SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10KSB

[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934

    For the fiscal year ended December 31, 1998

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934 (no fee required)

    For the transition period from _________ to __________.

    Commission File Number: 0-12575


                         ARIZONA INSTRUMENT CORPORATION
           -----------------------------------------------------------
           (Name of small business issuer as specified in its charter)


          Delaware                                               86-0410138
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(State or other jurisdiction of                                 (IRS Employer
incorporation or organization)                               Identification No.)

  4114 East Wood Street, Phoenix, AZ                               85040
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(Address of principal executive offices)                         (Zip Code)

Issuer's telephone number: (602) 470-1414

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value

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

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  Registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  In Part III of this Form 10-IKSB or any
amendment to this Form 10-KSB. [ ]
<PAGE>
As of March 23,  1999,  the  aggregate  market value of the voting stock held by
non-affiliates  of the registrant was $2,667,519.  The aggregate market value is
computed with  reference to the average bid and asked  prices.  Shares of Common
Stock held by each  officer and director and by such person who owns 10% 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 conclusive.

Issuers revenues for its most recent fiscal year were $13,736,981.

As of March 23, 1999,  1,362,975 shares of Common Stock ($.01 par value adjusted
to  reflect a 5 to 1 reverse  stock  split  effective  February  16,  1999) were
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Part III: Portions of the Proxy Statement for the 1999 Annual
          Shareholders' Meeting (to be filed).

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Unless the context  indicates  otherwise,  the term "Company" or "AZI" refers to
Arizona Instrument Corporation and its wholly-owned subsidiaries.

Except for the historical  information  contained herein, the discussion in this
Form 10-KSB contains certain  forward-looking  statements  within the meaning of
the Private  Securities  Litigation  Reform Act of 1995, and the Company intends
that such  forward-looking  statements  be subject to the safe  harbors  created
thereby.   The   forward-looking   statements   include   statements   regarding
management's  anticipation of the Company's future market position,  development
of additional products,  product introduction and delivery dates, reliability of
products, adequate sources of supplies,  acquisition of related product lines or
companies, positive responses to new developments, and availability and terms of
credit.  The  forward-looking  statements  included  herein are based on current
expectations  that  involve  a  number  of  risks  and  uncertainties,   and  on
assumptions that involve  judgments with respect to, among other things,  future
economic,  competitive and market conditions,  research and development results,
product introduction and delivery schedules,  raw materials,  market conditions,
stability of the  regulatory  environment,  future  business  decisions  and the
outcome  of  negotiations  with  its  lender,  all of  which  are  difficult  or
impossible to predict accurately and many of which are beyond the control of the
Company.  Although the Company  believes  that the  assumptions  underlying  the
forward-looking statements, many of which are beyond the control of the Company,
are reasonable,  any of the assumptions  could prove inaccurate and,  therefore,
there can be no  assurance  that the  results  contemplated  in  forward-looking
information will be realized.  Important  factors which may cause actual results
to differ materially from those contemplated or implied by such  forward-looking
statements  are  discussed in more detail in this form 10-KSB and the  Company's
1998 Annual Report to  Shareholders.  In light of the significant  uncertainties
inherent in the  forward-looking  information  included herein, the inclusion of
such information  should not be regarded as a  representation  by the Company or
any other person that the objectives or plans of the Company will be achieved.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

         Arizona  Instrument  Corporation  designs  and  manufactures  precision
instruments  used in  quality  control,  industrial  control  and  environmental
monitoring  applications.  The  operations  of  AZI's  wholly-owned  subsidiary,
Horizon  Engineering  and Testing,  Inc.  ("Horizon"),  which had specialized in
testing and  engineering  services  for the  underground  storage  tank  ("UST")
market, were discontinued during 1997.

         AZI completed its initial  public stock  offering on September 22, 1983
as Computrac Instruments,  Inc. Later that year, the Company changed its name to
Quintel  Corporation.  In March  1987,  to reflect new  product  offerings,  the
Company was renamed Arizona Instrument Corporation.

         AZI's initial  product was the Computrac  moisture  analyzer for use in
process  control  industries,  but the Company has expanded  into other  product
areas. In December 1986, AZI acquired Jerome Instrument Corporation  ("Jerome"),
a manufacturer of mercury and hydrogen  sulfide gas analyzers.  In January 1988,
AZI completed the acquisition of certain assets from Genelco,  Inc.  ("Genelco")
including the Soil Sentry line of UST leak detection systems.  In June 1994, the
Company introduced the ENCOMPASS(TM) product, its next generation

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of fuel management and leak detection compliance systems. In September 1992, the
Company acquired Horizon,  a company that specialized in testing and engineering
services for USTs; however, the Company discontinued Horizon's operations during
1997.

         On March 9, 1999, BP Oil Company  filed suit in United States  District
Court in the Northeast District of Ohio,  alleging breach of contract and breach
of warranty by AZI in the sale of Encompass  systems to BP Oil  Company.  BP Oil
Company seeks  approximately  $2.0 million in actual  damages plus an additional
several million dollars in incidental and consequential  damages. AZI intends to
vigorously defend this action. Unless a favorable result can be obtained for AZI
in this dispute, the defense and ultimate resolution of this action could have a
material adverse effect upon the Company.

ENCOMPASS(TM) AND SOIL SENTRY PRODUCT LINE

         Products - ENCOMPASS and the Soil Sentry line of UST monitoring systems
include  various  products that allow UST  operators  with diverse site needs to
automate  fuel  management  and comply  with  federal  and local leak  detection
regulations.

         In June 1994, the Company  introduced the ENCOMPASS product, a personal
computer-based fuel inventory reporting and environmental compliance system that
utilizes on-site  personal  computers to manage fuel inventory and meet EPA leak
detection  requirements.  The ENCOMPASS system is compatible with other business
software and runs in the computer's  background without  interrupting other site
activities.  In the  event  of an  alarm  condition,  the  system  automatically
notifies the operator. The ENCOMPASS system runs in a Windows-based environment.

         In 1996, the Company expanded the ENCOMPASS system to include line leak
detection and continuous statistical tank testing products.

         The Soil Sentry  Twelve-X,  improved in 1993,  combines  aspirated  and
dynamic vapor monitoring  technologies to monitor both tanks and piping at sites
which have existing hydrocarbon contamination.  It uses a unique aspirated vapor
technology to measure for the presence of leak-indicating  hydrocarbon vapors in
the soil surrounding  underground and aboveground tanks.  Sampling points placed
at strategic locations  throughout a site are connected with transport tubing to
a Twelve-X  console.  A pump inside the system console  automatically  draws air
samples  from  each  sampling  point,  one at a time,  back to the  console  for
analysis by the sensor. The microprocessor  establishes a baseline contamination
level, then employs a series of statistical  tests and mathematical  modeling to
differentiate between new leaks, spills and existing background contamination to
eliminate false alarms. If thresholds are exceeded, an alarm is sounded. Because
the  monitoring  wells are  located  throughout  the  site,  the user is able to
pinpoint the problem area quickly, greatly reducing costs to repair tanks and/or
piping and remediate the site.

         Primary  features of all ENCOMPASS and Soil Sentry products include the
ability to  remotely  access and  control  the  system  through a modem  using a
personal computer.

         Market  and  Applications  - In 1984,  Congress  amended  the  Resource
Conservation  and  Recovery  Act,   requiring  the   implementation   of  strict
registration and monitoring regulations for all underground storage tanks in the
United  States.  For the purpose of these  regulations,  the EPA has defined any
storage tank system with more than 10 percent of its total volume underground

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as a UST.  Estimates  of the  total  number  of  USTs  affected  by the  federal
regulations vary,  ranging from 1.8 to 2.1 million,  with an average of 3.3 USTs
per site.

         The markets and applications for UST leak detection include:  major oil
company service stations;  major oil company production and storage  facilities;
independent  retail  service  stations;  convenience  stores that sell gasoline;
shipping and trucking firms;  manufacturing and distribution  firms with fleets;
airports;  government and military sites equipped with underground storage tanks
and pipelines,  and facilities with back-up power systems.  All of these markets
contain  applications  appropriate  for  ENCOMPASS and Soil Sentry  systems.  In
addition,  non-regulated fuel systems such as aboveground storage tanks can also
be monitored with the ENCOMPASS and Soil Sentry products.

         Sales of the  Company's  Encompass  and Soil Sentry  products  for 1998
failed to meet industry analysts  expectations.  The Company believes the slower
sales are due to decisions by many UST operators to seek less expensive  methods
of meeting  regulatory  requirements such as annual tank testing,  combined with
monthly inventory reconciliation or statistical inventory reconciliation.

HORIZON

         Services - Horizon was acquired in 1992 to facilitate  the  penetration
of the UST market by the Company's Soil Sentry  products.  Horizon provided tank
testing  services using a tracer testing system for USTs,  which was licensed to
Horizon by Tracer Research Corp. ("Tracer") of Tucson, Arizona.

         In 1996, Horizon began offering a complete set of products and services
which were  required  by its tank  testing  customers  choosing  to convert to a
permanent  method of leak  detection.  Offering  ENCOMPASS as the leak detection
compliance method, Horizon also provided installation  management of the system,
cathodic protection,  interior tank lining, spill/overfill protection as well as
other  services  and  products  required to upgrade the site to meet federal and
local leak detection requirements.

         Markets  - Horizon  had been  engaged  since  1990 in the  business  of
testing  USTs for  leakage  using  EPA-recognized  testing  methods.  Due to its
declining  market share in tank testing,  and its inability to generate  profits
from tank upgrades, Horizon's operations were discontinued in 1997.

JEROME PRODUCT LINE

         Products - The first Jerome product was developed in 1976 as a portable
mercury detector for mining applications. The initial "mercury in soil" detector
spawned a line of hand-held, battery powered, field portable instruments capable
of detecting mercury vapor and hydrogen sulfide in minute quantities.

         The Jerome 431-X mercury vapor  analyzer  ("Jerome  Mercury  Analyzer")
quickly  and  accurately  quantifies  low levels of  mercury in ambient  air for
on-site  environmental  testing,  clean-up  and  analysis.  Using the  Company's
gold-film sensing technology, the unit can be carried to sources of mercury, and
displays results in seconds with the push of a button. After spill clean-up, the
analyzer can be used to verify that no hazardous residue remains.

