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, 1999.

[ ]  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
    ------------------------------                           -------------------
     (State or other jurisdiction                             (IRS Employer or
    incorporation of organization)                           Identification No.)


   1912 West 4th Street, Tempe, AZ                                 85281
----------------------------------------                         ----------
(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. [X]

As of March 22,  2000,  the  aggregate  market value of the voting stock held by
non-affiliates  of the registrant was  approximately  $5,782,000.  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.

Issuer's revenues for its most recent fiscal year were $9,052,505.

As of March 22,  2000,  1,371,399  shares of Common  Stock ($.01 par value) were
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Part III: Portions of the Proxy Statement for the 2000 Annual Shareholders'
          Meeting (to be filed).
<PAGE>
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 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
that 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.  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.  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  underground  storage  tank  ("UST")  leak
detection  systems.  In June 1994,  the  Company  introduced  the  ENCOMPASS(TM)
product,  its next generation of fuel  management and leak detection  compliance
systems.  The Company sold the  ENCOMPASS  product  line on April 30,  1999.  In
September  1992, the Company  acquired  Horizon  Engineering  and Testing,  Inc.
("Horizon"),  as an AZI wholly-owned subsidiary, that specialized in testing and
engineering  services for USTs; the Company  discontinued  Horizon's  operations
during 1997.

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.
<PAGE>
     Computrac instruments are rugged enough to be used on the factory floor for
quick batch analysis and accurate enough for precise laboratory testing. 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 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 in 1999  the  Company
announced  the Computrac  4000,  an instrument  designed to measure the moisture
content of edible oils, lubricating and cooling oils, and heavy fuels.

     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.

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 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 that 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.

                                       2
<PAGE>
     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.

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 was 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
notified the operator. The ENCOMPASS system ran in a Windows-based environment.

     Sales of the Company's  Encompass and Soil Sentry  products for 1998 failed
to meet  expectations.  The  Company  believes  the  slower  sales  were  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. In response to
the declining  sales,  the Company sold certain  assets related to the Encompass
and Soil Sentry product lines to National  Environmental  Service, Co. ("NESCO")
pursuant to an Asset Purchase Agreement executed April 30, 1999.

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 1997, the
Company discontinued Horizon's operations.

PRODUCT RELIABILITY AND QUALITY CONTROL

     The Company  believes  its  products  are highly  reliable.  The  Company's
products have built-in  self-test  features that 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

                                       3
<PAGE>
products have one- and two-year parts and labor  warranties.  For the year ended
December 31, 1999, 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  establishes  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.

MANUFACTURING AND SOURCES OF SUPPLY

     The  majority  of the  Company's  manufacturing  costs  are  for  purchased
components. Certain of the 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 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.

     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 18% of
total sales in 1999,  with no sales to any country  exceeding  10% of net sales.
(See Note 8 to the Consolidated Financial Statements)

     The Company's  business with United States government  agencies is effected
through  one  contract  with the  General  Services  Administration.  The Jerome
products are available for purchase by federal  agencies  through this contract.
The contract does not provide for renegotiation of profits,  except upon renewal
of such contract or termination at the election of the government.  The contract
for the Jerome product line was renewed without substantial  modifications.  The
Company's  products  and services are not subject to  government  approval.  The
Company is not aware of any pending government regulations that would materially
affect its business.

                                       4
<PAGE>
COMPETITION

     Computrac - A number of companies have products that 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
decreased  34.6%  in 1999  compared  to  1998.  Expenditures  for  research  and
development  for the years ended December 31, 1999, 1998 and 1997 were $866,985,
$1,324,640, and $984,628,  respectively. This represented 9.6% of sales in 1999,
9.6% of sales in 1998, and 6.5% of sales in 1997. The Company intends to develop
additional  instrumentation  products and services through OEM relationships and
the  acquisition  of  related  product  lines or  instrument  companies.  During
February  of  1999,  Mr.  Walfred   Raisanen   resigned  as  Vice  President  of
Engineering.   The  Company  then   reorganized  its  Research  and  Development
departments.

PATENTS, LICENSES AND TRADEMARKS

     The  Company  owns three  patents  directed  to  aspects  of its  Computrac
product,  and two domestic and five foreign  patents  directed to aspects of its
Jerome  product.  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.

EMPLOYEES

     As of December 31, 1999, the Company had a total of 60 full 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.

     Effective  March 18, 1999,  the  Company's  Board of Directors  amended its
employment  agreement with George G. Hays. Pursuant to that amendment,  the term
of the  employment  contract was  extended to March 31,  2001.  The contract was
amended  further to grant Mr. Hays his salary for the full term of the  contract
in the event the Company  sells all or  substantially  all of its assets or if a
change in control of the Company occurs.

MATERIAL PURCHASES, SALES AND STOCK CONVERSIONS

     The Company's  shareholders approved a 1 for 5 reverse split of outstanding
common  stock at a special  meeting on February 5, 1999.  The Board of Directors
approved the transaction on February 8, 1999.

