<PAGE>

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

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

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

                                  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, 2001

[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

   For the transitional period from        to

                         Commission File No. 0-029024

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

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

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

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

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

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

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

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

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

                       Common Stock, $.06 2/3 par value

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

<PAGE>

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

   Yes [X] No [_]

   Check if there is no disclosure of delinquent filers in response to item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X]

   The registrant had total operating revenues of $18,021,000 for its most
recent fiscal year ended September 30, 2001.

   The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 14, 2001, based on the closing price for the stock on
such date as reported on the Nasdaq SmallCap Market of $4.00 per share was
$3,614,680. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

                   APPLICABLE ONLY TO CORPORATE REGISTRANTS

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

   1,383,102 Shares of Common Stock, as of December 14, 2001

                      DOCUMENTS INCORPORATED BY REFERENCE

                               See Exhibit Index

   Transitional Small Business Issuer Format (check one):

   Yes [_] No [X]


                                      1

<PAGE>

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

                                    PART I

ITEM 1. DESCRIPTION OF BUSINESS

   Benthos, Inc. (the "Company") was founded in 1962 to act as a manufacturer
of oceanographic products. It was incorporated as a Massachusetts corporation
in 1965. Over the last 39 years, the Company has developed and acquired new
technology and products. Currently, the Company consists of two distinct
divisions: the Undersea Systems Division and the Package Inspection Systems
Division (formerly called the Container Inspection Systems Division).

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

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

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

Undersea Systems Division

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

Package Inspection Systems Division

   The Company's Package Inspection Systems Division designs, develops,
manufactures and sells systems used to inspect the integrity of containers in
the food, pharmaceutical, dairy, beer and beverage industries. The customers
for these systems include manufacturers of products packaged in bottles, cans,
glass jars, plastic

                                      2

<PAGE>

containers and assorted vacuum or pressurized containers with metal and plastic
caps. These systems are marketed under the trade name "TapTone." TapTone
systems integrate various sensor technologies with digital signal processing
techniques in order to inspect containers for leakage, seal integrity, low or
high pressure or vacuum, and similar packaging defects. TapTone systems may be
used on-line as continuous inspection systems that operate at production speeds
or as off-line inspection systems to periodically validate package integrity.

1. Principal Products

Undersea Systems

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

  a. Acoustics

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

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

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

  b. Hydrophones

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

   The Company's hydrophone product line includes sophisticated versions that
offer high sensitivity and can operate at great depth without significant
variation in response, as well as low cost hydrophones for the seismic research
industry that are produced in high production volumes. The Company's hydrophone
products may be used with companion amplifiers that convert the electrical
signals to usable formats and they may be integrated into arrays, which are
groupings of hydrophones assembled together in long tubes for the purpose of
added acoustic sensitivity and for listening to acoustic signals over a long
distance. The Company holds a U.S. patent on its pressure-sensitive switch
which enables the hydrophones to be sold in the export market.

  c. Imaging

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

                                      3

<PAGE>

surface and subsequent processing by software. The Company also sells companion
underwater camera flashes and lights.

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

  d. Remotely Operated Vehicles (ROVs)

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

  e. Glass Flotation

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

  f. Acoustic Modems

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

  g. Locator Pingers and Transponders

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

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

  h. Geophysical Systems

   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 while it is being towed and then listens for
the signal's reflections which are generated by objects on the sea floor. These
echoes are then manipulated electronically and by software and used to generate
an image of the sea floor. Side scan sonars are

                                      4

<PAGE>

commonly used to conduct underwater surveys in order to plan the routing of
pipes and cables, locate shipwrecks and similar objects and determine the
overall structure and nature of the ocean bottom.

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

  i. Contract Research and Engineering Services

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

Package Inspection Systems

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

  a. TapTone 100

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

  b. PBI-100

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

  c. Ray TRAK

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

  d. 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. During the fiscal year, the Company
completed versions of the TapTone-500 that accept acoustic sensor inputs and
x-ray fill level sensor inputs.

                                      5

<PAGE>

2. Distribution and Marketing Methods

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

3. New Products

   During fiscal year 2001 the Company introduced several new products. These
are:

   . The PBI-100 (Plastic Bottle Inspection) low profile system is designed for
     leak detection and package integrity verification for packages with
     compressible body walls of less than three inches. This low profile system
     is an addition to the PBI-100 product line of the Package Inspection
     Systems Division.

   . The I-MUX 200 (Intelligent Multiplexer) was introduced to complement
     existing Benthos geophysical survey products. It provides an Ethernet
     output and allows interfacing to any standard computer running data
     acquisition software. This new product is an addition to the geophysical
     systems product line of the Undersea Systems Division.

   . The split version 867A acoustic release and low cost deck unit products
     were introduced--both in response to customer requests and in an effort to
     better meet their operational requirements. These new products are
     additions to the Acoustics products group of the Undersea Systems Division.

   . The Stingray ROV was introduced and, because of its control system and
     modular reconfigurable design, represents a major advancement in ROV
     technology and will provide a solid technology base for future Benthos ROV
     systems.

4. Competition

  Undersea Systems Division

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

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

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

   Product Market                           Competitor(s)

   Hydrophones                              Sensor Technology Limited;
                                            Teledyne Brown Engineering;
                                            Input/Output, Inc.

                                      6

<PAGE>

   Glass Flotation                          Jena Glass Works division of Schott
                                            Glass Technologies, Inc.;
                                            McLane Research Laboratories, Inc.

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

   Acoustics                                InterOcean Systems, Inc.;
                                            Edgetech, Inc.; Sonardyne
                                            International Ltd.

   Imaging Systems                          Kongsberg Simrad, Inc.

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

   Locator Pingers                          Dukane Corporation

   Acoustic Modems                          LinkQuest, Inc.; Orca
                                            Instrumentation

  Package Inspection Systems Division

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

5. Sources and Availability of Raw Materials

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

6. Dependence on Major Customers

   Although the Company has a number of major customers, during fiscal 2001, no
single customer represented more than 10% of the Company's total revenue.

7. Patents, Trademarks and Other Agreements

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

                                      7

<PAGE>

8. Government Approvals and Contracts

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

   During fiscal 2001, 14% of the sales of the Undersea Systems Division were
derived from military procurement contracts, primarily contracts with the U.S.
Navy.

9. Effect of Government Regulations

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

10. Research and Development

   The Company maintains an internal staff of engineers and external
consultants with experience and expertise in the technologies it utilizes. The
majority of research and development programs are internally funded. Research
and development expenditures were $1,363,000, $1,607,000 and $1,695,000 for the
fiscal years ended September 30, 1999, 2000 and 2001, respectively. In
addition, the Company has an ongoing technical consulting agreement with
William D. McElroy, an expert in undersea acoustics.

11. Environmental Protection Regulations

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

12. Employees

   As of September 30, 2001, the Company employed 107 full-time individuals, 25
of whom were engaged in research and development, 54 in manufacturing and 28 in
sales, marketing and administrative positions. Of the 107 full-time employees,
one is employed on a temporary basis. None of the Company's employees is
covered by a collective bargaining agreement. The Company believes that it
maintains good relations with its employees.

ITEM 2. DESCRIPTION OF PROPERTY

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

ITEM 3. LEGAL PROCEEDINGS

   Not Applicable.

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.



                                      8

<PAGE>

                                    PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

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

<TABLE>
<CAPTION>
          Quarter Ended                                     High Low
          -------------                                     ---- ----
          <S>                                               <C>  <C>
          December 31, 1999................................ 9.50 7.50
          March 31, 2000................................... 9.44 7.50
          June 30, 2000.................................... 8.38 7.00
          September 30, 2000............................... 8.88 7.06
          December 31, 2000................................ 7.97 6.50
          March 31, 2001................................... 6.50 5.56
          June 30, 2001.................................... 5.70 4.65
          September 30, 2001............................... 5.09 3.51
</TABLE>

   As of December 14, 2001, there were approximately 284 holders of record of
the Company's Common Stock.

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

   The Company did not issue any equity securities during the fiscal year ended
September 30, 2001 that were not registered under the Securities Act of 1933,
other than the issuance of 4,046 shares of Common Stock to the Benthos, Inc.
Employee Stock Ownership Plan.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

  Overview

   The Company was founded in 1962 to act as a manufacturer of oceanographic
products. Over the last 39 years, the Company has developed and acquired new
technology and products. Currently, the Company consists of two distinct
divisions: the Undersea Systems Division and the Package Inspection Systems
Division. The Package Inspection Systems Division was formed in 1971 using
aspects of acoustic technology (originally developed for oceanographic
products) and applied to the testing of cans, bottles and other containers for
the purpose of finding leaks and other package defects.

   On August 19, 1999, the Company acquired substantially all of the assets of
Datasonics, Inc., a manufacturer of underwater acoustic products, including
side scan sonar systems, acoustic relocation devices, high-speed underwater
acoustic modems and data telemetry systems. The sales and income from the
acquired business are included in the Company's results of operations for the
last six weeks of fiscal 1999 and for the full years of fiscal 2000 and 2001.
The businesses were completely integrated during fiscal 2000.

