<PAGE>

                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC  20549

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

                                  FORM 10-KSB

(Mark One)

   [X]    Annual report under Section 13 of 15(d) of the Securities
          Exchange Act of 1934



            For the Fiscal Year Ended September 30, 2000

   [_]    Transition report under Section 13 or 15(d) of the
          Securities Exchange Act of 1934

          For the transitional period from _______ to ________

Commission File No. 0-029024

                                 BENTHOS, INC.
--------------------------------------------------------------------------------
                (Name of Small Business Issuer in Its Charter)


              Massachusetts                           04-2381876
--------------------------------------------------------------------------------
     (State or Other Jurisdiction of               (I.R.S. Employer
     Incorporation or Organization)               Identification No.)


49 Edgerton Drive, No. Falmouth, Massachusetts                  02556
------------------------------------------------          -----------------
(Address of Principal Executive Offices)                      (Zip Code)


                                 508-563-1000
--------------------------------------------------------------------------------
               (Issuer's Telephone Number, Including Area Code)


             Securities registered under Section 12(b) of the Act:


                              Name of Each Exchange on
Title of Each Class           Which Registered

            None

             Securities registered under Section 12(g) of the Act:

                       Common Stock, $.06 2/3 par value

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

Yes  x         No
---------      -------

Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB [X]

The registrant had total operating revenues of $20,553,000 for its most recent
fiscal year ended September 30, 2000.

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 11, 2000, based on the closing price for the stock on
such date as reported on the Nasdaq SmallCap Market of $6.875 per share was
$7,088,778.  Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.

                   APPLICABLE ONLY TO CORPORATE REGISTRANTS

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:

           1,383,102 Shares of Common Stock, as of December 11, 2000

                      DOCUMENTS INCORPORATED BY REFERENCE

                               See Exhibit Index

Transitional Small Business Issuer Format (check one):

Yes            No  x
--------       --------
<PAGE>

     This report contains forward-looking statements which involve certain risks
and uncertainties. See Item 6, "Management's Discussion and Analysis -- Forward-
Looking Information" herein. Actual results and events may differ from those
discussed in the forward-looking statements.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

     Benthos, Inc. (the "Company") was founded in 1962 to act as a manufacturer
of oceanographic products. It was incorporated as a Massachusetts corporation in
1965. Over the last 38 years, the Company has developed and acquired new
technology and products. Currently, the Company consists of two distinct
divisions: the Undersea Systems Division and the Container Inspection Systems
Division.

     Historically, the Company has focused its efforts on the Undersea Systems
marketplace with particular emphasis placed on the military and government
markets. Early in the 1990's, funding for these markets declined and the
Company's sales to these markets suffered a corresponding reduction. As a
result, the Company shifted its priorities to business development efforts in
commercial markets. These markets include the geophysical industry, where the
Company's hydrophone products are used in the search for oil and gas deposits
offshore, as well as the scientific research, nuclear inspection and
environmental markets. Also as a result of these efforts, added resources were
applied to the Company's Container Inspection Systems Division. A series of new
products was introduced and these products gained rapid acceptance into major
market segments such as the beer and beverage markets. The Company plans to
continue its emphasis on these markets in the future independent of any recovery
in the levels of government funding for the military market.

     In August, 1999, the Company acquired substantially all of the assets of
Datasonics, Inc., a manufacturer of acoustic-based oceanographic products. The
Datasonics product lines are complementary to the Company's traditional undersea
products and are sold to many of the same customers and through substantially
the same product distribution system. The Company has completed the process of
integrating the business acquired from Datasonics into its current operations.

     The Company's wholly-owned subsidiary, Benthos International, Inc. acts as
a foreign sales corporation (FSC) for the Company's foreign sales. It has no
substantial assets, liabilities or income.

                                       1
<PAGE>

Undersea Systems Division

     The Company's Undersea Systems Division designs, develops, manufacturers
and sells products and services used in oceanographic and underwater
environments. The markets for these products include oceanographic research, oil
and gas exploration and production, hydrographic survey, nuclear power
generation, and underwater relocation, marking and navigation. The product range
includes acoustic transponders used for location marking and navigation,
acoustic release devices used for recovering instrumentation packages from the
depths of the ocean, optical imaging systems (including video, 35mm and digital
still cameras), hydrophones used for geophysical exploration and sound
detection, remotely operated vehicles for inspection and light work tasks and
glass flotation products used to house instruments and to provide buoyancy. The
product lines acquired from Datasonics include side scan sonars and sub bottom
profilers used for seabed imaging, acoustic modems used to transmit digital data
underwater, and acoustic pingers used to locate and mark objects lost underwater
such as aircraft flight data and voice recorders. The Company's undersea
products are generally marketed under the trade name "Benthos." The Company may
also continue to use the "Datasonics" name for certain products.

Container Inspection Systems Division

     The Company's Container Inspection Systems Division designs, develops,
manufactures and sells systems used to inspect the integrity of containers in
the food, pharmaceutical and beverage industries. The customers for these
systems include manufacturers of food, beverages and pharmaceuticals packaged in
bottles, cans, glass jars, plastic containers and assorted vacuum packages with
metal and plastic caps. These systems are marketed under the trade name
"TapTone." TapTone systems integrate various sensor technologies with digital
signal processing techniques in order to inspect containers for leakage, seal
integrity, low or high pressure or vacuum, and similar packaging defects.
TapTone systems may be used on-line as continuous inspection systems that
operate at production speeds or as off-line inspection systems to periodically
validate package integrity.

1.   Principal Products

Undersea Systems

     The Company's undersea products and services are divided into nine distinct
groups as follows:

                                       2
<PAGE>

     a.   Acoustics

     The Acoustics product group includes transponders, acoustic releases and
companion deck control systems, and altimeters. Transponders are used to
transmit and receive acoustic signals underwater for the purposes of determining
location, navigation, or sending and receiving data. These products are used for
scientific research, salvage and ship positioning operations. Both expendable
and recoverable products are manufactured. The transponder line includes low
cost versions that transmit a limited signal selection in response to a command
received, as well as more sophisticated versions that can be programmed to
transmit a wide variety of functions in response to received commands.
Transponders are monitored by and communicate with companion deck units which
are typically located on board a ship.

     Acoustic releases are sound-operated devices that will anchor underwater
products in place and will release those products, allowing them to float to the
surface, in response to an acoustic command signal transmitted from the surface.
The acoustic release product line includes both deep water (up to 12,000
meters), heavy duty, releases as well as shallow water (up to 600 meters), light
duty, low cost releases. Releases may be operated with companion deck control
units.

     Altimeters are used to determine the distance from the seabed to an object
or vehicle in the water column.

     b.   Hydrophones

     Hydrophones are underwater sensors designed to produce an output signal in
response to an acoustic pressure signal. They can be thought of as underwater
microphones. The Company's hydrophone products are typically used in the
offshore oil and gas exploration industry, where they listen to acoustic sound
waves generated by the reflections of an acoustic signal as it bounces off of
the various geological layers beneath the ocean floor. These data are used to
generate information about the geological structure beneath the ocean as a means
of locating promising oil and gas exploration sites. The Company's hydrophone
product line is also used in military applications to listen for and detect
submarines and other vessels under and on the surface of the ocean. Hydrophones
may also be sold to research institutions for various applications such as
listening to marine animals.

     The Company's hydrophone product line includes sophisticated versions that
offer high sensitivity and can operate at great depth without significant
variation in response, as well as low cost hydrophones for the seismic research
industry that are produced in high production volumes. The Company's hydrophone
products may be used with companion amplifiers that convert the electrical
signals

                                       3
<PAGE>

to usable formats and they may be integrated into arrays, which are groupings of
hydrophones assembled together in long tubes for the purpose of added acoustic
sensitivity and for listening to acoustic signals over a long distance.

     c.   Imaging

     The imaging products group consists of a line of cameras that are packaged
in enclosures that allow them to operate at varying depths underwater. The
Company's capabilities include still cameras (typically 35 mm), video cameras,
and digital still cameras that can capture an image comprised of digital data
for transmission to the surface and subsequent processing by software. The
Company also sells companion underwater camera flashes and lights.

     The Company's imaging products are used in research to photograph
underwater wildlife and geological formations. Imaging products are also used in
the commercial market to photograph underwater structures, such as oil rigs and
shipwrecks, for the purposes of inspection. Imaging products are also employed
in military applications to remotely inspect underwater objects such as mines.

     d.   Remotely Operated Vehicles (ROVs)

     ROVs are unmanned underwater vehicles that are controlled from the surface
by a skilled operator. The Company's ROV product line includes a number of
specialized designs that are aimed at specific markets. These markets include
the research sector, where ROVs may be used as a camera delivery system for
visual documentation and inspection. ROVs are also sold to the nuclear power
industry, where they are used to perform inspections and light work tasks in
radioactive cooling water pools, and to the military sector, where they may be
used for remote inspection and to retrieve or deliver objects. The Company's ROV
products are also used for sewer and pipeline inspection. ROV systems are
occasionally used by the entertainment industry.

     e.   Glass Flotation

     The Company manufactures a line of glass spheres that are used to provide
buoyancy to underwater products and systems and may be used to house underwater
instruments and electronics, such as transponders. Glass spheres are offered in
three sizes depending on the individual requirements of buoyancy and/or housing
size. The Company also customizes its glass spheres for individual customer
requirements by providing various penetrations, machined surfaces and electrical
connectors. The Company pressure tests all of its glass sphere products in order
to insure successful operation at desired depths. Glass spheres are normally
provided

                                       4
<PAGE>

with companion plastic "hard hats" that allow for protection of the
glass from breakage and for safe transport.

     f.   Acoustic Modems

     Acoustic modems are used to send and receive digital data underwater using
sound as the transmitting signal. The Company manufactures several different
configurations of modems dependent on the specific requirements of the
applications. Underwater acoustic modems utilize a sending and/or receiving
transducer, suitable digital electronics for coding and decoding the acoustic
signals and proprietary software algorithms to enable the modems to work in the
underwater environment.

     g.   Relocation Pingers

     Relocation pingers are small acoustic transmitters that operate in water
and produce a steady acoustic signal. Using a suitable receiver, an underwater
object equipped with a relocation pinger may be located by listening for the
pinger's pressure-emitted signal. Relocation pingers are most commonly installed
on commercial and military flight data and voice recorders but may also be used
on other objects such as torpedoes, remotely operated vehicles and shipping
containers.

     h.   Side Scan Sonar Systems and Sub Bottom Profilers

     Side scan sonar systems consist of an underwater towed body, commonly
referred to as a "towfish" and an electronic control and display package. The
towfish emits an acoustic signal while it is being towed and then listens for
the signal's reflections which are generated by objects on the sea floor. These
echoes are then manipulated electronically and by software and used to generate
an image of the sea floor. Side scan sonars are commonly used to conduct
underwater surveys in order to plan the routing of pipes and cables, locate
shipwrecks and similar objects and determine the overall structure and nature of
the ocean bottom.

     Sub bottom profilers also utilize a towfish and topside electronic control
and display devices. The towfish emits acoustic signals which penetrate the
surface of the sea floor. Some of the acoustic energy is reflected back and
received by the towfish. These reflected signals are processed electronically
and by software and are used to generate a visual image of the structure beneath
the sea floor. Sub bottom profilers are used to locate buried objects such as
shipwrecks, shallow mineral deposits and to aid in hydrographic surveys by
providing information about the seabed structure.

