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                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
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                                   FORM 10-KSB
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(Mark One)
[x]   Annual report under Section 13 or 15(d) of the Securities  Exchange Act of
      1934. For the fiscal year ended June 30, 1997.

[     ] Transition  report under Section 13 or 15(d) of the Securities  Exchange
      Act of 1934. For the period from to .

Commission File Number:  0-20753

                            SONICS & MATERIALS, INC.
                 (Name of Small Business Issuer in Its Charter)

                  Delaware                                 060854713
       (State or Other Jurisdiction of                 (I.R.S. Employer
       Incorporation or Organization)                  Identification No.)

     4 West Kenosia Avenue, Danbury, CT                      06810
   (Address of Principal Executive Offices)                (Zip Code)

       Issuer's Telephone Number, Including Area Code: (203) 744-4400

     Securities registered under Section 12(b) of the Exchange Act: None

         Securities registered under Section 12(g) of the Exchange Act:
                     Common Stock, par value $.03 per share
                                (Title of class)
                        Warrants to Purchase Common Stock
                                (Title of class)

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

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

The issuer's revenues for the most recent fiscal year were:  $10,827,525.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant,  based upon the closing sale price of the Company's  Common Stock on
September  24,  1997,  as reported on the Nasdaq  National  Market  System,  was
approximately  $2,802,250.   This  determination  of  affiliate  status  is  not
necessarily a conclusive determination for other purposes.

As of September 22, 1997, the issuer had outstanding  3,590,100 shares of Common
Stock,  par value $.03 per share,  and 1,805,000  Warrants to purchase shares of
Common Stock.

Transitional Small Business Disclosure Format (check one):  Yes [ ]   No [x]

                       DOCUMENTS INCORPORATED BY REFERENCE
Portions  of  the  Proxy  Statement  relating  to the  1997  Annual  Meeting  of
Stockholders are incorporated by reference in Part III.


<PAGE>
                                     PART I

Item 1.    DESCRIPTION OF BUSINESS
           -----------------------

         Sonics  &  Materials,   Inc.  (the  "Company"  or  "Sonics")   designs,
manufactures and sells (i) ultrasonic bonding equipment for the welding, joining
and  fastening  of  thermoplastic  components,   textiles  and  other  synthetic
materials,  and (ii)  ultrasonic  liquid  processors for  dispersing,  blending,
cleaning,  degassing,  atomizing  and reducing  particles as well as  expediting
chemical reactions.  To further address the needs of its customers,  the Company
introduced  two new  product  lines in  fiscal  1996,  the spin  welder  and the
vibration  welder,  both of  which  are used for the  bonding  of  thermoplastic
components.

         The  Company  was  incorporated  in New Jersey in April  1969,  and was
reincorporated  in Delaware in October  1978.  Robert S. Soloff,  its  chairman,
president and founder,  invented the ultrasonic plastic welding process early in
his career.  He has been granted nine patents in the field of power  ultrasonics
and is considered to be a pioneer in the application of ultrasonic technology to
industrial processes. Howard Deans, general manager of the Company's Ultra Sonic
Seal division,  has also invented  ultrasonic  devices and processes  covered by
patents  primarily  for packaging  and sealing.  The patents  granted to Messrs.
Soloff and Deans have expired and the  technology  related to them is now in the
public  domain and is used in part in the  development  and  manufacture  of the
Company's products.

         On  July  25,  1997,  the  Company  acquired  Tooltex,  Inc.,  an  Ohio
corporation ("Tooltex"), through a merger transaction (the "Merger"). Tooltex is
a manufacturer of automated systems used in the plastics  industry.  Pursuant to
an  Agreement  and Plan of Merger,  dated July 25, 1997 (the "Plan of  Merger"),
among Sonics, SM Sub, Inc., an Ohio corporation and a wholly owned subsidiary of
Sonics ("Sonics Sub"),  Tooltex,  and the  shareholders of Tooltex,  Tooltex was
merged with and into Sonics  Sub.  Sonics Sub then  changed its name to Tooltex,
Inc. (the "Surviving Corporation"). Under the Plan of Merger the shareholders of
Tooltex received, in exchange for 100% of the stock of Tooltex, (i) an aggregate
of 70,000 shares of Sonics  Common Stock,  par value $.03 per share (the "Common
Stock"),  (ii)  $70,000 and (iii)  options to purchase  10,000  shares of Sonics
Common Stock.

         In connection with the Merger,  the former two shareholders of Tooltex,
who had also been the  President  and Vice  President  of Tooltex,  entered into
employment   agreements  with  the  Surviving  Corporation  and  non-competition
agreements and  confidentiality  agreements  with the Surviving  Corporation and
Sonics.

         The  Company  has also formed a wholly  owned  subsidiary,  Vibra-Surge
Corporation, for the manufacture and sale of its ultrasonic surgical device. See
"Products" below.

Products

         The Company manufactures equipment in the following categories:

         Ultrasonic  Welders --  Manufactured by the Company since its founding,
this  line  of  ultrasonic  devices  welds,  bonds,  fastens,  sews  and  rivets
thermoplastic components and other synthetic materials. As new applications were
requested by industrial customers, the line has expanded over the years. Plastic
welders  and  related  devices  are used in a wide  variety  of  industries  and
applications.  These include the automotive,  computer, electronics,  packaging,
toy, home entertainment, medical device, textile and garment, and home appliance
industries.

         There are certain  advantages  to  ultrasonic  bonding in comparison to
more traditional  welding  techniques.  Uniform production is often accomplished
due to the  consistency,  speed and focusing of the energy applied to the welded
part.  The bond created  between the  components is generally  strong and clean.
Because  no  solvents,   adhesives  or  external  heat  are  involved,   adverse
environmental factors are minimized. Materials which may not be easily assembled
or  welded  by other  technologies  can be  effectively  bonded  ultrasonically.
Moreover, ultrasonic bonding is generally faster and requires less skilled labor
or training than many other methods.


<PAGE>
         Liquid  Processors  -- Liquid  processors,  which  are sold  under  the
Company's trade name "Vibra-Cell" or under private label, are ultrasonic devices
that disperse, break up, emulsify, atomize, mix and blend substances in a liquid
or  semi-liquid  media.   Substances   affected  by  liquid  processing  include
molecules,  cells, tissues, fluids,  chemicals and particles.  These devices are
available  in different  power  configurations  for low,  medium and high volume
applications  with  various  capacities,  features  and  accessories.  Operating
similarly  to  ultrasonic  bonding  systems  and  composed  of many of the  same
components,  liquid  processors  produce a  different  result  because  they are
utilized in liquid, semi-liquid and powdered media.

         Liquid   processors  are  utilized  in   biotechnology  by  scientists,
biologists, chemists and pharmacologists, primarily in laboratories for research
and testing  purposes.  The Company has extended the applications for its liquid
processors  from the research  laboratories to industrial  settings.  The liquid
processor  also  functions to process and test  materials and  substances on the
production line and in vats and tanks. In the manufacture of pharmaceuticals and
in the processing of petroleum  products and certain specialty  chemicals,  they
reduce  particle size and  facilitate  mixing;  in the  preparation of paint and
dyes,  they blend and  homogenize  materials.  In the ink  industry,  processors
disperse black carbon.  In the beverage and other  industries,  they are used to
de-gas carbonated soda, wine, beer,  spirits and solvents.  The Company's liquid
processors are also used as high-intensity  cleaners.  These ultrasonic cleaning
devices are effective in spot cleaning and removing various  contaminants,  such
as  radioactive  particles,  proteins,  rust,  blood,  and oil  from  laboratory
equipment.

         The Company also  manufactures  a liquid  processor with a spray nozzle
that atomizes fluids by producing ultra-fine sprays in precisely measured dosage
or at extremely low flow rates. Utilized in laboratories and plants,  ultrasonic
atomizers  can coat,  moisten,  or  deposit  micro-droplets  of liquid on glass,
fabric, paper, semiconductors, pharmaceuticals, ceramics or tubes. They are also
used to apply silicone and Teflon, disinfect surfaces and lubricate small parts.

         Vibration Welder -- Vibration welders are generally used to weld larger
plastic  components  together,  and have the ability to weld a wider  variety of
plastics. In this technology,  a non-vibrating part is hydraulically lifted from
below to meet a  horizontally-vibrating  part. The vibrations cause friction and
heat, melting the plastic,  and a bond is effectuated between the plastic parts.
The vibration welder that has been designed and is currently being  manufactured
by the Company is  computer-controlled  and has a power supply,  digital display
and other features similar to the Company's ultrasonic welder.

          Spin Welder -- The Company has developed  and  currently  manufactures
spin welders based on a non-ultrasonic process known as rotary friction welding.
Rotary  friction  welding  is a  bonding  technology  generally  used  only when
assembling  cylindrical or round-shaped  thermoplastic  parts. It is also better
suited  for  plastics  of a  semi-crystalline  nature and  assemblies  requiring
significant  tooling  relief.  In spin  welding,  one plastic  component is spun
against a mating  plastic  part that is held  stationary  in a nesting  fixture.
Friction  generated by the spinning action produces heat which melts the plastic
and fuses the two parts together.

         The spin welding system offered by Sonics features, among other things,
a  multi-function  programmable  controller,  RPM display,  and a two horsepower
electronic  drive motor that spins the plastic part. The spin welder is composed
of a steel frame and column with a control box.  Other  components of the system
include a pneumatic head, an automotive spindle bearing, an air brake and clutch
system, and steel plates.

        Ultrasonic Surgical Instrument -- The Company has designed and developed
an  ultrasonic  medical  device,  the  Vibra-Surge  (TM)  System  Model  VS 2120
("Vibra-Surge"),  for the removal of soft  tissue in general and  reconstructive
and plastic surgery.  Sonics filed a patent application and a preliminary patent
application  covering Vibra-Surge (TM) with the U.S. Patent and Trademark Office
on May 1, 1997. It is not certain whether patents for this  application  will be
issued or, if issued,  that such patents will offer adequate  protection or will
not be  challenged  by the  holders  of prior or other  patents  issued or to be
issued for similar purposes.  The device received 510(k) clearance from the Food
and Drug  Administration  (the "FDA") on July 25, 1997 which  permits  Sonics to
market the device.  In September 1997, Sonics created a wholly owned subsidiary,
Vibra-Surge  Corporation,  which signed an exclusive distribution agreement with
Sonimedix,  Inc.  ("Sonimedix")  on September,  19, 1997. Under the distribution
agreement,   Sonimedix  serves  as  the  exclusive   worldwide   distributor  of
Vibra-Surge  (TM).  On September 25, 1997,  Sonics  transferred  to  Vibra-Surge
Corporation all of its rights and obligations under the 510(k) FDA clearance and
patent applications and all of the technology related to Vibra-Surge (TM).



<PAGE>


Industry Background

         Management  believes  that in recent  years the market  for  ultrasonic
bonding systems has undergone steady and consistent growth. It appears that more
companies are seeking to replace metal components with  thermoplastics  in order
to reduce the weight of products or to capitalize on other special properties of
synthetic  substances.  Consequently,  ultrasonic  bonding  systems  and related
welding devices have been more extensively utilized in industrial processing and
in new assembly applications.  In contrast,  management believes that the market
for  liquid  processors  in the past has  experienced  inconsistent  growth  and
occasional  contractions.  One of the major reasons for this inconsistent growth
appears to be the  decrease  in Federal  government  spending  on  research  and
development.  These budget cutbacks have adversely affected expenditures for new
testing equipment,  including liquid processors, by university,  and medical and
industrial  laboratories.  To a certain  extent,  the past  decline  in sales of
liquid  processors  in the research  laboratory  area has been offset by new and
more extensive applications of such technology in other industries,  such as the
paint, chemical,  petroleum and beverage industries, and medical industries. The
market for liquid  processors  has only recently  stabilized and appears to have
resumed its growth.

Manufacturing and Supply

         Sonics' manufacturing  operations,  conducted at its facilities located
in Danbury, Connecticut, Aston, Pennsylvania, and Grove City, Ohio, are run on a
batch  basis in which a series of  products  move  irregularly  from  station to
station.  The Company  manufactures  its  products  pursuant to  historical  and
projected sales data as well as specific customer orders.

