SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


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

For the fiscal year ended December 31, 1995 or
 
[ ]  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 of                             (IRS Employer
incorporation or organization)                            Identification No.)

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

Issuer's telephone number, including area code: (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 [ ]

As of February 29, 1996, the aggregate  market value of the voting stock held by
non- affiliates of the registrant was $15,434,603. 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 each 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.
 
[ ]      Check if disclosure  of delinquent  filers in response to Item  405  of
         Regulation S-B is not contained herein,  and will not be contained,  to
         the best of Registrant's  knowledge, in definitive proxy or information
         statements  incorporated by reference in Part III of this Form 10KSB or
         any amendment to this Form 10KSB.

As of February 29, 1996,  6,498,780 shares of Common Stock ($.01 par value) were
outstanding.
<PAGE>
                         ARIZONA INSTRUMENT CORPORATION

                                TABLE OF CONTENTS




PART I                                                                  Page No.

Item 1    Description of Business .........................................    1
Item 2    Description of Property .........................................    9
Item 3    Legal Proceedings ...............................................    9
Item 4    Submission of Matters to a Vote of Security Holders .............   11
          Executive Officers of the Registrant    .........................   11




PART II

Item 5    Market for Common Equity and Related
               Stockholder Matters ........................................   12
Item 6    Management's Discussion and Analysis of Financial
               Condition and Results of Operations ........................   14
Item 7    Financial Statements ............................................   19
Item 8    Changes in and Disagreements with Accountants
               on Accounting and Financial Disclosure .....................   37


PART III

Item 9    Directors, Executive Officers, Promoters,
               and Control Persons; Compliance with
               Section 16(a) of the Exchange Act ..........................   37
Item 10   Executive Compensation ..........................................   37
Item 11   Security Ownership of Certain Beneficial Owners
               and Management .............................................   37
Item 12   Certain Relationships and Related Transactions ..................   37


PART IV

Item 13   Exhibits and Reports on Form 8-K ................................   37
<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE:

         Part      III:  Portions  of the Proxy  Statement  for the 1996  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.


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

General

         AZI produces and markets measurement  instruments and provides services
which improve the quality of products and protect the environment. The Company's
products  incorporate  a variety  of  proprietary  technologies  and are used in
quality control, environmental and industrial 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 successfully expanded into other
product  areas.  In December 1986, AZI acquired  Jerome  Instrument  Corporation
("Jerome"), 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  product,  its next  generation of fuel  management and leak detection
compliance system.

         In  September  1992,  the  Company  acquired  Horizon  Engineering  and
Testing, Inc. ("Horizon"), a company that specializes in testing and engineering
services  for  USTs.  Horizon  complements  AZI's  existing  line of  monitoring
systems.  Sales of the Company's Soil Sentry  products,  as well as those of its
competitors,  have  been  slower  than  predicted  by  industry  analysts.  Many
operators have chosen the less expensive,  but temporary,  regulatory  option of
annual tank  testing,  combined  with  monthly  inventory  reconciliation,  thus
delaying their move to more expensive permanent  monitoring.  The combination of
AZI and Horizon  provides  customers with periodic testing until they eventually
comply with U.S.  Environmental  Protection  Agency ("EPA")  regulations using a
permanent method such as the Soil Sentry systems.

         By 1998,  however,  existing law will require virtually all underground
tank  operators to move from the  temporary,  annual testing option to a monthly
service or permanent leak  monitoring.  The  acquisition of Horizon and its tank
testing  network has allowed the Company to compete in the current  tank testing
market and to pursue  strong  business  relationships  in order to position  the
Company's permanent monitoring products as the systems of choice when the
operators are ready to upgrade.
<PAGE>

 ENCOMPASS 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 1994, the Company  introduced the ENCOMPASS product, a PC-based fuel
management  and  compliance  system.  This  new  system  takes  advantage  of  a
customer's  existing personal computer (PC) to reduce the cost of leak detection
compliance  and to provide fuel  management.  Unlike  conventional  wall mounted
consoles,  this new system  eliminates the controller and takes advantage of the
power of the computer to process the data on a real time basis.  It integrates a
unique software  program with inventory  probes,  line leak detectors and liquid
sensing probes to accommodate the needs of varying sites and tank constructions.
The system runs in the computer's  background,  monitoring  and collecting  data
without  interrupting  other site  activities  and  without  need for  attendant
intervention.  In the event of an alarm, the operator is automatically notified.
It is an  open-architecture  system  compatible  with  other  site  systems  and
interfaces with off-the-shelf  business software.  The application software runs
in a Microsoft(TM) Windows environment.

         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 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.

         In 1990,  the Company  introduced  a product  aimed at the  underground
storage tank market, the TLM-800 tank level monitoring system.  Using ultrasonic
probe technology,  the system continuously measures product levels inside a UST,
providing an extensive range of automated inventory reports.

         The TLM--830 was  introduced in February 1992.  This  versatile  system
accommodates  varying  tank site  needs by  combining  the  TLM-800's  inventory
monitoring technology with leak detection capabilities.
<PAGE>
         Many of the newer steel and  fiberglass  storage tanks being  installed
are  manufactured  with  a  second  outer  wall,  designed  to  contain  leaking
materials.  The TLM-830 uses optical sensing probes to monitor the space between
the two walls,  signaling an alarm in the event of a leak. In 1992,  the Company
began offering  groundwater  probes to monitor for leaking  hydrocarbon  product
floating on the site's groundwater.

         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
U.S. For the purpose of these regulations,  the EPA has defined any storage tank
system  with  more  than 10  percent  of its total  volume  underground  as UST.
Estimates of the total UST population  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 Soil Sentry products.

Horizon

         Services - Horizon  utilizes three methods for the testing of USTs. Its
primary method is the Tracer Tight(tm) tracer testing system,  which is licensed
to Horizon by Tracer Research Corp.  ("Tracer") in Tucson,  Arizona. The term of
the current license agreement is five years,  expiring October 1998. The license
is  nonexclusive  and  neither  Horizon  nor other  Tracer  licensees  have been
assigned specific protected  territories.  The license is requires that all test
samples taken by Horizon be submitted to Tracer for analysis at prescribed fees.
Horizon's business currently is substantially dependent on its license agreement
with Tracer,  and its business can be materially  adversely  affected by various
circumstances   regarding  the  license  agreement,   including  termination  or
nonrenewal  of  the  license  agreement  or  Tracer's  failure  to  upgrade  its
technology  or adjust its  pricing  should  such  changes  become  necessary  or
desirable in light of competitive conditions.

         As different customers have varying  technological  preferences for UST
testing,  Horizon also offers testing services  utilizing the Leak Computer(tm),
manufactured  by Hastech  and a similar  system  developed  by USTest.  Both are
EPA-recognized  volumetric testing methods. At present,  the Tracer Tight method
accounts for  approximately  90% of  Horizon's  testing  business,  and the Leak
Computer and the USTest methods for approximately 10%.
<PAGE>
         SIRTIFY, a statistical inventory  reconciliation  package introduced in
1993, is a cost-effective tank management system that meets EPA requirements for
monthly monitoring of tanks and piping. Daily inventory information is collected
by  the  tank  owner  and  submitted   monthly  to  the  Company  for  analysis.
Comprehensive management and compliance reports are provided.

         Markets  - Horizon  has been  engaged  since  1990 in the  business  of
testing USTs for leakage using  EPA-recognized  testing  methods.  Under current
federal  regulations,  UST owners are  required to monitor USTs o a permanent or
monthly  basis or,  alternatively,  to test  their  tanks on a  periodic  basis.
Various  methods  have  been  developed  for  testing  of USTs and most  must be
performed on an annual basis in order to conform to regulatory requirements.

         The  domestic  market for testing  USTs is slowly  declining as the UST
owners choose to convert to permanent  monitoring  systems like ENCOMPASS before
the EPA mandated deadline in December, 1998.

         Horizon's  territories in the testing  business have included  Arizona,
Utah, Idaho, Montana, Nevada, California, Washington and Oregon. The markets and
applications  for Horizon's  services are the same as those described above with
regard to the Company's Soil Sentry product line.

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  Analyzers'  excellent  sensitivity  is from the use of the
Company's  gold  film  sensing  technology.  Mercury  or H2S in air  samples  is
adsorbed  by the gold  film.  The  instrument  relates  the  change in  electric
resistance of the gold film to a measurement of the substance being detected and
displays the result within seconds.

         In  December  1995,  the  Company   announced  that  it  has  completed
development of a proprietary  gold film  micro-sensor for the next generation of
the  Company's  Jerome line of toxic gas  monitors.  The new  micro-sensor  will
significantly  extend sensor life and  facilitate  the Company's  entry into new
markets in which continuous monitoring applications are required. The new Jerome
products are scheduled to be introduced in late 1996.