                                       5
<PAGE>

     i.  Contract Research and Engineering Services

     The Company periodically performs research under contract and custom
engineering design for both commercial and government agencies. Generally these
contract research and development activities support the Company's primary
product development efforts and are used to offset a portion of the costs
associated with advanced research and development.

Container Inspection Systems

     The Company's container inspection systems are used to inspect bottles,
cans and similar packages for a variety of defects. The TapTone product line
includes the following:

     a.   TapTone II Pressure/Vacuum Discriminator

     TapTone II uses acoustic technology to test for acceptable levels of
pressure or vacuum in containers that have metal closures and/or are metallic
themselves (such as beverage cans, glass bottles with metal crowns, and
conventional steel cans). These data are used to determine if the tested package
meets preset quality acceptance criteria. TapTone II is used for a variety of
food processing and beverage applications and its principal market is the
brewing and beverage industry. The TapTone II system is an on-line, high speed
inspection system designed to test 100% of the containers on a production line
and to reject containers that are determined to be defective. A typical TapTone
II system consists of a sensor assembly, an electronic control and display unit,
and a rejector for removing defective containers from the production line.
TapTone II is also available in a case configuration which incorporates multiple
sensors for testing products that have been packaged in sealed cases.

     b.   TapTone 100

     The TapTone 100 system is a low cost universal inspection system that uses
a proximity sensor to measure the deflection of the metal lid on a container.
These data are used to determine if the container meets preset quality
acceptance criteria based upon lid deflection and its correlation with the
pressure or vacuum inside the container. TapTone 100 systems are normally used
to inspect steel and aluminum cans. TapTone 100 systems are on-line, high speed
inspection systems designed to test 100% of the containers on a production line,
rejecting containers that are determined to be defective. TapTone 100 systems
are self contained inspection systems and may be fitted with a variety of
optional sensors for additional inspections such as label presence, cocked cap
and missing cap.

                                       6
<PAGE>

     c.   PBI-100

     The PBI-100 was introduced during fiscal year 2000. This system utilizes a
side transport conveyor to apply a uniform force to a container. During
transport, the container is monitored by one or more sensors. The sensor's
output is analyzed using algorithms developed by the Company to determine if the
package has a detectable defect. The PBI-100 is used to test package integrity
on products such as household and industrial chemicals, pharmaceuticals packaged
in flexible packages, personal health care products and food and beverages
packaged in flexible packages.

     d. Ray TRAK

     Ray TRAK is an X-ray based container inspection system used to determine if
containers are filled to the correct level. The inspection system illuminates
the container with an X-ray beam as it passes through the Ray TRAK. A detector
measures the X-ray radiation that passes through the container and correlates
that signal to the level of material in the container. The system can be
configured to detect underfills, overfills, or both. Containers such as steel
cans, aluminum beverage cans, bottles and jars are used with Ray TRAK.

     e.   TapTone-500

     During fiscal year 2000 the Company completed development of the TapTone-
500, early versions of which were introduced in fiscal year 1999. The TapTone-
500 is a universal inspection controller that replaces earlier products such as
the TapTone II and the Turbo Tracker. The TapTone-500 offers several
improvements over earlier products and is designed to accept a wide variety of
inspection sensors as inputs. During the fiscal year, the Company completed
versions of the TapTone-500 that accept acoustic sensor inputs and x-ray fill
level sensor inputs.

2.   Distribution and Marketing Methods

     The Undersea Systems Division and the Container Inspection Systems Division
market their products through an international network of independent sales
representatives and distributors. The Container Inspection Systems Division also
utilizes direct salespersons for certain territories in the United States. Sales
representatives and distributors are located in North America, South America,
Europe, the Far East, Africa and Australia. Domestic and international customers
may also order the Company's products directly from its headquarters in
Massachusetts. Both divisions of the Company participate in a number of trade
shows and exhibitions around the world. The Company also maintains an internal
staff of trained sales and marketing personnel with experience and expertise in
the markets served by the Company.

                                       7
<PAGE>

3.   New Products.

     During fiscal year 2000 the Company introduced several new products.  These
are:

     .    The PBI-100 inspection system which is designed for leak detection and
          package integrity verification for flexible packages such as plastic
          bottles, pouches and tubes.

     .    The TapTone-500 universal inspection controller was completed. During
          the year, TapTone-500 versions for acoustic leak detection and x-ray
          fill level inspection were completed.

     .    The Model 867 shallow water transponding release was introduced. This
          acoustic release provides improvements over the earlier Model 875
          release, including a responding function.

4.   Competition

     Undersea Systems Division

     The Company competes with a variety of companies in various product
markets. The Company's policy is to compete based upon technical superiority and
quality and to differentiate itself through strong post-sale support. The
Company also has a policy of pursuing patent protection for its products when
possible. The Company also competes by providing customers with well trained
field service and application engineering support.

     In some markets, such as glass flotation and geophysical hydrophones, the
Company is one of the larger participants in the market. In other markets, such
as ROV systems, the Company is a minor participant and competes with larger,
well established companies that have significantly more resources than the
Company.

     A partial listing of competitors for the various markets in which the
Company competes appears below:

     Product Market                      Competitor(s)

     Hydrophones                         Teledyne Brown Engineering

     Glass Flotation                     Jenna Glass Works division
                                         of Schott Glass
                                         Technologies, Inc.

                                       8
<PAGE>

      ROV Systems                              Perry Tritech, Inc.;
                                               Hydrovision Ltd.; SeaEye
                                               Marine Ltd.; Deep Ocean
                                               Engineering, Inc.

      Acoustics                                Edgetech, Inc.; Sonardyne
                                               International Ltd.

      Imaging Systems                          Kongsberg Simrad, Inc.

      Side Scan Sonars                         Klein Associates, Inc.;
                                               Edgetech, Inc.

      Relocation Pingers                       Dukane Corporation

      Acoustic Modems                          Orca Instrumentation

      Container Inspection Systems Division

      The Container Inspection Systems Division competes with a number of
domestic and international competitors. At least two of these companies are
larger than the Company and offer a broader range of products. All of these
competitors offer some products that compete with certain models offered by the
Company. One German competitor competes with the Company in the bottled beer
leak detection market with products substantially similar to those produced by
the Company.

5.    Sources and Availability of Raw Materials

      The products of both divisions generally utilize mechanical and electrical
components that are readily available from a wide variety of domestic and
foreign vendors. In certain cases, the Company produces components internally,
utilizing its labor force and machine shop capability. Some components are
specially designed for specific products and are purchased from a single vendor.
A ceramic component that is used in the geophysical hydrophone product is
purchased from a single vendor, CTS Wireless Components, Inc., although the
Company believes that there are other vendors that possess the capability to
provide a replacement component. The Company's glass flotation products are also
purchased from a single vendor, Holophane Corp., although similar products could
be obtained from other vendors. The Company has not experienced any problems
with the supply of its raw materials and it believes that its sources of supply
are adequate for its present and future requirements.

                                       9
<PAGE>

6.   Dependence on Major Customers

     Although the Company has a number of major customers, during fiscal 2000,
no single customer represented more than 10% of the Company's total revenue.

7.   Patents, Trademarks and Other Agreements

     The Company possesses several patents pertaining to the design and
manufacture of its products. Several names utilized by the Company are also
trademarked. It is the Company's policy to seek patent protection on products
and designs that it considers important to its future. However, the Company
believes that quality and technical superiority, rather than patent protection,
are the most important criteria for its future success. The Company does not
license any of its patents or designs to others at this time. The Company is
currently a licensee under a non-exclusive license pertaining to the design of
its seismic hydrophone product from The Penn State Research Foundation. The
Company is also a licensee under an exclusive agreement with Sercel, Inc. for a
patent pertaining to the design of the Company's GeoPoint hydrophone product.

8.   Government Approvals and Contracts

     There are no government approvals required for any of the products
currently manufactured by the Company. Certain products of the Undersea Systems
Division cannot be sold to certain countries under U.S. export controls. Also,
certain hydrophone products must conform to regulations that limit the ability
of the hydrophone to be utilized for military applications. The Company does not
anticipate that these export restrictions will be removed in the near future.

     During fiscal 2000, 16% of the sales of the Undersea Systems Division were
derived from military procurement contracts, primarily contracts with the U.S.
Navy.

9.   Effect of Government Regulations

     The Company is not aware of any government regulations or pending
legislation that would adversely affect the future sales of its products.

10.  Research and Development

     The Company maintains an internal staff of engineers and external
consultants with experience and expertise in the

                                       10
<PAGE>

technologies it utilizes. The majority of research and development programs are
internally funded. Research and development expenditures were $1,239,000,
$1,363,000 and $1,607,000 for the fiscal years ended September 30, 1998, 1999
and 2000, respectively. In addition, the Company has an ongoing technical
consulting agreement with William D. McElroy, an expert in undersea acoustics.

11.  Environmental Protection Regulations

     The Company believes that its compliance with current federal, state, and
local environmental regulations will not have a material adverse effect on its
capital expenditures, earnings, or competitive position.

12.  Employees

     As of September 30, 2000, the Company employed 122 full-time individuals,
27 of whom were engaged in research and development, 61 in manufacturing and 34
in sales, marketing and administrative positions. Of the 122 full-time
employees, eight are employed on a temporary basis. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
that it maintains good relations with its employees.

ITEM 2.  DESCRIPTION OF PROPERTY

     The Company owns its corporate offices in North Falmouth, Massachusetts,
which consist of 35,000 square feet of office and light industrial manufacturing
space in two single-story, industrial buildings on a 34 acre rural setting. The
Undersea Systems Division and the Container Inspection Systems Division are
housed in separate facilities, each with its own dedicated engineering,
manufacturing, testing and sales administration staff. All facilities have been
recently modernized and are in good condition.

     In connection with the Datasonics acquisition, the Company leased two
buildings in the Cataumet section of Bourne, Massachusetts, containing 20,000
square feet of space used for office, administration and manufacturing. These
leases expired August 19, 2000 and the Company has relocated the Datasonics
operations to its North Falmouth headquarters.

ITEM 3.  LEGAL PROCEEDINGS

     Not Applicable.

                                       11
<PAGE>

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

     No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, whether through the
solicitation of proxies or otherwise.

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock is traded over-the-counter and is listed on the
Nasdaq SmallCap Market under the symbol BTHS.

     The following table sets forth the high and low bid information for the
Company's Common Stock for the periods shown. Said quotations reflect inter-
dealer prices, without retail mark-up, mark-down, or commission, and may not
represent actual transactions.

     Quarter Ended               High         Low

     December 31, 1998           7.00        4.63
     March 31, 1999              7.31        6.00
     June 30, 1999              10.00        6.00
     September 30, 1999          9.44        8.00
     December 31, 1999           9.50        7.50
     March 31, 2000              9.44        7.50
     June 30, 2000               8.38        7.00
     September 30, 2000          8.88        7.06

     As of December 15, 2000, there were approximately 273 holders of record of
the Company's Common Stock.

     The Company has never declared dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future.

     The Company did not issue any equity securities during the fiscal year
ended September 30, 2000 that were not registered under the Securities Act of
1933, other than the issuance of 8,738 shares of Common Stock to the Benthos,
Inc. Employee Stock Ownership Plan.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

     Overview

     The Company was founded in 1962 to act as a manufacturer of oceanographic
products. Over the last 38 years, the Company has developed and acquired new
technology and products. Currently, the

                                       12
<PAGE>

Company consists of two distinct divisions: the Undersea Systems Division and
the Container Inspection Systems Division. The Container Inspection Systems
Division was formed in 1971 using aspects of acoustic technology (originally
developed for oceanographic products) and applied to the testing of cans,
bottles and other containers for the purpose of finding leaks and other package
defects.