         The Jerome 631-X  hydrogen  sulfide  analyzer  ("Jerome H2S  Analyzer")
detects and measures low levels of ambient hydrogen sulfide ("H2S"). Using the

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Company's  gold-film  sensing  technology,   the  hand-held  instrument  quickly
quantifies H2S levels down to  parts-per-billion,  allowing corrective action to
reduce  complaints which arise at noxious-odor  levels.  The  simple-to-operate,
push  button  unit is easily  carried to sources  of H2S where it  monitors  gas
levels to meet air quality standards.

         Markets  and  Applications  - Mercury - The market  for Jerome  Mercury
Analyzer comprises customers in three major groups:

         Industrial Hygiene - These applications  involve workplace screening to
ensure  employees are not  subjected to  unacceptable  mercury risk.  The United
States Occupational Safety and Health Administration requires industries such as
battery  and caustic  soda  manufacturers,  thermometer  and  fluorescent  light
manufacturers, hospitals and laboratories to monitor for mercury.

         Industrial  Process  Quality Control - These customers test for mercury
in  products  where  even trace  amounts  can have  toxic  effects,  such as the
confined  environments of submarines,  engine rooms or spacecraft.  Suppliers to
the National Aeronautics and Space Administration and the United States Navy are
required  under   procurement   contracts  to  certify  that  certain  equipment
components are mercury free.

         Mercury Dental Amalgam  Screening - Mercury and silver dental  amalgams
have become the subject of intense scrutiny and controversy.  The Jerome Mercury
Analyzer has been used in research on this topic,  and the Company believes that
it is  recognized  in the dental and medical  professions  as the only  portable
instrument that provides accurate mercury vapor readings at the required levels.

         Markets and  Applications - Hydrogen  Sulfide - The Jerome H2S Analyzer
allows  industries  to monitor H2S in low parts per billion  levels for odor and
corrosion control.

         Odor Control - Jerome H2S  Analyzers  effectively  quantify the noxious
odor of H2S  given off from  industrial  processes  in order to manage  customer
complaints or potential  litigation.  The most common  market is the  wastewater
treatment industry.

         Corrosion  Control - Searching for and  quantifying the presence of H2S
near costly  industrial  equipment is critical  since H2S and its byproducts are
highly  corrosive.  Industries  utilizing  the Jerome H2S Analyzer for corrosion
control include wastewater treatment,  oil and gas refining,  and pulp and paper
processing.

COMPUTRAC PRODUCT LINE

         Products - AZI was founded on the Computrac line of moisture analyzers.
The  Computrac  moisture  analyzers  simplify and automate a tedious  industrial
quality control procedure.  Typically,  a sample material is weighed, then dried
in an oven for several hours to drive off moisture.  The sample is weighed again
and the initial  moisture content of the sample is computed based on the loss of
water weight. Computrac instruments house a heating chamber to dry the sample, a
precision balance to measure sample weight change and a microprocessor that uses
an algorithm to quickly extrapolate moisture content based on the rate of weight
loss. This technology is named the loss on drying or LOD technique.

         Computrac instruments are rugged enough to be used on the factory floor
for quick batch analysis and accurate enough for precise laboratory testing.

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They do not require a trained  technician  for  operation.  Thus,  they can save
customers both time and money.

         In 1994, the Company  completed  development of the Computrac  MAX-2000
and MAX-1000 moisture analyzers. The MAX-2000 uses the latest digital technology
to detect moisture levels  accurately down to .005% in as little as two minutes.
The  MAX-2000 is  programmable  from an  easy-to-use  front  panel menu  system,
allowing the user to store test parameters for 30 different sample materials. It
features a real-time front panel display of moisture  values,  the elapsing test
time and drying-curve graph, a statistical  software package, and the ability to
send test results to a PC or printer.

         In December  1995,  the Company  announced  that it completed  proof of
concept of its new line of Computrac 3000 moisture analyzers with Alpha and Beta
production  units  completed  in  1996.  The  Computrac  3000,  targeted  at the
worldwide  titration  market,  requires no toxic reagents,  is simple to use and
maintain, and offers excellent correlation and repeatability. The Computrac 3000
was  released  for  sale  to  customers  during  1997  and  additional   product
enhancements are under development.

         The MAX-500 was introduced in 1996 as a lower priced,  reduced  feature
version of the MAX-1000 and  MAX-2000.  The MAX-500 is for  customers who do not
need  all  the  features  or the  resolution  of the  other  Computrac  moisture
analyzers.

         Markets and  Applications - The markets for Computrac  instruments tend
to be niche  applications in various  industries.  Three primary industries have
yielded the Company's  historical sales:  Foods - measuring the moisture content
of cookie dough,  cigarette  tobacco,  pasta and numerous other raw and finished
food products;  Chemicals - measuring  moisture and total solids content of such
chemical products as adhesives,  coatings,  and paints; and Plastics - measuring
the water  content of resins used in molding or  extrusion.  Other  applications
include pharmaceutical production and forestry management.

PRODUCT RELIABILITY AND QUALITY CONTROL

         The Company  believes its products are highly  reliable.  The Company's
products have built-in  self-test features which are designed to insure that the
instrument is functioning  properly and will provide an accurate result.  If any
of the self-tests  indicate  abnormal  conditions,  the operator is alerted by a
light,  and a coded  display  indicates the type of  malfunction.  The Company's
products have one-, two- and five-year parts and labor warranties.  For the year
ended December 31, 1998, warranty expense approximated 2% of net sales.

         In  February  1996,  the  Company  achieved  ISO  9001  Quality  System
Certification.  This  certification  is  registered  through  SGS  International
Certification  Services,  Inc., an ANSI-RAB accredited  registrar.  The ISO 9001
certification  defines  models for quality  assurance in every phase of business
operations  including design,  development,  quality control,  customer service,
production,  installation  and service.  Certification to the worldwide ISO 9001
standard  documents  that the  Company  has in  place  policies,  practices  and
procedures to provide  services using quality  management  systems in compliance
with International Organization of Standardization (ISO) model.

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MANUFACTURING AND SOURCES OF SUPPLY

         The majority of the  Company's  manufacturing  costs are for  purchased
components.  Certain  components  are then  provided  to outside  companies  for
subassembly,  with final assembly and testing performed by the Company. While in
some cases,  the Company relies on sole source  vendors,  secondary  vendors are
generally  available.  Raw materials and component parts are supplied by vendors
to the Company pursuant to specifications  set by AZI. The Company has initiated
a vendor  qualification  program,  and  believes  that,  if  necessary,  the raw
materials and  components  supplied by sole source  vendors could be supplied by
such other vendors without a material disruption of the manufacturing process.

MARKETING AND SALES; BACKLOG

         The Company's marketing and sales strategy is to identify major markets
its products can serve, evaluate the sales potential of each market segment, and
conduct  specialized  promotional  campaigns,  market by market, to elicit sales
inquiries from prospective  customers.  The majority of the Company's  promotion
budget  is  spent on trade  advertising,  public  relations  and  exhibiting  at
industry trade shows.

         Inquiries are processed  through an in-house  inquiry  handling system.
Sales  representatives  are  trained to follow up on  inquiries  and qualify the
applicability of the Company's products to the prospect's need.

         Historically,  due to the relatively  short time period between receipt
of customer  orders and shipment of  products,  the  Company's  backlog has been
quite low. The dollar amount of unfilled  orders at the beginning of any quarter
has not exceeded 15% of sales for that quarter.

         The Company  markets its  instruments  for export through its own sales
force, as well as through foreign  distributors  in Canada,  Europe,  the Middle
East, the Far East, and Latin America.

INDUSTRIES SERVED - CUSTOMERS

         The  specific  industries  served  domestically  by  each  product  are
detailed in the specific Markets and Applications sections presented earlier.

         A single customer, B.P. Oil Company,  represented  approximately 13% of
net sales in 1998.  The Company is actively  seeking to  diversify  sales of its
products to other  customers and anticipates  that additional  customers will be
added in the next 12 months.

         Most export sales are to foreign distributors. The Company is unable to
determine which  industries are served by the export sales, but believes them to
be similar in pattern to domestic sales.  Export sales were approximately 17% of
total sales in 1998,  with no sales to any country  exceeding  10% of net sales.
(See Note I to the Consolidated Financial Statements)

         The  Company's  business  with  United  States  government  agencies is
effected  through two contracts with the General Services  Administration.  Both
Jerome and Soil Sentry  products are available for purchase by federal  agencies
through these  contracts.  None of the contracts  provide for  renegotiation  of
profits,  except upon renewal of such contract or termination at the election of
the  government.  The  contracts  expired in January 1999 and were renewed for 1
year.  The  Company's  products  and  services  are not  subject  to  government
approval. The Company is not

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aware of any pending  government  regulations  which would materially affect its
business.

COMPETITION

         ENCOMPASS  and  Soil  Sentry  - There  are a  number  of  suppliers  of
permanent  storage tank monitoring  systems which compete with the ENCOMPASS and
Soil Sentry  product  line.  These  companies  are  nationwide in scope and many
operate in foreign markets. Channels of distribution for the competition include
direct account sales,  distributors,  and  manufacturers'  representatives.  The
ENCOMPASS and Soil Sentry  products  overlap the products of these  competitors,
except that AZI  believes  that it is the only  provider of an  aspirated  vapor
monitoring system.

         Computrac - A number of  companies  have  products  which  compete with
Computrac  moisture  analyzers.  For applications where very low moisture levels
are  measured,  titrators  provide  the  greatest  competition.  Many  of  these
companies operate both domestically and internationally.

         Jerome - There is no significant competition for Jerome in applications
where low levels of hydrogen  sulfide  gas or mercury  vapor need to be measured
with a hand-held  ambient air  analyzer.  When a less  sensitive  instrument  is
needed, the level of competition increases.

RESEARCH AND DEVELOPMENT

         The Company believes that the development of new products, enhancements
for existing products,  and the development of new applications for its existing
products  are  critical  to  its  success.  Research  and  development  expenses
increased  35%  in  1998  compared  to  1997.   Expenditures  for  research  and
development  for  the  years  ended  December  31,  1998,  1997  and  1996  were
$1,324,640, $984,628, and $720,133, respectively. This represented 9.6% of sales
in  1998,  6.5% of sales in  1997,  and  6.8% of  sales in 1996.  The  Company's
research  and  development   expenditures  for  1998  were  channeled  into  the
development of new products in all three product lines. The Company also intends
to  develop  additional   instrumentation  products  and  services  through  OEM
relationships  and the  acquisition  of  related  product  lines  or  instrument
companies.  During 1997, the Company reorganized its Engineering function, which
had the  effect of  increasing  Research  and  Development  expenses  which were
previously accounted for in the Cost of Goods Sold.

