<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K
     (Mark One)

     [x]  Annual report pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934
              For the fiscal year ended December 31, 1998

     [ ]  Transition report pursuant to Section 13 of 15(d) of the Securities
          Exchange Act of 1934
              For the transition period from _____________ to _______________

     Commission file number:  333-51355

                             NUMATICS, INCORPORATED
             (Exact Name of Registrant as Specified in Its Charter)

               Michigan                                38-2955710
     (State or Other Jurisdiction              (I.R.S. EmployerIdentification
     of Incorporation or Organization)                    Number)

              1450 North Milford Road, Milford, Michigan    48357
             (Address of Principal Executive Offices)    (Zip Code)

                                 (248) 887-4111
              (Registrant's Telephone Number, Including Area Code)

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

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

                  9 5/8% Series B Subordinated Notes Due 2008
                                (Title of Class)

     Indicate by check mark whether the registrant: (1) has filed all reports
     required to be filed by Section 13 of 15(d) of the Securities Exchange Act
     of 1934 during the preceding 12 months (or for such shorter period that the
     registrant was required to file such reports), and (2) has been subject to
     such filing requirements for the past 90 days.     YES  [x]    NO  [ ]

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

     State the aggregate market value of the voting and non-voting common equity
     held by non-affiliates of the registrant.  $0 (Registrant's common equity
     has no trading market.)

     Indicate the number of shares outstanding of each of registrant's classes
     of common stock, as of the latest practicable date:   Common Stock
     21,276.6 shares as of March 29, 1999

                  DOCUMENTS INCORPORATED BY REFERENCE:  None
<PAGE>
 
                 CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS
                 ---------------------------------------------
                                        
          This Form 10-K report, including the information provided under item 1
     and under item 7, contains forward-looking statements, which can be
     identified by the use of the future tense or other forward-looking terms
     such as "may," "intend," "will," "expect," "anticipate," "plan,"
     "management believes," "estimate," "continue," "should," "strategy," or
     "position" or the negatives of those terms or other variations on them or
     by comparable terminology. In particular, any statements, express or
     implied, concerning future operating results or the ability to generate net
     sales, income, or cash flow to service indebtedness  are forward-looking
     statements. Investors are cautioned that reliance on any of those forward-
     looking statements involves risks and uncertainties and that, although
     Numatics' management believes that the assumptions on which those forward-
     looking statements are based are reasonable, any of those assumptions could
     prove to be inaccurate. As a result, the forward-looking statements based
     on those assumptions also could be incorrect, and actual results may differ
     materially from any results indicated or suggested by those assumptions.
     The uncertainties in this regard include, but are not limited to, those
     identified in "Risk Factors" under item 1.  In light of these and other
     uncertainties, the inclusion of a forward-looking statement in this report
     should not be regarded as a representation by Numatics that its plans and
     objectives will be achieved. All forward-looking statements are expressly
     qualified by the cautionary statements contained in this paragraph and in
     "Risk Factors" below. Numatics undertakes no duty to update any forward-
     looking statements.


                                       1
<PAGE>
 
                                     PART I

     ITEM 1.  BUSINESS

          Numatics, Incorporated ("Numatics" and, together with its
     subsidiaries, the "Company") is a global manufacturer and marketer, both
     directly and through its subsidiaries,  of pneumatic valves, actuators, and
     related specialty products. The Company's principal market is the United
     States, in which it is the largest manufacturer in its core
     productdirectional control, base mounted, 4-way pneumatic valves. The
     Company also conducts operations in several foreign countries, including
     Canada, Germany, England, Italy, France, the Netherlands, Hungary, Taiwan,
     and Mexico.

     History
     -------

          The Company's operating history began in 1990, when senior management
     of Numatics' predecessor, led by Numatics' Chairman, CEO, and President,
     John Welker, formed Numatics,  and Numatics purchased the assets of the
     predecessor company (including the stock of its Canadian and German
     subsidiaries) from the predecessor's  founder, William Carls, in a
     leveraged buyout (the "1990 Buyout"). Mr. Welker and his management team
     held a 20% ownership interest in Numatics after the 1990 Buyout, with the
     remaining 80% held primarily by two venture capital investors. The 1990
     Buyout was funded with $61.8 million in debt, $8.0 million in junior
     subordinated convertible debt, $6.0 million in equity contributions, and
     $9.2 million in cash.