                                      9

<PAGE>

  Results of Operations

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

<TABLE>
<CAPTION>
                                                   Year Ended September 30,
                                                  -------------------------
                                                   2001     2000     1999
                                                  -------  -------  -------
                                                        (In Thousands)
<S>                                               <C>      <C>      <C>
Net sales........................................ $18,021  $20,553  $17,248
Cost of sales....................................  12,837   12,080    9,801
                                                  -------  -------  -------
Gross profit.....................................   5,184    8,473    7,447
Selling, general and administrative expenses.....   5,916    5,289    4,347
Research and development expenses................   1,695    1,607    1,363
Amortization of goodwill and other acquired
  intangibles....................................     507      507       38
In-process research and development..............      --       --      750
                                                  -------  -------  -------
(Loss) income from operations....................  (2,934)   1,070      949
Interest income..................................      28       78      176
Interest expense.................................    (368)    (402)     (49)
                                                  -------  -------  -------
(Loss) income before (benefit) provision for
  income taxes...................................  (3,274)     746    1,076
(Benefit) provision for income taxes.............    (982)     224      248
                                                  -------  -------  -------
Net (loss) income................................ $(2,292) $   522  $   828
                                                  =======  =======  =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                   Year Ended September 30,
                                                   ------------------------
                                                    2001     2000      1999
                                                   -----    -----     -----
<S>                                               <C>        <C>     <C>
Net sales........................................  100.0%   100.0%    100.0%
Cost of sales....................................   71.2     58.8      56.8
                                                   -----    -----     -----
Gross profit.....................................   28.8     41.2      43.2
Selling, general and administrative expenses.....   32.9     25.7      25.2
Research and development expenses................    9.4      7.8       7.9
Amortization of goodwill and other acquired
  intangibles....................................    2.8      2.5       .2
In-process research and development..............     --       --       4.4
                                                   -----    -----     -----
(Loss) income from operations....................  (16.3)     5.2       5.5
Interest income..................................     .1       .4       1.0
Interest expense.................................   (2.0)    (2.0)     (0.3)
                                                   -----    -----     -----
(Loss) income before (benefit) provision for
  income taxes...................................  (18.2)     3.6       6.2
(Benefit) provision for income taxes.............   (5.5)     1.1       1.4
                                                   -----    -----     -----
Net (loss) income................................  (12.7)%    2.5%      4.8%
                                                   =====    =====     =====
</TABLE>

  Years ended September 30, 2001 and 2000

   Sales. Total Sales decreased 12.3% to $18,021,000 for fiscal year 2001 as
compared to $20,553,000 for fiscal year 2000. Sales by the Package Inspection
Systems Division decreased by 6.9% to $4,957,000 for fiscal year 2001 as
compared to $5,327,000 for fiscal year 2000. This decrease was attributable to
the timing of orders. Sales of the Undersea Systems Division decreased by 14.2%
to $13,064,000 for fiscal year 2001 as compared to $15,226,000 for fiscal year
2000. This decrease resulted primarily from softness in the markets served by
the Company's Undersea Systems Division, timing of a large project order and
transition of the sales effort related to the locator product line from a
distributor to a direct sales force at mid year. The decreases in sales
extended to almost all product areas, with the exception of the acoustic and
glass flotation product lines.

                                      10

<PAGE>

   Gross Profit. Gross Profit decreased by 38.8% to $5,184,000 for fiscal year
2001 as compared to $8,473,000 for fiscal year 2000. As a percentage of sales,
gross profit for fiscal year 2001 was 28.8% as compared to 41.2% for fiscal
year 2000. The decrease in the gross profit percentage is a result of
unabsorbed overhead resulting from a lower sales volume, warranty costs related
to an older model geophysical hydrophone, and provisions related to excess
inventory.

   Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased 11.9% to $5,916,000 for fiscal year 2001 as
compared to $5,289,000 for fiscal year 2000. The increase in these expenses was
a result of increased commissions expense, write-offs and legal expenses
related to an accounts receivable balance from a former distributor, expenses
related to the resignation of the former CEO, such as search fees for a
successor and severance costs, offset by the removal of duplicate expenses
relating to the integration of Datasonics, Inc. in fiscal year 2000. As a
percentage of sales, selling, general and administrative expenses increased to
32.9% for fiscal year 2001 and compared to 25.7% for fiscal year 2000.

   Research and Development Expenses. Research and development expenses
increased 5.5% to $1,695,000 for fiscal year 2001 as compared to $1,607,000 for
fiscal year 2000. As a percentage of sales, research and development expenses
were 9.4% for fiscal year 2001 as compared to 7.8% for fiscal year 2000.
Although the total amount of research and development dollars increased in
fiscal 2001, consistent with the Company's plans, the percentage of sales
represented by those expenses increased largely as a result of decreased sales
volume.

   Amortization of Goodwill and Other Acquired Intangibles. Amortization of
goodwill and other acquired intangibles was $507,000 for fiscal years 2001 and
2000. The amortization of goodwill and other acquired intangibles relates to
the Datasonics acquisition in 1999. In June 2001, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. This statement supersedes Accounting Principles Board Opinion No. 17
(APB No. 17), Intangible Assets, and applies to goodwill and intangible assets
acquired after June 30, 2001, as well as goodwill and intangible assets
previously acquired. Under this statement, goodwill as well as certain other
intangible assets determined to have an indefinite life, will no longer be
amortized; instead these assets will be reviewed for impairment on a periodic
basis. Early adoption of this statement is permitted for companies with fiscal
years beginning after March 15, 2001 and whose first interim period financial
statements have not been issued. Pursuant to this statement, the Company
elected early adoption effective October 1, 2001. The goodwill and acquired
assembled workforce associated with past acquisitions is no longer subject to
amortization over its estimated useful life. Such intangible assets will be
subject to an annual assessment for impairment by applying a fair-value based
test. The Company is currently assessing these assets for impairment, and has
not yet determined whether, or the extent to which, there will be any effect on
the Company's financial position.

   Interest Income. Interest income decreased to $28,000 for fiscal year 2001
as compared to $78,000 for fiscal year 2000. The decrease resulted from lower
invested cash balances.

   Interest Expense. Interest expense was $368,000 for fiscal year 2001 as
compared to $402,000 for fiscal year 2000. The decrease is a result of lower
interest rates in fiscal year 2001 as compared to fiscal year 2000 and is
partially offset by borrowings on the line of credit in fiscal year 2001.

   (Benefit) Provision for Income Taxes. The benefit for income taxes was
$982,000 for fiscal year 2001 as compared to a provision of $224,000 for fiscal
year 2000. The effective tax rate for fiscal years 2001 and 2000 was 30.0%. The
rate used is lower than the statutory rate due primarily to benefits from the
Company's foreign sales corporation and other state tax credits.

  Years Ended September 30, 2000 and 1999

   Sales. Total Sales increased 19.1% to $20,553,000 for fiscal year 2000 as
compared to $17,248,000 for fiscal year 1999. Sales of the Undersea Systems
Division increased by 25.1% to $15,226,000 for fiscal year 2000

                                      11

<PAGE>

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

   Gross Profit. Gross Profit increased by 13.8% to $8,473,000 for fiscal year
2000 as compared to $7,447,000 for fiscal year 1999. As a percentage of sales,
gross profit for fiscal year 2000 was 41.2% as compared to 43.2% for fiscal
year 1999. The decrease in the gross profit percentage is a result of an
increased shift in product mix towards Undersea Systems Division products which
have lower margins than Package Inspection Systems Division products.

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

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

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

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

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

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

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

                                      12

<PAGE>

  Liquidity and Capital Resources

   The Company's cash and cash equivalents decreased $1,428,000 from September
30, 2000 to September 30, 2001. Cash of $646,000 was used in operating
activities, primarily the result of the net loss incurred during of fiscal year
2001 offset by depreciation and amortization and changes in operational assets
and liabilities. The Company also used $526,000 and $256,000 of cash in its
investing and financing activities, respectively. Investing activities
represents primarily the purchase of capital equipment and financing activities
represents the payment of the installment payments on the term note offset by
borrowings under the line of credit.

   The Company has filed for a $662,000 income tax refund as a result of a
carryback of the tax loss in fiscal 2001. In addition, the Company is exploring
various alternatives to realize the value of portions of its land which are
excess to its business operations.

   The Company has a credit facility with a bank. This facility, as amended,
provides for loans under two notes: a $5,500,000 variable rate term note and a
$800,000 variable rate secured line of credit. The term note is payable in 84
consecutive equal monthly installments of principal with interest at prime
(6.0% at September 30, 2001) plus 2.0%. The term note matures in August 2006.
The line of credit expires on January 31, 2003. Advances under the line of
credit are payable as follows: monthly payments of interest only and unpaid
principal and accrued and unpaid interest at maturity. The interest rate under
the line of credit is prime (6.0% at September 30, 2001) plus 2.0%. The amount
available under the variable rate line of credit is $800,000 until March 31,
2002, at which time, the amount available will reduce to $600,000. There were
$500,000 in advances outstanding under the line of credit as of September 30,
2001. The credit facility is secured by substantially all of the assets of the
Company and requires the Company to meet certain covenants, including debt
service coverage. On December 12, 2001, the interest rate on both these notes
was changed so that the minimum interest rate will not be less than 7.0%.

   During the year ended September 30, 2001, the Company did not satisfy all of
the financial covenants under its line of credit and term loan agreement with
its bank. The Company has obtained a waiver of these defaults and the financial
covenants have been reset based upon the Company's projections for the year
ending September 30, 2002.

   Management believes that its projections for fiscal 2002 are attainable and
that current cash balances, cash flow from operations and income tax refunds
and availability from its line of credit will be sufficient to fund the
Company's cash requirements for the foreseeable future. If the Company does not
meet its revised loan covenants, it may need to seek alternative financing. In
such event, there can be no guarantee that the Company will be able to obtain
alternative financing on commercially acceptable terms.

  New Accounting Standards

   In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations. SFAS No. 141 addresses changes in the financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, Business Combinations, and SFAS No. 38, Accounting for Pre-acquisition
Contingencies of Purchased Enterprises. Effective July 1, 2001, all business
combinations should be accounted for using only the purchase method of
accounting.

   In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement applies to all entities.
It applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and (or) the
normal operation of a long-lived asset, except for certain obligations of
lessees. This Statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company is currently evaluating the
ultimate impact of this statement on its results of operations and financial
position until such time as its provisions are applied.

                                      13

<PAGE>

   In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement supersedes FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
Under this statement it is required that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and used
or newly acquired, and it broadens the presentation of discontinued operations
to include more disposal transactions. The provisions of this statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
adoption permitted. The Company is currently evaluating the ultimate impact of
this statement on its results of operations and financial position until such
time as its provisions are applied.

  Prospects for the Future

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

  Undersea Systems Division

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

   The Company serves several segments of the undersea market, including
oceanographic research, oil and gas exploration and production, hydrographic
survey, nuclear power generation, and underwater location, marking and
navigation. These market segments experience periodic expansion and,
occasionally, 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, beer and 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.

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

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

                                      14

<PAGE>

Profit Margins

  Overall

   Overall profit margins on the Company's products are influenced by the
relative mix of sales between the Undersea Systems Division and the Package
Inspection Systems Division. For the fiscal year ended September 30, 2001,
sales of the Undersea Systems Division decreased to 72% of total Company sales
as compared to 74% for the prior fiscal year, while sales of the Package
Inspection Systems Division increased to 28% of total Company sales as compared
to 26% for the prior fiscal year. The decrease in sales from fiscal year 2000
to fiscal year 2001 was 14% for the Undersea Systems Division and 7% for the
Package Inspection Systems Division. This resulted in an overall gross profit
for the Company of 28.8% for the fiscal year ended September 30, 2001 as
compared to 41.2% for the fiscal year ended September 30, 2000.