         Markets  and  Applications  -- Mercury.  The market for Jerome  mercury
detectors comprises customers in four major groups:

         Industrial Hygiene - These applications  involve workplace screening to
ensure  employees  are not  subjected to  unacceptable  mercury  risk.  The U.S.
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.
<PAGE>
         Industrial  Process  Quality Control - These customers test for mercury
in  products  where even trace  amounts  can have toxic  effects,  such as I the
confined  environments of submarines,  engine rooms or spacecraft.  Suppliers to
the National Aeronautics and Space Administration and the U.S. Navy are required
under  procurement  contracts to certify that certain  equipment  components are
mercury-free.

         Laboratories  - One  specific  Jerome  product is  designed  to measure
mercury  concentrations  in  water  or  urine.  These  customers  are  typically
laboratories performing this service for industrial clients.

         Mercury Dental Amalgam  Screening - Mercury and silver dental  amalgams
have become the subject of intense scrutiny and controversy. The Jerome 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  application  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 Jerome products 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 convection oven 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 was 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.
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 balance
technology to detect  moisture  levels  accurately down to .005% in as little as
two minutes. The MAX-2000 is
<PAGE>
programmable from an easy-to-use  front panel Menu system,  allowing the user to
store test parameters for 30 different sample materials.  It features  real-time
front panel  display of moisture  values,  elapsing  test time and  drying-curve
graph;  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  and soon will  release  alpha-test  units of its new line of  Computrac
moisture analyzers. The new product, targeted at the worldwide titration market,
requires no toxic reagents, is simple to use and maintain,  and offers excellent
correlation  and  repeatability.  The new  Computrac  product is scheduled to be
released in the fourth quarter of 1996.

         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- and five-year parts and labor warranties.  For the year ended
December 31, 1995, warranty expense approximated 0.6% of net sales.

         In February  1996,  the  Company  announced  that it 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.

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. Although
two  vendors  currently  supply in excess  of 45% of the raw  materials  used in
Jerome's instrumentation, secondary vendors are available. The raw materials and
component parts are supplied by the two vendors  pursuant to  specifications  by
the Company. The Company has prequalified certain other vendors, and
<PAGE>
believes that, if necessary,  the raw materials and components could be supplied
by such other vendors without  disruption of the manufacturing  process or other
adverse affect on the Company.

Marketing and Sales

         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. Since 1988, the dollar amount of unfilled  orders at the beginning of
any quarter has not exceeded 15% of sales for that quarter. The Company had more
backlog  at the end of  1995  than it  historically  has had due to open  orders
related to tank testing  services and  ENCOMPASS  installation.  At December 31,
1995, backlog totaled approximately $730,000.

         The  Company  markets  its  instruments  for  export  through  a direct
international  office in Singapore,  as well as through foreign  distributors in
Europe, the Middle East and the Far East.

Industries Served: Customers

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

         A single ENCOMPASS customer represents  approximately 10% of Net Sales.
The  Company is actively  seeking to  diversify  sales of this  product 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 15% of
total sales in 1995, with no sales to any geographic region exceeding 10% of net
sales. (See Note I to the Consolidated Financial Statements.)

         The  Company's  business  with U.S.  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 contacts will last through January 1999.
<PAGE>
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 product  overlaps these  competitors,  except that AZI
believes that it is the only provider of an aspirated vapor monitoring system.

         Computrac  - A number  of  competitors  exist  for  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 increased.

         Horizon  -  Horizon  has a number of  competitors  in the tank  testing
business.   One  industry  leader  operates  a  nation-wide   tank  testing  and
multi-service UST business. Several other competitors operate regionally as does
Horizon.  There are many other local and  regional UST service  companies  which
provide tank testing services utilizing one or more of the available  volumetric
technologies  which  Horizon  also  uses.  Horizon  is  potentially  subject  to
competition from other licensees of these various methods.

Research and Development

         Research and  development  expenses  increased  62% in 1995 compared to
1994.  Expenditures  for  research  and  development  for the fiscal years ended
December  31,  1995,  1994  and  1993  were  $605,627,   $374,538  and  $427,279
respectively.  This  represented 4.6% of sales in 1995, 3.1% in 1994 and 3.0% in
1993.  The  Company's  research  and  development  expenditures  for  1995  were
channeled  into the  development  of possible new products in all three  product
lines.

         In August  1988,  the Company  entered into a Research  Agreement  (the
"Research  Agreement") with Arizona State Research Institute  ("ASRI").  AZI and
ASRI jointly  performed work to improve  current  sensors and develop new sensor
technology.  The Research  Agreement  required  the Company to pay  expenditures
which were set forth each contract year and to guarantee  ASRI's lease  payments
related to the research.  The Research  Agreement was  terminated as of December
31, 1990.  The Company has assumed the  obligation of the future lease  payments
through  November 1993. The research  performed under the Agreement is now being
continued by Company  personnel.  AZI completed  development  of a new gold film
microsensor in December, 1995.

         During the years ended  December 31, 1995,  1994 and 1993,  the Company
has expensed  approximately  $0, $0, and $127,000  respectively,  related to the
Research Agreement.
<PAGE>
         The  Company  also  intends to  develop  additional  environmental  and
electronic  instrumentation  products and services through internal research and
development,  and  acquisition (by purchase or license) of related product lines
or perhaps small instrument or service companies.

Patents and Licenses

         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.

         See  "Horizon-Services,"  above, for information regarding an agreement
pursuant  to  which  the  Company  licenses  the  technology   utilized  in  its
tank-testing operation.

Employees

         As of  December  31,  1995,  the  Company  had a total of 107 full time
employees and 7 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

         In August, 1993, the Company leased approximately 35,000 square feet in
Phoenix, Arizona. The facility enabled the Company to consolidate all operations
from two formerly leased facilities and one owned facility.  All administration,
sales,  customer  service,  engineering and manufacturing for the Company are in
the Phoenix facility. The lease on the new building expires in August, 2003.

         The Company  believes that its facilities  are modern,  well-maintained
and adequate for current needs.

ITEM 3.  LEGAL PROCEEDINGS

         The  Company  was  a  defendant  in  an  action   brought  by  Teledyne
Industries,  Inc.,  filed on March 24, 1992 in the United States District Court,
Northern District of Texas. The complaint alleged that the Company's Soil Sentry
product line infringed a patent of which the plaintiff was
<PAGE>
the exclusive United States  licensee.  The suit was dismissed with prejudice by
order of the court on April 12, 1995.

         On June 25, 1993, the State of Arizona  Department of Revenue issued an
assessment against a subsidiary of the Company, Horizon Engineering and Testing,
Inc. ("Horizon"), with respect to delinquent state sales tax payments alleged to
have been due in  connection  with  activities  of a  discontinued  construction
operation of a predecessor corporation of Horizon. The amount of the assessment,
including  interest  and  penalties,  is  approximately  $627,000.   Horizon  is
reviewing  the  assessment  and intends to seek a  substantial  reduction of the
assessment, though there can be no assurance that a reduction can be achieved.

         Litigation  has been  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
Arizona  State  Research  Institute  ("ASRI") in 1988  related to the  Company's
Jerome  product line and providing the Company with certain  rights  thereunder.
Notwithstanding  such agreements,  ASRI exclusively licensed relevant technology
to Senova  Corporation  ("Senova") in February  1993.  The Company filed suit in
February 1996 against  Senova,  ASRI, the Arizona Board of Regents (the "Board")
and certain other defendants  requesting a declaratory  judgment  confirming the
Company's  right to the contested  technology and seeking  damages.  Senova also
filed suit in January 1996 against ASRI,  the Board,  AZI and certain  executive
officers of AZI seeking  declaratory  judgment  confirming  the  validity of its
license  agreement with ASRI and seeking damages.  Certain other related actions
also have been filed. The Company intends to pursue the litigation vigorously.

         The Company is not involved in any other legal proceedings,  the result
of which the  Company  believes  could have a material  adverse  effect upon the
Company.
<PAGE>
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 1995.

EXECUTIVE OFFICERS OF THE REGISTRANT

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

         Walfred  R.  Raisanen,  age 60, has been the  Chairman  of the board of
Directors since the Company's inception in January 1981. From 1981 until 1986 he
was the  President  and Treasurer of the Company.  Mr.  Raisanen was  re-elected
Treasurer in 1991 and also serves as Vice President of Research and Development.
From June 1976 until  January 1981 he was  President  and a Director of Motorola
Process Control, Inc. a predecessor to the Company.

         John P. Hudnall, age 45, came to the Company in 1985 as Chief Financial
Officer.  He became President and Chief Executive Officer in 1986 and a Director
in 1988. Mr. Hudnall's background spans 20 years in industry,  with positions in
production,  sales, finance and systems, including a position as Chief Financial
Officer for Inter-Tel, Inc., an independent telephone company.

         Scott Carter,  age 41, joined the Company in 1992 as Vice President and
Chief  Financial  Officer.  Mr.  Carter is a CPA and has 17 years  experience in
financial  management  and  general  management.  Prior to his  position  at the
Company, Mr. Carter was Executive Vice President and Chief Financial Officer for
Rockford Corporation,  a consumer electronics  manufacturing  company.  Prior to
this, he was an accounting manager for Hewlett Packard Company.