PATENTS, LICENSES AND TRADEMARKS

         The  Company  owns two  patents  directed  to aspects of its  Computrac
product,  one patent directed to aspects of its Soil Sentry product,  one patent
directed to its  ENCOMPASS  product and one domestic  and five  foreign  patents
directed  to aspects of its  Jerome  product.  Two  additional  domestic  Jerome
patents,  one domestic  ENCOMPASS  patent and one Computrac patent are currently
pending.  The Company does not believe that patents are a significant  long-term
competitive  factor in these businesses and intends to rely more on its on-going
research  and  development,  engineering  and  customer  service  to  maintain a
long-term competitive advantage in the market place. The Company has not granted
licenses  under any of its patents and such patents have not been  challenged or
upheld in court. There can be no assurance that the validity of the patents will
be upheld if challenged. The Company has trademarked its ENCOMPASS(TM) product.

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EMPLOYEES

         As of  December  31,  1998,  the  Company  had a total of 73 full  time
employees and 2 part-time  employees.  The Company  provides ongoing training to
its  technical  and  sales  personnel.  None  of  the  Company's  employees  are
represented by a union.  Management  believes that relations between the Company
and its employees are excellent.

ITEM 2. DESCRIPTION OF PROPERTY

         The  Company  currently  leases  approximately  35,000  square  feet in
Phoenix, Arizona. All administration,  sales, customer service,  engineering and
manufacturing  for the Company are in the  Phoenix  facility.  The lease on this
building  expires in August 2003.  The Company  believes that its facilities are
modern,  well-maintained  and in excess of its  current  needs.  The  Company is
seeking to reduce its occupancy expenses.

ITEM 3. LEGAL PROCEEDINGS

         On March 9, 1999, BP Oil Company  filed suit in United States  District
Court in the Northeast District of Ohio,  alleging breach of contract and breach
of warranty by AZI in the sale of Encompass  systems to BP Oil  Company.  BP Oil
Company seeks  approximately  $2.0 million in actual  damages plus an additional
several million dollars in incidental and consequential  damages. AZI intends to
vigorously  defend this  action.  Unless a favorable  result can be obtained for
AZI,  the defense and  ultimate  resolution  of this action will have a material
adverse effect upon the Company.

         On March 7,  1997,  the  Company  was served  with a summons  and first
amended  complaint  which was filed in the United States  District Court for the
District of Idaho on February 28, 1997 by United Co-op, Inc. and Idaho Petroleum
Clean Water Trust Fund. The complaint alleges breach of contractual promises and
breach of warranties  in a commercial  transaction  for tank and line  tightness
services. The Company agreed to a settlement of this matter in March 1999.

         From time to time, the Company is involved in routine  litigation  that
is  incidental to its  business.  The Company is not  currently  involved in any
other legal  proceedings,  the result of which the Company believes would have a
material adverse effect upon the Company.

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

         The Company did not submit any matters to a vote of security holders in
the fourth quarter of 1998.

EXECUTIVE OFFICERS OF THE REGISTRANT

         Set forth below is certain information  regarding executive officers of
the Company.

         George G. Hays, age 43, is the President,  Chief Executive  Officer and
Chairman of the Board of Directors.  Mr. Hays joined the Company in 1997 as Vice
President  of  Finance,   Chief  Financial   Officer,   and  Vice  President  of
Manufacturing.  In  November  1997,  Mr. Hays was  elected  President  and Chief
Executive  Officer  for the  Company.  In January  1998,  Mr.  Hays was  elected
Chairman of the Board of Directors. Prior to his position with the

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Company,  Mr. Hays was president and founder of Hays Financial  Group,  Inc., an
investment banking firm, since 1986.

         Linda Shepherd,  age 47, is the Controller,  Chief Accounting  Officer,
and Corporate Secretary of the Company.  Ms. Shepherd has been an accountant for
the Company since 1984. In mid 1997,  Ms.  Shepherd  became the  Controller  and
Chief Accounting  Officer of the Company,  and in mid 1998, Ms. Shepherd assumed
the position of Corporate  Secretary.  Prior to joining AZI, Ms. Shepherd was an
accountant for a local trucking firm.

         Executive  officers are elected annually and serve at the discretion of
the Board of Directors.

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's Common Stock trades on the Nasdaq Small Cap Market. As of
March 23,  1999,  there were  approximately  400  shareholders  of record of the
Company's common stock, its only class of common equity.  The high and low sales
prices set forth below are derived from information provided by The Nasdaq Stock
Market.

              1998                        HIGH             LOW
              ----                        ----             ---
         First Quarter                    1.41             0.84
         Second Quarter                   1.63             1.06
         Third Quarter                    1.16             0.56
         Fourth Quarter                   1.00             0.50

              1997                        HIGH             LOW
              ----                        ----             ---
         First Quarter                    3.13             2.18
         Second Quarter                   2.50             1.50
         Third Quarter                    1.88             1.47
         Fourth Quarter                   1.72             0.84

         The Company has never paid a cash  dividend  and  currently  intends to
retain all  earnings for use in its  business.  The  declaration  and payment of
dividends in the future will be determined by the Board of Directors in light of
conditions then existing, including the Company's earnings, financial condition,
capital  requirements  and other factors.  Dividends are also  restricted by the
Company's lines of credit  agreements with the Company's bank. See "Management's
Discussion and Analysis or Plan of Operation."

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         Except for the historical  information contained herein, the discussion
in this Form  10-KSB  contains  certain  forward-looking  statements  within the
meaning of the Private Securities Litigation Reform Act of 1995, and the Company
intends  that such  forward-looking  statements  be subject to the safe  harbors
created thereby.  The  forward-looking  statements include statements  regarding
management's  anticipation of the Company's future market position,  development
of additional products,  product introduction and delivery dates, reliability of
products, adequate sources of

                                       11
<PAGE>
supplies,  acquisition of related product lines or companies  positive responses
to new developments,  and availability and terms of credit. The  forward-looking
statements  included  herein are based on current  expectations  that  involve a
number of risks and  uncertainties,  and on assumptions  that involve  judgments
with respect to, among other things,  future  economic,  competitive  and market
conditions,  research and development results, product introduction and delivery
schedules,  raw  materials,  market  conditions,  stability  of  the  regulatory
environment,  and  future  business  decisions,  all of which are  difficult  or
impossible to predict accurately and many of which are beyond the control of the
Company.  Although the Company  believes  that the  assumptions  underlying  the
forward-looking statements, many of which are beyond the control of the Company,
are reasonable,  any of the assumptions  could prove inaccurate and,  therefore,
there can be no  assurance  that the  results  contemplated  in  forward-looking
information will be realized.  Important  factors which may cause actual results
to differ materially from those contemplated or implied by such  forward-looking
statements  are  discussed in more detail in this Form 10-KSB and the  Company's
1998 Annual Report to  Shareholders.  In light of the significant  uncertainties
inherent in the  forward-looking  information  included herein, the inclusion of
such information  should not be regarded as a  representation  by the Company or
any other person that the objectives or plans of the Company will be achieved.

                                       12
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth items in the Company's Consolidated Statements of
Operations as a percent of total net sales for the years ended December 31 1998,
1997 and 1996. See ITEM 7 FINANCIAL STATEMENTS.

                                Percentage of net Sales       Percentage change
                                Year Ended December 31,       over prior periods
                               -------------------------      ------------------
                                                              1998 vs   1997 vs
                                1998      1997      1996       1997      1996
                                ----      ----      ----       ----      ----
NET SALES                      100.0%    100.0%    100.0%      -9.8%     42.8%
COST OF GOODS SOLD              46.6%     51.8%     41.4%     -18.9%     78.8%
                               -----     -----     -----

    Gross margin                53.4%     48.2%     58.6%      -0.1%     17.5%
                               -----     -----     -----
EXPENSES
 Marketing                      22.9%     25.5%     26.1%     -19.0%     39.4%
 General & administrative       12.6%     17.9%     15.8%     -36.3%     61.6%
 Research & development          9.6%      6.5%      6.8%      34.5%     36.7%
 Amortization & depreciation     4.6%      4.0%      5.4%       5.6%      5.5%
                               -----     -----     -----

  Total Expenses                49.7%     53.9%     54.1%     -16.5%     42.2%
                               -----     -----     -----

OPERATING INCOME (LOSS)          3.7%     (5.7)%     4.5%    -159.6%   -271.0%
                               -----     -----     -----
OTHER REVENUE (EXPENSE)
 Interest income                 0.0%      0.1%      0.2%    -100.0%    -33.3%
 Interest expense               (0.8)%    (0.9)%    (1.9)%    -24.3%    -31.2%
 Settlement of litigation        0.0%      0.0%      9.4%       0.0%   -100.0%
 Other                           0.5%      0.0%      0.6%  -3,648.8%   -103.2%
                               -----     -----     -----

  Total other income (expense)  (0.3)%    (0.8)%     8.3%     -74.2%   -114.2%
                               -----     -----     -----
INCOME (LOSS) BEFORE INCOME
TAXES                            3.4%     (6.5)%    12.8%    -148.5%   -170.4%

INCOME TAXES (BENEFIT)           2.5%     (2.4)%    (4.1)%   -194.0%    -17.0%
                               -----     -----     -----
NET INCOME (LOSS) FROM
 CONTINUING OPERATIONS           0.9%     (4.1)%    16.9%    -120.9%   -133.1%
                               -----     -----     -----
GAIN (LOSS) FROM
 DISCONTINUED OPERATIONS         0.0%     (4.2)%    (0.6)%   -100.0%   -788.7%
                               -----     -----     -----

NET INCOME                       0.9%     (8.3)%    16.3%    -110.1%   -171.0%
                               =====     =====     =====

                                       13
<PAGE>
1998 vs. 1997

         Net sales  decreased by $1,495,338 or 9.8% to  $13,736,981 in 1998 from
$15,232,319  in  1997.   Sales  decreased   primarily  due  to  lower  Encompass
installation and service  revenues,  which were partially offset by increases in
sales of Computrac and Jerome instruments.

         Cost of goods sold  decreased by  $1,488,032  or 18.9% to $6,397,475 in
1998  from  $7,885,507  in 1997.  Cost of goods  sold was 46.6% of sales in 1998
compared to 51.8% of sales in 1997. Gross margin increased  primarily due to the
substantially  larger portion of sales  represented by higher margin  instrument
products, and due to better utilization of manufacturing resources.