  Undersea Systems Division

   Gross profit margins on Undersea Systems Division products average
approximately 22.1% for fiscal year 2001. Gross margins on this segment of the
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. The Company expects that the relative mix of
products will remain approximately stable and does not expect the average gross
profit margin to be adversely affected. It is possible that the startup costs
associated with new products could affect gross margins temporarily. However,
the Company is not aware of other market trends, cost changes or competitive
pressures that would adversely affect gross profit margins within its existing
product lines.

  Package Inspection Systems Division

   Gross profit margins on Package Inspection Systems Division products average
approximately 46.4% for fiscal year 2001. The Company expects that the sales
mix of different products will not significantly change and will not adversely
affect overall divisional gross margins in the future. It is possible that
increased competition will result in an overall reduction of selling prices and
associated profit margins. The Company is not aware of any technological trends
or marketplace trends which would adversely affect gross margins on these
product lines

Forward-Looking Information.

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

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-17 hereof.

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

   Not Applicable

                                      15

<PAGE>

                                   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:

<TABLE>
<CAPTION>
          Name            Age                      Position
          ----            ---                      --------
<C>                       <C> <S>
Samuel O. Raymond........ 73  Chairman Emeritus of the Board of Directors and
                              Director of Research
Ronald L. Marsiglio...... 54  President and Chief Executive Officer and Director
Stephen D. Fantone....... 48  Chairman of the Board of Directors
A. Theodore Mollegen, Jr. 64  Director
Thurman F. Naylor........ 82  Director
Gary K. Willis........... 56  Director
Arthur L. Fatum.......... 49  Director
Francis E. Dunne, Jr..... 55  Vice President, Chief Financial Officer and
                              Treasurer
James R. Kearbey......... 38  Vice President, General Manager, Package
                              Inspection Systems Division
Daniel R. Conway......... 48  Vice President, Sales and Marketing, Undersea
                              Systems Division
</TABLE>

   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 2003 annual meeting; Class II, consisting of Mr. Mollegen and Dr. Fantone,
is eligible for re-election at the 2004 annual meeting; Class III, consisting
of Messrs. Raymond, Naylor and Fatum, is eligible for re-election at the 2002
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.

   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

                                      16

<PAGE>

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 over 50 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. and Treasurer of the Optical Society of
America. On January 26, 2001, Dr. Fantone was elected as President and Chief
Executive Officer of the Company on an interim basis; he served in that
capacity until the election of Mr. Marsiglio on May 21, 2001.

   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 provider of engineering and technical services to the U.S.
Navy. 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 Arts and Technology Advisory Council for Connecticut
College, and a member of the Advisory Committee of the Connecticut Small
Business Development Center, an agency jointly sponsored by the University of
Connecticut Graduate School of Business and the U.S. Small Business
Administration.

   Mr. Naylor is President of Cameras and Images International, Inc. (a dealer
in photographic images and equipment), is the owner and founder of the Naylor
Museum of Photography in Brookline, Massachusetts, and has served as a director
of the Company since 1987. Mr. Naylor is an internationally recognized
authority on photographic history, processes, and technology. Mr. Naylor is the
former Chairman, President and CEO of Standard-Thomson Corporation, a
manufacturer of temperature and pressure controls and electronic equipment. Mr.
Naylor is also the former Chairman, President and CEO of Thomson International
Corporation (1959-1989), a manufacturer of temperature controls with
engineering and manufacturing facilities in twelve countries. Mr. Naylor has a
B.A. in Economics from Fordham University and a B.S. in Mechanical Engineering
from The John Hopkins University. Mr. Naylor is also a member of the Board of
Directors of Summit Industries, Inc. (a manufacturer of x-ray equipment).

   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), Hpower
Corporation (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. Since
October 2000, he has been President of CNET Networks International Media, a
division of CNET Networks, Inc., a global Internet media company specializing
in technology information. From July 2000 to October 2000, he was Executive
Vice President and Chief Financial Officer of ZDNet, a global Internet media
company. ZDNet was acquired by CNET Networks, Inc. in October 2000. From
November 1998 to June 2000, he was Vice President and Chief Financial Officer
of PictureTel Corporation (a company engaged in the development, manufacture
and support of video conferencing and visual and audio collaboration
solutions). Before joining PictureTel Corporation, he was President and
Managing Director of AT&T Capital Europe (1995-1998), responsible for its
pan-European equipment leasing business. Before joining AT&T Capital, Mr. Fatum
also held positions with Dun & Bradstreet, Inc. and General Electric Company.
Mr. Fatum has a B.S. in mathematics from State University of New York and is a
graduate of GE Management Development Institute.

   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,

                                      17

<PAGE>

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. General Signal Corporation was a manufacturer of products
serving the process controls, electrical controls, and industrial technology
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 a M.B.A. from Keller Graduate School
of Management.

   Mr. Conway was appointed Vice President, Sales and Marketing of the
Company's Undersea Systems Division on June 18, 2001. Before this appointment,
Mr. Conway was Vice President, Business Development from April 2000 to June
2001. Before joining the Company, he was Vice President, Business Development
and Acquisition Integration (1995-2000) at Analysis & Technology, Inc., a
provider of engineering and technical services to Department of Defense and
commercial clients. Mr. Conway served as an officer on active duty in the naval
nuclear submarine force, and later held the position of Officer in Charge of
the Naval War College Detachment, Naval Intelligence, as a Commander in the
U.S. Naval Reserves. Mr. Conway holds a B.S. in Oceanography from the United
States Naval Academy and an MBA from the University of Rhode Island.

   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.

   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(d) during the fiscal year ended
September 30, 2001, 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.

                                      18

<PAGE>

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 three persons who served as the
Company's chief executive officer during the Company's fiscal year ended
September 30, 2001 and to the only other executive officers who received an
annual salary and bonus exceeding $100,000 during that fiscal year.

<TABLE>
<CAPTION>

                                                               Annual Compensation
                                                               -------------------
                                                                                   Shares Underlying  All Other
Name and Principal Position                        Fiscal Year  Salary     Bonus    Options Granted  Compensation
---------------------------                        ----------- --------  --------  ----------------- ------------
<S>                                                <C>         <C>       <C>       <C>               <C>
Ronald L. Marsiglio...............................    2001     $ 83,731  $ 50,000       100,000        $ 10,669
  President and Chief Executive Officer(1)

John L. Coughlin..................................    2001       76,238        --            --          58,528(7)
  President and Chief Executive Officer(2)            2000      187,000    28,000            --           8,172
                                                      1999      174,919    45,000            --          12,698

Stephen D. Fantone................................    2001       48,000    25,000            --          77,004(8)
  Chairman of the Board of Directors,                 2000           --        --        35,000          76,000(8)
   President and Chief Executive Officer(3)           1999           --        --            --          47,502(8)

Francis E. Dunne, Jr..............................    2001      145,000     5,000            --           4,513
  Vice President, Chief Financial Officer             2000      126,011    25,000        10,000           5,921
   and Treasurer (4)                                  1999      114,800    30,000         5,000          10,325

Daniel R. Conway,.................................    2001      130,000     5,000            --           2,091
  Vice President, Sales & Marketing, Undersea         2000       67,471    15,000        15,000              --
   Systems Division

Robert A. Catalano,...............................    2001      101,000        --         2,500           2,917
  Vice President, Operations (5)                      2000       95,825    10,000            --           4,606
                                                      1999       82,000    25,000            --           6,332

James R. Kearbey,.................................    2001      107,000     5,000            --           3,276
  Vice President, General Manager,                    2000       95,047    15,000            --           4,462
   Package Inspection Systems Division                1999       91,900    20,000            --          52,057(9)

All directors and officers as a group (6).........    2001      762,969    90,000       102,500         228,811
                                                      2000      705,932    93,000        75,000         154,211
                                                      1999      643,792   128,000        35,000         172,367
</TABLE>
--------
(1) Mr. Marsiglio has served as President and Chief Executive Office since May
    21, 2001.
(2) Mr. Coughlin served as President and Chief Executive Officer from October
    1, 1999 through January 26, 2001.
(3) Dr. Fantone served as President and Chief Executive Office from January 26,
    2001 to May 21, 2001.
(4) Mr. Dunne has served as Chief Financial Officer and Treasurer since
    February 1, 1997 and as Vice President since January 27, 2000.
(5) Mr. Catalano resigned from the Company on November 14, 2001.
(6) Consisted of ten persons for fiscal 1999, twelve persons for fiscal 2000,
    and twelve persons for fiscal 2001.
(7) Includes a $55,000 severance payment in consideration of the cancellation
    of stock options and continued availability to assist the Company for a
    specified period of time.
(8) Includes compensation paid to Dr. Fantone for services as Chairman of the
    Board of Directors and director's fees. See "Directors' Compensation"
    herein.
(9) Includes moving and relocation expenses.

                                      19

<PAGE>

Stock Option Tables

   The following table sets forth information concerning grants of stock
options during the Company's fiscal year ended September 30, 2001 to the
executive officers named in the table above.

<TABLE>
<CAPTION>
                                                                     Percentage
                                                                      of Total
                                                                      Options
                                                          Number of  Granted to
                                                            Shares   Employees
                                                          Underlying in Fiscal  Exercise Expiration
Name and Principal Position                                 Option      Year     Price      Date
---------------------------                               ---------- ---------- -------- ----------
<S>                                                       <C>        <C>        <C>      <C>
Ronald L. Marsiglio......................................  100,000      88.2%    $5.00    5/21/11
  President and Chief Executive Officer

John L. Coughlin.........................................       --        --        --         --
  President and Chief Executive Officer

Daniel R. Conway.........................................       --        --        --         --
  Vice President, Sales & Marketing,
  Undersea Systems Division

Stephen D. Fantone.......................................       --        --        --         --
  Chairman of the Board of Directors,
  President and Chief Executive Officer

Francis E. Dunne, Jr.....................................       --        --        --         --
  Vice President, Chief Financial Officer and Treasurer

Robert A. Catalano.......................................    2,500       2.2%     5.65     5/8/11
  Vice President, Operations

James R. Kearbey,........................................       --        --        --         --
  Vice President, General Manager,
  Package Inspection Systems Division
</TABLE>

                                      20

<PAGE>

   The following table sets forth information concerning each exercise of stock
options during the Company's fiscal year ended September 30, 2001 by the
executive officers named in the table above and the number and value of shares
underlying those stock options at that date.