         Most  supplies  and  materials  required  in  the  manufacture  of  the
Company's  products are available  from many sources.  Many of its suppliers are
based in the same general locality as the Company's manufacturing operations. To
date,  Sonics has  experienced few shortages and delays  regarding  supplies and
materials. However, it is not certain that such shortages or delays may not have
an adverse impact on Sonics' operations in the future. No one supplier accounted
for more than 5% of its total  purchases for inventory made in fiscal years 1996
or 1997.  Although  management  believes that in all cases alternate  sources of
supplies can be located,  a certain amount of time would  inevitably be required
to find substitutes.  During any such interruption in supplies,  the Company may
have to curtail  the  production  and sale of its  devices  and  systems  for an
indefinite period.

         Sonics is not a party to any  formal  written  contract  regarding  the
delivery of its  supplies  and  materials.  It  generally  purchases  such items
pursuant  to  written  purchase  orders  of  both  the  individual  and  blanket
varieties. Blanket purchase orders usually entail the purchase of larger amounts
of items at fixed prices for delivery and payment on specific dates ranging from
two months to one year.

         Sonics has  qualified  its  Connecticut  facility  to meet the  quality
management and assurance standards of an international  rating organization (ISO
9001).  ISO 9001  certification  indicates  that the  Company  has  successfully
implemented a quality assurance system that satisfies this standard.  Sonics has
also  obtained CE approvals,  which are now  necessary for sales in Europe,  for
many models of its ultrasonic welder and liquid processor. It is working towards
CE approvals for its other product lines.

Maintenance and Service

         The Company offers warranties on all its products,  including parts and
labor,  that  range  from  one year to three  years  depending  upon the type of
product concerned.  For the fiscal years ended June 30, 1996 and 1997,  expenses
attributable to warranties were approximately $63,000 and $77,000, respectively.
Sonics performs repair services on all of its products sold domestically  either
at  its  Connecticut  or  Pennsylvania  facilities  or  at  customer  locations.
Servicing of foreign sales is usually handled by  distributors  abroad or in the
Company's  Swiss  branch  office  regarding  its devices  sold in Europe.  These
services are performed upon specific  order without  contracts at various rates.
The Company usually  charges for the time that its employees  expend on the task
and the cost of the  materials or parts  involved in the repair.  For the fiscal
years  ended June 30, 1996 and 1997,  the  Company  had income of  approximately
$358,000 and $398,000,  respectively,  for  out-of-warranty  services performed.
Company  devices  generally have a long operating  life, and Sonics has repaired
machines manufactured by it that are more than 26 years old.

<PAGE>
Sales and Marketing

         Sonics  generally  markets and sells its products in the United  States
and abroad through a network of sales  representatives  and  distributors to end
users and original equipment  manufacturers  ("OEMs"). In the United States, the
Company and its Ultra Sonic Seal division ("USS") utilize approximately 50 sales
representatives in 48 states throughout the country.  The Company's wholly owned
subsidiary,  Tooltex, utilizes two sales representatives throughout the Midwest.
In the overseas  market,  it relies on approximately 66 distributors and several
sales  representatives  to distribute  its products in 49  countries.  The areas
covered by these third parties  include North and South America,  the Middle and
Far East, Europe and Australia.

Sales Representatives

         The Company's  relationship with its sales  representatives  is usually
governed by a written contract which is generally  terminable by either party on
30 days prior  notice.  The contract  provides  for  exclusive  territorial  and
product  representation and commissions payable to them on their sales depending
on  whether  basic  units or  accessories  are  involved  and  typically  covers
ultrasonic bonding systems and liquid processors.  OEM sales made by the Company
are  excluded   from  the   commission   arrangements.   Generally,   the  sales
representatives  do not purchase for their own account,  but merely sell Sonics'
products on the Company's  behalf.  They also may represent other  manufacturers
but generally not those  competitive  with the  Company's  products.  Except for
Tooltex,  which  accounted  for 10.1% and 6.0% in fiscal  1996 and fiscal  1997,
respectively,  no one sales representative accounted for more than 5% of Sonics'
sales in either fiscal year 1996 or 1997. Tooltex was acquired by the Company on
July 25, 1997. The loss of such  representatives  representing  in the aggregate
significant sales may have a material adverse impact on the Company's business.

         USS sells its plastic  welder under its division  name. USS maintains a
network of sales  representatives  in the United States different from those for
Sonics'  main  product  lines.  The terms of these  arrangements  with its sales
representatives  are similar to the terms Sonics  negotiates  with its own sales
representatives.

         The Company's  wholly owned  subsidiary,  Tooltex  sells its automated
systems under its corporate name,  Tooltex,  Inc.  Tooltex's sales  organization
consists of two direct sales personnel, as well as two sales representatives.

Distributors

         Sales of Sonics'  products  to  distributors  are also  generally  made
pursuant to written contracts. Under such contracts, distributors provide repair
service and are  prevented  from selling  devices  competitive  to the Company's
products.  Generally,  payments must be made in U.S.  dollars  within 30 days of
delivery of the  product.  Distribution  arrangements  are either  exclusive  or
non-exclusive  and are cancelable upon 30 days notice.  The contracts  generally
exclude private label sales made by Sonics in the  distributor's  territory even
if the  relationship is of an exclusive type and typically  covers sales of both
ultrasonic  bonding  systems and liquid  processor  lines.  The Company now also
offers both its spin welder and  vibration  welder to its sales  representatives
and distributors. The Company also sells these products directly to end-users or
under private  label.  The Company  usually  grants  discounts to  distributors,
depending on the product and quantity  sold.  No one  distributor  accounted for
more than 5% of Sonics'  sales in either  fiscal year 1996 or 1997.  The loss of
such  distributors  in  substantial  numbers  or at key  locations  could have a
material adverse effect on the Company's  business.  USS maintains  separate but
similar arrangements with at least three foreign distributors abroad.

         The Company  promotes the sale of its products through direct mailings,
trade shows, product literature, press releases,  advertising in trade magazines
and  listings in  catalogs.  The  Company  occasionally  engages in  cooperative
advertising with some of its distributors.

         Sonics' wholly owned subsidiary, Vibra-Surge Corporation, will sell its
ultrasonic  surgical  device  through its exclusive  distributor of the product,
Sonimedix. Under the distribution contract,  Sonimedix is prevented from selling
devices competitive to the ultrasonic surgical instrument.  Payment must be made
within 60 days of receipt of the product by the end user.  The  contract  may be
canceled by either party if certain terms and conditions are not satisfied.


<PAGE>

Customers

         Sonics  sells  its  products,   directly  or  indirectly,  to  numerous
customers,   ranging  in  size  from  small   companies  to  large  Fortune  100
corporations.  Its customers are end-users,  original  equipment  manufacturers,
system integrators and resellers as well as distributors.  Many of its customers
are repeat purchasers. None of its customers represented more than 5% of Sonics'
sales for fiscal 1996 or 1997.

International Operations

         The Company's international  activities are an important portion of its
business. Approximately 33% and 37% of its sales for fiscal years 1996 and 1997,
respectively,  are  attributable  to sales of its  products  outside  the United
States. The Company also operates a branch office in Gland, Switzerland where it
sells and services its ultrasonic devices for the European market except for the
United Kingdom.

         Internationally,  the Company sells its  ultrasonic  products under its
own  label  to end  users  and  distributors  or  under  the  trade  name of the
distributor.  In most cases, Sonics' devices are shipped to foreign distributors
and end users as completed units.  However,  in certain  situations,  especially
with regard to  distributors  of  ultrasonic  welders  located in Asia and South
America,  the  Company's  systems are made  available in kit form and  assembled
there. Kits frequently  contain all components for devices but in some instances
only a portion of the requisite components is provided.  For some foreign sales,
no written distribution arrangement exists.

Competition

         The Company  competes in each of its markets against a variety of other
concerns,  many of which  are  larger  and have  greater  financial,  technical,
marketing,  distribution  and other  resources  than Sonics.  It competes on the
bases of service, performance, reliability, price and delivery.

         Prior to making a sale,  the Company  will  expend  time and  resources
exploring  whether it can profitably  handle a new application for potential and
existing  customers.  Generally,  the Company  receives no compensation for this
pre-sale  activity  except when special tooling is required and payment for such
services only occurs when and if product sales are consummated.  Like nearly all
manufacturers  in this industry,  the Company  invests  heavily in this pre-sale
examination of new  applications.  Such examination  represents  another area in
which such manufacturers  compete, and those with greater resources and manpower
may possess a competitive advantage.

         With respect to its ultrasonic bonding equipment, the Company
encounters competition from Branson Ultrasonics Co.
("Branson"), a subsidiary of Emerson Electric Co., Dukane Corp. ("Dukane"),
Herrmann Ultrasonics, Inc., Forward
Technology Industries, Inc. and other smaller manufacturers. The two dominant
companies in this area are Branson and
Dukane.  Some of these competitors also offer spin and vibration devices as
 well as ultrasonic ones.

         In the ultrasonic  liquid  processor  market,  the Company's  principal
competitors are Branson and Misonix Inc. Management believes that in this market
Sonics has the largest market share.

         The   Company's   ultrasonic   surgical   instrument   has  three  main
competitors, Mentor Corporation, Lysonix Inc., and Wells-Johnson Corporation. No
one  company  dominates  this  market.   However,   the  Company's  three  major
competitors have entered the market place prior to Sonics.

Backlog

         As of June 30, 1997, the Company's backlog was approximately $1,195,000
as compared  with a backlog of  $1,466,000  as of June 30, 1996. No one customer
accounted for more than 10% of such backlog at June 30, 1997.

         Substantially all of the Company's backlog figures are based on written
purchase orders executed by the customer and involve product  deliveries and not
engineering services. All orders are subject to cancellation.

<PAGE>
Research and Development

         The  Company   maintains  an  engineering  staff  responsible  for  the
improvement  of existing  products,  modification  of products to meet  customer
needs  and  the  engineering,  research  and  development  of new  products  and
applications.   Engineering   and  research  and   development   expenses   were
approximately $372,000 for fiscal 1996, and $418,000 for fiscal 1997.

Intellectual Property

         Proprietary  information  and know-how are  important to the  Company's
success.  Sonics holds no active  patents but has trademark  protection  for its
"Vibra-Cell"  trade  name and its  "Vibra-Surge"  trade  name.  There  can be no
assurance that others have not developed, or will not develop, independently the
same or similar  information  or obtain and use  proprietary  information of the
Company.  Sonics has  obtained  written  assurances  from its  employees,  sales
representatives and distributors under confidentiality  agreements regarding its
proprietary information.

         On February 23, 1996, the Company filed a patent  application  with the
U.S.  Patent and  Trademark  office for one of its bonding  machines.  On May 1,
1997,  the  Company  filed  a  patent   application  and  a  preliminary  patent
application  with  the  U.S.  Patent  and  Trademark  Office  covering  its  new
ultrasonic surgical instrument.  The Company cannot predict whether patents will
be granted or the extent of  protection  which would be offered by a patent,  if
granted.

         On  September  25,  1997,  Sonics   transferred  to  its  wholly  owned
subsidiary,  Vibra-Surge  Corporation,  the  "Vibra-Surge"  trade name,  and its
rights and obligations under the Vibra-Surge  patent application and preliminary
patent application. See "Products" above.

Government Regulation

         Sonics'  bonding and liquid  processor lines generally are not governed
by specific legal rules and laws. The Company's  ultrasonic surgical instrument,
however, is subject to a variety of FDA regulations  relating to its manufacture
and sale in the  United  States.  The FDA has rules  which  govern  the  design,
manufacture,  distribution,  approval and  promotion  of medical  devices in the
United States.

         Various states and foreign  countries in which Sonics' products are, or
may be, sold may impose additional regulatory requirements,  such as the Medical
Device Directive in the European Common Market.

