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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-KSB



(Mark One)

|x |  | Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ------------------------------------------------------------------------------

For the Fiscal Year Ended September 30, 2005



| |  ̈ |  | 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



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BENTHOS, INC.

(Name of
Small Business Issuer in Its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Massachusetts                                                  |  | 04-2381876                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer 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)



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



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange on Which Registered
|None                |  |                                          



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

Common Stock, $.062/3par value



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

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

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 $24,095,000 for its most recent fiscal year ended September 30, 2005.

The aggregate market value of the Common Stock held by non-affiliates of the registrant as of December 19, 2005, based on the closing price for the stock on
such date as reported on the Nasdaq Capital Market of $17.47 per share, was $30,511,704. 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:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   ̈  No  x



2,105,996 Shares of Common Stock, as of December 19, 2005



DOCUMENTS INCORPORATED BY REFERENCE



See Exhibit Index



Transitional Small Business Issuer Format (check one):  Yes   ̈  No  x



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On November 2, 2005, Benthos, Inc., a Massachusetts corporation, announced that it has entered into an
Agreement and Plan of Merger, dated as of November 1, 2005 (the Merger Agreement) with Teledyne Technologies Incorporated, a Delaware corporation (Teledyne), and Boat Merger Sub Inc., a Massachusetts corporation
wholly-owned by Teledyne (Merger Sub). Pursuant to the Merger Agreement, Merger Sub will merge with and into Benthos (the Merger), with Benthos continuing as the surviving corporation. Pursuant to the Merger Agreement, at the
effective time of the Merger, each outstanding share of Benthos common stock, par value $0.062/3per share (the
Shares), other than any Shares owned by Benthos, Teledyne, or any wholly-owned subsidiary of either, will be converted into the right to receive $17.50 in cash, without interest. Each outstanding option to purchase Benthos common stock
(whether vested or unvested) will be converted into the right to receive an amount in cash equal to the excess, if any, of $17.50 over the exercise price of such option, without interest, less any required withholding taxes. The Merger is
conditioned, among other things, on the approval of the Merger Agreement by the shareholders of the Company and certain other customary conditions.



This report contains forward-looking statements that involve certain risks and uncertainties. See Item 6, Managements Discussion and Analysis
of Financial Condition and Results of Operations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. was founded in 1962 to manufacture oceanographic products, and was incorporated as a Massachusetts corporation in 1965.
Since 1962, we have developed and acquired new technology and products. Currently, we have two divisions: our Undersea Systems Division and our Package Inspection Systems Division.



Our Undersea Systems Division comprises our original business and designs, develops, manufactures and sells products and services used
in oceanographic and underwater environments to the commercial, scientific, military and governmental markets. The uses for these products include oceanographic research, oil and gas exploration and production, hydrographic survey, port and harbor
security, and underwater location, communication, 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, hydrophones used for geophysical exploration and sound detection, remotely operated vehicles, or ROVs, used for ship hull inspection and recovery tasks, glass spheres used to house instruments and to provide buoyancy, side scan
sonar, swath bathymetry 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 underwater such as aircraft flight data and voice recorders. We
market our undersea products under the trade name Benthos.



Our Package Inspection Systems Division was formed in the 1970s using certain acoustic technology originally developed for oceanographic products. This division designs, develops, manufactures and sells systems used to inspect the
integrity of containers in the food, pharmaceutical, dairy, chemical, personal care and beverage industries. The customers for these systems include manufacturers of products packaged in glass bottles, aluminum and steel cans, glass jars, and,
increasingly, flexible plastic containers. We market these systems 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, fill level, and similar packaging defects. TapTone systems are used as quality control tools to provide inspection at production speeds or as off-line inspection devices to periodically validate
package integrity.



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Principal Products



Undersea Systems Division



Our undersea products and services are divided into three groups as follows:



Underwater Acoustics



Acoustic Devices.    Our underwater acoustics products include SMART (Smart Modem Acoustic Release Technology) releases, acoustic releases and companion topside control systems, transponders, 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,
undersea warfare, and general commercial use. We manufacture both expendable and recoverable products. Our transponder line includes low cost models that transmit a limited signal selection in response to a received command, as well as more
sophisticated models that can be programmed to transmit a wide variety of signals in response to received commands. Transponders are monitored by and communicate with companion topside units that are typically located on board a ship.



Acoustic releases are used to release underwater anchored instruments, allowing them to
return to the surface, in response to an acoustic command signal transmitted from the surface. The SMART release combines the mechanism of a release with the communication capabilities of an underwater acoustic modem. The SMART release can be
connected to an instrument package being deployed and can transmit vital information or data samples after the deployment or during periodic inspections thereafter. 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 are operated with companion topside control units.



Altimeters are used to determine the elevation from the seabed of an object or vehicle in the water.



Locator Pingers and Transponders.    Locator pingers are small acoustic transmitters designed to operate in
water to produce a continuous acoustic signal. Using a suitable receiver, an underwater object equipped with a locator pinger may be found by listening for the pingers acoustically-emitted signal. Locator pingers are most commonly installed on
commercial and military flight data and voice recorders, often referred to as black boxes, but may also be used on other objects such as torpedoes, remotely operated vehicles, or ROVs, ships and shipping containers.



Locator transponders are similar to pingers, which enable a diver to determine
distance, in addition to direction, as an added feature. Customers for transponders primarily include the military and scientific communities.



Acoustic Modems.    Acoustic modems are used to send and receive digital data underwater using acoustic pressure signals. We manufacture
several different configurations of modems dependent on the specific requirements of the applications, including the SMARTModem.
Underwater acoustic modems utilize a sending and receiving transducer, suitable digital electronics for coding and decoding acoustic signals and proprietary software algorithms to enable the modems to communicate in the underwater environment.



Applications for acoustic modems include:



| |  |  | Military applications including unmanned undersea vehicles (UUV), autonomous undersea vehicles (AUV), manned vehicles (submarines), command and control, autonomous ocean sampling network
communications, and tactical underwater local area networks.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Oceanographic applications including real time command, control and acquisition of data from underwater instrumentation such as current profilers, current meters, tide gauges, and tsunami
warning systems.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Offshore oil and gas industry applications including command, control and acquisition of data from underwater instrumentation, long range communications with remote wellhead locations, and
wireless communications between platform and sea floor instrumentation.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The SMART Modem is a modem imbedded in a glass instrument housing utilized for flotation and combined with a release mechanism. This combination provides the communication capability of a modem with buoyancy and a release
system used for self-recovery.



Contract Research and Engineering
Services.    We periodically perform research under contract and custom engineering design for both commercial and government agencies. Generally these contract research and development activities support our primary product
development efforts and are used to offset a portion of the costs associated with advanced research and development.



Geophysical Exploration Equipment



Hydrophones.    Hydrophones are underwater sensors designed to produce an output signal in response to an acoustic pressure signal. They
are underwater microphones. Our hydrophone products are typically used in the offshore oil and gas exploration industry, where they monitor acoustic sound waves generated by the reflections of an acoustic signal as it bounces off 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 or monitoring existing sites. Our 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.



Our hydrophone product line includes sophisticated
models that offer high sensitivity and can operate at great depth without significant variation in response, as well as low cost models for the seismic research industry that are produced in high production volumes. Our hydrophone products may be
used with companion amplifiers that convert the electrical signals to usable output levels 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. Hydrophones may have sensitive military applications that make them subject to U.S. export control regulations. We hold a U.S. patent on a pressure-sensitive switch that enables our hydrophones
to be sold in compliance with U.S. export control regulations.



Geophysical Systems Products.    The geophysical systems product line has two main components:



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 to the side as it moves through the water and then listens for the signal reflected from the sea floor as well as objects on the sea floor. These echoes are then electronically processed in hardware and software and
subsequently used to generate a visual 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. They are also used in mine countermeasure warfare and harbor clearance. We have recently launched the Benthos C3D product, which combines swath bathymetry and side scan sonar, enabling a topographic
representation of the data in a three dimensional view. We have designed our C3D product to be suitable for such uses as harbor and ocean floor surveillance, searching for significant locations of fish, military mine countermeasures and salvage
recovery.



3



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Sub bottom profilers utilize a towfish or hull-mounted transducer array and topside electronic control and display
devices. The towfish emits acoustic signals that 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 in hardware and 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 and shallow mineral deposits and to aid in hydrographic surveys by providing information about the
seabed structure.



Other Undersea Products



This category of products in our Undersea Systems Division includes:



Remotely Operated Vehicles (ROVs).    ROVs are unmanned
underwater vehicles that are controlled from the surface by skilled operators. Our Stingray 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, and the government sector (military, state and local municipalities), where they may be used for remote inspection and to retrieve or deliver objects. Our ROV products are
also used in port and harbor security operations for ship hull and pier inspection and in the oil and gas sector to inspect drilling support structures such as anchor chains or risers. ROV systems have also been used by the entertainment industry.



Glass Spheres.    We manufacture a line of
glass spheres that are used to provide buoyancy to underwater products and systems and may be used to house instruments and electronics, such as transponders. Glass spheres are offered in three sizes depending on the individual requirements of
buoyancy and/or housing size. We also customize our glass spheres for individual customer requirements by providing various transmissivity curves, penetrations, machined surfaces and electrical connectors. Glass spheres are normally provided with
companion plastic hard hats that allow for protection of the glass from breakage and for safe transport. Principal customers include research laboratories, the U. S. Navy and various international users.



Package Inspection Systems Division



Our package inspection systems are used to inspect glass bottles, aluminum and steel
cans, glass jars and flexible plastic containers for a variety of defects. The TapTone product line includes the following:



TapTone 100.    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. This system accommodates up to seven optional inspection inputs for low vacuum, cocked cap, missing cap, missing foil seal, missing label, missing tamper bands, and other optional
inputs selected by the customer. TapTone 100 systems are normally used to inspect steel cans and glass jars with metal and plastic lids.



TapTone PBI-100.    The PBI-100 system finds and rejects leaking and damaged flexible packages through the use of a side transport
conveyor to apply a uniform force to a container. During transport, two or more sensors monitor the container. The sensors output is analyzed using algorithms we have developed 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, pharmaceutical and personal health care products, and food and beverages packaged in flexible packages.



TapTone 300.    The TapTone 300 is a fill level device that
expands on TapTones X-ray based inspection technology and offers underfill and overfill detection on cans, bottles, jars and other containers. This system accommodates up to six optional inspection inputs for cocked cap, missing cap, missing
foil seal, missing label, missing tamper bands, and other optional inputs selected by the customer.



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TapTone 500.    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. These sensors include:



| |  |  | Acoustic for leak detection on beer bottles;
| | - |  | --------------------------------------------



| |  |  | Proximity for vacuum and pressure detection on cans and other containers with metal lids;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Laser for vacuum and pressure detection on plastic bottle closures that display lid deflection;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Force for pressure detection on pressurized plastic bottles that do not display lid deflection;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Compression for leak detection on plastic bottles without vacuum or pressure; and
| | - |  | ---------------------------------------------------------------------------------



| |  |  | X-ray for fill level measurement in most container types.
| | - |  | ---------------------------------------------------------



New Products



During the fiscal year ended September 30, 2005, we introduced two new products. These are:



| |  |  | TapTone 1000, which expands on TapTones offering of universal inspection controllers, incorporates all of TapTones existing sensor packages available on the TapTone 500 and
PBI-100 systems into a single controller. TapTone 1000 offers up to ten total inspection options on a single production line combined with a state-of-the-art color touch screen, remote communications, and remote diagnostics.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | C3D AUV, which is a new model of our C3D Sidescan Sonar and Bathymetry System that can operate autonomously for operation on an AUV (Autonomous Underwater Vehicle) or UUV (Unmanned Underwater
Vehicle). The C3D AUV includes the electronics and transducer sections of the C3D tow vehicle and an additional data logger for storage of data and interface to the UUV/AUV control and command system.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Distribution and Marketing Methods



Our Undersea Systems and Package Inspection Systems Divisions market our products
through direct sales and separate international networks of independent sales representatives and distributors. Our Package Inspection Systems Division also utilizes direct salespersons for certain territories in the United States and Europe. We
have sales representatives and/or distributors in North America, South America, Europe, Asia, Africa and Australia. Domestic and international customers may also order our products directly from our headquarters in Massachusetts. Both of our
divisions participate in a number of trade shows and exhibitions in the United States and around the world. We also maintain an internal staff of trained sales and marketing personnel with experience and expertise in the markets we serve.



Competition



We operate in competitive, specialized and in most cases, fragmented markets, particularly in the case of our Undersea Systems
Division. Certain of our markets, such as glass flotation and geophysical hydrophones, are relatively small and the number of competitors is limited. In other markets, such as remotely operated vehicles, or ROVs, and package inspection systems, the
market is larger and we compete with a significant number of well-established companies that have significantly more resources than ours. The level of competition in our markets also varies based upon how our current and potential competitors then
evaluate market conditions. Our most important markets are dependent upon macro-economic factors such as:



| |  |  | the price of oil and gas which can impact the demand for marine oil and gas exploration (and therefore many of the products of our Undersea Systems Division),
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Department of Defense related budgets for maritime research (and therefore the ability of various governmental agencies to finance purchases of product and fund research and development that
we perform for those agencies), and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | demand for commercial aircraft (which affects the market for our locator pingers).
| | - |  | ----------------------------------------------------------------------------------



Demand for our Package Inspection Systems Division products is affected by industrial capital equipment cycles and expenditures in the food, pharmaceutical, dairy, chemical,
personal care and beverage industries.



Under our arrangement with
Sercel, Inc., we currently have a non-exclusive worldwide license to use certain technology owned by Sercel that allows us to manufacture our GeoPoint hydrophones. During the first three years of the license, we had the exclusive right to
manufacture the hydrophones using the licensed technology. Several years ago, the license converted from an exclusive license to a non-exclusive license. The term of the license has expired, but we, as licensee, have the right to continue to use the
licensed technology to make, distribute, use and sell the licensed product. Subject to our retained right, Sercel as the owner of the licensed technology also has the right to use the licensed technology to make, distribute, use and sell the
licensed product. Sercel is one of our largest customers (approximately 20% and 13%, respectively, of our net sales in fiscal 2005 and 2004), and substantially all of our revenues from Sercel consist of sales of hydrophones. Due to the current high
level of activity in the oil and gas exploration industry, Sercel has advised us that it has developed a second source of supply for GeoPoint hydrophones. As a result of Sercel having developed an alternative source of GeoPoint hydrophone
production, some or all of our GeoPoint hydrophone sales to Sercel could be replaced by the new source. If Sercel discontinued purchasing GeoPoint hydrophones from us, our sales would decline to the extent that we were unable to replace such sales
to Sercel with sales to other customers.



Both our Undersea Systems and
Package Inspection Systems Divisions compete on the basis of brand recognition, company reputation, technological expertise, product reliability and technical support as well as price or cost to the customer. We pursue patent protection for our
products when possible. Unlike some of our competitors, we test all of our undersea products in a pressure chamber to ensure their successful operations at rated depths. We also compete by providing customers with trained field service
representatives and applications engineering support. We seek to establish long-standing relationships with our customers in both our divisions market segments.



Underwater Acoustics



Our acoustic releases compete against products from InterOcean Systems, Inc., Edgetech, Inc. Sonardyne International Ltd., and iXSea Inc. Our locator pingers
compete against those produced by Dukane Corporation. Our acoustic modems compete against devices produced by LinkQuest, Inc., Sercel and Sonardyne.



Geophysical Exploration Equipment



Our hydrophones compete against products made by Teledyne, Sensor Technology Limited and Input/Output. Our C3D side scan sonar and sub bottom profilers compete
against products from L-3 Communications, Klein Associates, Inc., Edgetech, Inc., and GeoAcoustics Ltd.



Other Undersea Products



Our Stingray ROVs compete against products from Deep Ocean Engineering, Seaeye Marine, Ltd., Hydrovision Ltd. and a number of smaller companies.



Our glass flotation and instrument housings compete against products from Nautilus
Marine Service GmbH and other private companies.



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New Markets



Our Undersea Systems Division is designing systems using current products and technology to produce solutions directed at both tsunami warning systems applications
and port and harbor security. The plan announced by the U.S. Government on January 14, 2005 to spend $37.5 million to construct tsunami warning systems for east and west coast protection, and the recent estimates from the Homeland Security
Research Corporation and Civitas Group LLC that investment in homeland security in the United States will grow to $130 billion in 2010 and that investment in port and harbor security will equal 6% of that amount, indicate that there will be
significant opportunities in these two new markets. We expect that we will face significant competition in these new markets from the major competitors of our Undersea Systems Division described above, and that technical expertise, reliability of
service and price will be the key metrics of success.



Package
Inspection Systems Division



The market for quality control and
testing for package integrity in industrial markets is large. We compete in a few specialized sectors of this market, including the pressure and vacuum test market, leak detection and x-ray based fill levels. Our principal competitors in these
markets are Peco, Krones, Thermo Electron, Heuft, and Industrial Dynamics.



Sources
and Availability of Raw Materials



The products of both our
divisions generally utilize mechanical and electrical components that are readily available from a wide variety of domestic and foreign vendors. Some components are specially designed for specific products and are purchased from a single vendor. We
purchase a ceramic component used in our geophysical hydrophone products from a single vendor, although we believe that there are other vendors that possess the capability to provide a replacement component. We have not experienced any problems with
the supply of our raw materials and we believe that our sources of supply are adequate for our present and future requirements.



Dependence on Major Customers



During fiscal year 2005, two customers of our Undersea Systems Division, the U.S. Government (comprised of contracts and orders from multiple agencies) and Sercel,
Inc., represented approximately 12% and 20% of our net sales, respectively. During fiscal year 2004, those two customers each represented approximately 13% of our net sales. See Item 6, Managements Discussion and Analysis of
Financial Condition and Results of OperationsFactors That May Affect Future Results for additional information.



Patents, Trademarks and Other Agreements



We possess 20 patents pertaining to the design and manufacture of our products, and we have filed a patent application relating to our SMART technology. We also have trademarks for several of our brand names. We seek patent protection, to the extent we believe such patents may be obtained, on products and designs that we consider important to our future.
However, we believe that quality and technical superiority, rather than patent protection, are the most important criteria for our future success. We do not license any of our patents or designs to others at this time.



We are a licensee under an exclusive agreement with Simon Fraser University regarding
certain technology in the geophysical product line and an exclusive agreement with Woods Hole Oceanographic Institution regarding a patented compact bathyphotometer. The Simon Fraser University license expires on August 31, 2007 at which time
it will revert to an irrevocable nonexclusive license provided that we pay the royalties required under the license. The Woods Hole Oceanographic Institution agreement



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automatically terminates upon the expiration or lapse of the underlying patent (February 10, 2018) or in the event certain licensed processes, as defined in the
agreement, are found invalid by a court of competent jurisdiction. We are also a licensee under an nonexclusive agreement with Sercel, Inc. for a patent pertaining to the design of our GeoPoint hydrophone product. The original term of the Sercel
license expired in December of 2001 and thereafter we have a nonexclusive worldwide license to make, distribute, use and sell the licensed products and to practice the licensed processes, as defined therein, on the same terms and conditions as are
set forth in the agreement.



Government Approvals and Contracts



There are no government approvals required for any of the products that we currently
manufacture, other than Federal Aviation Administration approval for locator pingers and governmental X-ray standards for certain of our Package Inspection Systems Division products. During fiscal 2005, we derived 18% of the sales of our Undersea
Systems Division from U.S. military procurement contracts, primarily contracts with the U.S. Navy. We have no information that would cause us to believe that such military procurement contracts will not continue in the future. We believe that since
we have conducted business with the U. S. Government for many years, we have established a good relationship with the U.S. Government.



Effect of Government Regulations



We are not aware of U. S. Government regulations or pending legislation that would adversely affect the future sales of our products. The U.S. Commerce Department
has recently increased scrutiny of transactions with foreign countries in view of the international war on terrorism. In addition, U.S. export controls require that we obtain export licenses in connection with the sale of certain of our Undersea
Systems Division products to customers in certain countries. We must spend more time on the sale of products that require an export license than for sales which do not require such licenses. We have implemented procedures designed to ensure
compliance with the requirements imposed on us by the export control rules and have engaged an export control consultant who regularly confers with us on export control issues. From time to time, foreign governments also change their regulations
affecting the products that we sell in those countries, and our compliance with those regulations can affect the level of sales of our products in those countries. We are planning to comply with the European Reduction of Hazardous Substances
(RoHS) directive, designed to address environmental issues relating to hazardous materials, beginning in July 2006.



Research and Development



We maintain an internal staff of engineers and external consultants with experience and expertise in the technologies we utilize. We fund a portion of our research
and development internally and expense such costs against our results of operations. We also perform research and development on a contract basis for customers (primarily U.S. government agencies and their prime contractors) that pay for such
activities on a cost plus fixed-fee basis. We include the amount of such payments by our customers within our net sales. Research and development expenditures (exclusive of amounts funded by customers and included in net sales) were $2,025,000,
$1,687,000 and $1,700,000, for the fiscal years ended September 30, 2005, 2004 and 2003, respectively. During the fiscal years ended September 30, 2005, 2004, and 2003, our net sales included $1,481,000, $1,529,000 and $640,000 of payments
by customers to perform research and development activities on their behalf, which are included in services revenue in the accompanying Statement of Operations.



Environmental Protection Regulations



We believe that our compliance with current federal, state, and local environmental regulations will not have a material adverse effect on our capital expenditures,
earnings, or competitive position.



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Employees



As of September 30, 2005, we employed 124 individuals, 120 of which are full-time employees, 30 of whom were engaged in research and development, 58 in
manufacturing and 32 in sales, marketing and administrative positions. Of the 120 full-time employees, 8 were employed on a temporary basis. None of our employees is covered by a collective bargaining agreement. We believe that we maintain good
relations with our employees.



