================================================================================

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ----------------------

                                   FORM 10-KSB

[x]      ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934

                   For the fiscal year ended December 26, 1998


[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
         ACT OF 1934. For the transition period from _________ to _________

                               Commission File No.
                                     1-13628

                           INTELLIGENT CONTROLS, INC.
                 (Name of small business issuer in its charter)

                     Maine                                     01-0354107
         (State or other jurisdiction of                    (I.R.S. Employer
          incorporation or organization)                    Identification No.)

                   74 Industrial Park Road, Saco, Maine 04072
               (Address of principal executive offices) (Zip code)

         Issuer's telephone number: (207) 283-0156

         Securities registered under Section 12(b) of the Exchange Act:

         Title of Each Class           Name of Each Exchange On Which Registered
         -------------------           -----------------------------------------

         Common Stock,                 American Stock Exchange (Emerging Company
         no par value                  Marketplace)

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

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

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

Issuer's revenues for its most recent fiscal year: $16,198,385

The aggregate market value of Common Stock held by non-affiliates as of March
15, 1999 was $3,576,000

There were  5,061,123  shares of Common  Stock of the issuer  outstanding  as of
March 15, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III: Proxy  Statement for the Annual Meeting of  Shareholders to be held on
          June 10, 1999

Transitional Small Business Disclosure Format: Yes [ ]   No [X]
<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

Intelligent  Controls,  Inc.  ("INCON" or the "Company") is a Maine  corporation
founded in 1978. INCON develops,  manufactures, and sells electronic measurement
systems to the  petroleum  and power  utility  industries  and for general level
measurement and predictive  maintenance  applications.  The Company's  products,
including related applications and communication  software,  enable the users to
detect leaks,  measure  liquid  levels,  and to perform  predictive  maintenance
monitoring of equipment as an early indicator of wear and potential failure. The
table below summarizes sales for these product lines over the past three years.

                            NET SALES BY PRODUCT LINE
                             (Dollars In Thousands)

                                 1998             1997           1996
                            --------------   -------------  --------------
 Petroleum (ATG):
    OEMs                        451     3%   $   655    5%  $  557      6%
    End Users                14,409    89%    10,803   83%   7,881     79%
 
  Total ATG:                 14,860           11,458         8,438
 Utility and Other
    Power Utility             1,237     7%     1,398   11%   1,198     12%
    General Instrument          101     1%       149    1%     255      3%
                            -------          -------        ------
  Total Utility and Other     1,338            1,547         1,453
    TOTAL NET SALES         $16,198   100%   $13,005  100%  $9,891    100%
                            =======          =======        ======


PETROLEUM EQUIPMENT PRODUCTS

INCON  manufactures a line of electronic  instruments for use at retail gasoline
stations and  gasoline/convenience  stores.  The  products are also  utilized in
other  locations  where  petroleum  fuels or chemicals are stored in underground
storage tanks ("USTs") and above ground storage tanks ("ASTs"),  including large
private  fleets,  government  agencies,  municipalities,  and fuel  distribution
companies.  The product line  includes  automatic  tank gauges (some with remote
communications features),  dedicated leak detectors,  liquid level sensors, line
leak detectors,  user interface software, and various accessories,  all of which
can be  used  to  meet  UST  monitoring  regulations  promulgated  by  the  U.S.
Environmental  Protection Agency (the "EPA"), and to provide information for the
tank owner to manage inventories.  The manufacturing process for these and other
INCON products  consists of basic mechanical and electronic  assembly as well as
the integration of software into the overall system.

INCON's automatic tank gauge ("ATG") systems consist of wall-mounted  electronic
consoles,  tank-mounted  liquid level  sensors,  leak  sensors,  user  interface
software,  and  associated  accessories.   The  systems  provide  very  accurate
measurement of inventory  (gasoline or other liquid) in a UST or AST. INCON tank
gauges also perform leak tests to determine whether product is escaping from the
tank.  ATG  systems  can also  monitor a wide  variety of  sensors  which may be
located between the walls of double walled tanks, in sumps, under dispensers, or
in other locations where leaking product might collect.

                                                                               2

<PAGE>

The Company's  electronic  Line Leak Detector  ("LLD")  monitors the pressurized
pipe between the  submersible  pump (located in the tank) and the dispenser (gas
pump).  The  product  meets  pipeline  monitoring  requirements  imposed  by EPA
regulations and is an updated  technology which can replace mechanical line leak
detectors. The LLD can interface with an ATG or operate as a stand-alone device.
The product design has been enhanced since its original 1995  introduction,  and
the  Company  received  notice  recently of patent  allowance.  In 1997 and 1998
enhanced LLDs have been operating  successfully in numerous commercial locations
and  customer  response has been  favorable.  INCON also offers  dedicated  leak
detection  ("DLD")  consoles  which are similar to the ATG  console.  Instead of
measuring inventory levels, these products only monitor leak detection,  thereby
offering certain customers an inexpensive  alternative for achieving  regulatory
compliance.  In addition to the ATG  consoles,  line leak  detectors  and liquid
level sensors,  INCON offers a wide variety of accessories,  software,  and leak
detection sensors.  These provide the ability to customize a system for specific
customer  applications,  allow the system to sense leaks and inventory levels in
many different locations, and simplify installation.  Some of these products and
systems are  assembled by the Company,  while others are  fabricated  by outside
contractors to INCON specifications.

INCON first produced its own liquid level probes in 1994.  The Company's  liquid
level  sensors are based on  magnetostrictive  position  measurement  technology
which is widely proven in the industry. This capability of manufacturing its own
probes has given INCON control of product quality and significantly  reduced the
overall cost of this  component to the Company.  In most cases,  each UST or AST
requires a liquid level  sensor.  INCON's ATG consoles  will support from one to
eight liquid level sensors.  The average North American retail gasoline  station
or gasoline/convenience store has three USTs, while sites overseas may have five
to eight tanks.

In 1997 the Company  designed  and placed in beta site testing a new ATG product
line,  the 1001 and 2001 models,  marketed  under the  Company's  Tank  Sentinel
registered  trademark.  They were  designed  as the new  generation  product  to
replace  INCON's  model  1000 and  2000  series.  This  product  line was  fully
introduced in the Spring of 1998.  These units have optional  internal fax modem
communications  capability  and  were  designed  to be easy to use and  upgrade,
providing  greater  flexibility  for the  operator.  They  provide  more overall
capability  than any other tank gauge in their  price  range as well as upgraded
display,  printer,  and keyboard  functions.  This contrasts to some competitive
models that cannot be upgraded,  or require very expensive additional modules to
accommodate  needed  features.  The 1001 model can accommodate four liquid level
sensor inputs and the 2001 model  accommodates  eight.  The 1001 and 2001 models
are designed to be very  cost-effective  to manufacture  and incorporate a large
number of common components.

In keeping with the trend toward digital technology,  INCON manufactures,  under
private  label, a Digital Liquid Level Sensor  ("DLP").  This device  integrates
microcomputer   functions  of  the   automatic   tank  gauge  console  into  the
tank-mounted  liquid level sensor.  The microprocessor in the DLP interprets the
signal from the level and temperature sensing system and transmits the processed
data to a remote computer or other collection device. Data from many sensors can
be  transmitted  over a common  cable in a manner  similar  to a  computer  on a
network.  The product allows the ATG information to be read directly by personal
computers, cash registers,  point of sale equipment, or fuel management systems,
both  remotely  and at the site.  The Company  has been  actively  developing  a
software  product  capability which can be offered alone, or in combination with
INCON hardware products. This capability will allow digital or traditional probe
users to efficiently  integrate an overall  system using  equipment and software
modules,  which can interface  with their  established  or  developing  business
information systems. This software,  called System Sentinel was released to beta
sites starting in September 1998 and has been  officially  made available to the
market in February 1999.

The demand for ATGs, DLDs and LLDs domestically has been strong and bolstered by
EPA and state  regulations  that require owners of USTs to monitor the tanks and
related  lines for  leaks.  In  addition  to more  sophisticated  and  automated
techniques (such as automatic tank gauging),  the EPA regulations permit the use
of  inventory  reconciliation  and  manual  (dip  stick)  testing  as a means of
compliance.  Although less expensive,  these methods do

                                                                               3

<PAGE>

not provide for accurate inventory  measurement and control and are also subject
to  personnel  variables  affecting  manual stick  readings and data  recording.
INCON's  management  believes  that UST owners will  continue  to automate  both
inventory and leak detection systems to insure accuracy and reduce dependence on
trained  personnel.  Moreover,  leak  detection  requirements  will  become more
stringent.  After December 22, 1998, inventory reconciliation and manual testing
will be  permissible  only (i) during the first ten years  after a tank is newly
installed or upgraded in accordance  with EPA  performance  standards or (ii) in
the case of small tanks  having less than 550 gallons of  capacity.  In addition
all tanks must meet EPA performance standards in 1998 and management anticipates
that this will favorably affect the market for ATGs, DLDs, and LLDs through 1998
and  beyond.  Management  also notes that new  gasoline  and  convenience  store
expansion  is strong,  due to growth in the economy,  and  upgrading of acquired
sites by larger, more aggressive marketers.

Internationally,  many countries follow the lead of the United States,  in terms
of both environmental regulations and measurement  technologies.  The demand for
ATGs, DLDs, and LLDs is expected to continue to grow in other parts of the world
and INCON will continue to  aggressively  seek such  business.  During 1997, the
Company  shipped  two thirds of a  $1,800,000  ATG order  received  in 1996 from
Taiwan. The final third of this large order was shipped in March 1998.