         On May 1, 1997,  Sonics filed a patent  application  and a  preliminary
patent  application for its ultrasonic  surgical  instrument,  Vibra-Surge.  The
Company has obtained 510(k)  clearance from the FDA which permits the Company to
market the device for aiding the removal of soft  tissue in general  surgery and
plastic  and  reconstructive  surgery.   Vibra-Surge  has  signed  an  exclusive
distribution  agreement  with  Sonimedix  for  the  sale  and  marketing  of its
ultrasonic surgical instrument.

         Sonics'  sales  abroad may make it subject  to other U.S.  and  foreign
laws.  The Company and its agents are also governed by the  restrictions  of the
Foreign  Corrupt  Practices  Act of 1977,  as  amended  (the  "FCPA").  The FCPA
prohibits the promise or payments of any money,  remuneration  or other items of
value to foreign government officials,  public office holders, political parties
and others  with regard to  obtaining  or  preserving  commercial  contracts  or
orders.   Sonics  has  urged  its  foreign   distributors  to  comply  with  the
requirements of the FCPA. All these  restrictions  may hamper the Company in its
marketing efforts abroad.

         In addition,  other federal, state and local agencies,  including those
in the  environmental,  fire hazard control,  and working conditions areas could
have a material adverse affect upon the Company's ability to do business. Sonics
is not involved in any pending or  threatened  proceedings  which would  require
curtailment  of,  or  otherwise   restrict,   its  operations  because  of  such
regulations and compliance with applicable  environmental or other  regulations.
None of these  laws has had a material  effect  upon its  capital  expenditures,
financial condition or results of operations.

<PAGE>
Employees

         As of September 22, 1997, the Company, including its subsidiaries,  had
118  full-time  employees  including  its  officers,  of whom 69 were engaged in
manufacturing,  three in repair services,  eight in administration and financial
control, 16 in engineering and research and development, and 22 in marketing and
sales.

         None  of  Sonics'  employees  is  covered  by a  collective  bargaining
agreement or represented  by a labor union.  Sonics  considers its  relationship
with its employees to be good.

         The  design  and  manufacture  of  the  Company's   equipment  requires
substantial technical capabilities in many disparate disciplines, from mechanics
and computer science to electronics and mathematics.  While management  believes
that the capability and experience of its technical employees compares favorably
with other similar  manufacturers,  there can be no assurance that it can retain
existing  employees or attract and hire the highly capable  technical  employees
necessary in the future on favorable terms, if at all.

         Any  statements  in this  Annual  Report  that  are not  statements  of
historical fact are  forward-looking  statements that are subject to a number of
important  risks and  uncertainties  that could cause  actual  results to differ
materially.  Specifically,  any forward looking statements in this Annual Report
related  to  the  Company's  objectives  of  future  growth,  profitability  and
financial returns are subject to a number of risks and uncertainties, including,
but not  limited  to,  risks  related to a growing  market  demand  for  Sonics'
existing and new products,  continued growth in sales and market share of Sonics
and its USS products, pricing, market acceptance of existing and new products, a
fluctuation in the sales product mix, general economic  conditions,  competitive
products, and product and technology development. There can be no assurance that
such  objectives  will be achieved.  The Company's  objectives of future growth,
profitability  and  financial  returns are also  subject to the  uncertainty  of
Vibra-Surge  Corporation  being  able  to  successfully  market  its  ultrasonic
surgical device.  It is also uncertain  whether a patent will be granted for the
Company's  ultrasonic  surgical device, or whether any related patent litigation
may  hinder  the  Company's  ability  to market the  device.  In  addition,  the
Company's objectives of future growth, profitability,  and financial returns are
also subject to the  uncertainty of the growth and  profitability  of its wholly
owned subsidiary, Tooltex.

Item 2.    Description of Property
           -----------------------

         The Company's  primary  manufacturing and office facility is located in
Danbury, Connecticut in four separate steel and cinder block buildings, three of
which are on the same parcel of land. These  facilities are considered  adequate
for its current  needs,  but Sonics has  determined  that the facilities are not
suitable for Sonics'  anticipated  requirements.  As a result,  on September 19,
1997,  Sonics  purchased a 63,000  square foot cement and cinder block  building
located at 55A Church Hill Road,  Newtown,  Connecticut (the "Newtown Property")
for  $1,265,000.  The Company plans to renovate the building and consolidate its
four  Connecticut  facilities  in the Newtown  Property  which will serve as the
Company's primary manufacturing facility and corporate headquarters. The Company
anticipates  that  the  cost  of  the  improvements  to  the  property  will  be
approximately  $1.2  million.  The  Company  intends  to move  into the  Newtown
Property  by May 1, 1998.  Sonics may lease  12,000  square  feet in the Newtown
Property to an unrelated third party. Although no party has yet been identified,
the Company  believes  it will be able to find a lessee,  if it chooses to lease
the property because there is minimal  competition in Newtown for similar space.
The Newtown Property is presently  insured against fire and other casualty in an
amount the Company believes to be adequate.

         The Newtown Property is encumbered by a first mortgage lien in favor of
a bank (the "Bank"), which secures three credit facilities, each dated September
19, 1997: (i) a bridge loan in the original  principal amount of $1,600,000 (the
"Bridge  Loan");  (ii) a  revolving  line of  credit  facility  in the  original
principal  amount of up to $1,500,000  (the "Line of Credit");  and (iii) a term
loan in the original principal amount of $427,000 (the "Term Loan").

         The Bridge Loan bears  interest at the Bank's  base  lending  rate plus
one-half  percent.  The principal balance of the Bridge Loan, which at September
25, 1997 was $1,600,000, will mature and be due and payable upon the earliest to
occur of (i) the written demand of the Bank,  (ii) the  consummation  of the IRB
Loan (as  hereafter  defined),  or (iii)  December 31, 1997.  Subject to certain
terms  and  conditions,  the Bank has  agreed  to make a  tax-exempt  industrial
development  loan (the "IRB Loan") in the  aggregate  principal  amount of up to
$2,945,000 to be issued through the Connecticut Development Authority,


<PAGE>
the
proceeds of which will be used to refinance  the Bridge Loan,  pay any remaining
costs of preparing  the Newtown  Property for Sonics' use and  occupancy and for
purchasing or manufacturing  equipment.  Sonics expects to close the IRB Loan on
or before  December 31, 1997. The principal of the Bridge Loan may be prepaid in
whole or in part, without premium or penalty, at any time.

         The Company does not intend to use the proceeds from the Line of Credit
or the Term Loan to acquire or improve the  Newtown  Property.  For  information
about such  borrowings,  see  "Management's  Discussion  and Analysis or Plan of
Operations-Liquidity and Capital Resources."

         The  following  table  lists the  Company's  offices by  location as of
September 25, 1997, all of which are leased, and certain other information:


<TABLE>
<S>                                         <C>                   <C>                         <C>
                                              Approximate Total                               Approximate Current
                                               Area Leased in     Expiration Date of Lease      Annual Rent (1)
                                               Square Footage
                                            -------------------   --------------------------- ----------------------
Kenosia Ave., Danbury, Connecticut                    23,000         April 30, 1998                 $156,500
Shelter Rock Road, Danbury, Connecticut               10,000         April 30, 1998                   45,000
Aston, Pennsylvania                                    4,900         September 30, 2002               40,300
Naperville, Illinois                                   2,000         December 31, 1997                14,400
Gland, Switzerland                                     3,000         January 31. 1998 (2)             13,800
Grove City, Ohio(3)                                   13,600         July 26, 2002(2)                 77,900

---------------------------
</TABLE>

(1) Includes proportionate cost of utilities,  repairs,  cleaning, snow removal,
    taxes and insurance.

(2)   Contains renewal option as listed below:

         Gland Switzerland...........................1 year
         Grove City, Ohio ...........................5 years

(3)  Lease is with BPT,  Limited,  the sole  partners  of which  are the  former
     shareholders and current President and Vice President of Tooltex.

         The Company believes that it has adequate insurance coverage for all of
its  leased  properties.   The  Company  also  leases  certain  automobiles  and
equipment.

Item 3.    Legal Proceedings
           -----------------

         There is no pending or  threatened  material  litigation  or proceeding
against the Company.


<PAGE>


Item 4.    Submission of Matters to a Vote of Security-Holders
           ---------------------------------------------------

         Not applicable.

                                     PART II

Item 5.    Market for Common Equity and Related Stockholder Matters
           --------------------------------------------------------

         Since  February  27,  1996,  the Common  Stock and Warrants to purchase
Common  Stock of the Company  have been traded and quoted  through the  National
Association of Securities  Dealers Inc.  National Market System ("NASDAQ") under
the symbols "SIMA" and "SIMAW", respectively. The following table sets forth the
range of high and low bids for the  Company's  Common Stock and Warrants for the
periods indicated as reported by NASDAQ.

<TABLE>
<S>                         <C>                  <C>                  <C>                 <C>
                                           Stock                                    Warrants
                            -------------------------------------     -------------------------------------
    Quarter Ended                High                  Low                 High                 Low
                            ----------------     ----------------     ----------------    -----------------

March 31, 1996                   11 1/4                6  3/4                5                      3/4

June 30, 1996                    13                   11  7/8                6  5/8              4

September 30, 1996               14 1/2               10 13/16               7  1/4              4  1/4

December 31, 1996                13 1/2                3  3/4                6  1/4                 1/2

March 31, 1997                    8 1/2                4                     2  1/2                11/16

June 30, 1997                     6 1/4                2  7/8                1 11/16                3/8
</TABLE>

         The  prices  presented  in the table are bid  prices,  which  represent
prices between  broker-dealers and do not include retail mark-ups and mark-downs
or any  commission to the dealer.  The prices  presented may not reflect  actual
transactions.

         On  September  22, 1997,  the closing  price of the Common Stock of the
Company,  as reported by NASDAQ,  was $2 3/4 per share, and the closing price of
the Warrants, as reported by NASDAQ was $5/8 per Warrant. On September 22, 1996,
the Company had 28 stockholders of record and 13 Warrant holders of record.  The
Company has been  informed by its  registrar  and transfer  agent that these are
holders in nominee  name.  The Company  believes  that the number of  beneficial
holders is greater.

         The Company  intends to follow a policy of  retaining  any  earnings to
finance the  development  and growth of its business.  Accordingly,  it does not
anticipate  other  payments of cash  dividends in the  foreseeable  future.  The
payment  of  dividends,  if any,  rests  within the  discretion  of the Board of
Directors and will depend upon, among other things, the Company's earnings,  its
capital requirements and its overall financial condition.

         In connection with the Company's  initial public offering,  on June 20,
1996 the Company filed with the Securities and Exchange Commission (the "SEC") a
Form SR reporting the use of proceeds from such  offering.  Additional  Forms SR
were  subsequently  filed by the  Company.  There  have been no  changes  to the
information filed in the most recent Form SR.

Item 6.    Management's Discussion and Analysis or Plan of Operation
           ---------------------------------------------------------

         The following  discussion and analysis  provides  information which the
Company's  management believes is relevant to an assessment and understanding of
the Company's results of operations and financial  condition.  All references to
full years are to the  applicable  fiscal year of the Company.  This  discussion
should be read in  conjunction  with the financial  statements and notes thereto
included elsewhere herein.

<PAGE>
Results of Operations

Year Ended June 30, 1997 Compared to Year Ended June 30, 1996

         Net  Sales.  Net  sales  for the year  ended  June 30,  1997  increased
$1,451,000,  or 15.5%  over the prior  year.  This is  primarily  the  result of
increased  sales volume for the vibration  welder product line. The Company also
experienced  increased  volume for the ultrasonic  welder product line. In March
1997, the Company  implemented a slight price increase of between three and five
percent in the ultrasonic welder line in March, 1997 and in the liquid processor
product line in April, 1997

         Cost of Sales.  Cost of sales  increased  approximately  $1,319,000  or
25.9% over the prior year.  As a percentage  of sales,  cost of sales  increased
from 54.3% to 59.2%. This increase in cost of sales is primarily attributable to
increased  costs  associated  with the  vibration  welder in the  first  year of
production.  Initial costs  associated with the startup of the vibration  welder
line  caused  the cost of these  products,  as a  percentage  of their net sales
during this  period,  to be higher than the Company has  experienced  with other
product lines.  The Company was not able to pass these increased costs on to the
customer.  The  impact  of the  vibration  welder  upon  cost of sales  was most
significant  in the fourth  quarter.  If the  Company  had not made any sales of
vibration welders during the 1997 fiscal year, cost of sales would be only 55.6%
of sales, only slightly higher than the prior year.