ITEM 2.    DESCRIPTION OF PROPERTY



We own our corporate facility in North Falmouth, Massachusetts,
which consists of 26,000 square feet of office and light industrial manufacturing space in a single-story, industrial building on a six-acre rural site. The facility has been recently modernized and is in good condition. Our Undersea Systems and
Package Inspection Systems Divisions share the same facility. We consolidated the operations and staff of both our divisions during the fourth quarter of fiscal year 2003 and at the same time sold certain excess real estate.



ITEM 3.    LEGAL PROCEEDINGS



We are not currently involved in any material legal proceedings.



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.



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PART II



ITEM 5.    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL   BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES



Our Common Stock trades on the Nasdaq Capital Market
under the symbol BTHS.



The following table sets forth the high and low
closing price information for our Common Stock for the periods shown.



|                   |  |      |       |     |   |      
|------------------ |  | ---- | ----- | --- | - | -----
|Quarter Ended      |  | High |       | Low
|December 31, 2003  |  | $    | 6.08  |     | $ | 4.25 
|March 31, 2004     |  |      | 8.46  |     |   | 4.70 
|June 30, 2004      |  |      | 15.95 |     |   | 6.16 
|September 30, 2004 |  |      | 14.17 |     |   | 6.08 
|December 31, 2004  |  |      | 17.30 |     |   | 12.25
|March 31, 2005     |  |      | 18.95 |     |   | 13.65
|June 30, 2005      |  |      | 16.61 |     |   | 10.80
|September 30, 2005 |  |      | 13.54 |     |   | 10.63



As of December 19, 2005,
there were approximately 224 holders of record of our Common Stock.



We
have never declared dividends on our Common Stock and do not anticipate paying dividends in the foreseeable future.



We did not sell any equity securities during the fiscal year ended September 30, 2005 that were not registered under the Securities Act of 1933.



Securities Authorized for Issuance under Equity Compensation Plans



The following table provides information about securities authorized for issuance
under our equity compensation plans as of September 30, 2005:



|                                                          |  |                                                                              |     |  |                                                                         |      |                                                                                          |        |    
|--------------------------------------------------------- |  | ---------------------------------------------------------------------------- | --- |  | ----------------------------------------------------------------------- | ---- | ---------------------------------------------------------------------------------------- | ------ | ---
|                                                          |  | (a)                                                                          |     |  | (b)                                                                     |      | (c)                                                                                      |       
|Plan Category                                             |  | Number of Securities to beIssued Upon Exerciseof Options, Warrantsand Rights |     |  | Weighted AverageExercise Price ofOutstandingOptions, Warrantsand Rights |      | Number ofSecurities RemainingAvailable for FutureIssuance under EquityCompensation Plans |       
|Equity compensation plans approved by securityholders (1) |  | 357,126                                                                      | (2) |  | $                                                                       | 6.96 |                                                                                          | 75,325 | (3)
|Equity compensation plans not approved by securityholders |  |                                                                             |     |  |                                                                         |     |                                                                                          |       |    
|                                                          |  |                                                                              |     |  |                                                                         |      |                                                                                          |        |    
|TOTAL:                                                    |  | 357,126                                                                      | (2) |  | $                                                                       | 6.96 |                                                                                          | 75,325 | (3)
|                                                          |  |                                                                              |     |  |                                                                         |      |                                                                                          |        |    

---

|(1) |  | Consists of the following equity compensation plans: Benthos, Inc. 1990 Stock Option Plan, 1998 Non-Employee Directors Stock Option Plan, and 2000 Stock Incentive Plan.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Consists of 39,351 shares subject to outstanding options under the 1990 Stock Option Plan, 118,500 shares subject to outstanding options under the 1998 Non-Employee Directors Stock Option
Plan, and 199,275 shares subject to outstanding options under the 2000 Stock Incentive Plan.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Exclusive of securities reflected in column (a). Consists of 31,500 shares subject to future issuance under the 1998 Non-Employee Directors Stock Option Plan, and 43,825 shares subject to
future issuance under the 2000 Stock Incentive Plan.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10



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Issuer Purchases of Equity Securities



During the fiscal quarter ended September 30, 2005, we did not repurchase any of our outstanding Common stock or other securities
registered under the Securities Exchange Act of 1934, as amended.



ITEM 6.    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



You should read the following discussion of our financial condition and results of operations with our consolidated financial statements and related notes
included elsewhere in this Form 10-KSB. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in under the caption Factors That May Affect Future
Results in this Item 6. Our actual results may differ materially from those contained in any forward-looking statements.



Overview



We were founded in 1962 to manufacture oceanographic products. Since 1962, we have developed and acquired new technology and products. At present, we operate two divisions: our Undersea Systems Division and our Package
Inspection Systems Division. Both divisions are located at our facility in North Falmouth, Massachusetts.



For the fiscal year ended September 30, 2005, we achieved sales of $24,095,000, gross profit of $10,578,000, and net income of $3,274,000. These results were
21.4%, 31.2%, and 385.8% improvements over the fiscal year ended September 30, 2004 respectively. Sales of the Undersea Systems Division were $15,388,000, up 18.7% over the prior fiscal year, primarily as a result of improved market conditions
and large project orders in the geophysical exploration equipment product line. Sales of our Package Inspection Systems Division were $8,707,000. This increase of 26.5% from the prior fiscal year, was largely a result of sales of x-ray systems for
fill height and force measurement systems for plastic container leak detection.Sales of both divisions were enhanced by increased international sales of 24.5% in fiscal year 2005 over the prior fiscal year, partly resulting from the weakness
in the U.S. dollar in the first nine months of fiscal year 2005.



Gross
profit as a percent of sales improved to 43.9% of sales in fiscal year 2005, as compared to 40.6% in fiscal year 2004. The improvement in gross profit margins in fiscal year 2005 was primarily a result of the higher mix of the products of the
Package Inspection Systems Division and was also a result of improved overhead absorption related to the increased sales volume and improved pricing.



Our working capital at September 30, 2005 improved by $10,580,000 as compared to September 30, 2004. The year-to-year improvement was attributable
primarily to the proceeds from the issuance of common stock ($7,685,000), increases in accounts payable and accrued expenses ($872,000), principally from incentive compensation and profit-sharing accruals, cash received from the exercise of stock
options ($281,000), and elimination of our short-term debt ($279,000).



Critical
Accounting Policies



The preparation of our financial statements
requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures. On an ongoing basis, management evaluates our estimates and assumptions, including but not
limited to those related to revenue recognition, inventory valuation, warranty reserves, the impairment of goodwill, and income taxes. Management bases its estimates on historical experience and various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.



11



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Revenue Recognition.    We recognize revenue from product sales when products are
shipped to customers provided that title has passed, 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, pursuant to the guidance provided by Staff Accounting Bulletin No. 104. We generally enter into arrangements for multiple deliverables when we contract to deliver a product along with providing installation services. We follow
Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables. Based on the criteria contained in EITF No. 00-21, we have determined that our deliverables are separable into units of
accounting. Revenue is allocated based upon the relative fair values of the individual units of accounting, and we generally recognize our revenue from each of these units as each unit is delivered or performed. A general right of return or
cancellation does not exist once the product is delivered to the customer. We show amounts received from customers for future delivery as customer deposits in our consolidated balance sheets. We account for shipping and handling fees passed on to
customers as sales, and we record the corresponding costs as cost of sales.



Inventory Valuation.    We value our inventory at the lower of actual cost or the current estimated market value. We regularly review inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on historical usage for the prior twelve to twenty-four month period. Although we strive to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of our inventory and our reported operating results.



Warranty Reserves.    Our warranties require us to repair or replace defective products returned to us during the applicable warranty
period at no cost to the customer. We record an estimate for warranty-related costs based on actual historical return rates, anticipated return rates, and repair costs at the time of sale. A significant increase in product return rates, or a
significant increase in the costs to repair products, could have a material adverse impact on future operating results for the period or periods in which such returns or additional costs materialize and thereafter.



Goodwill.    The goodwill associated with our 1999
acquisition of substantially all of the assets of Datasonics, Inc. is subject to an annual assessment for impairment by applying a fair-value based test. In the fourth quarter of fiscal year 2005, we completed a valuation of our then reported
goodwill by comparing the fair value of our reporting unit, as determined by an independent appraiser, to the reporting units then book value. The valuation indicated that recorded goodwill, which relates to our Undersea Systems business
segment, was not impaired.



The valuation was based upon estimates of
future income from the reporting units and estimates of the market value of the units, based on comparable recent transactions. These estimates of future income are based upon historical results, adjusted to reflect managements best estimate
of future market and operating conditions, and are periodically reviewed based on actual operating trends. Actual results may differ from these estimates. In addition, the relevancy of recent transactions used to establish the market value for our
reporting units is based upon managements judgment.



Income
Taxes.    We account for income taxes under the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities
are determined based on differences between the financial reporting and income tax bases of assets and liabilities as well as net operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in
effect when the differences reverse. Deferred tax assets may be reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.



Significant management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and
any valuation allowance recorded against net deferred tax assets. As of September 30, 2005, we have no valuation allowance against our deferred tax asset. We believe that it



12



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is more likely than not that the deferred tax asset will be fully utilized against future income taxes based on our recent and anticipated profitable operations.
Therefore, in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, during the year ended September 30, 2005, we decreased our valuation reserve by $2,000,000. In the event that actual
results differ from these estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance that could materially impact our tax provision.



Results of Operations



The following table presents, for the periods indicated, certain consolidated statements of operations data. We have reclassified certain prior year information to
conform to the current years presentation.



|                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                        |  | Year Ended September 30, |       
|                                                        |  | 2005                     |        |   | 2004 |   |        | 2003 | 
|                                                        |  | (In thousands)           |       
|Net sales                                               |  | $                        | 24,095 |   |      | $ | 19,850 |      |  | $ | 17,024 |  
|Cost of sales                                           |  |                          | 13,517 |   |      |   | 11,788 |      |  |   | 10,728 |  
|                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Gross profit                                            |  |                          | 10,578 |   |      |   | 8,062  |      |  |   | 6,296  |  
|Selling, general and administrative expenses            |  |                          | 6,589  |   |      |   | 5,218  |      |  |   | 4,956  |  
|Research and development expenses                       |  |                          | 2,025  |   |      |   | 1,687  |      |  |   | 1,700  |  
|Amortization of acquired intangibles                    |  |                          | 218    |   |      |   | 239    |      |  |   | 239    |  
|Gain on sale of real estate                             |  |                          |       |   |      |   |       |      |  |   | (2,208 | )
|                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Income from operations                                  |  |                          | 1,746  |   |      |   | 918    |      |  |   | 1,609  |  
|Interest income                                         |  |                          | 81     |   |      |   | 2      |      |  |   | 3      |  
|Interest expense                                        |  |                          | (22    | ) |      |   | (58    | )    |  |   | (208   | )
|                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Income before (benefit from) provision for income taxes |  |                          | 1,805  |   |      |   | 862    |      |  |   | 1,404  |  
|(Benefit from) provision for income taxes               |  |                          | (1,469 | ) |      |   | 188    |      |  |   | 831    |  
|                                                        |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income                                              |  | $                        | 3,274  |   |      | $ | 674    |      |  | $ | 573    |  
|                                                        |  |                          |        |   |      |   |        |      |  |   |        |  



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



|                                                        |  |                         |   |  |       |   |  |       |  
|------------------------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                                                        |  | Year Ended September 30 |  
|                                                        |  | 2005                    |   |  | 2004  |   |  | 2003  |  
|Net sales                                               |  | 100.0                   | % |  | 100.0 | % |  | 100.0 | %
|Cost of sales                                           |  | 56.1                    |   |  | 59.4  |   |  | 63.0  |  
|                                                        |  |                         |   |  |       |   |  |       |  
|Gross profit                                            |  | 43.9                    |   |  | 40.6  |   |  | 37.0  |  
|Selling, general and administrative expenses            |  | 27.4                    |   |  | 26.3  |   |  | 29.1  |  
|Research and development expenses                       |  | 8.4                     |   |  | 8.5   |   |  | 10.0  |  
|Amortization of acquired intangibles                    |  | 0.9                     |   |  | 1.2   |   |  | 1.4   |  
|Gain on sales of real estate                            |  |                        |   |  |      |   |  | (13.0 | )
|                                                        |  |                         |   |  |       |   |  |       |  
|Income from operations                                  |  | 7.2                     |   |  | 4.6   |   |  | 9.5   |  
|Interest income                                         |  | 0.4                     |   |  |      |   |  |      |  
|Interest expense                                        |  | (0.1                    | ) |  | (0.3  | ) |  | (1.2  | )
|                                                        |  |                         |   |  |       |   |  |       |  
|Income before (benefit from) provision for income taxes |  | 7.5                     |   |  | 4.3   |   |  | 8.3   |  
|(Benefit from) provision for income taxes               |  | (6.1                    | ) |  | 0.9   |   |  | 4.9   |  
|                                                        |  |                         |   |  |       |   |  |       |  
|Net income                                              |  | 13.6                    | % |  | 3.4   | % |  | 3.4   | %
|                                                        |  |                         |   |  |       |   |  |       |  



13



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The following table presents, for the periods indicated, the net sales of each product line of the Undersea Systems
Division.



|                                  |  |                         |        |      |   |        |  |   |      
|--------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | -----
|                                  |  | Year Ended September 30
|                                  |  | 2005                    |        | 2004 |   | 2003  
|                                  |  | (In thousands)         
|Product Line:                     |  |                         |        |      |   |        |  |   |      
|Underwater Acoustics              |  | $                       | 5,910  |      | $ | 5,662  |  | $ | 5,089
|Geophysical Exploration Equipment |  |                         | 6,753  |      |   | 4,544  |  |   | 3,315
|Other Undersea Products           |  |                         | 2,725  |      |   | 2,760  |  |   | 1,295
|                                  |  |                         |        |      |   |        |  |   |      
|Total                             |  | $                       | 15,388 |      | $ | 12,966 |  | $ | 9,699
|                                  |  |                         |        |      |   |        |  |   |      



The Package Inspection Systems
Division has only one product line.



Fiscal Years ended September 30, 2005 and
2004



Sales.    The following table shows
our sales by segments:



|                                 |  |                         |        |      |   |       
|-------------------------------- |  | ----------------------- | ------ | ---- | - | ------
|                                 |  | Year EndedSeptember 30,
|                                 |  | 2005                    |        | 2004
|                                 |  | (In thousands)         
|Sales to Unaffiliated Customers: |  |                         |        |      |   |       
|Undersea Systems                 |  | $                       | 15,388 |      | $ | 12,966
|Package Inspection Systems       |  |                         | 8,707  |      |   | 6,884 
|                                 |  |                         |        |      |   |       
|Total                            |  | $                       | 24,095 |      | $ | 19,850
|                                 |  |                         |        |      |   |       



Total sales increased 21.4% to
$24,095,000 for fiscal year 2005 as compared to $19,850,000 for fiscal year 2004. The sales by product line within the Undersea Systems Division were as follows:



|                                  |  |                         |        |      |   |       
|--------------------------------- |  | ----------------------- | ------ | ---- | - | ------
|                                  |  | Year EndedSeptember 30,
|                                  |  | 2005                    |        | 2004
|                                  |  | (In thousands)         
|Product Line:                     |  |                         |        |      |   |       
|Underwater Acoustics              |  | $                       | 5,910  |      | $ | 5,662 
|Geophysical Exploration Equipment |  |                         | 6,753  |      |   | 4,544 
|Other Undersea Products           |  |                         | 2,725  |      |   | 2,760 
|                                  |  |                         |        |      |   |       
|Total                             |  | $                       | 15,388 |      | $ | 12,966
|                                  |  |                         |        |      |   |       



Sales of our Undersea Systems
Division increased by 18.7% to $15,388,000 for fiscal year 2005 as compared to $12,966,000 for fiscal year 2004. This increase in sales was primarily concentrated in our Geophysical Exploration Equipment and Underwater Acoustics product lines. In
our Geophysical Exploration Equipment product line, sales of geophysical hydrophones for use by the oil and gas industry increased by $2,165,000 in fiscal year 2005 as compared to fiscal year 2004. This increase was accompanied by a slight increase
in sales of geophysical systems of $44,000 in fiscal year 2005 as compared to fiscal year 2004. In the Underwater Acoustics product line, sales of our underwater acoustic modems and research and development efforts for the U. S. Government increased
by $291,000 over fiscal year 2004 and sales of locator pingers increased by $40,000 over fiscal year 2004, while sales of Acoustic releases decreased by $83,000 from fiscal year 2004. In the Other Undersea Products product line, sales of glass
instrument housings decreased by $233,000 as compared to fiscal year 2004, and sales of our robotic products, principally our Stingray remotely operated vehicles (ROVs), increased by $245,000



14



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as compared to fiscal year 2004. We anticipate that sales of geophysical hydrophones will remain strong in the next six months as a result of continued demand from the
oil and gas industry. However, we believe that in 2006, there will be increased competition in the geophysical hydrophone market as a result of the continued upturn in market demand caused by high energy prices and from the second source of
geophysical hydrophones that has been created by Sercel.



Sales of our
Package Inspection Systems Division increased by 26.5% to $8,707,000 for fiscal year 2005 as compared to $6,884,000 for fiscal year 2004. The increase resulted largely from the timing of orders. Early in fiscal year 2004, we had identified design
problems related to the launch of certain new products that had delayed our ability to accept new orders for those products. We resolved these issues in fiscal year 2004. Our Package Inspection Systems Division has only one product line.



Service revenues for fiscal year 2005 were $2,448,000, a 6% decrease from $2,614,000
in fiscal year 2004. This decrease was principally a result of timing of repair services and contract billings for research services by the Undersea Systems Division.



International sales increased by 24.5% to $12,008,000 in fiscal year 2005 as compared to $9,648,000 in fiscal year 2004. We believe
that the weakness of the U.S. dollar in the first nine months of fiscal year 2005 was a factor in this increase as it made the prices of our products more competitive with those of foreign suppliers. The increase in international sales was primarily
in Geophysical Exploration Equipment, where international sales (primarily to France) increased by $2,335,000 and in our Package Inspection Systems Division where international sales (primarily to Europe and Asia) increased by $286,000; Other
Undersea Products, where international sales of glass instrument housings (primarily to Germany, Sweden, and Japan) decreased by $455,000, partially offset by sales of ROVs (primarily to Canada) increased by $111,000 in total. In general, we price
our international sales in U. S. dollars in order to minimize foreign currency risk.



Gross Profit.    Gross profit increased by 31.2% to $10,578,000 for fiscal year 2005 as compared to $8,062,000 for fiscal year 2004. Gross profit as a percent of sales for fiscal year 2005 was 43.9%
as compared to 40.6% for fiscal year 2004. The increase in gross profit as a percent of sales was attributable primarily to improved gross profit as a percent of sales within our Package Inspection Systems Division resulting from increased sales
volume and pricing and was partly offset by higher sales from our Undersea Systems Division which has lower gross profit as a percent of sales than the Package Inspection Systems Division. We anticipate that we will maintain or improve the gross
profit as a percent of sales that we achieved in 2005 in the upcoming fiscal year.



Selling, General, and Administrative Expenses.    Selling, general, and administrative expenses increased 26.3% to $6,589,000 for fiscal year 2005 as compared to $5,218,000 for fiscal year 2004. As a
percentage of sales, selling, general and administrative expenses increased to 27.4% for fiscal year 2005 as compared to 26.3% for fiscal year 2004.The increase in selling, general and administrative expenses as a percentage of sales was
primarily a result of the 26.2% increase in selling, general and administrative expenses and was partially offset by the 21.4% increase in sales volume. The increase in selling, general and administrative expenses of $1,371,000 from fiscal year 2004
to fiscal year 2005 was principally a result of increases in incentive compensation ($393,000) and profit-sharing ($76,000) expenses as a result of increased profits, in expenses related to our evaluation of our strategic alternatives ($99,000) that
resulted in the successful public offering of our common stock in May 2005, in legal and audit fees ($301,000) which included certain Sarbanes-Oxley compliance costs, sales commissions ($133,000) due to increased sales volume, an increase in selling
expenses ($249,000), and increased recruiting expenses ($53,000).



Research and Development Expenses.    Research and development expenses increased 20.0% to $2,025,000 for fiscal year 2005 as compared to $1,687,000 for fiscal year 2004. As a percentage of sales,



15



---

research and development expenses were 8.4% for fiscal year 2005 as compared to 8.5% for fiscal year 2004. The decrease in the research and development expenses as a
percentage of sales was the result of a combination of 21.4% higher sales volume than in fiscal year 2004 and a 20.0% increase in spending on research and development programs than in fiscal year 2004. The spending on research and development
expenses in fiscal year 2005 was $338,000 higher than in fiscal year 2004, as we had increased spending in new product development in our Package Inspection Systems Division ($326,000) and on projects within our Undersea Systems Division ($12,000).



Amortization of Acquired
Intangibles.    Amortization of acquired intangibles was $218,000 in fiscal year 2005 and $239,000 in fiscal year 2004. The amortization of acquired intangibles related to the purchased technology we acquired in the
Datasonics acquisition in fiscal year 1999. In fiscal year 2005, we completed the amortization of this asset.



Interest Income.    Interest income increased to $82,000 for fiscal year 2005 as compared to $2,000 for fiscal year 2004. The primary
reason for the increase was interest earned in the last four months of fiscal year 2005 on the proceeds from our public offering in May 2005.



Interest Expense.    Interest expense was $22,000 for fiscal year 2005 as compared to $58,000 for fiscal year 2004. The decrease in
interest expense was a result of the reduced outstanding principal balance on the term loan and reduced borrowings under our line of credit.