     On August 19, 1999, the Company acquired substantially all of the assets of
Datasonics, Inc., a manufacturer of underwater acoustic products, including side
scan sonar systems, acoustic relocation devices, high-speed underwater acoustic
modems and data telemetry systems.  The sales and income from the acquired
business are included in the Company's results of operations for the last six
weeks of fiscal 1999 and for the full year of fiscal 2000.  The businesses have
been completely integrated during fiscal 2000.

Results of Operations

     The following table presents, for the periods indicated, certain
consolidated statements of income data. The Company has reclassified certain
prior year information to conform with the current year's presentation.

<TABLE>
<CAPTION>

                                             Year Ended
                                            September 30,
                                    ----------------------------
                                    2000      1999      1998
                                    ----      ----      ----
                                          (In Thousands)

<S>                                 <C>       <C>       <C>
Net sales                           $20,553   $17,248   $14,038

Cost of sales                        12,080     9,801     7,529
                                    -------   -------   -------

Gross profit                          8,473     7,447     6,509
Selling, general and
  administrative expenses             5,289     4,347     4,374
Research and development
  expenses                            1,607     1,363     1,239
Amortization of goodwill
  and other acquired intangibles        507        38        --
In-process research and
  development                            --       750        --
                                    -------   -------   -------
Income from operations                1,070       949       896
Interest income                          78       176       165
Interest expense                       (402)      (49)      (41)
                                    -------   -------   -------
Income before provision
  for income taxes                      746     1,076     1,020

Provision for income taxes              224       248       305
                                    -------   -------   -------

Net income                          $   522   $   828   $   715
                                    =======   =======   =======

</TABLE>

                                      13
<PAGE>

   The following table presents, for the periods indicated, the percentage
relationship of consolidated statements of income items to net sales.

<TABLE>
<CAPTION>
                                        Year Ended
                                       September 30,
                                    -------------------
                                    2000   1999    1998
                                    ----   ----   -----
<S>                                <C>     <C>     <C>
Net sales                          100.0%  100.0%  100.0%

Cost of sales                       58.8    56.8    53.6
                                    ----    ----   -----

Gross profit                        41.2    43.2    46.4
Selling, general and
  administrative expenses           25.7    25.2    31.2
Research and development
  expenses                           7.8     7.9     8.8
Amortization of goodwill
  and other acquired intangibles     2.5      .2      --
In-process research and
  development                         --     4.4      --
                                    ----    ----   -----
Income from operations               5.2     5.5     6.4
Interest income                       .4     1.0     1.2
Interest expense                    (2.0)   (0.3)   (0.3)
                                    ----    ----   -----
Income before provision for
  income taxes                       3.6     6.2     7.3
Provision for income taxes           1.1     1.4     2.2
                                    ----    ----   -----

Net income                           2.5%    4.8%    5.1%
                                    ====    ====   =====
</TABLE>

Years Ended September 30, 2000 and 1999.

Sales. Total Sales increased 19.1% to $20,553,000 for fiscal year 2000 as
compared to $17,248,000 for fiscal year 1999.  Sales of the Undersea Systems
Division increased by 25.1% to $15,226,000 for fiscal year 2000 as compared to
$12,174,000 for fiscal year 1999. This increase resulted primarily from the
inclusion of a full year of sales of the Datasonics product lines in fiscal year
2000 as compared to approximately six weeks' sales of these products in fiscal
year 1999. This represented approximately $ 8,133,000 of sales in fiscal year
2000 as compared to $511,000 of sales in fiscal year 1999.  This increase was
partially offset by decreases in sales of the Company's traditional Undersea
Systems Division products, which include the geophysical hydrophone (used for
offshore oil exploration) and remotely operated vehicle (ROV) product lines.
Sales by the Container Inspection Systems Division increased by 5.0% to
$5,327,000 for fiscal year 2000 as compared to $5,074,000 for fiscal year 1999.
The increase was attributable to new products.

Gross Profit.  Gross Profit increased by 13.8% to $8,473,000 for

                                      14
<PAGE>

fiscal year 2000 as compared to $7,447,000 for fiscal year 1999. As a percentage
of sales, gross profit for fiscal year 2000 was 41.2% as compared to 43.2% for
fiscal year 1999. The decrease in the gross profit percentage is a result of an
increased shift in product mix towards Undersea Systems Division products which
have lower margins than Container Inspection Systems Division products.

Selling, General, and Administrative Expenses.   Selling, general, and
administrative expenses increased 21.6% to $5,289,000 for fiscal year 2000 as
compared to $4,347,000 for fiscal year 1999. The increase in these expenses was
a result of increases in overall Company expenses, selling expenses, and
commission expenses relating to both increased sales volume and product mix and
inclusion of a full year of operations of the product lines acquired from
Datasonics in August 1999.  As a percentage of sales, selling, general and
administrative expenses increased to 25.7% for fiscal year 2000 and compared to
25.2% for fiscal year 1999.

Research and Development Expenses.  Research and development expenses increased
17.9% to $1,607,000 for fiscal year 2000 as compared to $1,363,000 for fiscal
year 1999.  As a percentage of sales, research and development expenses were
7.8% for fiscal year 2000 as compared to 7.9% for fiscal year 1999.  Although
the total amount of research and development expenses increased in fiscal 2000,
consistent with the Company's plans and with the inclusion of a full year of the
product lines acquired from Datasonics in August 1999, the percentage of sales
represented by those expenses decreased slightly as a result of increased sales
volume.

Amortization of Goodwill and Other Acquired Intangibles. Amortization of
goodwill and other acquired intangibles increased to $507,000 for fiscal year
2000 as compared to $38,000 for fiscal year 1999.  As a percentage of sales,
amortization of goodwill and other acquired intangibles was 2.5% for fiscal year
2000 as compared to 0.2% for fiscal year 1999.  The increase in dollars and
percentage of sales relates to inclusion in fiscal year 2000 of a full year of
amortization of goodwill and other acquired intangibles related to the
Datasonics acquisition, compared to approximately six weeks of amortization in
fiscal year 1999.

In-Process Research and Development.  In fiscal year 1999, the Company recorded
a charge of $750,000 for in-process research and development for projects that
did not have future alternative uses in connection with the Datasonics
acquisition, recorded under the purchase method of accounting.  As of September
30, 2000, the Company had either completed development or decided to discontinue
its development efforts related to the six research and development programs
acquired from Datasonics in 1999.  There were no

                                      15
<PAGE>

acquisitions in fiscal year 2000 and no amounts were charged to in-process
research and development in fiscal year 2000.

Interest Income.  Interest income decreased to $78,000 for fiscal year 2000 as
compared to $176,000 for fiscal year 1999.  This decrease resulted from lower
invested cash balances.

Interest Expense.  Interest expense was $402,000 for fiscal year 2000 as
compared to $49,000 from fiscal year 1999.  The increase was a result of a full
year of interest in fiscal year 2000 on the $5.5 million term loan made in
August 1999 in connection with the Datasonics acquisition, as compared to six
weeks of interest on that loan in fiscal year 1999.

Provision For Income Taxes.  The provision for income taxes decreased to
$224,000 for fiscal year 2000 as compared to $248,000 for fiscal year 1999.  The
effective tax rate for fiscal year 2000 was 30.0% as compared to 23.0% in fiscal
year 1999.  The rate used in fiscal year 2000 is lower than the statutory rate
due to benefits from the Company's foreign sales corporation and other state tax
credits.

Years Ended September 30, 1999 and 1998.

Sales.  Total sales increased 22.9% to $17,248,000 for fiscal year 1999 as
compared to $14,038,000 for fiscal year 1998.  Sales by the Undersea Systems
Division increased by 31.0% to $12,174,000 for fiscal year 1999 as compared to
$9,290,000 for fiscal year 1998. This increase resulted primarily from increased
sales of the Company's geophysical hydrophone (used for offshore oil
exploration) and remotely operated vehicle (ROV) product lines and was somewhat
offset by decreases in sales of the Company's imaging and flotation product
lines.  In addition, 1999 includes approximately six weeks' sales of the
Datasonics product lines acquired on August 19, 1999.  Sales by the Container
Inspection Systems Division increased by 6.9% to $5,074,000 for fiscal year 1999
as compared to $4,748,000 for fiscal year 1998.  This increase was attributable
to new products and an increase in international shipments.

Gross Profit.  Gross profit increased by 14.4% to $7,447,000 for fiscal year
1999 as compared to $6,509,000 for fiscal year 1998. As a percentage of sales,
gross profit was 43.2% for fiscal year 1999 as compared to 46.4%  for fiscal
year 1998.  The decrease in the gross profit percentage is a result of a shift
in product mix towards Undersea Systems Division products which have lower
margins than Container Inspection Systems Division sales.

                                      16
<PAGE>

Selling, General and Administrative Expenses.  Selling, general and
administrative expenses decreased 0.6% to $4,347,000 for fiscal year 1999 as
compared to $4,374,000 for fiscal year 1998. The minor decrease in these
expenses was a result of increases in overall Company expenses coinciding with
the increased sales volume which were offset by decreases in selling expenses
related to expense control and a reduction in commission expenses due to product
mix. As a percentage of sales, selling, general and administrative expenses
decreased to 25.2% for fiscal year 1999 as compared to 31.2% for fiscal year
1998.

Research and Development Expenses.  Research and development expenses increased
10.0% to $1,363,000 for fiscal year 1999 as compared to $1,239,000 for fiscal
year 1998.  As a percentage of sales, research and development expenses were
7.9% for fiscal year 1999 as compared to 8.8% for fiscal year 1998. Although the
total amount of research and development expenses increased in fiscal 1999,
consistent with the Company's current operational plans, the percentage of sales
represented by those expenses decreased as a result of increased sales volume.

Amortization of Goodwill and Other Acquired Intangibles. Amortization of
goodwill and other acquired intangibles was $38,000 for fiscal year 1999 as a
result of the acquisition of substantially all of the assets of the Datasonics,
Inc. in August 1999.

In-Process Research and Development.  On August 19, 1999, the Company acquired
substantially all of the assets and assumed certain liabilities of Datasonics,
Inc.  The Company acquired Datasonics for approximately $6.7 million (including
acquisition costs) and recorded the acquisition under the purchase method of
accounting.  As a result, a purchase price premium of $5.3 million was recorded
on the transaction.  A significant portion of the purchase price was identified
in an independent appraisal, using proven valuation procedures and techniques,
as intangible assets. These intangible assets included approximately $750,000
for in-process research and development for projects that did not have future
alternative uses.  This allocation represents the estimated fair market value
based on risk-adjusted cash flows related to the in-process research and
development projects.  At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the in-process
research and development had no alternative future uses.  Accordingly, these
costs were written off in the fiscal quarter ended September 30, 1999.  The
remaining premium of $4.5 million was allocated to identifiable intangibles and
goodwill, and is being amortized to operations over 6 to 13 years, with an
average amortization period

                                      17
<PAGE>

of approximately 8 1/2 years. The acquisition was financed from borrowings under
a $5.5 million note payable to a bank.