          In 1992, Numatics acquired the 80% equity interest it continutes to 
     hold in its subsidiary, Micro-Filtration, Inc. In 1994, Numatics formed    
     Numatech, Inc., retaining an 88% equity interest in that subsidiary, and   
     Numation, Inc., retaining a 90% equity interest in that subsidiary. In 
     1995, Numatics acquired 80% equity interests in two other subsidiaries, 
     Ultra Air Products, Inc., and MicroSmith, Inc. Numatics now holds a 90%    
     interest in MicroSmith, Inc. In accordance with the Company's management 
     philosophy,the managers of Micro Filtration, Numatech, Numation, Ultra Air 
     , and MicroSmith own all of the equity in these subsidiaries not owned by 
     Numatics. The stock they own is non-voting stock; the Company owns all of  
     the voting stock of each subsidiary. Also in 1995, Numatics purchased 12%
     of the stock of Univer SpA, the largest manufacturer of pneumatic products 
     in Italy.

          By the end of 1995, Numatics senior management had increased their
     share of Numatics' common stock to 30% through performance incentives.
     Effective December 31, 1995, Numatics redeemed the remaining equity
     interests of the outside investors (the "1995 Recapitalization"), and the
     management team became 100% owners of the outstanding common stock. The
     redemption of the outside investors' equity interests in the 1995
     Recapitalization was funded with $97.3 million in debt, including $30.0
     million in a senior subordinated note (the "Old Subordinated Note")
     with a detachable warrant for 6% of Numatics' common stock.

          The detachable warrant was exercised on March 24, 1998.  On the same
     day, Numatics issued $115.0 million of transfer-restricted 9 5/8% senior
     subordinated notes, guaranteed by all of Numatics domestic subsidiaries
     (the "Interim Notes"), the proceeds of which were used to repay the Old
     Subordinated Note and pay a $6 million dividend on Numatics' common stock,
     with the balance being paid against the Company's then outstanding bank
     debt.

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          At the same time as the Interim Note issuance, the Company also
     entered into a new bank credit facility, which included  term loans of
     $29.0 million, $4.0 million, and $2.0 million to Numatics and its German
     and Canadian subsidiaries, respectively, and revolving credit facilities,
     including letters of credit, of $32.0 million and $3.0 million to Numatics
     and its German subsidiary, respectively. This facility (the "New Credit
     Facility"), which continues in effect at present, is guaranteed by all of
     Numatics' domestic subsidiaries, and the facility and those guarantees are
     secured by substantially all the assets of Numatics and its domestic
     subsidiaries and, with respect to the loans to Numatic's foreign
     subsidiaries, substantially all the assets of those subsidiaries.
     Additional information concerning the New Credit Facility is provided below
     under "Risk Factors--Leverage," "--Subordination," and "--Dependence upon
     John Welker," item 7, and note 2 to the Company's consolidated financial
     statements filed with this Form 10-K as exhibit 99.1.

          In September 1998, in an exchange offer registered under the
     Securities Act of 1933, the Interim Notes were exchanged for Series B 9
     5/8% senior subordinated notes having identical terms, except for the
     absence of transfer restrictions, and guaranteed by the same subsidiaries
     (the "Series B Notes").  Some additional information concerning the Series
     B Notes and the indenture under which they were issued is provided below
     under "Risk Factors--Leverage," "--Subordination," and "--Possible
     Inability to Repurchase Series B Notes Upon a Change in Control," and in
     note 2 to the Company's 1998 consolidated financial statements.  More
     extensive information concerning the Series B Notes is contained in the
     Form S-4 registration statement (SEC File No. 333-51355) under which the
     Series B Notes were registered for purposes of the exchange offer, which
     can be found at the SEC's web site (www.sec.gov).

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<PAGE>
 
     Risk Factors
     ------------

          As noted above under "Cautions Regarding Forward-Looking Statements,"
     the information provided under this item 1, as well as elsewhere in this
     Form 10-K report, includes forward-looking statements. Although management
     believes that the plans, intentions, and expectations concerning the
     Company reflected in those forward-looking statements are reasonable, it
     can give no assurance that those plans, intentions, or expectations will be
     achieved. Important factors that could cause actual results to differ
     materially from those included in or suggested by any forward-looking
     statements are set forth below and elsewhere in this report. All forward-
     looking statements attributable to the Company or persons acting on its
     behalf are expressly qualified in their entirety by the Risk Factors set
     forth below.

          Leverage. The Company is highly leveraged. On December 31, 1998, the
     Company had total indebtedness of approximately $160.4 million and an
     accumulated deficiency of approximately $75.3 million. As of that date, the
     aggregate debt of the Company to which the Series B Notes are subordinated
     ("Senior Debt"), which includes borrowings under the New Credit Facility,
     was approximately $45.4 million, and approximately $24.5 million would have
     been available for additional borrowing under the New Credit Facility,
     subject to borrowing base limitations. All outstanding Senior Debt was owed
     by Numatics and its German and Canadian subsidiaries and none by its
     domestics subsidiaries that have guaranteed the Series B Notes (the
     "Guarantors"), except that the Guarantors have guaranteed Numatics'
     borrowings under the New Credit Facility. The indenture governing the
     Series B Notes permits the incurrence of additional indebtedness, including
     Senior Debt, by Numatics and its subsidiaries in the future, subject to
     certain limitations.