POWER UTILITY AND GENERAL INSTRUMENT PRODUCTS

INCON's Power Utility and  Predictive  Maintenance  Instrument  lines consist of
electronic  instruments  for  measurement  and control in the power  utility and
general  industrial  markets.  Typical  customers  include large  publicly owned
electric power utilities, municipal utilities, and manufacturing customers.

Historically,  regulation has insulated utilities in the United States and other
developed  countries from competitive  market forces,  creating  monopolies that
permitted  utilities to remain  profitable  despite their use of  inefficient or
outdated  technology.  In the deregulated  environment  being adopted across the
United States over the next five years,  consumers will have greater  freedom to
choose  electricity  suppliers,  just as they now can  choose  among  many  long
distance  telephone service providers.  This will place significant  pressure on
utility company  management to reduce costs and increase plant  efficiency.  The
Company  believes  this  overall  business  backdrop  will  provide  a  positive
environment  for  products  that help  utilities  operate more  efficiently  and
perform predictive maintenance in advance of system failures.

INCON's power utility product line includes two instruments,  the Model 1250 and
the Optimizer,  offering  automated  control and data  collection for electrical
substations.  Two other power utility  products,  the Model 1255 and Model 1810,
are offered for use in automating  hydroelectric  generating  plants.  The Model
1250 Tap  Position  Monitor is used on large  high-voltage  transformers.  These
transformers  are  typically  equipped  with "tap  changers"  that  regulate the
voltage on the power transmission and distribution grid. The voltage is adjusted
by  switching  to any one of  approximately  32  "voltage  taps." The Model 1250
allows utilities to use their system control and data acquisition system (SCADA)
to monitor from a central  station  which tap has been  selected.  Utilities can
then establish  interactive control over tap changing through the system and can
adjust and regulate the voltage being produced by the transformer.  This product
is also sold directly to  transformer  manufacturers  and is mounted on many new
units sold.

The Optimizer is a  microprocessor-based  monitoring device used to predict life
and schedule  preventive  maintenance for high-voltage  circuit breakers used by
electric  utilities.  It measures the energy dissipated by the contacts in large
circuit breakers as they operate. The Optimizer product can help power utilities
reduce the cost of breaker  maintenance  and avoid  service  interruptions.  The
product was originally  released in 1996 and a second  generation  version,  the
Optimizer+ was introduced in September 1998. A new product under  development in
1997,

                                                                               4
<PAGE>

dubbed the "Dry Guy," is a special  filtration  system product that reconditions
the fluids (oil) in circuit  breakers and  transformers.  After  further  market
study in 1998, this product development effort was discontinued.

SOFTWARE/SYSTEMS PRODUCTS

Consistent  with an overall  business  trend,  the  petroleum  market  sector is
rapidly  bringing  electronic data interchange and the power of the computer and
networking to bear on its business activities.  Remote communication,  via modem
or RF, is becoming an important capability as multiple-site  enterprises seek to
gather   information  and  control  their   activities  in  a  standardized  and
centralized   way.    Petroleum   product   marketers,    gasoline    retailers,
gas/convenience   store  operators,   and  fuel  wholesalers   desire  automated
information and the ability to monitor and plan their activities  centrally with
less dependence on local management and employees.  Modem communications as well
as local/host  computer  systems allow some  companies to manage  inventories of
liquid products,  automatically order new product, and comply with environmental
monitoring and reporting  requirements.  In order to meet  competitive  business
pressures as well as regulatory requirements to monitor leaks, users are pushing
this market sector towards greater demand for multi-site systems.

INCON is  already  actively  providing  a software  and  systems  capability  to
complement its measurement and leak detection  instruments.  In 1997 the Company
was  successful  in working  with a major  convenience  store  chain to supply a
customized  software and  communication  system which linked  environmental  and
business  monitoring and reporting across a multiple site activity.  As a result
of this successful  experience and to take advantage of the market trends, INCON
began the  development of a standardized  software  package in 1997 which can be
installed across a broad customer base. Beta site testing of a new Windows based
client/server  remote software  monitoring  package,  System Sentinel,  began in
September 1998. The product was formally introduced in February 1999. Management
believes that interconnectivity will be increasingly important, as the owners of
existing   instrumentation  expend  considerable  effort  to  link  their  sites
electronically and standardize monitoring and reporting.

COMPETITION

The  petroleum   equipment  market  segment  is  very   competitive,   both  for
instrumentation  and  software/system  products.  The Company's products compete
with similar offerings from other manufacturers in the industry.  In addition to
INCON,  there are at least four other  significant  suppliers of automatic  tank
gauge systems,  one of which (a division of a large public  company) is believed
to have  approximately a 50 percent market share.  These suppliers are generally
larger and have  potentially  greater  resources  than the Company.  In addition
there  are  over ten  other  minor  suppliers  of  ATGs,  as well as  additional
companies that sell software and other  environmental  and inventory  monitoring
services.  Several  suppliers offer customers the option of contracting out all,
or part of, their measurement and compliance  management  activities.  In such a
case a monthly  service fee is charged and the  products  can be  installed  and
leased to the site owner.  Based on  observations  to date,  INCON's  management
believes  that this concept is slowly being  adopted,  and may be  beneficial to
certain types of UST and ATG owners and operators.  Although the Company has not
provided this outsource service directly, one of its largest customers is active
in this area and the Company has  benefited  from this trend  through  increased
hardware, communications, and software sales.

INCON has a strong  competitive  position in the power utility market sector for
its particular  product niche.  The Company is the only supplier of programmable
tap position  monitoring  systems in the United  States,  and competes only with
older  technologies.  The competing  products tend to be lower in price, but are
more difficult to install,  are not  programmable,  and have more parts that are
subject to wear and  replacement.  There are many types of

                                                                               5
<PAGE>

transformers and tap changers in service in the United States today that operate
with the Model 1250, and the 1250's  programmability  gives it a major advantage
over non-programmable products.

INCON owns exclusive rights to the U.S. patent on certain Optimizer  technology.
Interest in the concept of circuit  breaker  monitoring  has resulted in several
competing models being offered by other companies.  These competitive  products,
however, tend to be more expensive.

CUSTOMERS

INCON's customer base is highly diversified, with no one customer accounting for
more  than 10  percent  of the  Company's  business  in 1998.  In the  petroleum
equipment segment the Company's  customers are principally  petroleum  equipment
distributors   who  purchase   products  from  INCON  and  are  responsible  for
installation and after-sales service.  These distributors range from very large,
regionally active  organizations,  to small organizations that focus on a narrow
customer   segment  or  geography.   The   distributors   usually  handle  other
complementary  products sold to the same end-use customer base. Examples of such
products are gasoline dispensers,  point-of-sale ("POS") systems, vapor recovery
systems,  lighting, and canopies.  Often the Company's products are specified by
end-users who choose to standardize their equipment for all their locations. The
distributors  and  end-use  customers  are  serviced  by  INCON's  factory-based
national   selling   and   technical   service   organization   as  well  as  by
regionally-based  manufacturer's  representatives.   In  addition,  the  Company
supplies  petroleum   equipment  products  to  a  few  OEM  (original  equipment
manufacturer) customers and has developed several large direct national accounts
during 1998.

In the power utility and predictive  maintenance  instruments  segment,  INCON's
customers are  equipment  OEMs and various  electric  utilities or large private
system  operators.  These customers are serviced by the Company's  factory-based
national  selling  organization  as well as by  regionally-based  manufacturer's
representatives.

International   sales  are  normally  made  to  distributors,   which  are  then
responsible for importing the product to their respective countries,  as well as
sales, installation, and after-sales service.


INTELLECTUAL PROPERTY

INCON markets its petroleum  equipment  products under the registered  trademark
"Tank Sentinel." INCON holds two patents for its electrical  instruments and has
been advised a patent will be allowed on its electronic line leak detector (LLD)
product. The Company has copyrights on certain software products;  and other key
software is highly technical and difficult to copy.

The Company has numerous trade secrets with regard to methods of detecting leaks
in tanks and  pipelines.  Among  these  are  INCON's  volumetric  tank leak test
algorithm,  its continuous automatic leak detection algorithm, and its method of
detecting  leaks in  pressurized  piping.  INCON's  process  for  producing  the
magnetostrictive  wire  required by the liquid level  sensor is a Company  trade
secret.

GENERAL

As of March 12, 1999 the  Company  employed  95 people,  including  16 in sales,
marketing and technical service, 12 in research and product  development,  11 in
administration, and 56 in manufacturing operations.

In most  of its  products,  INCON  tries  to  utilize  off-the-shelf  electronic
components that are readily available from more than one distributor. There are,
however, some products which are designed around a particular manufacturer,

                                                                               6
<PAGE>

such as in the use of microprocessor chips and compact printers. If one of these
manufacturers were suddenly to cease production of a key component,  the Company
might need to find an alternate source or redesign the product.  Stainless steel
and brass are major components in two of the Company's  products.  Both of these
commodities can fluctuate in price due to supply and demand,  thereby  affecting
the Company's future costs.

INCON  continuously  invests in the  development of new products and software as
well as adapting existing  products to new applications.  During 1996, 1997, and
1998 the  expenditures  relating  to the  development  of new  products  and the
improvement of existing  products were  approximately  $983,000,  $791,000,  and
$997,000  respectively.  These  expenditures  represent  a Research  and Product
Development   spending   rate  of  6  to  10   percent   of  sales.   