     In April 1999,  the Company  executed a letter of intent with NESCO to sell
the  assets of AZI's  Encompass  and Soil  Sentry  product  lines to NESCO.  The
parties  executed an Asset  Purchase  Agreement on April 30,  1999,  pursuant to
which NESCO agreed to pay the Company  $1,000,000 in exchange for the marketing,
licensing, distributing,  developing,  manufacturing,  service and operations of
Encompass and Soil Sentry, and the monitoring  services of their users.  Because
of this  sale,  the  Company  has been able to  redirect  its  attention  to its
historic core businesses of moisture analysis and toxic gas analysis.

                                       5
<PAGE>
     On  February  1, 2000,  the  Company  entered  into a letter of intent with
George G. Hays, its President and Chief Executive Officer, Harold D. Schwartz, a
member of the  Company's  Board of Directors,  and G. James Hays,  the father of
George G. Hays, for the acquisition of all of AZI's outstanding shares not owned
by them. This  transaction  was approved by a special  committee of the Board of
Directors,  which was formed in August  1999,  and is subject to approval by the
Company's shareholders, satisfactory completion of a due diligence investigation
by Mr.  Hays,  receipt  of a  fairness  opinion,  and  certain  other  customary
conditions.  The Company  anticipates that a shareholder vote and the closing of
the  transaction  (if  approved by the  shareholders)  will likely  occur in the
second quarter of 2000.

ITEM 2. DESCRIPTION OF PROPERTY

     As the result of a roof collapse at the Company's headquarters,  located at
4114 East Wood Street, Tempe, Arizona, in July 1999, during a monsoon storm, the
Company  moved  its   facilities   and  entered  into  a  lease   agreement  for
approximately  20,000  square  feet at 1912  West 4th  Street,  Tempe,  Arizona.
Although the  disruption in  operations  caused by the roof collapse and move to
the new facilities  adversely affected the Company's net sales, the Company does
not consider  the effect to be material.  All  administration,  sales,  customer
service,  engineering  and  manufacturing  for the  Company are in the new Tempe
facility.  The lease on the new building  expires in September 2004. The Company
believes that its facilities are modern,  well-maintained and sufficient for its
current needs.

ITEM 3. LEGAL PROCEEDINGS

     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.

     In February 1999, the Company  received a letter from BP Oil Company ("BP")
demanding the return of approximately  $1.9 million previously paid by BP to the
Company in prior years for the purchase of  Encompass  tank gauge  systems,  the
removal of Encompass  systems  from BP sites,  and for the  cancellation  of any
outstanding invoices from AZI. This suit was settled for $35,000 in July 1999.

     In February 2000,  the Company  received a demand in the amount of $100,000
from Maxey Energy Systems for alleged  difficulties with  Encompass/Soil  Sentry
software and hardware. The Company is investigating the claim.

     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 1999.

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 22,  2000,  there were  approximately  311  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.

                                       6
<PAGE>
             1999                          HIGH             LOW
             ----                          ----            ----
        First Quarter                      4.37            1.50
        Second Quarter                     2.87            1.75
        Third Quarter                      6.12            2.62
        Fourth Quarter                     5.84            3.00

             1998                          HIGH             LOW
             ----                          ----            ----
        First Quarter                      7.03            4.21
        Second Quarter                     8.12            5.31
        Third Quarter                      5.78            2.81
        Fourth Quarter                     5.00            2.50

     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 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.  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.

                                       7
<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 1999
and 1998. See ITEM 7 FINANCIAL STATEMENTS.

                                    Percentage of net Sales   Percentage change
                                     Year Ended December 31,  over prior periods
                                     -----------------------  ------------------
                                                                   1999 vs
                                       1999        1998             1998
                                       -----       -----            ----
NET SALES                              100.0%      100.0%          -34.1%
COST OF GOODS SOLD                      35.9%       46.6%          -49.2%
                                       -----       -----
      Gross margin                      64.1%       53.4%          -21.0%
                                       -----       -----
EXPENSES
  Marketing                             25.4%       22.9%          -26.8%
  General & administrative              16.3%       12.6%          -14.6%
  Research & development                 9.6%        9.6%          -34.6%
  Amortization & depreciation            5.3%        4.6%          -23.9%
                                       -----       -----
      Total Expenses                    56.7%       49.7%          -24.9%
                                       -----       -----
OPERATING INCOME (LOSS)                  7.4%        3.7%           32.9%
                                       -----       -----
OTHER REVENUE (EXPENSE)
  Interest income                        1.4%        0.0%          693.5%
  Interest expense                      -0.3%       -0.8%          -70.7%
  Other                                  0.2%        0.5%          -73.6%
                                       -----       -----
      Total other income (expense)       1.3%       -0.3%          456.3%
                                       -----       -----
INCOME                                   8.6%        3.4%           66.7%
                                       -----       -----
INCOME TAXES                             4.4%        2.5%           16.3%
                                       -----       -----
NET INCOME                               4.2%        0.9%          204.8%
                                       =====       =====

1999 vs. 1998

     Net sales  decreased  by  $4,684,476  or 34.1% to  $9,052,505  in 1999 from
$13,736,981 in 1998.  Sales  decreased  primarily due to reduced  Encompass/Soil
Sentry system and  installation  revenues which resulted from the disposition of
the Soil Sentry/Encompass  product line in April, 1999, and to a lesser extent a
decline in sales of Jerome instruments.