As of August 19, 1999, Datasonics' in-process research and development value was
comprised of six primary research and development programs that were expected to
reach completion during periods ranging from October 1999 through August 2000.
At the acquisition date, Datasonics' research and development programs ranged in
completion from approximately 41% to 61%, and total continuing research and
development commitments to complete the projects were expected to be
approximately $400,000.  On the acquisition date, certain projects within the
Datasonics research and development programs were expected, if successful, to
begin to bear results in fiscal year 2000.  Expenditures to complete the
Datasonics projects were expected to be approximately $400,000 in fiscal year
2000. These estimates are subject to change, given the uncertainties of the
development process, and no assurance can be given that deviations from these
estimates will not occur. Additionally, these projects will require maintenance
expenditures when and if they reach a state of technological and commercial
feasibility.  Management believes the Company is positioned to complete each of
the major research and development programs. However, there is risk associated
with the completion of the projects, and there is no assurance that any project
will meet with either technological or commercial success.  The substantial
delay or outright failure of the Datasonics research and development could
adversely impact the Company's financial condition.  See Note 2 of Notes to the
Company's Consolidated Financial Statements.

The value assigned to purchased in-process research and development was
determined by estimating the costs to develop Datasonics' purchased in-process
research and development into commercially viable products, estimating the
resulting net cash flows from the projects and discounting the net cash flows to
their present value. The revenue estimates used to value the in-process research
and development were based on estimates of relevant market sizes and growth
factors, expected trends in technology and the nature and expected timing of new
product introductions by the Company and its competitors.  Discounting the net
cash flows back to their present value was based on the weighted average cost of
capital ("WACC"). The business enterprise is comprised of various types of
assets, each possessing different degrees of investment risk contributing to a
company's overall cost of capital.  Intangible assets are assessed higher risk
factors due to their lack of liquidity and poor versatility for redeployment
elsewhere in the business.  A discount rate of 17 percent was used for in-
process research and development.  This rate is higher than the WACC due to the
inherent uncertainties surrounding the successful development of the purchased
in-process technology.  The estimates used by the Company in valuing in-process
research and development were based upon assumptions the Company believes to be
reasonable but which are inherently uncertain and unpredictable.  The Company's
assumptions

                                      18
<PAGE>

may be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. Accordingly, actual
results may vary from the projected results. Any such variance may result in a
material adverse effect on the financial condition and results of operations of
the Company.

Interest Income.  Interest income increased to $176,000 for fiscal year 1999 as
compared to $165,000 for fiscal year 1998.  This increase resulted from higher
invested cash balances and was offset by lower available returns on the invested
cash balances.

Interest Expense.  Interest expense was $49,000 for fiscal year 1999 as compared
to $41,000 for fiscal year 1998.  The increase was a result of borrowing on the
$5.5 million term loan made in August 1999 in connection with the Datasonics
acquisition, as compared to the Company's elimination of short and long term
debt in 1998.

Provision for Income Taxes.  The provision for income taxes decreased to
$248,000 for fiscal year 1999 as compared to $305,000 for fiscal year 1998.  The
effective tax rate used for fiscal year 1999 was 23.0% as compared to an
effective tax rate of 29.9% used in fiscal year 1998.  The rate used in fiscal
year 1999 is lower than the statutory rate due to an increased benefit from the
Company's foreign sales corporation and other state tax credits as compared to
the prior year.

Liquidity and Capital Resources

     The Company's principal capital requirement is to provide working capital
to support growth.

     As of September 30, 2000 the Company had cash and cash equivalents of
$1,474,000 compared to a balance of $2,930,000 on September 30, 1999. Operating
income for the fiscal year ended September 30, 2000 was $1,070,000 as compared
to $949,000 for the fiscal year ended September 30, 1999.  Accounts receivable
increased by $1,016,000 mainly as a result of higher sales in the final quarter
of fiscal year 2000.  Inventories increased by $180,000 to support future
shipments.  Deferred tax assets increased by $55,000 as a result of an increase
in refundable income taxes.  Accounts payable decreased by $132,000 as the
Company made payments of assumed liabilities related to the Datasonics
acquisition.  Accrued expenses decreased by $582,000 as transaction costs and
other items relating to the Datasonics acquisition were paid, offset by lower
profit sharing expenses and an increase in current income taxes payable.  Net
cash provided by operating activities decreased to $28,000 for fiscal year 2000
as compared to $1,588,000 for fiscal year 1999.

                                      19
<PAGE>

     In the fiscal year ended September 30, 2000, the Company used $795,000 for
investing activities.  Of this total, $589,000 was used to purchase property,
plant, and equipment and $113,000 represents cash paid in connection with the
Datasonics acquisition.

     Cash used in financing activities for the fiscal year ended September 30,
2000 was $689,000.  Included in this were payments on a note payable of
$786,000, offset by $23,000 from the exercise of stock options, and $74,000 from
the sale of treasury stock to the ESOP.

     The Company has a secured line of credit for $2,000,000.  As of September
30, 2000, the Company had no outstanding advances against the line of credit.

     The Company believes that existing cash balances, current line of credit
arrangement and cash anticipated to be generated from operations will be
sufficient to finance the Company's operations for the next twelve months.  A
portion of the Company's cash may be used to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
From time to time, in the ordinary course of business, the Company evaluates
potential acquisitions of such businesses, products or technologies.  The
Company engages in discussions and negotiations with respect to potential
acquisitions from time to time but has no current agreements or commitments at
the present time.

New Accounting Standards

     In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities.  SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal quarters for all
fiscal years beginning after June 15, 2000.  SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at fair value.  The
statement requires that changes in the derivatives' fair value be recognized in
earnings currently, unless specific hedge accounting criteria are met. Special
accounting or qualifying hedges allow derivative gains or losses to offset
related results on the hedged item in the income statement and require that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.  The Company does not expect that
such adoption will have an impact on the Company's results of operations,
financial position or cash flows.

                                      20
<PAGE>

     In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation - An Interpretation of APB
Opinion No. 25.  Interpretation No. 44 clarifies the application of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
in certain situations, as defined.  Interpretation No. 44 is effective July 1,
2000 but is retroactive for certain events that occurred after December 15,
1998.  The adoption of Interpretation No. 44 did not have a material effect on
the Company's consolidated results of operations.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition. This bulletin summarizes
certain views of the staff on applying generally accepted accounting principles
to revenue recognition in financial statements.  The Company believes that its
current revenue recognition policy complies with the guidelines in the bulletin.

Prospects for the Future

The Company will continue to pursue opportunities for growth. These include
investments in product development, acquisition of compatible product lines and
companies, licensing arrangements and geographical market development.

Undersea Systems Division

During 1999, the Company acquired the assets of Datasonics.  This added several
product lines and allowed the Company to participate in new undersea markets.
In the future, the Company intends to invest in further development of these
product lines and markets. For example, the Company is currently funding
development of new products that will extend its capabilities in the undersea
survey market.

The Company believes that the market for underwater data telemetry is an
emerging market and will continue to fund development of its underwater acoustic
modem products.  Development of this technology is also being funded by
government research contracts from ONR (Office of Naval Research) and SPAWAR
(Strategic Space and Warfare Center).

The Company serves several segments of the undersea market including oil and gas
seismic exploration, scientific research, military, survey and offshore oil and
gas production.  These market

                                      21
<PAGE>

segments experience periodic expansion and, occasionally, contraction as a
result of economic cycles, market fluctuation in oil prices, changes in
government funding, etc.

Container Inspection Systems Division

The Container Inspection Systems Division serves the beer, beverage, food
packaging, chemical and pharmaceutical markets. There are common trends in these
markets that are favorable to the future growth of the Container Inspection
Systems Division.  These include a focus on quality control, the need to improve
process yield and efficiency, and an increased awareness of product liability
exposure.

The Company has maintained a steady investment in new product development.  As a
result, the Company has introduced new products that expand the capabilities of
its existing inspection systems and open up new markets.  The Company intends to
continue this strategy of product line expansion and extension and development
of new package inspection market segments.

The Company is not aware of any technology trends or changes in competitive
environment that would adversely affect the sales of its products within the
industry segments that it serves.

Profit Margins

Overall

     Overall profit margins on the Company's products are influenced by the
relative mix of sales between the Undersea Systems Division and the Container
Inspection Systems Division. For the fiscal year ended September 30, 2000, sales
of the Undersea Systems Division increased to 74% of total Company sales as
compared to 71% for the prior fiscal year, while sales of the Container
Inspection Systems Division decreased to 26% of total Company sales as compared
to 29% for the prior fiscal year.  The increase in sales from fiscal year 1999
to fiscal year 2000 was 25% for the Undersea Systems Division and 5% for the
Container Inspection Systems Division.  This resulted in an overall gross profit
for the Company of 41.2% for the fiscal year ended September 30, 2000 as
compared to 43.2% for the fiscal year ended September 30, 1999.

Undersea Systems Division

     Gross profit margins on Undersea Systems Division products average
approximately 37.5%.  Gross margins on this segment of the

                                      22
<PAGE>

business can very depending on the relative mix of products shipped in any time
period and the timing of large single project shipments. The Company expects
that the relative mix of products will remain approximately stable and does not
expect the average gross profit margin to be adversely affected. It is possible
that the startup costs associated with new products could affect gross margins
temporarily. However, the Company is not aware of other market trends, cost
changes or competitive pressures that would adversely affect gross profit
margins within its existing product lines.

Container Inspection Systems Division

     Gross profit margins on Container Inspection Systems Division products
average approximately 52.4%.  The Company expects that the sales mix of
different products will not significantly change and will not adversely affect
overall divisional gross margins in the future.  It is possible that increased
competition will result in an overall reduction of selling prices and associated
profit margins.  The Company is not aware of any technological trends or
marketplace trends which would adversely affect gross margins on these product
lines.

Forward-Looking Information

     The statements made in this report and in oral statements which may be made
by representatives of the Company relating to plans, strategies, economic
performance and trends and other statements that are not descriptions of
historical facts may be forward-looking statements within the meaning of the
Private Securities Litigation Reform Act, Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Such information
includes information relating to the Company which is based upon the beliefs of
the Company's management as well as assumptions made by and information
currently available to the Company's management.  When used in this report,
words such as "anticipate," "believe," "estimate," "expect," "intend," and
similar expressions, as they relate to the Company's management, identify
forward-looking statements.  Such statements reflect the current views of
management with respect to future events and are subject to certain inherent
risks, uncertainties and assumptions relating to the operations and results of
operations of the Company, the timing of large project orders, competitive
factors, shifts in customer demand, government spending, economic cycles,
availability of financing as well as the factors described in this report.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.

                                      23

<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

     The information required by this item is incorporated by reference to the
Financial Statements set forth on pages F-1 through F-20 hereof.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     Not Applicable.

                                   PART III

     The information required by Part III of this report is incorporated by
reference from the registrant's definitive proxy statement for its 2001 annual
meeting of stockholders to be filed with the Commission in accordance with Rule
14a-101, Schedule 14A, on or before January 28, 2001.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  The financial statements set forth in the Index to Consolidated
          Financial Statements contained on page F-1 hereof are filed herewith
          as a part of this report.

     (b)  The exhibits set forth in the Exhibit Index on the page immediately
          preceding the exhibits are filed herewith as a part of this report.

                                      24

<PAGE>

                                  SIGNATURES

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

                                              BENTHOS, INC.


                                              By JOHN L. COUGHLIN
                                                 ---------------------------
                                                 John L. Coughlin,
                                                 President

Date: December 19, 2000

     In accordance with the Exchange Act, 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>
<S>                             <C>                              <C>
JOHN L. COUGHLIN                President, Chief Executive       December 19, 2000
-------------------------
John L. Coughlin                  Officer and Director



FRANCIS E. DUNNE, JR.           Vice President, Chief            December 19, 2000
-------------------------
Francis E. Dunne, Jr.             Financial Officer and
                                  Treasurer (principal
                                  financial and
                                  accounting officer)

STEPHEN D. FANTONE              Chairman of the Board of
-------------------------
Stephen D. Fantone              Directors                        December 22, 2000



SAMUEL O. RAYMOND               Director                         December 20, 2000
-------------------------
Samuel O. Raymond


A. THEODORE MOLLEGEN, JR.       Director                         December 22, 2000
-------------------------
A. Theodore Mollegen, Jr.