         Selling  Expenses.  Selling  expenses  for the year ended June 30, 1997
increased by approximately  $325,000 or 11.5% over fiscal 1996. This increase is
primarily  attributable  to the  increase in sales.  As a  percentage  of sales,
selling expense decreased  slightly from 30.2% in fiscal 1996 to 29.2% in fiscal
1997.

         General  and  Administrative   Expenses.   General  and  administrative
expenses for the year ended June 30, 1997 increased by approximately $235,000 or
39.9%  from the  prior  year.  This  increase  can be  primarily  attributed  to
increased  expenses  associated with being a publicly  traded  company,  such as
professional fees,  investor relations,  printing,  and directors' and officers'
insurance expenses.

         Research and Development  Expenses.  Research and development  expenses
increased by  approximately  $46,000 in fiscal 1997. This represents an increase
of approximately 12.5%. The primary factor that contributed to this increase was
the planned  addition of one research and development  engineer,  as part of the
expansion of research and development efforts.

         Interest  Expense.  Total  interest  expense for fiscal 1997  decreased
$20,000 or 20.4%.  This is, in large part,  due to decreased  borrowings  on the
Company's  line of credit  with its bank.  In fiscal  1996,  the  average  daily
balance  under  this line of credit  was  approximately  $661,000,  compared  to
approximately $355,000 in fiscal 1997. In the second quarter of fiscal 1997, the
Company  reduced  borrowings on its line of credit by utilizing a portion of the
proceeds from its initial public offering.

         Income  Taxes.  Income taxes  increased by $27,000 or 342.1% due to the
Company  recording  an income tax  benefit of $91,000 in fiscal  1996.  This tax
benefit  resulted  from the  recognition  of a Federal  deferred  tax asset upon
conversion of the Company from an  S-corporation  to a C-corporation  due to the
completion  of the  initial  public  offering.  This  resulted in an increase in
fiscal 1997 that was offset by lower taxes  resulting from lower earnings in the
current fiscal year.

Year Ended June 30, 1996 Compared to Year Ended June 30, 1995

         Net  Sales.  Net  sales  for the year  ended  June 30,  1996  increased
$801,000 or 9.3% over the prior year.  This is primarily the result of increased
sales volume for the liquid  processor  product line, as well as increased sales
volume generated by the Company's  ultrasonic bonding product line. In addition,
the Company implemented a limited price increase for some of its products during
the current fiscal year.

         Cost of Sales.  Cost of sales for the period  increased from $4,228,000
in fiscal 1995 to  $5,092,000  in fiscal 1996.  This  represents  an increase of
approximately  20.4%.  As a percentage of sales,  cost of sales  increased  from
49.3% in fiscal  1995 to 54.3% in fiscal  1996.  A  substantial  portion of this
increase is attributable to increased sales. The remaining increase is primarily
attributable  to the  introduction  of two  new  product  lines  as  well as the
introduction  of the new  generation  of  ultrasonic  welders,  in fiscal  1996.
Initial  costs  associated  with the  startup  of the Spin  Welder  line and the
Vibration  Welder line caused the cost of these  products,  as a  percentage  of
their net sales  during the start-up  period,  to be higher than the Company has
experienced  with other  product  lines.  The Company was not able to pass these
increased costs on to the customer.  A fluctuation in the sales product mix also
contributed to the increase.  Since not all products have the same markup due to
market  considerations,  the cost of sales may fluctuate depending on the actual
sales mix for the period.

         Selling  Expenses.  Selling  expenses  for the year ended June 30, 1996
increased  $382,000 or 15.6% over the prior year. A  substantial  portion of the
increase is attributable to increased sales. The primary factor  contributing to
the  remaining  portion of the  increase  is the costs  associated  with two new
product  lines,  the  vibration  welder  and the  spin  welder.  These  costs of
approximately $141,000 include the design and printing of product literature, as
well as associated  personnel expenses.  The Company also incurred an additional
expense relating to the design and printing of a new brochure for its ultrasonic
welders.  The  increase  is also  attributable  to $56,000 of  increased  travel
expenses,  including travel  associated with the Company's  international  sales
meeting held in November of 1995, and expenses related to the Company's  liaison
to the Korean marketplace.

         General  and  Administrative   Expenses.   General  and  administrative
expenses for the year ended June 30, 1996 decreased by approximately  $87,000 or
12.9% from the prior year.  In fiscal  1995,  the Company  paid its  shareholder
approximately  $160,000 to cover his personal tax liability  resulting  from the
Company's  sub-chapter S status. No such payments were made in fiscal year 1996.
Offsetting the elimination of the bonus was an increase of approximately $80,000
in  professional  fees.  This increase is primarily  attributable  to legal fees
associated with the litigation related to the Company's dispute with Sonique and
Mentor which has been settled.

         Research and Development  Expenses.  Research and development  expenses
increased by  approximately  $23,000 in fiscal 1996. This represents an increase
of  approximately  6.6%. The increase is primarily  attributable  to expenses of
approximately  $46,000  incurred in fiscal  year 1996  relating to CE testing of
Sonics' existing ultrasonic equipment. CE approval is required for all equipment
shipped  into  countries  belonging  to the  European  Community.  The  increase
resulting from the CE testing was partially offset by a decrease in research and
development materials.

         Total  Operating  Expenses.  Total  operating  expenses for fiscal 1996
increased  $211,000 or 5.9% over fiscal 1995.  This  increase is a result of the
factors  discussed above offset by a one-time charge to compensation  expense in
fiscal 1995  resulting from the  repurchase  and  cancellation  of stock options
formerly held by two officers of the Company.

         Interest  Expense.  Total  interest  expense for fiscal 1996  increased
$87,000 or 680%.  This is due to increased  borrowings on the Company's  line of
credit with its bank. In fiscal 1995,  the average daily balance under this line
of credit was  approximately  $141,000,  compared to  approximately  $661,000 in
fiscal 1996.

         Income  Taxes.  Income taxes  decreased by $53,000 or 117.8% due to the
Company  recording  an income  tax  benefit of $91,000  for the  recognition  of
Federal  deferred tax asset upon conversion of the Company from an S-corporation
to a C-corporation  due to the completion of the initial public  offering.  This
amount has been offset by an income tax provision of $50,000 based on the income
earned by the Company from the date of the offering.

Liquidity and Capital Resources

         As of June  30,  1997,  the  Company's  working  capital  decreased  to
$5,942,000 from $6,010,000 at the end of fiscal 1996. This represents a decrease
of approximately 1%.

         In fiscal  1997,  the Company  generated  approximately  $1,363,000  in
proceeds  from the sale of certain short term  investments.  During fiscal 1997,
the Company  converted a $500,000 demand note payable to the bank to a five year
term note payable.  It made principal  payments of approximately  $369,000.  The
Company used  approximately  $774,000 in  operating  activities.  An  additional
$204,000 was invested in new equipment.

         On September 19, 1997, the Company entered into three facilities with a
bank (the  "Bank"),  each of which is  secured by a first  mortgage  lien on the
Newtown  Property  (see  "Description  of  Property"):  (i) a Bridge Loan in the
original

<PAGE>
principal amount of $1,600,000;  (ii) a Line of Credit in the original principal
amount of up to  $1,500,000;  and (iii) a Term  Loan in the  original  principal
amount of $427,000.

         The Bridge Loan bears  interest at the Bank's  base  lending  rate plus
one-half  percent.  The principal balance of the Bridge Loan, which at September
25, 1997 was $1,600,000, will mature and be due and payable upon the earliest to
occur of (i) the written demand of the Bank,  (ii) the  consummation  of the IRB
Loan, or (iii) December 31, 1997.  Subject to certain terms and conditions,  the
Bank has agreed to make an IRB Loan in the aggregate  principal  amount of up to
$2,945,000  to be issued  through the  Connecticut  Development  Authority,  the
proceeds of which will be used to refinance  the Bridge Loan,  pay any remaining
costs of preparing  the Newtown  Property for Sonics' use and  occupancy and for
purchasing or manufacturing equipment. Sonics expect to close the IRB Loan on or
before  December  31, 1997.  The  principal of the Bridge Loan may be prepaid in
whole or in part, without premium or penalty, at any time.

         The Line of Credit is used by the Company for working capital. The Line
of Credit bears interest,  at Sonics' option, at the Bank's base lending rate or
LIBOR  plus  2.5%.  Advances  under the Line of Credit  are at the  Bank's  sole
discretion.  The  entire  principal  balance  of the  Line of  Credit,  which at
September  25, 1997 was  $992,000,  will mature and be due and payable  upon the
demand of the Bank.  The  borrowings  under the Line of Credit have been used to
repay a line of credit with another bank in the amount of  $1,005,101.  The line
of credit with the other bank bore  interest at such bank's loan pricing rate of
interest  plus  one-half  percent.  The  principal  of the Line of Credit may be
prepaid in whole or in part,  without  premium or penalty,  at any time.  In the
event of the  prepayment  of any portion of the Line of Credit during any period
in which the Line of Credit  bears  interest  at a LIBOR  rate,  Sonics  will be
obligated  to pay  the  Bank a  breakage  fee  relating  to the  LIBOR  interest
component. The Line of Credit is also secured by all of the Company's assets.

         The proceeds of the Term Loan were used to pay in full a term loan with
another bank with interest and principal totaling  $427,000.  The term loan with
the other bank bore  interest at such bank's loan pricing rate of interest  plus
one-half percent.  The current outstanding  principal amount of the Term Loan is
$427,000,  which bears interest,  at Sonics' option,  at the Bank's base lending
rate or LIBOR plus 2.5%. The principal of the Term Loan must be paid in 36 equal
monthly  installments  of  $11,861.11,  commencing on November 1, 1997,  and the
entire remaining principal balance will mature and be due and payable on October
1,  2000.  The terms and  conditions  under  which  Sonics may prepay all or any
portion of the Term Loan are the same as for the Line of Credit discussed above.
The Term Loan is also secured by all of the Company's assets.

Impact  of Inflation

         The Company does not believe that inflation  significantly affected its
results of operations for the 1997 fiscal year.

Item 7.    Financial Statements
           --------------------

         The response to this item is submitted in this report under the heading
"Financial Statements" and is incorporated herein by reference.

Item 8.    Changes in and Disagreements With Accountants on Accounting and
           Financial Disclosure
           ---------------------------------------------------------------

         Not applicable.

                                    PART III

Item 9.    Directors, Executive Officers, Promoters and Control Persons;
           Compliance with Section 16(a) of the Exchange Act
           -------------------------------------------------------------

         Information required by this Item 9 is incorporated herein by reference
from the  definitive  proxy  statement of Sonics to be filed with the Securities
and Exchange  Commission  ("SEC")  within 120 days  following the end of Sonics'
fiscal  year ended June 30,  1997,  or October  28,  1997,  relating to its 1997
Annual Meeting of Stockholders.


<PAGE>
Item 10.   Executive Compensation
           ----------------------

         Information  required  by  this  Item  10  is  incorporated  herein  by
reference from the definitive proxy statement of Sonics to be filed with the SEC
within 120 days following the end of Sonics' fiscal year ended June 30, 1997, or
October 28, 1997, relating to its 1997 Annual Meeting of Stockholders.

Item 11.   Security Ownership of Certain Beneficial Owners and Management
           --------------------------------------------------------------

         Information  required  by  this  Item  11  is  incorporated  herein  by
reference from the definitive proxy statement of Sonics to be filed with the SEC
within 120 days following the end of Sonics' fiscal year ended June 30, 1997, or
October 28, 1997, relating to its 1997 Annual Meeting of Stockholders.

Item 12.   Certain Relationships and Related Transactions
           ----------------------------------------------

         Information  required  by  this  Item  12  is  incorporated  herein  by
reference from the definitive proxy statement of Sonics to be filed with the SEC
within 120 days following the end of Sonics' fiscal year ended June 30, 1997, or
October 28, 1997, relating to its 1997 Annual Meeting of Stockholders.