Provision for (Benefit from) for Income Taxes.    The benefit from income taxes was $1,469,000 for fiscal year 2005 as compared to a
provision of $188,000 for fiscal year 2004. The effective tax rate for fiscal year 2005 was (81.3)%. The effective tax rate for 2004 was 21.8%. The rate in 2005 was lower than the statutory rate primarily due to the $2,000,000 reduction of the
valuation allowance against our deferred tax asset.



Fiscal Years ended
September 30, 2004 and 2003



Sales.    The following table shows our sales by segments:



|                                 |  |                         |        |      |   |       
|-------------------------------- |  | ----------------------- | ------ | ---- | - | ------
|                                 |  | Year EndedSeptember 30,
|                                 |  | 2004                    |        | 2003
|                                 |  | (In thousands)         
|Sales to Unaffiliated Customers: |  |                         |        |      |   |       
|Undersea Systems                 |  | $                       | 12,966 |      | $ | 9,699 
|Package Inspection Systems       |  |                         | 6,884  |      |   | 7,325 
|                                 |  |                         |        |      |   |       
|Total                            |  | $                       | 19,850 |      | $ | 17,024
|                                 |  |                         |        |      |   |       



Total sales increased 16.6% to
$19,850,000 for fiscal year 2004 as compared to $17,024,000 for fiscal year 2003. The sales by product line within the Undersea Systems Division were as follows:



|                                  |  |                         |        |      |   |      
|--------------------------------- |  | ----------------------- | ------ | ---- | - | -----
|                                  |  | Year EndedSeptember 30,
|                                  |  | 2004                    |        | 2003
|                                  |  | (In thousands)         
|Product Line:                     |  |                         |        |      |   |      
|Underwater Acoustics              |  | $                       | 5,662  |      | $ | 5,089
|Geophysical Exploration Equipment |  |                         | 4,544  |      |   | 3,315
|Other Undersea Products           |  |                         | 2,760  |      |   | 1,295
|                                  |  |                         |        |      |   |      
|Total                             |  | $                       | 12,966 |      | $ | 9,699
|                                  |  |                         |        |      |   |      



16



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Sales of our Undersea Systems Division increased by 33.7% to $12,966,000 for fiscal year 2004 as compared to
$9,699,000 for fiscal year 2003. This increase in sales was primarily concentrated in our Other Undersea Products and Geophysical Exploration Equipment product lines. In the Other Undersea Products product line, sales of glass instrument housings
increased by $1,081,000 as compared to fiscal year 2003, and sales of our robotic products, principally our Stingray remotely operated vehicles (ROVs), increased by $473,000 as compared to fiscal year 2003. In our Geophysical Exploration Equipment
product line, sales of geophysical hydrophones for use by the oil and gas industry increased by $2,469,000 in fiscal year 2004 as compared to fiscal year 2003; this increase was partially offset by a decrease in sales of geophysical systems of
$1,240,000 in fiscal year 2004 as compared to fiscal year 2003.



Sales of
our Package Inspection Systems Division decreased by 6.0% to $6,884,000 for fiscal year 2004 as compared to $7,325,000 for fiscal year 2003. The decrease resulted largely from the timing of orders and design problems. Early in fiscal year 2004, we
identified design problems related to the launch of certain new products that delayed our ability to accept new orders for those products. We have since resolved these issues. Our Package Inspection Systems Division has only one product line.



International sales increased by 87.2% to $9,648,000 in fiscal year 2004
as compared to $5,154,000 in fiscal year 2003. We believe that the weakness of the U.S. dollar was a factor in this increase as it made the prices of our products more competitive with those of foreign suppliers. The increase in international sales
was primarily in Geophysical Exploration Equipment, where international sales (primarily to France) increased by $2,166,000; Other Undersea Products, where international sales of glass instrument housings (primarily to Japan) and ROVs (primarily to
Canada) increased by $1,157,000 in total; and in our Package Inspection Systems Division where international sales (primarily to Germany and Korea) increased by $1,261,000. In general, we price our international sales in U. S. dollars in order to
minimize foreign currency risk.



Gross
Profit.    Gross profit increased by 28.0% to $8,062,000 for fiscal year 2004 as compared to $6,296,000 for fiscal year 2003. Gross profit as a percent of sales for fiscal year 2004 was 40.6% as compared to 37.0% for fiscal
year 2003. The increase in gross profit as a percent of sales within both the Undersea Systems and Package Inspection Systems Divisions resulted primarily from improved overhead absorption related to the increased sales volume, improved pricing and
product mix, and the reduced overhead costs and efficiencies related to our consolidation of operations in our facility in North Falmouth, Massachusetts.



Selling, General, and Administrative Expenses.    Selling, general, and administrative expenses increased 5.3% to $5,218,000 for fiscal
year 2004 as compared to $4,956,000 for fiscal year 2003. As a percentage of sales, selling, general and administrative expenses decreased to 26.3% for fiscal year 2004 as compared to 29.1% for fiscal year 2003. The decrease in selling, general and
administrative expenses as a percentage of sales was primarily a result of increased sales volume. The increase in selling, general and administrative expenses of $262,000 from fiscal year 2003 to fiscal year 2004 was principally a result of
increases in incentive compensation ($242,000), profit-sharing ($70,000) and sales commissions ($111,000) due to increased sales volume and profits, partially offset by a decrease in selling expenses ($187,000).



Research and Development Expenses.    Research and
development expenses decreased 0.7% to $1,687,000 for fiscal year 2004 as compared to $1,700,000 for fiscal year 2003. As a percentage of sales, research and development expenses were 8.5% for fiscal year 2004 as compared to 10.0% for fiscal year
2003. The decrease in the research and development expenses as a percentage of sales was primarily a result of higher sales volume than in fiscal year 2003.



Amortization of Acquired Intangibles.    Amortization of acquired intangibles was $239,000 in each of the fiscal years 2004 and 2003. The
amortization of acquired intangibles related to the purchased technology we acquired in the Datasonics acquisition in fiscal year 1999.



17



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Interest Income.    Interest income decreased to $2,000 for fiscal year 2004 as compared
to $3,000 for fiscal year 2003.



Interest
Expense.    Interest expense was $58,000 for fiscal year 2004 as compared to $208,000 for fiscal year 2003. The decrease in interest expense was a result of the reduced outstanding principal balance on the term loan and
reduced borrowings under our line of credit.



Provision for Income
Taxes.    The provision for income taxes was $188,000 for fiscal year 2004 as compared to $831,000 for fiscal year 2003. The effective tax rate for fiscal year 2004 was 21.8%. The effective tax rate for 2003 was 59.2%. The
rate in 2004 was lower than the statutory rate primarily due to the utilization of research and development tax credits.



Liquidity and Capital Resources



Sources of Liquidity.    Our primary sources of liquidity are cash provided by operating activities, cash and cash equivalents, and
availability under our credit facility with a bank. For the fiscal year ended September 30, 2005, cash provided by operating activities was $2,020,000, and as of September 30, 2005, cash and cash equivalents were $9,506,000 and we had
$1,500,000 available to borrow under our credit agreement.



Cash Flows
for the Fiscal Year Ended September 30, 2005.    Our cash and cash equivalents increased $9,265,000 from September 30, 2004 to September 30, 2005. Our working capital increased by $10,580,000 to $14,347,000 at
September 30, 2005 as compared to $3,767,000 at September 30, 2004.



The improvement in our working capital in fiscal year 2005 was primarily a result of the issuance of 655,760 shares of Common Stock under our public offering in May 2005.



The following table presents, for the fiscal year ended September 30, 2005, the cash generated and used in our operations:



|                                                      |  |                |        |   |      |   |        |  
|----------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                                      |  | Generated      |        |   | Used |  
|                                                      |  | (In thousands) |       
|Net income                                            |  | $              | 3,274  |   |      | $ |       |  
|Depreciation and amortization (noncash)               |  |                | 694    |   |      |   |       |  
|Increase in accounts payable and accrued expenses     |  |                | 872    |   |      |   |       |  
|Tax benefit of employee stock options                 |  |                | 118    |   |      |   |       |  
|Decrease in prepaid expenses and other current assets |  |                | 6      |   |      |   |       |  
|Increase in customer deposits                         |  |                | 4      |   |      |   |       |  
|Decrease in accounts receivable                       |  |                | 81     |   |      |   |       |  
|Increase in deferred tax asset                        |  |                |       |   |      |   | (1,900 | )
|Increase in inventories                               |  |                |       |   |      |   | (1,129 | )
|                                                      |  |                |        |   |      |   |        |  
|Total                                                 |  | $              | 5,049  |   |      | $ | (3,029 | )
|                                                      |  |                |        |   |      |   |        |  
|Cash Generated                                        |  | $              | 5,049  |   |      |   |        |  
|Cash Used                                             |  |                | (3,029 | ) |      |   |        |  
|                                                      |  |                |        |   |      |   |        |  
|Total provided by operations                          |  | $              | 2,020  |   |      |   |        |  
|                                                      |  |                |        |   |      |   |        |  



We generated cash of $2,020,000
from operating activities. Cash from operating activities was derived from the $3,274,000 of net income during fiscal year 2005, depreciation and amortization of $694,000 (a non-cash item added back to net income), increases in accounts payable of
$246,000, and



18



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increases in accrued expenses of $626,000 (primarily comprised of income taxes of $84,000, management incentive compensation of $393,000, and profit sharing of
$76,000), decreases in accounts receivable of $81,000 related to improved collections, decreases in prepaid expenses and other current assets of $6,000, and increases in customer deposits of $4,000. Cash was used as shown in the table above. The
deferred tax asset increased to $1,900,000 as a valuation reserve was eliminated. Cash was also used for increases in inventory of $1,129,000 (which includes $1,006,000 transferred to property, plant and equipment as demonstration equipment, and
$934,000 generated from the sale of demonstration equipment).



We used
$187,000 of cash in our investing activities, primarily from purchases of property, plant, and equipment.



We generated $7,432,000 of cash in financing activities. Financing activities include the proceeds from our issuance of common stock in May 2005, proceeds from the
exercise of stock options, and payment of $535,000 on the term loan. We do not have any significant contractual obligations or commercial commitments.



Credit Facility.    We have a credit facility with a bank. This facility originally provided for loans under two notes: a $5,500,000
variable rate term note and a $1,500,000 variable rate secured line of credit note. The term note was paid off in July 2005.



Under the line of credit, advances are payable as follows: monthly payments of interest only and unpaid principal and accrued and unpaid interest at maturity. In
July 2005, we renegotiated the line of credit with the bank. The available amount has been increased to $1,500,000 from the previous limit of $600,000 and the interest rate has been reduced to prime less 0.5%. There were no advances outstanding
under the line of credit at September 30, 2005. The line of credit expires on January 31, 2006.



The credit facility is secured by substantially all of our assets and requires us to meet certain covenants, including debt service coverage. As of
September 30, 2005, we were in compliance with all of the financial covenants under our line of credit with the bank.



During the fiscal year ended September 30, 2005, we generated $2,020,000 of cash from operating activities. We believe that we will have sufficient cash from
operating activities, existing cash balances, and other potential financing sources to continue operations for at least the next 12 months.



Recently Issued Accounting Pronouncements



In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory Costs, an amendment of Accounting Research
Bulletin (ARB) No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs,
and spoilage. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of so abnormal which was the criterion specified in ARB No. 43. In addition, this statement
requires that allocation of fixed production overheads to the cost of production be based on normal capacity of the production facilities. We will adopt this pronouncement on October 1, 2005 and we do not expect the adoption will have a
material impact on our financial condition or results of operations.



In
December 2004, the FASB issued Statement No. 123R, Share-Based Payment (SFAS 123R). SFAS 123R is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation
(SFAS 123). We are required to adopt the provisions of SFAS 123(R) as of January 1, 2006. This statement establishes standards for and requires the recognition of the cost of employment-related services settled in share-based
payment. We are currently evaluating the impact of adopting this new standard. Based on pro forma results, the effect could be significant.



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In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an
amendment of Accounting Principles Board (APB) Opinion No. 29, Accounting for Nonmonetary Transactions. The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. Previously, APB Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset
should be based on the recorded amount of the asset relinquished. We will adopt this pronouncement on October 1, 2005 and we do not expect the adoption will have a material impact on our financial condition or results of operations.



Prospects for the Future



We expect to 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



We serve several segments of
the undersea market, including oceanographic research, oil and gas exploration and production, hydrographic survey, and underwater location, marking and navigation. These market segments experience periodic expansion and contraction as a result of
economic cycles, market fluctuation in oil prices, changes in government funding, etc.



Package Inspection Systems Division



The Package
Inspection Systems Division serves the food, pharmaceutical, dairy, chemical, personal care, beer and both alcoholic and non-alcoholic beverage markets. There are common trends in these markets that are favorable to the future growth of the Package
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.



We have maintained a steady investment in new product development in the package inspection market. As a result, we have introduced
new products that expand the capabilities of our existing inspection systems and open up new markets. We intend to continue this strategy of product line expansion and extension and development of new package inspection market segments.



We expend a significant amount of funds on new product research and development.
During the fiscal years ended September 30, 2005, 2004 and 2003, we spent $2,025,000, $1,687,000 and $1,700,000, respectively. We anticipate that the spending level will increase considerably in fiscal year 2006.



We are not aware of any technology trends or changes in competitive environment that
would materially adversely affect the sales of our products within the industry segments that we serve.



Profit Margins



Overall



Overall profit margins on our products are influenced by the relative mix of sales
between the Undersea Systems Division and the Package Inspection Systems Division, as well as the product mix within the Undersea Systems Division. For the fiscal year ended September 30, 2005, sales of the Undersea Systems Division decreased
to 63.9% of total sales as compared to 65.3% for the prior fiscal year, while



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sales of the Package Inspection Systems Division increased to 36.1% of total sales as compared to 34.7% for the prior fiscal year. The increase in sales from fiscal
year 2004 to fiscal year 2005 was 18.6% for the Undersea Systems Division; sales for the Package Inspection Systems Division increased by 26.5%. This resulted in an overall gross profit margin of 43.9% for the fiscal year ended September 30,
2005 as compared to 40.6% for the fiscal year ended September 30, 2004.



Undersea Systems Division



Gross profit margins on
Undersea Systems Division products averaged approximately 39.5%, 39.5% and 35.4% for fiscal years 2005, 2004 and 2003, respectively. Gross margins on this segment of our business can vary depending on the relative mix of products shipped in any time
period, the effects of manufacturing overhead cost absorption and the timing of large single project shipments. We expect that the relative mix of products will change but do 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, we are not aware of other market trends, cost changes or competitive pressures that would adversely affect gross profit margins within our
existing product lines.



Package Inspection Systems Division



Gross profit margins on Package Inspection Systems Division
products averaged approximately 51.7%, 42.9% and 39.1% for fiscal years 2005, 2004 and 2003, respectively. The sales of the Package Inspection Systems Division for fiscal year 2005 were 26.5% higher than in fiscal year 2004 and the overall gross
margin improved from 42.9% to 51.7% as a result of product mix, cost reduction, and the effects of manufacturing overhead cost absorption. We expect that the sales mix of different products will not significantly change and will not adversely affect
overall divisional gross margins in the future. We are not aware of any technological or marketplace trends that would adversely affect gross margins on this product line.



Forward-Looking Information



The statements made in this report and in oral statements which may be made by our representatives relating to plans, strategies, economic performance and trends
and other statements that are not descriptions of historical facts are 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 our business and financial condition which is based upon the beliefs of our management as well as assumptions made by and information currently available to our
management. When used in this report, words such as anticipate, believe, estimate, expect, intend, and similar expressions, as they relate to our management, identify forward-looking
statements. Such statements reflect the current views of our management with respect to future events and are subject to certain inherent risks, uncertainties and assumptions relating to our business operations and results of operations, 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.



Factors That May Affect Future Results



We are dependent on major customers.



During our fiscal year ended September 30, 2005, two customers of our Undersea Systems Division, the U.S. Government (consisting of contracts and orders with
various agencies) and Sercel, Inc. (a subsidiary of Compagnie Generale de Geophysique SA), represented approximately 12% and 20% of our



21



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net sales, respectively. During our fiscal year ended September 30, 2004, each of those two customers represented approximately 13% of our net sales. Except for
those customers, no other single customer represented more than 10% of our net sales in either of our two most recently completed fiscal years. However, a loss of any of our current major customers could have an adverse effect on our business.



Under our arrangement with Sercel, Inc., we currently have a
non-exclusive worldwide license to use certain technology owned by Sercel that allows us to manufacture our GeoPoint hydrophones. During the first three years of the license, we had the exclusive right to manufacture the hydrophones using the
licensed technology. Several years ago, the license converted from an exclusive license to a nonexclusive license. The term of the license has expired, but we, as licensee, have the right to continue to use the licensed technology to make,
distribute, use and sell the licensed product. Subject to our retained right, Sercel as the owner of the licensed technology also has the right to use the licensed technology to make, distribute, use and sell the licensed product. Sercel is one of
our largest customers (approximately 20% and 13%, respectively, of our net sales in fiscal 2005 and fiscal 2004), and substantially all of our revenues from Sercel consist of sales of hydrophones. Due to the current high level of activity in the oil
and gas exploration industry, Sercel has advised us that it has developed a second source of supply for GeoPoint hydrophones. As a result of Sercel having developed an alternative source of GeoPoint hydrophone production, some or all of our GeoPoint
hydrophone sales to Sercel could be replaced by the new source. If Sercel discontinued purchasing GeoPoint hydrophones from us, our sales would decline to the extent that we were unable to replace such sales to Sercel with sales to other customers.



A significant portion of our business is dependent on the oil and
gas exploration industry.



We derived approximately 23%, 17% and
5% of our net sales during our fiscal years ended September 30, 2005, 2004 and 2003, from sales of products (primarily hydrophones) to companies engaged in oil and gas exploration or supplying products to companies engaged in that industry. We
anticipate deriving a significant portion of our future business from sales of products related to oil and gas exploration. The oil and gas exploration industry is cyclical and expenditures vary significantly over different periods based primarily
on the then price and anticipated price for oil and gas products. Any significant decline in the aggregate amount of expenditures by the oil and gas exploration industry would adversely affect our business, financial condition and results of
operations.



We face significant competition.



We have a variety of competitors in our various product markets. Certain of our
markets, such as glass flotation and geophysical hydrophones, are relatively small and the number of competitors is limited. In other markets, such as remotely operated vehicles, or ROVs, and systems and package inspection systems, the market is
larger and we compete with a significant number of well-established companies that have significantly more resources than ours. We compete on the basis of product performance, features, quality, reliability and price and on our ability to
manufacture and deliver our products on a timely basis. We may not be able to compete successfully in the future against existing or new competitors. In addition, competitive pressures may force us to reduce our prices, which could negatively affect
our operating results. If we do not respond adequately to competitive challenges, our business and results of operations would be harmed.



We are subject to risks associated with international sales.



We derived 49.9%, 46.6% and 30.3% of our net sales during our fiscal years ended September 30, 2005, 2004 and 2003 from international sales (primarily to
Canada, Europe and Asia). We anticipate deriving a significant portion of our future business from international sales. Our international sales expose us to various risks including:



| |  |  | potentially adverse changes in the political or economic conditions in countries or regions where we sell our products,
| | - |  | -----------------------------------------------------------------------------------------------------------------------



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| |  |  | compliance with multiple and potentially conflicting regulatory requirements including export requirements, tariffs and other trade barriers,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | longer accounts receivable collection periods, and
| | - |  | --------------------------------------------------



| |  |  | differing protection of intellectual property.
| | - |  | ----------------------------------------------



In addition, to the extent that we price such sales in foreign currencies, we are subject to the risk of fluctuations in exchange rates, although we have traditionally priced our
international sales in U.S. dollars in order to avoid such risks.



The portion of our net sales which consists of payments for research and development we perform for customers is dependent on government authorizations.



We derived approximately 6%, 8% and 4% of our net sales during our fiscal years ended September 30, 2005, 2004 and 2003, from
payments made by U.S. Government agencies, or prime contractors for such agencies, to finance research and development activities on their behalf. We anticipate deriving a portion of our future business from research and development activities
funded by such customers. Much of such research and development activities relate to development of products in the acoustic area. The level of such funded research and development is therefore dependent upon governmental appropriations to fund
research and development in the relatively small acoustic research area. Following the attack on the World Trade Center on September 11, 2001, the aggregate payments that we received for such research and development activities during our
fiscal year ended September 30, 2002 decreased by approximately 37% from the amount of such payments we received during our fiscal year ended September 30, 2001. Our fiscal year ended September 30, 2004 was the first fiscal year
during which the aggregate amount of the payments we received for funded research and development exceeded the amount we received during our 2001 fiscal year.



We are subject to risks associated with government contracts.



We derived 11.6%, 13.7% and 10.1% of our net sales, including those sales described in the preceding section, during our fiscal years
ended September 30, 2005, 2004 and 2003, respectively from government procurement contracts with U.S. Government agencies, primarily the U.S. Navy. We anticipate deriving a significant portion of our future business from government contracts.
Such business is subject to risks arising from regulations applicable to U.S. Government contracts. Under those regulations, we often must participate in competitive bidding in order to obtain such contracts and some contracts (or the full
implementation of such contracts) are subject to the agency involved being able to obtain sufficient funding through subsequent appropriations. The regulations also provide the government agency involved with extensive termination and audit rights.
In the event of termination by that agency, we will only be able to recover costs incurred or committed, settlement expenses and profit on the work completed prior to termination. Based on audits of such contracts, the U.S. Government may adjust our
contract-related costs and fees, and some of our costs, including most financing costs, portions of research and development costs and certain marketing expenses, may not be recoverable. Further, as a U.S. Government contractor, we are subject to
investigation, legal action and/or liability that would not apply to a contract with a commercial customer.



We are subject to risks related to compliance with and changes in governmental regulations.