     Cost of goods sold  decreased by  $3,144,865 or 49.2% to $3,252,610 in 1999
from  $6,397,475  in 1998.  The  decrease in Cost of goods sold was due to lower
Encompass/Soil  Sentry system and  installation  costs which resulted from lower
sales.  Cost of goods sold was 35.9% of sales in 1999 compared to 46.6% of sales
in 1998. Gross margin improved  primarily to the change in product mix resulting
from the sale of the  Encompass/Soil  Sentry product line and to a lesser extent
the better utilization of manufacturing resources.

     Operating  expenses in 1999  decreased by $1,704,876 or 24.9% to $5,132,775
from $6,837,651 in 1998. The decrease in operating expenses for 1999 compared to
1998 was a result of  decreased  personnel  expenses  and other  expenses  which
resulted from the sale of the Encompass/Soil Sentry product line and to a lesser
extent the Company's  continuing cost reduction effort.  Operating expenses were
56.7%  of  sales  in 1999,  as  compared  to  49.7% of sales in 1998.  Marketing

                                       8
<PAGE>
expenses  decreased by $841,838 or 26.8% to $2,303,230  from $3,145,068 in 1999.
Marketing   expenses   decreased   primarily   due  to  the  sale  of  the  Soil
Sentry/Encompass product line. Marketing expenses were 25.4% of sales in 1999 as
compared  to  22.9%  of  sales in  1998.  General  and  administrative  expenses
decreased by $253,162 or 14.6% to $1,479,004  from  $1,732,166 in 1998.  General
and  administrative  expenses  decreased  in 1999 due to  reductions  in capital
leases, property maintenance,  insurance and miscellaneous expenses. General and
administrative  expenses  were  16.3% of sales in 1999 as  compared  to 12.6% of
sales in 1998. Research and development  expenses decreased by $457,655 or 34.6%
in 1999 to $866,985  from  $1,324,640  in 1998.  The  decrease  in research  and
development  expenses was primarily due to a reduction in expenses for personnel
associated with the Encompass/Soil Sentry product line. Research and development
expenses  were  9.6% of  sales  in 1999 as  compared  to 9.6% of  sales in 1998.
Amortization  and  depreciation  expenses  decreased  by  $152,221  or  23.9% to
$483,556  from  $635,777  in 1998,  as the  Company  reduced  its  purchases  of
additional capital equipment.

     Other income (expense) in 1999 increased by $147,691 or 456.3% to income of
$115,321 as compared to loss of $32,370 in 1998.  Interest  income  increased by
$114,702 or 693.5% to $131,241 in 1999 from $16,539 in 1998,  due to better cash
management and the investment of the proceeds of the sale of the  Encompass/Soil
Sentry product line.  Interest  expense in 1999 decreased by $74,009 or 70.7% to
$30,651 from $104,660 in 1998, due to a decrease in average borrowings.

     As a result  income  before taxes  increased  by $312,956 to $782,441  from
$469,485 incurred in 1998.

     Income tax expense for 1999 was  $400,000 as compared to $344,000 for 1998.
The effective  income tax rates for 1999 and 1998 are greater than the statutory
federal and state rates due to nondeductible amortization and an increase in the
valuation allowance in 1998.

     As a result,  net income for 1999 was $382,441,  an increase of $256,956 or
204.8% from $125,485 in 1998.

LIQUIDITY AND CAPITAL RESOURCES

     Working  capital at December  31,  1999  increased  $1,046,563  or 25.8% to
$5,092,467 as compared to $4,045,904 of working capital at December 31 1998. The
current  ratio at December 31, 1999  increased to 5.6 from the current  ratio of
2.8 at December 31, 1998. The increase in working  capital and the current ratio
were primarily due to the Company's  positive cash  generated  from  operations,
which included the Encompass sale.

     At December 31, 1999,  accounts  receivable was  $1,649,030,  a decrease of
$1,263,600  from the  $2,912,630  accounts  receivable  as of December 31, 1998.
Receivables  decreased as a result of lower sales,  and an increase in allowance
for doubtful accounts.  The ratio of net sales to ending accounts receivable for
1999 was 5.5 as compared to 4.7 for 1998. This ratio increased  primarily due to
better  collection  efforts.  Inventory  at December  31, 1999 was  $688,236,  a
decrease of $958,568  from the  inventory of $1,646,804 as of December 31, 1998.
Inventory decreased due the sale of the Soil  Sentry/Encompass  product line and
to a lesser extent better inventory management.