<TABLE>
<CAPTION>
                                                                                Number of
                                                                               Unexercised   Value of
                                                                               Securities  Unexercised
                                                                               Underlying  In-the-Money
                                                            Shares             Options At   Options At
                                                           Acquired    Value   Fiscal Year Fiscal Year
              Name and Principal Position                 on Exercise Realized     End        End(1)
              ---------------------------                 ----------- -------- ----------- ------------
<S>                                                       <C>         <C>      <C>         <C>
Robert L. Marsiglio,.....................................     --         --    100,000(3)        --
  President and Chief Executive Officer

John L. Coughlin,........................................     --         --            --        --
  President and Chief Executive Officer

Stephen D. Fantone.......................................                       22,917(2)
  Chairman of the Board of Directors, President and           --         --     23,333(3)        --
  Chief Executive Officer

Francis E. Dunne, Jr.....................................                       20,000(2)
  Vice President, Chief Financial Officer and Treasurer       --         --     10,000(3)        --

Daniel R. Conway.........................................                        3,750(2)
  Vice President, Sales & Marketing,                          --         --     11,250(3)        --
  Undersea Systems Division

Robert A. Catalano.......................................     --         --      2,500(3)        --
  Vice President, Operations

James R. Kearbey.........................................                        7,250(2)
  Vice President, General Manager,                            --         --      5,000(3)        --
  Package Inspection Systems Division

</TABLE>
--------
(1) Based upon the difference between the option exercise price and the closing
    price of the Company's Common Stock on the Nasdaq SmallCap Market on
    September 30, 2001.
(2) Shares underlying options exercisable as of September 30, 2001.
(3) Shares underlying options not exercisable as of September 30, 2001.

Directors' Compensation

   Under the compensation policy adopted by the Board of Directors, each
non-employee director will receive a fee of $6,000 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 will receive a fee
of $500 for each committee meeting attended. Stephen D. Fantone also receives
additional compensation of $5,417 per month for his services as Chairman of the
Board of

                                      21

<PAGE>

Directors. Non-employee directors are also eligible to receive stock options
under the Company's 1998 Non-Employee Directors' Stock Option Plan.

Employment Contracts

   In 1990, the Company entered into an employment agreement with Samuel O.
Raymond. Under this agreement, as amended, Mr. Raymond will be employed as the
Director of Research of the Company at a salary of $72,000 per year and will
serve as the Chairman Emeritus of the Board of Directors for as long as he is
elected to that position. This agreement commenced on August 1, 1990 and will
expire on July 31, 2005. After the expiration of the initial term, the
agreement will automatically be renewed annually as of August 1, 2005 and each
August 1 thereafter. The agreement also provides that if a change in control of
the Company should occur during the first, second or last five years of the
initial term of the agreement, Mr. Raymond is entitled to receive $427,974,
$335,504, or $199,636, respectively, from the Company. The Company has also
agreed to pay the premiums on a $1,500,000 life insurance policy on Mr.
Raymond's life under a split dollar plan.

   The Company entered into an employment agreement with Ronald L. Marsiglio,
dated May 21, 2001, pursuant to which Mr. Marsiglio agrees to serve as
President and Chief Executive Officer of the Company for an initial term ending
on September 20, 2003. 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
or any extended term. The agreement provides for a base salary, commencing June
1, 2001, of $250,000 per year, subject to increase by the Board of Directors.
Mr. Marsiglio earned a $50,000 incentive bonus for fiscal year 2001 in
accordance with the agreement. During fiscal year 2002, Mr. Marsiglio will be
eligible to earn an incentive bonus of up to 100% of his base salary for
extraordinary and exceptional performance. This potential bonus will be based
on the achievement of various thresholds with respect to revenue, operating
income, earnings per share, etc. as negotiated with the Board of Directors. The
Board of Directors will review Mr. Marsiglio's base salary and incentive
compensation annually prior to the start of fiscal year 2003 and each fiscal
year thereafter. In the event that the Company terminates his employment other
than for cause, disability or death, Mr. Marsiglio will be entitled to receive
severance pay equal to a percentage of his annual base pay, commencing at 50%
and increasing incrementally to 100% by May 31, 2003. In addition, pursuant to
the agreement, Mr. Marsiglio was granted an option to purchase up to 100,000
shares of the Company's Common Stock at an exercise price of $5.00 per share,
vesting over a four year period.

   The Company entered into an employment agreement with Francis E. Dunne, Jr.
effective as of October 1, 1999, pursuant to which Mr. Dunne agrees to serve as
Vice President, Chief Financial Officer and Treasurer of the Company for an
initial two year period. The agreement has been extended through October 1,
2003 at a base salary of $145,000 per year, subject to increase from time to
time by the Board of Directors. Mr. Dunne is also eligible to participate in
any discretionary incentive compensation bonus plan which is generally made
available to the executives of the Company. In the event the Company terminates
his employment other than for cause, disability or death, Mr. Dunne will be
entitled to severance benefits equal to one year's base salary.

                                      22

<PAGE>

ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The following information is furnished as of December 14, 2001 with respect
to the beneficial ownership of shares of Common Stock of the Company by the
directors and executive officers of the Company, all of the directors and
officers of the Company as a group and all persons known to be the beneficial
owners of more than five percent of such outstanding stock. Unless otherwise
indicated, each of the persons named below held sole voting and investment
power over the shares listed below as of said date.

   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. Reference should be made to the footnotes below for further
information as to each individual listed.

<TABLE>
<CAPTION>
                                                                     Percent
                                                       Shares      Outstanding
                                                    Beneficially     Common
 Name and Address(1)                                   Owned          Stock
 -------------------                                ------------   -----------
 <S>                                                <C>            <C>
 Samuel O. Raymond.................................    165,511(2)     12.0%
 Ronald K. Church 1996 Trust.......................    128,250         9.3%
 Seth A. Newberger.................................     83,450(3)      6.0%
 Cape Cod Bank and Trust Company, N.A.,
   Trustee of the Benthos, Inc.
   Employee Stock Ownership Plan ("ESOP")(4).......     51,203         3.7%
 Stephen D. Fantone................................     84,584(5)      6.0%
 Ronald L. Marsiglio...............................      4,000         0.3%
 A. Theodore Mollegen, Jr..........................     25,500(6)      1.8%
 Thurman F. Naylor.................................     37,500(7)      2.7%
 Gary K. Willis....................................     30,000(8)      2.2%
 Arthur L. Fatum...................................     25,000(9)      1.8%
 Francis E. Dunne, Jr..............................     27,547(10)     2.0%
 Robert A. Catalano................................      3,574(11)     0.3%
 James R. Kearbey..................................     10,416(12)     0.7%
 Daniel R. Conway..................................     10,750(13)     0.8%
 John L. Coughlin..................................      7,396(14)     0.3%
 All directors and officers as a group (10 persons)    420,808(15)    27.9%
</TABLE>
--------
(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. The address of the Ronald K. Church 1996 Trust is 46
    Riddle Hill Road, Falmouth, Massachusetts 02540. The address of Seth A.
    Newburger is 513 Mandalay Drive East, San Antonio, Texas 78212. The address
    of Cape Cod Bank and Trust Company, N.A. is 307 Main Street, Hyannis,
    Massachusetts 02601.
(2) Includes 3,464 shares owned by the Company's ESOP, over which Mr. Raymond
    has sole voting power. Also includes 37,065 shares owned by Mr. Raymond's
    children, as to which shares Mr. Raymond disclaims beneficial ownership.
(3) Includes shares owned by Mr. Newberger, certain family members and a
    family-owned joint venture, according to Schedule 13G filed with the
    Securities and Exchange Commission on August 6, 2001.
(4) Pursuant to the terms of the plan, plan participants are entitled to direct
    the Trustee as to the manner in which all shares allocated to such
    participants' accounts are to be voted.
(5) Includes 11,250 shares which Dr. Fantone has the right to acquire through
    the exercise of a stock option for 11,250 shares granted January 24, 1997
    and 23,334 shares which Dr. Fantone has the right to acquire through the
    exercise of a stock option for 35,000 shares granted October 29, 1999.
(6) Includes 15,000 shares which Mr. Mollegen has the right to acquire through
    exercise of a stock option for 15,000 shares granted on April 3, 1998.

                                      23

<PAGE>

 (7) Includes 15,000 shares which Mr. Naylor has the right to acquire through
     exercise of a stock option for 15,000 shares granted on January 22, 1999.
 (8) Includes 15,000 shares which Mr. Willis has the right to acquire through
     the exercise of a stock option for 15,000 shares granted on January 23,
     1998.
 (9) Includes 10,000 shares which Mr. Fatum has the right to acquire through
     the exercise of a stock option for 15,000 shares granted on January 6,
     2000.
(10) Includes 15,000 shares which Mr. Dunne has the right to acquire through
     the exercise of a stock option for 15,000 shares granted January 24, 1997,
     3,750 shares which he has the right to acquire through the exercise of a
     stock option for 5,000 shares granted on January 22, 1999, 5,000 shares
     which he has the right to acquire through the exercise of a stock option
     for 10,000 shares granted January 27, 2000, and 797 shares owned by the
     Company's ESOP, over which Mr. Dunne has sole voting power.
(11) Includes 1,699 shares owned by the Company's ESOP, over which Mr. Catalano
     has sole voting power.
(12) Consists of 2,250 shares which Mr. Kearbey has the right to acquire
     through the exercise of a stock option for 2,250 shares granted October
     18, 1996, 7,500 shares which he has the right to acquire through the
     exercise of a stock option for 10,000 shares granted January 22, 1999, and
     666 shares owned by the Company's ESOP, over which Mr. Kearbey has sole
     voting power.
(13) Includes 3,750 shares which Mr. Conway has the right to acquire through
     the exercise of a stock option for 15,000 shares granted on April 20, 2000.
(14) Includes 1,396 shares owned by the Company's ESOP, over which Mr. Coughlin
     has sole voting power.
(15) Includes an aggregate of 126,834 shares which the directors and officers
     have the right to acquire through the exercise of certain 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 will pay the development costs to Dr.
Fantone's corporation. During the fiscal year ended September 30, 2001, the
Company paid Dr. Fantone's corporation approximately $20,000 as the minimum
annual royalty under this contract. The proprietary rights to the technology
will be owned by Dr. Fantone's corporation, which has granted an exclusive
license to the Company for 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.

ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K

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

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

                                      24

<PAGE>

                                  SIGNATURES

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

                                          BENTHOS, INC.