THURMAN F. NAYLOR               Director                         December 20, 2000
-------------------------
Thurman F. Naylor

GARY K. WILLIS                  Director                         December 20, 2000
-------------------------
Gary K. Willis


ARTHUR L. FATUM                 Director                         December 20, 2000
-------------------------
Arthur L. Fatum
</TABLE>
<PAGE>

BENTHOS, IMC. AND SUBSIDIARY

Consolidated Financial Statements
as of September 30, 2000 and 1999
Together with Auditors' Report
<PAGE>

Report of Independent Public Accountants                               F-1

Consolidated Balance Sheets as of September 30, 2000 and 1999          F-2

Consolidated Statements of Income for the Years Ended
September 30, 2000, 1999, 1998                                         F-3

Consolidated Statements of Stockholders' Investment for
the Years Ended September 30, 2000, 1999, 1998                         F-4

Consolidated Statements of Cash Flows for the Years
Ended September 30, 2000, 1999, 1998                                   F-5

Notes to Consolidated Financial Statements                             F-6
<PAGE>

Report of Independent Public Accountants

To Benthos, Inc.:

We have audited the accompanying consolidated balance sheets of Benthos, Inc. (a
Massachusetts corporation) and subsidiary as of September 30, 2000 and 1999 and
the related consolidated statements of income, stockholders' investment and cash
flows for each of the three years in the period ended September 30, 2000. These
financial statements are the responsibility of Benthos, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Benthos, Inc. and subsidiary as
of September 30, 2000 and 1999 and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 2000,
in conformity with accounting principles generally accepted in the United
States.


Boston, Massachusetts
November 6, 2000

F-1
<PAGE>

BENTHOS, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(in thousands, except share and per share data)

<TABLE>
<CAPTION>
ASSETS                                                                                         September 30,
                                                                                               2000      1999
<S>                                                                                          <C>        <C>
Current Assets:
 Cash and cash equivalents                                                                   $ 1,474    $ 2,930
 Accounts receivable, less reserves of $220 at September 30, 2000 and 1999                     3,448      2,432
 Inventories                                                                                   4,974      4,794
 Prepaid expenses and other current assets                                                       159        734
 Deferred tax asset                                                                            1,354      1,299
                                                                                             -------    -------

     Total current assets                                                                     11,409     12,189
                                                                                             -------    -------

Property, Plant and Equipment, at cost:
 Land                                                                                            127        127
 Buildings and improvements                                                                    2,248      1,876
 Equipment and fixtures                                                                        3,698      3,464
 Demonstration equipment                                                                       1,157      1,174
                                                                                             -------    -------

                                                                                               7,230      6,641

 Less--Accumulated depreciation                                                                5,270      4,862
                                                                                             -------    -------

                                                                                               1,960      1,779
                                                                                             -------    -------

Other Assets, net                                                                              4,496      4,819
                                                                                             -------    -------

                                                                                             $17,865    $18,787
                                                                                             =======    =======

LIABILITIES AND STOCKHOLDERS' INVESTMENT

Current Liabilities:
 Current maturities of long-term debt                                                        $   786    $   786
 Accounts payable                                                                              1,160      1,292
 Accrued expenses                                                                              1,729      2,311
 Customer deposits                                                                               350        391
                                                                                             -------    -------

     Total current liabilities                                                                 4,025      4,780
                                                                                             -------    -------

Long-term debt, net of current maturities                                                      3,863      4,649
                                                                                             -------    -------

Commitments and Contingencies (Note 9)

Stockholders' Investment:
 Common stock, $0.06 2/3 par value-
  Authorized--7,500,000 shares
  Issued--1,652,831 and 1,649,081 shares at September 30, 2000 and 1999, respectively            110        110
 Capital in excess of par value                                                                1,569      1,546
 Retained earnings                                                                             8,959      8,437
 Treasury stock, at cost                                                                        (661)      (735)
                                                                                             -------    -------

     Total stockholders' investment                                                            9,977      9,358
                                                                                             -------    -------

                                                                                             $17,865    $18,787
                                                                                             =======    =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-2
<PAGE>

BENTHOS, INC. AND SUBSIDIARY

Consolidated Statements of Income

(in thousands, except share and share data)

<TABLE>
<CAPTION>
                                                                         -------Year Ended September 30,-----
                                                                             2000         1999         1998
<S>                                                                      <C>          <C>          <C>
Net Sales                                                                $   20,553   $   17,248   $   14,038

Cost of Sales                                                                12,080        9,801        7,529
                                                                         ----------   ----------   ----------

     Gross profit                                                             8,473        7,447        6,509

Selling, General and Administrative Expenses                                  5,289        4,347        4,374

Research and Development Expenses                                             1,607        1,363        1,239

Amortization of Goodwill and Other Acquired Intangibles                         507           38            -

In-Process Research and Development                                               -          750            -
                                                                         ----------   ----------   ----------

     Income from operations                                                   1,070          949          896

Interest Income                                                                  78          176          165

Interest Expense                                                               (402)         (49)         (41)
                                                                         ----------   ----------   ----------

     Income before provision for income taxes                                   746        1,076        1,020

Provision for Income Taxes                                                      224          248          305
                                                                         ----------   ----------   ----------

     Net income                                                          $      522   $      828   $      715
                                                                         ==========   ==========   ==========

Basic Earnings per Share                                                      $0.38        $0.61        $0.54
                                                                         ==========   ==========   ==========

Diluted Earnings per Share                                                    $0.37        $0.60        $0.52
                                                                         ==========   ==========   ==========

Weighted Average Number of Shares Outstanding                             1,376,158    1,355,291    1,314,323
                                                                         ==========   ==========   ==========

Weighted Average Number of Shares Outstanding, assuming dilution          1,415,356    1,386,796    1,387,130
                                                                         ==========   ==========   ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE>

BENTHOS, INC. AND SUBSIDIARY

Consolidated Statements of Stockholder's Investment

(in thousands, except share and per share data)



<TABLE>
<CAPTION>
                                         Common Stock                Capital in              Treasury Stock, at cost      Total
                                    Number of      $0.06 2/3 Par    Excess of Par  Retained   Number of                Stockholders'
                                     Shares            Value           Value       Earnings    Shares      Amount       Investment

<S>                              <C>               <C>               <C>          <C>         <C>          <C>         <C>
Balance, September 30, 1997      1,586,081            $106               $1,270     $6,894       294,948     $(847)        $7,423

 Sale of treasury stock                  -               -                    -          -        (3,823)       70             70

 Exercise of stock options,
     including tax benefit          48,750               3                  232          -             -         -            235


 Net income                              -               -                    -        715             -         -            715
                                 ---------       ---------            ---------    -------      --------    ------       --------

Balance, September 30, 1998      1,634,831             109                1,502      7,609       291,125      (777)         8,443

 Sale of treasury stock                  -               -                    -          -        (8,592)       42             42

 Exercise of stock options          14,250               1                   44          -             -         -             45

 Net income                              -               -                    -        828             -         -            828
                                 ---------       ---------            ---------    -------      --------    ------       --------

Balance, September 30, 1999      1,649,081             110                1,546      8,437       282,533      (735)         9,358

 Sale of treasury stock                  -               -                    -          -        (8,738)       74             74

 Exercise of stock options           3,750               -                   23          -             -         -             23

 Net income                              -               -                    -        522             -         -            522
                                 ---------       ---------            ---------    -------      --------    ------       --------

Balance, September 30, 2000      1,652,831            $110               $1,569     $8,959       273,795     $(661)        $9,977
                                 =========       ==========           =========    =======      ========    ======       ========
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>

BENTHOS, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

(in thousands)


<TABLE>
<CAPTION>
                                                         ------------------Year Ended September 30,------------------
                                                                            2000      1999      1998
<S>                                                                      <C>       <C>       <C>
Cash Flows from Operating Activities:
 Net income                                                              $   522   $   828    $  715
 Adjustments to reconcile net income to  net cash provided by
 operating activities:
  Write-off of acquired in-process research and development                    -       750         -
  Depreciation and amortization                                              937       512       350
  Deferred income taxes                                                      (55)     (648)     (135)
  Changes in assets and liabilities, net of effect from acquisition of
   Datasonics, Inc.:
   Accounts receivable                                                    (1,016)      355       561
   Inventories                                                              (180)     (919)     (730)
   Prepaid expenses and other current assets                                 575       (75)      (27)
   Accounts payable and accrued expenses                                    (714)      631       265
   Customer deposits                                                         (41)      154        96
                                                                         -------   -------    ------

     Net cash provided by operating activities                                28     1,588     1,095
                                                                         -------   -------    ------

Cash Flows from Investing Activities:
 Purchase of property, plant and equipment                                  (589)     (181)     (215)
 (Increase) decrease in other assets                                         (93)      221      (380)
 Net cash paid in connection with the Datasonics, Inc. acquisition          (113)   (6,729)        -
                                                                         -------   -------    ------

     Net cash used in investing activities                                  (795)   (6,689)     (595)
                                                                         -------   -------    ------

Cash Flows from Financing Activities:
 Payments on note payable                                                   (786)      (65)        -
 Sale of treasury stock                                                       74        42        70
 Exercise of stock options, net of tax benefit                                23        45       101
 Borrowings of long-term debt                                                  -     5,500         -
 Payments on long-term debt, net                                               -         -      (825)
                                                                         -------   -------    ------

     Net cash (used in) provided by financing activities                    (689)    5,522      (654)
                                                                         -------   -------    ------

Net (Decrease) Increase in Cash and Cash Equivalents                      (1,456)      421      (154)

Cash and Cash Equivalents, beginning of year                               2,930     2,509     2,663
                                                                         -------   -------    ------

Cash and Cash Equivalents, end of year                                   $ 1,474   $ 2,930    $2,509
                                                                         =======   =======    ======

Supplemental Disclosure of Cash Flow Information:
 Interest paid during the year                                           $   403   $    35    $   41
                                                                         =======   =======    ======
 Income taxes paid during the year, net of refunds                       $   218   $   376    $  (38)
                                                                         =======   =======    ======

Supplemental Disclosure of Noncash Activities:
 Tax benefit for exercise of stock options                               $     -   $     -    $  134
                                                                         =======   =======    ======

Supplemental Disclosure of Cash Flows Related to Acquisition:
 In connection with the acquisition of Datasonics, Inc. (see Note 2),
  the following transactions occurred:
  Fair value of assets acquired                                          $   113   $ 7,749    $    -
  Liabilities assumed                                                          -    (1,020)        -
                                                                         -------   -------    ------

     Cash paid, including $675 for direct costs of acquisition           $   113   $ 6,729   $     -
                                                                         =======   =======   =======
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>

BENTHOS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)




(1)  OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

     Benthos, Inc. (the Company) designs, manufactures, sells and services
     oceanographic products and systems for underwater exploration, oil and gas
     development and production, research and defense, as well as electronic
     inspection equipment for the automated assessment of the seal integrity of
     consumer food, beverage, pharmaceutical and chemical containers. The
     Company's customers are located throughout the world.

     The accompanying consolidated financial statements reflect the application
     of certain significant accounting policies as described below and elsewhere
     in the accompanying notes to the consolidated financial statements.