         Operating  expenses  in  1998  decreased  by  $1,351,282  or  16.5%  to
$6,837,651 from $8,188,933 in 1997. The decrease in operating  expenses for 1998
compared to 1997 was a result of decreased personnel expenses and other expenses
achieved in the Company's cost reduction effort. As a result, operating expenses
were 49.7% of sales in 1998,  as compared  to 53.9% of sales in 1997.  Marketing
expenses  decreased by $736,916 or 19.0% to $3,145,068  from $3,881,984 in 1997.
Marketing  expenses  decreased  primarily  due  to a  reduction  in  promotional
activities  and the  implementation  of cost controls.  Marketing  expenses were
22.9% of  sales in 1998 as  compared  to  25.5%  of sales in 1997.  General  and
administrative  expenses  decreased  by  $988,083  or 36.3% to  $1,732,166  from
$2,720,249 in 1997. General and  administrative  expenses were 12.6% of sales in
1998 as compared to 17.9% of sales in 1997. General and administrative  expenses
decreased  in 1998 due to  personnel  reductions  and other  expense  reductions
including a decrease in  severance  packages to  terminated  employees,  and the
nonrecurrence of expenses  associated with shutting down of the Company's office
in Singapore.  Research and development  expenses increased by $340,012 or 34.5%
in 1998 to  $1,324,640  from  $984,628 in 1997.  The  increase  in research  and
development  expenses was primarily the result of a planned increase in research
and  development  personnel  to support the new product  activities  for all the
Company's various product lines.  Research and development expenses were 9.6% of
sales  in  1998  as  compared  to  6.5%  of  sales  in  1997.  Amortization  and
depreciation  expenses increased by $33,705 or 5.6% to $635,777 from $602,072 in
1997,  due  to  the  purchase  of  additional   capital   equipment,   including
demonstration  units  of the  Company's  own  instruments  as well  as  computer
equipment.

         Other  expense  in 1998  decreased  by  $93,230 or 74.2.% to $32,370 as
compared  to  $125,600 in 1997.  The  decrease in this  expense was due to lower
interest  expense  and a gain on the  sale of  assets  which  occurred  in 1998.
Interest expense in 1998 decreased by $33,654 or 24.3% to $104,660 from $138,314
in 1997,due to a decrease in average borrowings and a lower interest rates.

         As a result income from continuing operations before taxes increased by
$1,437,206 to $469,485 from a loss before taxes of $967,721 incurred in 1997.

                                       14
<PAGE>
         Income tax  expense for 1998 was  $344,000 as  compared to a benefit of
$366,000 for 1997, which was generated due to the Company's loss in 1997.

As a result,  income from  continuing  operations  for 1998 was a  $125,485,  an
increase  of  $727,206  from the loss from  continuing  operations  of  $601,721
suffered in 1997.

         The Company had no gain or loss from  discontinued  operations in 1998.
Loss  from  discontinued  operations  for  1997  was  $636,799  as  the  Company
discontinued its tank testing  business which was performed  through its Horizon
Engineering and Testing, Inc. subsidiary.

         As a result, net income for 1998 increased by $1,364,005 to $125,485 as
compared to a net loss in 1997 of $1,238,520.

1997 vs. 1996

         Net sales  increased by $4,568,830 or 42.8% to $15,232,319 in 1997 from
$10,663,489  in  1996.  Sales  increased  primarily  due to  increased  sales of
Encompass installations, Encompass systems, and Computrac instruments. Net sales
of Jerome  instruments  declined  slightly,  while sales generated from customer
service activities were unchanged.

         Cost of goods sold  increased by  $3,474,626  or 78.8% to $7,885,507 in
1997  from  $4,410,881  in 1996.  Cost of goods  sold was 51.8% of sales in 1997
compared to 41.4% of sales in 1996. Gross margin decreased  primarily due to the
substantially  larger  portion  of sales  represented  by low  margin  Encompass
installations,  and to a  lesser  extent,  a price  reduction  in the  Computrac
product line and increases in material costs.

         Operating  expenses  in  1997  increased  by  $2,428,791  or  42.2%  to
$8,188,933  from  $5,760,142  in 1996.  The  percentage  increase  in  operating
expenses for 1997 over 1996 was in line with sales  growth.  Operating  expenses
were 53.8% of sales in 1997,  as compared  to 54.0% of sales in 1996.  Marketing
expenses increased by $1,096,572 or 39.4% to $3,881,984 from $2,785,412 in 1996.
Marketing expenses increased primarily due to increased  activities necessary to
support  the  growth in sales,  and were 25.5% of sales in 1997 as  compared  to
26.1% of sales  in  1996.  General  and  administrative  expenses  increased  by
$1,036,512  or  61.6%  to  $2,720,249  from  $1,683,737  in  1996.  General  and
administrative  expenses  were  17.9% of sales in 1997 as  compared  to 15.8% of
sales in 1996. General and administrative  expenses increased in 1997 due to the
costs  associated  with  efforts  taken  to  improve  profitability,   providing
severance  packages  to  terminated  employees,  the  writing  off of bad  debt,
increased  reserves for bad debt and other  contingencies,  shutting down of the
Company's office in Singapore,  and increased personnel  expenses.  Research and
development  expenses  increased  by $264,495 or 36.7% in 1997 to $984,628  from
$720,133  in 1996.  The  increase  in  research  and  development  expenses  was
primarily the result of a planned increase in research and development personnel
to support the new product  activities  for all the  Company's  various  product
lines.  Research and development expenses were 6.5% of sales in 1997 as compared
to 6.8% of sales in 1996.  Amortization and depreciation  expenses  increased by
$31,212 or 5.5% to  $602,072  from  $570,860  in 1996,  due to the  purchase  of
additional capital equipment, including demonstration units of the Company's own
instruments as well as computer equipment.

         Other expense in 1997  decreased by $1,007,722 or 114.2.% to an expense
of $125,600 as  compared  to income of $882,122 in 1996.  The  decrease in other
expense was due  primarily  to other  expenses of  $997,096  recognized  in 1996
related to the settlement of litigation,  which did not recur in 1997.  Interest
expense in 1997  decreased  by $62,713 or 31.2% to  $138,314  from  $201,027  in
1996,due to a decrease in average borrowings.

                                       15
<PAGE>
         As a result income from continuing operations before taxes decreased by
$2,342,309  or  170.4%  to a loss  of  $967,721  from  income  before  taxes  of
$1,374,589 for 1996.

         Income  taxes  from  continuing  operations  for 1997 were a benefit of
$366,000 which  approximated  the statutory rate. For 1996, the Company realized
an income tax  benefit  from  continuing  operations  of $441,000 as a result of
reducing the  Company's  deferred tax  valuation  allowance  and  recognizing  a
deferred tax asset.

         As a result,  income from continuing  operations for 1997 was a loss of
$601,721,  a decrease of  $2,417,310  or 133.1% from the income from  continuing
operations of $1,815,589 generated for 1996.

         Loss from discontinued  operations for 1997 was $636,799 as the Company
discontinued its tank testing  business which was performed  through its Horizon
Engineering and Testing, Inc. subsidiary.  The loss from discontinued operations
in 1996 was $71,652.  The increased loss in 1997 of $565,147 as compared to 1996
was due  primarily  to expenses  associated  in shutting  down the tank  testing
business and the write off of intangible  assets associated with the purchase of
Horizon in 1992.

         As a result, net income decreased by $2,982,457 or 171.0% to a net loss
of $1,238,520 in 1997 from net income of $1,743,937 in 1996.

                                       16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

         Working  capital at December  31, 1998  increased  $911,921 or 29.1% to
$4,045,904 as compared to $3,133,983 of working capital at December 31 1997. The
current  ratio at December 31, 1998  increased to 2.8 from the current  ratio of
1.7 at December 31, 1997. The increase in working  capital and the current ratio
was primarily due to the Company's positive cash generated from operations.

         At December 31, 1998, accounts receivable was $2,912,630, a decrease of
$1,077,562  from the  $3,990,192  accounts  receivable  as of December 31, 1997.
Receivables  decreased as a result of lower sales,  more  successful  collection
efforts,  and an increase in allowance for doubtful  accounts.  The ratio of net
sales to ending  accounts  receivable  for 1998 was 4.7 as  compared  to 3.8 for
1997.  This ratio  decreased  primarily  due to a lower  portion of sales  being
shipped during the last part of 1998 as compared to 1997.  Inventory at December
31, 1998 was $1,646,804, a decrease of $910,188 from the inventory of $3,990,192
as of  December  31,  1997.  Inventory  decreased  due to  significantly  better
inventory management.

         Cash and cash  equivalents  at December  31, 1998 were  $1,098,846,  an
increase of $955,673  from cash of $143,173 at December 31, 1997.  Cash provided
by operating  activities  was  $2,199,610  as compared to cash used by operating
activities of $283,093 for 1997. Cash provided by operating  activities was used
to repay debt and purchase capital equipment.  The Company reduced its borrowing
under line of credit by $766,000 to $300,000 at December 31, 1998 as compared to
borrowings of $1,066,000 as of December 31, 1997.

         As of  December  31,  1998,  the  Company  was in  compliance  with its
borrowing  agreement with Imperial Bank (the "Bank").  At December 31, 1998, the
Company  had  a  line  of  credit  with  the  Bank  for  $2,000,000   which  was
collateralized  by the Company's  assets.  At December 31, 1998, the Company had
$300,000  outstanding  under  this  lines of credit.  The  failure  to  maintain
adequate credit facilities would have a material adverse effect on the Company.

YEAR 2000 COMPLIANCE

         The  inability of  computers,  software and other  equipment  utilizing
microprocessors  to recognize  and properly  process data fields  containing a 2
digit year is commonly  referred to as the Year 2000  problem.  As the year 2000
approaches,  such systems may be unable to accurately process certain date-based
information.

         The Company's current line of products are year 2000 compliant and uses
a four digit year data field. However,  earlier products in the field do not use
the four digit data field.  The Company is developing  software which would make
the earlier products year 2000 compliant.

         The Company has identified some internal  accounting  applications that
will  require  modification  to address the Year 2000  problem.  The Company has
purchased  and is in the  process of  installing  an  upgrade of the  accounting
programs that is year 2000  compliant.  Internal and external  resources will be
used to make the required  modifications in both the products and the accounting
application  and test these  modifications.  The Company plans on completing the
modifications and testing of these modifications by mid 1999.