                                                  /s/ Ronald L. Marsiglio
                                          By __________________________________
                                                    Ronald L. Marsiglio,
                                                         President

Date: December 22, 2001

   In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

<TABLE>
<C>                           <S>                                 <C>

   /S/ RONALD L. MARSIGLIO    President, Chief Executive Officer  December 22, 2001
-----------------------------   and Director
     Ronald L. Marsiglio

  /S/ FRANCIS E. DUNNE, JR.   Vice President, Chief Financial     December 22, 2001
-----------------------------   Officer and Treasurer (principal
    Francis E. Dunne, Jr.       financial and accounting officer)

   /S/ STEPHEN D. FANTONE     Chairman of the Board of Directors  December 22, 2001
-----------------------------
     Stephen D. Fantone

    /S/ SAMUEL O. RAYMOND     Director                            December 27, 2001
-----------------------------
      Samuel O. Raymond

/S/ A. THEODORE MOLLEGEN, JR. Director                            December 26, 2001
-----------------------------
  A. Theodore Mollegen, Jr.

    /S/ THURMAN F. NAYLOR     Director                            December 22, 2001
-----------------------------
      Thurman F. Naylor

     /S/ GARY K. WILLIS       Director                            December 22, 2001
-----------------------------
       Gary K. Willis

     /S/ ARTHUR L. FATUM      Director                            December 22, 2001
-----------------------------
       Arthur L. Fatum
</TABLE>

                                      25

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

                       CONSOLIDATED FINANCIAL STATEMENTS
       as of September 30, 2001 and 2000 Together with Auditors' Report

<PAGE>

                                     INDEX

<TABLE>
<CAPTION>
                                                                                            Page
                                                                                            ----
<S>                                                                                         <C>
Report of Independent Public Accountants................................................... F-1
Consolidated Balance Sheets as of September 30, 2001 and 2000.............................. F-2
Consolidated Statements of Operations for the Years Ended September 30, 2001, 2000 and 1999 F-3
Consolidated Statements of Stockholders' Investment for the Years Ended
  September 30, 2001, 2000 and 1999........................................................ F-4
Consolidated Statements of Cash Flows for the Years Ended September 30, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements................................................. F-6
</TABLE>

<PAGE>

                                                                         [LOGO]
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Benthos, Inc.:

   We have audited the accompanying consolidated balance sheets of Benthos,
Inc. (a Massachusetts corporation) and subsidiary as of September 30, 2001 and
2000 and the related consolidated statements of operations, stockholders'
investment and cash flows for each of the three years in the period ended
September 30, 2001. These financial statements are the responsibility of
Benthos, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Benthos, Inc. and
subsidiary as of September 30, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2001, in conformity with accounting principles generally accepted
in the United States.

                                          /s/ Arthur Andersen LLP
Boston, Massachusetts
December 12, 2001


                                      F-1

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                          September 30,
                                                                                        ----------------
                                                                                         2001     2000
                                                                                        -------  -------
<S>                                                                                     <C>      <C>
                                     A S S E T S
                                     -----------
Current Assets:
   Cash and cash equivalents........................................................... $    46  $ 1,474
   Accounts receivable, less reserves of $465 and $220 at September 30, 2001 and 2000,
     respectively......................................................................   2,723    3,448
   Inventories.........................................................................   5,101    4,974
   Prepaid expenses and other current assets...........................................     713      159
   Deferred tax asset..................................................................   1,650    1,354
                                                                                        -------  -------
       Total current assets............................................................  10,233   11,409
                                                                                        -------  -------
Property, Plant and Equipment, at cost:
   Land................................................................................     127      127
   Buildings and improvements..........................................................   2,252    2,248
   Equipment and fixtures..............................................................   3,802    3,698
   Demonstration equipment.............................................................     909    1,157
                                                                                        -------  -------
                                                                                          7,090    7,230
   Less--Accumulated depreciation......................................................   5,280    5,270
                                                                                        -------  -------
                                                                                          1,810    1,960
                                                                                        -------  -------
Other Assets, net......................................................................   4,045    4,496
                                                                                        -------  -------
                                                                                        $16,088  $17,865
                                                                                        =======  =======

   L I A B I L I T I E S   A N D   S T O C K H O L D E R S '   I N V E S T M E N T
   -------------------------------------------------------------------------------
Current Liabilities:
   Current maturities of long-term debt................................................ $   786  $   786
   Line of credit......................................................................     500       --
   Accounts payable....................................................................   1,520    1,160
   Accrued expenses....................................................................   2,329    1,729
   Customer deposits...................................................................     161      350
                                                                                        -------  -------
       Total current liabilities.......................................................   5,296    4,025
                                                                                        -------  -------
Long-term Debt, net of current maturities..............................................   3,077    3,863
                                                                                        -------  -------
Commitments and Contingencies (Note 9)

Stockholders' Investment:
   Common stock, $0.06 2/3 par value--
       Authorized--7,500,000 shares
       Issued--1,652,831 shares at September 30, 2001 and 2000.........................     110      110
   Capital in excess of par value......................................................   1,569    1,569
   Retained earnings...................................................................   6,667    8,959
   Treasury stock, at cost.............................................................    (631)    (661)
                                                                                        -------  -------
       Total stockholders' investment..................................................   7,715    9,977
                                                                                        -------  -------
                                                                                        $16,088  $17,865
                                                                                        =======  =======
</TABLE>

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

                                      F-2

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                      Year Ended September 30,
                                                                 ----------------------------------
                                                                    2001        2000        1999
                                                                 ----------  ----------  ----------
<S>                                                              <C>         <C>         <C>
Net Sales....................................................... $   18,021  $   20,553  $   17,248
Cost of Sales...................................................     12,837      12,080       9,801
                                                                 ----------  ----------  ----------
   Gross profit.................................................      5,184       8,473       7,447
Selling, General and Administrative Expenses....................      5,916       5,289       4,347
Research and Development Expenses...............................      1,695       1,607       1,363
Amortization of Goodwill and Other Acquired Intangibles.........        507         507          38
In-Process Research and Development.............................         --          --         750
                                                                 ----------  ----------  ----------
   (Loss) income from operations................................     (2,934)      1,070         949
Interest Income.................................................         28          78         176
Interest Expense................................................       (368)       (402)        (49)
                                                                 ----------  ----------  ----------
   (Loss) income before (benefit) provision for income taxes....     (3,274)        746       1,076
(Benefit) Provision for Income Taxes............................       (982)        224         248
                                                                 ----------  ----------  ----------
   Net (loss) income............................................ $   (2,292) $      522  $      828
                                                                 ==========  ==========  ==========
Basic (Loss) Earnings per Share................................. $    (1.66) $     0.38  $     0.61
                                                                 ==========  ==========  ==========
Diluted (Loss) Earnings per Share............................... $    (1.66) $     0.37  $     0.60
                                                                 ==========  ==========  ==========
Weighted Average Number of Shares Outstanding...................  1,381,745   1,376,158   1,355,291
                                                                 ==========  ==========  ==========
Weighted Average Number of Shares Outstanding, assuming dilution  1,381,745   1,415,356   1,386,796
                                                                 ==========  ==========  ==========
</TABLE>


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

                                      F-3

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>


                                                                      Treasury Stock,
                                 Common Stock                             at cost
                              ------------------- Capital in          ---------------
                                        $0.06 2/3 Excess of                                Total
                              Number of    Par       Par     Retained Number of        Stockholders'
                               Shares     Value     Value    Earnings  Shares   Amount  Investment
                              --------- --------- ---------- -------- --------- ------ -------------
<S>                           <C>       <C>       <C>        <C>      <C>       <C>    <C>
Balance, September 30, 1998.. 1,634,831   $109      $1,502   $ 7,609   291,125  $(777)    $ 8,443
   Sale of treasury stock....        --     --          --        --    (8,592)    42          42
   Exercise of stock options.    14,250      1          44        --        --     --          45
   Net income................        --     --          --       828        --     --         828
                              ---------   ----      ------   -------   -------  -----     -------
Balance, September 30, 1999.. 1,649,081    110       1,546     8,437   282,533   (735)      9,358
   Sale of treasury stock....        --     --          --        --    (8,738)    74          74
   Exercise of stock options.     3,750     --          23        --        --     --          23
   Net income................        --     --          --       522        --     --         522
                              ---------   ----      ------   -------   -------  -----     -------
Balance, September 30, 2000.. 1,652,831    110       1,569     8,959   273,795   (661)      9,977
   Sale of treasury stock....        --     --          --        --    (4,046)    30          30
   Net loss..................        --     --          --    (2,292)       --     --      (2,292)
                              ---------   ----      ------   -------   -------  -----     -------
Balance, September 30, 2001.. 1,652,831   $110      $1,569   $ 6,667   269,749  $(631)    $ 7,715
                              =========   ====      ======   =======   =======  =====     =======
</TABLE>