GOVERNMENT REGULATION/OTHER CERTIFICATIONS

The  automatic  tank  gauge  product  line,   used  in  gasoline   stations  and
convenience/gasoline stores, requires listing by Underwriters Laboratory (UL) in
the United States and by the Canadian Standards Association (CSA) in Canada. All
major  portions of the Tank  Sentinel  ATG  product  line,  including  line leak
detectors, are presently listed by UL and CSA.

The Tank Sentinel ATG products  perform leak  detection in  accordance  with EPA
regulation 40 CFR Part 280,  Subpart D. To prove compliance with the federal and
state  regulations for tank tightness tests, the ATG system must be tested by an
independent  laboratory in accordance with  EPA/530/UST-90/006  and certified to
meet the EPA performance requirements. The INCON TS-1000 system, TS-1001 system,
TS-2000  system,  TS-2001  system,  and  TS-LLD  have been  tested by Ken Wilcox
Associates of Blue Springs, Missouri and are certified.

The Tank Sentinel ATG products also meet the much more  stringent  standards for
tank  tightness  testing  . To prove  compliance  with  the  federal  and  state
regulations  for tank  tightness  test,  the ATG  system  must be  tested  by an
independent  laboratory in accordance with  EPA/530/UST-90/006  and certified to
meet the performance  requirements.  The INCON TS-1000,  1001 and TS-2000,  2001
systems have been tested by Ken Wilcox  Associates.  In Canada the  TS-1000,1001
system, TS-2000,2001 system, and TS-LLD are certified by Underwriters Laboratory
of  Canada in  accordance  with  ULC/ORD-C58.12-1992,  "Leak  Detection  Devices
(Volumetric Type) For Underground Flammable Liquid Storage Tanks." This standard
is very similar to EPA/530/UST-90/006.

With regard to INCON's own  operations,  the Company's  cost of compliance  with
federal,  state,  and local  environmental  laws does not materially  affect the
Company's financial condition.

ITEM 2.  DESCRIPTION OF PROPERTY.

The Company  leases two modern  13,000  square foot  facilities in an industrial
park in Saco, Maine. One building serves as INCON's executive offices; the other
its  manufacturing  facility.  The  executive  office  building is leased from a
corporation  owned in part by two principal  INCON  shareholders,  Alan and Paul
Lukas. The other building is leased from an unrelated third party. The leases on
these  buildings  expire  in  October  2000 and the  executive  office  building
includes an option to purchase at the then fair market value, subject to certain
minimum purchase prices.  The Company is currently  evaluating  whether to lease
the current  facilities for another year or lease a larger  building in the same
industrial  park.  The  Company  believes  it will renew  these  leases or lease
alternate facilities, without any material adverse effect on operations in 2000.

The Company maintains no other direct or indirect investments in real estate and
has no current intentions to do so.

                                                                               7
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.

The Company is not a party to any pending litigation or other legal proceedings,
other than routine  litigation  that is  incidental to the business and which is
not expected to have a material  adverse  effect on the Company.  The Company is
not aware of any contemplated  legal proceedings  against it by any governmental
authority.

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

No matters were submitted to the  shareholders  of the Company during the fourth
quarter of 1998.

                                                                               8

<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

On February  15, 1995 the  Company's  common  stock was accepted for listing and
began  trading  on  the  Emerging  Company  Marketplace  of the  American  Stock
Exchange. The trading symbol for INCON common stock is ITC.

Prior to  listing  on the  Emerging  Company  Marketplace,  there was no trading
market  for  the   Company's   common   stock  on  any   exchange  or  organized
over-the-counter  market.  The high-low  prices for the Company's  stock for the
last four quarters were as follows:

                                                          HIGH         LOW
                                                       ---------      -------
         Quarter Ended March 28, 1998                  $  2 3/4       $ 2 3/16
         Quarter Ended June 27, 1998                   $  3 1/8       $ 1 7/8
         Quarter Ended September 26, 1998              $  2 1/2       $ 1 13/16
         Quarter Ended December 26, 1998               $  2 7/8       $ 1 7/8

As of March 15, 1999 the Company had 440 shareholders of record.

It has been INCON's  policy to reinvest all  earnings in the  business,  and the
Company  has never  paid  dividends  on its Common  Stock.  Also,  under  credit
agreements  with its bank,  the  Company  may not  declare or pay  dividends  to
shareholders without the prior consent of the bank.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

RESULTS OF OPERATIONS

1998 COMPARED TO 1997

Net sales  totaled  $16.2 million in fiscal 1998, an increase of $3.2 million or
24.5 percent from 1997.  The increase was  primarily  due to a strong  petroleum
market segment  fueled by new  construction  and  compliance  deadlines for leak
detection mandated by the EPA.

Petroleum  segment sales  increased 30 percent during 1998 to $14.9 million from
$11.5 in 1997. Sales through the petroleum  distributors  (the Company's primary
sales  channel)  increased  by 44 percent  over 1997.  The increase in sales was
primarily due to a strong EPA compliance driven market, strong new construction,
success with the new ATG  1001/2001  products,  as well as general  market share
gains. The Company completed shipping a $1.8 million order to Taiwan in 1998, of
which $1.2 million was shipped in 1997.

The Utility and Predictive Maintenance segment sales fell in 1998 by $209,000, a
13% decline from 1997. The decline in sales was primarily attributable to design
changes in Optimizer circuit breaker monitor. During the first half of 1998, all
Optimizer  shipments were deferred pending completion of the upgrade.  Optimizer
units recalled from the field were modified to incorporate several improvements,
or for a small  charge,  to replace  them with the new model.  This latest model
(Optimizer+)  was released for sale in September 1998 and  preliminary  customer
feedback has been positive.

                                                                               9
<PAGE>

Gross margins improved markedly to 49 percent in 1998, as compared to 42 percent
for the year 1997.  Purchased  material cost  reductions,  manufacturing  volume
efficiencies,  reduced warranty scrap, and a favorable product/features mix were
the major components of this performance improvement. Another notable factor was
the  timing of  shipments  of a large low margin  order to  Taiwan.  In 1997 the
Company  shipped  two  thirds  of the  Chinese  Petroleum  order  with the final
one-third  shipping in March 1998. Gross margins improved as the year progressed
and averaged 52 percent for the second half.

Operating  expenses increased as a percentage of sales from 35.1 percent in 1997
to 41.8 percent in 1998. Included in this $2.2 million increase were substantial
onetime charges incurred in completing an investment transaction with an outside
venture capital firm,  legal and settlement  costs in two significant  lawsuits,
and recruiting costs along with the ongoing expenses  associated with building a
stronger  sales/marketing and senior management team. The company also increased
its  investment  in R&D to almost $1 million in 1998 as  compared to $790,000 in
1997.  Interest  expense  declined  due to strong  operating  cash flow and cash
proceeds  from an  investment by an outside  venture  capital firm.  The Company
recognized $148,809 in interest income for the last 8 months of 1998.

1998 operating  profits  increased to $1,223,000,  or 7.6 percent of sales, from
$868,000,  or 6.7 percent, in 1997. Even though the Company incurred substantial
one-time  operating  expenses and a higher ongoing  operating cost, the combined
effect of  increased  sales,  improved  gross  margins,  reduction  of  interest
expense,  and the  addition  of interest  income  resulted in $355,000 of profit
improvement.

1997 COMPARED TO 1996

Net sales  totaled  $13.0  million in 1997,  an increase  of $3.1  million or 31
percent from 1996.  The increase was  primarily a result of strong growth in the
petroleum  market  segment and the shipment of  approximately  two-thirds of the
$1.8 million Taiwan automatic tank gauge order received in late 1996.

Petroleum  segment  sales  increased to $11.5  million,  or 36 percent from $8.4
million for the comparable period in 1996. Sales,  excluding the large shipments
to Taiwan,  increased over 31 percent from 1996. The growth was  attributable to
continued  sales  increases  to key  accounts  as well as  strong  sales  of the
electronic Line Leak Detector product.

The Utility and General Instruments segment grew 6 percent, from $1.4 million in
1996 to $1.5  million  in 1997.  The  Company  continued  to ship the  Optimizer
product,  originally  released in 1996. In 1997,  however,  further sales of the
product  were  suspended,  pending  software  and  hardware  changes  to improve
reliability.  The  Company  began to  arrange  for the  replacement  of  several
malfunctioning units in the field, as it prepared to implement product changes.

Gross margins  improved  modestly in 1997, to 42 percent  compared to 41 percent
for the comparable  period in 1996. The 1996 adverse  effects of product mix and
increases in scrap  carried into early 1997 and resulted in lower gross  margins
during the first quarter of 1997.  Gross margins improved as the year progressed
and averaged 43 percent in the second half of 1997.

Operating expenses,  managed aggressively  following the operating loss in 1996,
increased  slightly in 1997 (by $73,977) but declined sharply as a percentage of
sales (35.1%  versus  45.4%).  Operating  expenses  were  favorably  impacted by
reduced  warranty  costs and lower  salaries  resulting  from the  departure  of
several  senior  management  individuals.  Research  and  development  spending,
although still strong,  was notably lower than in 1996 as the major  development
effort for the electronic  Line Leak Detector was completed.  Interest  expenses
declined by a small amount as the operating cash flow improved,  particularly in
the second half of the year.