Item 13.   Exhibits and Reports on Form 8-K
           --------------------------------

(a)   Exhibits.
         3(i)       Certificate of Incorporation of the Registrant, as amended
                    (incorporated by reference from Exhibit 3.1
                    of Amendment No. 3 to Registration Statement No. 33-96414).
         3(ii)      Amended By-laws of the Registrant (incorporated by reference
                    from Exhibit 3.2 of Registration
                    Statement No. 33-96414).
         10(i)      Form of Employment Agreement between the Registrant and
                    Robert S. Soloff (incorporated by reference
                    from Exhibit 10.1 of Registration Statement No. 33-96414).
         10(ii)     1995 Incentive Stock Option Plan and form of Stock Option
                    Agreement (incorporated by reference from
                    Exhibit 10.3 of Registration Statement No. 33-96414).
         10(iii)    Original Office Lease and Amendments  between the Registrant
                    and  Nicholas  R.  DiNapoli,  Jr. DBA  DiNapoli  Holding Co.
                    (Danbury,  CT)  (incorporated by reference from Exhibit 10.4
                    of Registration Statement No.
                    33-96414).
         10(iv)     Lease between Registrant and Aston Investment Associates
                    (Aston, PA) (incorporated by reference from
                    Exhibit 10.5 of Registration Statement No. 33-96414).
         10(v)      Amended lease between Registrant and Robert Lenert
                    (Naperville, IL) (incorporated by reference from
                    Exhibit 10.6 of Amendment No. 4 to Registration Statement
                    No. 33-96414).
         10(vi)     Lease between Registrant and Janine Berger (Gland,
                    Switzerland) (incorporated by reference from
                    Exhibit 10.7 of Registration Statement No. 33-96414).
         10(vii)    Form of Sales Representation Agreement (incorporated by
                    reference from Exhibit 10.8 of Registration
                    Statement No. 33-96414).
         10(viii)   Form of Sales Distribution Agreement (incorporated by
                    reference from Exhibit 10.9 of Registration
                    Statement No. 33-96414).
         10(ix)     Consulting Agreement dated October 17, 1995 between the
                    Registrant and Alan Broadwin (incorporated by
                    reference from Exhibit 10.10 of Amendment No. 3 of
                    Registration Statement No. 33-96414).
         10(x)      Agreement  and Plan of  Merger,  dated as of July 25,  1997,
                    among the Registrant,  SM Sub, Inc., Tooltex,  Inc., and the
                    persons  designated as the shareholders  thereon  (excluding
                    schedules  and  annexes).  A list of omitted  schedules  and
                    annexes  appears on pages iv and v of the Agreement and Plan
                    of  Merger.  The  Registrant  hereby  undertakes  to furnish
                    supplementally  a copy of any omitted  schedule and annex to
                    the Commission upon request. (incorporated by reference from
                    Exhibit  2(a) of the  Registrant's  Form 8-K dated  July 25,
                    1997).
         10(xi)     Agreement of Merger, dated as of July 25, 1997, among the
                    Registrant, SM Sub, Inc. and Tooltex, Inc.
                    (incorporated by reference from Exhibit 2(b) of the
                    Registrant's Form 8-K dated July 25, 1997).
         10(xii)    Credit Agreement, dated September 19, 1997, between Brown
                    Brothers Harriman & Co. and Registrant
                    (filed herewith).
<PAGE>
         10(xiii)   Term Loan Note of  Registrant,  dated  September  19,  1997,
                    payable to the order of Brown Brothers Harriman & Co. in the
                    original principal amount of $427,000 (filed herewith).
         10(xiv)    Line of Credit Note of Registrant, dated September 19, 1997,
                    payable to the order of Brown Brothers Harriman & Co. in the
                    original principal amount of $1,500,000 (filed herewith).
         10(xv)     Bridge Loan Note of Registrant, dated September 19, 1997,
                    payable to the order of Brown Brothers
                    Harriman & Co. in the original principal amount of
                    $1,600,000 (filed herewith).
         10(xvi)    Open-End Mortgage Deed from Registrant to Brown Brothers
                    Harriman & Co. dated September 19, 1997
                    (filed herewith).
         10(xvii)   General Security Agreement from Registrant to Brown Brothers
                    Harriman & Co. dated September 19, 1997
                    (filed herewith).
         21         Subsidiaries of the Registrant (filed herewith).
         27         Financial Data Schedule (filed herewith).

 (b) The Company filed a Form 8-K on April 30, 1997, reporting the issuance of a
press release that announced the execution of a letter of intent with respect to
the acquisition of Tooltex.


<PAGE>

                              INDEX TO FINANCIAL STATEMENTS


                                                                    Page


Report of Independent Certified Public Accountants                   F-2


Financial Statements

     Balance Sheets                                                  F-3

     Statements of Income                                            F-4

     Statement of Stockholders' Equity                               F-5

     Statements of Cash Flows                                        F-6

     Notes to Financial Statements                                   F-7 - F-23




<PAGE>





                      REPORT OF INDEPENDENT CERTIFIED
                             PUBLIC ACCOUNTANTS





Board of Directors and Stockholders
    Sonics & Materials, Inc.


We have audited the accompanying  balance sheets of Sonics & Materials,  Inc. as
of June 30, 1996 and 1997, and the related  statements of income,  stockholders'
equity and cash flows for the years then ended.  These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our 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,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Sonics & Materials,  Inc. as of
June 30, 1996 and 1997, and the results of its operations and its cash flows for
the  years  then  ended,  in  conformity  with  generally  accepted   accounting
principles.





GRANT THORNTON LLP

/s/GRANT THORNTON LLP

New York, New York
August 28, 1997



<PAGE>

<TABLE>

                            Sonics & Materials, Inc.

                                 BALANCE SHEETS

                                    June 30,
<S>                                                                                       <C>                  <C>


                                        ASSETS                                               1996                 1997
                                                                                          -----------          -------

  CURRENT ASSETS
    Cash and cash equivalents                                                            $     73,129          $   271,593
    Short-term investments                                                                  3,028,032            1,665,470
    Accounts receivable, net of allowance for doubtful
      accounts of $45,000 in 1996 and 1997                                                  1,953,941            1,854,118
    Inventories                                                                             3,248,782            3,718,250
    Prepaid income taxes                                                                       30,465              150,061
    Deferred income taxes                                                                      80,000               80,000
    Other current assets                                                                      111,327              137,562
                                                                                         ------------           ----------

         Total current assets                                                               8,525,676            7,877,054

  PROPERTY AND EQUIPMENT - NET                                                                301,706              364,354

  OTHER ASSETS - NET                                                                          353,124              917,709
                                                                                           ----------           ----------

                                                                                           $9,180,506           $9,159,117
                                                                                            =========            =========


                         LIABILITIES AND STOCKHOLDERS' EQUITY

  CURRENT LIABILITIES
     Notes payable                                                                        $   832,813          $   500,000
     Demand note payable                                                                      500,000
     Current maturities of long-term debt                                                                          116,600
     Accounts payable                                                                         767,620              804,653
     Commissions payable                                                                      160,081              235,203
     Other accrued expenses and sundry liabilities                                            254,677              278,310
                                                                                           ----------           ----------

         Total current liabilities                                                          2,515,191            1,934,766

  LONG-TERM DEBT                                                                                                   406,911

  COMMITMENTS

  STOCKHOLDERS' EQUITY
    Common  stock - par value  $.03 per share;  authorized,  10,000,000  shares;
      issued and outstanding, 3,500,100 shares at June 30, 1996
      and 3,520,100 at June 30, 1997                                                          105,003              105,603
    Additional paid-in capital                                                              6,417,126            6,539,597
    Retained earnings                                                                         143,186              172,240
                                                                                           ----------           ----------

                                                                                            6,665,315            6,817,440
                                                                                            ---------            ---------

                                                                                           $9,180,506           $9,159,117
                                                                                            =========            =========


The accompanying notes are an integral part of these statements.
</TABLE>

<PAGE>


<TABLE>

                            Sonics & Materials, Inc.

                              STATEMENTS OF INCOME

                               Year ended June 30,
<S>                                                                                  <C>                  <C>

                                                                                         1996                  1997
                                                                                     -------------        ---------


  Net sales                                                                             $9,376,170           $10,827,525
  Cost of sales                                                                          5,091,789             6,410,584
                                                                                         ---------           -----------

         Gross profit                                                                    4,284,381             4,416,941

  Operating expenses
    Selling                                                                              2,832,251             3,157,193
    General and administrative                                                             588,923               823,767
    Research and development                                                               372,087               418,465
                                                                                        ----------            ----------

         Total operating expenses                                                        3,793,261             4,399,425

  Other income (expense)
    Interest expense                                                                      (100,011)              (79,565)
    Other                                                                                   45,201               110,471
                                                                                       -----------          ------------
                                                                                           (54,810)               30,906
         Income before income taxes                                                        436,310                48,422
  Provision for income taxes                                                                (8,000)               19,368
                                                                                      ------------         -------------

          NET INCOME                                                                   $   444,310        $       29,054
                                                                                        ==========         =============

  Pro forma data
    Historical income before taxes                                                     $   436,310

    Provision for income taxes                                                             174,524

          NET INCOME                                                                   $   261,786
                                                                                        ==========

  Primary income per share
    Net income per share                                                                      $.09                  $.01
                                                                                               ===                   ===
    Weighted average common shares outstanding                                           3,409,303             4,247,104
  Fully diluted income per share
    Net income per share                                                                      $.08                  $.01
                                                                                               ===                   ===
    Weighted average common shares outstanding                                           3,440,770             4,247,104





The accompanying notes are an integral part of these statements.
</TABLE>

<PAGE>

<TABLE>


                            Sonics & Materials, Inc.

                        STATEMENT OF STOCKHOLDERS' EQUITY

                       Years ended June 30, 1996 and 1997





<S>                                         <C>            <C>             <C>             <C>                <C>
                                                   Common stock               Additional
                                                               Par            paid-in        Retained         Stockholders'
                                            Shares            value            capital       earnings           equity

  Balance - June 30, 1995                  1,350,000       $  40,500        $   139,237     $ 2,704,030         $2,883,767

  1.85-for-1 stock split                   1,150,000          34,500            (34,500)
  Distribution to stockholder                                                                  (495,730)          (495,730)
  Capital contribution from
    S-corporation earnings                                                    2,509,424      (2,509,424)
  Issuance of common stock                 1,000,100          30,003          3,802,965                          3,832,968
  Net income                                                                                    444,310            444,310
                                         ---------------  -------------   ---------------   -----------         ----------


  Balance - June 30, 1996                  3,500,100         105,003          6,417,126         143,186          6,665,315

  Exercise of warrants for stock              20,000             600             97,471                             98,071
  Exercise of options for
    warrants                                                                     25,000                             25,000
  Net income                                                                                     29,054             29,054
                                         ---------------  -------------   ---------------  ------------        -----------


  Balance - June 30, 1997                  3,520,100        $105,603         $6,539,597    $    172,240         $6,817,440
                                           =========         =======          =========     ===========          =========



















           The accompanying notes are an integral part of these statements.
</TABLE>

<PAGE>

<TABLE>


                                 Sonics & Materials, Inc.