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

                                      F-4

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                     Year Ended September 30,
                                                                                    -------------------------
                                                                                     2001     2000     1999
                                                                                    -------  -------  -------
<S>                                                                                 <C>      <C>      <C>
Cash Flows from Operating Activities:
   Net (loss) income............................................................... $(2,292) $   522  $   828
   Adjustments to reconcile net (loss) income to net cash (used in) provided by
     operating activities:
       Write-off of acquired in-process research and development...................      --       --      750
       Depreciation and amortization...............................................   1,127      937      512
       Deferred income taxes.......................................................    (296)     (55)    (648)
       Changes in assets and liabilities (net of effect from acquisition of
         Datasonics, Inc.)--
          Accounts receivable......................................................     725   (1,016)     355
          Inventories..............................................................    (127)    (180)    (919)
          Prepaid expenses and other current assets................................    (554)     575      (75)
          Accounts payable and accrued expenses....................................     960     (714)     631
          Customer deposits........................................................    (189)     (41)     154
                                                                                    -------  -------  -------
              Net cash (used in) provided by operating activities..................    (646)      28    1,588
                                                                                    -------  -------  -------
Cash Flows from Investing Activities:
   Purchase of property, plant and equipment.......................................    (445)    (589)    (181)
   (Increase) decrease in other assets.............................................     (81)     (93)     221
   Net cash paid in connection with the Datasonics, Inc. acquisition...............      --     (113)  (6,729)
                                                                                    -------  -------  -------
              Net cash used in investing activities................................    (526)    (795)  (6,689)
                                                                                    -------  -------  -------
Cash Flows from Financing Activities:
   Payments of long-term debt......................................................    (786)    (786)     (65)
   Line of credit..................................................................     500       --       --
   Sale of treasury stock..........................................................      30       74       42
   Exercise of stock options, net of tax benefit...................................      --       23       45
   Borrowings of long-term debt....................................................      --       --    5,500
                                                                                    -------  -------  -------
              Net cash (used in) provided by financing activities..................    (256)    (689)   5,522
                                                                                    -------  -------  -------
Net (Decrease) Increase in Cash and Cash Equivalents...............................  (1,428)  (1,456)     421
Cash and Cash Equivalents, beginning of year.......................................   1,474    2,930    2,509
                                                                                    -------  -------  -------
Cash and Cash Equivalents, end of year............................................. $    46  $ 1,474  $ 2,930
                                                                                    =======  =======  =======
Supplemental Disclosure of Cash Flow Information:
   Interest paid during the year................................................... $   375  $   403  $    35
                                                                                    =======  =======  =======
   Income taxes (refunded) paid during the year, net of refunds.................... $   (49) $   218  $   376
                                                                                    =======  =======  =======
Supplemental Disclosure of Cash Flows Related to Acquisition:
   In connection with the acquisition of Datasonics, Inc. (see Note 2), the
     following transactions occurred:
       Fair value of assets acquired............................................... $    --  $   113  $ 7,749
       Liabilities assumed.........................................................      --       --   (1,020)
                                                                                    -------  -------  -------
              Cash paid, including $675 for direct costs of acquisition............ $    --  $   113  $ 6,729
                                                                                    =======  =======  =======
</TABLE>

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

                                      F-5

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (in thousands, except share and per share data)

(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

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

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

   During the year ended September 30, 2001, the Company experienced a decrease
in sales and incurred a loss from operations. As a result, the Company did not
satisfy all of the financial covenants under its line of credit and term loan
agreement with its bank. The Company has obtained a waiver of these defaults
and the covenants have been reset based upon the Company's projections for the
year ended September 30, 2002. Management believes that its projections for
fiscal 2002 are attainable and that current cash balances, cash flow from
operations and availability from its line of credit will be sufficient to fund
the Company's cash requirements for the foreseeable future. If the Company does
not meet its revised covenants, it may need to seek alternative financing. In
such event, there can be no guarantee that the Company will be able to obtain
financing on commercially acceptable terms.

  (a) Principles of Consolidation

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

  (b) Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

  (c) Cash and Cash Equivalents

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

  (d) Inventories

   Inventories are stated at the lower of cost (first-in, first-out) or market.
Work-in-process and finished goods inventories include materials, labor and
overhead. Inventories consist of the following at September 30, 2001 and 2000:

<TABLE>
<CAPTION>
                                                      2001   2000
                                                     ------ ------
             <S>                                     <C>    <C>
             Raw materials.......................... $  375 $  423
             Work-in-process........................  4,704  4,538
             Finished goods.........................     22     13
                                                     ------ ------
                                                     $5,101 $4,974
                                                     ====== ======
</TABLE>

                                      F-6

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  (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:

<TABLE>
<CAPTION>
                                                  Estimated
                   Asset Classification          Useful Life
                   --------------------          -----------
                   <S>                           <C>
                   Buildings and improvements... 15-33 years
                   Equipment and fixtures.......     5 years
                   Demonstration equipment......     3 years
</TABLE>

  (f) Long-Lived Assets

   The Company assesses the realizability of its long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. Under SFAS No. 121, the Company is required to assess the
valuation of its long-lived assets, including intangible assets, based on the
estimated cash flows to be generated by such assets. Based on its most recent
analysis, the Company believes that no material impairment of its long-lived
assets exists as of September 30, 2001.

   In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
statement supersedes SFAS No. 121, and the accounting and reporting provisions
of Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
Under this statement it is required that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and used
or newly acquired, and it broadens the presentation of discontinued operations
to include more disposal transactions. The provisions of this statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
adoption permitted. The Company is currently evaluating the ultimate impact of
this statement on its results of operations and financial position until such
time as its provisions are applied.

  (g) Intangible Assets

   Intangible assets, resulting from Datasonics, Inc. (Datasonics) acquisition
(see Note 2), are included in other assets and are amortized on a straight-line
basis based on their estimated lives, as follows:

<TABLE>
<CAPTION>

                                                          September 30,
                                                Estimated -------------
                                                  Life     2001   2000
                                                --------- ------ ------
        <S>                                     <C>       <C>    <C>
        Developed technology...................  6 years  $1,430 $1,430
        Assembled workforce....................  6 years     200    200
        Goodwill............................... 13 years   3,011  3,011
                                                          ------ ------
                                                           4,641  4,641
        Less--Accumulated amortization.........            1,052    545
                                                          ------ ------
                                                          $3,589 $4,096
                                                          ====== ======
</TABLE>

   In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement supersedes APB Opinion No. 17, Intangible Assets, and
applies to goodwill and intangible assets acquired after June 30, 2001, as well
as goodwill and intangible assets previously acquired. Under this statement,
goodwill, as well as certain other intangible assets determined to have an
indefinite life, will no longer be amortized; instead these assets will be
reviewed for impairment on a periodic basis. Early adoption of this statement
is permitted for

                                      F-7

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

entities with fiscal years beginning after March 15, 2001 and whose first
interim period financial statements have not been issued. Pursuant to this
statement, the Company elected early adoption effective October 1, 2001. The
goodwill and acquired assembled workforce associated with past acquisitions are
no longer subject to amortization over their estimated useful lives. Such
intangible assets will be subject to an annual assessment for impairment by
applying a fair-value based test. The Company is currently assessing these
assets for impairment and has not yet determined whether, or the extent to
which, there will be any effect on the Company's financial position.

  (h) Revenue Recognition and Warranty Costs

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

  (i) Concentration of Credit Risk

   SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentration
of credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements. Financial instruments, which potentially subject
the Company to concentrations of credit risk, are principally cash, cash
equivalents and accounts receivable. The Company places its cash and cash
equivalents in highly rated financial institutions. In 2001 and 2000, there
were no customers who accounted for more than 10% of net sales. In 1999, two
customers accounted for 14% and 12% of net sales, respectively. As of September
30, 2001, no customers accounted for 10% of accounts receivable. As of
September 30, 2000, one customer accounted for 12% of accounts receivable.

   The changes in the accounts receivable reserve are as follows:

<TABLE>
<CAPTION>
                                           Charged
                                 Balance,  to Costs                       Balance,
                                 Beginning   and     Acquired              End of
                                 of Period Expenses Reserve(1) Deductions  Period
                                 --------- -------- ---------- ---------- --------
<S>                              <C>       <C>      <C>        <C>        <C>
For the year ended September 30,
1999............................   $175      $  8      $45        $  8      $220
2000............................    220        --       --          --       220
2001............................    220       389       --         144       465
</TABLE>
--------
(1) Represents reserve acquired as part of the Datasonics acquisition (see Note
    2).

  (j) Reclassifications

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

  (k) Financial Instruments

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

                                      F-8

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  (l) New Accounting Standards

   In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No.
141 addresses changes in the financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, Business Combinations, and SFAS
No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises.
Effective July 1, 2001, all business combinations should be accounted for using
only the purchase method of accounting.

   In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This Statement applies to all entities.
It applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/or the
normal operation of a long-lived asset, except for certain obligations of
lessees. This Statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company is currently evaluating the
ultimate impact of this statement on its results of operations and financial
position.

  (m) Comprehensive (Loss) Income

   Comprehensive (loss) 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 (loss) income is the same as net (loss)
income for all periods presented.

  (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 FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation--An Interpretation of APB Opinion No. 25. Interpretation No. 44
clarifies the application of APB Opinion No. 25 in certain situations, as
defined. SFAS No. 123, Accounting for Stock-Based Compensation, establishes a
fair value method of accounting for stock-based compensation plans. The Company
has adopted the disclosure-only alternative under SFAS No. 123, which requires
disclosures of the pro forma effects on earnings and earnings per share as if
SFAS No. 123 had been adopted, as well as certain other information (see Note
7).

(2) ACQUISITION OF DATASONICS, INC.

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

<TABLE>
<S>                                               <C>
Cash............................................. $     3
Current assets...................................   2,289
Property and equipment...........................     182
Acquired intangibles (Note 1(g)).................   4,641
Purchased incomplete (in-process) research and
  development....................................     750
Assumed liabilities..............................  (1,020)
                                                  -------
                                                  $ 6,845
                                                  =======
</TABLE>

                                      F-9

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

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

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

<TABLE>
<CAPTION>
                                         Year Ended
                                        September 30,
                                         1999(1),(2)
                                        -------------
<S>                                     <C>
Pro forma total revenues...............    $24,717
                                           =======
Pro forma net income...................    $   897
                                           =======
Pro forma net income per share--
   Basic...............................    $  0.66
                                           =======
   Diluted.............................    $  0.65
                                           =======
</TABLE>
--------
(1) For the purposes of these pro forma operating results, the charge for
    in-process research and development was excluded so that the operating
    results presented included only recurring costs.
(2) Fiscal 1999 represents the results of the Company for the year ended
    September 30, 1999 combined with Datasonics results from October 1, 1998
    through the date of the acquisition.

(3) ACCRUED EXPENSES

   Accrued expenses consist of the following at September 30, 2001 and 2000:

<TABLE>
<CAPTION>
                                                      2001   2000
                                                     ------ ------
             <S>                                     <C>    <C>
             Accrued salary and related expenses.... $  535 $  595
             Accrued warranty.......................    815    302
             Accrued taxes..........................    506    517
             Other accrued expenses.................    473    315
                                                     ------ ------
                                                     $2,329 $1,729
                                                     ====== ======
</TABLE>

(4) LINE OF CREDIT

   As of September 30, 2001, the Company has an $800 secured line of credit
with a bank expiring on January 31, 2002. There was $500 outstanding under this
line of credit at September 30, 2001. Borrowings under this agreement are
payable on demand and bear interest at the Wall Street Journal's reported prime
rate (6.00% at September 30, 2001) plus 1.50%. The Company is required to
maintain certain covenants, including debt

                                     F-10

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

service coverage. The Company was not in compliance with all covenants at
September 30, 2001 and received a waiver from the bank with respect to that
noncompliance. As of December 12, 2001, the bank extended the secured line of
credit through January 31, 2003. Effective December 12, 2001, the line will
bear interest at the Wall Street Journal's reported prime rate plus 2.0%, or
7%, whichever is higher. The amount allowable under the secured line of credit
will become $600 after March 31, 2002.

