,575            $ 1,773
Add-provision charged to operations .......................................                985                554              3,802
Less-reserve applied during the year ......................................                379              1,907                 --
                                                                                       -------            -------            -------
Balance at end of period ..................................................            $ 4,828            $ 4,222            $ 5,575
                                                                                       =======            =======            =======
Reserve for prepaid royalties:
Balance at beginning of period ............................................            $    70            $   820            $   750
Add-provision charged to operations .......................................                 --                 --                 70
Less-reserve applied during the year ......................................                 --                750                 --
                                                                                       -------            -------            -------
Balance at end of period ..................................................            $    70            $    70            $   820
                                                                                       =======            =======            =======
Valuation allowances for deferred income tax assets:
Balance at beginning of period ............................................            $13,573            $12,088            $ 5,984
Add-provision charged to operations .......................................              1,293              1,485              6,104
                                                                                       -------            -------            -------
Balance at end of period ..................................................            $14,866            $13,573            $12,088
                                                                                       =======            =======            =======
</TABLE>


                                      F-21


<PAGE>


                                  EXHIBIT INDEX

     The following exhibits are filed as part of this Form 10-K Statement or are
incorporated herein by reference.


                             DESCRIPTION OF EXHIBITS


Exhibit
  No.
-------
3.1     Restated  Certificate of  Incorporation  of Registrant,  as currently in
        effect.*

3.2     Certificate of  Designations,  Preferences and Relative,  Participating,
        Optional  and  Other  Special  Rights of  Series B  Preferred  Stock and
        Qualifications,  Limitations and  Restrictions  Thereof dated August 10,
        1993  (incorporated by reference to Exhibit 4.1 to Registrant's Form 8-K
        dated August 10, 1993).

3.3     Bylaws of Registrant,  as currently in effect (incorporated by reference
        to Exhibit 3.2 to Registrant's  Form 10-K for the year ended October 28,
        1990).

3.4     First Amendment to the Restated By-Laws of the Registrant,  dated August
        6, 1996  (incorporated  by reference to Exhibit 3.0 to the  Registrant's
        Form 8-K dated August 6, 1996).

10.1    Line of Credit Agreement, Security Agreement, Addendum to Line of Credit
        Agreement,  and Loan Disbursement  Instructions  dated September 8, 1993
        (incorporated by reference to Exhibit 10.1 to Registrant's Form 10-K for
        the year ended October 31, 1993).

10.3    Lease for Woodland Hills facility between the Company and  Manufacturers
        Life  Insurance  Company  dated as of December 19,  1993,  as amended on
        August  31,  1994   (incorporated   by  reference  to  Exhibit  10.2  to
        Registrant's Form 10-K for the year ended October 30, 1994).

10.4    Agreement  between  the  Company and Sidney E. Wing dated March 17, 1989
        (incorporated by reference to Exhibit 10.4 to Registrant's Form 10-K for
        the year ended October 29, 1989).

10.5    Deferred Compensation Agreement between the Company and Garland S. White
        dated  October 18, 1989  (incorporated  by  reference to Exhibit 10.5 to
        Registrant's Form 10-K for the year ended October 29, 1989).

10.6    Amended and  Restated  Agreement  and Plan of Merger dated as of May 12,
        1993  between  Registrant  and Rugged  Digital  Systems,  Inc.  ("Rugged
        Digital")  (incorporated by reference to Exhibit 2 to Registrant's  Form
        8-K dated May 12, 1993).

10.7    Escrow  Agreement  dated August 10, 1993 among the Registrant and others
        relating to the acquisition of Rugged Digital (incorporated by reference
        to Exhibit 4.3 to Registrant's Form 8-K dated August 10, 1993).

10.8    Debt Exchange  Agreement dated August 10, 1993 among Registrant and debt
        holders of Rugged Digital  (incorporated  by reference to Exhibit 4.2 to
        Registrant's Form 8-K dated August 10, 1993).

10.9    Security  and  Loan  Agreement  between  Registrant  and  Imperial  Bank
        executed  March 21,  1995,  as amended  May 15,  1995  (incorporated  by
        reference to Exhibit 10.1 to Registrant's Form 10-Q for the period ended
        April 30, 1995), and as amended March 4, 1996 (incorporated by reference
        to  period  ended  April  30,  1995),  and  as  amended  March  4,  1996
        (incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q for
        the period ended April 28, 1996).

10.10   Agreement  between the Company and The Angeloff  Company dated  February
        15, 1995 (incorporated by reference to Exhibit 10.2 to Registrant's Form
        10-Q for the period ended April 30, 1995).

21      List of Subsidiaries


<PAGE>


Exhibit
   No.
-------
24.1    Consent of Ernst & Young LLP, Independent Auditors.*

24.2    Consent of BDO Seidman, LLP, Independent Auditors.*

27      Financial Data Schedule *

99.1    The Datametrics  Employee Savings Plan And The Trust Agreement  Pursuant
        To The Datametrics  Employee Savings Plan  (incorporated by reference to
        Exhibit 28 to Registrant's  Registration  Statement on Form S-8 filed on
        November 12, 1985 SEC File No. 33-01469).

99.2    The  Amended  and  Restated  1993  Stock  Option  Plan  of   Datametrics
        Corporation  (incorporated  by reference to Exhibit 28.2 to Registrant's
        Form 10-K for the year ended October 31, 1993).

99.3    The 1986  Stock  Option  Plan of  Datametrics  Corporation,  as  amended
        (incorporated by reference to Exhibit 28.1 to Registrant's  Registration
        Statement on Form S-8 filed on June 10, 1987, SEC File No.  33-14969 and
        Exhibit 28.5 to  Registrant's  Form 10-K for the year ended  October 29,
        1988).

99.4    The 1982  Stock  Option  Plan of  Datametrics  Corporation,  as  amended
        (incorporated by reference to Exhibit 28.2 to Registrant's  Registration
        Statement on Form S-8 filed on June 10, 1987, SEC File No. 33-14969).

99.5    The 1993 Directors' Option Plan of Datametrics Corporation (incorporated
        by  reference  to Exhibit  28.5 to  Registrant's  Form 10-K for the year
        ended October 31, 1993).

99.6    Datametrics  Corporation  Supplemental  Executive  Retirement  Plan  and
        Master  Trust  Agreement  (incorporated  by reference to Exhibit 28.6 to
        Registrant's Form 10-K for the year ended October 30, 1994).

99.7    The 1995 Stock Option Plan of Datametrics  Corporation  (incorporated by
        reference  to  Exhibit  28.7 to  Registrant's  Form S-8 filed on May 30,
        1996, S.E.C. File No. 333-04815).

99.8    The  Datametrics  Corporation  Employee  Qualified  Stock  Purchase plan
        (incorporated  by  reference to Exhibit  28.8 to  Registrant's  Form S-8
        filed on May 30, 1996, S.E.C. File No. 333-04815).

------
*    Filed herewith.