UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                    FORM 10-K


              Annual Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

                         Commission File Number 0-12283

                    For the fiscal year ended March 31, 1999


                                ZONIC CORPORATION
             (Exact name of registrant as specified in its charter)


                         An Ohio Corporation 31-0791199
      (State or other jurisdiction of (I.R.S. Employer Identification No.)
                         incorporation or organization)


    Park 50 TechneCenter, 50 W. TechneCenter Drive, Milford, Ohio 45150-9777
               (Address of principal executive offices) (Zip Code)


        Registrant's telephone number, including area code (513)248-1911


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


                    Securities registered pursuant to Section
                               12(g) of the Act:


                        Common Shares, Without Par Value
                                 Title of Class


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of June 11, 1999 was $211,406.

The number of shares  outstanding of the  registrant's  Common Shares as of June
11, 1999 was 3,044,136.


                       DOCUMENTS INCORPORATED BY REFERENCE
--------------------------------------------------------------------------------

Portions  of the  Registrant's  Proxy  Statement  for the July 20,  1999  Annual
Meeting of Shareholders are incorporated by reference in Part III.


<PAGE>



         Special Cautionary Notice Regarding Forward-Looking Statements
--------------------------------------------------------------------------------
Certain  of the  matters  discussed  under the  captions  "Business,"  "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operation" may constitute forward-looking statements for purposes
of the  Securities  Act of 1933 and the  Securities  Exchange  Act of  1934,  as
amended,  and as such may involve  known and unknown  risks,  uncertainties  and
other factors which may cause the actual results, performance or achievements of
the Company to be  materially  different  from future  results,  performance  or
achievements expressed or implied by such forward-looking statements.  Important
factors that could cause the actual  results,  performance or achievement of the
Company to differ materially from the Company's  expectations  include,  without
limitation, the following: 1) the Company is unable to improve existing products
or develop new products  which satisfy needs in the  Company's  markets;  2) the
Company is unable to penetrate  new markets;  3) the Company is unable to retain
existing personnel or hire additional  personnel;  4) the industries the Company
serves experience less rapid growth than  anticipated;  5) the Company is unable
to obtain  supplies on a timely basis from its limited  number of suppliers;  6)
new  competitors  enter the markets the Company  serves or existing  competitors
increase  their  marketing  efforts;  and 7) the  Company  is  unable  to obtain
additional  debt or equity  financing on favorable  terms, if at all, to satisfy
its  cash  requirements.   All  written  or  oral   forward-looking   statements
attributable  to the Company are expressly  qualified in their  entirety by such
factors.


                                     PART I

Item 1.  Business.

General

Zonic Corporation  ("Zonic" or the "Company") designs,  manufactures and markets
integrated standard systems, which are used to measure and analyze the vibration
and noise  characteristics  of  mechanical  structures.  These  systems are used
worldwide in product design conformance  testing,  manufactured  product quality
verification,  and operating  machine  condition  monitoring.  Key  technologies
utilized by the  Company  include  personal  computers  and  related  peripheral
equipment, multi-channel data acquisition, digital signal processing, structural
analysis, noise analysis, and rotating machinery analysis.

In product design conformance  testing, the Company's systems are used by highly
skilled engineers to reduce product  development time and enhance the quality of
their  company's  products  during  the  design  phase.  In  manufacturing,  the
Company's  systems  are used both to measure  manufactured  product  quality and
provide evidence of conformance to quality standards.  The Company's  monitoring
systems allow  maintenance and reliability  engineers  responsible for turbines,
compressors,  and other  large  rotating  equipment  to monitor  wear,  schedule
maintenance, and optimize operating performance.

During the past year,  the  Company has  focused on  manufacturing  applications
primarily  in the areas of machine  condition  monitoring  and  quality  product
production  monitoring.  The  Company has been  developing  new  products  which
utilize certain existing products to satisfy needs which are currently not being
met in certain niche segments of these markets.


Industry-Applications and Technology

Product  Design  Conformance  Testing.  Increasing  global  competition  in  the
industries  served by the Company has made the development  and  introduction of
new  products  on a  timely,  cost  effective  basis  vital to a  manufacturer's
success.  As a result,  product design  engineers are  constantly  challenged to
shorten product design cycles and improve product  quality.  Computer based test
systems are a vital tool in helping engineers achieve these goals.

The absence of noise and vibration in mechanical  structures is a key measure of
product  quality.  Advances in mechanical  design  software have enabled  design
engineers to predict and estimate  noise and vibration  characteristics  through
simulation  algorithms.  Accordingly,  quality  standards have been increasingly
stringent and  verification  of a product's  conformance  to these  standards is
crucial to a manufacturer.

Manufacturing  Testing Systems.  World-class  manufacturing  requires consistent
quality.  At all levels of the  manufacturing  process,  manufacturers are being
forced by their customers to not only  incrementally  improve quality,  but also
provide  documentary  evidence of the improvement.  Interest is growing in using
100 percent parts inspection as a method of accomplishing  zero-defect  delivery
of parts.  Although  there are a variety of  techniques  available  to inspect a
manufactured  component,  vibration analysis techniques offer the advantage of a
non-invasive,  non-destructive  means to detect  cracks  and  internal  flaws of
components.  Further,  vibration  measurements  of  equipment  integral  to  the
manufacture  of components or the end product can be used as a means to document
the process under which that component or end product was produced.

When a vibration analysis system is used for non-destructive production testing,
the vibration  characteristics of an approved component are measured and used as
a baseline.  As each  component is  produced,  it is tested and compared to that
baseline. Components that do not match the baseline can be rejected or receive a
more  thorough  inspection  and  analysis.  A metal  casting  is an example of a
component for which this technique is applicable.  When  inspection on a unit is
not practical, such as coiled metals, the machinery producing the product can be
monitored  for  vibration  characteristics,  which  affect  the  quality  of the
product.  In both cases,  data specific to the manufactured item can be retained
as evidence of the  condition of the product at that point in the  manufacturing
process.

Machinery  Monitoring  Systems (MMS).  Turbines,  compressors and other types of
large,  rotating machinery  designed to operate  continuously for many years are
used extensively in the petrochemical and power generation industries. Breakdown
of the machinery can be extremely  expensive,  both in terms of lost  production
and repair cost.

Machinery  Monitoring  Systems  utilize  high-speed  digital  signal  processing
technology  and  sophisticated   monitoring  software  to  continuously  monitor
vibration,  temperature,  pressure and flows in this type of machinery.  Current
operating  characteristics  can be  compared  to a  baseline  obtained  when the
machine  was new.  This  comparison  can be used to  monitor  wear in  bearings,
blades, and other parts, and to predict failures.  The analysis can be conducted
automatically  without the presence of a skilled engineer at the equipment site.
Predictions can be used to schedule  maintenance before catastrophic  breakdowns
occur.

Monitoring large,  rotating machinery requires rapid collection,  management and
analysis of vast amounts of data. Once this data is available, it can be used to
monitor the  performance and efficiency of the machinery.  Machinery  Monitoring
Systems can be  developed to adjust  operating  parameters  of the  equipment to
maximize output and minimize fuel cost.

Relationship

In 1988, the Company  entered into a relationship  with A&D Co. Ltd., a Japanese
instrument manufacturer,  ("A&D"). As part of this relationship,  A&D acquired a
28%  ownership  interest in the  Company.  The Company had entered  into various
joint product  development  arrangements,  marketing  arrangements  and a credit
agreement with A&D most of which have been terminated in the past few years.

Pursuant to the terms of a Subscription  Agreement  between the Company and A&D,
dated  January 30, 1998,  A&D  purchased  12,000  shares of Class A  Non-Voting,
Redeemable  Convertible  Preferred  Stock of the  Company  ("Class  A  Preferred
Stock") at a price of $100 per share.  The Class A Preferred  Stock is currently
convertible at the rate of one Class A Preferred  Share for 100 shares of common
stock.  Proceeds of $1,200,000  from this sale were used to repay a bank loan of
$1,078,000,  and related accrued  interest of $26,757 and to settle a portion of
the loans payable to A&D of $95,243. In addition,  A&D purchased 6,000 shares of
Class B Non-Convertible,  Redeemable,  Non-Voting Preferred Stock of the Company
at a price  of $200  per  share  with an  annual  dividend  equal  to 20% of the
Company's annual after-tax earnings excluding non-recurring earnings and charges
("Class B Preferred  Stock").  Proceeds of  $1,200,000  from the sale of Class B
Preferred  Stock were used to repay a short-term  bank loan of $600,000 that A&D
guaranteed,  the balance of loans  payable to A&D totaling  $538,203 and related
accrued  interest of $61,797.  In the event of  liquidation  or  dissolution  of
Zonic,  the Class A Preferred  Stock is entitled to receive $100 per share,  and
the Class B  Preferred  Stock $200 per  share,  before  holders of common  stock
receive any  amounts.  Both  classes of  Preferred  Stock may be redeemed by the
Company upon thirty days prior notice, the Class A shares at $100 per share, and
the Class B shares at $200 per share.  Pursuant to the  Subscription  Agreement,
the Credit  Agreement  between the Company and A&D dated December 7, 1992, under
which  A&D made  loans to the  Company,  was  terminated  and A&D  released  its
security interest in the Company's assets.

Products

Vibration  and  noise  analysis  systems  require  both  hardware  and  analysis
software. The Company provides both complete systems and components depending on
the specific customer's requirements.  In addition to product sales, the Company
offers  services  to its  customers  in the form of  training,  consulting,  and
extended warranty and equipment repairs.

Products offered by the Company include:

A&D 35XX Series - This is a line of single and dual channel FFT analyzers  which
the  Company  imports  from  A&D  in  Japan  for  distribution  in  the  Western
Hemisphere.  The  products  range  from  hand-held  analyzers  to  dual  channel
instruments  with a breadth of built-in noise and analysis  functions.  The 35XX
series products are used both as engineering  test  instruments and incorporated
in production testing systems. The price range is $4,000 to $25,000.