         The  total  cost to the  Company  of these  Year 2000  problem  related
activities is not anticipated to be material.  These costs and the date on which
the Company  plans to complete the  modifications  and testing to solve the Year
2000 problem are based upon  management's  estimates.  However,  there can be no
assurance  that these  estimates  will be achieved  and the costs of solving the
Year 2000 problem could differ significantly from management's estimates.

                                       17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS

                         ARIZONA INSTRUMENT CORPORATION

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

                                    CONTENTS

                                                                    Page
                                                                    ----

       Independent auditor's report                                   1

       Consolidated financial statements:

           Balance sheets                                             2

           Statements of operations                                   3

           Statements of shareholders' equity                         4

           Statements of cash flows                                 5 - 6

           Notes to financial statements                            7 - 18

<PAGE>
Board of Directors
Arizona Instrument Corporation
Phoenix, Arizona


                          INDEPENDENT AUDITOR'S REPORT

          We have audited the consolidated  balance sheet of Arizona  Instrument
Corporation   and   subsidiaries  as  of  December  31,  1998  and  the  related
consolidated  statements of operations,  shareholders' equity and cash flows for
the year then ended.  These financial  statements are the  responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.

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

          In our opinion, the 1998 consolidated financial statements referred to
above  present  fairly,  in all material  respects,  the  financial  position of
Arizona Instrument Corporation and subsidiaries as of December 31, 1998, and the
results  of their  operations  and their  cash  flows for the year then ended in
conformity with generally accepted accounting principles.


TOBACK CPAs P.C.
Phoenix, Arizona


March 10, 1999



INDEPENDENT AUDITORS' REPORT


Board of Directors
Arizona Instrument Corporation
Phoenix, Arizona

We  have  audited  the  accompanying   consolidated  balance  sheet  of  Arizona
Instrument Corporation and subsidiaries (the "Company") as of December 31, 1997,
and the related consolidated statements of operations, shareholders' equity, and
cash  flows for each of the two years in the period  ended  December  31,  1997.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audit.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1997
and the  results  of their  operations  and their cash flows for each of the two
years in the  period  ended  December  31,  1997 in  conformity  with  generally
accepted accounting principles.


/s/ Deliotte & Touche LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona

March 15, 1998
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997


                                     ASSETS
                                                        1998           1997
                                                   ------------    ------------
Current assets:
 Cash  and cash equivalents                        $  1,098,846    $    143,173
 Receivables, less allowance for doubtful
  accounts of $469,000 and $279,000                   2,912,630       3,990,192
 Inventories:
   Components                                         1,166,289       1,974,553
   Finished goods                                       480,515         582,439
                                                   ------------    ------------
     Total inventories                                1,646,804       2,556,992

 Deferred income taxes (Note 8)                         625,000         577,000
 Prepaid expenses and other current assets               37,182          49,942
                                                   ------------    ------------
     Total current assets                             6,320,462       7,317,299

 Property, plant and equipment, net (Note 2)            861,808         975,180
 Goodwill, net of accumulated amortization
  (Note 12) of $2,837,422 and $2,650,655              1,493,494       1,680,261
 Deferred income taxes (Note 8)                         465,000         854,000
 Other Assets                                           638,191         764,976
                                                   ------------    ------------
     TOTAL ASSETS                                  $  9,778,955    $ 11,591,716
                                                   ============    ============

                      LlABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
 Bank lines of credit (Note 4)                     $    300,000    $  1,066,000
 Accounts payable                                       277,743       1,342,539
 Current portion of long-term debt and
   capital lease obligations (Note 5)                    12,940         284,801
 Other accrued expenses (Note 3)                      1,683,875       1,489,976
                                                   ------------    ------------
   Total current liabilities                          2,274,558       4,183,316

Long-term debt and capital lease obligations
  - less current portions (Note 5)                       11,956          93,444

Commitments and contingencies (Note 11)

Shareholders' equity: (Note 7)
 Common stock, .01 par value per share:
   Authorized, 10,000,000 shares;
   Issued, 6,862,523 and 6,774,696 shares
   Outstanding, 6,764,027 and 6,688,531 shares           68,625          67,747
 Preferred stock, $.01 par value per share:
   Authorized, 1,000,000 shares                              --              --
 Additional paid-in capital                           9,890,416       9,826,963
 Accumulated deficit                                 (2,231,818)     (2,357,303)
                                                   ------------    ------------
                                                      7,727,223       7,537,407
 Less treasury stock, 98,496 and 86,165
  shares at cost                                       (234,782)       (222,451)
                                                   ------------    ------------
   Total shareholders' equity                         7,492,441       7,314,956
                                                   ------------    ------------
   TOTAL LIABILITIES AND
     SHAREHOLDERS' EQUITY                          $  9,778,955    $ 11,591,716
                                                   ============    ============

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

                                        2
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

                                            1998          1997          1996
                                        -----------   -----------   -----------
Net sales                               $13,736,981   $15,232,319   $10,663,489
Cost of goods sold                        6,397,475     7,885,507     4,410,881
                                        -----------   -----------   -----------
    Gross profit                          7,339,506     7,346,812     6,252,608
                                        -----------   -----------   -----------
Operating expenses
  Selling & marketing                     3,145,068     3,881,984     2,785,412
  General & administrative                1,732,166     2,720,249     1,683,737
  Research & development                  1,324,640       984,628       720,133
  Amortization & depreciation               635,777       602,072       570,860
                                        -----------   -----------   -----------
    Total expenses                        6,837,651     8,188,933     5,760,142
                                        -----------   -----------   -----------

Operating income (loss)                     501,855      (842,121)      492,466
                                        -----------   -----------   -----------
Other revenue (expense)
  Interest income                            16,539        14,751        22,124
  Interest expense                         (104,660)     (138,314)     (201,027)
  Settlement of litigation (Note 11)             --            --       997,096
  Other                                      55,751        (2,037)       63,930
                                        -----------   -----------   -----------
    Total other income (expense)            (32,370)     (125,600)      882,123
                                        -----------   -----------   -----------
Income (loss) from continuing
 operations before income taxes             469,485      (967,721)    1,374,589
Income tax expense (benefit) (Note 8)       344,000      (366,000)     (441,000)
                                        -----------   -----------   -----------
Net income (loss) from continuing
 operations                                 125,485      (601,721)    1,815,589
                                        -----------   -----------   -----------
Loss from discontinued operations,
 net of income tax benefit of $0,
 $388,000, and $47,000                          --      (636,799)      (71,652)
                                        -----------   -----------   -----------
Net income (loss)                       $   125,485   $(1,238,520)  $ 1,743,937
                                        ===========   ===========   ===========
Net income (loss) per share - basic:
  From continuing operations            $      0.02   $     (0.09)  $      0.28
  From discontinued operations                   --         (0.10)        (0.01)
                                        -----------   -----------   -----------
Net income (loss) per share                    0.02         (0.19)         0.27
                                        -----------   -----------   -----------
Net income (loss) per share - diluted:
  From contining operations                    0.02         (0.09)         0.26
  From discontinued operations                   --         (0.10)        (0.01)
                                        -----------   -----------   -----------
Net income (loss) per share             $      0.02   $     (0.19)  $      0.25
                                        ===========   ===========   ===========
Basic shares outstanding                  6,764,027     6,647,689     6,507,112
Equivalent shares - stock options                --            --       444,699
                                        -----------   -----------   -----------
Diluted shares outstanding                6,764,027     6,647,689     6,951,811
                                        ===========   ===========   ===========

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

                                        3
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                      Additional
                                     Common Stock      paid-in     Accumulated     Treasury
                                  Shares     Amount    capital       deficit        stock         Total
                                  ------     ------    -------       -------        -----         -----
<S>                           <C>         <C>       <C>          <C>            <C>          <C>        
Balance, January 1, 1996        6,352,563   $63,526   $9,360,950   $(2,862,721)   $(222,451)   $ 6,339,304

Issuance of stock pursuant to:
  Stock purchase plan              40,637       406       57,207            --           --         57,613
  Exercise of warrants             22,714       227       27,773            --           --         28,000
  Earnout agreement               208,424     2,084      200,501            --           --        202,585
  Exercise of stock options        53,342       534       59,732            --           --         60,266
Net income                             --        --           --     1,743,938           --      1,743,938
                                ---------   -------   ----------   -----------    ---------    -----------

Balance, December, 31, 1996     6,667,680    66,777    9,706,163    (1,118,783)    (222,451)     8,431,706

Issuance of stock pursuant to:
  Stock purchase plan              43,756       437       72,367            --           --         72,804
  Exercise of stock options        53,260       533       48,433            --           --         48,966
Net loss                               --        --           --    (1,238,520)          --     (1,238,520)
                                ---------   -------   ----------   -----------    ---------    -----------

Balance, December 31, 1997      6,774,696    67,747    9,826,963    (2,357,303)    (222,451)     7,314,956

Issuance of stock pursuant to:
  Stock purchase plan              83,827       838       59,813            --           --         60,651
  Exercise of stock options         4,000        40        3,640            --           --          3,680
  Purchase of treasury stock           --        --           --            --      (12,331)       (12,331)
Net income                             --        --           --       125,485           --        125,485
                                ---------   -------   ----------   -----------    ---------    -----------