     Cash and cash equivalents at December 31, 1999 were $3,471,429, an increase
of $2,372,583  from cash of  $1,098,846  at December 31, 1998.  Cash provided by
operating  activities  was  $1,886,079 as compared to cash provided by operating
activities of $2,199,610  for 1998.  Cash provided by operating  activities  was
used to repay debt and purchase capital equipment. The Company had no borrowings
from the line of credit at December  31,  1999,  as compared  to  borrowings  of
$300,000 as of December 31, 1998.

     As of December 31, 1999 the Company was in  compliance  with its  borrowing
agreement with Imperial Bank (the "Bank"). At December 31, 1999, 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, 1999, the Company had no  outstanding  debts
with this line of credit.  The failure to maintain  adequate  credit  facilities
would have a material adverse effect on the Company.

                                       9
<PAGE>
ITEM 7. FINANCIAL STATEMENTS

                         ARIZONA INSTRUMENT CORPORATION

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1999

                                    CONTENTS

                                                                           Page
                                                                           ----
Independent auditor's report                                               11-12

Consolidated financial statements:

    Balance sheet                                                            13

    Statements of operations                                                 14

    Statements of shareholders' equity                                       15

    Statements of cash flows                                               16-17

    Notes to financial statements                                          18-26

                                       10
<PAGE>
                          INDEPENDENT AUDITOR'S REPORT

Board of Directors
Arizona Instrument Corporation
Phoenix, Arizona

     We have  audited  the  consolidated  balance  sheet of  Arizona  Instrument
Corporation   and   subsidiaries  as  of  December  31,  1999  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 1999  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, 1999, and the
results  of their  operations  and their  cash  flows for the year then ended in
conformity with generally accepted accounting principles.

/s/ McGladrey & Pullen, LLP

McGladrey & Pullen, LLP
Phoenix, Arizona
March 10, 2000

                                       11
<PAGE>
                          INDEPENDENT AUDITOR'S REPORT

Board of Directors
Arizona Instrument Corporation
Phoenix, Arizona

     We have audited the  consolidated  statement of  operations,  shareholders'
equity and cash flows of Arizona  Instrument  Corporation and subsidiaries as of
December 31, 1998.  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.


/s/ Toback CPAs, P.C.

Toback CPAs, P.C.
Phoenix, Arizona
March 10, 1999

                                       12
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

                           CONSOLIDATED BALANCE SHEET

                                DECEMBER 31, 1999

                                                                ASSETS

Current assets:
  Cash  and cash equivalents                                  $ 3,471,429
  Receivables, less allowance for doubtful
   accounts of $186,000                                         1,649,030
  Inventories:
    Components                                                    606,275
    Finished goods                                                 81,961
                                                              -----------
      Total inventories                                           688,236

  Deferred income taxes (Note 6)                                  358,000
  Prepaid expenses and other current assets                        35,827
                                                              -----------
      Total current assets                                      6,202,522

  Property, plant and equipment, net (Note 2)                     793,971
  Goodwill, net of accumulated amortization of $3,024,000       1,306,727
  Deferred income taxes (Note 6)                                  379,500
  Other assets                                                    335,139
                                                              -----------

      TOTAL ASSETS                                            $ 9,017,859
                                                              ===========

                      LlABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                            $   191,798
  Capital lease obligation (Note 9)                                10,691
  Other accrued expenses                                          907,566
                                                              -----------
      Total current liabilities                                 1,110,055

Commitments and contingencies (Note 10)

Shareholders' equity: (Note 5) Common stock, .01
  par value per share: Authorized, 10,000,000 shares;
  Issued, 1,383,213 Outstanding, 1,363,514 shares                  13,832
Preferred stock, $.01 par value per share:
  Authorized, 1,000,000 shares                                         --
Additional paid-in capital                                      9,978,131
Accumulated deficit                                            (1,849,377)
                                                              -----------
                                                                8,142,586

Less treasury stock, 19,699 shares at cost                       (234,782)
                                                              -----------
      Total shareholders' equity                                7,907,804
                                                              -----------

      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY              $ 9,017,859
                                                              ===========

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

                                       13
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                     YEARS ENDED DECEMBER 31, 1999 AND 1998


                                                  1999              1998
                                               ----------        -----------

Net sales                                      $9,052,505        $13,736,981
Cost of goods sold                              3,252,610          6,397,475
                                               ----------        -----------
      Gross profit                              5,799,895          7,339,506
                                               ----------        -----------
Operating expenses
  Selling & marketing                           2,303,230          3,145,068
  General & administrative                      1,479,004          1,732,166
  Research & development                          866,985          1,324,640
  Amortization & depreciation                     483,556            635,777
                                               ----------        -----------
      Total expenses                            5,132,775          6,837,651
                                               ----------        -----------