Zonic  Medallion  Series - The Medallion is Zonic's  newest  product having been
introduced in February 1996 with shipment  commencing in June 1996.  The product
was designed for field-testing and is integrated with a laptop personal computer
running  Microsoft Windows 95 or NT. The base product includes eight channels of
signal conditioning, a digital signal processing card which fits into the PCMCIA
slot of the personal computer, necessary cables and software. During fiscal year
1999, the Company  introduced units with 2, 4, or 6 input channels.  The Company
offers accessories including personal computers,  carrying cases, battery packs,
and additional  analysis  software.  The Company also sells third party software
packages with Medallion systems. The price range is $10,000 to $40,000.



<PAGE>


A&D WCA  (World  Class  Analyzer)  - The WCA is an  Apple  Macintosh  based  FFT
analyzer configurable from two to thirty-two input channels.  Originally jointly
developed  by Zonic  and A&D and  owned by both  companies,  Zonic  sold its 40%
interest in the product to A&D in June 1995. The Company now imports  components
from A&D for integration into systems for delivery to end customers, principally
for  design  testing  applications.  The line  includes  a breadth  of  analysis
software packages and systems range in price from $30,000 to $90,000.

Zonic 7000 Series - The 7000 series was designed to provide cost-effective large
channel count systems for applications  where  simultaneous  data acquisition is
crucial. Systems range in size from eight input channels configured with desktop
personal  computers  running Microsoft Windows NT and PC based analysis software
applications  to systems of greater than 500 input  channels  controlled by UNIX
based  workstation  computers as a part of integrated  Computer Aided Design and
Test  systems.  The  product is modular  and systems can be tailored to specific
applications through  configuration of hardware modules and application software
modules.

A variety of software is offered,  again  tailored to the specific  application.
For general signal data acquisition and FFT analysis, Zeta software is used. For
structural  analysis  applications,  the Company  will offer  either MTS Systems
Corporation's  ("MTS")  structural  analysis software or Spectral Dynamics' STAR
series  software.  The MTS  software  is  available  on both UNIX and Windows NT
operating  systems.  Spectral's  STAR  software is offered for PC host  computer
applications  only. The Company has  Distribution  Agreements  with both MTS and
Spectral Dynamics for the distribution of their software products.

Windows NT based  7000  systems  have a price  range  from  $25,000 to  $130,000
depending on  configuration  and software  content.  UNIX based systems sell for
approximately  $50,000 to over $1,000,000 primarily due to larger channel counts
and the amount of add-on equipment and services.  The Company's sale of its Zeta
Technology  and software to A&D in fiscal year 1997 has had an adverse effect on
the  marketability of 7000 Series products.  However,  the Company  continues to
support  its  customers  for these  products  and has no plans to  suspend  that
support.

Machinery  Monitoring  Systems - The  Company  designs,  assembles,  and markets
systems for machinery monitoring. These products have been targeted toward large
petrochemical  processing and electric power generation plants. Such plants have
large rotating  compressors and generators that may run continuously for several
years or longer.  Often this equipment is unattended and is checked infrequently
by maintenance personnel.

The Company's  Machinery  Monitoring  Systems are designed to measure  vibration
characteristics and operating parameters (pressures, temperatures, speeds, etc.)
at  predetermined  intervals.  The systems record,  store,  organize and analyze
massive amounts of data. The systems also perform analytical functions to assist
maintenance personnel in monitoring the equipment.

The  Company's   Machinery   Monitoring   Systems  compare   current   vibration
characteristics  with a baseline determined when the equipment was new. Based on
this  comparison,  the systems are designed to monitor wear and predict possible
failure  before it occurs.  They can also be programmed  to broadcast  alarms or
even shut down the machine if certain  parameters exceed  predetermined  levels.
Machinery  Monitoring  Systems also can be programmed to use the operating  data
they collect to calculate adjustments to operating parameters that will maximize
efficiency and minimize fuel usage.

Because each large  petrochemical  and power  generation  plant is unique,  each
Machinery  Monitoring  System  has been  tailored  to  measure  the  operational
characteristics  of specific  machines  and to meet the needs of each  customer.
Machinery  Monitoring Systems prices range from $200,000 to $2,000,000 depending
on the requirements of the installation.

The Company's  products offered in this market to date have  concentrated on the
application  of its  vibration  analysis  products  to the very  high end of the
market.  The Company believes there is significant  opportunities  for growth in
these  markets  through  the  application  of  machinery  monitoring  techniques
developed by the Company to smaller  scale  systems for less  critical  rotating
machinery.  Products  developed  for  this  market  are also  applicable  to the
Company's production testing  applications and, to a lesser extent,  engineering
test applications.

Marketing and Distribution

The Company markets its Engineering  Test and Production Test systems  primarily
to  original  equipment   manufacturers  and  suppliers  in  the  aerospace  and
transportation  industries,  while its Machinery Monitoring Systems are marketed
primarily  to  steel,   industrial  chemical  and  petrochemical   manufacturing
facilities, and power generation plants.

The Company sells its products worldwide,  but principally in the United States,
Canada, the Pacific Rim Countries (Korea,  Japan, China, etc.) and India. Export
sales  accounted for 10%,  26%, and 39% of the Company's net revenue  during the
fiscal years ended March 31, 1999,  1998 and 1997,  respectively.  See Note G of
Notes to Financial  Statements.  The Company is  represented in these markets by
manufacturers'  representatives  and agents who solicit orders for the Company's
products on behalf of the Company.  The Company  sells its products and services
directly to the end customer and pays the representative a commission. A&D sells
Zonic products in the Japanese market. The Company is the exclusive  distributor
of the WCA Product owned by A&D in the Western Hemisphere.  (See Note J of Notes
to  Financial  Statements.)  In Japan,  A&D buys  products  from the Company for
re-sale to end  customers.  The Company  sells it  products to A&D at  discounts
which vary by product. These discounts are a vendor-to-agent  discount and not a
discount to the end-user.  Generally,  the discount  rates made available to A&D
for specific  products are greater  than the  discount  rates made  available to
non-affiliated  international  sales  agents in other  countries  because of the
significance  of the  Japanese  market and  because  A&D, as a  manufacturer  of
similar products,  has significantly more technical  expertise than other agents
currently used by the Company.  Accordingly,  A&D can provide  installation  and
more  technical  services to the end user,  which reduces the Company's  selling
expenses.  The  Company  believes  that the terms  made  available  to A&D as an
international  sales  agent are fair and are not more  favorable  than the terms
that would be made available to a non-affiliated sales agent in a similar market
and with similar technical expertise.

Major Customers

There were two customers, which accounted for 10% or more of the Company's total
revenues in 1999. See Note H of Notes to Financial
Statements.

Manufacturing and Supplies

In manufacturing its systems,  the Company utilizes  custom-designed  electronic
components,  custom-machined  parts and,  to the extent  feasible,  commercially
available devices such as integrated circuits, power supplies, and CRT monitors.
The Company also purchases engineering  workstations and personal computers that
are used in the assembly of its products.

The Company purchases  several component parts from single source suppliers.  If
these  single  source  suppliers  are unable to supply the  Company  with needed
parts, or to supply them on schedule, material production delays could occur.

Service, Maintenance and Warranty

The Company  provides a one-year  limited warranty from the date of shipment for
all hardware  products,  and effective January 1, 1999, the limited warranty for
software  products was also extended  from ninety days to one year.  The Company
will  repair,  or at its  option,  replace  defective  products  returned to its
Milford, Ohio, location. As an alternative,  service technicians employed by the
Company will provide repair  service at the customer's  location if the customer
pays travel expenses.  Service for products sold overseas are generally provided
by the  Company's  appointed  agent in that  country.  (See  Item 1  Business  -
Marketing and Distribution)  The Company's  warranty expense was 2.0%, 3.0%, and
2.0% of revenue for fiscal 1999, 1998 and 1997, respectively.

The  Company  also  sells  extended   warranty   service   contracts  for  Zonic
manufactured equipment and software.  These contracts are generally for one year
and extend the original  warranty  provisions.  Effective  January 1, 1999,  the
price for one year of  extended  warranty  coverage  is 10% of the then  current
price for the covered  equipment and  software.  All products are on a return to
factory basis and include software, in which case, software updates are provided
at no additional charge.  Software updates for customers under extended warranty
are available from the Company's website.

Research and Development and Software Construction

Research  and product  development  and  software  construction  is an important
factor in the Company's  business.  The Company  maintains an internal  staff of
three full-time  employees for the development of new products and software,  as
well as the improvement and refinement of its present products and the expansion
of their uses and  applications.  There can be no assurance  the Company will be
successful in developing new products or software or improving existing products
or software.  Moreover,  there can be no assurance that the  introduction of new
products  or  technological  developments  by  others  will not  materially  and
adversely affect the Company's operations.  The Company has reduced its research
and product development and software construction in 1999 and 1998 versus levels
in prior years.

Software  construction  and  product  enhancement  costs  totaling  $47,000  and
$261,000 were capitalized during fiscal years 1998 and 1997, respectively. There
were no software  construction and product  enhancement costs capitalized during
fiscal year 1999.  Software  construction and product  enhancement  amortization
expenses  for fiscal  years  1999,  1998 and 1997 were  $44,000,  $139,000,  and
$779,000, respectively. The Company expensed $163,000, $196,000, and $27,000 for
research and product development for fiscal 1999, 1998, and 1997, respectively.

Patents

The  Company's  primary  focus in the area of research  and  development  is the
development of data acquisition and digital signal processing equipment.  In the
opinion of management,  the Company's  present  position and its future progress
are a function of the level of excellence and creativity of its technical staff;
patent protection is useful, but of secondary importance.

Competition

The Company markets a full range of standard products for use in analyzing noise
and vibration from single channel instruments to systems that process over 1,000
channels  of data.  (See  Item 1  Business  -  Products).  There  are  different
competitors in each market segment.