1997  operating  profits,  at  $868,426,  compared  favorably  to a 1996 loss of
$441,100.  It should be noted that the  Company  was  unprofitable  in the first
quarter of 1997, and thus the improved profits were achieved during the April to
December  1997  period.  The  keys  to  the  profit  turnaround  from  the  loss
experienced in 1996 were  increased  sales volume,  improved gross margins,  and
reduced operating spending as a percent of sales revenue.

                                                                              10
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

In 1997 the  Company  utilized  its working  capital  line of credit to fund the
growth in sales and accounts  receivable and to  accommodate  the weak operating
results experienced early in the year. The Company increased the working capital
line of credit from $3 million to $3.5 million during the first half of 1997. As
of December 27, 1997 the Company had $2,745,634  available to be borrowed on the
working  capital line of credit.  Total  inventories,  at  $1,884,000,  compared
favorably  to  $2,863,000  at year  end  1996 and a  meaningful  improvement  in
inventory  turnover  was  achieved  in 1997.  The  reduction  in  inventory  was
attributable to shipment of two-thirds of the Taiwan  automatic tank gauge order
and an overall improvement in material planning and purchasing.

The Company continued to utilize its $3.5 million working capital line of credit
to fund  operations  and growth through the first four months of 1998. On May 1,
1998 the  Company  completed  an  investment  by Roger E. Brooks and two venture
capital  funds,   Ampersand   Specialty  Materials  and  Chemicals  III  Limited
Partnership and Ampersand  Specialty  Materials and Chemicals III Companion Fund
Limited Partnership (collectively,  "Ampersand").  Ampersand and Roger E. Brooks
invested  $5.6 million to purchase  common stock from INCON.  The proceeds  from
these  funds were  utilized to pay off the  working  capital  line of credit ($1
million), complete a Company tender offer to its own shareholders ($1.6 million)
and pay legal  settlement costs  ($500,000).  The remainder of the investment is
available  as  additional  working  capital,  and  could be used to fund  future
acquisitions by the Company.  Although the Company has completed no acquisitions
to date, it continues to explore growth opportunities through acquisition. As of
December 26, 1998, the Company had $3.5 million  available to be borrowed on its
working capital line of credit, as well as a cash balance of $4,202,084.

Total year end inventories valued at $1,321,000, down from $1,854,000, primarily
due to continued  improvement in materials  management and purchasing.  Accounts
receivable  grew from $2,200,000 at year end 1997 to $3,253,000 at year end 1998
due to an exceptionally strong fourth quarter 1998.

The Company has a $1 million equipment revolver, of which $666,000 was available
to be borrowed as of December 26, 1998. The Company  funded  $157,000 of capital
additions  with this  equipment  revolver  in 1997.  In 1998 the Company did not
borrow against the equipment revolver.

On  September  18,  1998  the  Company  announced  its  Board of  Directors  had
authorized  the  repurchase  of up to  $250,000  of its Common  Stock in a stock
buyback  program  which  would  end after  March  1999.  The Board of  Directors
increased and extended this program on December 14, 1998 to allow up to $500,000
of the Company's  Common Stock to be repurchased  through  September 1999. As of
December  26,  1998,  the Company was able to  repurchase  $17,956 of its Common
Stock at an average price of $2.36 per share.  The shares  purchased  under this
program will be held for issuance under the employee stock option plan and other
compensation plans, or for other proper corporate purposes.

The Company feels that current  funds and existing  lines of credit are adequate
to fund existing operations for the foreseeable future.

YEAR 2000 ISSUES

Year 2000 (Y2K) issues arise from the inability of some  computer-based  systems
to properly  recognize and process dates after December 31, 1999. The Company is
dependent on computer  hardware and software ("IT Systems") and non-IT  systems,
such as telephones, HVAC, and other equipment containing embedded microprocessor
technology.  Most of the Company's key business processes utilize this equipment
either directly or indirectly.

STATE OF READINESS

The readiness  effort by the Company is proceeding on schedule.  All IT hardware
and software  systems have been  inventoried.  These systems and equipment  have
been  ranked  according  to  their   criticality  to  individual  core  business
operations. Lists of non-IT systems, such as telephone,  security systems, etc.,
including  those  identified  as  potentially  having  embedded   time-dependant
computer  chips,  have been  inventoried and ranked  similarly.  All significant
business  partners   including  service  providers  such  as  banks,   financial
consultants,  etc.,  vendors  of  material  for  production,  and  sales-channel
partners including independent  representatives and distributors,  were included
in the inventory process.

                                                                              11
<PAGE>

The  Company  believes  it is highly  unlikely  that there  will be  significant
internal Y2K problems,  as all major IT systems have had  extensive  upgrades in
1998,  including  accounting,  manufacturing,  and sales processing software and
hardware, some with the assistance of system vendor support. Although helpful to
the Y2K  compliance  effort,  theses  upgrades were made in the normal course of
business  to  replace  outmoded   systems.   All  INCON  products  that  require
date-related  computations have been thoroughly tested for Y2K compliance.  Most
INCON products have no date-dependencies in either operation or computation. The
Company  believes that all INCON products are Y2K compliant,  and information to
that effect has been distributed widely to customers,  investors, and government
agencies, and is available on the Company web site.

COSTS TO ADDRESS Y2K ISSUES

The Company began incurring costs to address Y2K issues in 1998. These costs are
primarily the costs of current  employees' time to do the appropriate  planning,
testing,  and  investigation  of the  many  areas  of the  business  potentially
affected  by this  issue.  The  total  cost of this  compliance  effort  through
December 26, 1998 was  approximately  $10,000.  The costs have not been, and are
not  forecasted  to be,  material to the operating  results of the Company.  All
expenses will continue to be expensed as incurred,  except those  capitalized as
normal costs of doing business.  The Company  estimates that its total remaining
costs to address Y2K issues forecasted for 1999 are approximately $20,000.

RISKS OF Y2K ISSUES

With the  completion  of  major  internal  systems  upgrades  in 1998,  and with
thorough  product  testing  completed in first  quarter 1999, it is now believed
that the most  reasonably  likely Y2K risk would be the loss of a major business
partner or other external system.  One such scenario would be the inability of a
major  (high-sales  volume)  distributor or  representative to carry on its core
business  function,  resulting in  interrupted  cash flow and customer  service.
Means to  identify  and  protect  the  Company  in the case of these  and  other
uncontrollable  scenarios will be fully  considered in the contingency  planning
phase.

CONTINGENCY PLANS

Remediation efforts on internal systems and products, including verification and
validation tests, will continue until all identified mission-critical, high-risk
systems are tested,  by July 1,1999.  It is possible that remedial  efforts will
include  contacting  outside parties and agencies to identify and evaluate their
Y2K issues,  and working  cooperatively  with them when  possible to correct and
test deficiencies.  Work will continue thereafter to test secondary,  low-impact
systems.  For Y2K  issues  that  have a  significant  probability  of not  being
remediated by the time of the  changeover to 2000,  and to plan for unlikely but
possible business  disruptions from  undiscovered Y2K issues,  contingency plans
will be developed and completed by October 1, 1999.

EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

In June of 1997, the Financial  Accounting  Standards Board issued  STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 130 - REPORTING  COMPREHENSIVE INCOME,
which requires the separate  reporting of all changes to  shareholders'  equity,
and SFAS NO. 131 -  DISCLOSURES  ABOUT  SEGMENTS  OF AN  ENTERPRISE  AND RELATED
INFORMATION,  which  revises  existing  guidelines  about the level of financial
disclosure  of  a  Company's  operations.  Both  Statements  are  effective  for
financial  statements issued for fiscal years beginning after December 15, 1997.
The Company has determined that these new reporting standards do not necessitate
any changes to existing financial reporting.

                                                                              12
<PAGE>

In June 1998,  the  Financial  Accounting  Standards  Board issued  STATEMENT OF
FINANCIAL  ACCOUNTING  STANDARDS  (SFAS) NO.  133 -  ACCOUNTING  FOR  DERIVATIVE
INSTRUMENTS  AND  HEDGING  ACTIVITIES,  which  requires  entities  to report all
derivatives  at fair  value as  assets or  liabilities  in their  statements  of
financial position.  This statement is effective for financial statements issued
for fiscal periods beginning after June 15, 1999. The Company does not currently
have any  derivative  instruments  or hedging  activities  to report  under this
standard.

FORWARD-LOOKING STATEMENTS

The "Management's Discussion and Analysis" section and "Description of Business"
section of this report contain forward-looking statements, as defined in Section
21E of the Securities  Exchange Act of 1934. Examples of such statements in this
report  include  those  relating to estimates of future market demand and trends
regarding  Petroleum  and   Utility/Predictive   Maintenance  segment  products,
expected  future  efforts with regard to foreign  markets for Company  products,
expected lease  renewals and  associated  costs,  expected  future  revenues and
warranty costs, future adequacy of the Company's capital resources, and expected
completion  dates and forecasted  costs of Y2K compliance  efforts.  The Company
cautions investors that numerous factors could cause actual results and business
conditions to differ  materially  from those  reflected in such  forward-looking
statements including, but not limited to, the following: unanticipated shifts in
market demand for ATG and LLD products or Utility/Predictive Maintenance segment
products,  owing to competition,  regulatory  changes, or changes in the overall
economy;   competitive   pressures   on  sales   margins  for  INCON   products;
unanticipated   warranty  costs  from  existing  products  or  newly  introduced
products;  unexpected costs  associated with Y2K issues;  and risks attendant to
expansion of the  Company's  business  through  increased  investment in product
development, increased marketing and sales efforts, and future acquisitions.