     (a)  Principles of Consolidation

          The consolidated financial statements include the accounts of the
          Company and its wholly-owned subsidiary, Benthos International Inc., a
          foreign sales corporation. All material intercompany transactions and
          balances have been eliminated in consolidation.

     (b)  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 at the date of the financial statements and the reported
          amounts of revenues and expenses during the reporting period. Actual
          results could differ from those estimates.

     (c)  Cash and Cash Equivalents

          The Company considers all highly liquid securities with original
          maturities of three months or less to be cash equivalents.

     (d)  Inventories

          Inventories are stated at the lower of cost (first-in, first-out) or
          market. Work-in-process and finished goods inventories include
          materials, labor and overhead. Inventories consist of the following at
          September 30, 2000 and 1999:

                                               2000            1999

                   Raw materials             $  423          $  891
                   Work-in-process            4,538           3,861
                   Finished goods                13              42
                                             ------          ------

                                             $4,974          $4,794
                                             ======          ======

F-6
<PAGE>

BENTHOS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)



(e)  Depreciation and Amortization

     The Company provides for depreciation and amortization using the straight-
     line method by charges to operations in amounts estimated to allocate the
     cost of the assets over their estimated useful lives, as follows:



                   Asset Classification          Estimated
                                                Useful Life

                 Buildings and improvements     15-33 years
                 Equipment and fixtures             5 years
                 Demonstration equipment            3 years

(f)  Intangible Assets

     The Company assesses the realizability of intangible assets in accordance
     with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting
     for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
     Disposed Of. Under SFAS No. 121, the Company is required to assess the
     valuation of its long-lived assets, including intangible assets, based on
     the estimated cash flows to be generated by such assets. Based on its most
     recent analysis, the Company believes that no material impairment of
     intangible assets exists as of September 30, 2000.

     Intangible assets, resulting from the Datasonics acquisition (see Note 2),
     are included in other assets on the face of the consolidated balance sheets
     and are amortized on a straight-line basis based on their estimated lives,
     as follows:

<TABLE>
<CAPTION>
                                      Estimated            September 30,
                                        Life             2000         1999
<S>   <C>                             <C>              <C>          <C>
      Developed technology               6 years       $1,430       $1,430
      Assembled workforce                6 years          200          200
      Goodwill                          13 years        3,011        2,898
                                                       ------       ------

                                                        4,641        4,528

      Less--Accumulated amortization                      544           38
                                                       ------       ------

                                                       $4,097       $4,490
                                                       ======       ======
</TABLE>

F-7
<PAGE>

     BENTHOS, INC. AND SUBSIDIARY

     Notes to Consolidated Financial Statements

     (in thousands, except share and per share data)


     (g)  Revenue Recognition and Warranty Costs

          Revenue is recognized when products are shipped to customers, provided
          that there are no uncertainties regarding customer acceptance, there
          is persuasive evidence of an arrangement, the sales price is fixed or
          determinable and collection of the related receivable is probable. The
          Company provides for estimated warranty costs at the time of shipment.
          Amounts received from customers for future delivery are shown as
          customer deposits in the accompanying consolidated balance sheets.

     (h)  Concentration of Credit Risk

          SFAS No. 105, Disclosure of Information about Financial Instruments
          with Off-Balance-Sheet Risk and Financial Instruments with
          Concentration of Credit Risk, requires disclosure of any significant
          off-balance-sheet and credit risk concentrations. The Company has no
          significant off-balance-sheet concentration of credit risk such as
          foreign exchange contracts, options contracts or other foreign hedging
          arrangements. Financial instruments, which potentially subject the
          Company to concentrations of credit risk, are principally cash, cash
          equivalents and accounts receivable. The Company places its cash and
          cash equivalents in highly rated financial institutions. In 2000,
          there were no customers who accounted for more than 10% of net sales.
          In 1999, two customers accounted for 14% and 12% of net sales,
          respectively. In 1998, one customer accounted for approximately 22% of
          net sales. As of September 30, 2000, one customer accounted for 12% of
          accounts receivable. At September 30, 1999, one customer accounted for
          approximately 15% of accounts receivable. The Company has not
          experienced significant losses related to receivables from individual
          customers or groups of customers in any specific industry or
          geographic area. Due to these factors, no additional credit risk
          beyond amounts provided for collection losses is believed by
          management to be probable in the Company's accounts receivable.

          The changes in the accounts receivable reserve are as follows:
<TABLE>
<CAPTION>
                     Balance,    Charged to     Acquired      Deductions   Balance,
                     Beginning    Costs and    Reserve/(1)/                 End of
                     of Period    Expenses                                  Period
<S>                  <C>         <C>           <C>            <C>          <C>
     For the year
     ended September
     30,

          1998         $  162        $  13      $    -         $    -      $   175
          1999            175            8          45              8          220
          2000            220            -           -              -          220
</TABLE>
/(1)/Represents reserve acquired as part of the Datasonics acquisition (see Note
2).

F-8
<PAGE>

     BENTHOS, INC. AND SUBSIDIARY

     Notes to Consolidated Financial Statements

     (in thousands, except share and per share data)



     (i)  Reclassifications

          The Company has reclassified certain prior-year information to conform
          with the current year's presentation.

     (j)  Financial Instruments

          The estimated fair value of the Company's financial instruments, which
          include cash and cash equivalents, accounts receivable and debt,
          approximate their carrying value.

     (k)  New Accounting Standards

          In June 1998, the Financial Accounting Standards Board (FASB) issued
          SFAS No. 133, Accounting for Derivative Instruments and Hedging
          Activities. SFAS No. 133, as amended by SFAS No. 137, is effective for
          all fiscal quarters of all fiscal years beginning after June 15, 2000.
          SFAS No. 133 establishes accounting and reporting standards requiring
          that every derivative instrument (including certain derivative
          instruments embedded in other contracts) be recorded in the balance
          sheet as either an asset or liability measured at fair value. The
          statement requires that changes in the derivatives' fair value be
          recognized in earnings currently, unless specific hedge accounting
          criteria are met. Special accounting or qualifying hedges allow
          derivative gains or losses to offset related results on the hedged
          item in the income statement and require that a company must formally
          document, designate and assess the effectiveness of transactions that
          receive hedge accounting. The Company does not expect that such
          adoption will have an impact on the Company's results of operations,
          financial position or cash flows.

          In March 2000, the FASB issued Interpretation No. 44, Accounting for
          Certain Transactions Involving Stock Compensation--An Interpretation
          of APB Opinion No. 25. Interpretation No. 44 clarifies the application
          of Accounting Principles Board (APB) Opinion No. 25, Accounting for
          Stock Issued to Employees, in certain situations, as defined.
          Interpretation No. 44 is effective July 1, 2000 but is retroactive for
          certain events that occurred after December 15, 1998. The adoption of
          Interpretation No. 44 did not have a material effect on the
          consolidated results of operations.

          In December 1999, the Securities and Exchange Commission issued Staff
          Accounting Bulletin No. 101, Revenue Recognition. This bulletin
          summarizes certain views of the staff on applying generally accepted
          accounting principles to revenue recognition in financial statements.
          The Company believes that its current revenue recognition policy
          complies with the guidelines in the bulletin.


F-9
<PAGE>

     BENTHOS, INC. AND SUBSIDIARY

     Notes to Consolidated Financial Statements

     (in thousands, except share and per share data)


     (l)  Comprehensive Income

          The Company has adopted SFAS No. 130, Reporting Comprehensive Income.
          SFAS No. 130 requires disclosure of all components of comprehensive
          income on an annual and interim basis. Comprehensive income is defined
          as the change in equity of a business enterprise during a period from
          transactions and other events and circumstances from nonowner sources.
          Comprehensive income is the same as net income for all periods
          presented.

(2)  ACQUISITION OF DATASONICS, INC.

     In August 1999, the Company acquired substantially all of the assets of
     Datasonics, Inc. (Datasonics). This acquisition was accounted for as a
     purchase in accordance with APB Opinion No. 16, Business Combinations. To
     fund the purchase, the Company entered into a $5.5 million note payable
     with a bank (see Note 5). The aggregate purchase price of approximately
     $6,845 (which consisted of a $6,170 of cash, paid in two installments, and
     $675 of direct acquisition costs) was allocated based on the fair value of
     the tangible and intangible assets acquired, as follows:

<TABLE>
<S>                                                       <C>

          Cash                                                       $      3
          Current assets                                                2,289
          Property and equipment                                          182
          Acquired intangibles (Note 1(f))                              4,641
          Purchased incomplete (in-process) research and                  750
          development
          Assumed liabilities                                          (1,020)
                                                                      -------

                                                                      $ 6,845
                                                                      =======
</TABLE>

In connection with the purchase price allocation, the Company obtained an
independent appraisal of the intangible assets acquired. Acquired intangibles
include acquired technology, goodwill and an assembled workforce. These
intangibles are being amortized over their estimated useful lives of six to 13
years. The portion of the purchase price allocated to the purchased incomplete
(in-process) research and development projects that had not yet reached
technological feasibility and did not have a future alternative use, totaling
$750, was charged to expense as of the acquisition date. The amount allocated to
the purchased incomplete research and development projects represents the
estimated fair value related to these projects determined by an independent
appraisal. Proven valuation procedures and techniques were used in determining
the fair market value of each intangible asset. To bring these projects to
technological feasibility, high-risk developmental and testing issues needed to
be resolved, which required substantial additional effort and testing.

The Company made an initial cash outlay of $6,729 during fiscal year 1999
related to the estimated purchase price as of September 30, 1999. During fiscal
year 2000, the Company revised these estimates to actuals, resulting in an
addition of $113 to the purchase price.


F-10
<PAGE>

     BENTHOS, INC. AND SUBSIDIARY

     Notes to Consolidated Financial Statements

     (in thousands, except share and per share data)


     Unaudited pro forma operating results for the Company, assuming the
     acquisition of Datasonics occurred as of the beginning of the years
     presented, are as follows:

                                                    Year Ended September 30,
                                           1999/(1)/,/(2)/             1998/(1)/
          Pro forma total revenues            $  24,717                 $21,355
                                              =========                 =======

          Pro forma net income                $     897                 $   440
                                              =========                 =======

          Pro forma net income per share-
            Basic                             $    0.66                 $  0.34
                                              =========                 =======
            Diluted                           $    0.65                 $  0.32
                                              =========                 =======
          /(1)/For the purposes of these pro forma operating results, the charge
          for in-process research and development was excluded so that the
          operating results presented included only recurring costs.

          /(2)/Fiscal 1999 represents the results of Benthos for the year ended
          September 30, 1999 combined with Datasonics results from October 1,
          1998 through the date of the acquisition.

(3)  ACCRUED EXPENSES

     Accrued expenses consist of the following at September 30, 2000 and 1999:

<TABLE>
                                                                      2000               1999
<S>                                                                 <C>                <C>
          Accrued salary and related expenses                       $  595             $  653
          Accrued warranty                                             302                287
          Accrued taxes                                                517                460
          Accrued transaction costs                                      -                475
          Other accrued expenses                                       315                436
                                                                    ------             ------

                                                                    $1,729             $2,311
                                                                    ======             ======
</TABLE>
(4)  Demand Note Payable

     As of September 30, 2000, the Company has a $2,000 secured line of credit
     with a bank expiring on January 31, 2001. There were no amounts outstanding
     under this line of credit at September 30, 2000. Borrowings under this
     agreement are payable on demand and bear interest at the Wall Street
     Journal's reported prime rate (9.50% at September 30, 2000) less 0.50% or
     LIBOR (6.62% at September 30, 2000) plus 2.38%. The Company is required to
     maintain certain covenants, including debt service coverage. The Company
     was in compliance with all covenants at September 30, 2000.