Balance, December 31, 1998      6,862,523   $68,625   $9,890,416   $(2,231,818)   $(234,782)   $ 7,492,441
                                =========   =======   ==========   ===========    =========    ===========
</TABLE>
                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                        4
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
                                                   1998         1997          1996
                                               -----------  -----------   -----------
<S>                                            <C>          <C>           <C>
Cash flows from operating activities:
 Net income (loss)                             $   125,485  $(1,238,520)  $ 1,743,937
 Adjustments to reconcile net income (loss)
 to net cash provided by (used in)
 operating activities:
   Depreciation and amortization                   668,189    1,167,514       804,495
   Gain on sale or abandonment of property,
     plant and equipment                           (27,572)          --       (34,570)
   Provision for doubtful accounts                 271,609      113,855       (25,289)
   (Increase) decrease in receivables              805,953   (1,186,571)      479,650
   (Increase) decrease in inventories              845,658     (507,011)     (256,212)
   Decrease in other current assets                 12,760      546,400        46,257
   Increase in settlement receivable                    --           --      (364,419)
   (Increase) decrease in deferred tax asset       341,000     (789,800)     (518,000)
   (Increase) decrease in other assets              27,425      198,707      (330,412)
   (Decrease) increase in accounts payable      (1,064,796)     570,860       (91,707)
   (Decrease) incrase in accrued expenses          193,899      841,474      (222,635)
                                               -----------  -----------   -----------
       Net cash provided by (used in)
        operating activites                      2,199,610     (283,092)    1,231,095
                                               -----------  -----------   -----------
Cash flows from investing activities:
 Purchases of property, plant and equipment
   and other assets                               (206,663)    (565,405)     (207,354)
 Proceeds from sale of property, plant and
   equipment and other assets                       30,075           --        77,897
                                               -----------  -----------   -----------
     Net cash used in investing activities        (176,588)    (565,405)     (129,457)
</TABLE>
                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                        5
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                          1998           1997           1996
                                                      -----------    -----------    -----------
<S>                                                <C>            <C>            <C>
Cash flows from financing activities:
 Payments of long-term debt and capital leases       $  (353,349)   $ (794,031)   $(1,104,058)
 Net (payments) borrowings under bank lines of
   credit                                               (766,000)    1,066,000       (250,000)
 Proceeds received on notes receivable                        --            --         15,506
 Proceeds from stock issued for warrants and options       3,680            --         88,265
 Sale of common stock, net proceeds                           --        48,966             --
 Issuance of common stock for earnout
   agreement                                                  --            --        202,585
 Purchase of treasury stock                              (12,331)           --             --
 Issuance of common stock pursuant to stock
   purchase plan                                          60,651        72,804         57,613
                                                     -----------    ----------    -----------
     Net cash (used in) provided by financing
       activities                                     (1,067,349)      393,739       (990,089)
                                                     -----------    ----------    -----------
 Net increase (decrease) in cash and cash
   equivalents                                           955,673      (454,758)       111,549

 Cash and cash equivalents, beginning of year            143,173       597,931        486,382
                                                     -----------    ----------    -----------

 Cash and cash equivalents, end of year              $ 1,098,846    $  143,173    $   597,931
                                                     ===========    ==========    ===========

                       SUPPLEMENTAL CASH FLOW INFORMATION

 Transfer of inventories to property, plant and
   equipment to be used as demonstration units       $    64,530    $  315,354    $    57,057
 Interest paid                                            75,733       153,736        126,172
 Income taxes paid                                            --        90,000          5,025
</TABLE>
                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                        6
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Summary of significant accounting policies:

     Description of business:

     Arizona  Instrument  Corporation  designs,  manufactures  and  markets  the
         Computrac  line  of  automated  microprocessor   controlled  analytical
         instruments used to measure the moisture content of various  materials,
         the ENCOMPASS and Soil Sentry line of  computer-based  fuel  management
         and compliance leak detection  instruments  for monitoring  underground
         storage  tanks  (USTs)  and the  Jerome  line of  toxic  gas  detection
         instruments  primarily used to detect mercury and hydrogen sulfide. The
         Company  also  provided  tank  testing  and  related  services  for the
         underground  storage  tank  market  through  its  subsidiary,   Horizon
         Engineering  and Testing,  Inc. In 1997, the Company  discontinued  the
         operations of Horizon  Engineering and Testing,  Inc (see Note 12). The
         Company sells in the United States and also in international markets.

     Principles of consolidation:

     The consolidated  financial  statements  include  the  accounts  of Arizona
         Instrument Corporation and its wholly-owned subsidiaries (collectively,
         the "Company').  All material  intercompany  profits,  transactions and
         balances have been eliminated upon consolidation.

     Reclassifications:

     Certain  financial  statement  reclassifications  have  been  made  to  the
         previous years financial statements to conform with the presentation of
         the December 31, 1998 financial statements.

     Concentrations of credit risk:

     The Company periodically holds cash deposits in excess of federally insured
         limits.

     Revenue recognition:

     Sales of instruments are recognized once the shipment is made.

     Inventories:

     Inventories are stated at the lower of cost or market  using the  first-in,
         first-out method.

                                        7
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1.   Summary of significant accounting policies, continued:

     Property, plant and equipment, amortization and depreciation:

     Property,  plant  and  equipment  are  recorded  at cost.  Depreciation  is
         provided by the straight-line method over the estimated useful lives of
         the various  classes of assets.  Equipment and  furniture/fixtures  are
         estimated  to  have  5  and  7  year  lives,  respectively.   Leasehold
         improvements  are amortized  over the shorter of the  estimated  useful
         life or the period of the lease.  Equipment  under  capital  leases are
         generally amortized over the estimated lives of the related equipment.

     Goodwill and amortization:

     Goodwill is the cost of investments in purchased companies in excess of the
         fair  value of net  assets  of the  businesses  acquired.  Goodwill  is
         amortized  on a  straight-line  basis  over 20  years  for  the  Jerome
         goodwill and over 10 years for the Horizon goodwill (see Note 12).

     Income (loss) per share:

     Basic earnings per share (EPS) is computed as net income (loss)  divided by
         the  weighted  average  number of  common  shares  outstanding  for the
         period.  Diluted EPS reflects the  potential  dilution that could occur
         from common shares issuable through stock options,  warrants, and other
         convertible  securities and includes  shares  issuable upon exercise of
         stock options when dilutive.

     Statements of cash flows:

     For purposes of the  consolidated  statements of cash flows,  cash and cash
         equivalents represent cash in bank and money market funds.

     Use of estimates:

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

                                        8
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1.   Summary of significant accounting policies, continued:

     Research and development:

     Research and development costs are charged to expense as incurred.

2.   Property, plant and equipment:

     Property, plant and equipment at December 31 consists of the following:

                                                  1998           1997
                                              -----------    -----------
       Leasehold improvements                 $   169,654    $   169,654
       Furniture, fixtures and equipment        4,687,973      4,452,959
       Automobiles                                 99,358         99,358
                                              -----------    -----------
                                                4,956,985      4,721,971
       Less accumulated depreciation

          and amortization                     (4,095,177)    (3,746,791)
                                              -----------    -----------

                                              $   861,808    $   975,180
                                              ===========    ===========

3.   Other accrued expenses at December 31, consist of the following:

                                                   1998           1997
                                                ----------     ----------
       Legal accrual                            $  315,230     $  209,709
       Warranty reserve                            264,509        167,705
       Unearned income on maintenance
          agreements                               148,472        189,953
       Accrued rent                                122,608        150,208
       Accrued vacation                            116,396        143,749
       Accrued severance pay                        95,591        312,150
       Other accruals                              621,069        316,502
                                                ----------     ----------

                                                $1,683,875     $1,489,976
                                                ==========     ==========
4.   Bank lines of credit:

     The Company has a revolving line of credit which provides for borrowings up
         to  $2,000,000,  based on  eligible  accounts  receivable.  The line of
         credit is collateralized by Company assets.  Borrowings  extended under
         the  revolving  line of credit bear  interest at prime plus 1.5% (9% at
         December 31, 1998). The line of credit contains certain covenants.  The
         Company was in  compliance  with these  covenants at December 31, 1998.
         The line of credit, if not renewed, expires June 1999.

                                        9
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


4.   Bank lines of credit, continued:

     At December 31, 1997,  the Company  had two lines of credit  available (one
         for  domestic   operations  and  one  for   international   operations)
         collateralized by accounts receivable,  inventory,  and property, plant
         and equipment  which  provided for an aggregate  maximum  commitment of
         $3,500,000  through March 15, 1998.  At December 31, 1997,  the Company
         had  $996,000  outstanding  under  its  domestic  line of credit at the
         bank's prime rate of interest plus 1.5% (10% at December 31, 1997). The
         Company also had $70,000  outstanding under the  international  line of
         credit at December 31, 1997.  Borrowings under this line of credit were
         at the bank's  prime rate of interest  plus 1.0% (9.5% at December  31,
         1997).  The  lines of credit  contained  certain  covenants,  including
         minimum net income levels and certain financial ratios.

5.   Long-term debt and capital lease obligations:

     Long-term debt and capital lease obligations at December 31, consist of the
         following:

                                                    1998          1997
                                                 ---------     ---------
       Capital lease obligation (Note 11)        $  24,896     $ 146,487
       Notes payable to the bank                        --       231,758
                                                 ---------     ---------
          Total debt and capital leases             24,896       378,245

       Less current portion                        (12,940)     (284,801)
                                                 ---------     ---------
          Long-term portion of debt and

             capital leases                      $  11,956     $  93,444
                                                 =========     =========

     On November 17, 1995,  the  Company  entered into a loan  agreement  with a
         bank ("Bank"). The Bank held a Note in the principal amount of $231,758
         at an interest rate of prime plus 2% (10.5% at December 31, 1997) and a
         warrant to purchase up to 62,500  unregistered  shares of the Company's
         Common  Stock at an  exercise  price of $2.08 per  share.  The note was
         repaid in full during 1998.

                                       10
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


6.   Estimated fair value of financial instruments:

     Statement of Financial Accounting Standard ("SFAS"). 107 "Disclosures About
         Fair Value of  Financial  Instruments"  was adopted for the year ending
         December 31, 1995.  SFAS No. 107 requires  disclosure  of the estimated
         fair value of certain financial instruments.  The Company has estimated
         the fair value of its  financial  instruments  using  available  market
         data.  However,  considerable  judgement  is required  in  interpreting
         market data to develop  estimates  of fair value.  The use of different
         market  assumptions or methodologies  may have a material effect on the
         estimates of fair values.  The  carrying  values of cash,  receivables,
         lines of credit, accounts payable, accrued expenses, and long term debt
         and  capital  lease  obligations  approximate  fair  values  due to the
         short-term maturities or market rates of interest.

7.   Shareholders' equity:

     In March 1985, the Company  adopted a Stock Option Plan ("SOP") under which
         the Company could, for a period of ten years, grant options to purchase
         up to 250,000 shares of the Company's  common stock. SOP options may be
         granted to  employees,  officers  or  directors  of the  Company or any
         subsidiary.  The  exercise  price of options  must be at least the fair
         market value of the Company's common stock on the date of grant and the
         options must be exercised within 11 years from the date of grant.