ITEM 7.  FINANCIAL STATEMENTS.

Audited financial  statements of the Company appear beginning at page F-1 below,
and are incorporated herein by reference.


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

There were no changes in or  disagreements  with  accountants  on accounting and
financial disclosures in 1998.

                                                                              13
<PAGE>

                                    PART III

ITEM 9.  DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL   PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

Certain information with respect to the executive officers of the Company is set
forth below. All other information  required by this Item is incorporated herein
by reference to the Company's  definitive proxy statement for the Annual Meeting
of Shareholders, to be held on June 10, 1999.

Under the bylaws of the Company,  all officers hold office until the next Annual
Meeting of Directors and until their  successors are chosen and have  qualified,
or until their earlier resignation or removal from office.

There are no family relationships among any executive officers or directors.

The executive officers of the Company are as follows:

NAME                            AGE     POSITIONS WITH COMPANY

Roger E. Brooks                 54      Chief Executive Officer and Director

Alan Lukas                      48      Vice President Product Development,
                                          Director, and Chairman of the Board

Andrew B. Clement               29      Controller and Assistant Treasurer

Enrique Sales                   35      Vice President Sales & Marketing

Roger E. Brooks  served as a consultant  to INCON from February 5, 1998 until he
became  President/CEO  and  a  Director  on  May  1,  1998.  Previously  he  was
President/CEO and a Director of Dynisco, Inc. (1984-1996), a Director, Executive
Vice  President/Chief  Operating  Officer  and VP  Marketing  & Sales for Thermo
Electric  Co.  Inc.  (1977-1984),   and  Marketing  Manager  for  General  Cable
Corporation (1970-1977). Currently he is a Director of American MSI Corporation,
and Moldflow Corporation.

Alan Lukas  founded INCON in 1978.  Previously he had held  positions as Project
Engineer at GenRad (1972-1973),  Applications  Engineer at Analog Devices,  Inc.
(1973),  Product  Marketing Manager at Teledyne  Philbrick  (1974),  Engineering
Manager at Process Development Corp.,  Division of Honeycomb Systems (1975-1978)
and President/CEO and Chairman of INCON (1978-1998). He currently is a member of
the Advisory  Board of the School of  Engineering  Science at the  University of
Southern Maine. He has been a director of INCON since 1978.

Andrew B. Clement has been with INCON since November of 1997, in the position of
Controller.  Previously he held  positions as  Controller  at EDM, Inc.  (1997),
Accountant at Portland Pipe Line Corp.  (1996) and Cost  Accountant at Aero Tech
Manufacturing, Inc. (1992-1995)

Enrique ( Rick)  Sales  joined  INCON in  December  1998 as the  company's  Vice
President of Sales & Marketing. Previously, he was Director of Sales & Marketing
for LMI, Inc. (1998),  Vice President of Sales & Markeitng for Lan Technologies,
Inc.  (1992-1998),  Sales  Manager,  Latin America and Product  Manager for BASF
Corporation  (1987-1989),  and Sales Representative for International Paper, Co.
(1985-1987). He is a Trustee of the Renssalaer Alumni Association.

ITEM 10.  EXECUTIVE COMPENSATION.

The information required by this Item is incorporated herein by reference to the
Company's   definitive   proxy   statement  for  the  1999  Annual   Meeting  of
Shareholders.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this Item is incorporated herein by reference to the
Company's   definitive   proxy   statement  for  the  1999  Annual   Meeting  of
Shareholders.

                                                                              14
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item is incorporated herein by reference to the
Company's   definitive   proxy   statement  for  the  1999  Annual   Meeting  of
Shareholders.


ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

An index of the exhibits  filed with this report  appears  beginning at page E-1
below, and is incorporated herein by reference.

During the forth  quarter of 1998 the Company  filed one report on Form 8-K. The
report  was  filed on  December  14,  1998 and  related  to an  increase  in the
Company's stock buyback program.

                                                                              15
<PAGE>

                                   SIGNATURES

In  accordance  with  Section 13 of the Exchange  Act,  the Company  caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

                                            INTELLIGENT CONTROLS, INC.

                                            By: /s/ ROGER E. BROOKS 
                                               ---------------------------------
                                               Roger E. Brooks, President and
                                               Chief Executive Officer
                                               Date: March 26, 1999

                                            By: /s/ ANDREW B. CLEMENT
                                               ---------------------------------
                                               Andrew B. Clement, Controller
                                               (principal financial officer and
                                               principal accounting officer)
                                               Date:  March 26, 1999

In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  Company  and in the  capacities  and on the
dates indicated.


/s/ ROGER E. BROOKS                         Date:  March 26, 1999
--------------------------------
Roger E. Brooks, President, Chief
Executive Officer and Director


/s/ ANDREW B. CLEMENT                       Date: March 26, 1999
--------------------------------
Andrew B. Clement, Controller


/s/ GEORGE E. HISSONG                       Date: March 26, 1999
--------------------------------
George E. Hissong, Director


/s/ ALAN LUKAS                              Date:  March 26, 1999
--------------------------------
Alan Lukas, Director


/s/ PAUL  F. WALSH                          Date: March 26, 1999
--------------------------------
Paul F. Walsh, Director


/s/ CHARLES D. YIE                          Date: March 26, 1999
--------------------------------
Charles Yie, Director

                                                                              16
<PAGE>

                                INDEX TO EXHIBITS

EXHIBIT NO.        DESCRIPTION

3(i)               Conformed  copy of Articles of  Incorporation,  as amended to
                   date

3(ii)              Bylaws of the Company, as amended to date

4                  See Exhibits 3(i) and 3(ii)

10.1               Investment  Agreement,   dated  March  26,  1998,  among  the
                   Company,  Ampersand  Specialty  Materials  and  Chemicals III
                   Limited   Partnership,   Ampersand  Specialty  Materials  and
                   Chemicals III Companion Fund Limited  Partnership,  and Roger
                   E. Brooks;  incorporated  by reference to Exhibit  99.c(1) to
                   the Company's  Schedule  13E-4 Issuer Tender Offer  Statement
                   filed March 30, 1998

10.1A              Amendment No. 1 to Investment  Agreement,  dated as of May 1,
                   1998, among the Company,  Ampersand  Specialty  Materials and
                   Chemicals  III  Limited   Partnership,   Ampersand  Specialty
                   Materials   and   Chemicals   III   Companion   Fund  Limited
                   Partnership,  and Roger E. Brooks;  incorporated by reference
                   to Exhibit 10.1A to the Company's Form 10-QSB for the quarter
                   ended March 28, 1998

10.2               Stockholders  Agreement,  dated as of May 1, 1998,  among the
                   Company,  Ampersand  Specialty  Materials  and  Chemicals III
                   Limited   Partnership,   Ampersand  Specialty  Materials  and
                   Chemicals III Companion  Fund Limited  Partnership,  Roger E.
                   Brooks,  Alan  Lukas,  Paul E.  Lukas,  and  certain  related
                   parties;  incorporated by reference to Exhibit 99.c(2) to the
                   Company's  Schedule 13E-4 Issuer Tender Offer Statement filed
                   March 30, 1998

Note:    Compensatory plans and management  contracts are filed as Exhibits 10.3
through 10.10 below.

10.3               Employment Agreement between the Company and Roger E. Brooks;
                   incorporated  by reference  to Exhibit 10.3 to the  Company's
                   Form 10-QSB for the fiscal quarter ended March 28, 1998

10.3A              Employee Stock Restriction  Agreement between the Company and
                   Roger E. Brooks and related promissory note, pledge agreement
                   and form of 83(b)  election;  incorporated  by  reference  to
                   Exhibit  10.3A to the  Company's  Form  10-QSB for the fiscal
                   quarter ended March 28, 1998

10.4               Employment Agreement dated as of May 1, 1998 with Alan Lukas;
                   incorporated  by reference  to Exhibit 10.2 to the  Company's
                   Form 10-QSB for the fiscal quarter ended June 27, 1998

10.5               1998 Employee Stock Option Plan; incorporated by reference to
                   Exhibit  10.4 to the  Company's  Form  10-QSB for the quarter
                   ended March 28, 1998

10.6               1984 Incentive  Stock Option Plan;  incorporated by reference
                   to  Exhibit  6.5 of the  Company's  Form 1-A,  filed June 19,
                   1993, as amended, SEC File No.
                   24B-3429 ("Company's Form 1-A")

                                      E-1
<PAGE>

10.6A              Amendment  No.  1  to  1984  Incentive   Stock  Option  Plan;
                   incorporated  by reference to Exhibit  10.5A of the Company's
                   Form 10-SB, filed February 2, 1995

10.6B              Amendment  No.  2  to  1984  Incentive   Stock  Option  Plan;
                   incorporated  by reference to Exhibit  10.6B of the Company's
                   Form 10-KSB for the fiscal year ended December 31, 1996

10.7               1993 Director Stock Option Plan; incorporated by reference to
                   Exhibit 6.7 of the Company's Form 1-A

10.8               1994 Employee Stock Purchase Plan, amended and restated as of
                   January 1, 1996; incorporated by reference to Exhibit 10.9 of
                   the Company's  Form 10-KSB for the fiscal year ended December
                   31, 1996

10.9               Advisory Board Stock Option Plan;  incorporated  by reference
                   to Exhibit 6.6 of the Company's Form 1-A

10.10              Form  of   Confidentiality   and   Nondisclosure   Agreement;
                   incorporated  by reference  to Exhibit 6.11 of the  Company's
                   Form 1-A

10.11              Settlement Agreement and Mutual Release,  dated May 13, 1998,
                   with John Knight; incorporated herein by reference to Exhibit
                   99.1 to the Company's Form 8-K filed May 27, 1998

10.12              Settlement  Agreement,  dated  August 25,  1998,  between the
                   Company and Hasstech, Inc.