(5) NOTE PAYABLE

   On August 18, 1999, the Company entered into a $5,500 note payable with a
bank. The note is secured by substantially all of the assets of the Company and
is due in 84 monthly installments with interest at prime (6.0% at September 30,
2001) plus 0.5%. Payments under this note end in August 2006. The Company is
required to meet certain covenants, including debt service coverage. The
Company was not in compliance with all covenants at September 30, 2001 and
received a waiver from the bank with respect to that noncompliance. As of
December 12, 2001, in connection with the renewal of the Company's line of
credit, the interest rate on the note payable was increased to the Wall Street
Journal's reported prime rate plus 2%, or 7%, whichever is higher.

(6) INCOME TAXES

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

   The components of the provision (benefit) for income taxes for each of the
three years in the period ended September 30, 2001 are as follows:

<TABLE>
<CAPTION>
                                        2001   2000  1999
                                        -----  ----  -----
<S>                                     <C>    <C>   <C>
Federal--
   Current............................. $(690) $222  $ 781
   Deferred............................  (460)   10   (597)
   Valuation allowance.................   405   (46)    --
                                        -----  ----  -----
                                         (745)  186    184
State--
   Current.............................     4   103    115
   Deferred............................  (241)  (65)   (51)
                                        -----  ----  -----
                                         (237)   38     64
                                        -----  ----  -----
                                        $(982) $224  $ 248
                                        =====  ====  =====
</TABLE>

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

<TABLE>
<CAPTION>
                                         2001    2000    1999
                                        ------   -----  ------
<S>                                     <C>      <C>    <C>
Federal statutory rate................. (34.00)% 34.00%  34.00%
State income taxes, net of federal tax
  benefit..............................  (4.71)   3.37    3.90
Tax provision (benefit) of foreign
  sales corporation....................   0.31   (4.23)  (4.30)
Tax credits............................  (5.64)  (4.25) (13.30)
Change in valuation allowance..........  12.37   (6.17)     --
Other..................................   1.67    7.28    2.70
                                        ------   -----  ------
   Effective tax rate.................. (30.00)% 30.00%  23.00%
                                        ======   =====  ======
</TABLE>

                                     F-11

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                   2001    2000
                                                  ------  ------
<S>                                               <C>     <C>
Acquisition related intangibles.................. $  344  $  289
Inventory reserves...............................    618     558
Tax credits......................................    322      80
Other nondeductible reserves and accruals........    771     427
Valuation allowance..............................   (405)     --
                                                  ------  ------
Net deferred tax asset........................... $1,650  $1,354
                                                  ======  ======
</TABLE>

   Under SFAS No. 109, the Company recognizes a deferred tax asset for the
future benefit of its temporary differences if it concludes that it is more
likely than not that the deferred tax asset will be realized. The Company has
recorded a valuation allowance of $405 for certain temporary differences and
tax credits, about which the Company believes there is uncertainty regarding
realizability.

(7) EMPLOYEE BENEFIT PLANS

  (a) Stock Option Plans

   The Company has granted to certain directors nonqualified stock options to
purchase shares of the Company's common stock at a price not less than the fair
market value of the shares at the date of grant. The options are exercisable
ratably over a three-year period, commencing one year from the date of grant,
and expire not more than 10 years from the date of grant. At September 30,
2001, 161,250 shares of common stock were reserved for issuance upon exercise
of the nonqualified stock options. At September 30, 2001, 55,000 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 Board of Directors (the Board) and
provide for the granting of incentive stock options and nonqualified stock
options. The options are exercisable ratably over a four-year period,
commencing one year from the date of grant, and expire not more than 10 years
from the date of grant. The purchase price applicable to incentive stock
options granted may not be less than the fair market value of the shares at the
date of grant. At September 30, 2001, 125,800 shares were available for future
grant.

                                     F-12

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Stock option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                    Employee Plans    Director Options
                                                  ------------------ ------------------
                                                            Weighted           Weighted
                                                            Average            Average
                                                   Number    Option   Number    Option
                                                  of Shares  Price   of Shares  Price
                                                  --------- -------- --------- --------
<S>                                               <C>       <C>      <C>       <C>
Outstanding, September 30, 1998..................  134,813   $ 7.79    41,250   $13.18
   Granted.......................................   38,750     6.25    15,000     6.44
   Terminated....................................   (7,688)   10.10        --       --
   Exercised.....................................  (14,250)    3.13        --       --
                                                   -------   ------   -------   ------
Outstanding, September 30, 1999..................  151,625     7.71    56,250    11.38
   Granted.......................................   78,500     8.14    50,000     8.35
   Terminated....................................  (30,750)   10.14        --       --
   Exercised.....................................   (3,750)    6.25        --       --
                                                   -------   ------   -------   ------
Outstanding, September 30, 2000..................  195,625     7.61   106,250     9.96
   Granted.......................................  113,400     5.08        --       --
   Terminated....................................  (77,950)    5.36        --       --
                                                   -------   ------   -------   ------
Outstanding, September 30, 2001..................  231,075   $ 7.13   106,250   $ 9.96
                                                   =======   ======   =======   ======
Exercisable, September 30, 2001..................   57,563   $ 9.97    67,917   $11.00
                                                   =======   ======   =======   ======
Exercisable, September 30, 2000..................   99,188   $ 6.62    36,250   $12.08
                                                   =======   ======   =======   ======
Exercisable, September 30, 1999..................   65,254   $ 6.63    17,500   $12.82
                                                   =======   ======   =======   ======
</TABLE>

   The range of exercise prices for options outstanding and options exercisable
at September 30, 2001 for the Employee Plans is as follows:

<TABLE>
<CAPTION>
                            Options Outstanding  Options Exercisable
                            -------------------- --------------------
                             Weighted
                              Average   Weighted             Weighted
                             Remaining  Average              Average
   Range of       Options   Contractual Exercise   Options   Exercise
Exercise Prices Outstanding    Life      Price   Exercisable  Price
--------------- ----------- ----------- -------- ----------- --------
<S>             <C>         <C>         <C>      <C>         <C>
 $ 4.33             3,375       4.5      $ 4.33     3,375     $ 4.33
 $ 5.00-- 5.65    112,700       9.6        5.07        --         --
 $ 6.25            17,000       7.3        6.25     8,500       6.25
 $ 8.00-- 8.75     66,500       8.5        8.15    16,625       8.15
 $10.17--11.50     21,750       5.3       11.14    21,750      11.14
 $17.54             9,750       6.1       17.54     7,313      17.54
                  -------       ---      ------    ------     ------
                  231,075       8.5      $ 7.13    57,563     $ 9.97
                  =======       ===      ======    ======     ======
</TABLE>

                                     F-13

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The range of exercise prices for options outstanding and options exercisable
at September 30, 2001 for director stock options is as follows:

<TABLE>
<CAPTION>
                            Options Outstanding  Options Exercisable
                            -------------------- --------------------
                             Weighted
                              Average   Weighted             Weighted
                             Remaining  Average              Average
   Range of       Options   Contractual Exercise   Options   Exercise
Exercise Prices Outstanding    Life      Price   Exercisable  Price
--------------- ----------- ----------- -------- ----------- --------
<S>             <C>         <C>         <C>      <C>         <C>
 $ 6.44            15,000       7.3      $ 6.44    10,000     $ 6.44
 $ 8.00-- 8.50     50,000       8.1        8.35    16,667       8.35
 $11.50--14.25     41,250       4.8       13.18    41,250      13.18
                  -------       ---      ------    ------     ------
                  106,250       6.7      $ 9.96    67,917     $11.00
                  =======       ===      ======    ======     ======
</TABLE>

   SFAS No. 123 requires the measurement of the fair value of stock options or
warrants to be included in the statement of operations or disclosed in the
notes to financial statements. The Company has determined that it will continue
to account for stock-based compensation for employees under APB Opinion No. 25
and elect the disclosure-only alternative under SFAS No. 123 for stock-based
compensation awarded in 2001, 2000 and 1999 using the Black-Scholes option
pricing model prescribed by SFAS No. 123. The underlying assumptions used are
as follows:

<TABLE>
<CAPTION>
                                          September 30,
                                        ----------------
                                        2001  2000  1999
                                        ----  ----  ----
<S>                                     <C>   <C>   <C>
Risk-free interest rate................ 5.24% 6.45% 4.80%
Expected dividend yield................   --    --    --
Expected life (in years)...............    7     7     7
Expected volatility....................   48%   48%   48%
</TABLE>

   The weighted average fair value of options granted during the years ended
September 30, 2001, 2000 and 1999 under these plans is $2.89, $4.84 and $3.51,
respectively.

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

<TABLE>
<CAPTION>
                                        September 30,
                                    --------------------
                                      2001   2000  1999
                                    -------  ----- -----
<S>                                 <C>      <C>   <C>
Net (loss) income--
   As reported..................... $(2,292) $ 522 $ 828
   Pro forma.......................  (2,678)   160   525
Basic (loss) earnings per share--
   As reported..................... $ (1.66) $0.38 $0.61
   Pro forma.......................   (1.94)  0.12  0.39
Diluted (loss) earnings per share--
   As reported..................... $ (1.66) $0.37 $0.60
   Pro forma.......................   (1.94)  0.11  0.38
</TABLE>

  (b) Employee Stock Ownership Plan

   The Company has an Employee Stock Ownership Plan covering all eligible
employees, as defined. Contributions to the plan are made at the discretion of
the Board and in an amount determined by the Board,

                                     F-14

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

provided that the total amount contributed for any plan year does not exceed
the maximum amount allowable by the Internal Revenue Code (IRC). These
contributions vest to a participant's account over five years based on
completed service, as defined. The accompanying consolidated statements of
operations for the years ended September 30, 2000 and 1999 include provisions
for contributions to the plan of approximately $30 and $74, respectively. There
was no provision for contribution for the year ended September 30, 2001.

  (c) 401(k) Retirement Plan

   The Company has a 401(k) retirement plan covering all eligible employees, as
defined. Contributions to the plan are made at the discretion of the Board and
in an amount determined by the Board, provided that the total amount
contributed for any plan year does not exceed the maximum amount allowable by
the IRC. These contributions vest to a participant's account over five years
based on completed service, as defined. Additionally, each participant may
elect to contribute up to 15% of his or her compensation for the plan year, but
not more than $10,500 (for calendar year 2001), to the plan. The accompanying
consolidated statements of operations for the years ended September 30, 2000
and 1999 include provisions for contributions to the plan of approximately $30
and $74, respectively. There was no provision for contribution for the year
ended September 30, 2001.