Many of the Company's  competitors offer only hardware or software components of
a noise and vibration analysis system. Thus, a customer purchasing products from
those competitors must integrate components in order to have the complete system
necessary to conduct  noise and  vibration  analysis.  The Company  provides its
customers  with fully  integrated  systems  that  include  both the hardware and
software necessary for the customer to conduct noise and vibration analysis.

Competition in the market for noise and vibration  analysis systems is generally
based on product  features.  Customers  select a particular  system based on how
well they  perceive it will meet their  particular  needs.  Price is generally a
secondary  consideration,  although  the  system  selected  must fit  within the
customer's  equipment budget.  The Company has designed its products with a wide
range of  capabilities  so that those  products  will meet a variety of customer
needs.

Competitors   in  the  market  for  one  and  two  channel   analyzers   include
Hewlett-Packard  Corporation,  Ono Sokki (a Japanese company), Stanford Research
Systems, and Bruel & Kjaer (a Danish company).

Competitors with the Company for engineering  design test and production testing
include a division of Hewlett-Packard,  Bruel & Kjaer, Data Physics,  Ono Sokki,
Signal  Processing  Systems,  OROS (a French  company),  and Leuven  Measurement
Systems, N.V. (a Belgian company).

Competitors in the market for large  Machinery  Monitoring  Systems  include SKF
Corporation and Bentley Nevada Corporation.  Competitors in this market may also
include custom systems developers who develop specialized one-of-a-kind systems.

Bentley  Nevada,   Computational  Systems,  Inc.  and  ENTEK-IRD  are  the  main
competitors with the Company in machine condition monitoring systems for smaller
scale machinery applications.

Several of the  Company's  competitors,  including  the above,  have  financial,
technical,  research,  distribution and personnel resources that exceed those of
the Company. There can be no assurance that the Company can compete against such
companies, or that other competitors will not emerge.  Competition is intense in
all product lines and, in many cases,  requires significant  discounts from list
prices being passed on to customers.

Product Backlog

The Company's  product and services  backlog of orders believed to be firm as of
March 31, 1999 and March 31, 1998 was $309,000 and $705,000,  respectively.  The
most significant portion of this decrease was related to a 7000 Series order for
8 systems  received  during the fourth quarter of fiscal 1998. Only one unit was
shipped in fiscal 1998, with the remaining units shipped throughout fiscal 1999.
Significant  decreases in product  backlog also occurred in the WCA and standard
Medallion  product lines.  These  decreases  were partially  offset by orders in
targeted new markets for special systems and test  applications  using Medallion
products.

Generally,  orders can be  processed  and  shipped  on  products  not  requiring
modifications  from  stock  within 45 days.  Certain  orders are  processed  and
shipped  on a longer  cycle due to  customer  delivery  requests  or  because of
modifications  ordered by a customer.  Orders are subject to  cancellation  upon
certain conditions.

Employees

As of March 31,  1999,  the  Company  had 16  employees.  Many of the  Company's
employees are highly  skilled.  The Company's  continued  success will depend in
part on its ability to attract and retain such employees.  None of the Company's
employees are  represented  by a labor  organization.  The Company  believes its
relations with its employees are good.

Item 2.  Properties.
The Company's executive offices and manufacturing facilities are located at Park
50 TechneCenter,  50 West TechneCenter Drive, Milford, Ohio. The leased premises
consist of  approximately  6,500 square feet of which about  one-third is office
space.

Item 3.  Legal Proceedings.
The Company  occasionally is involved in ordinary routine litigation  incidental
to its business.  The Company is not involved in any material pending litigation
not covered by insurance.

Item 4.  Submission of Matters to a Vote of Security Holders.
Not Applicable.


                                     PART II

Item 5.  Market For Registrant's Common Equity and Related Stockholder Matters.
(a) The Company's  Common Shares are currently  listed  over-the-counter  on the
"OTC Bulletin Board" through the National Daily Quotation Bureau, Inc. under the
symbol "ZNIC"; therefore,  there is only limited trading in the Company's Common
Shares. Quarterly trading information is not available.

(b) As of March 31,  1999,  there were 571  holders  of record of the  Company's
Common Shares,  without par value, the Company's only class of common equity. On
June 11, 1999, there were 3,044,136 Common Shares of the Company outstanding.

(c) The Company did not pay any dividends on its common shares during the fiscal
years ended March 31, 1999 and March 31, 1998.

Item 6.  Selected Financial Data.
The following  financial  data is provided for the Company and its  subsidiaries
for  the  five  preceding  fiscal  years.  See  Note  C of  Notes  to  Financial
Statements.

<TABLE>
<CAPTION>
<S> ...................................  <C>           <C>             <C>            <C>            <C>

                                                 1999          1998            1997           1996           1995
                                         ------------   ------------   -------------  -------------  -------------

Net revenues ..........................  $  2,114,183  $   2,025,938   $   3,734,706  $   3,639,982  $   4,860,036
Gain on sale of assets ................  $     (6,050) $       4,090   $   3,027,551  $   1,417,027  $           0

Profit (loss) before
   extraordinary item .................  $    164,207  $    (315,604)  $   1,898,113  $      (9,969) $  (1,366,481)

Net profit (loss) .....................  $    164,207  $    (315,604)  $   1,898,113  $     387,306  $     447,648

Basic earnings (loss) per share:
Profit (loss) before
   extraordinary item .................  $       0.04  $       (0.10)  $        0.62  $        0.00  $       (0.44)

Extraordinary item - gain from
   debt restructuring net of taxes ....  $       0.00  $        0.00   $        0.00  $        0.13  $         0.58

   Net profit (loss) ..................  $       0.04  $       (0.10)  $        0.62  $        0.13  $         0.14

Diluted earnings (loss) per share:
Profit (loss) before extraordinary item  $       0.04  $       (0.10)  $        0.62  $        0.00  $        (0.44)

Extraordinary item - gain from
  debt restructuring net of taxes .....  $       0.00  $        0.00   $        0.00  $        0.13  $          0.58

   Net profit (loss) ..................  $       0.04  $        (0.10) $        0.62  $        0.13  $          0.14

Total assets ..........................  $    568,827  $      699,597  $   2,687,484  $   3,242,766  $     4,387,721

Long-term obligations
  (including long-term debt
  and capital leases less
  current maturities) .................  $     10,160  $       30,186  $     987,425  $   4,070,000  $     6,018,761

Cash dividends declared
  per common share ....................  $       0.00  $         0.00  $        0.00  $        0.00  $          0.00

</TABLE>

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operation.

The following Management's Discussion and Analysis should be read in conjunction
with the financial statements and notes thereto which follow.

Results of Operations

1999 versus 1998
Revenues.  Total revenues  increased $88,000 or 4% in fiscal 1999 from the prior
year.  Sales increased in the Company's 7000 Series,  WCA and Medallion  product
lines and  decreased in  consulting,  extended  warranty and MMS  products.  The
increases  in 7000  Series and WCA  revenues  were due to sales  resulting  from
orders received in fiscal 1998 which were completed during the current year. The
increase in  Medallion  revenues  was due  primarily  to sales made to a company
under an OEM  distribution  agreement.  The  decrease  in  consulting,  extended
warranty and MMS  revenues  were  attributable  to the  continuing  slow down of
orders  resulting  from the  sale of its Zeta  technology  and  software  to A&D
Company Ltd. in fiscal 1997.  Except as discussed  below,  sales in both periods
were geographically  diverse and not dependent on any one customer for recurring
business,  nor  specific  region of the  world.  (See  Notes G and H of Notes to
Financial  Statements.)  Price  increases did not have a  significant  impact on
sales. As a percentage of total revenues,  sales to domestic customers increased
in 1999 to 90% compared to 74% in 1998. The Company's  largest customer in 1999,
a U.S. company,  accounted for 16% of total sales. A foreign  government was the
Company's largest customer in 1998 that accounted for 8% of total sales.

Cost of Products and  Services  Sold.  Cost of products  and services  sold as a
percentage  of revenues  decreased  to 37% in 1999 from 40% the prior year.  The
improved  profit margin was due primarily to higher profit  margins on Medallion
product sales resulting from add-on  software and equipment  options and reduced
production costs.

Selling  and  Administrative  Expenses.   Selling  and  administrative  expenses
decreased  by  approximately  $77,000  or 7% in 1999  from  the  prior  year due
primarily  to a  decrease  in rent  and  other  facility  related  costs,  lower
professional services expense and sales commisssion expense resulting from fewer
sales commissionable to sales representatives. As a percentage of total revenue,
these expenses decreased to 45% in 1999 compared to 51% in 1998.

Research and  Development  and  Software  Construction  and Product  Enhancement
Amortization.  Research and development  expense and software  construction  and
product  enhancement  amortization  decreased  by $128,000 or 38% in 1999 versus
1998.  This  decrease  was due to less  amortization  expense  as a result  of a
decrease in capitalized  software  construction  and product  enhancement  costs
during recent years.  (See Liquidity and Capital Resources and Note A-3 of Notes
to Financial Statements.)

Interest  Expense.  Interest  expense  decreased  by  $158,000  in  1999  due to
significantly  less  borrowings  during  the  current  year  resulting  from the
retirement of  outstanding  current and long-term  debt using  proceeds from the
sale of preferred stock to A&D in fiscal 1998.

Foreign Currency Gains (Losses). Foreign currency gains and (losses) of $875 and
$(146) in 1999 and 1998,  respectively  were due to increases  and  decreases in
value of the U.S. dollar against the Japanese yen.

Results of Operations

1998 versus 1997
Revenues.  Total  revenues  decreased  $1,709,000 or 46% in fiscal 1998 from the
prior year. Sales decreased  across all product lines,  except  Medallion,  with
significant  declines  in the  Company's  7000 Series and  Machinery  Monitoring
System (MMS) product lines.  The prior year included revenue from work completed
on a large MMS order received in fiscal year 1996. Revenue from this project was
recorded on the percentage of completion method in accordance with the Company's
revenue  recognition  policies and the project was  completed in December  1996.
Revenue  from the  Medallion  product line that was  introduced  during 1997 was
$1,175,000,  an increase of $718,000  over the prior year.  Except as  discussed
below,  sales in both periods were  geographically  diverse and not dependent on
any one customer for recurring business,  nor specific region of the world. (See
Notes G and H of Notes to Financial  Statements.) Price increases did not have a
significant  impact  on  sales.  As a  percentage  of total  revenues,  sales to
domestic  customers  increased  in  1998 to 74%  compared  to 61% in  1997.  The
Company's  largest customer in 1998, a foreign  government,  accounted for 8% of
total sales.  A foreign  government was also the Company's  largest  customer in
1997 that accounted for 29% of total sales.