         Susan Berry,  age 47, was named Secretary in early 1989. She has served
as Human  Resources  Manager for the Company  since 1985.  Prior to her position
with the Company, Ms.
Berry was in corporate administration for Inter-Tel, Inc.

         Michael Grant,  age 46, became Vice President of Manufacturing in 1993.
He started wth the Company in 1988,  first serving as National  Service Manager,
then as Director of Customer Service,  and, for the last five years, as Director
of Operations. Mr. Grant has over 20 years of experience in manufacturing.

         Executive  officers are elected annually and serve at the discretion of
the Board of Directors.
<PAGE>
                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
             MATTERS

         The Company's Common Stock trades on the Nasdaq Small Cap Market. As of
February 28, 1996, there were approximately 400 shareholders of record. The high
and low prices set forth below are derived from the Nasdaq  Monthly  Statistical
Report  prepared  by the  National  Association  of  Securities  Dealers,  Inc.,
represent quotations by dealers,  may not reflect applicable markups,  markdowns
or commissions, and do not necessarily represent actual transactions.


                                        Bid
                           ----------------------------


1995                          High              Low
                           ---------        -----------


First Quarter                   1.19             .69
Second Quarter                  1.69             .75
Third Quarter                   2.75            1.25
Fourth Quarter                  2.25            1.81


1994                         High               Low
                           ---------        -----------


First Quarter              $   1.75         $   1.50
Second Quarter                 1.06              .94
Third Quarter                  1.19             1.06
Fourth Quarter                 1.13              .81

         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 Silicon Valley Bank. See Management's
Discussion and Analysis and Results of Operations.
<PAGE>
SELECTED FINANCIAL DATA

         The  selected  financial  data for each of the five years in the period
ended December 31, 1995 have been derived from the Company's  audited  financial
statements,  and should be read in conjunction with the financial statements and
related notes thereto and other financial information appearing elsewhere herein
and in Item 6. The selected  financial  data is not required by Form 10- KSB and
is included herein as an unnumbered item.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA:

                                                                 Year Ended December 31, (1)
                                      -----------------------------------------------------------------------------------

                                          1995              1994              1993             1992              1991
                                      ------------     ------------      ------------      ------------      ------------
<S>                                   <C>              <C>               <C>               <C>               <C>         
Net sales                             $ 13,104,230     $ 12,105,818      $ 14,182,410      $ 10,862,419      $  8,535,197
Cost of goods sold                       5,644,945        5,859,033         6,624,607         4,534,819         3,190,692
Operating expenses                       6,588,757        7,789,962         6,706,167         5,601,140         4,839,395
                                      ------------     ------------      ------------      ------------      ------------
Operating income (loss)                    870,528       (1,543,177)          851,636           726,460           505,110
Interest Expense                           449,816          507,573           542,499           511,375           552,426
Income tax expense                          11,000            2,000            35,000           180,458            92,500
Extraordinary item                      
   reduction of income tax         
   expense from utilization of
   prior years' operating losses                                                                172,922            88,891
 Cumulative effect of a change
    in accounting method                                                                        113,500
                                      ------------     ------------      ------------      ------------      ------------
Net income (loss)                     $    532,585    ($  1,938,200)     $    408,279      $    192,128      $      9,916
                                      ============     ============      ============      ============      ============
Net income (loss) per share                   $.08             ($.31)            $.09              $.07                $0
Weighted average number of 
    shares outstanding                   6,584,860         6,186,816        4,373,191         2,909,613         2,384,684
     

BALANCE SHEET DATA:




                                                                 Year Ended December 31, (1)
                                      -----------------------------------------------------------------------------------

                                          1995              1994              1993              1992             1991
                                      ------------     ------------      ------------      ------------      ------------

Total assets                          $ 10,600.162     $ 11,966,710      $ 12,768,299      $ 11,369,361      $  8,867,806
Working capital                       $  3,332,424     $  2,318,979      $  4,439,421      $  1,766,729      $  2,017,714
Long-term debt, excluding
   current portion                    $  1,663,112     $  1,816,288      $  2,161,298      $  1,961,515      $  3,000,000
Total liabilities                     $  4,260,858     $  6,228,112      $  5,092,459      $  6,238,749      $  5,134,411
Shareholders' equity                  $  6,339,304     $  5,738,598      $  7,675,840      $  5,130,612      $  3,733,395

(1) Includes operations of Horizon acquired in September, 1992.
</TABLE>
<PAGE>
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations:
---------------------
         The  following  tables set forth  items in the  Company's  Consolidated
Statements  of  Operations  as a percent of total net sales for the years  ended
December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
                                                        Percent of net sales               Percentage change        
                                                       Year ended December 31,             over prior periods   
                                                                                                               
                                                                                           1995 vs.   1994 vs. 
                                                        1995     1994     1993               1994      1993     
                                                       ------   ------   ------             ------    ------   
<S>                                                    <C>      <C>      <C>                <C>       <C>      
Net sales                                              100.0%   100.0%   100.0%                 8%      -15%   
Cost of goods sold                                      43.1%    48.4%    46.7%                -4%      -12%   
                                                       ------   ------   ------             ------    ------   
            Gross margin                                56.9%    51.6%    53.3%                19%      -17%   
                                                       ------   ------   ------             ------    ------   
Expenses                                                                                                       
   Marketing                                            23.8%    29.4%    24.8%               -12%        1%   
   General and administrative                           17.3%    20.0%    15.7%                -6%        9%   
   Research and development                              4.6%     3.1%     3.0%                62%      -12%   
   Amortization and depreciation                         4.6%     4.8%     3.8%                 3%        8%   
   Restructuring costs                                   0.0%     7.1%     0.0%              -100%      100%   
                                                       ------   ------   ------             ------    ------   
             Total expenses                             50.3%    64.3%    47.3%               -15%       16%   
                                                       ------   ------   ------             ------    ------   
Operating income (loss)                                  6.6%   -12.7%     6.0%               156%     -281%   
                                                       ------   ------   ------             ------    ------   
Other revenue (expense)                                                                                        
   Interest income                                        .2%     0.1%     0.0%               136%       86%   
   Interest expense                                     -3.4%    -4.2%    -3.8%               -11%       -6%   
   Other                                                  .8%     0.9%     0.1%                -4%      573%   
                                                       ------   ------   ------             ------    ------   
             Total other expense                        -2.5%    -3.2%    -3.7%               -17%      -25%   
                                                       ------   ------   ------             ------    ------   
                                                                                                               
Income (loss) before income taxes and cumulative                                                               
effect of change in accounting method                    4.1%   -16.0%     2.3%               128%     -687%   
Income taxes                                              .1%     0.0%      .2%               450%      -94%   
Cumulative effect of change in accounting method         0.0%     0.0%      .8%                 0%      0.0%   
                                                       ------   ------   ------             ------    ------   
Net income (loss)                                        4.1%   -16.0%     2.9%               127%     -575%   
                                                       ======   ======   ======             ======    ======   
</TABLE>        
1995 vs. 1994
         The Company  reported net income of $532,585 in 1995  compared to a net
loss of $1,938,200 in 1994. The increase in net income compared to 1994 resulted
in part from the Company  developing and implementing a formal plan in the third
quarter of 1994 to restructure the  Environmental  Technology  Group (ETG).  The
total one-time  restructuring  costs for 1994 were $863,837.  Also,  compared to
1994,  sales in 1995 increased 8%, gross margin as a percent of sales  increased
from 52% in 1994 to 57% in 1995 and  Marketing  and General  and  Administrative
expenses decreased $587,277.

         Net  sales  for the  year  ended  December  31,  1995  increased  8% to
$13,104,230  compared to  $12,105,818  in 1994.  The increase in sales  resulted
primarily  from  increases  in  sales  of  the  ENCOMPASS  fuel  management  and
compliance  systems,  ENCOMPASS  related  installations  and Computrac  moisture
analyzers.  These sales  increases  more than offset a decrease in tank  testing
sales. Tank testing sales decreased  primarily as a result of the reorganization
in 1994 to redirect  the sales focus from the Eastern  U.S.  back to the Western
U.S. and a small decline in the domestic market for testing UST's.
<PAGE>
         Cost of goods sold was 43% of sales in 1995 compared to 48% of sales in
1994.  Gross margin  increased  primarily due to higher  utilization of the tank
testing  field  technicians.   Lower  tank  testing  sales  for  1995  has  been
accomplished with significantly  fewer technicians and much higher  productivity
compared to 1994. Gross margin also improved in 1995 as a result of a higher mix
of sales of the ENCOMPASS systems in the ENCOMPASS and Soil Sentry product line.