                                STATEMENTS OF CASH FLOWS

                                     Year ended June 30,
<S>                                                                                     <C>                  <C>
                                                                                             1996                 1997
                                                                                          -----------          -------

  Cash flows from operating activities
    Net income                                                                           $    444,310         $     29,054
    Adjustments to reconcile net income to net cash used in
      operating activities
        Depreciation of equipment and leasehold improvements                                  236,105              141,308
        Deferred income taxes                                                                 (80,000)
        Gain on sale of equipment                                                              (2,500)
        Increase (decrease) in cash flows from changes in
          operating assets and liabilities
             Accounts receivable                                                               (3,983)              99,823
             Inventory                                                                     (1,190,475)            (469,468)
             Prepaid income taxes                                                             (30,465)            (119,596)
             Other assets                                                                     (43,901)            (590,820)
             Accounts payable and accrued liabilities                                         244,354              135,788
                                                                                          -----------           ----------
         Net cash used in operating activities                                               (426,555)            (773,911)
                                                                                          -----------           ----------
  Cash flows from investing activities
    Capital expenditures on equipment and leasehold
      improvements                                                                           (149,512)            (125,632)
    Proceeds from sale of equipment                                                             2,500
    Short-term investments                                                                 (3,028,032)           1,362,562
                                                                                           ----------            ---------
         Net cash (used in) provided by investing activities                               (3,175,044)           1,236,930
                                                                                           ----------            ---------
  Cash flows from financing activities
    Distribution to stockholder                                                              (495,730)
    Payment of capital lease obligation                                                                            (18,504)
    Proceeds from note payable, net                                                           150,000              130,878
    Payment of demand note payable                                                                                (500,000)
    Proceeds from issuance of options and warrants                                          3,832,968              123,071
                                                                                           ----------           ----------
         Net cash provided by (used in) financing activities                                3,487,238             (264,555)
                                                                                           ----------           ----------
         NET (DECREASE) INCREASE IN CASH
             AND CASH EQUIVALENTS                                                            (114,361)             198,464
  Cash and cash equivalents at beginning of year                                              187,490               73,129
                                                                                          -----------          -----------
  Cash and cash equivalents at end of year                                              $      73,129          $   271,593
                                                                                         ============           ==========
  Supplemental disclosures of cash flow information:
    Cash paid during the year for
      Interest                                                                          $      94,000          $   122,000
                                                                                         ============           ==========
      Income taxes                                                                       $    150,000          $   149,000
                                                                                          ===========           ==========

For the year ended June 30,  1997,  a capital  lease  obligation  of $78,324 was
    incurred when the Company entered into a lease for new equipment.

The accompanying notes are an integral part of these statements.

</TABLE>

<PAGE>


                            Sonics & Materials, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 1996 and 1997



NOTE A - BUSINESS

     Sonics  &  Materials,  Inc.'s  (the  "Company")  primary  business  is  the
     manufacturing and distribution of ultrasonic assembly and liquid processing
     machinery  and  equipment.  Sales are made  throughout  the United  States,
     Europe,  Asia, South America and Australia.  The Company's primary location
     of operations is Danbury, Connecticut.


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     1.  Inventories

         Inventories are stated at the lower of cost,  determined on a first-in,
first-out basis, or market.

     2.  Equipment and Leasehold Improvements

         Equipment  and  leasehold   improvements   are  carried  at  cost  less
         accumulated depreciation and amortization.  Depreciation using both the
         declining-balance and straight-line methods is designed to amortize the
         cost of various  classes of assets over their  estimated  useful lives,
         which  range  from  five to seven  years.  Leasehold  improvements  are
         amortized over the shorter of the life of the related asset or the term
         of the lease.  Expenditures  for  replacements  are capitalized and the
         replaced  items are  retired.  Maintenance  and repairs are expensed as
         incurred.

     3.  Taxes

         In 1989,  the  Company  elected to be treated as an S  Corporation  for
         Federal  income tax reporting.  An S Corporation  is generally  treated
         like a  partnership,  and is exempt  from  Federal  income  taxes  with
         certain exceptions.  Accordingly, no provision or liability for Federal
         income taxes was reflected in the  accompanying  statements  during the
         period the  Company  was  treated  as an S  Corporation.  Instead,  the
         stockholder  reported his pro rata share of corporate taxable income or
         loss on his respective  individual income tax returns.  A provision for
         state  income  taxes  was made  for  those  states  not  recognizing  S
         Corporation status.

         On February 26, 1996,  the  Company's S Corporation  status  terminated
         with the  completion  of the  Offering  as  described  in Note J.  Upon
         termination of its S Corporation status, the Company



<PAGE>


                                 Sonics & Materials, Inc.

                         NOTES TO FINANCIAL STATEMENTS (continued)

                                 June 30, 1996 and 1997



NOTE B (continued)

         uses the  liability  method  for both  Federal  and  state  income  tax
         purposes.  The  effect of the change in status is  reflected  in income
         from  continuing  operations.  Such  change  in status  resulted  in an
         increase in deferred tax assets at February  26, 1996 by  approximately
         $91,000 and earnings by the same amount.

     4.  Cash Equivalents

         For purposes of the statement of cash flows, the Company  considers all
         highly liquid investments  purchased with an original maturity of three
         months or less to be cash equivalents.

     5.  Revenue Recognition

         Revenue is  recognized  upon the  shipment of finished  merchandise  to
         customers.  Allowances for sales returns are recorded as a component of
         net sales in the periods in which the related sales are recognized.

     6.  Other Assets

         Demonstration   equipment   is   carried   at  cost  less   accumulated
         depreciation.  Depreciation is provided for using the declining-balance
         method  over the  estimated  useful life of seven  years.  The net book
         value  is used to  calculate  any  gain or loss on sale of the  related
         demonstration equipment.

         At June 30, 1996 and 1997, the major components of other assets were:

<TABLE>
            <S>                                                                           <C>                     <C>
                                                                                          June 30,                June 30,
                                                                                          1996                    1997

            Demonstration equipment - net of accumulated
                depreciation of $196,973 and $242,525 for
                1996 and 1997, respectively                                                $270,863               $338,024
            Other accounts receivable                                                                              254,185
            Security deposits                                                                                      142,298
            Other                                                                            82,261                183,202
                                                                                           --------                -------


                                                                                           $353,124               $917,709
                                                                                            =======                =======
</TABLE>


<PAGE>

                              Sonics & Materials, Inc.

                     NOTES TO FINANCIAL STATEMENTS (continued)

                               June 30, 1996 and 1997



NOTE B (continued)

     7.  Other Accrued Expenses and Sundry Liabilities

         At June 30,  1996 and  1997,  the  major  components  of other  accrued
expenses and sundry liabilities were:

<TABLE>
            <S>                                                                          <C>                    <C>
                                                                                         June 30,               June 30,
                                                                                           1996                   1997

            Accrued Compensation                                                           $135,597               $143,975
            Professional fees                                                                43,088                 63,637
            Other                                                                            75,992                 70,698
                                                                                           --------               --------

                                                                                           $254,677               $278,310
                                                                                            =======                =======
</TABLE>

     8.  Use of Estimates

         In preparing financial statements in conformity with generally accepted
         accounting  principles,  management  is required to make  estimates and
         assumptions  that affect the reported amounts of assets and liabilities
         and disclosure of contingent  assets and liabilities at the date of the
         financial  statements,  as well as the reported amounts of revenues and
         expenses during the reporting period.  Actual results could differ from
         those estimates.

     9.  Fair Value of Financial Instruments

         Based on borrowing  rates  currently  available to the Company for bank
         loans  with  similar  terms  and  maturities,  the  fair  value  of the
         Company's  debt  approximates  the  carrying  value.  Furthermore,  the
         carrying values of all other financial instruments  potentially subject
         to valuation risk (principally  consisting of cash, accounts receivable
         and accounts payable) also approximate fair value.

    10.  Net Income Per Share

         Net income per share is based on the weighted  average number of common
         and common equivalent shares (warrants and options)  outstanding during
         the period, calculated using the



<PAGE>


                          Sonics & Materials, Inc.

                 NOTES TO FINANCIAL STATEMENTS (continued)

                            June 30, 1996 and 1997



NOTE B (continued)

         modified  treasury  stock method in fiscal 1996 and the treasury  stock
         method in fiscal 1997 (see Note P). The modified  treasury stock method
         limits  the  assumed   purchase  of  treasury  shares  to  20%  of  the
         outstanding common shares.

         In  connection  with the  initial  public  offering  (see Note J),  the
         Company paid down $670,000 of outstanding debt. If this transaction had
         occurred  as of July 1, 1995,  the net income per share would have been
         the same as the  reported  net income per share for the year ended June
         30, 1996.

    11.  Advertising Costs

         All costs related to advertising  are expensed in the period  incurred.
         Advertising  costs were  approximately  $220,000  and  $217,000 for the
         years ended June 30, 1996 and 1997, respectively.


NOTE C - SHORT-TERM INVESTMENT

     The Company has a  short-term  investment  comprised  of a U.S.  Government
     agency issue.  This investment is classified as  available-for-sale  and is
     reported at fair value on the Company's balance sheet. Quoted market prices
     have been used in determining the fair value of this investment.


NOTE D - INVENTORIES

     Inventories consist of the following:
<TABLE>
         <S>                                                                            <C>                     <C>
                                                                                        June 30,                June 30,
                                                                                          1996                    1997

         Raw materials                                                                   $   975,332            $   956,073
         Work-in-process                                                                   1,501,716              1,909,256
         Finished goods                                                                      771,734                852,921
                                                                                          ----------             ----------

                                                                                          $3,248,782             $3,718,250
                                                                                           =========              =========
</TABLE>




<PAGE>


                            Sonics & Materials, Inc.

                     NOTES TO FINANCIAL STATEMENTS (continued)

                             June 30, 1996 and 1997


<TABLE>

NOTE E - PROPERTY AND EQUIPMENT

     A summary of equipment and leasehold improvements follows:
         <S>                                                                           <C>                    <C>
                                                                                        June 30,                June 30,
                                                                                          1996                    1997

         Trade show booth                                                              $     50,494           $     50,494
         Machinery and equipment                                                            586,063                675,409
         Tooling                                                                            103,762                105,453
         Office furniture and equipment                                                     143,235                152,830
         Leasehold improvements                                                             174,081                186,851
         Automobiles                                                                         32,408                 32,408
         Data processing equipment                                                          365,240                455,794
                                                                                         ----------             ----------

                                                                                          1,455,283              1,659,239
         Less accumulated depreciation                                                    1,153,577              1,294,885
                                                                                          ---------              ---------

                                                                                        $   301,706            $   364,354
                                                                                         ==========             ==========
</TABLE>


NOTE F - NOTES PAYABLE

     a.  Bank Line of Credit

         The loan agreement with the Village Bank & Trust Company provides for a
         $1,000,000  collateralized  line of credit at one half  percent  (1/2%)
         above the prime rate (9% at June 30, 1997). The agreement ends on March
         5, 1999. Notes payable under the loan agreement are collateralized by a
         security  interest  in all of the  Company's  tangible  and  intangible
         assets. The Company must also meet certain covenants to comply with the
         loan  agreement,  the most important of which are: (a) the Company must
         maintain its stockholders' equity at a sum at least equal to 75% of the
         outstanding    principal   balance   of   the   note,   and   (b)   the
         President/shareholder  must be continuously and actively engaged in the
         Company business.



<PAGE>


                              Sonics & Materials, Inc.

                     NOTES TO FINANCIAL STATEMENTS (continued)

                               June 30, 1996 and 1997



NOTE F (continued)

     b.  Note Payable to President/Shareholder

         In  connection  with the  initial  public  offering  (see Note J),  the
         Company paid $45,730 in cash and issued a $450,000  noninterest-bearing
         note payable to the President and major  shareholder  as a dividend for
         the  amount  of taxes due by him  personally  for the  earnings  of the
         Company  from  January 1, 1995  through  February  26,  1996,  a period
         through  which the Company was an S  Corporation  (see Note B-3). As of
         June 30,  1996,  a balance of $32,813  was due.  The amount was paid in
         full during the year ended June 30, 1997.


NOTE G - LONG-TERM DEBT

     a.  Term Loan

         On December  3, 1996,  the Company  entered  into a $500,000  term loan
         agreement with Village Bank & Trust Company at one-half  percent (1/2%)
         above the prime rate (9% at June 30,  1997).  The loan is unsecured and
         is due in equal annual installments through December 3, 2001.

     b.  Capital Lease Obligations

         During the year ended  June 30,  1997,  the  Company  entered  into two
         five-year lease agreements for new equipment.

         The aggregate maturities of long-term debt are as follows:
<TABLE>
                             <S>                                                       <C>
                             Year ending June 30,
                                  1998                                                 $116,600
                                  1999                                                  118,384
                                  2000                                                  117,930
                                  2001                                                  112,266
                                  2002                                                   58,331
                                                                                       --------

                                                                                       $523,511
</TABLE>




<PAGE>


                          Sonics & Materials, Inc.