Cost of Products and  Services  Sold.  Cost of products  and services  sold as a
percentage of revenues  decreased to 40% in 1998 from 44% in the prior year. The
improved  profit  margin is the result of higher  profit  margins on the sale of
Medallion products.

Selling  and  Administrative  Expenses.   Selling  and  administrative  expenses
decreased by approximately $236,000 in 1998 from the prior year due primarily to
lower administrative salaries and the reduction of facility-related costs offset
by higher  advertising  and sales  promotion  costs.  As a  percentage  of total
revenue,  these expenses increased to 51% in 1998 compared to 34% in 1997 due to
significantly lower revenues in 1998.

Research and  Development  and  Software  Construction  and Product  Enhancement
Amortization.  Research and development  expense and software  construction  and
product  enhancement  amortization  decreased  by $471,000 or 58% in 1998 versus
1997. This decrease was due to less amortization expense as a result of the sale
of the Company's  Zeta  technology  and software and  accompanying  writedown of
software  construction and product  enhancement  costs  associated  therewith in
December 1996. This reduction has been partially offset by amortization  expense
related to  Medallion  products  of $118,000  and an  increase  in research  and
development  expense of $169,000  during 1998. The Company  capitalized  certain
costs related to significant  improvements in its products,  which were incurred
after technological  feasibility of the product was established.  Such costs are
amortized over the estimated useful life of the improvements. (See Liquidity and
Capital Resources and Note A-3 of Notes to Financial Statements.)

Gain on Sale of Asset. In December 1996, the Company sold its Zeta Technology to
A&D for $3,618,578.  The gain from this sale was net of the unamortized  portion
of capitalized  software and product enhancement costs for the Zeta software,  a
$46,585  writedown  of  software  construction  and  product  enhancement  costs
associated with the expected  decline in 7000 product  revenues,  a provision of
$150,000 for the  write-off of excess and obsolete 7000 product  inventory,  and
other expenses related to the sale resulting in a gain of $3,020,942.

Loss From  Affiliate.  The Company  recorded  expenses  of $385,000  during 1997
related to  uncollected  old accounts  receivable  from the  affiliate and costs
expected to be incurred from the dissolution of Zonic A&D Company.

Interest Expense.  Interest expense decreased by $220,000 in 1998 from the prior
year as borrowings decreased substantially during the current year. In addition,
the Company  realized  benefits  for the entire year from the  reduction of debt
resulting from the sale of the Company's Zeta Technology in 1997.

Foreign Currency Gains (Losses).  Foreign currency  (losses) and gains of $(146)
and $26,462 in 1998 and 1997,  respectively  were due to decreases and increases
in value of the U.S. dollar against the Japanese yen.

Liquidity and Capital Resources.

Working  capital as of March 31, 1999 was a negative  $748,000 versus a negative
$832,000 as of March 31,  1998.  The  improvement  was due to a reduction in the
current maturity of long-term debt, accounts payable and deferred income.  These
reductions were partially offset by a decrease in cash.

The Company's cash flow from  operations was $5,000 in fiscal 1999.  Payments on
long-term debt totaled $42,000 and purchases of equipment totaled $11,000. There
was no investment in software  construction and product  enhancement  activities
during fiscal 1999.

The Company has experienced some improvement in its cash flow resulting from its
operating  profit  during fiscal 1999,  but  continues to  experience  cash flow
problems as current  liabilities exceed current assets. The Company continues to
seek  additional  sources of working  capital either through  additional debt or
equity financing to sustain operations and reduce current liabilities. There can
be no assurance that the Company will be able to obtain additional  financing on
favorable terms, if at all, from any source.

Market Risk

The Company's  operations  and cash flow can be affected by, among other things,
interest  rate  changes and  foreign  currency  fluctuations.  The impact of any
reasonably  possible  change  in the  values  of  these  financial  items on the
Company's  financial  position,  its results of  operations,  and its cash flows
would be immaterial.


Item 8.  Financial Statements and Supplementary Data.
Financial Statements included as part of this Report:
<TABLE>
<CAPTION>

                                                                                                      Page No.
<S>                                                                                                     <C>

Independent Auditors' Report............................................................                12-13

Statements of Operations for the Years Ended March 31, 1999, 1998 and 1997..............                14

Balance Sheets as of March 31, 1999 and 1998............................................                15

Statements of Cash Flows for the Years Ended March 31, 1999, 1998 and 1997..............                16

Statements of Shareholders' Equity (Deficit) for the Years
     Ended March 31, 1999, 1998 and 1997 ...............................................                17

Notes to Financial Statements...........................................................                18


</TABLE>


<PAGE>



Independent Auditors' Report





To the Board of Directors and Shareholders
Zonic Corporation
Cincinnati, Ohio



We have audited the accompanying  balance sheet of Zonic Corporation as of March
31,  1999  and  the  related  statements  of  operations,  shareholders'  equity
(deficit),  and cash flows for the year then ended.  These financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audit.

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the  financial  position  of the Company as of March 31, 1999 and the
results  of its  operations  and its  cash  flows  for the  year  then  ended in
conformity with generally accepted accounting principles.

The  accompanying  financial  statements have been prepared  assuming that Zonic
Corporation  will  continue as a going  concern.  As  disclosed in Note M to the
Financial  Statements,  the Company is  experiencing  difficulty  in  generating
sufficient cash flow to meet its  obligations and sustain its operations,  which
raises  substantial  doubt about its  ability to  continue  as a going  concern.
Management's  plans in regard to these matters are also described in Note M. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.




by: / s / Clark, Schaefer, Hackett & Co.



Cincinnati, Ohio

May  18, 1999



<PAGE>




Independent Auditors' Report





To the Board of Directors and Shareholders
Zonic Corporation
Cincinnati, Ohio



We have audited the accompanying  balance sheet of Zonic Corporation as of March
31,  1998  and  the  related  statements  of  operations,  shareholders'  equity
(deficit),  and cash flows for each of the two years in the period  ended  March
31, 1998.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the  financial  position  of the Company as of March 31, 1998 and the
results  of its  operations  and its cash flows for each of the two years in the
period ended March 31, 1998 in conformity  with  generally  accepted  accounting
principles.

The  accompanying  financial  statements have been prepared  assuming that Zonic
Corporation  will  continue as a going  concern.  As  disclosed in Note M to the
Financial  Statements,  the Company is  experiencing  difficulty  in  generating
sufficient cash flow to meet its  obligations and sustain its operations,  which
raises  substantial  doubt about its  ability to  continue  as a going  concern.
Management's  plans in regard to these matters are also described in Note M. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.




by: / s / Deloitte and Touche LLP



Cincinnati, Ohio

June 22, 1998

<PAGE>


Statements of Operations for the Years Ended March 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>

                                                                    1999          1998          1997
                                                             -----------   -----------   -----------
<S>                                                          <C>           <C>           <C>

Products and service revenue ..............................  $ 2,114,183   $ 2,025,938   $ 3,734,706
                                                             -----------   -----------   -----------

Cost of products and services sold ........................      775,638       813,600     1,645,985
Selling and administrative expenses .......................      954,629     1,031,718     1,268,115
Research and development expenses and software construction
  and product enhancement amortization ....................      207,459       335,004       806,048
Writedown of capitalized software .........................         --            --         400,000
                                                             -----------   -----------   -----------

Total operating expenses ..................................    1,937,726     2,180,322     4,120,148
                                                             -----------   -----------   -----------

Operating income (loss) ...................................      176,457      (154,384)     (385,442)

Gain (loss) on sale and disposal of assets ................       (6,050)        4,090     3,027,551
Loss from affiliate .......................................         --            --        (385,000)
Interest expense ..........................................       (7,075)     (165,164)     (385,458)
Foreign currency gains (losses) ...........................          875          (146)       26,462
                                                             -----------   -----------   -----------

Income (loss) before taxes ................................      164,207      (315,604)    1,898,113

Provision for income taxes ................................         --            --            --
                                                             -----------   -----------   -----------

Net income (loss) .........................................      164,207      (315,604)    1,898,113

Less: Dividend payable on preferrred shares ...............      (35,698)         --            --
                                                             -----------   -----------   -----------

Net income (loss) available to common shares ..............  $   128,509   ($  315,604)  $ 1,898,113
                                                             ===========   ===========   ===========

Basic earnings (loss) per share: ..........................  $      0.04   ($     0.10)  $      0.62
                                                             ===========   ===========   ===========

Diluted earnings (loss) per share: ........................  $      0.04   ($     0.10)  $      0.62
                                                             ===========   ===========   ===========
</TABLE>



The accompanying notes are an integral part of these statements.