     In April 1991, the Company adopted the 1991 Stock  Option Plan ("OP") under
         which the Company may, for a period of ten years, grant incentive stock
         options and nonstatutory stock options to purchase up to 450,000 shares
         of the  Company's  common  stock.  In May,  1996 the Board of Directors
         amended  this Plan to  increase  the shares  reserved  for  issuance by
         300,000 shares. Additionally,  each year, the number of shares of stock
         that may be issued is  increased  automatically  by 1 % on January 1 if
         certain  conditions are met. Stock options may be granted to employees,
         directors and other persons whose  participation is deemed to be in the
         Company's  best interest,  but only employees may be granted  incentive
         stock options.  Incentive  stock options  granted under the plan have a
         maximum term of ten years and  nonstatutory  options may have a maximum
         term of twenty years.  The exercise price for an incentive stock option
         must be at least the fair market value of the Company's common stock on
         the date of grant. The exercise price for a nonstatutory  option may be
         any amount above the par value of the Company's common stock determined
         in good faith.

                                       11
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7.   Shareholders' equity, continued:

     The following is a summary of stock option activity:

                                                                    Weighted
                                                                     average
                                                                    exercise
                                                       Number         price
                                                     of shares      per share
                                                     ---------      ---------

       Outstanding January 1, 1996                    718,903       $   1.00
          Granted                                     145,000           2.57
          Canceled                                    (17,850)          0.92
          Exercised                                   (53,342)          0.96
                                                     --------       --------

       Outstanding December 31, 1996                  792,711       $   1.29
          Granted                                      97,500           1.91
          Canceled                                   (182,240)          0.96
          Exercised                                   (53,260)          0.99
                                                     --------       --------

       Outstanding December 31, 1997                  654,711       $   1.50
          Granted                                     345,000           1.00
          Canceled                                   (174,500)          1.75
          Exercised                                    (4,000)          0.92
                                                     --------       --------

       Outstanding December 31, 1998                  821,211           1.25
                                                     ========       ========

     At December 31, 1998, and 1997,  approximately  370,000 and 225,000 options
         were exercisable, respectively.

     In January 1985, the Company  adopted an Employee Stock Purchase Plan which
         provides  for the  sale of up to  200,000  shares  of  common  stock to
         qualifying  employees  of the  Company.  In  May,  1996  the  Board  of
         Directors  amended  this  Plan to  increase  the  shares  reserved  for
         issuance by 200,000  shares.  The purchase price of the stock is 85% of
         the lesser of the fair market value at the  beginning or the end of the
         offering period,  January and July of each year. During the years ended
         December 31, 1998,  1997 and 1996 a total of 83,827,  43,756 and 40,637
         shares of common stock have been  purchased at average  prices of $.72,
         $1.66  and $1.42 per  share,  respectively.  As of  December  31,  1998
         approximately 54,000 shares were available under this plan.

                                       12
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.   Shareholders' equity, continued:

     The estimated fair value of options granted during 1998 was $.30 per share,
         while the estimated fair value of options  granted during 1997 was $.57
         per share. The Company applies Accounting  Principles Board Opinion No.
         25 and related  interpretations  in accounting for its stock option and
         purchase plans.  Accordingly,  no compensation cost has been recognized
         for its stock option  plans.  Had  compensation  cost for the Company's
         stock option plans been determined based on the fair value at the grant
         dates for awards under those plans  consistent  with the method of FASB
         Statement  123, the Company's net income and earnings per share for the
         years ended December 31 would have been as follows:

                                      1998           1997           1996
                                   ---------      ---------       ---------
       Net income (loss)
          As reported               $125,485     $(1,238,520)     $1,743,937
          Pro forma                   62,665      (1,266,730)      1,671,943

       Earnings (loss) per share
          As reported               $    .02     $     (0.19)     $     0.25
          Pro forma                      .01           (0.19)           0.24

     The fair values of options  granted under the Company's  stock option plans
         were   estimated   on  the  date  of  grant  using  the   Black-Scholes
         option-pricing  model with the following  weighted average  assumptions
         used: No dividend yield, expected volatility of 35%, risk free interest
         rate of 5.4% and expected lives of 3 years from vest date.

8.   Income taxes:

     The provision for income taxes for the years ended December 31, consists of
         the following:

                                           1998           1997           1996
                                        ---------      ---------      ---------
       Current expense                  $   3,000      $  35,800      $  30,000
       Deferred expense (benefit)         341,000       (789,800)      (518,000)
                                        ---------      ---------      ---------

                                        $ 344,000      $(754,000)     $(488,000)
                                        =========      =========      =========

                                       13
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8.   Income taxes, continued:

     The provision  for income taxes as shown in the  accompanying  consolidated
         statements of operations  differs from the amounts computed by applying
         the federal statutory income tax rates to income before income taxes. A
         reconciliation  of the  provision  (benefit)  for income  taxes and the
         amounts that would be computed  using the statutory  federal income tax
         rates for the years ended December 31 is set forth below:

                                              1998         1997         1996
                                           ---------    ---------    ---------
       Provision (benefit) computed at
          Federal statutory rates          $ 160,000    $(678,000)   $ 427,000

       State taxes                            28,000     (120,000)     (15,500)
       Permanent differences                  97,000       63,000       63,500
       Other                                   9,000      (19,000)     (19,000)
       Change in valuation allowance          50,000           --     (944,000)
                                           ---------    ---------    ---------

                                           $ 344,000    $(754,000)   $(488,000)
                                           =========    =========    =========

     Deferred  income  taxes  reflect  the  net  tax  effects  of (a)  temporary
         differences  between the carrying amounts of assets and liabilities for
         financial  reporting  purposes  and the  amounts  used for  income  tax
         purposes, and (b) operating loss and tax credit carryforwards.  The tax
         effects of significant  items comprising the Company's net deferred tax
         asset as of December 31 are as follows:

                                                            1998         1997
                                                         ---------    ---------
       Current deferred tax assets:
          Accrued expenses not currently deductible      $ 311,000    $ 353,000
          Reserves not currently deductible                255,000      148,000
          Unearned income                                   59,000       76,000
                                                         ---------    ---------
             Net current deferred tax assets             $ 625,000    $ 577,000
                                                         =========    =========

       Non-current deferred tax assets (liabilities):
          Intangible assets                                221,000      246,000
          Capitalized product costs                        (58,000)     (97,000)
          Difference between book and tax basis
             of property                                   (66,000)     (50,000)
          Net operating loss carryforwards                  71,000      381,000
          Tax credit carryforwards                         347,000      374,000
                                                         ---------    ---------
                                                           515,000      854,000
          Valuation allowance                              (50,000)          --
                                                         ---------    ---------

             Net non-current deferred tax assets         $ 465,000    $ 854,000
                                                         =========    =========

                                       14
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8.   Income taxes, continued:

     At December 31, 1998, the Company had net operating loss  carryforwards  of
         approximately  $200,000  available to reduce  federal  taxable  income.
         These net operating losses begin to expire in 2012.

     At December  31,  1998,  the  Company  had  tax  credit   carryforwards  of
         approximately  $347,000  available to reduce  federal  taxable  income.
         These tax credits expire between the years 2000 and 2009.

9.   Profit sharing plan:

     Full time employees with greater than six months of service are eligible to
         participate  in the  Company's  401K  profit  sharing  retirement  plan
         adopted  in  1981  whereby,  at the  Board  of  Directors'  discretion,
         contributions are made on an annual basis. Contributions made in any of
         the three years ended December 31, 1998 have not been material.

10.  Sales:

     Export sales,  primarily  to Canada,  Korea and Sweden  were  approximately
         $2,320,000,  $2,120,000 and $2,191,000 for the years ended December 31,
         1998, 1997 and 1996, respectively.

     The Company has a  concentration  of sales of a product to seven  customers
         that make up approximately  28% of net sales during 1998. The potential
         for a negative  financial  impact  could result from a partial or total
         loss of the business relationships with these customers (see Note 15).

11.  Commitments and contingencies:

     Lease commitments:

     Certain  office  facilities  and  equipment  are  held  under  capital  and
         operating  leases.  These  leases  expire in periods  through  2003 and
         include  renewal  options.  Equipment  under capital leases included in
         property  and  equipment   total   $1,281,374  and   $1,281,374   (less
         accumulated  amortization of $1,264,124 and $1,160,190) at December 31,
         1998 and 1997, respectively.

                                       15
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


11.   Commitments and contingencies, continued:

     At December 31, 1998, the  approximate  future minimum lease payments under
         such  leases  having  non-cancelable  terms in  excess  of one year are
         summarized as follows:

                                                    Capital      Operating
                                                     leases        leases
                                                   ----------    ----------
       1999                                        $   20,000    $  283,000
       2000                                            19,000       283,000
       2001                                                --       283,000
       2002                                                --       283,000
       2003                                                --       165,000
       Thereafter                                          --            --
                                                   ----------    ----------

       Total minimum lease payments                $   39,000    $1,297,000
                                                   ==========    ==========

       Less amount representing interest              (14,000)
                                                   ----------
       Net present value of future minimum lease

          payments                                 $   25,000
                                                   ==========

     Rent expense for operating leases was approximately $275,000,  $290,000 and
         $325,000  for the  years  ended  December  31,  1998,  1997  and  1996,
         respectively.

     Genelco earnout agreement:

     In connection with the Company's  purchase of Genelco,  Inc. on January 30,
         1988, the Company entered into a potential  $700,000 earnout  agreement
         based on future sales.  The agreement was modified on December 31, 1992
         for a  remaining  earnout of $202,585 to be  compensated  with  208,421
         shares of unregistered common stock in 1996. Through December 31, 1991,
         $155,669 has been earned under the prior earnout  agreement.  Under the
         modified  agreement,  the expense was $33,765 and $33,764 for the years
         ended  December  31,  1997 and 1996,  respectively.  In March  1996 the
         Company issued 208,424  shares of  unregistered  common stock under the
         modified agreement. The earnout period under the modified agreement was
         completed on December 31, 1997.

                                       16
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


11.  Commitments and contingencies, continued:

     Litigation:

     In a prior  year,  litigation  was  commenced in Superior  Court,  Maricopa
         County,  Arizona with respect to certain  matters arising in connection
         with a technology  development agreement and related agreements entered
         into by the Company  and a state  organization  in 1988  related to the
         Company's  Jerome  product line and  providing the Company with certain
         rights  thereunder.   The  Company  believed,   not  withstanding  such
         agreements,   the  state  organization  exclusively  licensed  relevant
         technology to another firm in February  1993. The Company filed suit in
         February 1996 against this firm and, the state organization and certain
         other  defendants  requesting a declaratory  judgement,  confirming the
         Company's right to the contested  technology and seeking  damages.  The
         firm also filed suit in January  1996  against the state  organization,
         the  Company  and certain  executive  officers  of the Company  seeking
         declaratory  judgement confirming the validity of its license agreement
         with the state organization and seeking damages.  The parties reached a
         settlement  in  June,  1996  under  which  the  Company  would  receive
         $1,000,000 and certain free education  rights, in addition to exclusive
         rights to the  contested  technology.  The  Company has  received  full
         payment of this settlement as of January 30, 1997.