Federal Aviation Administration approval is required for our locator pingers and state
X-ray standards apply for certain of our Package Inspection Systems Division products. Sales of pingers and Package Inspection Systems Division products subject to such government regulations represented 4.4% and 3.2%, respectively of our net sales
for the fiscal year ended September 30, 2005.Certain products of our Undersea Systems Division cannot be sold to restricted countries under U.S. export controls, and certain of our hydrophone products must conform to regulations that
limit the ability of the hydrophones to be



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utilized for military applications. While we believe that such export controls have not to date had a significant adverse effect on our net sales, compliance with them
increases the cost and delay associated with sale of those products to foreign customers. We will need to comply with the European RoHS directive, designed to address environmental issues relating to hazardous materials, beginning in July 2006.



Our business involves rapidly evolving products and technological
change.



Rapid change of technology is a key feature of all of
the markets in which our divisions operate. To succeed in the future, we will need to continue to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. Historically, our
technology has been developed through customer-funded and internally-funded research and development and through business acquisitions. We may not be able in the future to continue to maintain comparable levels of research and development or
successfully complete such acquisitions. In the past we have allocated substantial funds to capital expenditures, programs and other investments, and we will be required to continue to do so in the future. Even so, we may not be able to successfully
identify new opportunities and may not have the needed financial resources to develop new products in a timely or cost-effective manner. Products and technologies developed by others may also render our products and systems obsolete or
non-competitive and, in such event, we would need to write off a portion of the inventory which we maintain or have contractual commitments to acquire. Any of these events would adversely affect our financial condition and results of operations.



Our products could contain defects which would increase our costs
and harm our business.



Certain of our products, especially our
geophysical sonar products, are inherently complex in design, and their manufacture involves highly complex and precise processes. As a result of the technical complexity of these products, design defects, changes in manufacturing processes or the
inadvertent use of defective materials could adversely affect our manufacturing yields and product reliability, which could in turn harm our business operating results, financial condition and customer relationships. For example, early in fiscal
year 2004 we delayed our launch of certain new products in our Package Inspection Systems Division because of design problems which we then identified.



We provide warranties for our products and accrue allowances for estimated warranty costs at the time we recognize revenue from the sale of the products. We
determine the amount of such allowances through estimates of product return rates and expected costs to repair or replace the products under warranty based on our historical experience. If actual return rates or repair and replacement costs differ
significantly from our estimates, we may be required to make adjustments to recognize additional cost of sales in future periods.



Our customers may discover defects in our products after the products have been fully deployed and operated under peak stress conditions. In addition, some of our
products are combined with products from other suppliers, which may contain defects. As a result, should problems occur, it may be difficult to identify the source of the problem. If we are unable to identify and fix defects or other problems, we
could suffer loss of customers, increased costs of product returns and warranty expenses, damage to our brand reputation, diversion of development and engineering resources or legal actions. Any one or more of the foregoing could seriously harm our
business, financial condition and results of operations.



Our
operating results are difficult to predict with certainty, and if we fail to meet the expectations of investors, the market price of our common stock could decline significantly.



Our operating results from quarter to quarter have fluctuated and will likely continue to fluctuate. These fluctuations are typically
unpredictable and result from factors such as:



| |  |  | changes in our customers capital spending,
| | - |  | -------------------------------------------



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| |  |  | industry cyclicality (particularly in the oil and gas exploration industry),
| | - |  | ----------------------------------------------------------------------------



| |  |  | levels of government funding available to our customers and other economic conditions within the markets we serve,
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the level of orders within a given quarter and preceding quarters,
| | - |  | ------------------------------------------------------------------



| |  |  | the timing and level of cancellations and delays of orders for our products,
| | - |  | ----------------------------------------------------------------------------



| |  |  | the timing of product shipments within a given quarter,
| | - |  | -------------------------------------------------------



| |  |  | timing of new product introductions by us and our competitors,
| | - |  | --------------------------------------------------------------



| |  |  | changes in our pricing policies or in the pricing policies of our competitors or suppliers,
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | market acceptance of any new or enhanced versions of our products,
| | - |  | ------------------------------------------------------------------



| |  |  | our ability to manufacture a sufficient quantity of our products to meet customer demand,
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | our level of expenses, and
| | - |  | --------------------------



| |  |  | the impact of newly promulgated accounting pronouncements.
| | - |  | ----------------------------------------------------------



We may in the future elect to change prices, increase spending, or add or eliminate products in response to actions by competitors in an effort to pursue new market
opportunities. These actions may also adversely affect our business and operating results and may cause our quarterly results to be lower than the results of previous quarters.



In addition, we often recognize a substantial portion of our sales in the last month of the quarter. Thus, unexpected variations in
timing of sales, particularly for our higher-priced, higher-margin products such as our Package Inspection Systems Division products, can cause significant fluctuations in our quarterly operating results. Orders expected in one quarter can shift to
another period due to changes in the anticipated timing of customers purchase decisions or rescheduled delivery dates requested by our customers or the failure by customers to make agreed prepayments when scheduled. Our operating results for a
particular quarter or year may be adversely affected if our customers, particularly our largest customers, cancel or reschedule orders, or if we cannot fill orders in time due to unexpected delays in manufacturing, testing, shipping, and product
acceptance. Also, we base our manufacturing on our forecasted product mix for the quarter. If the actual product mix varies significantly from our forecast, we may not be able to fill some orders during that quarter, which would result in delays in
the shipment of our products and could shift sales to a subsequent period. In addition, if sales are below expectations in any given quarter, the adverse impact of the shortfall on our operating results may be magnified by our inability to adjust
spending quickly to compensate for the shortfall.



Due to these and other
factors, we believe that quarter-to-quarter comparisons of results from operations, or any other similar period-to-period comparisons, should not be construed as reliable indicators of our future performance. In any period, our results may be below
the expectations of investors, which would likely cause the trading price of our common stock to drop.



Because the sales cycle for some of our products is long and difficult to predict, and certain of our orders are subject to rescheduling or cancellation, we
may experience fluctuations in our operating results.



Many of
our capital equipment, system and subsystem products are complex, and customers for these products require substantial time to make purchase decisions. These customers often perform, or require us to perform, extensive configuration, testing and
evaluation of our products before committing to purchase them. The sales cycle for our capital equipment, system and subsystem products from initial contact through shipment typically varies, is difficult to predict and can last as long as one year.
The orders constituting our backlog are often subject to cancellation and changes in delivery schedules by our



25



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customers without significant penalty. We have from time to time experienced order rescheduling and cancellations that have caused our net sales in a given period to
be materially less than would have been expected based on our backlog at the beginning of the period. If we experience such rescheduling and/or cancellations in the future, our operating results will fluctuate from period to period. These
fluctuations could harm our results of operations and cause our stock price to decline.



We may in the future experience intellectual property infringement claims, which could be costly and time-consuming to defend.



Although we have not in any recent years received communications from third parties alleging that we are infringing trademarks,
patents or other intellectual property rights held by them, it is possible that we may receive such claims in the future. Any claims of infringement brought by third parties could result in protracted and costly litigation, and we could become
subject to damages for infringement, or to an injunction preventing us from selling one or more of our products or using one or more of our trademarks. Such claims could also result in the necessity of obtaining a license relating to one or more of
our products or current or future technologies, which may not be available on commercially reasonable terms or at all. Any intellectual property litigation and the failure to obtain necessary license or other rights or develop substitute technology
may divert managements attention from other matters and could have a material adverse effect on our business, financial condition and results of operations. In addition, the terms of certain customer contracts require us to indemnify the
customer in the event of any claim or infringement brought by a third party based on our products. Any such claims of this kind may have a material adverse effect on our business, financial condition or results of operations.



If we fail to protect our intellectual property and proprietary technology, we
may lose our competitive advantage.



Our success and ability to
compete depend in large part upon protecting our proprietary technology. We rely on a combination of patent, trademark and trade secret protection and nondisclosure agreements to protect our proprietary rights. The steps we have taken may not be
sufficient to prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. The patent and trademark law and trade secret
protection may not be adequate to deter third party infringement or misappropriation of our patents, trademarks and other proprietary rights. In addition, patents issued to us may be challenged, invalidated or circumvented. Our rights granted under
those patents may not provide competitive advantages to us, and the claims under our patent applications may not be allowed. The process of seeking patent protection can be time consuming and expensive and patents may not be issued from currently
pending or future applications. Moreover, our existing patents or any new patents that may be issued may not be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us. Although we have not done so in the
past, we may in the future initiate claims or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors. Any such
claims could result in costly litigation, the diversion of our technical and management personnel and the assertion of counterclaims by the defendants, including counterclaims asserting invalidity of our patents.



If we are unable to attract new employees and retain and motivate existing
employees, our business and results of operations will suffer.



Our ability to maintain and grow our business is directly related to the service of our employees in each area of our operations. Our future performance will be directly tied to our ability to employ, train, motivate and retain qualified
personnel. Competition for personnel in our industry segments is intense, and housing and other living costs in the geographic area where our facility is located are higher than in the geographical areas where the facilities of many of our major
competitors are located. If we are unable to employ sufficient employees with the experience and skills we need or to retain our employees, our business and results of operations would be harmed.



26



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We will incur substantial costs and uncertainties associated with the Sarbanes-Oxley Act.



Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by
the Securities and Exchange Commission and the Public Company Accounting Oversight Board will require us to include in our annual report on Form 10-KSB filed with the SEC for each of our fiscal years commencing with the year ending
September 30, 2007, reports by our management and by the independent registered public accounting firm which audits our financial statements as to the effectiveness of our internal control over financial reporting. If our management and
independent registered public accounting firm determine that any material weakness exists in our internal control over financial reporting as of the end of the relevant fiscal year, they would be precluded from finding that our internal
control is then effective. During our fiscal year ending September 30, 2005, we incurred approximately $150,000 of expenses in connection with documentation and testing of our internal control over financial reporting. These
expenses are expected to be significantly greater in subsequent fiscal years, although the timing and amount of these expenditures will largely depend on regulatory developments.



Section 404 of the Sarbanes-Oxley Act and the related rules adopted by the SEC and the Public Company Accounting Oversight Board
are fairly new and involve significant uncertainties concerning how they will be applied to smaller publicly-held companies such as Benthos. Accordingly, there is considerable uncertainty as to whether our management and independent registered
public accounting firm will be able to conclude that our internal control over financial reporting is effective. If our management and independent registered public accounting firm were unable to determine that our internal control over financial
reporting is effective, this could have an adverse effect upon the market price of our common stock.



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.



ITEM 8A.    CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



We
maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified within the Commissions rules
and forms, and that such information is accumulated and communicated to its management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any
controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.



As of the end of the
period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of its disclosure controls and
procedures to meet the criteria referred to above. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective.



ITEM 8B.    OTHER INFORMATION



Not Applicable.



27



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PART III



ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL

PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT



The current directors and executive officers of the Company are as follows:



|                          |  |     |  |                                                                     
|------------------------- |  | --- |  | --------------------------------------------------------------------
|Name                      |  | Age |  | Position                                                            
|                          |  |    
|Samuel O. Raymond         |  | 77  |  | Chairman Emeritus of the Board of
Directors                         
|                          |  |    
|Ronald L. Marsiglio       |  | 58  |  | President, Chief Executive Officer and Director                     
|                          |  |    
|Stephen D. Fantone        |  | 52  |  | Chairman of the Board of Directors                                  
|                          |  |    
|A. Theodore Mollegen, Jr. |  | 68  |  | Director                                                            
|                          |  |    
|Gary K. Willis            |  | 60  |  | Director                                                            
|                          |  |    
|Arthur L. Fatum           |  | 53  |  | Director                                                            
|                          |  |    
|Francis E. Dunne, Jr.     |  | 59  |  | Vice President, Chief Financial Officer and Treasurer               
|                          |  |    
|James R. Kearbey          |  | 42  |  | Vice President, General Manager,
Package Inspection Systems Division
|                          |  |    
|Francois Leroy            |  | 42  |  | Vice President, Sales and Marketing, Undersea Systems Division      
|                          |  |    
|Richard B. Martin         |  | 48  |  | Vice President of Purchasing and Production                         



The Companys Board of
Directors is classified into three classes, with the members of the respective classes serving for staggered three-year terms. Class I, consisting of Messrs. Marsiglio and Willis, is eligible for re-election at the 2006 annual meeting; Class II,
consisting of Mr. Mollegen and Dr. Fantone, is eligible for re-election at the 2007 annual meeting; Class III, consisting of Messrs. Raymond and Fatum, is eligible for re-election at the 2008 annual meeting. Officers of the Company serve
at the pleasure of the Board of Directors.



The following information is
provided with respect to the business experience of each director and executive officer of the Company:



Mr. Raymond founded the Company in 1962 and served as its President for twenty years. He previously served as Chairman of the Board from 1965-1982 and
from 1989 to January 1997. Mr. Raymond most recently served as the President and Chief Executive Officer of the Company from June 1995 to April 1996. Mr. Raymond has served as a director of the Company since 1965. In January 1997,
Mr. Raymond was elected as Chairman Emeritus of the Board of Directors and Director of Research of the Company. Mr. Raymond has a B.S. in Mechanical Engineering from M.I.T., holds nine U.S. patents, and is the author of several technical
papers on undersea technology. He was instrumental in the development and marketing of many of the Companys original products in both the Companys Undersea Systems Division and the Package Inspection Systems Division.



28



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Mr. Marsiglio has served as President, Chief Executive Officer and a director of the Company since
May 21, 2001. Prior to joining the Company he was President and Chief Executive Officer of VDO North America (1998-2001), a division of Mannesmann VDO, a global automotive parts supplier. From 1975 to 1998, Mr. Marsiglio was employed by
Philips Electronics. During those years he held various positions in consumer electronics including Senior Vice President and General Manager of the Philips/Magnavox television business in North America. His most recent position with Philips was
President and Chief Executive Officer of Philips Automotive Electronics before it was sold to Mannesmann VDO in 1998. Mr. Marsiglio has a BSEE from the University of Illinois and an M.B.A. from Loyola University in Chicago.



Dr. Fantone became a director of the Company in March 1995 and was elected
Chairman of the Board of Directors in January 1997. Since 1982, he has been President and Chief Executive Officer of Optikos Corporation, an optical engineering firm that he founded and which specializes in the design and manufacture of optical
products and instrumentation and optical test equipment. He has B.S. degrees in Electrical Engineering and Management from M.I.T. and a Ph.D. in Optics from the Institute of Optics at the University of Rochester. Dr. Fantone has been awarded
sixty U.S. patents and is the author of numerous technical papers and articles on optical technology. He is also currently a Senior Lecturer in the Mechanical Engineering Department at M.I.T., a Trustee of the Sea Education Association, a director
of Rofin-Sinar Technologies, Inc. (industrial laser systems), and Treasurer of the Optical Society of America. From January to May 2001, Dr. Fantone served as President and Chief Executive Officer of the Company on an interim basis.



Mr. Mollegen has served as a director of the Company since 1985. He is
the President and Chief Executive Officer of Allied Resources Corporation, a company which provides engineering, technical training, and safety management services to industrial firms. Before founding Allied Resources in 1993, Mr. Mollegen was
for sixteen years Chief Executive Officer of Analysis & Technology, Inc., a publicly-traded provider of engineering and technical services to the U.S. Navy. He is a member of the Arts and Technology Advisory Council for Connecticut College.
Mr. Mollegen has a B.E. in Electrical Engineering from Yale University and is the author of over 90 technical papers and reports on undersea topics. He is also a member of the national board of directors (Executive Council) of the U.S.
Episcopal Church.



Mr. Willis has been a director of the
Company since 1998. In November 2000, Mr. Willis retired from Zygo Corporation, a supplier of high precision yield improvement and metrology systems, where since November 1998, he had been Chairman of the Board of Directors. Mr. Willis had
also served as a director of Zygo Corporation since February 1992 and as President (1992-1999) and Chief Executive Officer (1993-1999) of that corporation. Before joining Zygo, he was the Chairman, President and Chief Executive Officer of The
Foxboro Company, a manufacturer of process control instruments and systems. Mr. Willis is also a director of Rofin-Sinar Technologies, Inc. (industrial laser systems), Vion Pharmaceuticals, Inc. (cancer treatment drugs), Plug Power Inc.
(commercial and residential fuel cells), and Middlesex Health Services, Inc., a Connecticut-based health care provider. Mr. Willis has a B.S. in Mechanical Engineering from Worcester Polytechnic Institute.



Mr. Fatum has been a director of the Company since January 6, 2000. He
is President of IBP Associates, LLC, a consulting firm that provides general business advice principally to independent businesses. From September 2003 to January 2004, he was Chief Financial Officer of MediaLive International, Inc., a leading
global producer of technology events, conferences, and related media and services. From April 2002 to August 2003, he was Chief Corporate Officer of CNET Networks, Inc., a global Internet media company specializing in technology information. From
October 2000 to December 2002, he was also President of CNET Networks International Media, a division of CNET Networks, Inc. From July 2000 to October 2000, he was Executive Vice President and Chief Financial Officer of ZDNet, Inc., a global
Internet media company acquired by CNET in October 2000. Mr. Fatum has also held senior management positions with General Electric Company, PictureTel Corporation, AT&T Capital Corporation and Dun & Bradstreet Corporation.
Mr. Fatum has a B.S. in mathematics from State University of New York and is a graduate of GE Management Development Institute.



29



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Mr. Dunne has been Treasurer and Chief Financial Officer of the Company since 1997 and Vice President
since January 2000. Before joining the Company, he was Chief Financial Officer of Kinney Vacuum Company, then an operating division of General Signal Corporation (1993-1996). Kinney Vacuum Company is a manufacturer of industrial vacuum pumps and
pump systems for the food packaging, chemical and pharmaceutical, heat treating, automotive, and other industries. Mr. Dunne has a B.S. degree in Accounting from St. Johns University, an M.B.A. in Finance from Long Island University, and
is a Certified Public Accountant.



Mr. Kearbey was appointed
as Vice President and General Manager of the Companys Package Inspection Systems Division on December 1, 2000. Before this appointment, Mr. Kearbey was General Manager of the Package Inspection Systems Division from 1998 to 2000 and
Western Regional Sales Manager for the Package Inspection Systems Division from 1996 to 1998. Before joining the Company, he was the National Sales Manager at Sasib Packaging Systems, a manufacturer of packaging equipment for the food industry
(1994-1996). Mr. Kearbey holds a B.A. degree from National Louis University and an M.B.A. from Keller Graduate School of Management.



Mr. Leroy was appointed as Vice President, Sales and Marketing of the Companys Undersea Systems Division on April 10, 2003. Before this
appointment, Mr. Leroy was Vice President, Finance and Sales of Triton Elics International, Inc. (TEI) located in Watsonville, California from 1996 to 2003. TEI is a software developer and system integrator for data acquisition and image
processing systems for oceanographic survey, oil and gas exploration and military applications. Mr. Leroy holds a degree in International Business and Finance from EPSCI in Paris.



Mr. Martin has served as Director of Purchasing and Production from February 2002 to June 2005 and as Vice President of
Purchasing and Production since June 30, 2005. From July 2001 to February 2002, he was the Materials Manager for Pacific Scientific, a division of the Danaher Motion Group of the Danaher Corporation, a manufacturer of electronic controls for
servo motors for the printed circuit board assembly industry. From 1999 to 2001, Mr. Martin was the Materials Manager for C&K Components in Watertown, Massachusetts. C&K is a division of ITT Industries and is a manufacturer of
electronic and micro switching devices. From 1996 to 1999, Mr. Martin served as the Unit Manager of Materials and Logistics for Greenfield Industries, a division of Kennametal Industries located in South Deerfield, Massachusetts. The Deerfield
operation manufactured and distributed metal cutting tools to both industrial and retail customers. Mr. Martin attended the United States Coast Guard Academy for two years and holds a B.S. in Business Administration from Rochester Institute of
Technology in Rochester, N.Y.



There are no family relationships among
the directors or executive officers of the Company.



None of the
following events has occurred within the past five years with respect to any director or executive officer of the Company or, to the knowledge of the Company, any person owning 5% or more of the outstanding shares of Common Stock of the Company:



| | (1) |  | Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that
time;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) |  | Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) |  | Being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a Federal or State
securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



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Compliance with Section 16(a) of the Securities Exchange Act



Section 16(a) of the Securities Exchange Act of 1934 requires the Companys
executive officers and directors, and persons who beneficially own more than 10% of a registered class of the Companys equity securities, to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Copies
of those reports are to be furnished to the Company.



Based solely upon a
review of Forms 3, 4 and 5 and amendments thereto furnished to the Company under Rule 16a-3(e) during the fiscal year ended September 30, 2005, no director, officer, or beneficial owner of more than 10% of the Companys equity securities
failed to file on a timely basis, any reports required by Section 16(a) of the Securities Exchange Act of 1934.