         Overall  expenses in 1995  decreased  $1,201,205 or 15% below 1994. The
decrease was primarily  the result of the $863,837  decrease in costs related to
ETG  restructuring  in the third  quarter  of 1994  which was zero in 1995.  The
restructuring  costs were related to formally  restructuring  the  Environmental
Technology  Group (ETG) and consisted  primarily of the write down of inventory,
patents and related severance expenses. Total expenses also decreased a total of
$587,277 in marketing and general and  administrative  expense  primarily in the
restructured tank testing operations.

         Marketing  expenses decreased $440,228 or 12% in 1995 compared to 1994.
The  decrease in marketing  expenses  was  primarily a result of the decrease in
tank  testing  sales  personnel in the Eastern  United  States which the Company
anticipates will be permanent.

         General and administrative  expenses decreased $147,049,  or 6% in 1995
compared to 1994. General and administrative  expenses decreased  primarily as a
result of decreased  administrative  personnel  and expenses in the tank testing
operations.  Some of this tank testing  personnel have been reassigned to manage
the installation of ENCOMPASS systems.

         Research and development  expenses increased  $231,089,  or 62% in 1995
compared  to 1994.  The  increase  in  research  and  development  expenses  was
primarily the result of capitalizing  some final stage development costs for the
ENCOMPASS  product in 1994. There were no similar final stage  development costs
in 1995.  Research and development  expenses are anticipated to continue at this
higher level for 1996.

         Amortization and depreciation expenses increased $18,820, or 3% in 1995
compared to 1994.

         Interest expense decreased $57,757, or 11% in 1995 compared to 1994 due
to a decrease in the average outstanding debt.

1994 vs. 1993
         The Company  reported a net loss of  $1,938,200 in 1994 compared to net
income of $408,279 in 1993. The decrease in net income compared to 1993 resulted
in part from the Company  developing and implementing a formal plan in the third
quarter of 1994 to restructure the  Environmental  Technology  Group (ETG).  The
total one-time  restructuring  costs for 1994 were $863,837.  Also,  compared to
1993,  sales in 1994  decreased  in the U.S.  military  subcontract  with Jacobs
Engineering and the Soil Sentry product line.

         Net sales for the year  ended  December  31,  1994  decreased  15% from
$14,182,410 in
<PAGE>
1993 to $12,105,818  in 1994. The decrease in sales resulted  primarily from the
decrease  in  construction  related  sales  under the  Company's  U.S.  military
subcontract  with Jacobs  Engineering.  The  subcontract  construction  work was
completed  in 1993 and  approximately  $1,030,000  of  construction  sales  were
recorded in 1993 compared to none in 1994. Sales in the Soil Sentry product line
decreased as a result of the unsettled  political situation in Korea during much
of 1994 and a  transition  in the  domestic  market  sales  focus as part of the
restructuring  to newer,  more  profitable  products.  Computrac sales increased
compared  to  1993  as a  result  of the  new  MAX-1000  and  MAX-2000  products
introduced in 1994.

         During the third quarter of 1994 the Company  developed and implemented
a formal plan to restructure the Environmental  Technology Group (ETG).  Because
of  competitive  market  conditions  in the  Eastern  U.S.,  the Company was not
successful in profitably developing tank testing in these territories. Also, the
Company  changed focus in the ENCOMPASS and Soil Sentry product line by reducing
the number of products offered and focusing on newer, more profitable  products.
The plan for  restructuring  involved  closing down the tank  testing  sales and
service  operations  in the  Eastern  U.S.,  writing  off  certain  Soil  Sentry
inventory  and the  related  Patent  and  reducing  related  corporate  staffing
expenses  by  approximately  10%.  The total  restructuring  costs for 1994 were
$863,837.

         Cost of goods sold was 48% of sales in 1994 compared by 47% of sales in
1993.  The  increase  was due  primarily  to the under  utilization  of the tank
testing  field   technicians   in  the  Eastern  U.S.  and  the   under-absorbed
manufacturing overhead expenses related to the decrease in Soil Sentry sales.

         Overall expenses in 1994 increased  $1,083,795,  or 16% above 1993. The
increase was primarily the result of the costs related to ETG  restructuring  in
the third quarter of 1994. .

         Marketing expenses  increased $39,254,  or 1% in 1994 compared to 1993.
The  increase  in  marketing  expenses  was  primarily  a result  of  additional
Computrac sales and marketing expenses in 1994.

         General and administrative  expenses increased $192,659,  or 9% in 1994
compared to 1993. General and administrative  expenses increased  primarily from
increased  health  insurance costs,  tank testing  administrative  personnel and
increases in the reserve for bad debts.

         Research and development  expenses  decreased  $52,741,  or 12% in 1994
compared  to 1993.  The  decrease  in  research  and  development  expenses  was
primarily  the  result  of  the  completion  of  the  MAX-1000/MAX-2000  product
development projects.

         Amortization and depreciation expenses increased $40,786, or 8% in 1994
compared  to 1993.  Amortization  expenses  increased  primarily  because of the
amortization of new capital leases for sales  demonstration  products related to
the new Computrac MAX-2000 and MAX- 1000 products.

         Interest expense decreased $34,926,  or 6% in 1994 compared to 1993 due
to a decrease
<PAGE>
in the average  outstanding debt. Other revenue  (expense)  increased $89,588 in
1994 compared to 1993 due to gains on the sale of older Computrac  demonstration
products.

Liquidity and Capital Resources:

         Working  capital  increased  96% to  $3,332,424  at  December  31, 1995
compared to $1,702,312 at December 31, 1994. The current ratio increased to 2.28
in 1995 from 1.34 in 1994. The increase in working capital and the current ratio
was primarily due to increased cash flow from operations.

         At  December  31,  1995 as compared  to  December  31,  1994,  accounts
receivable  decreased $486,164,  primarily as a result of improvements in credit
and collection policies and procedures. Inventory at December 31, 1995 decreased
$296,388 compared to December 31, 1994, primarily as a result of improvements in
materials  management  and the  introduction  of newer,  easier  to  manufacture
products.

         Cash and cash equivalents increased $98,403 in 1994, to end the year at
$486,382.  Cash provided by operating  activities  was  $2,241,741 in 1995.  The
sources  of cash for  operating  activities  was  primarily  a result of the net
income plus non-cash charges  (depreciation  and amortization) and the decreases
in accounts  receivable  and  inventory.  Cash used by investing  activities was
$25,970 in 1995. Cash used by financing activities was $2,117,368 in 1995, which
was  primarily  used to reduce  borrowing  under the bank lines of credit and to
make payments on long-term debt and capital leases.

         The Company currently has two lines of credit available through Silicon
Valley Bank ("the bank"), collateralized by accounts receivable,  inventory, and
property,  plant and equipment which provide for an aggregate maximum commitment
of  $2,750,000  through  March 15, 1996.  At December 31, 1995,  the Company had
$150,000   outstanding  under  its  domestic  line  of  credit  for  $1,500,000.
Borrowings  under this line of credit are at the bank's  prime rate of  interest
plus  2.0%  (10.5%  at  December  31,  1995.)  The  second  line of credit is an
international credit line and is 90% guaranteed by the Export-Import Bank of the
United States. At December 31, 1995, the Company had $100,000  outstanding under
its international  line of credit for $1,250,000.  Borrowings under this line of
credit are at the bank's prime rate of interest plus 1.5% (10.0% at December 31,
1995). Subsequent to December 31, 1995, the lines of credit were renewed through
March 15, 1997 for an aggregate commitment of $2,500,000.  The domestic line was
renewed for $1,500,000 at an interest rate of prime plus 1.5%. The international
line was renewed for  $1,000,000  at an interest of rate of prime plus 1.0%.  In
connection with originally  obtaining these lines of credit in 1991, the Company
issued a warrant to the bank to purchase  43,011 shares of the Company's  common
stock at an exercise  price of $2.25  through  December 15,  1996.  The lines of
credit  contain  certain  covenants,  including  minimum  net income  levels and
certain financial ratios.  The Company was in compliance with all bank covenants
at December 31, 1995.

         In November,  1995, the Company prepaid the remaining principal balance
($1,162,083) of its 12% subordinated  convertible note payable to Bridge Capital
Investors II ("Bridge"). In
<PAGE>
connection  with the  prepayment,  Bridge  waived  all  rights  to  receive  any
additional  warrants under its loan agreement with the Company.  The Company had
also made  scheduled  principal  payments of  $375,000  and  $616,667  principal
payments on April 30, 1995 and October 31, 1995, respectively.

         On April 14, 1995,  the Company  entered into an agreement with Classic
Syndicate,  Inc.  ("Classic").  Pursuant  to the  Subordinated  Loan  Agreement,
Classic  holds a 10% Note in the  principal  amount of $375,000  with a maturity
date of April 30, 1997. The funds were to be used  exclusively for the April 30,
1995 principal payment to Bridge.  Semi-annual  interest payments are to be made
on April 30, 1996 and October 31, 1996.