10.15              Lease Agreement with Apollo  Development  Corp.,  dated as of
                   April 11, 1991;  incorporated  by reference to Exhibit 6.4 of
                   the Company's Form 1-A

10.15A             Lease Extension Agreement, executed May 27, 1997, with Apollo
                   Development Corp.; incorporated by reference to Exhibit 10.3A
                   to the  Company's  Form  10-KSB  for the  fiscal  year  ended
                   December 27, 1997

10.15B             Lease  Extension  Agreement,  executed  March  27,  1998 with
                   Appollo  Development  Corp.;  incorporated  by  reference  to
                   Exhibit  10.5 to the  Company's  Form  10-QSB  for the fiscal
                   quarter ended March 28, 1998

10.15C             Lease  Extension  Agreement,  executed  January  4, 1999 with
                   Appollo Development Corp.

10.16              Lease  Agreement  with BJB  Associates,  dated June 21, 1994;
                   incorporated  by reference  to Exhibit 10.4 of the  Company's
                   Form 10-KSB for the fiscal year ended December 31, 1994

10.16B             Addendum  to  Lease,   executed  May  27,   1997,   with  BJB
                   Associates; incorporated by reference to Exhibit 10.4A to the
                   Company's  Form 10-KSB for the fiscal year ended December 27,
                   1997

                                       E-2
<PAGE>

10.16C             Addendum  to  Lease,   executed   April  28,  1998  with  BJB
                   Associates,   and  Letter   dated  April  3,  1998  from  BJB
                   Associates   regarding   reimbursement  of  utility  cost  by
                   landlord;  incorporated  by  reference to Exhibit 10.6 to the
                   Company's  Form 10-QSB for the fiscal quarter ended March 28,
                   1998

21                 Subsidiaries of the Company

23                 Consent of Accountants

27                 Financial Data Schedule

                                      E-3

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS



BOARD OF DIRECTORS AND STOCKHOLDERS OF INTELLIGENT CONTROLS, INC.

In our opinion,  the accompanying  balance sheets and the related  statements of
income,  stockholders'  equity,  and cash flows present fairly,  in all material
respects,  the financial position of Intelligent Controls,  Inc. at December 26,
1998 and December 27, 1997, and the results of its operations and its cash flows
for the years  then  ended in  conformity  with  generally  accepted  accounting
principles.  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 of these statements in
accordance with generally accepted auditing standards which 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,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.


/S  PRICEWATERHOUSECOOPERS     L.L.P.
-------------------------------------
Portland, Maine
February 5, 1999

<PAGE>

                           INTELLIGENT CONTROLS, INC.
                                 BALANCE SHEETS

                     December 26, 1998 and December 27, 1997

                                     ASSETS

<TABLE>
<CAPTION>

                                                                    1998              1997
                                                                    ----              ----
<S>                                                            <C>               <C>        
Current assets:
  Cash and cash equivalents                                    $  4,202,084      $       300
  Accounts receivable, net of allowances of $170,000                                        
    in 1998 and $50,000 in 1997                                   3,253,477        2,200,062
  Inventories                                                     1,320,913        1,854,328
  Prepaid expenses and other                                        127,425          257,704
  Income tax receivable                                                   -          119,099
  Deferred income taxes                                             343,520          192,464
                                                               ------------      -----------
  Total current assets                                            9,247,419        4,623,957

Property and equipment, net                                         889,748          856,581
Other assets                                                         31,611           27,176
                                                               ------------      -----------
                                                               $ 10,168,778      $ 5,507,714
                                                               ============      ===========
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Non-interest bearing overdraft                               $          -      $    67,259
  Note payable - bank                                                     -          754,366
  Income taxes payable                                              299,269                -
  Accounts payable                                                1,007,400          769,097
  Accrued expenses                                                1,144,682          520,709
  Current portion of long-term debt                                 194,000          194,700
                                                               ------------      -----------
  Total current liabilities                                       2,645,351        2,306,131

Long-term debt, net of current portion                              140,279          372,401

Deferred income taxes                                                76,740           67,295

Stockholders' equity:
  Common stock, no par value; 8,000,000 shares authorized;
    5,060,760 shares issued in 1998 and 3,274,306 in 1997         7,585,080        2,293,841
  Retained earnings                                               1,139,196          468,046
  Receivable from stockholder                                    (1,376,728)               -
  Treasury stock, 115,951 shares in 1998                            (41,140)               -
                                                               ------------      -----------
  Total stockholders' equity                                      7,306,408        2,761,887
                                                               ------------      -----------
                                                               $ 10,168,778      $ 5,507,714
                                                               ============      ===========
</TABLE>

     The accompanying notes are an integral part of the financial statements

                                       F-1

<PAGE>

                           INTELLIGENT CONTROLS, INC.
                              STATEMENTS OF INCOME

           For the Years Ended December 26, 1998 and December 27, 1997

                                                   1998           1997
                                               ------------    ------------

Net sales                                      $ 16,198,385    $ 13,005,184

Cost of sales                                     8,198,641       7,568,247
                                               ------------    ------------
Gross profit                                      7,999,744       5,436,937

Operating expenses:
  Selling, general and administrative             5,032,227       3,777,699
  Research and development                          996,933         790,812
  Legal settlement charges                          747,660              --
                                                  6,776,820       4,568,511
Operating income                                  1,222,924         868,426

Other income (expense):
  Interest income (expense)                          82,517        (157,230)
  Other (expense)                                   (67,291)        (30,221)
                                               ------------    ------------
                                                     15,226        (187,451)
Income before income tax expense                  1,238,150         680,975

Income tax expense                                  567,000         246,000
                                               ------------    ------------

Net income                                     $    671,150    $    434,975
                                               ============    ============

  Net income per share basic and diluted       $        .15    $        .13
                                               ============    ============

  Weighted average common shares outstanding      4,391,305       3,249,769
                                               ============    ============
  Weighted average common
    and common equivalent shares outstanding      4,455,635       3,392,686
                                               ============    ============


    The accompanying notes are an integral part of the financial statements

                                       F-2
<PAGE>

                           INTELLIGENT CONTROLS, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY

           For the Years Ended December 26, 1998 and December 27, 1997

<TABLE>
<CAPTION>

                                        OUTSTANDING                                                          TOTAL
                                    COMMON        STOCK         RETAINED    RECEIVABLE TO    TREASURY     STOCKHOLDERS'
                                    SHARES        AMOUNT        EARNINGS    SHAREHOLDERS      STOCK          EQUITY
                                  ----------    -----------    -----------   -----------    -----------    -----------
<S>                                <C>          <C>            <C>           <C>            <C>            <C>        
Balances, January 1, 1997          3,238,952    $ 2,252,041    $    33,071   $        --    ($    4,306)   $ 2,280,806
Exercise of stock options             25,050         20,312             --            --             --         20,312
Issuance of common stock              12,457         25,794             --            --             --         25,794
Retirement of 2,153                   (2,153)        (4,306)            --            --          4,306              0
  treasury shares

Net Income                                --             --        434,975            --             --        434,975
                                  ----------    -----------    -----------   -----------    -----------    -----------
Balances, December 27, 1997        3,274,306      2,293,841        468,046            --              0    $ 2,761,887

Exercise of stock options            125,141         44,012             --            --             --         44,012
Issuance of common stock           2,136,313      6,850,494             --            --             --      6,850,494
Retirement of common stock          (475,000)    (1,603,267)            --            --             --     (1,603,267)
Acquisition of treasury shares      (116,121)            --             --            --        (41,483)       (41,483)
Issuance of treasury shares              170             --             --            --            343            343
Receivable from stockholder               --             --             --    (1,376,728)            --     (1,376,728)

Net Income                                --             --        671,150            --             --        671,150
                                  ----------    -----------    -----------   -----------    -----------    -----------
Balances, December 26, 1998        4,944,809    $ 7,585,080    $ 1,139,196   ($1,376,728)   ($   41,140)   $ 7,306,408
                                  ==========    ===========    ===========   ===========    ===========    ===========