Operating income                                  667,120            501,855
                                               ----------        -----------
Other revenue (expense)
  Interest income                                 131,241             16,539
  Interest expense                                (30,651)          (104,660)
  Other                                            14,731             55,751
                                               ----------        -----------
      Total other income (expense)                115,321            (32,370)
                                               ----------        -----------

Income before income taxes                        782,441            469,485
Income tax expense (Note 6)                       400,000            344,000
                                               ----------        -----------

Net income                                     $  382,441        $   125,485
                                               ==========        ===========

Net income per share - basic                         0.28               0.09
                                               ----------        -----------
Net income per share - diluted                       0.28               0.09
                                               ----------        -----------

Basic shares outstanding                        1,362,792          1,352,805
Equivalent shares - stock options                  16,788                 --
                                               ----------        -----------
Diluted shares outstanding                      1,379,580          1,352,805
                                               ==========        ===========

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

                                       14
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                     YEARS ENDED DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                        Common Stock        Additional
                                     -------------------     Paid-in      Accumulated     Treasury
                                     Shares       Amount     Capital        Deficit        Stock          Total
                                     ------       ------     -------        -------        -----          -----
<S>                               <C>           <C>        <C>           <C>             <C>           <C>
Balance, December 31, 1997         1,354,939     $13,549    $9,881,161    $(2,357,303)    $(222,451)    $ 7,314,956

Issuance of stock pursuant to:
Stock purchase plan                   16,766         168        60,483             --            --          60,651
Exercise of stock options                800           8         3,672             --            --           3,680
Purchase of treasury stock                --          --            --             --       (12,331)        (12,331)
Net income                                --          --            --        125,485            --         125,485
                                  ----------     -------    ----------    -----------     ---------     -----------

Balance, December 31, 1998         1,372,505     $13,725    $9,945,316    $(2,231,818)    $(234,782)    $ 7,492,441
                                  ==========     =======    ==========    ===========     =========     ===========
Issuance of stock pursuant to:
Stock purchase plan                   10,736         107        32,815             --            --          32,922
Fractional shares retired                (28)         --            --             --            --              --
Net income                                --          --            --        382,441            --         382,441
                                  ----------     -------    ----------    -----------     ---------     -----------

Balance, December 31, 1999         1,383,213     $13,832    $9,978,131    $(1,849,377)    $(234,782)    $ 7,907,804
                                  ==========     =======    ==========    ===========     =========     ===========
</TABLE>
                     The accompanying notes are an integral
                part of these consolidated financial statements.

                                       15
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                     YEARS ENDED DECEMBER 31, 1999 AND 1998


                                                        1999           1998
                                                     ----------     -----------
Cash flows from operating activities:
  Net income                                         $  382,441     $   125,485
  Adjustments to reconcile net income to net cash
   provided by operating activities:
   Depreciation and amortization                        520,453         668,189
   Gain on sale of product line (Note 10)               (25,235)             --
   (Gain) loss on sale or abandonment of property,
      plant and equipment                                23,714         (27,572)
   Provision for doubtful accounts                      109,031         271,609
   Decrease in receivables                            1,154,569         805,953
   Decrease in inventories                               81,796         845,658
   (Increase) decrease in other current assets           (6,795)         12,760
   Decrease in deferred tax asset                       352,500         341,000
   Decrease in other assets                             155,859          27,425
   Decrease in accounts payable                         (85,945)     (1,064,796)
   (Decrease) increase in accrued expenses             (776,309)        193,899
                                                     ----------     -----------
      Net cash provided by operating activities       1,886,079       2,199,610
                                                     ----------     -----------
Cash flows from investing activities:
  Purchases of property, plant and equipment
   and other assets                                    (304,927)       (206,663)
  Proceeds from sale of property, plant and
   equipment and other assets                            11,183          30,075
  Proceeds from sale of Soil Sentry/Encompass
    Product line (Note 10)                            1,061,531              --
      Net cash provided by (used in) investing
       activities                                       767,787        (176,588)
                                                     ----------     -----------

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

                                       16
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                     YEARS ENDED DECEMBER 31, 1999 AND 1998


                                                       1999             1998
                                                   -----------      -----------
Cash flows from financing activities:
Payments of long-term debt and capital leases      $   (14,205)     $  (353,349)
Net payments under bank lines of credit               (300,000)        (766,000)
Proceeds from stock issued for options                      --            3,680
Purchase of treasury stock                                  --          (12,331)
Issuance of common stock pursuant to stock
  purchase plan                                         32,922           60,651
                                                   -----------      -----------
    Net cash used in financing activities             (281,283)      (1,067,349)
                                                   -----------      -----------

Net increase in cash and cash equivalents            2,372,583          955,673

Cash and cash equivalents, beginning of year         1,098,846          143,173
                                                   -----------      -----------

Cash and cash equivalents, end of year             $ 3,471,429      $ 1,098,846
                                                   ===========      ===========


                       SUPPLEMENTAL CASH FLOW INFORMATION

Transfer of inventories to property, plant and
 equipment to be used as demonstration units       $   19,633       $    64,530
Interest paid                                          30,651            75,733
Income taxes paid                                      37,660                --


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

                                       17
<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 and
     the Jerome line of toxic gas detection instruments primarily used to detect
     mercury and hydrogen sulfide. The Company also had a line of computer-based
     fuel  management and compliance  leak detection  instruments for monitoring
     underground  storage tanks.  The Company sold the assets and rights to this
     product  line  during 1999 (see Note 10).  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.