<PAGE>



Balance Sheets as of March 31, 1999 and 1998
<TABLE>
<CAPTION>


                                                                                           1999          1998
                                                                                    -----------   -----------
<S>                                                                                 <C>           <C>

Current Assets
  Cash ...........................................................................  $    32,848   $    79,408
  Receivables, net of allowance for doubtful accounts
      Trade ......................................................................      125,786       248,519
      Related parties ............................................................          200         1,708
      Unbilled contracts .........................................................      115,588          --
                                                                                    -----------   -----------
  Total receivables ..............................................................      241,574       250,227

  Inventories
      Finished products ..........................................................       96,164       144,718
      Work in process ............................................................       68,128        49,111
      Raw material ...............................................................       85,049        71,766
                                                                                    -----------   -----------
  Total inventory ................................................................      249,341       265,595
  Prepaid expenses ...............................................................        2,702         3,734
                                                                                    -----------   -----------
Total current assets .............................................................      526,465       598,964

Property and Equipment-at cost
  Furniture and office equipment .................................................      133,284       452,417
  Machinery and plant equipment ..................................................      264,164       597,022
  Software construction and product enhancements .................................    2,203,070     2,203,070
                                                                                    -----------   -----------
                                                                                      2,600,518     3,252,509
  Less accumulated depreciation and amortization .................................    2,558,156     3,151,876
                                                                                    -----------   -----------
                                                                                    -----------   -----------
Total net property and equipment .................................................       42,362       100,633
                                                                                    -----------   -----------

                                                                                    $   568,827   $   699,597
                                                                                    ===========   ===========

Liabilities and Shareholders' Equity (Deficit)
Current Liabilities
  Current maturities of long-term obligations ....................................  $    20,788   $    42,365
  Accounts payable - trade .......................................................      614,230       728,062
  Accounts payable - related parties .............................................         --           4,223
  Deferred income ................................................................      321,819       365,258
  Dividend payable ...............................................................       35,698          --
  Accrued liabilities
      Salaries and wages .........................................................      105,514       108,947
      Property and payroll taxes .................................................       41,317        54,684
      Other ......................................................................      135,468       127,052
                                                                                    -----------   -----------
                                                                                    -----------   -----------
  Total accrued liabilities ......................................................      282,299       290,683
                                                                                    -----------   -----------
Total current liabilities ........................................................    1,274,834     1,430,591

Long-term obligations, less current maturities ...................................       10,160        30,186

Deferred rent ....................................................................       34,789       118,285
Commitments and Contingencies

Shareholders' Equity (Deficit)
  Preferred shares - authorized, 250,000 shares without par value;
      12,000 shares Class A  non-voting , redeemable, convertible, $100 per share     1,200,000     1,200,000
      6,000 shares Class B non-voting, redeemable, non-convertible, $200 per share    1,200,000     1,200,000
  Common shares - authorized, 9,750,000 shares without par value; issued and
    outstanding, 3,044,136 shares at March 31, 1998 and 1997 at stated issue price       61,674        61,674
Additional paid in capital .......................................................    5,727,881     5,727,881
                                                                                    -----------   -----------
                                                                                      8,189,555     8,189,555
Accumulated deficit ..............................................................   (8,940,511)   (9,069,020)
                                                                                    -----------   -----------
                                                                                    -----------   -----------
Total shareholders' equity (deficit) .............................................     (750,956)     (879,465)
                                                                                    -----------   -----------

                                                                                    $   568,827   $   699,597
                                                                                    ===========   ===========

</TABLE>


The accompanying notes are an integral part of these statements.


<PAGE>


Statements of Cash Flows for the Years Ended March 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>

                                                                          1999          1998          1997
                                                                   -----------   -----------   -----------
<S>                                                                <C>           <C>          <C>

Cash provided by (used in) operations
  Net income (loss) for year ....................................  $   164,207   ($  315,604)  $ 1,898,113
  Adjustments to reconcile net income (loss) to net cash provided
           by (used in) operating activities:
 (Gain) loss from sale of assets ................................        6,050        (4,090)   (3,027,551)
  Depreciation and amortization .................................       17,704        21,052        33,486
  Amortization of software construction and product enhancements        44,383       139,179       778,750
  Write-off of capitalized software costs .......................         --            --         400,000
  Amortization of deferred income and deferred rent .............     (200,770)     (220,601)     (277,797)
  Bad debts provision (recovery) ................................         --            --         (29,806)
  Amortization of discount on notes receivable ..................         --         (30,000)         --
  Provision for obsolete inventories ............................       24,000        33,385        31,111
  Loss from affiliates ..........................................         --            --         385,000
  Foreign currency (gain) loss and other ........................         (875)          235       (26,646)
  Increase (decrease) in cash due to changes in:
    Receivables .................................................        4,053        36,301       321,362
    Inventories .................................................       (7,746)      120,886        64,595
    Prepaid expenses ............................................        1,032           504          (405)
    Accounts payable and accrued liabilities ....................     (120,964)      (87,469)     (296,605)
    Accrued rent ................................................         --         (64,079)      (61,615)
    Deferred revenue (expense) and advanced billings to customers       73,835       183,581      (161,608)
                                                                   -----------   -----------   -----------
        Net cash provided by (used in) operations ...............        4,909      (186,720)       30,384

Cash used in investment activities
  Purchase of equipment and leasehold improvements ..............      (10,891)       (9,094)       (9,166)
  Proceeds from sale of fixed assets ............................        1,025        13,976        72,210
  Software construction and product enhancement expenditures ....         --         (47,198)     (261,234)
                                                                   -----------   -----------   -----------
        Net cash used in investment activities ..................       (9,866)      (42,316)     (198,190)

Cash provided by (used in) financing activities
  Proceeds from short-term and long-term notes payable ..........         --          75,000       405,000
  Repayment of long-term debt obligations .......................      (41,603)      (26,050)       (6,651)
                                                                   -----------   -----------   -----------
        Net cash provided by (used in) financing activities .....      (41,603)       48,950       398,349

Increase (decrease) in cash .....................................      (46,560)     (180,086)      230,543
Cash - beginning of period ......................................       79,408       259,494        28,951
                                                                   -----------   -----------   -----------
                                                                   ===========   ===========   ===========
Cash - end of period ............................................  $    32,848   $    79,408   $   259,494
                                                                   ===========   ===========   ===========
                                                                   ===========   ===========   ===========
Interest paid during the year ...................................  $     7,075   $   171,722   $   349,603
                                                                   ===========   ===========   ===========
</TABLE>

The accompanying notes are an integral part of these statements.


<PAGE>

Statements of Shareholders' Equity (Deficit) for the Years Ended March 31, 1999,
1998 and 1997


<TABLE>
<CAPTION>
                                                            Common     Preferred       Paid in    Accumulated
                                                            Shares        Shares       Capital       Deficit          Total
<S>                                                  <C>            <C>          <C>            <C>            <C>

Balance at March 31, 1996 ..........................  $     61,674  $          0  $  5,727,881  ($10,651,529)  ($ 4,861,974)

Net income for year ................................          --            --            --       1,898,113      1,898,113
                                                      ------------  ------------  ------------  ------------   ------------

Balance at March 31, 1997 ..........................  $     61,674  $          0  $  5,727,881  ($ 8,753,416)  ($ 2,963,861)

Preferred shares issued ............................          --       2,400,000          --            --        2,400,000

Net loss for year ..................................          --            --            --        (315,604)      (315,604)
                                                      ------------  ------------  ------------  ------------   ------------

Balance at March 31, 1998 ..........................  $     61,674  $  2,400,000  $  5,727,881  ($ 9,069,020)  ($   879,465)

Net income for year ................................          --            --            --         164,207        164,207

Dividends payable on preferred shares ..............          --            --            --         (35,698)       (35,698)
                                                      ------------  ------------  ------------  ------------   ------------

Balance at March 31, 1999 ..........................  $     61,674  $  2,400,000  $  5,727,881  ($ 8,940,511)  ($   750,956)
                                                      ============  ============  ============  ============   ============
</TABLE>

The accompanying notes are an integral part of these statements.


Notes to Financial Statements

Note A - Summary of Accounting Policies

The  Company's  principal  activity  consists  of the design,  manufacture,  and
marketing of data  acquisition  and analysis  systems.  A summary of significant
accounting  policies  applied in the preparation of the  accompanying  financial
statements follows.  Certain  reclassifications  have been made to amounts shown
for the prior  year to  conform to  current  year  classifications  which had no
effect on operating losses or net income (loss) for any period.

1.  Inventories
      Inventories are stated at the lower of cost or market.  Finished  products
and work in process costs are determined principally by the average cost method,
including material,  labor, and overhead  associated with inventory  production.
Raw  material  cost is  determined  by the  first-in  first-out  method  (FIFO).
Inventories  are reduced by allowances for  obsolescence  totaling  $179,000 and
$185,000 at March 31, 1999 and 1998, respectively.

2.  Depreciation
      Depreciation  is  provided  in  amounts  sufficient  to relate the cost of
depreciable  assets to operations over their  estimated  service lives under the
straight-line  method.  Estimated  remaining useful lives range from one to five
years.

3.  Research and  Development  Expenses and  Software  Construction  and Product
Enhancement  Certain software  development  costs are capitalized when incurred.
Capitalization  of software  development  costs begins upon the establishment of
technological  feasibility.  The establishment of technological  feasibility and
the ongoing  assessment of  recoverability of capitalized  software  development
costs  requires  considerable  judgment by  management  with  respect to certain
external  factors,  including,  but not limited to,  technological  feasibility,
estimated  economic  life and changes in  software  and  hardware  technologies.
Research and development  expenses,  including development costs of new products
and processes, are expensed as incurred.

     There were no  unamortized  costs for  software  construction  and  product
enhancement  at March  31,  1999.  At March  31,  1998,  there  was  $44,383  of
unamortized costs for software construction and product enhancement.


Capitalized costs of software  construction and product  enhancement and related
information for fiscal years 1999, 1998 and 1997 follow:

                                                     1999      1998      1997
                                                 --------  --------  --------
Capitalized costs
Software construction and product enhancement .      --    $ 47,198  $261,234

Amortization
  Software construction .......................  $ 44,383   139,179   594,918
  Product enhancement .........................      --        --     183,832
Reductions of capitalized software construction
   and product enhancement costs ..............      --        --     446,585

Net book value of assets sold .................      --        --     271,552

Research and development expenses .............  $163,076  $195,825  $ 27,298


During 1998, the Company  wrote-off fully amortized  capitalized  costs totaling
$2,646,650.  There was no effect on the profit and loss statement. The reduction
of capitalized  software  construction and product enhancement costs in 1997 was
due to the estimated  useful lives of certain  products being reduced to reflect
management's projection of future revenues.

4.  Income Taxes
     The Company  provides for income taxes using the asset and liability method
required under Statement of Financial  Accounting  Standards No. 109 "Accounting
for Income Taxes." (See Note I of Notes to Financial Statements.)