  (d) Supplemental Executive Retirement Plan

   The Company has a Supplemental Executive Retirement Plan for the benefit of
certain management and highly compensated executive employees. Under the plan,
participants may elect to defer a portion of their compensation paid by the
Company for supplemental retirement benefits. The Company also established the
Supplemental Executive Retirement Trust (the Trust Fund) and shall regularly
transfer to the Trust Fund amounts equal to the elective deferrals made by
participants under the plan. No such elective deferrals have been made by
participants as of September 30, 2001.

(8) EARNINGS PER SHARE

   Basic earnings per share were computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share were computed by dividing net income by the weighted average
number of diluted common and common equivalent shares outstanding during the
period. All common equivalent shares have been excluded in 2001 due to the net
loss as the effect would be antidilutive. 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:

<TABLE>
<CAPTION>
                                                    2001      2000      1999
                                                  --------- --------- ---------
<S>                                               <C>       <C>       <C>
Weighted average common shares outstanding....... 1,381,745 1,376,158 1,355,291
Effect of dilutive securities....................        --    39,198    31,505
                                                  --------- --------- ---------
Weighted average common shares outstanding,
  assuming dilution.............................. 1,381,745 1,415,356 1,386,796
                                                  ========= ========= =========
</TABLE>

   For the years ended September 30, 2001, 2000 and 1999, 250,450, 165,438 and
106,917 weighted average options, respectively, were outstanding but not
included in the diluted weighted average common share calculation as the effect
would have been antidilutive.

                                     F-15

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


(9) EMPLOYMENT AND NONCOMPETITION AGREEMENT

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

   Compensation expense of approximately $85, $87 and $86 related to this
agreement is included in the accompanying 2001, 2000 and 1999 consolidated
statements of operations, respectively.

(10) SEGMENT REPORTING

   The Company has viewed its operations and manages its business as two
segments, Undersea Systems and Package Inspection Systems (formerly called
Container 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.

<TABLE>
<CAPTION>
                                 Year Ended September 30,
                                 ------------------------
                                  2001     2000    1999
                                 -------  ------- -------
<S>                              <C>      <C>     <C>
Sales to unaffiliated customers:
   Undersea systems............. $13,064  $15,226 $12,174
   Package inspection systems...   4,957    5,327   5,074
                                 -------  ------- -------
       Total.................... $18,021  $20,553 $17,248
                                 =======  ======= =======
(Loss) income from operations:
   Undersea systems............. $(2,416) $ 1,046 $   742
   Package inspection systems...    (518)      24     207
                                 -------  ------- -------
       Total.................... $(2,934) $ 1,070 $   949
                                 =======  ======= =======
Identifiable assets:
   Undersea systems............. $10,244  $11,839 $11,116
   Package inspection systems...   2,994    2,682   2,349
   Corporate assets.............   2,850    3,344   5,322
                                 -------  ------- -------
       Total.................... $16,088  $17,865 $18,787
                                 =======  ======= =======
</TABLE>

                                     F-16

<PAGE>

                         BENTHOS, INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Revenues by geographic area for the years ended September 30, 2001, 2000 and
1999 were as follows:

<TABLE>
<CAPTION>
Geographic Area                                         2001    2000    1999
---------------                                        ------- ------- -------
<S>                                                    <C>     <C>     <C>
United States......................................... $11,923 $12,835 $ 6,257
Norway................................................      19     402   2,195
Other.................................................   6,079   7,316   8,796
                                                       ------- ------- -------
                                                       $18,021 $20,553 $17,248
                                                       ======= ======= =======
</TABLE>

(11) RELATED PARTY TRANSACTIONS

   The Company paid patent license fees to an entity controlled by the
Company's Chairman of the Board. The Company expensed approximately $20, for
these fees in fiscal 2001, 2000 and 1999. Additionally, during the year, the
Company paid the Chairman of the Board $48 for providing services as interim
President and Chief Executive Officer.

                                     F-17

<PAGE>

                                 BENTHOS, INC.

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
-------
<C>     <S>
  3.1   Restated Articles of Organization(1) .
  3.2   Articles of Amendment dated April 28, 1997(2)
  3.3   Articles of Amendment dated April 20, 1998(5)
  3.4   By-Laws(1)
  3.5   By-Law Amendments adopted January 23, 1998(4)
  4.1   Common Stock Certificate(1)
 10.1   Employment Contract with Samuel O. Raymond(1)
 10.2   Amendment to Employment Contract with Samuel O. Raymond(2)
 10.3   Employment Contract with John L. Coughlin(1)
 10.4   Amended and Restated Employment Agreement with John L. Coughlin(10)
 10.5   Severance Agreement with John L. Coughlin(13)
 10.6   Employment Agreement with Ronald L. Marsiglio dated May 21, 2001(15)
 10.7   Employment Agreement with Francis E. Dunne, Jr.(11)
 10.8   Employee Stock Ownership Plan(1)
 10.9   First Amendment to Employee Stock Ownership Plan(2)
 10.10  Second Amendment to Employee Stock Ownership Plan(8)
 10.11  Third Amendment to Employee Stock Ownership Plan(8)
 10.12  Fourth Amendment to Employee Stock Ownership Plan(11)
 10.13  Fifth Amendment to Employee Stock Ownership Plan(11)
 10.14  401(k) Retirement Plan (1993)(1)
 10.15  First Amendment to 401(k) Retirement Plan(2)
 10.16  Second Amendment to 401(k) Retirement Plan(2)
 10.17  Third Amendment to 401(k) Retirement Plan(3)
 10.18  401(k) Retirement Plan (1999)(8)
 10.19  First Amendment to 1999 401(k) Retirement Plan(11)
 10.20  Second Amendment to 1999 401(k) Retirement Plan(11)
 10.21  Third Amendment to 1999 401(k) Retirement Plan(14)
 10.22  Supplemental Executive Retirement Plan(1)
 10.23  1990 Stock Option Plan(1)
 10.24  Stock Option Plan for Non-Employee Directors(1)
 10.25  1998 Non-Employee Directors' Stock Option Plan(4)
 10.26  Benthos, Inc. 2000 Stock Incentive Plan(9)
 10.27  License Agreement between the Company and The Penn State Research Foundation dated
          December 13, 1993(1)
 10.28  Technical Consultancy Agreement between the Company and William D. McElroy dated July 12,
          1994(1)
</TABLE>

<PAGE>

<TABLE>
<C>     <S>
10.29   Technical Consultancy Agreement between the Company and William D. McElroy dated October 1,
          1996(3)
10.30   General Release and Settlement Agreement between the Company and Lawrence W. Gray dated
          February 8, 1996(1)
10.31   Line of Credit Loan Agreement between the Company and Cape Cod Bank and Trust Company dated
          September 24, 1990, as amended(1)
10.32   Commercial Mortgage Loan Extension and Modification Agreement between the Company and Cape
          Cod Bank and Trust Company, dated July 6, 1994(1)
10.33   Credit Agreement between the Company and Cape Cod Bank and Trust Company dated August 18,
          1999(8)
10.34   First Amendment to Credit Agreement dated March 23, 2001(14)
10.35   License Agreement between the Company and Optikos Corporation dated July 29, 1997(3)
10.36   Hydrophone License Agreement between the Company and Syntron, Inc. dated December 5, 1996(6)
10.37   Amendment Number 1 to Hydrophone License Agreement between the Company and Syntron, Inc.
          dated September 11, 1998(6)
10.38   Asset Purchase Agreement among Benthos, Inc., Datasonics, Inc., and William L. Dalton and David
          A. Porta(7)
10.39   Settlement Agreement and Mutual Release dated October 18, 2001 between the Company and RJE
          International, Inc.
   21   Subsidiaries of the Registrant(1)
   23   Consent of Independent Public Accountants
</TABLE>
--------
 (1) Previously filed as an exhibit to Registrant's Registration Statement on
     Form 10-SB filed with the Commission on December 17, 1996 (File No.
     O-29024) and incorporated herein by this reference.
 (2) Previously filed as an exhibit to Registrant's Quarterly Report on Form
     10-QSB for the quarterly period ended March 30, 1997 (File No. O-29024)
     and incorporated herein by this reference.
 (3) Previously filed as an exhibit to Registrant's Quarterly Report on Form
     10-QSB for the quarterly period ended June 29, 1997 (File No. O-29024) and
     incorporated herein by this reference.
 (4) Previously filed as an exhibit to the Registrant's Quarterly Report on
     Form 10-QSB for the quarterly period ended December 31, 1997 (File No.
     O-29024) and incorporated herein by this reference.
 (5) Previously filed as an exhibit to the Registrant's Quarterly Report on
     Form 10-QSB for the quarterly period ended March 31, 1998 (File No.
     0-29024) and incorporated herein by this reference.
 (6) Previously filed as an exhibit to the Registrant's Quarterly Report on
     Form 10-QSB for the quarterly period ended December 31, 1998 (File No.
     0-29024) and incorporated herein by this reference.
 (7) Previously filed as an exhibit to Registrant's Current Report on Form 8-K
     filed on or about August 27, 1999 (File No. 0-29024) and incorporated
     herein by this reference.
 (8) Previously filed as an exhibit to Registrant's Annual Report on Form
     10-KSB for the fiscal year ended September 30, 1999 (File No. 0-29024) and
     incorporated herein by this reference.
 (9) Previously filed as an exhibit to the Registrant's definitive proxy
     statement filed on Schedule 14A on or about January 18, 2000 and
     incorporated herein by this reference.
(10) Previously filed as an exhibit to the Registrant's Quarterly Report on
     Form 10-QSB for the quarterly period ended December 31, 1999 (File No.
     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 June 30, 2000 (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, 2000 (File No. 0-29024) and
     incorporated herein by this reference.
(13) Previously filed as an exhibit to Amendment No. 1 to the Registrant's
     Annual Report on Form 10-KSB for the fiscal year ended September 30, 2000
     (File No. 0-29024) and incorporated herein by this reference.
(14) 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.
(15) Previously filed as an exhibit to the Registrant's Quarterly Report on
     Form 10-QSB for the quarterly period ended June 30, 2001 (File No.
     0-29024) and incorporated herein by this reference.

                                      2