F-11
<PAGE>

     BENTHOS, INC. AND SUBSIDIARY

     Notes to Consolidated Financial Statements

     (in thousands, except share and per share data)


(5)  NOTE PAYABLE

     On August 18, 1999, the Company entered into a $5,500 note payable with a
     bank. The note is secured by substantially all of the assets of the Company
     and is due in 84 monthly installments with interest at prime (9.50% at
     September 30, 2000) less 0.50% or LIBOR (6.62% at September 30, 2000) plus
     2.38%. The Company was using the floating prime rate option of 9.00% at
     September 30, 2000. At any time during the remaining term of the note, the
     Company may elect to fix the interest rate at 2.25% above the Federal Home
     Loan Bank of Boston Classic Credit Rate (6.64% at September 30, 2000), as
     defined, or the Company may continue to pay interest at either prime less
     0.50% or the LIBOR plus 2.38% options. Payments under this note end in
     August 2006. The Company is required to meet certain covenants, including
     debt service coverage. The Company was in compliance with all covenants at
     September 30, 2000.

(6)  INCOME TAXES

     The Company accounts for income taxes under the liability method in
     accordance with SFAS No. 109, Accounting for Income Taxes. Under the
     liability method specified by SFAS No. 109, a deferred tax asset or
     liability is determined based on the difference between the financial
     statement and tax bases of assets and liabilities, as measured by the
     enacted tax rates.

     The components of the provision for income taxes for each of the three
     years in the period ended September 30, 2000 are as follows:

<TABLE>
<CAPTION>
                                            2000          1999          1998
<S>                                        <C>           <C>           <C>
          Federal-
           Current                         $ 222         $ 781         $ 372
           Deferred                           10          (597)         (138)
           Valuation allowance               (46)            -             -
                                           -----         -----         -----

                                             186           184           234
          State-
           Current                           103           115            68
           Deferred                          (65)          (51)            3
                                           -----         -----         -----

                                              38            64            71
                                           -----         -----         -----

                                           $ 224         $ 248         $ 305
                                           =====         =====         =====
</TABLE>

F-12
<PAGE>

     BENTHOS, INC. AND SUBSIDIARY

     Notes to Consolidated Financial Statements

     (in thousands, except share and per share data)

     The Company's effective tax rate differed from the statutory rate for the
     reasons set forth below:

<TABLE>
<CAPTION>
                                                          2000                1999                1998
<S>                                                      <C>                 <C>                 <C>
          Federal statutory rate                         34.00%              34.00%              34.00%
          State income taxes, net of federal
            tax benefit                                   3.37                3.90                3.50
          Tax benefit of foreign sales corporation       (4.23)              (4.30)              (5.00)
          Tax credits                                    (4.25)             (13.30)              (3.60)
          Change in valuation allowance                  (6.17)                  -                   -
          Other                                           7.28                2.70                1.00
                                                       -------            --------            --------

               Effective tax rate                        30.00%              23.00%              29.90%
                                                       =======            ========            ========
</TABLE>

     The components of the net deferred tax asset recognized in the accompanying
     consolidated balance sheets are as follows:

<TABLE>
<CAPTION>
                                                                   2000                 1999
<S>                                                             <C>                  <C>
          Acquisition related intangibles                       $      289           $      226
          Inventory reserves                                           558                  595
          Other nondeductible reserves and accruals                    507                  524
          Valuation allowance                                            -                  (46)
                                                                ----------           ----------

          Net deferred tax asset                                $    1,354           $    1,299
                                                                ==========           ==========
</TABLE>

     Under SFAS No. 109, the Company recognizes a deferred tax asset for the
     future benefit of its temporary differences if it concludes that it is more
     likely than not that the deferred tax asset will be realized. The Company
     has concluded that the entire deferred tax asset is realizable as of
     September 30, 2000.

(7)  EMPLOYEE BENEFIT PLANS


     (a)  Stock Option Plans

          The Company has granted to certain directors nonqualified stock
          options to purchase shares of the Company's common stock at a price
          not less than the fair market value of the shares at the date of
          grant. The options are exercisable ratably over a three-year period,
          commencing one year from the date of grant, and expire not more than
          10 years from the date of grant. At September 30, 2000, 161,250 shares
          of common stock were reserved for issuance upon exercise of the
          nonqualified stock options. At September 30, 2000, 55,000 shares were
          available for future grant.

F-13
<PAGE>

        BENTHOS, INC. AND SUBSIDIARY

        Notes to Consolidated Financial Statements

        (in thousands, except share and per share data)

                    The Company's 1990 and 2000 Stock Option Plans (the Employee
                    Plans) each authorize 300,000 shares of the Company's common
                    stock for issuance. The Employee Plans are administered by
                    the Board of Directors (the Board) and provide for the
                    granting of incentive stock options and nonqualified stock
                    options. The options are exercisable ratably over a four-
                    year period, commencing one year from the date of grant, and
                    expire not more than 10 years from the date of grant. The
                    purchase price applicable to incentive stock options granted
                    may not be less than the fair market value of the shares at
                    the date of grant. At September 30, 2000, 236,500 shares
                    were available for future grant.

                    Stock option activity is summarized as follows:

<TABLE>
<CAPTION>
                                            Employee Plans                  Director Options
                                                       Weighted                         Weighted
                                      Number of        Average          Number of       Average
                                       Shares        Option Price        Shares       Option Price
<S>                                  <C>             <C>             <C>              <C>
Outstanding, September 30, 1997         117,563       $     5.86          56,250       $     3.77
   Granted                               31,500            17.54          30,000            13.81
   Terminated                           (10,500)           17.54               -                -
   Exercised                             (3,750)            2.04         (45,000)            1.83
                                     ----------                      -----------

Outstanding, September 30, 1998         134,813             7.79          41,250            13.18
   Granted                               38,750             6.25          15,000             6.44
   Terminated                            (7,688)           10.10               -                -
   Exercised                            (14,250)            3.13               -                -
                                     ----------                      -----------

Outstanding, September 30, 1999         151,625             7.71          56,250            11.38
   Granted                               78,500             8.14          50,000             8.35
   Terminated                           (30,750)           10.14               -                -
   Exercised                             (3,750)            6.25               -                -
                                     ----------       ----------     -----------       ----------

Outstanding, September 30, 2000         195,625       $     7.61         106,250       $     9.96
                                     ==========       ==========     ===========       ==========

Exercisable, September 30, 2000          99,188       $     6.62          36,250       $    12.08
                                     ==========       ==========     ===========       ==========

Exercisable, September 30, 1999          65,254       $     6.63          17,500       $    12.82
                                     ==========       ==========     ===========       ==========

Exercisable, September 30, 1998          47,254       $     5.05           3,750       $    11.50
                                     ==========       ==========     ===========       ==========
</TABLE>

F-14
<PAGE>

        BENTHOS, INC. AND SUBSIDIARY

        Notes to Consolidated Financial Statements

        (in thousands, except share and per share data)


               The range of exercise prices for options outstanding and options
               exercisable at September 30, 2000 for the Employee Plans is as
               follows:

<TABLE>
<CAPTION>
                                 Options Outstanding
                                Weighted                     Options Exercisable
                                Average     Weighted                      Weighted
 Range of                      Remaining    Average                       Average
 Exercise         Options     Contractual   Exercise        Options       Exercise
  Prices        Outstanding       Life       Price        Exercisable      Price
<S>            <C>            <C>           <C>           <C>            <C>
$       4.33       67,875          5.5      $    4.33         67,875     $    4.33
$       6.25       21,750          8.3           6.25          5,438          6.25
$  8.00-8.75       68,500          9.5           8.14              -             -
$10.16-11.50       24,000          6.3          11.05         19,125         11.01
$      17.54       13,500          7.1          17.54          6,750         17.54
               ----------                                 ----------

                  195,625          7.4      $    7.61         99,188     $    6.62
               ==========     ========      =========     ==========     =========
</TABLE>

               The range of exercise prices for options outstanding and options
               exercisable at September 30, 2000 for director stock options is
               as follows:

<TABLE>
<CAPTION>
                                 Options Outstanding
                                Weighted                     Options Exercisable
                                Average       Weighted                    Weighted
 Range of                      Remaining      Average                     Average
 Exercise         Options     Contractual     Exercise      Options       Exercise
  Prices        Outstanding       Life         Price      Exercisable      Price
<S>           <C>             <C>           <C>           <C>            <C>
$       6.44       15,000          8.3      $    6.44          5,000     $    6.44
$  8.00-8.50       50,000          9.1           8.35              -             -
$11.50-14.25       41,250          5.8          13.18         31,250         12.98
               ----------                                 ----------

                  106,250          7.7      $    9.96         36,250     $   12.08
               ==========     ========      =========     ==========     =========
</TABLE>

F-15
<PAGE>

BENTHOS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(in thousands, except share and per share data)


   SFAS No. 123, Accounting for Stock-Based Compensation, requires the
   measurement of the fair value of stock options or warrants to be included in
   the statement of operations or disclosed in the notes to financial
   statements.  The Company has determined that it will continue to account for
   stock-based compensation for employees under APB Opinion No. 25 and elect the
   disclosure-only alternative under SFAS No. 123 for stock-based compensation
   awarded in 2000, 1999 and 1998 using the Black-Scholes option pricing model
   prescribed by SFAS No. 123.  The underlying assumptions used are as follows:


                                    -----------September 30,---------
                                     2000         1999         1998

        Risk-free interest rate     6.45%        4.80%        4.38%
        Expected dividend yield        -            -            -
        Expected life (in years)       7            7            7
        Expected volatility           48%          48%          65%


   The weighted average fair value of options granted during the years ended
   September 30, 2000, 1999 and 1998 under these plans is $4.84, $3.51 and
   $10.51, respectively.

   Had compensation cost for the Company's stock option plans been determined
   consistent with SFAS No. 123, pro forma net income and net income per share
   would have been the following:


                                       -----------September 30,--------
                                        2000         1999         1998

      Net income-
             As reported               $ 522        $ 828        $ 715
             Pro forma                   160          525          445

      Basic earnings per share-
             As reported               $0.38        $0.61        $0.54
             Pro forma                  0.12         0.39         0.34

      Diluted earnings per share-
             As reported               $0.37        $0.60        $0.52
             Pro forma                  0.11         0.38         0.32

F-16
<PAGE>

     BENTHOS, INC. AND SUBSIDIARY

     Notes to Consolidated Financial Statements

     (in thousands, except share and per share data)


     (b)  Employee Stock Ownership Plan

          The Company has an Employee Stock Ownership Plan covering all eligible
          employees, as defined. Contributions to the plan are made at the
          discretion of the Board and in an amount determined by the Board,
          provided that the total amount contributed for any plan year does not
          exceed the maximum amount allowable by the Internal Revenue Code
          (IRC). These contributions vest to a participant's account over five
          years based on completed service, as defined. The accompanying
          consolidated statements of income for the years ended September 30,
          2000, 1999 and 1998 include provisions for contributions to the plan
          of approximately $30, $74 and $41, respectively.

     (c)  401(k) Retirement Plan

          The Company has a 401(k) retirement plan covering all eligible
          employees, as defined. Contributions to the plan are made at the
          discretion of the Board and in an amount determined by the Board,
          provided that the total amount contributed for any plan year does not
          exceed the maximum amount allowable by the IRC. These contributions
          vest to a participant's account over five years based on completed
          service, as defined. Additionally, each participant may elect to
          contribute up to 15% of his or her compensation for the plan year, but
          not more than $10,500 (for calendar year 2000), to the plan. The
          accompanying consolidated statements of income for the years ended
          September 30, 2000, 1999 and 1998 include provisions for contributions
          to the plan of approximately $30, $74 and $41, respectively.