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



<PAGE>


6.  Revenue Recognition
     The Company  recognizes  revenue  upon  shipment for  contracts,  which are
completed and shipped within one fiscal quarter.  The Company recognizes revenue
using  the  percentage  of  completion  method  for  those  contracts  for which
production  spans more than one fiscal quarter and are material to the financial
statements.

     Under the percentage of completion method, revenues are recognized based on
the ratio of total cost  incurred at the balance  sheet date to total  estimated
cost of the project through completion.  There were two contracts in progress at
March 31, 1999.  Unbilled  receivables  relating to these contracts at March 31,
1999, were $115,588. There were no contracts in progress at March 31, 1998.

      Billings,  as specified  in the terms of a contract,  in excess of revenue
earned have been recorded as deferred income.

     The Company sells extended  warranty  contracts which provide for repair of
hardware and no-cost  upgrades of software.  These  contracts  normally  cover a
one-year period with revenue being  recognized on a straight line basis over the
contract period.

7.  Credit Risk
     The Company is  diversified  geographically  and has a broad customer base.
The Company grants credit to  substantially  all of its customers.  Export sales
are generally secured with a letter of credit in favor of the Company payable on
shipment.  At March 31, 1999 and 1998 two customers  accounted for approximately
64% and 58% of total accounts  receivable,  respectively.  The Company's  credit
risk is not  concentrated  in any one industry and the  significant  receivables
were from different  customers in 1999 and 1998.  (See Notes G and H of Notes to
Financial  Statements).  The Company had an allowance  for doubtful  accounts of
approximately $25,000 and $26,000 at March 31, 1999 and 1998, respectively.

8.  Stock Based Compensation
     The Company  adopted the  "disclosure-only"  provisions  of  Statements  of
Financial  Accounting  Standards  (SFAS) No. 123 -  Accounting  for  Stock-Based
Compensation  and measures  compensation  expense for  stock-based  compensation
using the  intrinsic-value-based  method under the  provisions  of the standard.
(See Note E of Notes to Financial Statements).

9.  Earnings Per Share

     The  Company  implemented  SFAS No. 128  during the third  quarter of 1998.
Basic  earnings  (loss) per share is based on net income (loss) and the weighted
average number of common shares outstanding during the period.  Diluted earnings
(loss) per share is based on net income (loss) and the weighted  average  number
of common shares plus all dilutive potential common shares.

Computation of basic and diluted earnings (loss) per share are as follows:
<TABLE>
<CAPTION>

                                                               1999          1998          1997
                                                        -----------   -----------   -----------
<S>                                                     <C>           <C>           <C>

Net income (loss) ....................................  $   164,207   $  (315,604)  $ 1,898,113

Class B preferred stock dividend .....................      (35,698)         --            --
                                                        -----------   -----------   -----------
Net income (loss) available to common shareholders ...  $   128,509   $  (315,604)  $ 1,898,113
                                                        ===========   ===========   ===========

Weighted average of common shares outstanding ........    3,044,136     3,044,136     3,044,136
Dilutive potential common shares:
              Class A convertible preferred stock ....      200,000          --            --
              Stock options ..........................       10,046          --            --
                                                        -----------   -----------   -----------

Adjusted weighted average of common shares outstanding    3,254,182     3,044,136     3,044,136
                                                        ===========   ===========   ===========

Basic earnings (loss) per share ......................  $      0.04   $     (0.10)  $      0.62
Diluted earnings (loss) per share ....................  $      0.04   $     (0.10)  $      0.62
</TABLE>


At March 31, 1999,  there were  1,252,500  additional  stock options and 450,000
warrants  outstanding for the purchase of common shares.  These potential common
shares were not included in the diluted earnings per share  calculation for 1999
as their effect was  anti-dilutive.  Stock options and warrants  outstanding  at
March 31,  1998 and 1997 were not  included in the  diluted  earnings  per share
calculation for 1998 and 1997 as their effect was anti-dilutive.  (See Note E of
Notes to the Financial Statements)



<PAGE>


10.   New Standards

     The Company implemented  Statement of Financial Accounting Standards (SFAS)
No. 130,  "Reporting  Comprehensive  Income" during the current year.  Under the
provisions of this Statement,  all changes in equity that result from recognized
transactions  and other  economic  events of the period other than  transactions
with owners in their capacity as owners are reported as comprehensive income. As
required by the statement, comprehensive income should be reported as net income
and other  comprehensive  income with a total amount  displayed in the financial
statements.  Since the Company has no items of other comprehensive income during
the current year, comprehensive income is not reported.

The Company also implemented  Statement of Financial Accounting Standards (SFAS)
No. 131,  "Disclosures about Segments of an Enterprise and Related  Information"
in the annual financial  statements of the current year. This statement requires
disclosure  of  certain  information  for each  operating  segment of a business
enterprise.  Specific  criteria  is  included  in this  statement  to  determine
reportable  segments  of the  business.  The  Company  has a  single  reportable
segment.  Revenues  and  the  profit  for  this  segment  are  reported  in  the
accompanying  Statement of Operations.  Adoption of the statement did not impact
the reported results of operations of the Company.

The Financial Accounting Standards Board has proposed an interpretive release on
several issues that are not  specifically  addressed in APB No. 25,  "Accounting
for Stock Issued to  Employees."  The proposed  guidance for  accounting for the
repricing  of employee  stock  options  could result in  significant  accounting
changes for the Company as a result of the repricing of options  which  occurred
in February 1999. (See Note E of Notes to the Financial Statements). The Company
would be  required  to  record  an  expense  (compensation  costs)  equal to the
difference  between the modified  exercise price and any subsequent  increase in
the price of the Company's  common stock.  This accounting would be applied from
the  date  of  issuance  until  the  exercise  date  of the  option.  The  final
Interpretation  would be effective upon issuance  (probably in  September),  but
will cover events that  occurred  after  December  15,  1998.  The impact on the
Company's  financial  statements  would depend on the market value of the common
stock.  At March 31, 1999,  the market value of the  Company's  common stock was
less than the exercise price of the repriced  options,  and as such, there would
be no additional expense.


Note B - Preferred Stock

Pursuant to the terms of a Subscription  Agreement  between the Company and A&D,
dated  January 30, 1998,  A&D  purchased  12,000  shares of Class A  Non-Voting,
Redeemable,  Convertible  Preferred  Stock of the Company at a price of $100 per
share which is convertible on or after January 30, 1999 at the rate of one Class
A Preferred  Share for 100 shares of common  stock.  In addition,  A&D purchased
6,000 shares of Class B Non-Voting, Redeemable,  Non-Convertible Preferred Stock
of the Company at a price of $200 per share with an annual dividend equal to 20%
of the Company's annual after-tax earnings excluding  non-recurring earnings and
charges  beginning  with  the  year  ended  March  31,  1999.  In the  event  of
liquidation or dissolution of Zonic,  the Class A Preferred Stock is entitled to
receive $100 per share,  and the Class B Preferred Stock $200 per share,  before
holders of common stock receive any amounts. Both classes of Preferred Stock may
be redeemed by the Company upon thirty days prior notice. Proceeds from the sale
of the stock  were used to  retire  debt and  related  accrued  interest.  These
transactions were considered non-cash transactions on the accompanying Statement
of Cash Flow.

The Company has recorded an annual  dividend  amount of $35,698 in 1999 relating
to the Class B Preferred Stock.



Note C - Year 2000 Issues

The Company defines Year 2000 compliance as proper functionality, or performance
of a system, process, or equipment that is not adversely affected by dates prior
to,  during,  and  after  the  year  2000.  Due  to  memory  constraints,  early
programmers  represented  years by the last two digits of the century.  Thus the
year 1970 is represented by the number "70" in many older software programs.  At
the turn of the  century,  the year will become "00" and the  computer or system
will  interpret  this as the year 1900 and not the year 2000.  Many systems have
electronic  components  that  utilize a date to control the  function it serves.
Most computer software,  including the Company product  offerings,  utilize date
identification.

The Company has initiated a comprehensive  review and evaluation of all relevant
internal and external systems, processes, and third party providers to determine
their compliance or progress toward Year 2000 compliance.  If a system,  process
or third party  provider is deemed  significant to the operations of the Company
and Year 2000 compliance is in question,  the Company will develop a contingency
plan to address  the issue.  At this time the Company  has not  encountered  nor
anticipates any significant Year 2000 issues requiring a contingency plan.

The Company's product offerings utilize date reference for the identification of
printed and stored  data.  A date  reference  problem will result in stored data
being tagged with an incorrect  date,  or printed data  indicating  an incorrect
date.  The Company has  determined  that  certain  legacy  products  will not be
reviewed  for Year  2000  compliance.  All  current  products  will be Year 2000
compliant.  This information has been provided to the Company's  clients and the
information is available on the company's  website.  This review process was 95%
complete at March 31, 1999 and the Company has  discovered no material Year 2000
compliance  issues.  The Company has not incurred nor anticipates any additional
significant expenses as a result of its on-going Year 2000 work.

Note D - Short-Term Note Payable and Long-Term Obligations

Short-term  notes payable and long-term  obligations  at March 31 consist of the
following:
<TABLE>
<CAPTION>

                            1999     1998
                         -------  -------
<S>                      <C>      <C>

Loan payable to bank ..  $15,625  $53,125
Other debt ............   15,323   19,426
                         -------  -------
                          30,948   72,551
Less current maturities   20,788   42,365
                         -------  -------
                         $10,160  $30,186
                         =======  =======
</TABLE>

The loan  payable and other debt as of March 31, 1999 mature as follows:  2000 -
$20,788; 2001 - $5,134; and 2002 - $5,026.

On August 30, 1997, the Company  borrowed $75,000 from a bank to make payment on
past due  rental  obligations.  This loan which  matures  on August 30,  1999 is
secured by the assets of the Company and requires a monthly principal payment of
$3,125 and interest computed at the prime rate plus 2%.