         On November  17,  1995,  the Company  entered  into an  agreement  with
Silicon Valley Bank ("the Bank"). Pursuant to the Loan Agreement, the Bank holds
a Note in the  principal  amount of $1,220,238 at an interest rate of prime plus
2% (10.75% at December 31,  1995) and a warrant to purchase up to 62,500  shares
of the  Company's  Common  Stock at an  exercise  price of $2.08 per share.  The
Company is required to pay 42 monthly principal  payments of $29,762 in addition
to monthly interest payments from December 7, 1995 through May 7, 1999. The Note
is cross-  collateralized  with the Company's bank lines of credit with accounts
receivable, inventory, and property, plant and equipment. The Company has agreed
to not use  $400,000 of its  available  bank lines of credit  until this Note is
fully repaid. The Note contains certain covenants,  including minimum net income
levels and certain  financial  ratios.  On a quarterly basis, half of any excess
cash  flow that the  Company  generates  is  required  to be used to prepay  any
remaining principal balance due on this Note. Excess cash flow is defined as net
income plus non-cash  expenses less capital  expenditures,  scheduled  principal
payments and increases in net working capital.
<PAGE>
ITEM 7.   FINANCIAL STATEMENTS


                                    I N D E X



                                                                        Page No.


Independent Auditors' Report .........................................    21

Consolidated Balance Sheets ..........................................    22

Consolidated Statements of Operations ................................    23

Consolidated Statements of Shareholders' Equity ......................    24

Consolidated Statements of Cash Flows ................................    25

Notes to Consolidated Financial Statements ...........................    27
<PAGE>
















                 ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
             1995 Consolidated Financial Statements and Independent
                                 Auditors Report
<PAGE>



                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors of
Arizona Instrument Corporation:

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Arizona
Instrument  Corporation  and  subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended  December 31, 1995.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility is to express an opinion on the financial statements based on our
audits.

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 Arizona Instrument Corporation and
subsidiaries  as of  December  31,  1995  and  1994  and the  results  of  their
operations  and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.


/s/  Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Phoenix, Arizona
March 13, 1996, except for Note C, as to which the date is March 26, 1996
<PAGE>

                 ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                                                             December 31,
                                                   ----------------------------
                                                        1995            1994
                   ASSETS                          ------------    ------------
                   ------
CURRENT ASSETS:
 Cash and cash equivalents                         $    486,382    $    387,979
 Receivables, less allowance for doubtful
  accounts of $191,000 and $187,000                   3,371,837       3,862,258
 Inventories:
 Components                                           1,148,508       1,358,533
 Finished Goods                                         645,262         832,214
                                                   ------------    ------------
                                                      1,793,770       2,190,747
 Current portion of notes receivable related party       55,501           6,000
 Prepaid expenses and other current assets              222,680         283,819
                                                   ------------    ------------
Total current assets                                  5,930,170       6,730,803

PROPERTY, PLANT AND EQUIPMENT, net                    1,083,199       1,237,882
GOODWILL, net of accumulated amortization
 of $1,874,912 and $1,628,559                         2,455,924       2,702,357
COVENANT NOT TO COMPETE, net of accumulated
 amortization of $189,583 and $131,250                  160,417         218,750
NOTES RECEIVABLE RELATED PARTY                                0          49,502
OTHER ASSETS                                            970,452       1,027,416
                                                   ------------    ------------
TOTAL                                               $10,600,162    $ 11,966,710
                                                   ============    ============

          LIABILITIES AND SHAREHOLDERS' EQUITY
          ------------------------------------
CURRENT LIABILITIES:
 Lines of credit                                       $250,000      $1,625,000
 Accounts payable                                       863,386         816,361
 Accrued salaries and commissions                       374,838         300,856
 Accrued interest                                        14,713          98,787
 Other accrued expenses                                 481,585         346,104
 Current portion of long-term debt and
  capital lease obligations                             613,224       1,841,383
                                                   ------------    ------------
    Total current liabilites                          2,597,746       5,028,491

LONG-TERM DEBT AND CAPITAL LEASE
 OBLIGATIONS - less current portion                   1,663,112       1,199,621

COMMITMENTS AND CONTINGENCIES (Note J)

SHAREHOLDERS' EQUITY:
 Common Stock, $.01 par value:
  Authorized, 10,000,000 shares;
  Issued, 6,352,563 and 6,195,484 shares                 63,526          61,955
 Preferred Stock, $.01 par value
  Authorized, 1,000,000 shares
 Additional paid-in capital                           9,360,950       9,294,400
 Deficit                                             (2,862,721)     (3,395,306)
                                                   ------------    ------------
                                                      6,561,755       5,961,049
 Less treasury stock, 86,165 shares at cost            (222,451)       (222,451)
                                                   ------------    ------------
  Total shareholders' equity                          6,339,304       5,738,598
                                                   ------------    ------------
TOTAL                                               $10,600,162     $11,966,710
                                                   ============    ============


                 See Notes to Consolidated Financial Statements
<PAGE>
                 ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      -------------------------------------

                                                   Year Ended December 31,
                                         -------------------------------------
                                             1995         1994        1993
                                         -----------  -----------  -----------
NET SALES                                $13,104,230  $12,105,818  $14,182,410

COSTS OF GOODS SOLD                        5,644,945    5,859,033    6,624,607
                                         -----------  -----------  -----------
    Gross margin                           7,459,285    6,246,785    7,557,803
                                         -----------  -----------  -----------
EXPENSES
 Marketing                                 3,116,104    3,556,332    3,517,078
 General & administrative                  2,268,641    2,415,690    2,223,031
 Research & development                      605,627      374,538      427,279
 Amortization & depreciation                 598,385      579,565      538,779
 Restructuring costs                               0      863,837            0
                                         -----------  -----------  -----------

     Total Expenses                        6,588,757    7,789,962    6,706,167
                                         -----------  -----------  -----------
OPERATING INCOME (LOSS)                      870,528   (1,543,177)     851,636
                                         -----------  -----------  -----------
OTHER REVENUE (EXPENSE)
 Interest income                              22,039        9,320        5,000
 Interest expense                           (449,816)    (507,573)    (542,499)
 Other                                       100,834      105,230       15,642
                                         -----------  -----------  -----------
     Total other expense                    (326,943)    (393,023)    (521,857)
                                         -----------  -----------  -----------
INCOME (LOSS) BEFORE INCOME TAXES
 AND CUMULATIVE EFFECT OF CHANGE
 IN ACCOUNTING METHOD                        543,585   (1,936,200)     329,779

INCOME TAXES                                  11,000        2,000       35,000
                                         -----------  -----------  -----------
INCOME (LOSS) BEFORE CUMMULATIVE EFFECT
 OF CHANGE IN ACCOUNTING METHOD              532,585   (1,938,200)     294,779

CUMULATIVE EFFECT OF CHANGE IN
 ACCOUNTING METHOD                                 0            0      113,500

NET INCOME (LOSS)                        $   532,585  ($1,938,200) $   408,279
                                         ===========  ===========  ===========
INCOME (LOSS) BEFORE INCOME TAXES
 AND CUMULATIVE EFFECT OF CHANGE
 IN ACCOUNTING METHOD PER SHARE          $      0.08  ($     0.31) $      0.07

CUMULATIVE EFFECT OF CHANGE IN
 ACCOUNTING METHOD PER SHARE             $      0.00  $      0.00  $      0.02
                                         -----------  -----------  -----------
NET INCOME (LOSS) PER SHARE              $      0.08  ($     0.31) $      0.09
                                         ===========  ===========  ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
 AND COMMON STOCK EQUIVALENTS              6,584,860    6,186,816    4,373,191
                                         ===========  ===========  ===========

                 See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
                 ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 -----------------------------------------------
<CAPTION>

                                                               Additional    (Deficit)
                                         Common Stock            paid-in      retained      Treasury
                                    Shares          Amount       capital      earnings        stock          TOTAL
                                   ---------      ---------    ----------    ----------     ----------    -----------
<S>                                <C>            <C>          <C>          <C>            <C>            <C>        
BALANCE, JANUARY 1, 1993           4,009,906      $  40,099    $7,018,350   ($1,865,385)   ($   62,452)   $ 5,130,612

 Issuance of stock pursuant to:
  Stock purchase plan                 25,452            255        38,936                                      39,191
  Horizon purchase fees              (37,742)          (378)       13,862                                      13,484
  Exercise of warrants                65,000            650        48,100                                      48,750
  Stock private placement          2,090,000         20,900     2,174,623                                   2,195,523
 Purchase of treasury stock                                                                   (159,999)      (159,999)
 Net Income                                                                     408,279                       408,279
                                   ---------      ---------    ----------    ----------     ----------    -----------
BALANCE, DECEMBER 31, 1993         6,152,616      $  61,526   $ 9,293,871   ($1,457,106)   ($  222,451)   $ 7,675,840