ITEM 10.    EXECUTIVE COMPENSATION



The following table sets forth the compensation paid by the Company for the Companys last three fiscal years to the only person who served as the
Companys chief executive officer during the Companys fiscal year ended September 30, 2005 and the only other executive officers who received an annual salary and bonus exceeding $100,000 during that fiscal year.



|                                                                     |  |            |  |                     |                |                                   |   |                       |  |             |  |   |             |    
|-------------------------------------------------------------------- |  | ---------- |  | ------------------- | -------------- | --------------------------------- | - | --------------------- |  | ----------- |  | - | ----------- | ---
|Name and Principal Position                                          |  | FiscalYear |  | Annual Compensation |                | Shares Underlying Options Granted |   | All OtherCompensation | 
|                                                                     |  | Salary     |  | Bonus               |                |                                  
|Ronald L. Marsiglio,                                                 |  | 2005       |  | $                   | 257,500        |                                   | $ | 232,523               |  |            |  | $ | 8,439       |    
|President and Chief Executive Officer                                |  | 20042003   |  |                     | 250,000250,000 |                                   |   | 72,40025,000          |  | 5,00020,000 |  |   | 8,2817,212  |    
|                                                                     |  |            |  |                     |               
|Francis E. Dunne, Jr.,                                               |  | 2005       |  |                     | 173,835        |                                   |   | 92,984                |  |            |  |   | 7,934       |    
|Vice President, Chief Financial Officer and Treasurer                |  | 20042003   |  |                     | 170,000166,135 |                                   |   | 26,96217,500          |  | 3,00010,000 |  |   | 7,4464,787  |    
|                                                                     |  |            |  |                     |               
|James R. Kearbey,                                                    |  | 2005       |  |                     | 139,000        |                                   |   | 60,656                |  |            |  |   | 6,532       |    
|Vice President, General Manager, Package Inspection Systems Division |  | 20042003   |  |                     | 136,000134,454 |                                   |   | 15,09312,500          |  | 3,0007,500  |  |   | 5,2233,947  |    
|                                                                     |  |            |  |                     |               
|Francois Leroy,                                                      |  | 2005       |  |                     | 142,750        |                                   |   | 74,772                |  |            |  |   | 6,277       |    
|Vice President, Sales and Marketing Undersea Systems Division (1)    |  | 20042003   |  |                     | 134,99661,000  |                                   |   | 40,00016,250          |  | 3,00015,000 |  |   | 2,32417,500 | (4)
|                                                                     |  |            |  |                     |               
|Richard B. Martin,                                                   |  | 2005       |  |                     | 118,577        |                                   |   | 31,126                |  |            |  |   | 3,116       |    
|Vice President of Purchasing and Production (2)                      |  | 20042003   |  |                     | 112,000110,196 |                                   |   | 11,8729,000           |  | 2,0005,000  |  |   | 2,163      |    
|                                                                     |  |            |  |                     |               
|All directors and                                                    |  | 2005       |  |                     | 891,201        |                                   |   | 492,061               |  |            |  |   | 161,192     |    
|officers as a group (3)                                              |  | 2004       |  |                     | 933,150        |                                   |   | 166,327               |  | 24,000      |  |   | 141,188     |    
|                                                                     |  | 2003       |  |                     | 948,202        |                                   |   | 116,130               |  | 76,000      |  |   | 173,785     |    

---

|(1) |  | Mr. Leroy has served as Vice President, Sales and Marketing, Undersea Systems Division, since April 10, 2003.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(2) |  | Mr. Martin has served as Director of Purchasing and Production from February 2002 to June 2005 and as Vice President of Purchasing and Production since June 30, 2005.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



31



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|(3) |  | Consisted of twelve persons for fiscal 2003, eleven persons for fiscal 2004, and ten persons for fiscal 2005.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(4) |  | Includes moving and relocation expenses.
|--- |  | ----------------------------------------



Stock Options



No stock options were granted during the Companys fiscal year ended September 30, 2005 to any of the executive officers named in the table above.



The following table sets forth information concerning stock options during the Companys fiscal year ended September 30,
2005 held by the executive officers named in the table above and the number and value of shares underlying those stock options at that date.



|                                                                     |  |                          |  |               |         |                                                                  |         |     |                                                            |   |        
|-------------------------------------------------------------------- |  | ------------------------ |  | ------------- | ------- | ---------------------------------------------------------------- | ------- | --- | ---------------------------------------------------------- | - | -------
|Name and Principal
Position                                          |  | SharesAcquiredonExercise |  | ValueRealized |         | Number ofUnexercisedSecuritiesUnderlyingOptions AtFiscal YearEnd |         |     | Value ofUnexercisedIn-the-MoneyOptions AtFiscal YearEnd(1)
|Ronald L. Marsiglio,                                                 |  | 17,000                   |  | $             | 120,240 |                                                                  | 100,500 | (2) |                                                            | $ | 772,425
|President and Chief Executive Officer                                |  |                          |  |               |         |                                                                  | 7,500   | (3) |                                                            |   | 57,175 
|                                                                     |  |                          |  |              
|Francis E. Dunne, Jr.,                                               |  | 11,000                   |  |               | 77,015  |                                                                  | 35,000  | (2) |                                                            |   | 138,155
|Vice President, Chief Financial Officer and Treasurer                |  |                          |  |               |         |                                                                  | 4,000   | (3) |                                                            |   | 30,290 
|                                                                     |  |                          |  |              
|James R. Kearbey,                                                    |  | 9,899                    |  |               | 75,252  |                                                                  | 14,476  | (2) |                                                            |   | 89,723 
|Vice President, General Manager, Package Inspection Systems Division |  |                          |  |               |         |                                                                  | 3,375   | (3) |                                                            |   | 25,271 
|                                                                     |  |                          |  |              
|Richard B. Martin                                                    |  | 4,500                    |  |               | 37,182  |                                                                  | 2,250   | (2) |                                                            |   | 17,018 
|Vice President of Purchasing and Production                          |  |                          |  |               |         |                                                                  | 2,250   | (3) |                                                            |   | 16,847 
|                                                                     |  |                          |  |              
|Francois Leroy                                                       |  | 3,500                    |  |               | 32,795  |                                                                  | 5,500   | (2) |                                                            |   | 50,215 
|Vice President, Sales and Marketing, Undersea Systems Division       |  |                          |  |               |         |                                                                  | 9,000   | (3) |                                                            |   | 85,215 

---

|(1) |  | Based upon the difference between the option exercise price and the closing price of the Companys Common Stock on the Nasdaq Capital Market on September 30, 2005.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Shares underlying options exercisable as of September 30, 2005.
|--- |  | ---------------------------------------------------------------

|(3) |  | Shares underlying options not exercisable as of September 30, 2005. In accordance with the Teledyne Merger Agreement, all stock options will vest and will be converted into cash as of
the effective date of the Merger.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Directors Compensation



Under the compensation policy adopted by the Board of Directors,
each non-employee director will receive a fee of $8,000 per year plus $1,000 for each directors meeting attended and reimbursement for reasonable travel and other expenses when incurred. Each committee chairman will receive an additional fee
of $2,000 per year, and each committee member (including the chairman) will receive a fee of $1,000 for each committee meeting attended. Stephen D. Fantone also receives additional compensation of $36,000 per year for his services as Chairman of the
Board of Directors. Non-employee directors are also eligible to receive stock options under the Companys 1998 Non-Employee Directors Stock Option Plan.



32



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Ronald L.
Marsiglio.    On January 19, 2005, the Company entered into an amended and restated employment agreement with Ronald L. Marsiglio, effective October 1, 2004, pursuant to which Mr. Marsiglio agreed to serve as
President and Chief Executive Officer of the Company for an initial two-year period expiring September 30, 2006. Thereafter, said term will be automatically extended for consecutive two-year terms unless either the Company or Mr. Marsiglio
provides the other with six months written notice prior to the expiration of the initial term or any extended term. The agreement provides for a base salary of $250,000 per year, subject to increase by the Compensation Committee of the board of
directors. Mr. Marsiglios base salary was increased to $272,000 effective January 1, 2006. During fiscal year 2006, Mr. Marsiglio will be eligible to earn an incentive bonus of up to 100% of his base salary in accordance with
the Companys 2006 Incentive Compensation Plan described below. In the event that the Company terminates his employment other than for cause, disability or death, Mr. Marsiglio will be entitled to receive severance benefits equal to one
years base salary. If a Change of Control occurs, and within one year thereafter the Company terminates Mr. Marsiglios employment other than for cause, materially and adversely reduces his duties, requires him to relocate more than
50 miles from the present facility of the Company, or materially and adversely reduces his base salary or the benefits under any incentive compensation plan, the Company shall pay him one years base salary plus any earned and unpaid incentive
compensation earned in a fiscal year prior to the fiscal year of termination and continue his participation in the Companys group medical insurance program for one year. A Change of Control means (i) a merger, reorganization or
consolidation of the Company with another entity or the sale of all or substantially all of the assets of the Company, unless 50% or more of the voting power of the securities of the acquiring entity is owned by the shareholders of the Company
immediately prior to the transaction, or (ii) a sale or transfer of more than 50% of the common stock of the Company to a person or persons not controlled, directly or indirectly, by the Company.



Francis E. Dunne, Jr.On January 19, 2005, the
Company entered into an amended and restated employment agreement with Francis E. Dunne, Jr., effective October 1, 2004, pursuant to which Mr. Dunne agreed to serve as Vice President, Treasurer and Chief Financial Officer of the Company
for an initial two-year period expiring September 30, 2006. Thereafter, said term will be automatically extended for consecutive two-year terms unless either the Company or Mr. Dunne provides the other with six months written notice prior
to the expiration of the initial term or any extended term. The agreement provides for a base salary of $170,000 per year, subject to increase by the Compensation Committee of the board of directors. Mr. Dunnes base salary was increased
to $183,000 effective January 1, 2006. During fiscal year 2006, Mr. Dunne will be eligible to earn an incentive bonus of up to 40% of his base salary in accordance with the Companys 2006 Incentive Compensation Plan described below.
In the event that the Company terminates his employment other than for cause, disability or death, Mr. Dunne will be entitled to receive severance benefits equal to one years base salary and continue his participation in the
Companys group medical insurance program for one year. If a Change of Control occurs, and within one year thereafter the Company terminates Mr. Dunnes employment other than for cause, materially and adversely reduces his duties,
requires him to relocate more than 50 miles from the present facility of the Company, or materially and adversely reduces his base salary or the benefits under any incentive compensation plan, the Company shall pay him one years base salary
plus any earned and unpaid incentive compensation earned in a fiscal year prior to the fiscal year of termination. A Change of Control means (i) a merger, reorganization or consolidation of the Company with another entity or the sale of all or
substantially all of the assets of the Company, unless 50% or more of the voting power of the securities of the acquiring entity is owned by the shareholders of the Company immediately prior to the transaction, or (ii) a sale or transfer of
more than 50% of the common stock of the Company to a person or persons not controlled, directly or indirectly, by the Company.



33



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James R. Kearbey.On January 19, 2005, the Company entered into an amended and
restated employment agreement with James R. Kearbey, effective January 1, 2005, pursuant to which Mr. Kearbey agreed to serve as a Vice President of the Company for an initial two-year period expiring December 31, 2006. Thereafter,
said term will be automatically extended for consecutive two-year terms unless either the Company or Mr. Kearbey provides the other with 180 days written notice prior to the expiration of the initial term or any extended term. The agreement
provides for a base salary of $140,000 per year, subject to increase by the Company. Mr. Kearbeys base salary was increased to $147,000, effective January 1, 2006. During fiscal year 2006, Mr. Kearbey will be eligible to earn an
incentive bonus of up to 40% of his base salary in accordance with the Companys 2006 Incentive Compensation Plan described below. In the event that the Company terminates his employment other than for cause, disability or death,
Mr. Kearbey will be entitled to receive severance benefits equal to six months base salary. If a Change of Control occurs, and within one year thereafter the Company terminates Mr. Kearbeys employment other than for cause, the
Company shall pay him six months base salary. A Change of Control means (i) a merger, reorganization or consolidation of the Company with another entity or the sale of all or substantially all of the assets of the Company, unless 50% or
more of the voting power of the securities of the acquiring entity is owned by the shareholders of the Company immediately prior to the transaction, or (ii) a sale or transfer of more than 50% of the common stock of the Company to a person or
persons not controlled, directly or indirectly, by the Company.



Francois Leroy.    On January 19, 2005, the Company entered into an employment agreement with Francois Leroy, effective January 1, 2005, pursuant to which Mr. Leroy agreed to serve as a Vice
President of the Company for an initial two-year period expiring December 31, 2006. Thereafter, said term will be automatically extended for consecutive two-year terms unless either the Company or Mr. Leroy provides the other with 180 days
written notice prior to the expiration of the initial term or any extended term. The agreement provides for a base salary of $145,000 per year, subject to increase by the Company. Mr. Leroys base salary was increased to $153,000,
effective January 1, 2006. During fiscal year 2006, Mr. Leroy will be eligible to earn an incentive bonus of up to 40% of his base salary in accordance with the Companys 2006 Incentive Compensation Plan described below. In the event
that the Company terminates his employment other than for cause, disability or death, Mr. Leroy will be entitled to receive severance benefits equal to six months base salary. If a Change of Control occurs, and within one year thereafter
the Company terminates Mr. Leroys employment other than for cause, the Company shall pay him six months base salary. A Change of Control means (i) a merger, reorganization or consolidation of the Company with another entity or
the sale of all or substantially all of the assets of the Company, unless 50% or more of the voting power of the securities of the acquiring entity is owned by the shareholders of the Company immediately prior to the transaction, or (ii) a sale
or transfer of more than 50% of the common stock of the Company to a person or persons not controlled, directly or indirectly, by the Company.



Richard B. Martin.On June 30, 2005, the Company entered into an employment agreement with Richard B. Martin, effective on that
date, pursuant to which Mr. Martin agreed to serve as a Vice President of the Company for an initial period expiring December 31, 2006. Thereafter, said term will be automatically extended for consecutive two-year terms unless either the
Company or Mr. Martin provides the other with 180 days written notice prior to the expiration of the initial term or any extended term. The agreement provides for a base salary of $130,000 per year, subject to increase by the Company.
Mr. Martins base salary was increased to $135,000, effective January 1, 2006. During fiscal year 2006, Mr. Martin will be eligible to earn an incentive bonus of up to 40% of his base salary in accordance with the Companys
2006 Incentive Compensation Plan described below. In the event that the Company terminates his employment other than for cause, disability or death, Mr. Martin will be entitled to receive severance benefits equal to six months base
salary. If a Change of Control occurs, and within one year thereafter the Company terminates Mr. Martins employment other than for cause, the Company shall pay him six months base salary. A Change of Control means (i) a merger,
reorganization or consolidation of the Company with another entity or the sale of all or substantially all of the assets of the Company, unless



34



---

50% or more of the voting power of the securities of the acquiring entity is owned by the shareholders of the Company immediately prior to the transaction, or
(ii) a sale or transfer of more than 50% of the common stock of the Company to a person or persons not controlled, directly or indirectly, by the Company.



2005 Incentive Bonuses.    On December 5, 2005, the Compensation Committee of the Companys board of directors ratified and
approved the following bonuses with respect to the Companys fiscal year ended September 30, 2005:



|                      |  |                               |        
|--------------------- |  | ----------------------------- | -------
|Officer               |  | Amount of 2005Incentive Bonus
|Ronald L. Marsiglio   |  | $                             | 232,523
|Francis E. Dunne, Jr. |  |                               | 92,984 
|Francois Leroy        |  |                               | 74,772 
|James R. Kearbey      |  |                               | 60,656 
|Richard B. Martin     |  |                               | 31,126 



The 2005 incentive bonuses for
Messrs. Marsiglio, Leroy, Kearbey and Martin were computed in accordance with the Companys 2005 Incentive Compensation Matrix. The 2005 incentive bonus for Mr. Dunne included the amount computed pursuant to the Companys 2005
Incentive Compensation Matrix, plus an additional $30,000 bonus for outstanding performance during fiscal year 2005.



2006 Incentive Compensation Plan.On December 5, 2005, the Compensation Committee of the Companys Board of Directors
approved the Benthos, Inc. Fiscal Year 2006 Incentive Compensation Plan, which provides for incentive compensation for specified employees of the Company, including the five executive officers named above. The plan provides for payment of incentive
compensation for all of the specified employees equal to a percentage of the employees base compensation for the 2006 fiscal year, varying from 10% to 100% based upon the Companys pre-tax profit for the fiscal year, or the period
October 1, 2005 through the effective date of the Teledyne Merger, whichever shall first occur.



ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth certain information regarding the beneficial ownership of Benthos common stock as of December 19, 2005, by: (i) each person
who is known by the Company to beneficially own more than 5% of the outstanding common stock; (ii) each of the Companys directors; (iii) the Companys Chief Executive Officer and each of the Companys other four most highly
compensated executive officers; and (iv) all directors and executive officers of the Company as a group.



In accordance with the rules of the Securities and Exchange Commission, shares which an individual has the right to acquire pursuant to stock options which are
exercisable within sixty days are considered to be beneficially owned and, for purposes of calculating the percentage ownership of stock for an individual who holds exercisable stock options, such shares are also considered to be outstanding. For
purposes of this table, it is assumed that the vesting of all options accelerates within sixty days in accordance with the terms of the Teledyne Merger Agreement. Reference should be made to the footnotes below for further information as to each
individual listed.



|                          |  |                         |     |  |                            |  
|------------------------- |  | ----------------------- | --- |  | -------------------------- | -
|Name and Address (1)      |  | SharesBeneficiallyOwned |     |  | % ofOutstandingCommonStock |  
|Samuel O. Raymond         |  | 73,057                  | (2) |  | 3.47                       | %
|Glazer Capital, LLC       |  | 109,994                 | (3) |  | 5.22                       | %
|Loeb Partners Corporation |  | 123,040                 | (3) |  | 5.84                       | %
|Stephen D. Fantone        |  | 88,750                  | (4) |  | 4.11                       | %



35



---

|                                                    |  |                         |      |  |                            |  
|--------------------------------------------------- |  | ----------------------- | ---- |  | -------------------------- | -
|Name and Address (1)                                |  | SharesBeneficiallyOwned |      |  | % ofOutstandingCommonStock |  
|Ronald L. Marsiglio                                 |  | 113,000                 | (5)  |  | 5.10                       | %
|A. Theodore Mollegen, Jr.                           |  | 22,000                  | (6)  |  | 1.03                       | %
|Gary K. Willis                                      |  | 40,500                  | (7)  |  | 1.90                       | %
|Arthur L. Fatum                                     |  | 39,000                  | (8)  |  | 1.83                       | %
|Francis E. Dunne, Jr.                               |  | 43,808                  | (9)  |  | 2.04                       | %
|James R. Kearbey                                    |  | 18,525                  | (10) |  | 0.87                       | %
|Richard B. Martin                                   |  | 4,500                   | (11) |  | 0.21                       | %
|Francois Leroy                                      |  | 14,500                  | (12) |  | 0.68                       | %
|All directors and officers as a group (ten persons) |  | 457,640                 | (13) |  | 19.00                      | %

---

|(1) |  | Except as set forth below, the address of each of the individuals set forth in the table is c/o Benthos, Inc., 49 Edgerton Drive, North Falmouth, Massachusetts 02556-2826. The address of
Glazer Capital, LLC is 237 Park Avenue, Suite 900, New York, New York 10017. The address of Loeb Partners Corporation is 61 Broadway, New York, New York 10006.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 1,109 shares owned by Mr. Raymonds wife and 27,738 shares owned by Mr. Raymonds children, as to which shares Mr. Raymond disclaims beneficial ownership.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Based solely upon the report on Schedule 13G filed with the Securities and Exchange Commission by Glazer Capital, LLC on or about December 8, 2005 and the report on Schedule 13D filed by Loeb
Partners Corporation on or about December 15, 2005.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes 53,000 shares which Dr. Fantone has the right to acquire through the exercise of stock options.
|--- |  | --------------------------------------------------------------------------------------------------------

|(5) |  | Includes 108,000 shares which Mr. Marsiglio has the right to acquire through the exercise of stock options.
|--- |  | -----------------------------------------------------------------------------------------------------------

|(6) |  | Includes 20,000 shares which Mr. Mollegen has the right to acquire through the exercise of stock options.
|--- |  | ---------------------------------------------------------------------------------------------------------

|(7) |  | Includes 25,500 shares which Mr. Willis has the right to acquire through the exercise of stock options.
|--- |  | -------------------------------------------------------------------------------------------------------

|(8) |  | Includes 20,000 shares which Mr. Fatum has the right to acquire through the exercise of stock options.
|--- |  | ------------------------------------------------------------------------------------------------------

|(9) |  | Includes 39,000 shares which Mr. Dunne has the right to acquire through the exercise of stock options.
|--- |  | ------------------------------------------------------------------------------------------------------

|(10) |  | Consists of 17,851 shares which Mr. Kearbey has the right to acquire through the exercise of stock options.
|---- |  | -----------------------------------------------------------------------------------------------------------

|(11) |  | Consists of 4,500 shares which Mr. Martin has the right to acquire through the exercise of a stock options.
|---- |  | -----------------------------------------------------------------------------------------------------------

|(12) |  | Consists of 14,500 shares which Mr. Leroy has the right to acquire through the exercise of stock options.
|---- |  | ---------------------------------------------------------------------------------------------------------

|(13) |  | Includes an aggregate of 302,351 shares that the directors and officers have the right to acquire through the exercise of stock options.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------



ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



On July 29, 1997, the Company entered into a License Agreement with a
corporation wholly-owned by Dr. Stephen D. Fantone, Chairman of the Board of Directors of the Company, with respect to the concept of utilizing optical technology, for which Dr. Fantones corporation possesses technical
expertise, for application to certain products currently under development by the Company. Under the agreement, the Company has paid the development costs to Dr. Fantones corporation. During the fiscal year ended September 30, 2002,
the Company elected to discontinue payment of the minimum annual royalty under this agreement. As a consequence, the Companys rights under this license were converted from exclusive rights to nonexclusive rights, effective as of
November 30, 2002. The proprietary rights to the technology will continue to be owned by Dr. Fantones corporation, and the Company will have a nonexclusive right



36



---

to the use of the technology in certain specified fields of use upon the terms and conditions set forth in the agreement. The Companys policy with respect to
business relationships with officers, directors, or affiliates is that any such relationships must be fully disclosed to the Board of Directors and must be upon terms not less favorable to the Company than those available from third parties dealing
at arms length.

The Company conducts a review of all related party transactions on an ongoing basis and utilizes the Audit Committee for the review of
potential conflict of interest situations where appropriate.



ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | The financial statements set forth in the Index contained on the page immediately preceding 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.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------



ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES



The following table summarizes the fees of BDO Seidman, LLP, the Companys
independent registered public accounting firm billed to the Company during each of the last two fiscal years for audit services and other services.



|                       |  |         |        |         |   |        
|---------------------- |  | ------- | ------ | ------- | - | -------
|Fee Category           |  | FY 2004 |        | FY 2005
|Audit Fees (1)         |  | $       | 73,000 |         | $ | 135,000
|Audit Related Fees (2) |  |         | 3,960  |         |   | 56,460 
|Tax Fees (3)           |  |         | 13,500 |         |   | 13,500 
|All Other Fees (4)     |  |         | -0-    |         |   | 53,200 

---

|(1) |  | Audit fees consist of fees for professional services for the audit of the Companys annual financial statements, review of financial statements included in the Companys Forms
10-QSB and services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years. The aggregate fee amounts do not include out-of-pocket expenses of $6,095 and $7,758 and for fiscal year 2004
and fiscal year 2005 respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of the Companys financial statements and are
not reported under Audit Fees. These services relate to the review of accounting matters. The Audit Committee approved 100% of these fees for fiscal 2004 and fiscal 2005 under its pre-approval policies and procedures.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Tax fees consist of fees rendered for tax compliance, tax advice and tax planning. These services include preparation of tax returns, estimated tax payments and general corporate tax advice.
The Audit Committee approved 100% of these fees for fiscal 2004 and fiscal 2005 under its pre-approval policies and procedures.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | All other fees consist of fees for products and services provided by the independent registered public accounting firm other than Audit Fees, Audit Related Fees, and
Tax Fees, and consist principally of services provided in connection with the Companys public offering of stock in fiscal 2005. The Audit Committee approved 100% of these fees for 2005 under its pre-approval policies and
procedures.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



37



---

Pre-Approval Policies and Procedures



The Audit Committee has adopted policies and procedures relating to the approval of all audit and non-audit services to be performed
by the independent registered public accounting firm. This policy generally provides that the Company will not engage its independent auditors to render audit or non-audit services unless the service is specifically approved in advance by the Audit
Committee or the engagement is entered into pursuant to one of the pre-approval procedures described below.



From time to time, the Audit Committee may pre-approve specific types of services that are expected to be provided by the independent registered public accounting
firm during the next twelve months. Any such pre-approval is detailed as to the particular services to be provided and is also subject to a maximum dollar amount.



The Audit Committees practice is to consider for approval, at its regularly scheduled quarterly meetings, all audit and
non-audit services proposed to be provided by its independent registered public accounting firm. In situations where a matter cannot wait until the next regularly scheduled committee meeting, the chairman of the committee has been delegated
authority to consider and, if appropriate, approve audit and non-audit services or, if in the chairmans judgment it is appropriate, to call a special meeting of the committee for that purpose.



38



---

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

/S/    RONALD L.
MARSIGLIORonald L. Marsiglio, President




|Date: |  | December 27, 2005
|----- |  | -----------------



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.



|                                                          |  |                                                                                                    |  |                  
|--------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | -----------------
|                                                          |  |                                                                                                   
|/S/    RONALD L.
MARSIGLIORonald L.
Marsiglio             |  | President, Chief Executive Officer and Director                                                    |  | December 27, 2005
|                                                          |  |                                                                                                   
|/S/    FRANCIS E. DUNNE,
JR.Francis E. Dunne, Jr.         |  | Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer) |  | December 27, 2005
|                                                          |  |                                                                                                   
|/S/    STEPHEN D.
FANTONEStephen D. Fantone               |  | Chairman of the Board of Directors                                                                 |  | December 28, 2005
|                                                          |  |                                                                                                   
|/s/    Samuel O. RaymondSamuel O. Raymond                 |  | Director                                                                                           |  | December 28, 2005
|                                                          |  |                                                                                                   
|/S/    A. THEODORE MOLLEGEN,
JR.A. Theodore Mollegen,
Jr. |  | Director                                                                                           |  | December 27, 2005
|                                                          |  |                                                                                                   
|/S/    GARY K.
WILLISGary K. Willis                       |  | Director                                                                                           |  | December 28, 2005
|                                                          |  |                                                                                                   
|/S/    ARTHUR L.
FATUMArthur L. Fatum                     |  | Director                                                                                           |  | December 28, 2005



39



---

I
ndex



|                                                                                                          |  |     
|--------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                          |  | Page
|Report of Independent Registered Public Accounting Firm                                                   |  | F2 
|Consolidated Balance Sheets as of September 30, 2005 and 2004                                             |  | F3 
|Consolidated Statements of Operations for the Years Ended September 30, 2005, 2004 and 2003               |  | F4 
|Consolidated Statements of Stockholders Investment for the Years Ended September 30, 2005, 2004 and 2003 |  | F5 
|Consolidated Statements of Cash Flows for the Years Ended September 30, 2005, 2004 and 2003               |  | F6 
|Notes to Consolidated Financial Statements                                                                |  | F7 



F-1



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Directors and Stockholders of Benthos, Inc.:



We have audited the accompanying consolidated balance sheets of Benthos, Inc. and
subsidiaries as of September 30, 2005 and 2004 and the related consolidated statements of operations, stockholders investment and cash flows for each of the three years in the period ended September 30, 2005. 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 of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.



In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial position of Benthos, Inc. and subsidiaries as of September 30, 2005 and 2004 and the results of their operations and their cash flows for each of the three years in the
period ended September 30, 2005, in conformity with accounting principles generally accepted in the United States of America.



|                                         |  |                     
|---------------------------------------- |  | --------------------
|Boston, Massachusetts                    |  | /s/ BDO SEIDMAN, LLP
|October 28, 2005 (except for the matter  |  |                     
|discussed in Note 10, for which the date |  |                     
|is November 2, 2005)                     |  |                     











F-2



---

BENTHOS, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                              |  |               |        |   |      |   |       |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | - | ---- | - | ----- | -
|                                                                                                                              |  | September 30, |       
|                                                                                                                              |  | 2005          |        |   | 2004 |  
|ASSETS                                                                                                                        |  |               |        |   |      |  
|Current Assets:                                                                                                               |  |               |        |   |      |   |       |  
|Cash and cash equivalents                                                                                                     |  | $             | 9,506  |   |      | $ | 241   |  
|Accounts receivable, less reserves of $238 and $291 at September 30, 2005 and 2004, respectively (Note 9)                     |  |               | 3,484  |   |      |   | 3,565 |  
|Inventories                                                                                                                   |  |               | 3,843  |   |      |   | 3,149 |  
|Prepaid expenses and other current assets                                                                                     |  |               | 162    |   |      |   | 168   |  
|Deferred Tax Asset (Note 4)                                                                                                   |  |               | 1,305  |   |      |   |      |  
|                                                                                                                              |  |               |        |   |      |   |       |  
|Total current assets                                                                                                          |  |               | 18,300 |   |      |   | 7,123 |  
|                                                                                                                              |  |               |        |   |      |   |       |  
|Property, Plant and Equipment, at cost:                                                                                       |  |               |        |   |      |   |       |  
|Land                                                                                                                          |  |               | 32     |   |      |   | 32    |  
|Buildings and improvements                                                                                                    |  |               | 2,111  |   |      |   | 2,081 |  
|Equipment and fixtures                                                                                                        |  |               | 4,121  |   |      |   | 4,053 |  
|Demonstration equipment                                                                                                       |  |               | 1,235  |   |      |   | 1,162 |  
|                                                                                                                              |  |               |        |   |      |   |       |  
|                                                                                                                              |  |               | 7,499  |   |      |   | 7,328 |  
|LessAccumulated depreciation                                                                                                 |  |               | 6,145  |   |      |   | 6,139 |  
|                                                                                                                              |  |               |        |   |      |   |       |  
|Property, Plant and Equipment, net                                                                                            |  |               | 1,354  |   |      |   | 1,189 |  
|                                                                                                                              |  |               |        |   |      |   |       |  
|Goodwill                                                                                                                      |  |               | 576    |   |      |   | 576   |  
|Acquired Intangible Assets, net of accumulated amortization of $1,430 and $1,212 at September 30, 2005 and 2004, respectively |  |               |       |   |      |   | 218   |  
|Deferred Tax Asset (Note 4)                                                                                                   |  |               | 595    |   |      |   |      |  
|Other Assets, net                                                                                                             |  |               | 16     |   |      |   | 35    |  
|                                                                                                                              |  |               |        |   |      |   |       |  
|                                                                                                                              |  | $             | 20,841 |   |      | $ | 9,141 |  
|                                                                                                                              |  |               |        |   |      |   |       |  
|LIABILITIES AND STOCKHOLDERS INVESTMENT                                                                                      |  |               |        |   |      |  
|Current Liabilities:                                                                                                          |  |               |        |   |      |   |       |  
|Current maturities of long-term debt (Note 3)                                                                                 |  | $             |       |   |      | $ | 279   |  
|Accounts payable                                                                                                              |  |               | 1,463  |   |      |   | 1,217 |  
|Accrued expenses (Note 9)                                                                                                     |  |               | 2,184  |   |      |   | 1,558 |  
|Customer deposits                                                                                                             |  |               | 306    |   |      |   | 302   |  
|                                                                                                                              |  |               |        |   |      |   |       |  
|Total current liabilities                                                                                                     |  |               | 3,953  |   |      |   | 3,356 |  
|                                                                                                                              |  |               |        |   |      |   |       |  
|Long-term Debt, net of current maturities (Note 3)                                                                            |  |               |       |   |      |   | 256   |  
|                                                                                                                              |  |               |        |   |      |   |       |  
|Commitments and Contingencies (Notes 5 and 7)                                                                                 |  |               |        |   |      |   |       |  
|Stockholders Investment: (Note 5)                                                                                            |  |               |        |   |      |   |       |  
|Common stock, $0.062/3par value                                                                                              |  |               |        |   |      |   |       |  
|Authorized7,500,000 shares                                                                                                   |  |               |        |   |      |   |       |  
|Issued2,375,516 and 1,665,307 shares at September 30, 2005 and 2004, respectively                                            |  |               | 159    |   |      |   | 111   |  
|Capital in excess of par value                                                                                                |  |               | 9,684  |   |      |   | 1,648 |  
|Retained earnings                                                                                                             |  |               | 7,675  |   |      |   | 4,401 |  
|Treasury stock, at cost269,645 and 269,749 shares at September 30, 2005 and 2004, respectively                               |  |               | (630   | ) |      |   | (631  | )
|                                                                                                                              |  |               |        |   |      |   |       |  
|Total stockholders investment                                                                                                |  |               | 16,888 |   |      |   | 5,529 |  
|                                                                                                                              |  |               |        |   |      |   |       |  
|                                                                                                                              |  | $             | 20,841 |   |      | $ | 9,141 |  
|                                                                                                                              |  |               |        |   |      |   |       |  



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



F-3



---

BENTHOS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)





|                                                                          |  |                          |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                          |  | Year Ended September 30, |          
|                                                                          |  | 2005                     |           |   | 2004 |   |           | 2003 | 
|Product Sales                                                             |  | $                        | 21,647    |   |      | $ | 17,236    |      |  | $ | 15,143    |  
|Services                                                                  |  |                          | 2,448     |   |      |   | 2,614     |      |  |   | 1,881     |  
|                                                                          |  |                          |           |   |      |   |           |      |  |   |           |  
|Total Net Sales                                                           |  |                          | 24,095    |   |      |   | 19,850    |      |  |   | 17,024    |  
|Cost of Product Sales                                                     |  |                          | 12,274    |   |      |   | 10,323    |      |  |   | 9,643     |  
|Cost of Services                                                          |  |                          | 1,243     |   |      |   | 1,465     |      |  |   | 1,085     |  
|                                                                          |  |                          |           |   |      |   |           |      |  |   |           |  
|Gross profit                                                              |  |                          | 10,578    |   |      |   | 8,062     |      |  |   | 6,296     |  
|Selling, General and Administrative Expenses                              |  |                          | 6,589     |   |      |   | 5,218     |      |  |   | 4,956     |  
|Research and Development Expenses                                         |  |                          | 2,025     |   |      |   | 1,687     |      |  |   | 1,700     |  
|Amortization of Acquired Intangibles                                      |  |                          | 218       |   |      |   | 239       |      |  |   | 239       |  
|Gain on Sale of Real Estate (Note 1)                                      |  |                          |          |   |      |   |          |      |  |   | (2,208    | )
|                                                                          |  |                          |           |   |      |   |           |      |  |   |           |  
|Income from operations                                                    |  |                          | 1,746     |   |      |   | 918       |      |  |   | 1,609     |  
|Interest Income                                                           |  |                          | 81        |   |      |   | 2         |      |  |   | 3         |  
|Interest Expense                                                          |  |                          | (22       | ) |      |   | (58       | )    |  |   | (208      | )
|                                                                          |  |                          |           |   |      |   |           |      |  |   |           |  
|Income before (benefit from) provision for income taxes                   |  |                          | 1,805     |   |      |   | 862       |      |  |   | 1,404     |  
|(Benefit from) Provision for Income Taxes (Note 4)                        |  |                          | (1,469    | ) |      |   | 188       |      |  |   | 831       |  
|                                                                          |  |                          |           |   |      |   |           |      |  |   |           |  
|Net income                                                                |  | $                        | 3,274     |   |      | $ | 674       |      |  | $ | 573       |  
|                                                                          |  |                          |           |   |      |   |           |      |  |   |           |  
|Basic Earnings per Share (Note 6)                                         |  | $                        | 1.74      |   |      | $ | .49       |      |  | $ | .41       |  
|                                                                          |  |                          |           |   |      |   |           |      |  |   |           |  
|Diluted Earnings per Share (Note 6)                                       |  | $                        | 1.60      |   |      | $ | .47       |      |  | $ | .41       |  
|                                                                          |  |                          |           |   |      |   |           |      |  |   |           |  
|Weighted Average Number of Shares Outstanding (Note 6)                    |  |                          | 1,635,429 |   |      |   | 1,384,466 |      |  |   | 1,383,082 |  
|                                                                          |  |                          |           |   |      |   |           |      |  |   |           |  
|Weighted Average Number of Shares Outstanding, assuming dilution (Note 6) |  |                          | 1,814,467 |   |      |   | 1,441,730 |      |  |   | 1,388,796 |  
|                                                                          |  |                          |           |   |      |   |           |      |  |   |           |  



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



F-4



---

BENTHOS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT

(In thousands, except share and per share data)



|                                         |  |                 |  |                             |     |                  |   |                         |  |   |                              |  |         |   |  |   |      |   |  |   |       
|---------------------------------------- |  | --------------- |  | --------------------------- | --- | ---------------- | - | ----------------------- |  | - | ---------------------------- |  | ------- | - |  | - | ---- | - |  | - | ------
|                                         |  | Common Stock    |  | Capital inExcess ofParValue |     | RetainedEarnings |   | Treasury Stock, at cost |  |   | TotalStockholdersInvestment
|                                         |  | Number ofShares |  | $0.062/3Par Value           |     |                  |   | Number ofShares         |  |   | Amount                       |  |        
|Balance, September 30, 2002              |  | 1,652,831       |  | $                           | 110 |                  | $ | 1,569                   |  | $ | 3,154                        |  | 269,749 |   |  | $ | (631 | ) |  | $ | 4,202 
|Net income                               |  |                |  |                             |    |                  |   |                        |  |   | 573                          |  |        |   |  |   |     |   |  |   | 573   
|                                         |  |                 |  |                             |     |                  |   |                         |  |   |                              |  |         |   |  |   |      |   |  |   |       
|Balance, September 30, 2003              |  | 1,652,831       |  |                             | 110 |                  |   | 1,569                   |  |   | 3,727                        |  | 269,749 |   |  |   | (631 | ) |  |   | 4,775 
|Net income                               |  |                |  |                             |    |                  |   |                        |  |   | 674                          |  |        |   |  |   |     |   |  |   | 674   
|Exercise of stock options                |  | 12,476          |  |                             | 1   |                  |   | 79                      |  |   |                             |  |        |   |  |   |     |   |  |   | 80    
|                                         |  |                 |  |                             |     |                  |   |                         |  |   |                              |  |         |   |  |   |      |   |  |   |       
|Balance, September 30, 2004              |  | 1,665,307       |  | $                           | 111 |                  | $ | 1,648                   |  | $ | 4,401                        |  | 269,749 |   |  | $ | (631 | ) |  | $ | 5,529 
|Net income                               |  |                |  |                             |    |                  |   |                        |  |   | 3,274                        |  |        |   |  |   |     |   |  |   | 3,274 
|Sale of treasury stock                   |  |                |  |                             |    |                  |   |                        |  |   |                              |  | (104    | ) |  |   | 1    |   |  |   | 1     
|Exercise of stock options                |  | 54,449          |  |                             | 4   |                  |   | 277                     |  |   |                             |  |        |   |  |   |     |   |  |   | 281   
|Tax benefit from stock options exercised |  |                |  |                             |    |                  |   | 118                     |  |   |                             |  |        |   |  |   |     |   |  |   | 118   
|Sale of common stock, net                |  | 655,760         |  |                             | 44  |                  |   | 7,641                   |  |   |                             |  |        |   |  |   |     |   |  |   | 7,685 
|                                         |  |                 |  |                             |     |                  |   |                         |  |   |                              |  |         |   |  |   |      |   |  |   |       
|Balance, September 30, 2005              |  | 2,375,516       |  | $                           | 159 |                  | $ | 9,684                   |  | $ | 7,675                        |  | 269,645 |   |  | $ | (630 | ) |  | $ | 16,888
|                                         |  |                 |  |                             |     |                  |   |                         |  |   |                              |  |         |   |  |   |      |   |  |   |       



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



F-5



---

BENTHOS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                            |  | Year Ended September 30, |       
|                                                                                            |  | 2005                     |        |   | 2004 |   |        | 2003 | 
|Cash Flows from Operating Activities:                                                       |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income                                                                                  |  | $                        | 3,274  |   |      | $ | 674    |      |  | $ | 573    |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                          |        |   |      |   |        |      |  |   |        |  
|Gain on sale of real estate                                                                 |  |                          |       |   |      |   |       |      |  |   | (2,208 | )
|Depreciation and amortization                                                               |  |                          | 694    |   |      |   | 883    |      |  |   | 837    |  
|Tax benefit from stock options exercised                                                    |  |                          | 118    |   |      |   |       |      |  |   |       |  
|Deferred income taxes                                                                       |  |                          | (1,900 | ) |      |   |       |      |  |   | 1,500  |  
|Changes in assets and liabilities:                                                          |  |                          |        |   |      |   |        |      |  |   |        |  
|Accounts receivable                                                                         |  |                          | 81     |   |      |   | (1,030 | )    |  |   | 336    |  
|Inventories                                                                                 |  |                          | (1,129 | ) |      |   | (201   | )    |  |   | (676   | )
|Refundable Income taxes                                                                     |  |                          |       |   |      |   |       |      |  |   | 393    |  
|Prepaid expenses and other current assets                                                   |  |                          | 6      |   |      |   | (15    | )    |  |   | (5     | )
|Accounts payable and accrued expenses                                                       |  |                          | 872    |   |      |   | (546   | )    |  |   | (48    | )
|Customer deposits and deferred revenue                                                      |  |                          | 4      |   |      |   | 41     |      |  |   | (279   | )
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash provided by (used in) operating activities                                         |  |                          | 2,020  |   |      |   | (194   | )    |  |   | 423    |  
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash Flows from Investing Activities:                                                       |  |                          |        |   |      |   |        |      |  |   |        |  
|Purchase of property, plant and equipment                                                   |  |                          | (187   | ) |      |   | (120   | )    |  |   | 209    |  
|Other investing activities, net                                                             |  |                          |       |   |      |   |       |      |  |   | 330    |  
|Proceeds from sale of real estate, net                                                      |  |                          |       |   |      |   | 1,150  |      |  |   | 1,231  |  
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash (used in) provided by investing activities                                         |  |                          | (187   | ) |      |   | 1,030  |      |  |   | 1,770  |  
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash Flows from Financing Activities:                                                       |  |                          |        |   |      |   |        |      |  |   |        |  
|Payments of long-term debt                                                                  |  |                          | (535   | ) |      |   | (879   | )    |  |   | (1,665 | )
|Line of credit                                                                              |  |                          |       |   |      |   |       |      |  |   | (400   | )
|Proceeds from sale of treasury stock to ESOP                                                |  |                          | 1      |   |      |   |       |      |  |   |       |  
|Proceeds from exercise of stock options                                                     |  |                          | 281    |   |      |   | 80     |      |  |   |       |  
|Proceeds from issuance of common stock, net                                                 |  |                          | 7,685  |   |      |   |       |      |  |   |       |  
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Net cash provided by (used in) financing activities                                         |  |                          | 7,432  |   |      |   | (799   | )    |  |   | (2,065 | )
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Net Increase in Cash and Cash Equivalents                                                   |  |                          | 9,265  |   |      |   | 37     |      |  |   | 128    |  
|Cash and Cash Equivalents, beginning of year                                                |  |                          | 241    |   |      |   | 204    |      |  |   | 76     |  
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Cash and Cash Equivalents, end of year                                                      |  | $                        | 9,506  |   |      | $ | 241    |      |  | $ | 204    |  
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Supplemental Disclosure of Cash Flow Information:                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Interest paid during the year                                                               |  | $                        | 23     |   |      | $ | 62     |      |  | $ | 210    |  
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Income taxes paid (refunded) during the year, net                                           |  | $                        | 229    |   |      | $ | 77     |      |  | $ | (774   | )
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Supplemental Disclosure of Non-cash Investing Activities:                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Transfer of inventory to property, plant, and equipment as demonstration equipment          |  | $                        | 1,006  |   |      | $ | 937    |      |  | $ | 1,170  |  
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Sale of real estate for note and other receivable                                           |  | $                        |       |   |      | $ |       |      |  | $ | 1,150  |  
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  
|Retirement of fixed assets                                                                  |  | $                        | 90     |   |      | $ |       |      |  | $ |       |  
|                                                                                            |  |                          |        |   |      |   |        |      |  |   |        |  



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



F-6



---

BENTHOS, INC. AND SUBSIDIARIES



Notes To
Consolidated Financial Statements



(In thousands, except share and
per share data)



(1)    Operations and Significant Accounting Policies



Benthos, Inc. and its subsidiaries (the Company) design, manufacture, sell and service
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 food, dairy, beverage,
pharmaceutical, personal care and chemical packages. The Companys customers are located throughout the world.