</TABLE>

     The accompanying notes are an integral part of the financial statements

                                       F-3

<PAGE>

                           INTELLIGENT CONTROLS, INC.
                            STATEMENTS OF CASH FLOWS

           For the Years Ended December 26, 1998 and December 27, 1997

<TABLE>
<CAPTION>

                                                             1998           1997
                                                          -----------    -----------
<S>                                                       <C>            <C>        
Cash flows from operating activities:
  Net income                                              $   671,150    $   434,975
    Adjustments to reconcile net income to net cash
      Provided (used) by operating activities:
      Depreciation and amortization                           267,605        242,430
      Loss on disposal of property and equipment               13,426             --
      Deferred income taxes                                  (141,611)        26,381
      Changes in assets and liabilities:
      Accounts receivable                                  (1,053,415)      (239,083)
      Inventories                                             533,415        979,007
      Prepaid expenses and other current assets               130,279         85,133
      Income tax receivable                                   119,099         40,901
      Income tax payable                                      299,269             --
      Accounts payable and accrued expenses                   862,276       (265,310)
      Other                                                    (4,435)        (7,196)
                                                          -----------    -----------
  Net cash provided by operating activities                 1,697,058      1,297,238
                                                          -----------    -----------
Cash flows from investing activities:
  Capital expenditures                                       (314,198)      (247,931)
                                                          -----------    -----------
  Net cash used by investing activities                      (314,198)      (247,931)
                                                          -----------    -----------
Cash flows from financing activities:
  (Decrease) increase in non-interest bearing overdraft       (67,259)        67,259
  Repayment of note payable - bank                           (754,366)    (1,261,496)
  Issuance of long-term debt                                       --        157,000
  Repayment of long-term debt                                (232,822)      (191,566)
  Issuance of common stock, net                             5,517,778         46,106
  Retirement of common stock                               (1,603,267)            --
  Acquisition of treasury stock                               (41,140)            --
  Decrease in restricted cash balances                             --        199,120
  Decrease in liability to shareholder                             --       (199,120)
                                                          -----------    -----------
  Net cash (used by) provided by financing activities       2,818,924     (1,182,697)
                                                          -----------    -----------
Net decrease in cash                                        4,201,784       (133,390)
Cash and cash equivalents at beginning of year                    300        133,690
                                                          -----------    -----------
Cash and cash equivalents at end of year                  $ 4,202,084    $       300
                                                          ===========    ===========

Supplemental  disclosures of cash flow information:
  Cash paid during the period for:
    Interest                                              $    66,292    $   160,624
    Income taxes                                          $   320,000    $   373,000

</TABLE>

Supplemental disclosure of noncash financing activity:
   During  1998  common  stock  amounting  to  $1,376,728  was  issued  for  a
   receivable from stockholder During 1997 treasury stock with a carrying cost
   of $4,306 was retired.

    The accompanying notes are an integral part of the financial statements

                                      F-4

<PAGE>

                           INTELLIGENT CONTROLS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                     December 26, 1998 and December 27, 1997

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


ORGANIZATION AND OPERATIONS

The   Company   is   engaged    primarily   in   designing   and   manufacturing
microprocessor-based control devices and systems for industrial,  commercial and
power utility applications.

During 1997 the Company  changed its reporting year end from a calendar year end
used in prior years, to the last Saturday in December.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company  considers  all highly  liquid  debt  instruments  purchased  with a
maturity of three months or less to be cash equivalents.

REVENUE RECOGNITION

Substantially  all revenue is related to the sale of products and is recorded at
the time of shipment to the customer.

INVENTORIES

Inventories  are  stated at the  lower of cost  (average  cost) or  market  (net
realizable value) on a first in first out basis.

PROPERTY AND EQUIPMENT

Property and equipment  are stated at cost.  Depreciation  is  calculated  using
straight-line  and  accelerated  methods  over  estimated  useful  lives  of the
equipment   (three  to  ten  years)  and  the  lease  terms  for  the  leasehold
improvements for book and tax purposes.

Expenditures  for  maintenance,  repairs and minor  replacements  are charged to
operations while  expenditures for major  replacements and betterments are added
to property  and  equipment  accounts.  When fixed  assets are sold,  retired or
otherwise  disposed of, the asset cost and accumulated  depreciation are removed
from the accounts and any resulting gain or loss is reflected in income.

                                       F-5
<PAGE>

                           INTELLIGENT CONTROLS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                     December 26, 1998 and December 27, 1997


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

NET INCOME (LOSS) PER SHARE

The net income  (loss) per common  share has been  computed in  accordance  with
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 128 - EARNINGS PER SHARE.
The Statement requires dual presentation of basic and diluted earnings per share
of common stock on the statements of income.  Basic earnings per share of common
stock have been  determined  by dividing net  earnings by the  weighted  average
number of shares of common stock outstanding  during the year.  Diluted earnings
per share  reflect the  potential  dilution  that would occur if existing  stock
options were exercised.  Following is a reconciliation of the dual presentations
of earnings per share for the fiscal years presented.

                                     Net             Common      Earnings
                                  Income             Shares        Per
                                (Numerator)      (Denominator)    Share
                                -----------      -------------   --------
DECEMBER 26, 1998

  Basic earnings per share      $   671,150       4,391,305       $ .15
                                                                  =====
  Dilutive potential shares              --          64,330
                                -----------       ---------
  Diluted earnings per share    $   671,150       4,455,635       $ .15
                                ===========       =========       =====

DECEMBER 27, 1997

  Basic earnings per share      $   434,975       3,249,769       $ .13
                                                                  =====
  Dilutive potential shares              --         142,917
                                -----------       ---------
  Diluted earnings per share    $   434,975       3,392,686       $ .13
                                ===========       =========       =====


FAIR VALUE OF FINANCIAL INSTRUMENTS

At  December  27,  1997,  the  carrying  amounts  of  the  Company's   financial
instruments included in current assets and current liabilities  approximate fair
value of the short maturity of those  instruments.  The carrying  amounts of the
Company's  long-term debt also approximates  their value as of December 26, 1998
based upon the borrowing rates currently available to the Company for loans with
similar terms and maturities.

IMPAIRMENT ACCOUNTING

The Company adopted FINANCIAL  ACCOUNTING  STANDARD NO. 121,  ACCOUNTING FOR THE
IMPAIRMENT OF  LONG-LIVED  ASSETS AND FOR  LONG-LIVED  ASSETS TO BE DISPOSED OF,
(SFAS No. 121) in 1996. The Company reviews the recoverability of its long-lived
assets,  including goodwill and other intangible assets,  when events or changes
in  circumstances  occur that indicate that the carrying value of the assets may
not be  recoverable.  The  measurement  of possible  impairment  is based on the
Company's  ability to recover the asset from expected  future pre-tax cash flows
(undiscounted  and without  interest  charges) of the  related  operations.  The
measurement  of impairment  requires  management  to make  estimates of expected
future  cash  flows  related to  long-lived  assets.  It is at least  reasonably
possible  that future  events or  circumstances  could cause these  estimates to
change.

                                       F-6
<PAGE>

                           INTELLIGENT CONTROLS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                     December 26, 1998 and December 27, 1997

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

NEW ACCOUNTING PRONOUNCEMENTS

In June of 1997, the Financial  Accounting  Standards Board issued  STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 130 - REPORTING  COMPREHENSIVE INCOME,
which requires the separate  reporting of all changes to  shareholders'  equity,
and SFAS NO. 131 -  DISCLOSURES  ABOUT  SEGMENTS  OF AN  ENTERPRISE  AND RELATED
INFORMATION,  which  revises  existing  guidelines  about the level of financial
disclosure  of  a  Company's  operations.  Both  Statements  are  effective  for
financial  statements issued for fiscal years beginning after December 15, 1997.
The Company has determined that these new reporting standards do not necessitate
any changes to existing financial reporting.

In June 1998,  the  Financial  Accounting  Standards  Board issued  STATEMENT OF
FINANCIAL  ACCOUNTING  STANDARDS  (SFAS) NO.  133 -  ACCOUNTING  FOR  DERIVATIVE
INSTRUMENTS  AND  HEDGING  ACTIVITIES,  which  requires  entities  to report all
derivatives  at fair  value as  assets or  liabilities  in their  statements  of
financial position.  This statement is effective for financial statements issued
for fiscal periods beginning after June 15, 1999. The Company does not currently
have any  derivative  instruments  or hedging  activities  to report  under this
standard.

RECLASSIFICATIONS

Certain  reclassifications  have been made to the 1997  financial  statements to
conform to the 1998 presentation.

2.   INVENTORIES

Inventories  consisted  of the  following  at December 26, 1998 and December 27,
1997:

                                                    1998              1997
                                                ------------      -----------

     Raw materials and parts                    $    960,552      $ 1,214,749
     Work-in-progress                                167,512          229,824
     Finished goods                                  187,849          356,974
     Supplies and other                                5,000           52,781
                                                ------------      -----------

                                                $  1,320,913      $ 1,854,328
                                                ============      ===========

                                       F-7
<PAGE>

                           INTELLIGENT CONTROLS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                     December 26, 1998 and December 27, 1997


3.   PROPERTY AND EQUIPMENT

Property  and  equipment  consisted  of the  following  at December 26, 1998 and
December 27, 1997:

                                                         1998          1997
                                                     -----------   -----------

     Equipment                                       $ 1,217,932   $ 1,139,210
     Furniture and fixtures                              102,874       104,312
     Computer software                                   169,176       154,560
     Leasehold improvements                              109,512       111,983
     Construction in progress                            105,813            --
                                                     -----------   -----------

                                                     $ 1,705,307   $ 1,510,065

     Less accumulated depreciation and amortization      815,559       653,484
                                                     -----------   -----------

                                                     $   889,748   $   856,581
                                                     ===========   ===========

4.   NOTE PAYABLE - BANK

Note payable - bank  represents  amounts  borrowed  under a  $3,500,000  working
capital line of credit.  Such borrowings are collateralized by all assets of the
Company and are subject to certain restrictions,  including those related to new
borrowings,  maximum debt to equity ratio,  and minimum  pretax  income  levels.
Interest is  variable  at the bank's base rate plus .25% (7.75% at December  26,
1998 and 8.5% at December 27,  1997).  At December  26,  1998,  the line was not
being  utilized  and all $3.5  million was  available  to be  borrowed.  Amounts
borrowed at December 27, 1997 were $754,366.  The weighted average interest rate
on all  outstanding  borrowings at fiscal year ended December 26, 1998 was 7.75%
and 8.55% for fiscal year ended December 27, 1997.