 Issuance of stock pursuant to:
  Stock purchase plan                 38,702            387        43,838                                      44,225
  Stock private placement fees                                    (43,309)                                    (43,309)
  Exercise of warrants                 4,166             42                                                        42
 Net loss                                                                    (1,938,200)                   (1,938,200)
                                   ---------      ---------    ----------    ----------     ----------    -----------
BALANCE, DECEMBER 31, 1994         6,195,484      $  61,955    $9,294,400   ($3,395,306)   ($  222,451)   $ 5,738,598

 Issuance of stock pursuant to:
  Stock purchase plan                 46,476            465        37,806                                      38,271
  Exercise of warrants               105,603          1,056        21,444                                      22,500
  Exercise of stock options            5,000             50         7,300                                       7,350
 Net Income                                                                      532,585                      532,585
                                   ---------      ---------    ----------    ----------     ----------    -----------
BALANCE, DECEMBER 31, 1995         6,352,563      $  63,526    $9,360,950   ($2,862,721)   ($  222,451)   $ 6,339,304
                                   =========      =========    ==========    ==========     ==========    ===========
</TABLE>


                 See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
                 ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

<CAPTION>
                                                             Year ended December 31,
                                                   -----------------------------------------
                                                       1995           1994           1993
                                                   ----------      ----------     ----------
<S>                                                <C>            <C>             <C> 
OPERATING ACTIVITIES:      
 Net income (loss)                                 $  532,585     ($1,938,200)    $  408,279

Adjustments to reconcile net income to net cash
 provided (used) by operating activities:
 Depreciation and amortization                        779,577         812,501        802,280
 Gain on sale or abandonment of property,
  plant and equipment                                 (62,294)        (93,552)        (7,391)
 Provision for losses on receivables                    4,257          10,882          9,017
 Restructuring charges                                                747,995
 Provision for inventory obsolesence                                   89,965

Change in operating assets and liabilities:
 Decrease (increase) in receivables                   486,164         177,576       (785,832)
 Decrease (increase) in inventories                   296,388        (389,816)       (71,628)
 Decrease (increase) in other current assets           11,639         129,779       (289,383)
 Decrease (increase) in other assets                   21,011        (302,051)      (394,443)
 Increase (decrease) in accounts payable               47,025         (73,205)       (27,514)
 Increase (decrease) in accrued expenses              125,389         (20,939)       (64,434)
                                                   ----------      ----------     ----------
NET CASH PROVIDED (USED) BY
 OPERATING ACTIVITIES                               2,241,741        (849,065)      (421,049)
                                                   ----------      ----------     ----------
INVESTING ACTIVITIES:
 Purchases of property, plant and
  and equipment and other assets                     (106,523)        (64,639)      (472,765)
 Proceeds from sale of property, plant and
  and equipment and other assets                       80,553         136,264
                                                   ----------      ----------     ----------
NET CASH (USED) PROVIDED BY
 INVESTING ACTIVITIES                                 (25,970)         71,625       (472,765)
                                                   ----------      ----------     ----------
                                   Continued
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                             Year ended December 31,
                                                   -----------------------------------------
                                                       1995           1994           1993
                                                   ----------      ----------     ----------
<S>                                                <C>            <C>             <C> 
FINANCING ACTIVITIES:
 Borrowings of long-term debt                       1,625,000         414,001
 Payments of long-term debt and capital leases     (2,441,192)       (156,201)      (922,965)
 Net (payments) borrowings under bank
  lines of credit                                  (1,375,000)        825,000       (545,378)
 Proceeds recevied on notes receivable                  5,703             902
 Stock issued for warrants                             29,850              42         48,750
 Sale of common stock, net proceeds                   (43,309)      2,209,007
 Purchase of treasury stock                          (159,999)
 Issuance of common stock pursuant
  to stock purchase plan                               38,271          44,225         39,191
                                                   ----------      ----------     ----------
NET CASH (USED) PROVIDED BY
 FINANCING ACTIVITIES                              (2,117,368)        670,659      1,082,607
                                                   ----------      ----------     ----------
NET INCREASE (DECREASE) IN CASH
 AND CASH EQUIVALENTS                                  98,403        (106,781)       188,793

CASH AND CASH EQUIVALENTS,
 beginning of year                                    387,979         494,760        305,967
                                                   ----------      ----------     ----------
CASH AND CASH EQUIVALENTS
 end of year                                       $  486,382      $  387,979    $   494,760
                                                   ==========      ==========     ==========

SUPPLEMENTAL CASH FLOW INFORMATION:
 Transfer of inventories to property, plant and
  equipment to be used as demonstration units         100,589         115,239         18,346
 Property, plant and equipment acquired through
  capital lease obligations                            51,524         550,998        436,343
 Note receivable acquired for asset sale              170,000
 Note payable due for asset sale                       10,000
 Interest paid                                        502,759         477,039        415,362
 Income taxes paid                                      4,669           9,270         38,030


                 See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>

                 ARIZONA INSTRUMENT CORPORATION AND SUBSIDIARIES
                 -----------------------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                       THREE YEARS ENDED DECEMBER 31, 1995
                       -----------------------------------

A.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

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 (UST's) and
the Jerome  line of toxic gas  detection  instruments  primarily  used to detect
mercury and hydrogen sulfide. The Company also provides tank testing and related
services  for the  underground  storage tank  market.  The Company  sells in the
United States and also international markets.

Sales of  instruments  are  recognized  once  the  shipment  is  made.  Sales of
underground  storage tank (UST) services are recognized  based on the percentage
of completion.

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

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
useful  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 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.  The Financial Accounting Standards Board issued Statement
of  Financial  Accounting  Standards  (SFAS) No. 121 during  1995.  SFAS No. 121
establishes  the accounting  standard for the  impairment of long-lived  assets,
certain  identifiable  intangibles,  and goodwill  related to those assets to be
held and used for long-lived assets and certain  identifiable  intangibles to be
disposed  of. The  Company  will adopt SFAS No. 121  effective  January 1, 1996.
Management  of the Company does not believe  that  adoption of SFAS No. 121 will
have a material effect on the financial position or results of operations of the
Company.
<PAGE>
Covenant not to compete resulted as part of the Horizon  acquisition in 1992 and
is being amortized on a straight line basis.

Debt issue costs are  amortized  using the interest  method over the term of the
related debt.

Stock based compensation.  In October 1995, the Financial  Accounting  Standards
Board issued SFAS No. 123 "Accounting for Stock Based Compensation". The Company
has  determined  that it will not  change  to the  fair  value  method  and will
continue to use Accounting  Principles  Board Opinion No. 25 for measurement and
recognition  of employee  stock based  compensation.  SFAS No. 123 will  require
additional disclosures in the 1996 financial statements.

Income (Loss) per share is computed using the weighted  average number of common
shares  outstanding  during each year after giving  effect to stock  options and
warrants considered to be dilutive common stock equivalents.

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 necessarily requires management to make
estimates  and  assumptions  that  effect  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.

 B.     PROPERTY, PLANT AND EQUIPMENT

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


                                        1995           1994
                                    -----------    -----------

Leasehold improvements              $   154,807    $   154,807
Furniture, fixtures and equipment     3,887,422      3,756,333
Automobiles                             123,111        123,111
                                    -----------    -----------

Less accumulated depreciation
   and amortization                   4,165,340      4,034,251

                                     (3,082,141)    (2,796,369)
                                    -----------    -----------

                                    $ 1,083,199    $ 1,237,882
                                    ===========    ===========


C.     BANK LINES OF CREDIT

At December 31,  1995,  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
<PAGE>
$2,750,000  through  March 15,  1996.  At  December  31,  1995,  the Company had
$150,000  outstanding under its domestic line of credit at the bank's prime rate
of interest  plus 2.0%  (10.5% at  December  31,  1995).  The  Company  also had
$100,000  outstanding  under the  international  line of credit at December  31,
1995.  Borrowings  under  this line of credit  are at the  bank's  prime rate of
interest  plus 1.5% (10.0% at December  31,  1995).  Subsequent  to December 31,
1995,  the lines of credit were renewed  through March 15, 1997 for an aggregate
commitment of  $2,500,000.  The domestic  line was renewed for  $1,500,000 at an
interest  rate of prime plus 1.5% and the  international  line was  renewed  for
$1,000,000 at an interest rate of prime plus 1.0%. In connection  with obtaining
these lines of credit in a prior year,  the Company issued a warrant to the bank
to purchase 43,011 shares of the Company's  common stock at an exercise price of
$2.25.  These warrants  expire at December 15, 1996. The lines of credit contain
certain  covenants,  including  minimum net income levels and certain  financial
ratios.  The Company was in compliance  with all bank  covenants at December 31,
1995.