                 NOTES TO FINANCIAL STATEMENTS (continued)

                           June 30, 1996 and 1997



NOTE H - DEMAND NOTE PAYABLE

     The Company had a demand note payable  from  Village  Bank & Trust  Company
     bearing  interest at one-half percent (1/2%) above the prime rate (8.25% at
     June 30, 1996). The note was converted to a long-term note in December 1996
     (see Note G).


NOTE I - COMMITMENTS

     Leases

     The  Company  leases  certain   facilities  and  automobiles   under  lease
     agreements  that are  classified as operating  leases and expire in various
     years through 2002.

     The following is a schedule of future  minimum lease payments for operating
leases as of June 30, 1997:
<TABLE>
                             <S>                                                       <C>
                             Year ending June 30,
                                  1998                                                 $194,700
                                  1999                                                   32,800
                                  2000                                                   33,800
                                  2001                                                   35,000
                                  2002                                                   36,200
                                  Subsequent to 2002                                      9,100
                                                                                      ---------

                                                                                       $341,600
</TABLE>

     Rental  expense for operating  leases  totaled  approximately  $229,000 and
     $279,000 for the years ended June 30, 1996 and 1997, respectively.


NOTE J - STOCKHOLDERS' EQUITY

     1.  Initial Public Offering

         On February 26,  1996,  the Company  successfully  completed an initial
         public  offering of 1,000,100  shares of common stock of the Company at
         an initial offering price of $5.00 per share, and 1,725,000 warrants to
         purchase 1,725,000 shares of common stock at an exercise price of



<PAGE>


                          Sonics & Materials, Inc.

                NOTES TO FINANCIAL STATEMENTS (continued)

                           June 30, 1996 and 1997


NOTE J (continued)

         $6.00  per  share  with an  offering  price  of $.15 per  warrant.  The
         proceeds  from  the  offering  were  approximately  $3,833,000,  net of
         $1,426,000 of costs  associated  with the offering.  For the year ended
         June 30, 1997, 20,000 warrants were exercised.

         In connection with the offering, the Company granted to the underwriter
         an option to  purchase  100,000  shares of common  stock at an exercise
         price of $8.25 per share and an option to purchase  100,000 warrants to
         purchase  100,000  shares of common stock at an exercise price of $6.00
         at a price of $.25 per warrant  over a period of four years  commencing
         on February 26, 1997. On March 20, 1997, the underwriter  exercised its
         option to  purchase  the  100,000  warrants.  Proceeds  to the  Company
         totaled $25,000.

         At June 30, 1997, a total of 1,805,000 warrants at an exercise price of
         $6.00 were issued and outstanding.

     2.  Stock Splits

         In  February  1996,  the  Company's  Board  of  Directors   approved  a
         1.85-for-1  split of the Company's  common stock.  A total of 1,150,000
         shares of common stock were issued in  connection  with the split.  The
         stated par value of each share remained at $.03. A total of $34,500 was
         reclassified from the Company's  additional  paid-in capital account to
         the Company's common stock account.

         All share and per share amounts in the financial  statements  have been
         restated to retroactively reflect the above stock split.

     3.  Distribution to Stockholder

         During the period from July 1, 1995,  through the  termination of the S
         Corporation  status, the Company  distributed  approximately  $496,000,
         including an adjustable note payable to the stockholder of $450,000, to
         cover estimated taxes on S Corporation income (see Note F).



<PAGE>


                              Sonics & Materials, Inc.

                      NOTES TO FINANCIAL STATEMENTS (continued)

                               June 30, 1996 and 1997



NOTE J (continued)

     4.  Capital Contribution

         As of February 26, 1996,  undistributed S Corporation retained earnings
         of  approximately  $2,509,000  have  been  reclassified  as  additional
         paid-in  capital  as if  the  earnings  had  been  distributed  to  the
         stockholder and then contributed to the Company.

     5.  Employee Stock Options

         a.   Incentive Stock Option Plan

              Under the  Company's  Incentive  Stock  Option Plan (the  "Plan"),
              options to  purchase  a maximum  of  250,000  shares of its common
              stock  may  be  granted  to  officers,  directors  and  other  key
              employees of Sonics.  Options  granted under the Plan are intended
              to qualify as incentive  stock  options as defined in the Internal
              Revenue Code of 1986, as amended.

              The Plan is administered by the Board of Directors and a Committee
              presently  consisting  of two members of the Board that  determine
              which  persons  are to  receive  options,  the  number of  options
              granted  and  their  exercise  prices.  In the  event an  optionee
              voluntarily  terminates  their  employment  with the Company,  the
              optionee has the right to exercise  their accrued  options  within
              thirty  (30) days of such  termination.  However,  the Company may
              redeem any accrued option held by each optionee by paying them the
              difference  between  the option  exercise  price and the then fair
              market value.

              On February  11, 1996,  the Board of Directors  approved a plan to
              grant  options for 80,000 shares of common stock of the Company at
              the initial offering price of $5.00 per share.  These options will
              expire on February 11, 2001.  Subsequently,  the approval to grant
              options to acquire 10,500 shares of the common stock was rescinded
              by the Board of  Directors.  On May 5, 1997,  2,000  options  were
              granted at an exercise price of $3.50 per share, which will expire
              on May 5, 2002.  As of June 30, 1997,  options to purchase  71,500
              shares of common stock were granted to 26 officers,  directors and
              key employees of the Company.



<PAGE>


                           Sonics & Materials, Inc.

                  NOTES TO FINANCIAL STATEMENTS (continued)

                           June 30, 1996 and 1997


NOTE J (continued)

         b.   Nonqualified Stock Options

              The  Company  has also  granted a  nonqualified  stock  option for
              10,976  shares of common stock to an officer at an option price of
              $.31  per  share.   In  January  1994,   the  Company   granted  a
              nonqualified stock option for 274,390 shares of common stock to an
              officer  at an option  price of $1.03  per  share.  These  options
              expire on January 1, 2004.


         c.    Summary Information

              The Company has adopted the disclosure-only provisions of SFAS No.
              123,  "Accounting for Stock Based Compensation."  Accordingly,  no
              compensation  cost  has  been  recognized  for the  stock  options
              granted to employees and  directors.  Had  compensation  cost been
              determined based on the fair value at the grant date for the stock
              options  awards in fiscal 1996  consistent  with the provisions of
              SFAS No. 123, the Company's  net income would have been  decreased
              by  approximately  $10,000  and  earnings  per  share  would  have
              remained  unchanged.   In  fiscal  1997,  net  income  would  have
              decreased  by  approximately  $29,000 and earnings per share would
              have been reduced by $.01 per share.  During the initial  phase-in
              period   of  SFAS  No.   123,   such   compensation   may  not  be
              representative of the future effects of applying this statement.

              The  weighted  average  fair  value at date of grant  for  options
              granted  was $1.41 per  option.  The fair value of each  option at
              date of grant was estimated using the Black-Scholes option pricing
              model with the following weighted average assumptions:

<TABLE>
                             <S>                                                    <C>
                             Expected stock price volatility                        17%
                             Expected life of options                               5 years
                             Risk-free interest rate                                5.55%
                             Expected dividend yield                                0%
</TABLE>





<PAGE>


                           Sonics & Materials, Inc.

                   NOTES TO FINANCIAL STATEMENTS (continued)

                            June 30, 1996 and 1997



NOTE J (continued)

              For the two years ended June 30, 1997,  employee  option  activity
was as follows:
<TABLE>
                 <S>                                     <C>               <C>                <C>               <C>
                                                              Incentive options                  Nonqualified options
                                                                           Weighted-                            Weighted-
                                                                            average                              average
                                                          Number           exercise            Number           exercise
                                                         of shares           price            of shares           price

                 Outstanding at June 30, 1995
                     Granted                               69,500           $5.00               285,366           $1.00
                     Exercised
                     Canceled

                 Outstanding at June 30,
                     1996                                  69,500           $5.00               285,366           $1.00
                                                           ======                               =======

                     Granted                                2,000           $3.50
                     Exercised
                     Canceled

                 Outstanding at June 30,
                     1997                                  71,500           $4.96               285,366           $1.00
                                                           ======                               =======
</TABLE>
<TABLE>

              The following  table  summarizes  information  about stock options
outstanding at June 30, 1997:

                  <S>                 <C>               <C>                 <C>             <C>                  <C>
                                    Weighted-
                                                          average           Weighted-                            Weighted-
                                                         remaining           average                              average
                     Range of            Number         contractual         exercise          Number             exercise
                  exercise prices      outstanding         life               price         exercisable            price

                      $0.31              10,976         6.5 years            $0.31            10,976             $0.31
                       1.03             274,390         6.5 years             1.03           274,390              1.03
                    3.50 - 5.00          71,500         3.7 years             4.96            21,667              5.00
                                       --------                                             --------

                                        356,866                                              307,033
                                        =======                                              =======
</TABLE>





<PAGE>


                             Sonics & Materials, Inc.

                     NOTES TO FINANCIAL STATEMENTS (continued)

                             June 30, 1996 and 1997

NOTE K - 401(k) AND PROFIT SHARING PLANS

     The  Company  has a 401(k)  plan for  eligible  employees.  The 401(k) plan
     provides for eligible  employees to elect to  contribute  to the plan up to
     15% of their annual compensation. In addition, the 401(k) plan provides for
     the Company to make additional  contributions at its discretion up to 4% of
     the participant's annual compensation.  Expenses under the 401(k) plan were
     approximately  $21,000  and  $30,000  for the years ended June 30, 1996 and
     1997, respectively.

     The Company also has a nonqualified  profit sharing plan.  Under this plan,
     the Company  distributes to eligible  employees 10% of its pretax  profits,
     based on a three-month  moving  average.  Expenses under the profit sharing
     plan were  approximately  $65,000  and $42,000 for the years ended June 30,
     1996 and 1997, respectively.


NOTE L - CONCENTRATION OF CREDIT RISK

     Financial   instruments   that   potentially   subject   the   Company   to
     concentrations  of credit risk consist  primarily  of accounts  receivable.
     Credit risk on  receivables  is minimized as a result of the diverse nature
     of the Company's worldwide customer base. The Company generally requires no
     collateral from its customers.

     Net sales by geographic area for the periods ended are as follows:
<TABLE>
          <S>                                                                          <C>                  <C>
                                                                                             Year ended June 30,
                                                                                         1996                  1997

          United States                                                                 $6,320,000           $  6,826,000
          Europe                                                                         1,376,000              1,408,000
          Asia/Pacific Rim                                                                 967,000              1,869,000
          Canada and Mexico                                                                396,000                509,000
          Other                                                                            317,000                216,000
                                                                                        ----------           ------------

                                                                                        $9,376,000            $10,828,000
                                                                                         =========             ==========
</TABLE>





<PAGE>


                          Sonics & Materials, Inc.

                    NOTES TO FINANCIAL STATEMENTS (continued)

                           June 30, 1996 and 1997



NOTE M - INCOME TAXES

     Prior to the  completion of the initial public  offering,  the Company had,
     since 1989,  elected to be treated as an S Corporation  for Federal  income
     tax  reporting  purposes.  An S  Corporation  is  generally  treated like a
     partnership,   and  is  exempt  from  Federal  income  taxes  with  certain
     exceptions.  The S Corporation  stockholder  reported his pro rata share of
     corporate  taxable income or loss on his individual  income tax returns.  A
     provision for state income taxes was made for those states not  recognizing
     S Corporation  status.  The Company's S Corporation  status terminated with
     the completion of the initial public offering described in Note J-1.

     Subsequent to the initial public offering,  the Company accounts for income
     taxes using the liability  method under  Statement of Financial  Accounting
     Standards No. 109, "Accounting for Income Taxes."