     Concentrations of credit risk:

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

     Revenue recognition:

     Sales of instruments are recognized at the time shipments are made.

     Inventories:

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

     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.

                                       18
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1.   Summary of significant accounting policies, continued:

     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.

     Income per share:

     Basic  earnings  per share (EPS) is  computed as net income  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.

     Research and development:

     Research and development costs are charged to expense as incurred.

                                       19
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


 2.  Property, plant and equipment:

     Property,  plant  and  equipment  at  December  31,  1999  consists  of the
     following:

     Leasehold improvements                                           176,455
     Furniture, fixtures and equipment                              4,394,732
     Automobiles                                                       28,237
                                                                  -----------
                                                                    4,599,424
     Less accumulated depreciation
        and amortization                                           (3,805,453)
                                                                  -----------

                                                                  $   793,971
                                                                  ===========

 3.  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% (8.5% at  December  31,
     1999). The line of credit contains certain  covenants.  The Company did not
     have any  borrowings  against this line at December  31, 1999.  The line of
     credit expires June 2000.

4.   Estimated fair value of financial instruments:

     Statement of Financial Accounting Standard ("SFAS"). 107 "Disclosures About
     Fair Value of Financial  Instruments"  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, and lines of credit  approximate  fair values
     due to the short-term maturities or market rates of interest.

5.   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 50,000 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.

                                       20
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.   Shareholders' equity, continued:

     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 90,000 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 60,000  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. The current stock options
     granted have a vesting period ranging from six (6) months to five (5) years
     from the date of grant.

     The following is a summary of stock option activity:

                                                                       Weighted
                                                                       Average
                                                                       Exercise
                                                      Number            Price
                                                     of Shares        Per Share
                                                     ---------        ---------

     Outstanding January 1, 1997                      158,542         $   6.45
        Granted                                        19,500             9.55
        Canceled                                      (36,448)            4.80
        Exercised                                     (10,652)            4.95
                                                     --------         -----

     Outstanding December 31, 1997                    130,942         $   7.50
        Granted                                        69,000             5.00
        Canceled                                      (34,900)            8.75
        Exercised                                        (800)            4.60
                                                     --------         -----

     Outstanding December 31, 1998                    164,242         $   6.25
        Granted                                        41,000             2.29
        Canceled                                      (23,289)            8.75
        Exercised                                          --             0.00
                                                     --------         -----

     Outstanding December 31, 1999                    181,953             5.02
                                                     ========         =====

     At December 31, 1999,  and 1998,  approximately  110,000 and 74,000 options
     were   exercisable,   respectively.   At  December  31,  1999,   there  are
     approximately 48,000 stock options available for grant.

     The  following  table  summarizes  information  about fixed  stock  options
     outstanding at December 31, 1999:

                          Options Outstanding              Options Exercisable
                  ------------------------------------   -----------------------
                                  Weighted-   Weighted-                Weighted-
   Range of           Number      Average     Average       Number     Average
   Exercise        Outstanding    Remaining   Exercise    Exercisable  Exercise
    Prices         at 12/31/99      Life       Price      at 12/31/99    Price
    ------         -----------      ----       -----      -----------    -----
$ 2.12 to  2.75       38,000        8.8        $ 2.17            --      $   --
  3.75 to  5.30      107,353        6.1        $ 4.80        82,082      $ 4.61
  6.10 to  9.05       26,600        7.3        $ 7.91        18,520      $ 8.70
 10.00 to 12.50        8,000         .7        $11.18         8,000      $11.18
 15.63 to 20.94        2,000        1.1        $18.20         2,000      $18.28
                     -------                                -------
                     181,953                                110,602
                     =======                                =======

                                       21
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.   Shareholders' equity, continued:

     In January 1985, the Company  adopted an Employee Stock Purchase Plan which
     provides for the sale of up to 40,000  shares of common stock to qualifying
     employees of the Company. In May, 1996 and again in July 1999, the Board of
     Directors amended this Plan to increase the shares reserved for issuance by
     40,000 and 65,000 shares , respectively. 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,  1999 and 1998 a total of 10,736 and 16,766  shares of common
     stock have been  purchased at average  prices of $3.20 and $3.60 per share,
     respectively.  As of December  31, 1999  approximately  65,000  shares were
     available under this plan.