D.      LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

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


                                                       1995          1994
                                                    ----------   ----------

   Convertible subordinated note, interest at 12%
   payable quarterly, paid off in 1995              $        0   $2,176,250
   Capital lease obligations (Note J)                  670,170      836,541
   Notes payable                                       375,000            0
   Notes payable to Bank                             1,231,166       28,213
                                                    ----------   ----------

Total Debt and Capital Leases                        2,276,336    3,041,004
   Less current position                               613,224    1,841,383
                                                    ----------   ----------

Long-Term Portion of Debt and Capital Leases        $1,663,112   $1,199,621
                                                    ==========   ==========


In  November,   1995,  the  Company  prepaid  the  remaining  principal  balance
($1,184,583) of its 12% subordinated  convertible note payable to Bridge Capital
Investors II ("Bridge").  In connection with the  prepayment,  Bridge waived all
rights to receive any  additional  warrants  under its loan  agreement  with the
Company.  The Company  also made  scheduled  principal  payments of $375,000 and
$616,667 on April 30, 1995 and October 31, 1995, respectively.

On April 14, 1995, the Company entered into an agreement with Classic Syndicate,
Inc ("Classic").  Pursuant to the Subordinated  Loan Agreement,  Classic holds a
10% Note in the  principal  amount of $375,000 with a maturity date of April 30,
1997.  The funds were to be used  exclusively  for the April 30, 1995  principal
payment to Bridge.  Semi-annual  interest  payments  are to be made on April 30,
1996 and October 31, 1996.
<PAGE>
On  November  17,  1995,  the  Company  entered  into an  agreement  with a bank
("Bank"). Pursuant to the Loan Agreement, the Bank holds a Note in the principal
amount of  $1,220,238  at an interest  rate of prime plus 2% (10.75% at December
31,  1995) 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 Company is
required to pay 42 monthly principal  payments of $29,762 in addition to monthly
interest  payments from December 7, 1995 through May 7, 1999. The Note is cross-
collateralized with the Company's bank lines of credit with accounts receivable,
inventory,  and property, plant and equipment. The Company has agreed to not use
$400,000 of its available  bank lines of credit until this Note is fully repaid.
The Note contains  certain  covenants,  including  minimum net income levels and
certain  financial  ratios.  On a quarterly basis,  half of any excess cash flow
that the  Company  generates,  is  required  to be used to prepay any  remaining
principal  balance  due on this Note.  Excess cash flow is defined as net income
plus non-cash expenses less capital  expenditures,  scheduled principal payments
and  increases in net working  capital.  At December 31, 1995 the Company was in
agreement with all covenants of this agreement.

Long-term debt and capital lease obligations at December 31, 1995 are payable as
follows:


                    1996           $  613,224
                    1997            1,010,908
                    1998              478,627
                    1999              161,749
                    2000               11,828
                                   ----------
                                             
                                             
                                   $2,276,336
                                   ==========


 E.      ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial  Accounting  Standard ("SFAS") No. 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.

F.      SHAREHOLDERS' EQUITY

In July 1983,  the Company  adopted an  Incentive  Stock  Option  Plan  ("ISOP")
pursuant to which the Company could, for a period of 10 years,  grant options to
purchase up to 100,000 shares of the Company's Common Stock. ISOP options may be
granted to employees of the Company or any subsidiary. The exercise price of all
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 10 years
<PAGE>
from the date of grant. In 1984,  non-qualified stock options were granted to an
officer and a former director. The exercise price of the options is equal to the
fair market value of the Company's Common Stock on the date of grant.

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. 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 following is a summary of stock option activity:


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


Outstanding December 31, 1992                 280,285           $  3.51
   Granted                                    328,860              2.40
   Canceled                                  (213,500)             3.62
                                            ---------           -------  

Outstanding December 31, 1993                 395,645              2.53
   Granted                                     57,719              2.20
   Canceled                                   (75,480)             3.00
                                            ---------           -------

Outstanding December 31, 1994                 377,884              2.39
   Granted                                    678,903               .92 
   Canceled                                  (332,884)             2.39
   Exercised                                   (5,000)             1.47
                                            ---------           -------
Outstanding December 31, 1995                 718,903           $  1.00
                                            =========           =======
<PAGE>
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.  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, 1995,  1994
and 1993 a total of 46,476,  38,702 and 25,452  shares of common stock have been
purchased at average prices of $.82, $1.14 and $1.54 per share, respectively. As
of December 31, 1995, a total of 21,900 shares were available under this plan.

Stock Private Placement

At November  30, 1993 the Company  completed a private  placement  of  2,090,000
shares of common stock  raising gross  proceeds of  $2,612,550  and net proceeds
after fees and expenses of $2,195,523. The proceeds were used to reduce debt, to
obtain certain European product certifications, and for new product development.
The Company also  utilized  $159,999 of the net proceeds to redeem 73,845 shares
of its  common  stock held  primarily  by Mr.  Quinn  Johnson,  a  director  and
executive  officer of the Company.  On November 30, 1993,  the Company  issued a
warrant to purchase up to 209,000 shares at an exercise price of $1.25 per share
to the placement agent in connection with the private placement of the Company's
stock.

A shelf registration  statement covering 3,781,000 shares of common stock issued
in the private  placement  described  above, in a 1992 private  placement and in
connection with the Horizon acquisition was declared effective by the Securities
and Exchange Commission on February 11, 1994.


G.      INCOME TAXES

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


                                1995        1994         1993
                              --------    --------     --------
Federal:
   Current                    $  2,250    $      0     $ 17,800 
   Deferred
State:                           8,750       2,000       17,200 
                              --------    --------     --------
                              $ 11,000    $  2,000     $ 35,000 
                              ========    ========     ========


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 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:
<PAGE>
                                    1995         1994         1993
                                  ---------     --------    --------
Provision (benefit) computed at
   federal statutory rates        $ 185,000    ($658,988)   $138,815
State taxes                           9,000        2,000       4,410
Goodwill                             63,000       63,500      63,500
Life Insurance                        9,000        9,600      13,136
Other                                57,000        3,000       1,677
Benefit of loss carryforward              0            0      15,242
Change in valuation allowance      (312,000)     582,888    (201,780)
                                  ---------     --------    --------

                                  $  11,000     $  2,000    $ 35,000
                                  =========     ========    ========



The Company adopted Statement of Financial  Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes",  effective January 1, 1993. The cumulative effect
of adopting SFAS No. 109 on the Company's  financial  statements was to increase
income $113,500 for 1993.

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:


                                                            1995       1994
                                                         ---------   ---------
Deferred tax assets:
Current
   Reserves not currently deductible                     $ 114,000   $ 369,000
Long Term
   Other intangibles                                        70.000      49,000
   Operating loss carryforwards                            398,000     671,500
   Tax credit carryforwards                                324,000
   Difference between book and tax basis of property       151,500     323,000
                                                          --------   ---------

Total deferred tax assets                                1,057,500   1,412,500

Deferred tax liabilities:                                
Long Term
   Difference between book and tax basis of property                    42,500
                                                                     ---------
Total deferred tax liabilities                                          42,500
                                                                        
Valuation allowance                                       (944,000) (1,256,500)
                                                         ---------   ---------
Net deferred tax asset                                   $ 113,500   $ 113,500
                                                         =========   =========

The Company has evaluated its past  earnings  history and trends,  sales backlog
and  budgets  and  determined  that it is more  likely than not that most of the
deferred tax assets will not be realized.  As a result, a valuation allowance of
$944,000 has been recorded on the deferred tax assets. The Company will continue
to review this valuation  allowance on a quarterly basis and make adjustments as
appropriate.

At December  31,  1995,  the Company had net  operating  loss  carryforwards  of
approximately  $1,000,000  available to reduce federal taxable income. These net
operating losses begin to expire in 2005.
<PAGE>
H.    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.  No  contributions  have been made in any of the three years ended
December 31, 1995.

I.     SALES

Export  sales,   primarily  to  Canada,  Korea  and  Sweden  were  approximately
$1,950,000,  $2,220,000  and  $3,212,000  for the years ended December 31, 1995,
1994 and 1993, respectively.

The  Company has a  concentration  of sales from a newly  released  product to a
single customer that makes up approximately  10% of Net Sales. The potential for
a negative  financial  impact  could  result from a partial or total loss of the
business   relationship  with  this  customer.   Management  believes  that  the
relationship  between  the Company and this  customer  was good at December  31,
1995. Management is actively seeking to diversify sales of this new product to a
number of other  customers,  and anticipate  that  additional  customers will be
added during the next twelve months.

J.      COMMITMENTS AND CONTINGENCIES

Leases

Certain  office  facilities  and  equipment are held under capital and operating
leases. These leases expire in periods through 2003 and include renewal options.
Capital  leases  included  in  Property  and  Equipment  total   $1,361,193  and
$1,343,228  (net of  accumulated  amortization  of $765,429 and  $533,650) as of
December 31, 1995 and 1994, respectively.