     From time to time,  the Company  may become a defendant  as the result of a
         claim filed by a customer  alleging breach of contractual  promises and
         warranties in a commercial  transaction.  While the outcome of any such
         claim cannot be determined at this time, management of the Company does
         not believe that the ultimate  disposition  of these claims will have a
         material  effect on the financial  position or results of operations or
         cash flows of the Company.

12.  Discontinued operations:

     In August 1997, the Company adopted a plan to discontinue the operations of
         Horizon Engineering and Testing, Inc.  ("Horizon").  The disposition of
         Horizon was substantially completed by December 31, 1997. Net assets of
         the  discontinued  operation at December 31, 1998 and 1997 were $0. The
         loss from discontinued  operations for 1997 (before income tax benefit)
         includes a write-off of goodwill and other  intangibles of $444,705 and
         a loss from  operations of $580,713.  The final disposal of Horizon did
         not have a material effect on the Company's operations during 1998.

                                       17
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


13.  Related Party Transactions:

     During September  1993,  the Company loaned $45,000 to one of its officers.
         The loan was  collateralized  by a pledge  of  15,000  shares of common
         stock of the  Company  and the cash value of a life  insurance  policy.
         During 1996, a $10,000  principal payment was made on this loan leaving
         a  remaining  balance of  $35,000.  The note bears  interest at 10% per
         annum and the remaining  balance was due December,  1997.  During April
         1994, the Company loaned approximately  $10,000 to another officer. The
         note bears interest at 10% and was due December, 1997. These loans have
         been repaid.

14.  Impact of year 2000 issue (unaudited):

     The Company  has  conducted  a review of its  computer  systems to identify
         computer  programs  that could be affected by the Year 2000 issue,  and
         has developed a remediation plan to resolve the problem.

     The issue  is  whether  the  computer   systems  will  properly   recognize
         date-sensitive  information when the year changes to 2000. Systems that
         do not properly  recognize such  information  could generate  erroneous
         data or cause a system to fail.

     Management  does  not  believe  the  cost of  further  remediation  will be
         material to the company's financial statements.

15.  Subsequent events:

     Litigation:

     On  March 9, 1999, a significant customer,  claiming breach of contract and
         breach of warranty,  sued the Company. The customer seeks approximately
         $2,000,000 in actual damages plus an additional several million dollars
         in  incidental  and  consequential  damages.  The  Company  intends  to
         vigorously defend this action.  However,  if a favorable result can not
         be obtained,  the cost of defense and the ultimate  resolution  of this
         action could have a materially  adverse  effect on the Company.  At the
         present  stage of this  lawsuit,  it is not  possible to  evaluate  the
         likelihood  of an  unfavorable  outcome  or the  amount  or a range  of
         potential  loss,  if any,  which  may be  experienced  by the  Company.
         Accordingly,  no provision for any liability  that may result from this
         litigation has been made in the financial statements as of December 31,
         1998. Sales to this customer during 1998 were approximately $1,650,000.

     Reverse stock split:

     Subsequent  to  year  end  December  31,  1998,  the  Company   approved  a
         one-for-five reverse stock split of its outstanding common stock.

                                       18
<PAGE>

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

         On June 22, 1998  Arizona  Instrument  Corporation  (the  "Registrant")
dismissed   Deloitte  &  Touche  LLP,  which  was  previously   engaged  as  the
Registrant's principal independent accountant to audit its financial statements.
Deloitte & Touche  LLP's report on the  Registrant's  financial  statements  for
either of the past two years did not contain an adverse opinion or disclaimer of
opinion, and was not qualified or modified in any manner. The decision to change
accountants was recommended by the Registrant's  Board of Directors.  During the
Registrant's two most recent fiscal years, and the subsequent quarters preceding
such dismissal, there were no disagreements or reportable events with the former
accountant  on any  matter of  accounting  principles  or  practices,  financial
statement disclosure, or auditing scope of procedure.

         On  June  23,  1998,  the  Registrant  engaged  Toback  CPAs as its new
principal independent  accountant to audit its financial statements.  During the
Registrant's  two most recent fiscal years,  the  Registrant  (or someone on its
behalf) did not consult with Toback CPAs  regarding any of the matters set forth
in Item 304(a)(2) of Regulation S-K.

                                    PART III

ITEMS 9 THROUGH 12.

         Within 120 days after the close of the fiscal year, the Company intends
to file with the Securities and Exchange Commission a definitive proxy statement
pursuant to  Regulation  14A which will involve the election of  directors.  The
answers to Items 9 through 12 are incorporated by reference  pursuant to General
Instruction E(3).

                                     PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

Financial  Statements.  The  following is a list of the  consolidated  financial
statements of Arizona  Instrument  Corporation and its subsidiaries  included in
Item 7 of Part II.

Independent auditors' reports

Consolidated balance sheets - December 31, 1998 and 1997

Consolidated  statements of operations - Years ended December 31, 1998, 1997 and
1996

Consolidated statements of shareholders' equity - Years ended December 31, 1998,
1997 and 1996

Consolidated  statements of cash flows - Years ended December 31, 1998, 1997 and
1996

Notes to consolidated financial statements

       (a)    The following  exhibits are incorporated by reference or are filed
              with this Form 10-KSB, as indicated.

3.1    Composite of  Certificate  of  Incorporation  of  Registrant,  as amended
       through July 5, 1994.  Incorporated by reference from  Registrant's  Form
       8-A filed on June 26, 1996 (the "June 1996 8-A").

                                       18
<PAGE>
3.2    Bylaws of Registrant, as amended. Incorporated by reference from the June
       1996 8-A.

10.1*  Registrant's  1985 Stock Option  Plan.  Incorporated  by  reference  from
       Registrant's  Form 10-KSB for the year ended  December  31, 1995 filed in
       March 1996.

10.2*  Registrant's  1985 Stock  Purchase Plan.  Incorporated  by reference from
       Registrant's Form S-8 filed on August 5, 1996.

10.3*  Registrant's  1991 Stock Option  Plan.  Incorporated  by  reference  from
       Registrant's Form S-8 filed on June 28, 1996.

10.4   Amended and Restated  Export-Import  Guaranteed  Business Loan  Agreement
       between   Registrant   and  Silicon  Valley  Bank  dated  February  1993.
       Incorporated  by  reference  From  Registrant's  Form 10-KSB for the year
       ended December 31, 1992, filed in March 1993 (the "1992 10-KSB").

10.5   Warrant  Purchase  Agreement  between  Registrant and Silicon Valley Bank
       dated December 14, 1991. Incorporated by reference from the 1992 10-KSB.

10.6   Loan Modification  Agreement  between  Registrant and Silicon Valley Bank
       dated November 7, 1995.  Incorporated by reference to  Registrant's  Form
       10-KSB for the Year ended  December 31, 1995 filed on March 29, 1996 (the
       "1995 10-KSB").

10.7   Promissory Note between Registrant and Silicon Valley Bank dated November
       7, 1995. Incorporated by reference to the 1995 10-KSB.

10.8   Loan Modification  Agreement  between  Registrant and Silicon Valley Bank
       dated March 24, 1997. Incorporated by reference to the 1997 10-KSB.

10.9   Promissory  Note between  Registrant  and Classic  Syndicate,  Inc. dated
       April 15, 1996. Incorporated by reference to the 1995 10-KSB.

10.10  Warrant  Agreement  between  Registrant  and Cruttenden & Co., Inc. dated
       November  30, 1993.  Incorporated  by reference  from  Registrant's  Form
       10-QSB for the quarter  ended  September  30, 1993 filed on November  30,
       1993 (the "September 1993 10-QSB").

10.11  Lease Agreement  between  Registrant and Wood Street Limited  Partnership
       dated  September 1, 1993.  Incorporated  by reference  from the September
       1993 10-QSB.

10.12* Employment  Agreement  between  Registrant  and Walfred R. Raisanen dated
       November 5, 1992. Incorporated by reference to the 1992 10-KSB.

10.13* Employment Agreement between Registrant and George G. Hays dated April 1,
       1997.  Incorporated  by reference from  Registrant's  Form 10-QSB for the
       quarter Ended March 31, 1997 filed on May 15, 1997.

10.14* Employment  Agreement between Registrant and George G. Hays dated January
       1, 1998. Incorporated by reference to the 1997 10-KSB.

10.15  Loan and Security Agreement between Registrant and Imperial Bank dated as
       of June 30, 1998.  Incorporated  by reference  to the  Registrant's  Form
       10-QSB for the quarter ended June 30, 1998.

16.0   Correspondence  from Deloitte & Touche LLP regarding change in certifying
       accountant.  Incorporated by reference to the Registrant's Form 8-K filed
       July 7, 1998.

21.1   Subsidiaries of Registrant. Filed herewith.

                                       19
<PAGE>
27.    Financial Data Schedule. Filed herewith.

----------
*    Management  contract of  compensatory  plan or  arrangement  required to be
     filed pursuant to Item 13(a) of Form 10-KSB.

     (b)  There was no Form 8-K filed by  Registrant  during the last quarter of
          the period Covered by this Form 10-KSB.

                                       20
<PAGE>
                                   SIGNATURES

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

                                               ARIZONA INSTRUMENT CORPORATION

Date: March 31, 1999                           By: /s/ George G. Hays
      ------------------                           -----------------------------
                                                   George G. Hays,
                                                   President

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

Signature                                Capacity                      Date
---------                                --------                      ----

/s/ George G. Hays        President and Chairman of the Board     March 30, 1999
-----------------------   (Principal Executive Officer)
George G. Hays


/s/ S. Thomas Emerson     Director                                March 30, 1999
-----------------------
S. Thomas Emerson

/s/ Steven Zylstra        Director                                March 30, 1999
-----------------------
Steven Zylstra

/s/ Harold Schwartz       Director                                March 30, 1999
-----------------------
Harold Schwartz


                                       21