     (d)  Supplemental Executive Retirement Plan

          The Company has a Supplemental Executive Retirement Plan for the
          benefit of certain management and highly compensated executive
          employees. Under the plan, participants may elect to defer a portion
          of their compensation paid by the Company for supplemental retirement
          benefits. The Company also established the Supplemental Executive
          Retirement Trust (the Trust Fund) and shall regularly transfer to the
          Trust Fund amounts equal to the elective deferrals made by
          participants under the plan. No such elective deferrals have been made
          by participants as of September 30, 2000.

(8)  EARNINGS PER SHARE

     Basic earnings per share were computed by dividing net income by the
     weighted average number of common shares outstanding during the period.
     Diluted earnings per share were computed by dividing net income by the
     weighted average number of diluted common and common equivalent shares
     outstanding during the period. The weighted average number of common
     equivalent shares outstanding has been determined in accordance with the
     treasury-stock method. Common stock equivalents consist of common stock
     issuable upon the exercise of outstanding options.

F-17
<PAGE>

     BENTHOS, INC. AND SUBSIDIARY

     Notes to Consolidated Financial Statements

     (in thousands, except share and per share data)


     A reconciliation of basic and diluted shares outstanding is as follows:

                                            2000          1999           1998

     Weighted average common shares      1,376,158     1,355,291      1,314,323
      outstanding
     Effect of dilutive securities          39,198        31,505         72,807
                                         ---------     ---------      ---------

     Weighted average common shares      1,415,356     1,386,796      1,387,130
      outstanding, assuming dilution     =========     =========      =========


     For the years ended September 30, 2000 and 1999, 165,438 and 106,719
     weighted average options, respectively, were outstanding but not included
     in the diluted weighted average common share calculation as the effect
     would have been antidilutive.

(9)  EMPLOYMENT AND NONCOMPETITION AGREEMENT

     The Company has an employment and noncompetition agreement, as amended,
     with a director/stockholder. In connection with the employment agreement,
     the Company has agreed to provide a $1,500 split-dollar life insurance
     policy on the director/stockholder. At the director/stockholder's request,
     the Company may be obligated to repurchase from the director/stockholder
     the number of shares that are contributed to or purchased by the Company's
     Employee Stock Ownership Plan each year. The Company also has the right of
     first refusal on any future sales of common stock by the director/
     stockholder at fair market value. In addition, a change in the control of
     the Company, as defined, will result in certain payments to the
     director/stockholder, as outlined under the employment agreement.

     Compensation expense of approximately $87, $86 and $85 related to this
     agreement is included in the accompanying 2000, 1999 and 1998 consolidated
     statements of income, respectively.

F-18
<PAGE>

     BENTHOS, INC. AND SUBSIDIARY

     Notes to Consolidated Financial Statements

     (in thousands, except share and per share data)


(10)  SEGMENT REPORTING

     The Company adopted SFAS No. 131, Disclosures about Segments of an
     Enterprise and Related Information, in the fiscal year ended September 30,
     1999. SFAS No. 131 established standards for reporting information
     regarding operating segments in annual financial statements and requires
     selected information of those segments to be presented in interim financial
     reports issued to stockholders. SFAS No. 131 also established standards for
     related disclosures about products and services and geographic areas.
     Operating segments are identified as components of an enterprise about
     which separate discrete financial information is available for evaluation
     by the chief operating decision maker, or decision making group, in making
     decisions on how to allocate resources and assess performance. The
     Company's chief decision-maker, as defined under SFAS No. 131, is a
     combination of the president, the chief financial officer and other
     operating officers. To date, the Company has viewed its operations and
     manages its business as two segments, Undersea Systems and Container
     Inspection Systems, as being strategic business units that offer different
     products. The Company evaluates the performance of its operating segments
     based on revenues from external customers, income from operations and
     identifiable assets.

                                               ----Year Ended September 30,----
                                                2000        1999        1998

     Sales to unaffiliated customers:
      Undersea systems                         $15,226     $12,174     $ 9,290
      Container inspection systems               5,327       5,074       4,748
                                               -------     -------     -------

          Total                                $20,553     $17,248     $14,038
                                               =======     =======     =======

     Income from operations:
      Undersea systems                         $ 1,046     $   742     $   761
      Container inspection systems                  24         207         135
                                               -------     -------     -------

          Total                                $ 1,070     $   949     $   896
                                               =======     =======     =======

     Identifiable assets:
      Undersea systems                         $11,839     $11,116     $ 4,843
      Container inspection systems               2,682       2,349       2,074
      Corporate assets                           3,344       5,322       3,715
                                               -------     -------     -------

          Total                                $17,865     $18,787     $10,632
                                               =======     =======     =======

F-19
<PAGE>

     BENTHOS, INC. AND SUBSIDIARY

     Notes to Consolidated Financial Statements

     (in thousands, except share and per share data)


     Revenues by geographic area for the years ended September 30, 2000, 1999
     and 1998 were as follows:

          Geographic Area            2000         1999          1998

           United States          $12,835      $ 6,257       $ 6,954
           Norway                     402        2,195           165
           United Kingdom             655        1,694         1,659
           Other                    6,661        7,102         5,260
                                  -------      -------       -------

                                  $20,553      $17,248       $14,038
                                  =======      =======       =======

(11)  Related Party transactions

     The Company had research and development services performed by an entity
     controlled by the Company's Chairman of the Board. The Company expensed
     approximately $20, $20 and $21 for these services in fiscal 2000, 1999 and
     1998, respectively.

F-20
<PAGE>

                                 BENTHOS, INC.

                                 EXHIBIT INDEX

          Exhibit
          -------

           3.1      Restated Articles of Organization (1)

           3.2      Articles of Amendment dated April 28, 1997 (2)

           3.3      Articles of Amendment dated April 20, 1998 (5)

           3.4      By-Laws (1)

           3.5      By-Law Amendments adopted January 23, 1998 (4)

           4.1      Common Stock Certificate (1)

          10.1      Employment Contract with Samuel O. Raymond (1)

          10.2      Amendment to Employment Contract with Samuel O. Raymond (2)

          10.3      Employment Contract with John L. Coughlin (1)

          10.4      Amended and Restated Employment Agreement with John L.
                    Coughlin (10)

          10.5      Employment Agreement with Francis E. Dunne, Jr. (11)

          10.6      Employee Stock Ownership Plan (1)

          10.7      First Amendment to Employee Stock Ownership Plan (2)

          10.8      Second Amendment to Employee Stock Ownership Plan (8)

          10.9      Third Amendment to Employee Stock Ownership Plan (8)

         10.10      Fourth Amendment to Employee Stock Ownership Plan (11)

         10.11      Fifth Amendment to Employee Stock Ownership Plan (11)

         10.12      401(k) Retirement Plan (1993)(1)

<PAGE>

          10.13     First Amendment to 401(k) Retirement Plan (2)

          10.14     Second Amendment to 401(k) Retirement Plan (2)

          10.15     Third Amendment to 401(k) Retirement Plan (3)

          10.16     401(k) Retirement Plan (1999)(8)

          10.17     First Amendment to 1999 401(k) Retirement Plan (11)

          10.18     Second Amendment to 1999 401(k) Retirement Plan (11)

          10.19     Supplemental Executive Retirement Plan (1)

          10.20     1990 Stock Option Plan (1)

          10.21     Stock Option Plan for Non-Employee Directors (1)

          10.22     1998 Non-Employee Directors' Stock Option Plan (4)

          10.23     Benthos, Inc. 2000 Stock Incentive Plan (9)

          10.24     License Agreement between the Company and The Penn State
                    Research Foundation dated December 13, 1993 (1)

          10.25     Technical Consultancy Agreement between the Company and
                    William D. McElroy dated July 12, 1994 (1)

          10.26     Technical Consultancy Agreement between the Company and
                    William D. McElroy dated October 1, 1996 (3)

          10.27     General Release and Settlement Agreement between the Company
                    and Lawrence W. Gray dated February 8, 1996 (1)

          10.28     Line of Credit Loan Agreement between the Company and Cape
                    Cod Bank and Trust Company dated September 24, 1990, as
                    amended (1)
<PAGE>

          10.29     Commercial Mortgage Loan Extension and Modification
                    Agreement between the Company and Cape Cod Bank and Trust
                    Company, dated July 6, 1994 (1)

          10.30     Credit Agreement between the Company and Cape Cod Bank and
                    Trust Company dated August 18, 1999 (8)

          10.31     License Agreement between the Company and Optikos
                    Corporation dated July 29, 1997 (3)

          10.32     Hydrophone License Agreement between the Company and
                    Syntron, Inc. dated December 5, 1996 (6)

          10.33     Amendment Number 1 to Hydrophone License Agreement between
                    the Company and Syntron, Inc. dated September 11, 1998 (6)

          10.34     Asset Purchase Agreement among Benthos, Inc., Datasonics,
                    Inc., and William L. Dalton and David A. Porta (7)

          21        Subsidiaries of the Registrant (1)

          23        Consent of Independent Public Accountants

          27.1      Financial Data Schedule (2000)

          27.2      Revised Financial Data Schedule (1999)

          (1) Previously filed as an exhibit to Registrant's Registration
     Statement on Form 10-SB filed with the Commission on December 17, 1996
     (File No. O-29024) and incorporated herein by this reference.

          (2) Previously filed as an exhibit to Registrant's Quarterly Report on
     Form 10-QSB for the quarterly period ended March 30, 1997 (File No. O-
     29024) and incorporated herein by this reference.

          (3) Previously filed as an exhibit to Registrant's Quarterly Report on
     Form 10-QSB for the quarterly period ended June 29, 1997 (File No. O-29024)
     and incorporated herein by this reference.
<PAGE>

          (4)  Previously filed as an exhibit to the Registrant's Quarterly
     Report on Form 10-QSB for the quarterly period ended December 31, 1997
     (File No. O-29024) and incorporated herein by this reference.

          (5)  Previously filed as an exhibit to the Registrant's Quarterly
     Report on Form 10-QSB for the quarterly period ended March 31, 1998 (File
     No. 0-29024) and incorporated herein by this reference.

          (6)  Previously filed as an exhibit to the Registrant's Quarterly
     Report on Form 10-QSB for the quarterly period ended December 31, 1998
     (File No. 0-29024) and incorporated herein by this reference.

          (7)  Previously filed as an exhibit to Registrant's Current Report on
     Form 8-K filed on or about August 27, 1999 (File No. O-29024) and
     incorporated herein by this reference.

          (8)  Previously filed as an exhibit to Registrant's Annual Report on
     Form 10-KSB for the fiscal year ended September 30, 1999 File No. 0-29024)
     and incorporated herein by this reference.

          (9)  Previously filed as an exhibit to the Registrant's   definitive
     proxy statement filed on Schedule 14A on or about January 18, 2000 and
     incorporated herein by this reference.

          (10) Previously filed as an exhibit to the Registrant's Quarterly
     Report on Form 10-QSB for the quarterly period ended December 31, 1999
     (File No. O-29024) and incorporated herein by this reference.

          (11) Previously filed as an exhibit to the Registrant's Quarterly
     Report on Form 10-QSB for the quarterly period ended June 30, 2000 (File
     No. O-29024) and incorporated herein by this reference.