Other  debt for  $15,323  is a  promissory  note for the  purchase  of a company
vehicle.  Monthly  principal  and  interest  payments  are $473,  with the final
payment due March 11, 2002.


Note E - Stock Options
The Company has certain incentive and non-qualified stock option plans available
to key  employees  to purchase  common stock of the Company at not less than the
market value on the date of grant. A summary of option transactions during 1999,
1998 and 1997 follows:
<TABLE>
<CAPTION>

                                          Weighted    Average
                                          Exercise      Price
<S>                                     <C>           <C>

Outstanding at March 31, 1996           1,752,000        1.68

Granted in 1997                            15,000        0.30
Exercised in 1997                            --            --
Forfeited in 1997                         (61,000)       0.98

Outstanding at March 31, 1997           1,706,000        1.70

Granted in 1998                                --          --
Exercised in 1998                              --          --
Forfeited in 1998                        (148,000)        .61

Outstanding at March 31, 1998           1,558,000        1.80

Granted in 1999                            30,000         .14
Exercised in 1999                              --          --
Forfeited in 1999                         (15,000)        .30

Outstanding at March 31, 1999           1,573,000        1.69

Exercisable at March 31, 1998           1,519,250        1.83
Exercisable at March 31, 1999           1,550,500        1.72

</TABLE>


<PAGE>


The following table summarizes  information  about stock options  outstanding at
March 31, 1999.
<TABLE>
<CAPTION>

                                  Options Outstanding      Options Exercisable
                                  ----------------------   ---------------------
                                  Weighted
                    Outstanding   Average       Weighted   Exercisable  Weighted
                    at            Remaining     Average    at           Average
         Exercise   March 31,     Contractual   Exercise   March 31,    Exercise
         Prices     1999          Life          Price      1999         Price
         ------     ----          ----          -----      ----         -----
<S>       <C>       <C>           <C>          <C>         <C>          <C>

           .14        320,500     5.76          .14          298,000      .14
          2.00      1,140,000     3.95         2.00        1,140,000     2.00
          2.50         62,500     3.33         2.50           62,500     2.50
          3.63         50,000     2.67         3.63           50,000     3.63
</TABLE>


On February 19, 1999, the Board of Directors  re-priced  290,500 incentive stock
options for common  shares  shares at $0.14 per share,  the fair market value of
the stock as of that date. Nothing else was changed about the options.

At  March  31,  1999,  there  were  320,500   incentive  options  and  1,252,500
non-qualified  options  outstanding and 229,500 common shares were available for
granting additional options.

As consideration  for entering into the Credit Agreement between the company and
A&D dated December 7, 1992 which was terminated in 1998, the Company granted A&D
a stock option to purchase  1,000,000 shares of the company's stock at $2.00 per
share. The option expires on March 20, 2005.

Gerald Zobrist, the former President of the company, personally guaranteed loans
received under the Credit  Agreement.  This  guarantee was  terminated  upon his
resignation  in  December  of 1995.  As  consideration  for this  guarantee,  he
received an option to purchase  140,000  shares of the stock at $2.00 per share.
This option expires December 7, 2002.

During 1994, the Company issued warrants for 100,000 common shares in connection
with  the  renegotiation  of the  lease  of its  facilities.  The  warrants  are
exercisable  at $2.00 per share and expire on March 31, 2000.  During 1995,  the
Company  issued  warrants  for  350,000  common  shares in  connection  with the
extinguishment  of  certain  long-term  debt  obligations.  These  warrants  are
exercisable  at $2.00  per share and  expire  on March 31,  2000.  None of these
warrants have been exercised.

At March 31, 1999,  the Company has reserved  common shares  sufficient to cover
the exercise of outstanding stock options and warrants.

The  Company  has  adopted the  "disclosure  only"  provisions  of SFAS No. 123,
therefore no  compensation  expense has been recognized for stock option grants.
Had compensation  expense been determined based upon the fair value  (determined
using the Black-Sholes option pricing model) at the grant date,  consistent with
the provisions of SFAS No. 123, the Company's  income (loss) would have been the
pro forma amounts as follows:
<TABLE>
<CAPTION>

                                                                1999        1998         1997
                                                          ----------  ----------   ----------
<S>                                                       <C>         <C>          <C>

Pro forma income (loss) ................................  $  152,001  $ (333,078)  $1,884,008
Pro forma income (loss) available to common stockholders  $  116,303  $ (333,078)  $1,884,008
Pro forma income (loss) per share of common stock ......  $      .04  $     (.11)  $      .62
</TABLE>

The weighted  average per option fair value of options  granted in 1999 and 1997
was $.14 and $.27, respectively.  There were no options granted during 1998. The
fair value of each option grant was estimated on the date of the grant and using
the Black-Scholes  option-pricing model with the following  assumptions used for
grants in 1999 and 1997: no expected dividend yield and expected option lives of
ten years for both years;  expected  volatility  of 112% and 99%; and  risk-free
interest rates of 5.0% and 6.5%, respectively.


Note F - Operating Lease Commitments
On August 15,  1997,  the  Company  reached an  agreement  with its  landlord to
terminate its then existing lease agreement and satisfy all outstanding past due
rental  obligations  with a payment of $100,000 to the landlord and by signing a
new lease for less space in the same building. The new lease commenced September
1, 1997 for a period of two years with monthly  payments of $4,604.  The minimum
future rental commitment under the lease agreement is $23,020 in fiscal 2000.

Deferred  rent arising from  incentives  and  concessions  from the landlord was
$34,789 and $118,285 at March 31, 1999 and 1998, respectively. These amounts are
amortized as a reduction of rent payments  charged to expense over the remaining
life of the lease.  Rent expense for 1999, 1998 and 1997 was $ 55,506,  $91,866,
and $132,371, respectively.  Amortization of deferred rent for 1999 and 1998 was
$83,496 and $48,706, respectively.


The Company also has computer  equipment  under an operating  lease at March 31,
1999.  Leased  equipment  expense under this lease was $1,576 for 1999.  Minimum
future rental commitments under this lease are 2000 - $6,303, 2001 - $6,303, and
2002 - $4,727.

Note G - Foreign Sales

The Company had foreign sales as follows:

                  Percent of
          Amount  Total Sales
      ----------  ----------
1999  $  215,000          10%
1998  $  519,000          26%
1997  $1,445,000          39%

Note H - Sales to Major Customers

Sales to major customers  (customers with sales in excess of 10% of total annual
sales)  include  products and services  sold to end-user  customers  through the
Company's exclusive selling agents for their respective geographic  territories.
These selling agents  include  related  parties  described in Note J of Notes to
Financial  Statements.  Sales of large systems to end-users represent relatively
high  percentages  of sales.  However,  the Company is not  dependent on any one
customer for future sales.

Two U.S.  companies  accounted for more than 29% of the Company's total sales in
1999.  There were no major customers in 1998.  There were two major customers in
1997, a foreign government and the U.S.  Government,  which accounted for 41% of
total sales.

Note I - Federal Income Taxes
Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amount used for income tax  purposes.  Deferred tax assets have
been  reduced by a valuation  allowance,  as it is  uncertain  if and when these
benefits will be realized.  Although the Company realized profits in 1999, there
was no  provision  for income  taxes as the result of  changes in  deferred  tax
assets and the related valuation allowance during the year.

     Deferred taxes at March 31 consist of the following:
<TABLE>
<CAPTION>

                                                                                         1999          1998
                                                                                  -----------   -----------
<S>                                                                              <C>            <C>

Current deferred tax asset:
   Reserves not currently deductible                                              $    74,275   $    76,878
   Deferred revenue                                                                   109,418        96,012
   Accruals not currently deductible                                                   58,851        62,294
                                                                                  -----------   -----------
 Subtotal                                                                             242,544       235,184
Less valuation allowance                                                             (242,544)     (235,184)
                                                                                  -----------   -----------
      Net                                                                         $      --     $      --
                                                                                  ===========   ===========

Non-current deferred tax asset:
  Net operating loss carryforward                                                 $ 2,279,920   $ 2,156,935
  Tax credits                                                                         666,205       646,248
  Deferred income                                                                      12,150        40,909
                                                                                  -----------   -----------
  Subtotal                                                                        $ 2,958,275   $ 2,844,092

Non-current deferred tax liability - Capital leases and accelerated depreciation       (2,867)       (2,733)
                                                                                  -----------   -----------
Net non-current deferred tax asset                                                  2,955,408     2,841,359
Less valuation allowance                                                           (2,955,408)   (2,841,359)
                                                                                  -----------   -----------
    Net                                                                           $      --     $      --
                                                                                  ===========   ===========
</TABLE>

     The  provision  for  income  taxes  for  the  years  ended  consist  of the
following:
<TABLE>
<CAPTION>

                                                      1999        1998        1997
                                                 ---------   ---------   ---------
<S>                                              <C>         <C>         <C>

Deferred (income) expense                        $(121,409)  $ (47,190)  $ 756,920
Increase (Reduction) in the valuation allowance    121,409      47,190    (756,920)
                                                 ---------   ---------   ---------
Provision for income taxes                       $     -     $    --     $    --
                                                 =========   =========   =========
</TABLE>


At  March  31,  1999  the  Company  had  net  operating  loss  carryforwards  of
approximately   $6.7  million  for  U.S.   Federal  tax   purposes.   Such  loss
carryforwards,  if unused as  offsets  to future  taxable  income,  will  expire
beginning in 2002 and continuing through 2013.


Tax credits are  accounted for under the  flow-through  method as a reduction of
the provisions for income taxes in the year utilized.

The Company has  $666,000 of tax credits  primarily  comprised  of research  and
development  available  for U.S.  income tax purposes.  These credits  expire at
various dates beginning in 2000 and continuing through 2008.