     The estimated fair value of options granted during 1999 was $.99 per share,
     while the estimated fair value of options granted during 1998 was $1.50 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:

                                                          1999           1998
                                                        --------       --------
     Net income
        As reported                                     $382,441       $125,485
        Pro forma                                        361,964         87,793

     Basic and diluted earnings per share
        As reported                                     $   .28        $    .09
        Pro forma                                           .26             .06

     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 58%,  risk free interest rate of 5.40% and
     expected lives of 3 years from vest date.

     On November 17, 1995, the Company entered into a loan agreement with a bank
     ("Bank").  The Bank  held a Note and a  warrant  to  purchase  up to 12,500
     unregistered  shares of the Company's  Common Stock at an exercise price of
     $10.40 per share.  The note was repaid in full during  1998.  The  warrants
     expire in November 2000.

     On February 8, 1999,  the Company  approved a  one-for-five  reverse  stock
     split of its issued and outstanding  common stock.  The reverse stock split
     has been retroactively reflected in the accompanying financial statements.

                                       22
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


6.   Income taxes:

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

                                                        1999           1998
                                                      --------       --------

     Current expense                                  $ 47,500       $  3,000
     Deferred expense                                  352,500        341,000
                                                      --------       --------

                                                      $400,000       $344,000
                                                      ========       ========

     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, 1999 is set forth below:

                                                         1999          1998
                                                      ---------      --------
     Provision computed at
      Federal statutory rates                         $ 265,000      $160,000

     State taxes                                         40,000        28,000
     Permanent differences                               95,000        97,000
     Other                                                   --         9,000
     Change in valuation allowance                           --        50,000
                                                      ---------      --------

                                                      $ 400,000      $344,000
                                                      =========      ========

     Permanent differences include amortization of goodwill and increase in life
     insurance cash surrender value net of life insurance premiums.

                                       23
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


6.   Income taxes, continued:

     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) tax  credit  carryforwards.  Management  estimates  that it is more
     likely than not that the Company will not use 100% of its future deductible
     amounts or tax credits.  As such,  management  has provided an allowance of
     $50,000 to offset its deferred tax assets.  The tax effects of  significant
     items  comprising  the  Company's net deferred tax asset as of December 31,
     1999 are as follows:

      Current deferred tax assets:
        Accrued expenses not currently deductible                     $ 173,000
        Reserves not currently deductible                               155,000
        Unearned income                                                  54,000
                                                                      ---------
                                                                        382,000
        Valuation allowance                                             (24,000)
                                                                      ---------
           Net current deferred tax assets                            $ 358,000
                                                                      =========
      Non-current deferred tax assets (liabilities):
        Intangible assets                                               195,500
        Difference between book and tax basis
          of property, plant and equipment                              (61,500)

        Tax credit carryforwards                                        271,500
                                                                      ---------
                                                                        405,500
        Valuation allowance                                             (26,000)
                                                                      ---------
           Net non-current deferred tax assets                        $ 379,500
                                                                      =========

     At  December  31,  1999,  the  Company  had  tax  credit  carryforwards  of
     approximately  $272,000  available to reduce future federal taxable income.
     These tax credits expire as follows:

                    12/31/02                      $  58,000
                    12/31/03                        109,000
                    12/31/04                         36,000
                    12/31/09                         37,000
                    Indefinite                       32,000
                                                  ---------
                                                  $ 272,000
                                                  =========

7.   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.  Contribution  expense was  approximately  $15,000 and
     $3,500 for the years ended December 31, 1999 and 1998, respectively.

8.   Foreign sales:

     Export  sales,  primarily  to Canada,  England and Japan for the year ended
     December 31, 1999, were approximately $1,595,000 and export sales primarily
     to Canada,  Korea and Sweden  were  approximately  $2,320,000  for the year
     ended December 31, 1998.

                                       24
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9.   Commitments and contingencies:

     Lease commitments:

     Certain  office  facilities  and  equipment  are  held  under  capital  and
     operating  leases.  These leases expire in periods through 2004 and include
     renewal  options.  Equipment  under capital leases included in property and
     equipment total $1,281,374 (less accumulated amortization of $1,275,751) at
     December 31, 1999.

     At December 31, 1999, 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
                                                       ------           ------

                   2000                               $13,000         $144,000
                   2001                                    --          147,000
                   2002                                    --          149,000
                   2003                                    --          154,000
                   2004                                    --          103,000
                                                      -------         --------
     Total minimum lease payments                     $13,000         $697,000
                                                                      ========

     Less amount representing interest                 (2,000)
                                                      -------
     Net present value of future minimum lease
        payments                                      $11,000
                                                      =======

     Rent expense for operating leases was approximately $204,000 and $275,000
         for the years ended December 31, 1999 and 1998, respectively.