5.   LONG-TERM DEBT

Long-term  debt consisted of the following at December 26, 1998 and December 27,
1997:

<TABLE>
<CAPTION>

                                                                                  1998           1997
                                                                                ---------     ---------
<S>                                                                              <C>           <C>     
   Term note payable, interest at 9.5%
     Payable monthly through December 1999                                      $      --     $  71,950
                                                                                                       
   Borrowing under a $1,000,000  revolving  credit  agreement with a bank,                             
     interest at a variable rate (7.75% at December 26, 1998 and 8.5%                                  
     at December 27, 1997), with principal and interest payable                                        
     monthly through December 2000                                                334,279       495,151
                                                                                ---------     ---------

                                                                                  334,279       567,101

   Less current portion                                                          (194,000)     (194,700)
                                                                                ---------     ---------

   Long-term portion                                                            $ 140,279     $ 372,401
                                                                                =========     =========
</TABLE>

The revolving credit agreement is  collateralized in the same manner and subject
to the same  conditions  as the note payable  described in Note 4. The term note
payable is  collateralized  by a  subordinated  interest  in Company  assets and
contains restrictions with respect to dividends capital,  expenditures,  and new
borrowings.

                                       F-8
<PAGE>

                           INTELLIGENT CONTROLS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                     December 26, 1998 and December 27, 1997

5.   LONG-TERM DEBT (CONT'D)

At December 26, 1998, aggregate maturities of long-term debt are as follows:

                       1999                            194,000
                       2000                            140,279
                                                      --------
                                                      $334,279
                                                      ========

6.   INCOME TAXES

Income tax expense (benefit) consists of the following:

                                                1998              1997
                                              ---------        ---------
         Current:
              Federal                         $ 544,000        $ 197,000
              State                             165,000           57,000
                                              ---------        ---------
                                                709,000          254,000
                                              ---------        ---------
         Deferred:
              Federal                         (110,000)          (6,200)
              State                            (32,000)          (1,800)
                                              ---------        ---------
                                              (142,000)          (8,000)
                                              ---------        ---------
              Total income tax expense        $ 567,000        $ 246,000
                                              =========        =========

The actual income tax benefit differs from the expected tax computed by applying
the U.S.  federal  corporate  tax rate of 34% to  income  before  income  tax as
follows:

                                                            1998      1997
                                                            -----     -----

         Computed expected income tax expense (benefit)       34%       34%
         State income taxes, net of federal benefit            6         6
         Foreign Sales Corporation                            --        (5)
         Legal Settlement                                      5
         Other                                                 1         1
                                                            -----     -----
              Total income tax expense rate                   46%       36%
                                                            =====     =====


The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and liabilities  consist of the following at December
26, 1998 and December 27, 1997:

                                       F-9
<PAGE>

                           INTELLIGENT CONTROLS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                     December 26, 1998 and December 27, 1997


6.   INCOME TAXES (CONT'D)

Deferred tax assets:                    1998              1997
                                      ---------        ---------
         Inventory                    $ 109,212        $  60,381
         Reserves                       207,660          108,585
         Compensation                    26,648           23,498
                                      ---------        ---------
                                      $ 343,520        $ 192,464
                                      =========        =========

Deferred tax liabilities:
         Depreciation                 $  76,740        $  67,295
                                      =========        =========

7.  COMMON STOCK

The  Company has  granted  stock  options to  employees,  directors  and outside
consultants  and  advisors  under a 1984  Incentive  Stock  Option  Plan, a 1993
Directors  Stock Option Plan,  an Advisory  Board Stock Option Plan,  and a 1998
Employee  Stock Option Plan.  Options  granted  under the 1984  Incentive  Stock
Option  Plan  vest at a rate of 20% per  year,  options  granted  under the 1998
Employee Stock Option Plan vest at a rate of 25% per year,  and options  granted
under the  other two plans  vest  immediately.  Options  granted  under the 1984
Incentive  Stock Option Plan, the Advisory Board Stock Option Plan, and the 1998
Employee  Stock Option Plan expire after 10 years,  while options  granted under
the 1993  Directors  Stock Option Plan expire after 5 years.  As of December 26,
1998,  227,500  shares  were  available  to be granted  under these plans in the
future. A summary of changes of common stock options during 1998 and 1997 is:

                                                 Number of     Weighted Average
                                                  Shares        Exercise Price

      Outstanding at January 1, 1997              495,508           $1.69
      Issued during 1997                          118,000           $2.19
      Lapsed during 1997                          (40,500)          $2.97
      Exercised during 1997                       (21,300)          $0.73
                                                 --------
      Outstanding at December 27, 1997            551,708           $1.74
      Issued during 1998                          181,000           $2.28
      Lapsed during 1998                         (223,072)          $1.36
      Exercised during 1998                      (125,668)          $1.30
                                                 --------

      Outstanding at December 26, 1998            383,968           $2.36
                                                 ========

      Shares exercisable at December 26, 1998     157,454
                                                 ========

      Shares exercisable at December 27, 1997     398,373
                                                 ========

The weighted  average  fair value of options  granted in 1998 and 1997 was $1.28
and $1.26, respectively and the range of exercise prices at December 26, 1998 is
$0.50 to $4.52. The weighted average remaining contractual life of these options
is approximately 6.4 years.

                                      F-10
<PAGE>

                           INTELLIGENT CONTROLS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                     December 26, 1998 and December 27, 1997


7.   COMMON STOCK (CONT'D)

On January 1, 1996,  the  Company  adopted  STATEMENT  OF  FINANCIAL  ACCOUNTING
STANDARDS NO. 123,  ACCOUNTING FOR STOCK BASED COMPENSATION (SFAS No. 123). This
statement  requires a fair value based method of accounting  for employee  stock
options and results in expense  recognition  for the  Company's  employee  stock
plans. It also permits a Company to continue to measure compensation expense for
such plans using value based method as prescribed by Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" (APB No. 25). The Company
has elected to follow APB No. 25 in accounting for its employee stock plans, and
accordingly, no compensation cost has been recognized. Had compensation cost for
the Company's stock plans been determined  based on the fair value  requirements
under SFAS No. 123, the  Company's  net income and earnings per share would have
been to the pro forma amounts indicated below:

                                           1998                     1997
                                 -----------------------   ---------------------
                                     As            Pro         As         Pro
                                  Reported        Forma     Reported     Forma

   Net income                    $ 671,150     $ 596,630   $ 434,975   $ 399,519

   Basic net income per share    $    0.15     $    0.14   $    0.13   $    0.12

The fair value of stock  options in the pro forma  accounts for 1998 and 1997 is
not necessarily  indicative of the future effects on net income and earnings per
share.  The fair value of each stock option grant has been estimated on the date
of the grant using the  Black-Scholes  option-pricing  model with the  following
weighted-average assumptions used for grants in 1998 and 1997, respectively:  no
dividend yield;  expected  volatility of 50% for both years;  risk-free interest
rates of 6% for both years; and expected life of 6 years for both years.

8.   COMMITMENTS

The Company  leases two  facilities,  including  one from a related  party,  and
various computer and office equipment under non-cancelable operating leases. The
Company has an option to purchase one of the  facilities  prior to October 2000.
Minimum lease payments over the fixed terms of these leases are as follows:

                         1999             $148,348
                         2000              110,623
                         2001                7,447
                         2002                2,960

Rent  expense  was  approximately  $118,000  and  $117,000  in  1998  and  1997,
respectively, including approximately $65,000 and $64,000 to a related party.

The Company  manufactures  a certain  product  line under an  exclusive  license
agreement  which  requires the Company to make royalty  payments on such product
sales through 2007.  Royalty  expense  related to this  agreement was $5,690 and
$9,377 in 1998 and 1997 respectively.

 9.  EMPLOYEE BENEFIT PLAN

The Company has adopted a 401(k) plan,  which covers all eligible  employees and
includes a matching contribution by the Company. In 1995, the Company's Board of
Directors  voted to increase the Company's match from 40% of the first 5% of the
employee's  contribution,  to 50% of an employee's  contribution up to 5% of the
employee's salary.  Expenses associated with the plan were approximately $40,700
and $35,300 in 1998 and 1997, respectively.

                                      F-11
<PAGE>

                           INTELLIGENT CONTROLS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                     December 26, 1998 and December 27, 1997

10.  LITIGATION

On July 26, 1996 the Company received notice of the filing of an action entitled
John D. Knight v. Intelligent Controls, Inc. in Maine Superior Court, Cumberland
County.  The action was brought by Mr. Knight,  a former  director and executive
officer of Intelligent  Controls,  Inc.  whose  employment was terminated by the
Company in June 1996.  In May 1998 the  Company  settled  the  lawsuit  with Mr.
Knight. The financial statements reflect a $40,000 cash payment,  recognition of
$200,000  for the  disqualifying  disposition  of  incentive  stock  options and
$407,660 for exercise of  non-qualified  stock options.  The company was able to
realize a tax benefit on $447,660 of these charges,  $200,000 was not deductible
for tax purposes.

The Company reached a final agreement, early in the third quarter, with Hasstech
which had brought suit in October 1997  claiming that INCON's line leak detector
infringed a certain  Hasstech  patent.  A settlement  reached in mediation,  and
recorded  in the court  records,  calls for an  agreement  between  the  parties
whereby INCON will pay Hasstech $100,000, half in September 1998 and half in the
first  quarter of 1999.  The entire  $100,000  obligation  was  recognized as an
operating expense in the second quarter of 1998.

                                      F-12