On September 29, 2003, the Company completed the sale of two parcels of real estate in Falmouth Massachusetts, called the South Side and the North Side
parcels, for a total sales price of $2,500. The real estate had a net book value of approximately $171 that resulted in a gain of $2,208. The gross proceeds of $1,300 for the South Side parcel were received on September 30, 2003. The Company
used $650 of these proceeds to repay a portion of the principal on a term loan (see Note 3). The proceeds, net of $50 of commissions, for the North Side parcel were $1,150. The Company received these proceeds in October 2003. The Company used $600
of these proceeds to repay an additional portion of the principal on a term loan (see Note 3).



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 subsidiaries, Benthos International, Inc. (a foreign sales corporation that was dissolved in April 2005), Leumas LLC (a single member limited liability company), and Evets LLC (a single member limited liability company). 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 in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates include allowance for doubtful accounts, inventory
valuation, and warranty reserves. Managements estimates are based on facts and circumstances available at the time that the estimates are made, past historical experience, risk of loss, general economic conditions and trends and
managements assessment of the probable future outcome of these matters. 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.



F-7



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



(d)    Inventories



Inventories are stated at the lower of cost (first-in, first-out) or market, net of obsolescence reserves. Work-in-process and
finished goods inventories include materials, labor and overhead. Inventories consist of the following at September 30, 2005 and 2004:



|                |  |      |       |      |   |      
|--------------- |  | ---- | ----- | ---- | - | -----
|                |  | 2005 |       | 2004
|Raw materials   |  | $    | 263   |      | $ | 235  
|Work-in-process |  |      | 3,523 |      |   | 2,806
|Finished goods  |  |      | 57    |      |   | 108  
|                |  |      |       |      |   |      
|                |  | $    | 3,843 |      | $ | 3,149
|                |  |      |       |      |   |      



The Company regularly reviews
inventory quantities on hand and inventory commitments with suppliers and records a provision for excess and obsolete inventory based primarily on historical usage for the prior twelve to twenty-four month period and forecast of future demand.
Although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of its inventory and
its reported operating results.



(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       |  | EstimatedUseful Life
|Buildings and improvements |  | 1533 years         
|Equipment and fixtures     |  | 5 years             
|Demonstration equipment    |  | 3 years             



Depreciation expense for the
years ended September 30, 2005, 2004 and 2003 was approximately $457, $626 and $583, respectively.



(f)  Impairment of Long-Lived Assets



Long-lived assets, such as intangible assets, property and equipment and certain sundry assets, are evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets are written down to fair value.



Intangible assets subject to amortization consist of developed technology purchased
in the acquisition of the assets of Datasonics, Inc. in August of 1999. The developed technology has an estimated useful life of 6 years and is recorded in acquired intangible assets. The amortization of this asset was completed during fiscal year
2005.



F-8



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



(g)  Goodwill



The Company accounts for purchased goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets. Goodwill, as well as certain other intangible assets determined to have indefinite lives, are no longer amortized; instead, these assets are tested for impairment at least
annually.



The Company performed its annual impairment test of the
goodwill allocated to the Undersea Systems reporting unit as of September 30, 2005 and 2004 and determined that there was no impairment at those times.



(h)  Revenue Recognition



Revenue is recognized when products are shipped to customers, provided that title has passed, 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, pursuant to the guidance provided by Staff Accounting Bulletin (SAB) No. 104. The Company
generally enters into arrangements for multiple deliverables when it contracts to deliver a product along with providing installation services. The Company follows Emerging Issues Task Force (EITF), Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. Based on the criteria contained in EITF No. 00-21, the Company has determined that the deliverables are separable into units of accounting. Revenue is allocated based on the relative fair values of the
individual units of accounting, and the Company generally recognizes revenue from each of these units as each unit is delivered or performed. A general right of return or cancellation does not exist once the product is delivered to the customer.
Amounts received from customers for future delivery are shown as customer deposits in the accompanying consolidated balance sheets. The Company accounts for shipping and handling fees passed on to customers as sales, and the Company records the
corresponding costs as cost of sales.



(i)  Concentration of
Credit Risk



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 fiscal year 2005, two customers of the Undersea Systems Division accounted for $4,732 (20%) and $2,791
(12%), respectively of net sales. In fiscal year 2004, two customers of the Undersea Systems Division accounted for $2,534 (13%) and $2,491(13%), respectively, of net sales. In fiscal year 2003, there were no customers who accounted for more
than 10% of net sales. As of September 30, 2005, two customers accounted for 22% and 14%, respectively, of accounts receivable. As of September 30, 2004, two customers accounted for 21% and 17%, respectively, of accounts receivable. As of
September 30, 2003, no customers accounted for more than 10% of accounts receivable.



The Company reviews accounts receivable on a monthly basis to determine if any receivables will be potentially uncollectable. The Company does not require collateral from customers. The Company includes any accounts receivable
balances that are determined to be uncollectable, along with a general reserve based on historical collection experience, in the overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is
written off against the allowance. Based on the information available, the Company believes the allowance for doubtful accounts is adequate. However, actual write-offs may exceed the recorded allowance.



F-9



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



(j)  Reclassifications



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



(k)  Financial Instruments



The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are reasonable estimates of their fair value because of the short maturities of those items.



The carrying amount of the term loan approximates fair market value as the loan bears interest at the current market rate. The term loan was paid in full in July
2005.



(l)  Recently Issued Accounting Pronouncements



In November 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 151, Inventory Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and spoilage. This statement requires that those items be recognized as current period charges regardless of whether they meet the
criterion of so abnormal which was the criterion specified in ARB No. 43. In addition, this statement requires that allocation of fixed production overheads to the cost of production be based on normal capacity of the production
facilities. This pronouncement is effective for the Company beginning October 1, 2005. The Company will adopt this pronouncement on October 1, 2005 and does not expect the adoption will have a material impact on its financial condition or
results of operations.



In December 2004, the FASB issued SFAS
No. 123(R), Share-Based Payment. SFAS 123(R) is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. The Company is required to adopt the provisions of SFAS 123 (R) as of the beginning of its second
fiscal quarter of 2006, beginning January 1, 2006. This statement establishes standards for, and requires the recognition of the cost of employment-related services settled in share-based payment. The Company is currently evaluating the impact
of adopting this new standard.



In December 2004, the FASB issued SFAS
No. 153, Exchanges of Nonmonetary Assets, an amendment of Accounting Principles Board ( APB) Opinion No. 29, Accounting for Nonmonetary Transactions. The amendments made by SFAS No. 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, APB Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The Company will adopt this pronouncement on October 1, 2005 and does not expect the adoption will have a material impact on its
financial condition or results of operations.



(m)  Comprehensive Income



Comprehensive
income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income is the same as net income for all periods presented.



F-10



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



(n)  StockBased Compensation



The Company accounts for its stock-based compensation plans under APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations. SFAS No. 123, Accounting for Stock-Based Compensation, establishes a fair value method of accounting for stock-based compensation plans as an
alternative for employee stock-based compensation plans and as a requirement for non-employee awards.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. SFAS No. 148 requires the disclosure
of the effects of a Companys accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financial statements. The Company has adopted the
disclosure-only provision of SFAS No. 123 and the enhanced disclosures as required by SFAS No. 148 for its employee plans.



Had compensation cost for the Companys stock option plans been determined consistent with SFAS No. 123 and 148, pro forma net income and net income per
share would have been the following:



|                            |  |               |       |      |   |      |  |   |    
|--------------------------- |  | ------------- | ----- | ---- | - | ---- |  | - | ---
|                            |  | September 30,
|                            |  | 2005          |       | 2004 |   | 2003
|Net income                 |  |               |       |      |   |      |  |   |    
|As reported                 |  | $             | 3,274 |      | $ | 674  |  | $ | 573
|Pro forma                   |  |               | 3,227 |      |   | 511  |  |   | 429
|                            |  |               |      
|Basic earnings per share   |  |               |       |      |   |      |  |   |    
|As reported                 |  | $             | 1.74  |      | $ | .49  |  | $ | .41
|Pro forma                   |  |               | 1.72  |      |   | .37  |  |   | .31
|                            |  |               |      
|Diluted earnings per share |  |               |       |      |   |      |  |   |    
|As reported                 |  | $             | 1.60  |      | $ | .47  |  | $ | .41
|Pro forma                   |  |               | 1.58  |      |   | .35  |  |   | .31



The underlying assumptions used
by the Company using the Black-Scholes option pricing model for fiscal years 2005, 2004, and 2003 are as follows:



|                         |  |               |   |  |      |   |  |      |  
|------------------------ |  | ------------- | - |  | ---- | - |  | ---- | -
|                         |  | September 30, |  
|                         |  | 2005          |   |  | 2004 |   |  | 2003 |  
|Risk-free interest rate  |  | 3.78          | % |  | 3.86 | % |  | 3.56 | %
|Expected dividend yield  |  |              |   |  |     |   |  |     |  
|Expected life (in years) |  | 7             |   |  | 7    |   |  | 7    |  
|Expected volatility      |  | 71            | % |  | 60   | % |  | 40   | %



The weighted average fair value
of options granted during the years ended September 30, 2005, 2004 and 2003 under these plans is $8.61, $3.63 and $1.93, respectively.



(o)  Income Taxes



The Company accounts for income taxes under the liability method in accordance with SFAS No. 109, Accounting for Income Taxes.Deferred tax assets and
liabilities are determined based on differences



F-11



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



between the financial reporting and income tax bases of assets and liabilities as well as net operating loss and tax credit carry-forwards and are measured using the
enacted tax rates and laws that will be in effect when the differences reverse. Deferred tax assets may be reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.



(p)  Research and Development



All costs of research and development activities are expensed as incurred.



(q)  Advertising Costs



Advertising costs are expensed as incurred and are included as a component of selling,
general, and administrative expenses in the accompanying Consolidated Statements of Operations. Advertising costs were $108, $104 and $133 for the years ended September 30, 2005, 2004, and 2003, respectively.



(r)  Warranties



The Companys products generally carry a standard one-year warranty. The Company
sets aside a reserve based on anticipated warranty claims at the time product revenue is recognized. Actual warranty claims incurred are charged to the warranty accrual. Factors that affect the Companys product warranty liability include the
number of units sold, the anticipated cost of warranty repairs, and both historical and anticipated rates of warranty claims.



(2)    Line of Credit



As of September 30, 2005, the Company has a $1,500 line of credit with a bank expiring on January 31, 2006. No amounts were outstanding under this line of
credit at September 30, 2005. Borrowings under this agreement are payable on demand and bear interest at the Wall Street Journals reported prime rate (6.75% at September 30, 2005) less 0.5%. The line of credit is secured by
substantially all of the assets of the Company. The Company is required to maintain certain covenants, including debt service coverage.The Company was in compliance with all of the covenants at September 30, 2005.



(3)    Note Payable



The Company had a note payable with a bank that was paid in full in July 2005. This
note was secured by substantially all of the assets of the Company. The Company was required to meet certain covenants, including debt service coverage. The Company was in compliance with all of these covenants at September 30, 2005. The note
was payable in monthly installments of $23 and was due to be paid off in August 2006. The interest rate on the note was the Wall Street Journal reported prime rate plus 0.75%.



F-12



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



(4)    Income Taxes



The components of the (benefit from) provision for income taxes for each of the three years ended September 30, 2005 are as
follows:



|                                           |  |               |        |   |      |   |      |      |  |   |    
|------------------------------------------ |  | ------------- | ------ | - | ---- | - | ---- | ---- |  | - | ---
|                                           |  | September 30,
|                                           |  | 2005          |        |   | 2004 |   |      | 2003
|Federal                                   |  |               |        |   |      |   |      |      |  |   |    
|Current                                    |  | $             | 427    |   |      | $ | 171  |      |  | $ |   
|Deferred                                   |  |               | 90     |   |      |   | (121 | )    |  |   | 477
|                                           |  |               |        |   |      |   |      |      |  |   |    
|                                           |  |               | 517    |   |      |   | 50   |      |  |   | 477
|                                           |  |               |       
|State                                     |  |               |        |   |      |   |      |      |  |   |    
|Current                                    |  |               | 4      |   |      |   | 17   |      |  |   |   
|Deferred                                   |  |               | 10     |   |      |   | (81  | )    |  |   | 215
|                                           |  |               |        |   |      |   |      |      |  |   |    
|                                           |  |               | 14     |   |      |   | (64  | )    |  |   | 215
|(Decrease) increase in valuation allowance |  |               | (2,000 | ) |      |   | 202  |      |  |   | 139
|                                           |  |               |        |   |      |   |      |      |  |   |    
|                                           |  | $             | (1,469 | ) |      | $ | 188  |      |  | $ | 831
|                                           |  |               |        |   |      |   |      |      |  |   |    



Income tax benefits attributable
to employee stock option transactions of $118 for the year ended September 30, 2005 were included in Capital in Excess of Par Value in the Consolidated Balance Sheets.



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



|                                               |  |               |    |  |        |   |  |       |  
|---------------------------------------------- |  | ------------- | -- |  | ------ | - |  | ----- | -
|                                               |  | September 30, |   
|                                               |  | 2005          |    |  | 2004   |   |  | 2003  |  
|Federal statutory rate                         |  | 34.00         | %  |  | 34.00  | % |  | 34.00 | %
|State income taxes, net of federal tax benefit |  | 2.27          |    |  | 2.00   |   |  | 4.70  |  
|Tax benefit of foreign sales                   |  | (0.73         | )  |  | (1.20  | ) |  | (0.36 | )
|Tax credits                                    |  | (6.48         | )  |  | (34.90 | ) |  | (0.00 | )
|Change in valuation allowance                  |  | (110.76       | )  |  | 23.00  |   |  | 25.00 |  
|Permanent differences                          |  | 0.38          |    |  | (1.10  | ) |  | 0.85  |  
|Elimination of tax contingency reserves        |  |              |    |  |       |   |  | (5.00 | )
|                                               |  |               |    |  |        |   |  |       |  
|Effective tax rate                             |  | (81.32        | )% |  | 21.80  | % |  | 59.19 | %
|                                               |  |               |    |  |        |   |  |       |  



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



|                                          |  |               |       |      |   |        |  
|----------------------------------------- |  | ------------- | ----- | ---- | - | ------ | -
|                                          |  | September 30, |      
|                                          |  | 2005          |       | 2004 |  
|Deferred Tax Assets:                      |  |               |       |      |   |        |  
|Acquisition related intangibles           |  | $             | 169   |      | $ | 221    |  
|Inventory reserves                        |  |               | 791   |      |   | 627    |  
|Tax credits and net operating losses      |  |               | 510   |      |   | 608    |  
|Other nondeductible reserves and accruals |  |               | 430   |      |   | 544    |  
|Valuation allowance                       |  |               |      |      |   | (2,000 | )
|                                          |  |               |       |      |   |        |  
|Deferred tax asset                        |  | $             | 1,900 |      | $ |       |  
|                                          |  |               |       |      |   |        |  



F-13



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



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.As of September 30, 2005, the Company has no valuation allowance against its deferred tax asset. The Company believes it is more
likely than not that the deferred tax asset at September 30, 2005, will be fully utilized against future income taxes based on its recent and anticipated profitable operations. During the years ended September 30, 2005 and 2004, the
Company decreased its valuation reserve by $2,000 and increased it by $202, respectively. The Company has state tax credits of approximately $285 that begin to expire in 2016 and state net operating losses of approximately $2,560 that expire at
various dates through 2008.



(5)    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 ten years from the date of grant. At September 30, 2005, 150,000 shares of common stock were reserved for issuance upon exercise of the nonqualified stock options. At September 30, 2005, 31,500 shares were available for future
grant.



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 Compensation and Stock Option Committee of the Board of Directors 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 ten 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, 2005, 43,825 shares were available for future grant. Stock option activity is summarized as follows:



|                                |  |                  |   |                  |                             |       |                |         |   |                             |   |     
|------------------------------- |  | ---------------- | - | ---------------- | --------------------------- | ----- | -------------- | ------- | - | --------------------------- | - | ----
|                                |  | Employee Options |   | Director Options
|                                |  | NumberofShares   |   |                  | WeightedAverageOption Price |       | NumberofShares |         |   | WeightedAverageOption Price
|Outstanding, September 30, 2002 |  | 245,125          |   |                  | $                           | 6.67  |                | 121,500 |   |                             | $ | 8.47
|Granted                         |  | 70,000           |   |                  |                             | 4.20  |                | 6,000   |   |                             |   | 2.86
|Terminated                      |  | (38,450          | ) |                  |                             | 7.09  |                | (15,000 | ) |                             |   | 6.44
|                                |  |                  |   |                  |                             |       |                |         |   |                             |   |     
|Outstanding, September 30, 2003 |  | 276,675          |   |                  |                             | 5.99  |                | 112,500 |   |                             |   | 8.44
|Granted                         |  | 36,100           |   |                  |                             | 5.82  |                | 6,000   |   |                             |   | 5.48
|Terminated                      |  | (11,274          | ) |                  |                             | 5.22  |                |        |   |                             |   |    
|Exercised                       |  | (12,476          | ) |                  |                             | 6.41  |                |        |   |                             |   |    
|                                |  |                  |   |                  |                             |       |                |         |   |                             |   |     
|Outstanding, September 30, 2004 |  | 289,025          |   |                  |                             | 5.98  |                | 118,500 |   |                             |   | 8.29
|Granted                         |  | 5,000            |   |                  |                             | 12.35 |                |        |   |                             |   |    
|Terminated                      |  | (950             | ) |                  |                             | 5.81  |                |        |   |                             |   |    
|Exercised                       |  | (54,449          | ) |                  |                             | 5.16  |                |        |   |                             |   |    
|                                |  |                  |   |                  |                             |       |                |         |   |                             |   |     
|Outstanding, September 30, 2005 |  | 238,626          |   |                  | $                           | 6.30  |                | 118,500 |   |                             | $ | 8.29
|                                |  |                  |   |                  |                             |       |                |         |   |                             |   |     
|Exercisable, September 30, 2005 |  | 176,426          |   |                  | $                           | 6.60  |                | 112,500 |   |                             | $ | 8.48
|                                |  |                  |   |                  |                             |       |                |         |   |                             |   |     
|Exercisable, September 30, 2004 |  | 183,625          |   |                  | $                           | 6.63  |                | 99,667  |   |                             | $ | 9.07
|                                |  |                  |   |                  |                             |       |                |         |   |                             |   |     
|Exercisable, September 30, 2003 |  | 140,425          |   |                  | $                           | 7.12  |                | 88,833  |   |                             | $ | 9.74
|                                |  |                  |   |                  |                             |       |                |         |   |                             |   |     



F-14



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



The range of exercise prices for options outstanding and options exercisable at September 30, 2005 for the
Employee Plans is as follows:



|                         |  |                     |  |                                          |  |                               |       |                 |         |                               |   |      
|------------------------ |  | ------------------- |  | ---------------------------------------- |  | ----------------------------- | ----- | --------------- | ------- | ----------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                     
|Range of Exercise
Prices |  | Number ofShares     |  | WeightedAverageRemainingContractual Life |  | WeightedAverage ExercisePrice |       | Number ofShares |         | WeightedAverage ExercisePrice
|$  2.65                  |  | 11,500              |  | 7.5                                      |  | $                             | 2.65  |                 | 4,000   |                               | $ | 2.65 
|$  3.78                  |  | 4,250               |  | 6.3                                      |  |                               | 3.78  |                 | 1,250   |                               |   | 3.78 
|$  4.62  4.92           |  | 36,000              |  | 7.2                                      |  |                               | 4.63  |                 | 14,000  |                               |   | 4.63 
|$  5.00  5.84           |  | 116,925             |  | 6.2                                      |  |                               | 5.23  |                 | 92,225  |                               |   | 5.07 
|$  6.25                  |  | 10,351              |  | 3.3                                      |  |                               | 6.25  |                 | 10,351  |                               |   | 6.25 
|$  8.00  8.75           |  | 30,600              |  | 4.4                                      |  |                               | 8.32  |                 | 30,600  |                               |   | 8.32 
|$10.1711.50             |  | 19,500              |  | 1.3                                      |  |                               | 11.22 |                 | 19,500  |                               |   | 11.22
|$12.35                   |  | 5,000               |  | 9.7                                      |  |                               | 12.35 |                 |        |                               |   |     
|$17.54                   |  | 4,500               |  | 2.1                                      |  |                               | 17.54 |                 | 4,500   |                               |   | 17.54
|                         |  |                     |  |                                          |  |                               |       |                 |         |                               |   |      
|                         |  | 238,626             |  | 5.7                                      |  | $                             | 6.30  |                 | 176,426 |                               | $ | 6.60 
|                         |  |                     |  |                                          |  |                               |       |                 |         |                               |   |      



The range of exercise prices for
options outstanding and options exercisable at September 30, 2005 for director stock options is as follows:



|                         |  |                     |  |                                          |  |                               |       |                 |         |                               |   |      
|------------------------ |  | ------------------- |  | ---------------------------------------- |  | ----------------------------- | ----- | --------------- | ------- | ----------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                     
|Range of Exercise
Prices |  | Number ofShares     |  | WeightedAverageRemainingContractual Life |  | WeightedAverage ExercisePrice |       | Number ofShares |         | WeightedAverage ExercisePrice
|$  2.86                  |  | 6,000               |  | 7.3                                      |  | $                             | 2.86  |                 | 4,000   |                               | $ | 2.86 
|$  3.78                  |  | 26,500              |  | 6.3                                      |  |                               | 3.78  |                 | 26,500  |                               |   | 3.78 
|$  5.48                  |  | 6,000               |  | 8.4                                      |  |                               | 5.48  |                 | 2,000   |                               |   | 5.48 
|$  8.00  8.50           |  | 50,000              |  | 4.1                                      |  |                               | 8.35  |                 | 50,000  |                               |   | 8.35 
|$13.3814.25             |  | 30,000              |  | 2.4                                      |  |                               | 13.81 |                 | 30,000  |                               |   | 13.81
|                         |  |                     |  |                                          |  |                               |       |                 |         |                               |   |      
|                         |  | 118,500             |  | 4.6                                      |  | $                             | 8.29  |                 | 112,500 |                               | $ | 8.48 
|                         |  |                     |  |                                          |  |                               |       |                 |         |                               |   |      



(b)  Employee Stock
Ownership Plan



The Company had an Employee Stock Ownership Plan
(ESOP) covering all eligible employees, as defined. Contributions to the plan were 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 did not exceed the maximum
amount allowable by the Internal Revenue Code (IRC). These contributions vested to a participants account over five years based on completed service, as defined. In fiscal year 2005, he Company contributed $1 to the ESOP for distributions
related to the termination of the plan, which occurred in fiscal year 2005. There were no provisions for contributions for the years ended September 30, 2004 or 2003.