     Employment contract:

     The Company has entered into an employment  agreement  with a key member of
     management.  The contract  requires  severance  pay equal to the  remaining
     compensation  through the term of the contract,  which is through March 31,
     2001. The total approximate amount of the contract is $200,000.

                                       25
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9.   Commitments and contingencies, continued:

     Litigation:

     From time to time,  the  Company  may become a  defendant  as the result of
     claims filed alleging breach of contractual  promises or warranties.  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 of the Company.

10.  Sale of product line:

     During 1999,  the Company  entered into an asset  purchase  agreement  with
     National  Environmental Services Company (NESCO), an unrelated party. NESCO
     purchased   certain   assets  of  the  Company  for  a  purchase  price  of
     approximately  $1,061,000.  The net  book  value  of the  assets  sold  was
     appoximately $1,036,000 resulting in a gain of approximately $25,000. Sales
     related to this product line were approximately $260,000 and $2,950,000 for
     the years ended December 31, 1999 and 1998, respectively.

11.  Subsequent event:

     On February 1, 2000, the Company  entered into a letter of intent  pursuant
     to which,  a company to be formed by the  President  of the  Company  and a
     member  of the  Company's  Board of  Directors,  would  acquire  all of the
     Company's  outstanding  shares  not  owned by them at a price of $5.00  per
     share in cash. The transaction is subject to authorization by the Company's
     shareholders.

                                       26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     On January 28, 2000, the Company was notified that McGladrey & Pullen,  LLP
had acquired the attest assets of the  Company's  independent  auditors,  Toback
CPAs P.C.  ("Toback") and that Toback would no longer be the Company's  auditor.
McGladrey  &  Pullen,  LLP was  appointed  as the  Company's  new  auditor.  The
Company's Board of Directors approved this appointment.

                                    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  an amendment to this filing
that will contain information that is responsive to Items 9 through 12.

                                     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 sheet - December 31, 1999

     Consolidated statements of operations - Years ended
     December 31, 1999 and 1998

     Consolidated statements of shareholders' equity -
     Years ended December 31, 1999 and 1998

     Consolidated statements of cash flows - Years ended
     December 31, 1999 and 1998

     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 Amended and Restated  Certificate of Incorporation of
              Registrant, incorporated by reference from Registrant's Form 10QSB
              filed on May 17, 1999 (the "May 1999 10QSB").

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

                                       27
<PAGE>
       10.1*  Registrant's  1991 Stock  Option Plan.  Incorporated  by reference
              from Registrant's Form S-8 filed on June 28, 1996.

       10.2   Registrant's  1991  Employee Stock Purchase Plan.  Incorporated by
              reference from Registrant's Form S-8 filed on August 5, 1996.

       10.3   Loan and Security Agreement dated June 30, 1998 between Registrant
              and Imperial Bank.  Incorporated  by reference  from  Registrant's
              Form 10QSB for the quarter ended June 30, 1998.

       10.4   Asset Purchase  Agreement dated April 30, 1999, between Registrant
              and National  Environmental Service, Co. Incorporated by reference
              from Registrant's Form 10QSB for the quarter ended March 31, 1999,
              filed May 17, 1999.

       10.5*  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.

       10.6*  Employment  Agreement between  Registrant and George G. Hays dated
              January 1, 1998.  Incorporated by reference from Registrant's 1997
              Form 10KSB filed March 31, 1998.

       10.7*  Amended Employment Agreement between Registrant and George G. Hays
              dated May 13, 1999.  Incorporated  by reference from  Registrant's
              10QSB for the quarter ended March 31, 1999, filed on May 17, 1999.

       16.1   Letter on change in certifying  accountant  from Toback CPAs, P.C.
              to  McGladrey & Pullen,  L.L.P.  Incorporated  by  reference  from
              Registrant's  Form 8K for period  ended  January 31,  2000,  filed
              February 8, 2000.

       21.1   Subsidiaries   of  Registrant.   Incorporated  by  reference  from
              Registrant's Form 10KSB filed March 31, 1999.

       27.1   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) The  following  Form 8-K was  filed by  Registrant  after  the year end
Covered by this Form 10-KSB.

     Form 8-K filed  February 8, 2000,  reporting  under Item 4 that McGladrey &
Pullen,  L.L.P. had acquired the attest assets of the  Registrant's  independent
auditors  Toback CPAs,  P.C. and that Toback CPAs would no longer be the auditor
of the Registrant.  McGladrey & Pullen, L.L.P. was appointed as the Registrant's
new auditor.

                                       27
<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 30, 2000                    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, 2000
----------------------     (Principal Executive Officer)
George G. Hays


/s/ S. Thomas Emerson      Director                               March 30, 2000
----------------------
S. Thomas Emerson


/s/ Steven Zylstra         Director                               March 30, 2000
----------------------
Steven Zylstra


/s/ Harold Schwartz        Director                               March 30, 2000
----------------------
Harold Schwartz

                                       28