Note J - Related Party Transactions
A&D, a 28.6%  shareholder,  sells the company's products in the Japanese market.
The Company  sells its  products to A&D at  discounts  which vary by product for
re-sale to end  customers.  Revenues from sales to A&D were $2,800,  $84,000 and
$114,000 during 1999, 1998, and 1997 respectively. In 1997, the Company sold its
products in the Western  Hemisphere  through Zonic A&D Company,  a joint venture
between the Company and A&D Engineering  Inc., a wholly owned subsidiary of A&D.
The Company and A&D  Engineering  Inc. each had 50% ownership.  The Company sold
its products to Zonic A&D Company at its normal profit margins for resale to its
customers and paid  commissions  to Zonic A&D Company for those sales.  Revenues
from sales to Zonic A&D Company were  $2,053,000 in 1997 and commission  expense
paid on those sales was  $370,580.  The  operations  of Zonic A&D  Company  were
merged  into  Zonic as of April 1,  1997.  During  1997,  the  Company  recorded
expenses of $385,000  related to uncollected old accounts  receivable from Zonic
A&D  Company  and costs  expected  to be  incurred  in the  dissolution  of this
affiliate.

The Company is also the exclusive distributor of the WCA Product owned by A&D in
the Western Hemisphere and purchases components from A&D used principally in the
production of its WCA product line. Such purchases totaled $48,085,  $32,110 and
$31,767 during 1999, 1998 and 1997,  respectively.  The Company had a receivable
balances  from A&D of $200 and $1,708 at March 31, 1999 and 1998,  respectively,
and an amount payable to A&D of $4,223 at March 31, 1998.

During  1997,  A&D paid the Company  $300,000 to promote its WCA  products.  The
amount was recorded as deferred income and is recorded as a reduction of selling
and  administrative  expenses as expenses  are  incurred.  The Company  recorded
$35,000 and $50,000 of this amount during fiscal 1998 and 1997,  respectively as
a reduction of selling and administrative expenses.

In December  1996, the Company sold its Zeta  Technology to A&D for  $3,618,578.
The gain  from  this  sale was net of the  unamortized  portion  of  capitalized
software  and  product  enhancement  costs  for the  Zeta  software,  a  $46,585
writedown of software construction and product enhancement costs associated with
the expected decline in 7000 product  revenues,  a provision of $150,000 for the
write-off of excess and  obsolete  7000 product  inventory,  and other  expenses
related to the sale resulting in a gain of  $3,020,942.  Revenues from the sales
of  7000  products,   including  Zeta  software,  were  $390,408,  $306,546  and
$1,296,872 in 1999, 1998 and 1997, respectively.

Note K - Retirement Plan
The Company has an employee  savings and  investment  retirement  plan qualified
under sections 401 (a) and 401 (k) of the Internal Revenue Code. The plan covers
all employees of the Company age 18 and over who have completed  three months of
service and are scheduled to work 1,000 hours or more during the plan year.

Under the Plan  agreement,  the Company is required to  contribute 30 percent of
the voluntary 401 (k)  contribution of all participants up to a maximum of 5% of
each employee's  salary.  One half of this  contribution  may be made in Company
stock at the discretion of the Company's Board of Directors.

In any plan year, a supplemental  contribution  may be made if the Company has a
net after tax profit of more than 5% of sales.

The Company made  contributions of $ 16,757,  $10,777 and $12,067 for 1999, 1998
and 1997,  respectively.  None of the contributions  were made in Company stock.
The 1999 contribution included a supplemental contribution of $7,315.

Note L - Statement of Cash Flows

In addition to those shown in the accompanying  Statement of Cash Flows and Note
B of Notes to the Financial Statements,  the following non-monetary transactions
occurred:

     1) The Company offset accounts payable owed to A&D with accounts receivable
from A&D in 1999 and 1998.  This offset  reduced both current assets and current
liabilities by $4,600 and $33,868 in 1999 and 1998,  respectively,  resulting in
no gain or loss.

     2) The Company  received a direct loan for the  purchase of fixed assets in
the amount of $23,936 during 1997.

     3) Amortization of discount on notes  receivable of $30,000 in 1998 was due
to a non-interest  bearing note  receivable  from A&D resulting from the sale if
its Zeta  Technology  and software which was paid on June 30, 1997. The discount
was recorded as a reduction in interest expense.



<PAGE>


Note M - Basis of Financial Statement Presentation
The  Company  has  made   significant   progress  in  returning  to   consistent
profitability  during 1999 and expects  similar and  possibly  improved  results
during  fiscal year 2000.  Revenue is expected to increase  slightly  with gross
margins and operating expenses to remain at constant levels.

The Company has  experienced  improvement  in its cash flow  resulting  from its
operating  profit during the current year, but continues to experience some cash
flow problems as current  liabilities  exceed current assets.  The  accompanying
financial  statements have been prepared assuming that the Company will continue
as a going  concern,  which  contemplates  the  realization  of  assets  and the
satisfaction  of  liabilities  in the normal  course of business.  The financial
statements  do not include any  adjustment  relating to the  recoverability  and
classification  of recorded  asset amounts or the amount and  classification  of
liabilities  that might be  necessary  should the  Company be unable to generate
sufficient cash to meet its obligations and sustain operations.


Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure.

Effective  December  17,  1998,  the  Board of  Directors  of Zonic  Corporation
dismissed  its former  auditor  and  selected  Clark,  Schaefer,  Hackett & Co.,
located in  Cincinnati,  Ohio as the sole auditor for the Company for the fiscal
year ending  March 31,  1999.  Since  November  11,  1991  Deloitte & Touche LLP
("Deloitte"),  also located in Cincinnati,  Ohio acted as the Company's auditor.
The decision to change  auditors was recommended by the Board of Directors based
on  management's  belief  that  the  Company  could  substantially   reduce  its
accounting fees by selecting a regional rather than a national  accounting firm.
Deloitte's  report on the financial  statements of the Company has not contained
an adverse opinion or a disclaimor of opinion, and was not qualified or modified
as  to  uncertainity,   audit  scope,  or  accounting  principles,  except  that
Deloitte's  reports for the last six fiscal years  expressed  uncertainity as to
the  Company's  ability to  continue  as a going  concern.  The  Company  had no
disagreements with Deloitte on any matter of accounting principles or practices,
financial disclosure,  or auditing scope or procedures which, if not resolved to
Deloitte's satisfaction, would have caused it to make a reference to the subject
matter of the disagreement in connection with its audit report.

                                    PART III

Items 10, 11, 12 and 13 of Part III hereof are  incorporated by reference to the
Company's  Definitive  Proxy  Statement for the Annual  Meeting of  Shareholders
involving  the  election of  directors  which will be filed on or about June 18,
1999. The  information  being  incorporated  by reference is set forth under the
captions: "Outstanding Voting Securities";  "Election of Directors";  "Executive
Officers of the Company"; and "Executive Compensation."


                                     PART IV


Item 14. Exhibits,  Financial Statement Schedules,  and Reports on Form 8-K. (a)
The following  documents are filed as a part of this Report or  incorporated  by
reference:
   (1) All financial  statements required to be filed by Item 8 of this
Form and included in this Report have been listed previously.

   (2) Financial Statements and Financial Statement Schedules Required: none

   (3) Exhibits Required by Item 601 of Regulations S-K:

       Exhibit No.       Description

       (3)        (i)   Amended and Restated Articles of Incorporation
                        (incorporated by reference).

       (3)       (ii)   Code of Regulations (incorporated by reference).

       (3)      (iii)   Amendment to Article II Section 1 of the Company's Code
                        of Regulations (incorporated by reference).

       (4)        (i)   Specimen Common Share Certificate (incorporated by
                        reference).

       (4)       (ii)   1989 Stock Option Plan (incorporated by reference).

       (4)      (iii)   1991 Executive Stock Option Plan (incorporated by
                        reference).

       (10)       (v)   Lease Termination Agreement dated August 29, 1997,
                        between the Company and Duke Realty Limited Partnership.

       (10)      (vi)   Lease  Agreement  dated  August  29, 1997, between the
                        Company and Duke Realty Limited Partnership
                        (incorporated by reference).

       (10)      (vii)   Subscription Agreement, dated January 30, 1998, between
                         Zonic Corporation and A&D Company. (incorporated by
                         reference)

       (10)     (viii)   Contribution Agreement among the Company and A&D
                         Engineering and Zonic A&D Company, effective as
                         of December 30, 1997. (incorporated by reference)

       (10)       (ix)   Notice of Abandonment of Partnership Interest by A&D
                         Engineering, effective March 29, 1998.
                         (incorporated by reference)

       (10)        (x)   Termination Agreement between the Company and A&D
                         Engineering, effective May 15, 1998.
                         (incorporated by reference)

       (11)              Computation of earnings per common share --
                         See Note A-9 of Notes to Financial Statements.

       (16)              Letter of  Deloitte & Touche agreeing to changes in
                         Certifying Accountant (incorporated by reference)

       (23)              Independent Auditor's Consent

       (27)              Financial Data Schedule.

   (b)   Reports on Form 8-K.
         None.

   (c)   Exhibits. See subparagraph (a) above.

   (d)   Financial Statement Schedules.
         None.



<PAGE>





                                   SIGNATURES

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



                                ZONIC CORPORATION



                                    By: /s/ James B. Webb

Date: June 18, 1998                 James B. Webb, President



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

Signature                                        Title                  Date



/s/ James B. Webb                     President, Treasurer,        June 18, 1999
-------------------------         Principal Executive Officer,
    James B. Webb                          and Director


/s/ John H. Reifschneider                 Controller and           June 18, 1999
-------------------------             Principal Financial and
    John H. Reifschneider              Accounting Officer


/s/ Shoichi Sekine                          Director               June 18, 1999
-------------------------
    Shoichi Sekine


/s/ Gerald J. Zobrist                       Director               June 18, 1999
--------------------------
    Gerald J. Zobrist





<PAGE>


                                       E-1

                                   Exhibit 23




                          INDEPENDENT AUDITORS' CONSENT


We consent to the  incorporation  by reference  in  Registration  Statement  No.
33-45686 of Zonic  Corporation  on Form S-8 of our report  dated June 22,  1998,
appearing in this Annual Report on Form 10-K of Zonic  Corporation  for the year
ended March 31, 1999.



Cincinnati, Ohio
June 18, 1999