     The components of the provision for taxes on income are as follows:
<TABLE>
         <S>                                                                             <C>                    <C>
                                                                                              Year ended June 30,
                                                                                          1996                  1997

          U.S. Federal
              Current tax provision                                                       $ 50,000               $16,463
              Deferred tax benefit                                                         (68,000)
                                                                                           -------                ------

                                                                                           (18,000)               16,463
                                                                                           -------                ------

          State
              Current tax provision                                                         22,000                 2,905
              Deferred tax benefit                                                         (12,000)
                                                                                           -------                ------

                                                                                            10,000                 2,905
                                                                                           -------               -------

          Total income tax provision (benefit)                                           $  (8,000)              $19,368
                                                                                          ========                ======
</TABLE>




<PAGE>


                               Sonics & Materials, Inc.

                      NOTES TO FINANCIAL STATEMENTS (continued)

                                June 30, 1996 and 1997



NOTE M (continued)

     The tax effect of  temporary  differences  which give rise to deferred  tax
     assets and liabilities at June 30, 1996 and 1997 are as follows:
<TABLE>
          <S>                                                                          <C>                   <C>
                                                                                          1996                  1997
                                                                                       -----------           -------

          Accrued expenses                                                                 $22,000              $22,000
          Allowance for doubtful accounts                                                   17,000               17,000
          Inventory                                                                         41,000               41,000
                                                                                            ------               ------

          Net deferred tax asset                                                           $80,000              $80,000
                                                                                            ======               ======
</TABLE>


     The following is a reconciliation  of the statutory Federal income tax rate
     to the effective rate reported in the financial statements:
<TABLE>
        <S>                                           <C>              <C>                   <C>                <C>
                                                                             Year ended June 30,
                                                                1996                                   1997
                                                                       Percent of                               Percent of
                                                      Amount             income              Amount               income

        Provision for Federal income
           taxes at the statutory rate                $148,000             34.0%             $16,000                34.0%
        State and local taxes, net of
           Federal income tax benefit                   15,000              3.4                2,000                 4.0
        Tax effect of S Corporation
           earnings during the year                    (99,000)           (22.8)
        Deferred tax benefit from
           the effect of conversion to
           C Corporation status                        (91,000)           (20.9)
        Nondeductible expenses                           7,000              1.6
        Other                                           12,000              2.8                1,368                 2.0
                                                      --------           ------              -------               -----

        Actual provision (benefit) for
           income taxes                             $   (8,000)            (1.9)%            $19,368                40.0%
                                                     =========           ======               ======                ====
</TABLE>





<PAGE>


                               Sonics & Materials, Inc.

                       NOTES TO FINANCIAL STATEMENTS (continued)

                                 June 30, 1996 and 1997



NOTE N - EMPLOYMENT AGREEMENT

     Effective  July 1, 1995, the Company  entered into an employment  agreement
     with its  President  for an  initial  term  expiring  in three  years at an
     initial  annual base salary of  $180,000,  $198,000 and $218,000 in each of
     the three  years,  respectively.  Such base salary may be  increased at the
     discretion of the Board of Directors as follows:  (i) any bonus arrangement
     provided by the Company in its  discretion and (ii) other  compensation  or
     employee benefit plans and arrangements, if any, provided to other officers
     and key employees of the Company.


NOTE O - RELATED PARTY TRANSACTIONS

     The  Company  paid  $73,959  to a  member  of the  Board of  Directors  for
     consulting services during the year ended June 30, 1997.


NOTE P - PRO FORMA INFORMATION

     a.  Pro Forma Income Taxes

         As  discussed  in Note B-3,  the  Company  elected  to be taxed as an S
         Corporation  pursuant to the Internal  Revenue Code. In connection with
         the Offering,  the Company terminated its S election and became subject
         to Federal and  additional  state and local  income tax.  The pro forma
         provision for income taxes  represents the income tax  provisions  that
         would have been  reported  had the Company  been subject to Federal and
         additional  state and local  income  taxes for the year  ended June 30,
         1996.

         The pro forma income tax provision has been prepared in accordance with
         SFAS No. 109.  The pro forma  provision  for income  taxes for the year
         ended June 30, 1996 after giving effect to the Federal  statutory  rate
         of 34% and state and local taxes, a net effective rate of 6%,  consists
         of the following:




<PAGE>


                             Sonics & Materials, Inc.

                  NOTES TO FINANCIAL STATEMENTS (continued)

                             June 30, 1996 and 1997



NOTE P (continued)

            Federal                                              $135,256
            State and local                                        39,268
                                                                 --------
                                                                 $174,524
                                                                 ========
     b.  Pro Forma Net Income

         Represents  the  historical  amounts  after  the pro  forma  adjustment
         discussed above.

     c.  Pro Forma Net Income Per Share

         Represents net income per share  including the weighted  average number
         of shares outstanding immediately prior to the closing of the offering,
         after giving effect to a stock split of 1.85-for-1 and shares issued in
         the Offering (see Note J). The  calculations  also reflect the dilutive
         effect of shares issuable for common stock equivalents.


NOTE Q - FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING
                  PRONOUNCEMENTS

     In February  1997,  the  Financial  Accounting  Standards  Board has issued
     Statement of Financial  Accounting Standards No. 128, "Earnings Per Share,"
     which is effective  for  financial  statements  for both interim and annual
     periods ending after  December 1997.  Early adoption of the new standard is
     not  permitted.  The new  standard  eliminates  primary  and fully  diluted
     earnings per share and requires  presentation of basic and diluted earnings
     per  share  together  with  disclosure  of how the per share  amounts  were
     computed.  The pro forma effect of adopting the new standard would be basic
     earnings per share of $.09 and $.01 and diluted  earnings per share of $.08
     and $.01 for the years ended June 30, 1996 and 1997, respectively.



<PAGE>


                            Sonics & Materials, Inc.

                  NOTES TO FINANCIAL STATEMENTS (continued)

                             June 30, 1996 and 1997



NOTE R - SUBSEQUENT EVENT

     On July 25, 1997, the Company acquired, through a newly formed wholly-owned
     subsidiary,  100% of the stock of Tooltex, Inc.  ("Tooltex").  Tooltex is a
     manufacturer  of  automated  systems  used in the  plastics  industry.  The
     shareholders received, in exchange for 100% of the stock of Tooltex, (i) an
     aggregate of 70,000 shares of the Company's common stock, par value of $.03
     per share,  (ii) $70,000 and (iii) options to purchase 10,000 shares of the
     Company's  common stock.  For the year ended June 30, 1997, the Company had
     sales to Tooltex of approximately $83,000 and at June 30, 1997 a receivable
     balance  of  approximately  $254,000  from  Tooltex.   Unaudited  financial
     information  of Tooltex at June 30,  1997 and for the year then ended is as
     follows:

                  Total Assets            $   726,000
                   Revenues                 1,944,000
                   Net Loss                   321,000





<PAGE>


                              SIGNATURES



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

Date:   September 25, 1997


                            SONICS & MATERIALS, INC.



                            By:   /s/ ROBERT S. SOLOFF
                                  --------------------
                                  Robert S. Soloff
                                  Chairman and President


         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.
<TABLE>
<S>                                    <C>                                         <C>
             Signature                                  Title                                Date


       /s/ ROBERT S. SOLOFF            Chairman, President, Treasurer, Chief       September 25, 1997
 ....................................
        (Robert S. Soloff)                Executive and Chief Financial Officer


       /s/ LAUREN H. SOLOFF            Secretary and Director                      September 25, 1997
 ....................................
        (Lauren H. Soloff)


        /s/ CAROLE. SOLOFF             Director                                    September 25, 1997
 ....................................
          (Carole Soloff)


       /s/ JACK T. TYRANSKY            Director                                    September 25, 1997
 ....................................
        (Jack T. Tyransky)


         /s/ ALAN BROADWIN             Director                                    September 25, 1997
 ....................................
          (Alan Broadwin)


       /s/ STEPHEN DRESCHER            Director                                    September 25, 1997
 ....................................
        (Stephen Drescher)

    /s/ CHRISTOPHER S. ANDRADE         Accounting Manager                          September 25, 1997
 ....................................
     (Christopher S. Andrade)             Principal Accounting Officer



</TABLE>



<PAGE>

<TABLE>
<S>       <C>                                                             <C>
                                  Exhibit Index

Exhibit                                                                               Location of Exhibit in
No.                         Description                                            Sequential Numbering System
___                         ___________                                            ___________________________
3(i)      Certificate of Incorporation of the Registrant, as amended.      Previously filed as Exhibit 3.1 of Amendment
                                                                           No. 3 to Registration Statement No. 33-96414
3(ii)     Amended By-laws of the Registrant.                               Previously filed Exhibit 3.2 of Registration
                                                                           Statement No. 33-96414
10(i)     Form of Employment Agreement between the Registrant and          Previously filed Exhibit 10.1 of Registration
          Robert S. Soloff.                                                Statement No. 33-96414
10(ii)    1995 Incentive Stock Option Plan and form of Stock Option        Previously filed as Exhibit 10.3 of
          Agreement.                                                       Registration Statement No. 33-96414
10(iii)   Original Office Lease and Amendments between the Registrant      Previously filed as Exhibit 10.4 of
          and Nicholas R. DiNapoli, Jr. DBA DiNapoli Holding Co.           Registration Statement No. 33-96414
          (Danbury, CT).
10(iv)    Lease between Registrant and Aston Investment Associates         Previously filed as Exhibit 10.5 of
          (Aston, PA).                                                     Registration Statement No. 33-96414
10(v)     Amended lease between Registrant and Robert Lenert               Previously filed as Exhibit 10.6 of Amendment
          (Naperville, IL).                                                No. 4 to Registration Statement No. 33-96414
10(vi)    Lease between Registrant and Janine Berger (Gland,               Previously filed as Exhibit 10.7 of
          Switzerland).                                                    Registration Statement No. 33-96414
10(vii)   Form of Sales Representation Agreement.                          Previously filed as Exhibit 10.8 of
                                                                           Registration Statement No. 33-96414
10(viii)  Form of Sales Distribution Agreement.                            Previously filed as Exhibit 10.9 of
                                                                           Registration Statement No. 33-96414
10(ix)    Consulting Agreement dated October 17, 1995 between the          Previously filed as Exhibit 10.10 of Amendment
          Registrant and Alan Broadwin.                                    No. 3 of Registration Statement No. 33-96414
10(x)     Agreement and Plan of Merger, dated as of July 25, 1997,         Previously filed as Exhibit 2(a) of
          among the Registrant, SM Sub, Inc., Tooltex, Inc., and the       Registrant's Form 8-K dated July 25, 1997
          persons designated as the shareholders thereon (excluding
          schedules and annexes).  A list of omitted schedules and
          annexes appears on pages iv and v of the Agreement and Plan
          of Merger.  The Registrant hereby undertakes to furnish
          supplementally a copy of any omitted schedule and annex to
          the Commission upon request. .
10(xi)    Agreement of Merger, dated as of July 25, 1997, among the        Previously filed as Exhibit 2(b) of the
          Registrant, SM Sub, Inc. and Tooltex, Inc.                       Registrant's Form 8-K dated July 25, 1997).
10(xii)   Credit Agreement, dated September 19, 1997, between Brown        Filed Herewith
          Brothers Harriman & Co. and Registrant
10(xiii)  Term)Loan Note of Registrant, dated September 19, 1997,          Filed Herewith
          payable to the order of Brown Brothers Harriman & Co. in the
          original principal amount of $427,000.
10(xiv)   Line of Credit Note of Registrant,  dated September 19, 1997,    Filed Herewith
          payable  to the  order of  Brown  Brothers  Harriman  & Co.  
          in the  original principal amount of $1,500,000.
10(xv)    Bridge Loan Note of Registrant, dated September 19, 1997,        Filed Herewith
          payable to the order of Brown Brothers Harriman & Co. in the
          original principal amount of $1,600,000.
10(xvi)   Open-End Mortgage Deed from Registrant to Brown Brothers         Filed Herewith
          Harriman & Co. dated September 19, 1997.
10(xvii)  General Security Agreement from Registrant to Brown Brothers     Filed Herewith
          Harriman & Co. dated September 19, 1997.
<PAGE>

21        Subsidiaries of the Registrant (filed herewith).                 Filed Herewith
27        Financial Data Schedule.                                         Filed Herewith

</TABLE>