At December 31, 1995,  future  minimum lease  payments  under such leases having
non- cancelable terms in excess of one year are summarized as follows:


                                       Capital leases          Operating leases
                                         ----------              ----------

                 1996                    $  333,878              $  302,004
                 1997                       312,092                 284,839
                 1998                       134,140                 294,920
                 1999                        17,316                 317,835
                 2000                        12,988                 317,604
                 Thereafter                       0                 873,411
                                         ----------              ----------

Total minimum lease payments             $  810,414              $2,390,613
                                         ----------              ==========
Less amount representing interest           140,243
                                         ----------              
Net present value of future minimum
   Lease payments                        $  670,170
                                         ==========              

Rent  expense for  operating  leases was  approximately  $360,000,  $335,000 and
$301,000 for the years
<PAGE>
ended December 31, 1995, 1994 and 1993, 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  $33,764,
$35,801  and  $27,233  for the years ended  December  31,  1995,  1994 and 1993,
respectively.  The earnout period under the modified agreement will be completed
on December 31, 1997.

Litigation

Litigation has been 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  believes,   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,  AZI and certain executive officers
of AZI seeking  declaratory  judgement  confirming  the  validity of its license
agreement with the state organization and seeking damages. Certain other related
actions  also have been  filed.  The  Company  intends to pursue the  litigation
vigorously.  Management of the Company believes that the ultimate  resolution of
these matters will not have a material  effect on the financial  position of the
Company.

K.      RESTRUCTURING COSTS

During the third quarter of 1994 the Company  developed and implemented a formal
plan to  restructure  the  Environmental  Technology  Group  (ETG).  Because  of
competitive  market  conditions  in the  Eastern  US, the  Company  had not been
successful in profitably developing tank testing in these territories. Also, the
Company  changed focus in the Soil Sentry product line by reducing the number of
products offered and focusing on newer, more profitable  products.  The plan for
restructuring   involved  closing  down  the  tank  testing  sales  and  service
operations in the Eastern US, writing off certain Soil Sentry  inventory and the
related patent and reducing related corporate staffing expenses by approximately
10%. The total restructuring costs for 1994 were $863,837 which consisted of the
following:

Write down of inventory                          $ 405,373
                                                 
Write down of patent                               342,622
                                                 ---------

Total non-cash restructuring costs                 747,995
Total cash severance costs                         115,842
                                                 ---------

Total restructuring costs                        $ 863,837
                                                 =========
<PAGE>
The   restructuring   was  completed  in  1994  and  there  were  no  additional
restructuring related expenses in 1995.

L.     RELATED PARTY TRANSACTIONS

During  September  1993, the Company loaned $45,000 to one of its officers.  The
loan is  collateralized  by a pledge  of 15,000  shares  of common  stock of the
Company and the cash value of a life insurance  policy.  The note bears interest
at 10% per annum and is due August 1996.  During April 1994,  the Company loaned
approximately  $10,000 to another officer. The note bears interest at 10% and is
due April, 1996.
<PAGE>
ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE

         There has been no Form 8-K filed within 24 months prior to the date the
most recent financial  statements reporting a change of accountants or reporting
disagreements  on any matter of  accounting  principle  or  financial  statement
disclosure


                                    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 8 of Part II.

Independent auditors' report.

Consolidated balance sheets - December 31, 1995 and 1994.

Consolidated  statements of operations - Years ended December 31, 1995, 1994 and
1993

Consolidated statements of shareholders' equity - Years ended December 31, 1995,
1994 and 1993

Consolidated  statements of cash flows - Years ended December 31, 1995, 1994 and
1993

Notes to consolidated financial statements
<PAGE>
(a) The following  exhibits are incorporated by reference or are filed with this
Form 10-KSB.

3.1      Certificate of  Incorporation of Registrant as amended through June 30,
         1994: Incorporated by reference from Form 10-Q filed in August

3.2      By-laws of Registrant as amended through June 30, 1994: Incorporated by
         reference from Form 10-Q filed in August 1994.

10.1     United States Patent No. 4,165,633 issued August 28, 1979: Incorporated
         by reference from Form S-18 filed on July 27, 1983.

10.2*    1983  Incentive  Stock  Option  Plan  of  Registrant:  Incorporated  by
         reference from Form S-18 filed on July 17, 1983.

10.3*    1985 Stock Option Plan:  Incorporated  by reference from Form 10K filed
         in March 1986.

10.4*    1991 Stock Option Plan:  Incorporated  by reference from Form 10K filed
         in March 1992.

10.5     Amended and  restated  Silicon  Valley Bank,  Export-Import  Guaranteed
         Business Loan Agreement,  February 1993. Incorporated by reference from
         Form 10-KSB filed in March 1993.

10.6     Loan  Modification  Agreement  with Silicon Valley Bank dated March 15,
         1994 to renew the lines of credit through March 15, 1995.  Incorporated
         by reference from Form 10-QSB filed in March 1994.

10.7     Amended  and  restated  Silicon  Valley Bank  Domestic  and Export Loan
         Agreements, dated March 15, 1995 through March 15, 1996.

10.8     Warrant  Purchase  Agreement  dated as of  December  15,  1991  between
         Arizona Instrument Corporation and Silicon Valley Bank: Incorporated by
         reference from Form 10K filed in March 1992.

10.9*    Employment   Agreement   dated   September  30,  1992  between  Horizon
         Acquisition Co. And Quinn Johnson.  Incorporated by reference from Form
         8-K dated September 30, 1992.

10.10    Noncompete   Agreement   dated   September  30,  1992  between  Horizon
         Acquisition Co. and Quinn Johnson.  Incorporated by reference from Form
         8-K dated September 30, 1992.

10.11*   Employment Agreement between Walfred R. Raisanen and Arizona Instrument
         Corporation dated November 5, 1992. Incorporated by reference from
<PAGE>
         Form ESB filed in March 1993.

10.12*   Employment Agreement between the Company and John P. Hudnall dated June
         3, 1993. Incorporated by reference from Form 10-QSB filed August 1993.

10.13    Lease Agreement between the Company and Wood Street Limited Partnership
         dated  September 1, 1993.  Incorporated  by reference  from Form 10-QSB
         filed August 1993.

10.14    Amended and Restated License  Agreement  between the Company and Tracer
         Research Corporation dated October 27, 1993.  Incorporated by reference
         from Form 10-QSB filed November 1993.

10.15    Warrant  Agreement between the Company and Cruttenden & Co., Inc. dated
         November 30, 1993. Incorporated by reference from Report on Form 10-QSB
         dated November 30, 1993.

10.16    Amendment No. 7 to the Purchase  Agreement  between Arizona  Instrument
         Corporation and Bridge Capital Investors II, dated July 1, 1994.

10.17    Amendment No. 8 to the Purchase Agreement between Arizona Instrument
         Corporation and Bridge Capital Investors II, dated March 30, 1995.

10.18    Promissory  Note between  Arizona  Instrument  Corporation  and Classic
         Syndicate, Inc., dated April 15, 1996.

10.19    Loan Modification  Agreement between Arizona Instrument Corporation and
         Silicon Valley Bank related to a new Promissory Note, dated November 7,
         1995.

10.20    Promissory  Note between  Arizona  Instrument  Corporation  and Silicon
         Valley Bank, dated November 7, 1995.

10.21    Agreement  between  Arizona  Instrument  Corporation and Bridge Capital
         Investors II,  regarding  the terms for  prepayment of the Bridge Note,
         dated November 27, 1995.

22.1     Subsidiaries:  Quintel  International,  Inc.,  incorporated  under  the
         Companies Act of 1982 of Barbados, W.I.; Computrac International, Inc.,
         an Arizona  Corporation,  Horizon  Engineering  and  Testing  Inc.,  an
         Arizona  Corporation,   each  of  which  is  wholly  owned  by  Arizona
         Instrument Corporation.

24.1     Accountants' Consent

(b)      There were no reports on Form 8-K for the year ended December 31, 1995.

         * Management Contract or compensatory plan or arrangement.
<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 29, 1996                    By:   /s/ John P. Hudnall
                                              -------------------
                                              John P. Hudnall, 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/ Walfred R. Raisanen       Chairman of the Board of          March 29, 1996
--------------------------                                      --------------
Walfred R. Raisanen            Directors

/s/ John P. Hudnall           President and Director (Princi-   March 29, 1996
--------------------------                                      --------------
John P. Hudnall               pal Executive Officer)


/s/ Scott M. Carter           Chief-Financial-Officer           March 29, 1996
--------------------------                                      --------------
Scott M. Carter               (Principal Financial and
                              Accounting Officer)

/s/ Quinn Johnson             Director                          March 29, 1996
--------------------------                                      --------------
Quinn Johnson

/s/ Richard Long              Director                          March 29, 1996
--------------------------                                      --------------
Richard Long

/s/ S. Thomas Emerson         Director                          March 29, 1996
--------------------------                                      -------------- 
S. Thomas Emerson

/s/ Patricia Onderdonk        Director                          March 29, 1996
--------------------------                                      --------------
Patricia Onderdonk                                                

/s/ Stanley H. Weiss          Director                          March 29, 1996
--------------------------                                      --------------
Stanley H. Weiss