(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



F-15



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



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 100% of his or her compensation for the plan year, but not more than $14,000 (for calendar year 2005), to the plan. There were no provisions for discretionary contributions for the years ended September 30, 2005, 2004, and
2003. The Company made matching contributions to the plan of $123, $108, or $98 for the years ended September 30, 2005, 2004, and 2003, 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 for the three years ended September 30, 2005, 2004, or 2003.



(6)    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.



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



|                                                              |  |                          |  |           |  |          
|------------------------------------------------------------- |  | ------------------------ |  | --------- |  | ---------
|                                                              |  | Year Ended September 30,
|                                                              |  | 2005                     |  | 2004      |  | 2003     
|Weighted average common shares outstanding                    |  | 1,635,429                |  | 1,384,466 |  | 1,383,082
|Effect of dilutive securities                                 |  | 179,038                  |  | 57,264    |  | 5,714    
|                                                              |  |                          |  |           |  |          
|Weighted average common shares outstanding, assuming dilution |  | 1,814,467                |  | 1,441,730 |  | 1,388,796
|                                                              |  |                          |  |           |  |          



For the years ended
September 30, 2005, 2004 and 2003, 22,000, 140,375 and 340,107 weighted average options, respectively, were outstanding but not included in the diluted weighted average common share calculation as the effect would have been antidilutive.



(7)    Contingent Obligations



(a)  Employment and Noncompetition Agreements



The Company had an employment and noncompetition agreement, as amended, with a
director/stockholder. In connection with the employment agreement, the Company had agreed to provide a $1,500 split-dollar life insurance policy on the director/stockholder. In 2003, as a result of provisions of the Sarbanes-Oxley Act, the
employment agreement was amended to remove the requirement that the Company provide the split-dollar life insurance policy. The existing split-dollar life insurance was surrendered in August 2003 and the Company received proceeds of $457 which was
its approximate carrying value.



F-16



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



Compensation expense of approximately $60, $85 and $103 related to this agreement is included in the
accompanying 2005, 2004 and 2003 consolidated statements of operations, respectively.



The Company also has employment agreements with its CEO, CFO, and Vice President, General Manager, Package Inspection Systems Division, Vice President, Sales and Marketing, Undersea Systems Division, Vice-President
Manufacturing and Purchasing, and its Controller. These agreements are for two-year periods and provide for minimum salary during their term and a Company severance obligation should the employee be terminated without cause.



(b)  Risk of Competition



Under the Companys arrangement with Sercel, Inc., the Company currently has a
non-exclusive worldwide license to use certain technology owned by Sercel that allows the Company to manufacture its GeoPoint hydrophones. During the first three years of the license, the Company had the exclusive right to manufacture the
hydrophones using the licensed technology. Several years ago, the license converted from an exclusive license to a non-exclusive license. The term of the license has expired, but the Company, as licensee, has the right to continue to use the
licensed technology to make, distribute, use and sell the licensed product. Subject to the Companys retained right, Sercel as the owner of the licensed technology, also has the right to use the licensed technology to make, distribute, use and
sell the licensed product. Sercel is one of the Companys largest customers (approximately 20% and 13%, respectively, of net sales in fiscal 2005 and 2004), and substantially all of the Companys revenues from Sercel consist of sales of
hydrophones. Due to the current high level of activity in the oil and gas exploration industry, Sercel has advised the Company that it has developed a second source of supply for GeoPoint hydrophones. As a result of Sercel having developed an
alternative source of GeoPoint hydrophone production, some or all of the Companys GeoPoint hydrophone sales to Sercel could be replaced by the new source. If Sercel discontinued purchasing GeoPoint hydrophones from us, the Companys sales
would decline to the extent that the Company were unable to replace such sales to Sercel with sales to other customers.



F-17



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



(8)    Segment Reporting



SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, established standards for reporting
information about operating segments and related disclosures about products and services, geographic areas, and major customers. The Company views its operations and manages its business as two segments, Undersea Systems and Package Inspection
Systems, as being strategic business units that offer different products. 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 is a combination of the president, the chief financial officer and other operating officers.
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, |       
|                                   |  | 2005                     |        |   | 2004 |   |        | 2003 | 
|Sales to unaffiliated customers:   |  |                          |        |   |      |   |        |      |  |   |        |  
|Undersea systems                   |  | $                        | 15,388 |   |      | $ | 12,966 |      |  | $ | 9,699  |  
|Package inspection systems         |  |                          | 8,707  |   |      |   | 6,884  |      |  |   | 7,325  |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Total                              |  | $                        | 24,095 |   |      | $ | 19,850 |      |  | $ | 17,024 |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Gross Profit:                      |  |                          |        |   |      |   |        |      |  |   |        |  
|Undersea systems                   |  | $                        | 6,080  |   |      | $ | 5,117  |      |  | $ | 3,429  |  
|Package inspection systems         |  |                          | 4,498  |   |      |   | 2,945  |      |  |   | 2,867  |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Total                              |  | $                        | 10,578 |   |      | $ | 8,062  |      |  | $ | 6,296  |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Income (loss) from operations:     |  |                          |        |   |      |   |        |      |  |   |        |  
|Undersea systems                   |  | $                        | 1,067  |   |      | $ | 923    |      |  | $ | (473   | )
|Package inspection systems         |  |                          | 679    |   |      |   | (5     | )    |  |   | (126   | )
|Corporate                          |  |                          |       |   |      |   |       |      |  |   | 2,208  |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Total                              |  | $                        | 1,746  |   |      | $ | 918    |      |  | $ | 1,609  |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Identifiable assets:               |  |                          |        |   |      |   |        |      |  |   |        |  
|Undersea systems                   |  | $                        | 6,375  |   |      | $ | 6,460  |      |  | $ | 5,411  |  
|Package inspection systems         |  |                          | 2,383  |   |      |   | 1,740  |      |  |   | 2,247  |  
|Corporate assets                   |  |                          | 12,083 |   |      |   | 941    |      |  |   | 2,112  |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Total                              |  | $                        | 20,841 |   |      | $ | 9,141  |      |  | $ | 9,770  |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Depreciation:                      |  |                          |        |   |      |   |        |      |  |   |        |  
|Undersea systems                   |  | $                        | 213    |   |      | $ | 251    |      |  | $ | 315    |  
|Package inspection systems         |  |                          | 146    |   |      |   | 315    |      |  |   | 227    |  
|Corporate assets                   |  |                          | 98     |   |      |   | 60     |      |  |   | 41     |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Total                              |  | $                        | 457    |   |      | $ | 626    |      |  | $ | 583    |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Tax (benefit) expense:             |  |                          |        |   |      |   |        |      |  |   |        |  
|Undersea systems                   |  | $                        | 314    |   |      | $ | 201    |      |  | $ | (142   | )
|Package inspection systems         |  |                          | 200    |   |      |   | (1     | )    |  |   | (38    | )
|Corporate assets                   |  |                          | (1,983 | ) |      |   | (12    | )    |  |   | 1,011  |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Total                              |  | $                        | (1,469 | ) |      | $ | 188    |      |  | $ | 831    |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Purchases (sales) of fixed assets: |  |                          |        |   |      |   |        |      |  |   |        |  
|Undersea systems                   |  | $                        | 54     |   |      | $ | 81     |      |  | $ | 50     |  
|Package inspection systems         |  |                          | 20     |   |      |   | 17     |      |  |   | (374   | )
|Corporate assets                   |  |                          | 113    |   |      |   | 22     |      |  |   | 115    |  
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  
|Total                              |  | $                        | 187    |   |      | $ | 120    |      |  | $ | (209   | )
|                                   |  |                          |        |   |      |   |        |      |  |   |        |  



F-18



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



The net sales of each product line of the Undersea Systems Division were:



|                                  |  |   |        |  |   |        |  |   |      
|--------------------------------- |  | - | ------ |  | - | ------ |  | - | -----
|Underwater Acoustics              |  | $ | 5,910  |  | $ | 5,662  |  | $ | 5,089
|Geophysical Exploration Equipment |  |   | 6,753  |  |   | 4,544  |  |   | 3,315
|Other Undersea Products           |  |   | 2,725  |  |   | 2,760  |  |   | 1,295
|                                  |  |   |        |  |   |        |  |   |      
|Total                             |  | $ | 15,388 |  | $ | 12,966 |  | $ | 9,699
|                                  |  |   |        |  |   |        |  |   |      



The Package Inspection Systems
Division has only one product line.



Net sales by geographic area for the
years ended September 30, 2005, 2004 and 2003 were:



|                |  |      |        |      |   |        |  |   |       
|--------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|Geographic Area |  | 2005 |        | 2004 |   | 2003  
|United States   |  | $    | 12,087 |      | $ | 10,202 |  | $ | 11,870
|France          |  |      | 4,496  |      |   | 2,296  |  |   | 607   
|Germany         |  |      | 747    |      |   | 944    |  |   | 316   
|South Korea     |  |      | 743    |      |   | 1,301  |  |   | 365   
|Other           |  |      | 6,022  |      |   | 5,107  |  |   | 3,866 
|                |  |      |        |      |   |        |  |   |       
|                |  | $    | 24,095 |      | $ | 19,850 |  | $ | 17,024
|                |  |      |        |      |   |        |  |   |       



Other than presented above, no
one country represented more than 10% of net sales in any of the last three fiscal years.



(9)    Certain Balance Sheet Accounts



(a)  Accrued Expenses



Accrued expenses
consist of the following at September 30, 2005 and 2004:



|                                    |  |      |       |      |   |      
|----------------------------------- |  | ---- | ----- | ---- | - | -----
|                                    |  | 2005 |       | 2004
|Accrued salary and related expenses |  | $    | 1,055 |      | $ | 564  
|Accrued warranty                    |  |      | 185   |      |   | 200  
|Accrued income taxes                |  |      | 295   |      |   | 211  
|Other accrued expenses              |  |      | 649   |      |   | 583  
|                                    |  |      |       |      |   |      
|                                    |  | $    | 2,184 |      | $ | 1,558
|                                    |  |      |       |      |   |      



(b)   Accounts
Receivable Reserve



|The |  | changes in the accounts receivable reserve are as follows:
|--- |  | ----------------------------------------------------------



|                                 |  |                            |     |                            |   |     |            |  |                      |    |  |   |    
|-------------------------------- |  | -------------------------- | --- | -------------------------- | - | --- | ---------- |  | -------------------- | -- |  | - | ---
|For the year ended September 30, |  | Balance,Beginningof Period |     | Chargedto CostsandExpenses |   |     | Deductions |  | Balance,End ofPeriod
|2003                             |  | $                          | 365 |                            | $ | (98 | )          |  | $                    | 32 |  | $ | 235
|2004                             |  |                            | 235 |                            |   | 65  |            |  |                      | 9  |  |   | 291
|2005                             |  |                            | 291 |                            |   | (35 | )          |  |                      | 18 |  |   | 238



F-19



---

BENTHOS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(In thousands, except share and per share data)



(c)  Warranty Reserve



The changes in the warranty reserve are as follows:



|                                 |  |                            |     |                            |   |            |  |                      |     |  |   |    
|-------------------------------- |  | -------------------------- | --- | -------------------------- | - | ---------- |  | -------------------- | --- |  | - | ---
|For the year ended September 30, |  | Balance,Beginningof Period |     | Chargedto CostsandExpenses |   | Deductions |  | Balance,End ofPeriod
|2003                             |  | $                          | 250 |                            | $ | 107        |  | $                    | 157 |  | $ | 200
|2004                             |  |                            | 200 |                            |   | 141        |  |                      | 141 |  |   | 200
|2005                             |  |                            | 200 |                            |   | 143        |  |                      | 158 |  |   | 185



During fiscal year 2003, the
Company reversed approximately $50 of a warranty reserve related to an older model hydrophone. The reduction in warranty reserve in that year was the result of a lower return rate and lower repair and replacement costs for this issue related to the
older model hydrophone.



(10)    Subsequent Event



On November 2, 2005, the Company announced that it had entered into an
Agreement and Plan of Merger, dated as of November 1, 2005 (the Merger Agreement) with Teledyne Technologies Incorporated, a Delaware corporation (Teledyne), and Boat Merger Sub Inc., a Massachusetts corporation
wholly-owned by Teledyne (Merger Sub). Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company (the Merger), with the Company continuing as the surviving corporation. Pursuant to the Merger
Agreement, at the effective time of the Merger, each outstanding share of common stock, par value $0.062/3per share,
of the Company (the Shares), other than any Shares owned by the Company, Teledyne, or any wholly-owned subsidiary of either, will be converted into the right to receive $17.50 in cash, without interest. Each outstanding option to
purchase common stock of the Company (whether vested or unvested) will be converted into the right to receive an amount in cash equal to the excess, if any, of $17.50 over the exercise price of such option, without interest, less any required
withholding taxes. The Merger is conditioned, among other things, on the approval of the Merger Agreement by the shareholders of the Company and certain other customary conditions.



F-20



---

EXHIBIT INDEX



BENTHOS, INC.



|            |  |                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                             
|            | 
|2.1         |  | Agreement and Plan of Merger with Teledyne Technologies Incorporated (21)                               
|            | 
|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)                                                          
|            | 
|10.1        |  | Employment Contract with Samuel O. Raymond (1)                                                          
|            | 
|10.2        |  | Third Amendment to Employment Contract with Samuel O. Raymond (2)                                       
|            | 
|10.3        |  | Fourth Amendment to Employment Agreement with Samuel O. Raymond (14)                                    
|            | 
|10.4        |  | Amended and Restated Employment Agreement with Ronald L. Marsiglio (17)                                 
|            | 
|10.5        |  | Amended and Restated Employment Agreement with Francis E. Dunne, Jr. (17)                               
|            | 
|10.6        |  | Amended and Restated Employment Agreement with James R. Kearbey (17)                                    
|            | 
|10.7        |  | Employment Agreement between the Company and Francois Leroy (17)                                        
|            | 
|10.8        |  | Employment Agreement between the Company and Richard B. Martin (19)                                     
|            | 
|10.9        |  | Benthos, Inc. Fiscal Year 2005 Incentive Compensation Matrix (17)                                       
|            | 
|10.10       |  | Benthos, Inc. Fiscal Year 2006 Incentive Compensation Plan (22)                                         
|            | 
|10.11       |  | Employee Stock Ownership Plan (1)                                                                       
|            | 
|10.12       |  | First Amendment to Employee Stock Ownership Plan (2)                                                    
|            | 
|10.13       |  | Second Amendment to Employee Stock Ownership Plan (7)                                                   
|            | 
|10.14       |  | Third Amendment to Employee Stock Ownership Plan (7)                                                    
|            | 
|10.15       |  | Fourth Amendment to Employee Stock Ownership Plan (9)                                                   
|            | 
|10.16       |  | Fifth Amendment to Employee Stock Ownership Plan (9)                                                    
|            | 
|10.17       |  | Amendment to Benthos, Inc. Employee Stock Ownership Plan dated July 19, 2004 (16)                       
|            | 
|10.18       |  | Benthos, Inc. Employee Stock Ownership Plan as Amended and Restated Effective as of October 1, 2002 (12)
|            | 
|10.19       |  | Benthos, Inc. 401(k) Retirement Plan dated March 2004 (15)                                              
|            | 
|10.20       |  | Supplemental Executive Retirement Plan (1)                                                              
|            | 
|10.21       |  | 1990 Stock Option Plan (1)                                                                              
|            | 
|10.22       |  | 1994 Stock Option Plan for Non-Employee Directors (1)                                                   
|            | 
|10.23       |  | 1998 Non-Employee Directors Stock Option Plan (4)                                                      
|            | 
|10.24       |  | Benthos, Inc. 2000 Stock Incentive Plan (8)                                                             
|            | 
|10.25       |  | Credit Agreement between the Company and Cape Cod Bank and Trust Company dated August 18, 1999 (7)      
|            | 
|10.26       |  | First Amendment to Credit Agreement dated March 23, 2001 (10)                                           
|            | 
|10.27       |  | Second Amendment to Credit Agreement dated December 12, 2001 (11)                                       
|            | 
|10.28       |  | Third Amendment to Credit Agreement dated January 29, 2003 (13)                                         
|            | 
|10.29       |  | Fourth Amendment to Credit Agreement dated November 3, 2003 (14)                                        



---

|            |  |                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                  
|            | 
|10.30       |  | Fifth Amendment to Credit Agreement dated January 7, 2004 (15)                                                                               
|            | 
|10.31       |  | Sixth Amendment to Credit Agreement dated December 20, 2004 (18)                                                                             
|            | 
|10.32       |  | Seventh Amendment to Credit Agreement dated July 8, 2005 (20)                                                                                
|            | 
|10.33       |  | License Agreement between the Company and Optikos Corporation dated July 29, 1997 (3)                                                        
|            | 
|10.34       |  | Hydrophone License Agreement between the Company and Sercel, Inc. (formerly Syntron, Inc.) dated December 5, 1996 (6)                        
|            | 
|10.35       |  | Amendment Number 1 to Hydrophone License Agreement between the Company and Sercel, Inc. (formerly Syntron, Inc.) dated September 11, 1998 (6)
|            | 
|10.36       |  | Agreement among the Company, Samuel O. Raymond and the Samuel O. Raymond 1996 Irrevocable Insurance Trust dated July 24, 2003 (14)           
|            | 
|10.37       |  | License Agreement with Simon Fraser University dated September 1, 2000 (15)                                                                  
|            | 
|10.38       |  | Amendment No. 1 to Simon Fraser License Agreement dated March 15, 2004 (15)                                                                  
|            | 
|10.39       |  | Contract with University of Wisconsin-Madison (15)                                                                                           
|            | 
|10.40       |  | License Agreement with Woods Hole Oceanographic Institution dated as of August 18, 2004 (16)                                                 
|            | 
|21          |  | Subsidiaries of the Registrant (12)                                                                                                          
|            | 
|23          |  | Consent of BDO Seidman, LLP                                                                                                                  
|            | 
|31.1        |  | Section 302 Certification of Chief Executive Officer                                                                                         
|            | 
|31.2        |  | Section 302 Certification of Chief Financial Officer                                                                                         
|            | 
|32          |  | Section 1350 Certifications                                                                                                                  

---

|(1) |  | Previously filed as an exhibit to the Registrants Registration Statement on Form 10-SB filed with the Commission on December 17, 1996 (File No. 0-29024) and incorporated herein by
this reference.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-QSB for the quarterly period ended March 30, 1997 (File No. 0-29024) and incorporated herein by this
reference.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-QSB for the quarterly period ended June 29, 1997 (File No. 0-29024) and incorporated herein by this
reference.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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. 0-29024) 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 Annual Report on Form 10-KSB for the fiscal year ended September 30, 1999 (File No. 0-29024) and incorporated herein by this
reference.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | 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. 0-29024) 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 March 31, 2001 (File No. 0-29024) 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 December 31, 2001 (File No. 0-29024) and incorporated herein by
this reference.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Previously filed as an exhibit to the Registrants Annual Report on Form 10-KSB for the fiscal year ended September 30, 2002 (File No. 0-29024) and incorporated
herein by this reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

|(13) |  | Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2003 (File No. 0-29024) and incorporated herein by this
reference.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | Previously filed as an exhibit to the Registrants Annual Report on Form 10-KSB for the fiscal year ended September 30, 2003 (File No. 0-29024) and incorporated herein by this
reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2004 (File No. 0-29024) and incorporated herein by this
reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) |  | Previously filed as an exhibit to the Registrants Annual Report on Form 10-KSB for the fiscal year ended September 30, 2004 (File No. 0-29024) and incorporated herein by this
reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(17) |  | Previously filed as an exhibit to the Registrants Current Report on Form 8-K filed on or about January 24, 2005 (File No. 0-29024) and incorporated herein by this reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(18) |  | Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-QSB for the quarterly period ended December 31, 2004 (File No. 0-29024) and incorporated herein by
this reference.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(19) |  | Previously filed as an exhibit to the Registrants Current Report on Form 8-K filed on or about June 30, 2005 (File No. 0-29024) and incorporated herein by this reference.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(20) |  | Previously filed as an exhibit to the Registrants Current Report on Form 8-K filed on or about July 8, 2005 (File No. 0-29024) and incorporated herein by this reference.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(21) |  | Previously filed as an exhibit to the Registrants Current Report on Form 8-K filed on or about November 4, 2005 (File No. 0-29024) and incorporated herein by this reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(22) |  | Previously filed as an exhibit to the Registrants Current Report on Form 8-K filed on or about December 8, 2005 (File No. 0-29024) and incorporated herein by this reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------