          The Company's current annual debt service requirement is approximately
     $17.0 million.  The Company's ability to make scheduled payments of
     principal of or interest on, or to refinance, its indebtedness (including
     the Series B Notes) will depend on its future performance, which to some
     extent is subject to general economic, financial, competitive, legislative,
     regulatory, and other factors that are beyond its control. Based upon the
     Company's current level of operations and future business which has been
     awarded, management believes that cash flow from operations and available
     cash, together with available borrowings under the New Credit Facility,
     will be adequate to meet the Company's future liquidity needs until the
     scheduled expiration of the New Credit Facility, at which time the Company
     would expect to replace the New Credit Facility. However, there can be no
     assurance that the Company's business will generate sufficient cash flow
     from operations, that anticipated growth opportunities and operating
     improvements will be realized, or that future borrowings will be available
     under the New Credit Facility in an amount sufficient to enable the Company
     to service its indebtedness, including the Series B Notes, or to fund its
     other liquidity needs. The New Credit Facility, the term loans under it,
     and a $2.5 million industrial revenue bond for which the Company is
     responsible under the facility mature prior to the maturity of the Series B
     Notes, and there can be no assurance that the Company will be able to
     replace the New Credit Facility, or refinance any other indebtedness, on
     commercially reasonable terms or at all.

          The degree to which the Company is leveraged could have important
     consequences to investors, including, but not limited to, making it more
     difficult for the Company to satisfy its obligations with respect to the
     Series B Notes, increasing the Company's

                                       4
<PAGE>
 
     vulnerability to general adverse economic and industry conditions, limiting
     the Company's ability to obtain additional financing to fund future working
     capital, capital expenditures, and other general corporate requirements, or
     to fund acquisitions, requiring the dedication of a substantial portion of
     the Company's cash flow from operations to the payment of principal of, and
     interest on, its indebtedness, thereby reducing the availability of such
     cash flow to fund working capital, capital expenditures, research and
     development or other general corporate purposes, limiting the Company's
     flexibility in planning for, or reacting to, changes in its business and
     the industries it serves, and placing the Company at a competitive
     disadvantage compared to less leveraged competitors. In addition, the
     indenture governing the Series B Notes and the New Credit Facility contain
     financial and other restrictive covenants that limit the ability of the
     Company to, among other things, borrow additional funds. Failure by the
     Company to comply with such covenants could result in an event of default
     which, if not cured or waived, could have a material adverse effect on the
     Company.

          Subordination. The Series B Notes are subordinated in right of payment
     to all of Numatics' current and future Senior Debt (as defined in the
     indenture governing the Series B Notes), and the guarantees of the Series B
     Notes by the Guarantors (the "Subsidiary Guarantees") are subordinated in
     right of payment to all current and future Senior Debt of the Guarantors.
     As defined in the governing indenture, the term Senior Debt includes  the
     New Credit Facility and the Guarantors' guarantees of that facility.  The
     New Credit Facility is secured by substantially all of the assets of
     Numatics and its domestic subsidiaries as well as all of the outstanding
     voting stock of Numatics' domestic subsidiaries, and by 66% of the capital
     stock of the Numatics' foreign subsidiaries.  Due to these subordination
     provisions, upon any distribution to creditors of Numatics or any Guarantor
     in a liquidation or dissolution of Numatics or the Guarantor or in a
     bankruptcy, reorganization, insolvency, receivership, or similar proceeding
     relating to Numatics, a Guarantor, or the property of Numatics or a
     Guarantor,  the holders of Senior Debt of  Numatics or the Guarantor,
     respectively, will be entitled to be paid in full before any payment may be
     made with respect to the Series B Notes or the related Subsidiary
     Guarantee.  In addition, under the governing indenture, payments with
     respect to the Series B Notes and the Subsidiary Guarantees will be blocked
     in the event of a payment default on Designated Senior Debt (defined in the
     indenture to include the New Credit Facility and the related guarantees of
     that facility) and may be blocked for up to 179 days each year in the event
     of certain non-payment defaults on Designated Senior Debt.

          In the event of a bankruptcy, liquidation, or reorganization of
     Numatics or a Guarantor, holders of the Series B Notes will participate
     ratably with all holders of subordinated indebtedness of Numatics or the
     Guarantor that is deemed to be of the same class as the Series B Notes, and
     potentially with all general creditors of Numatics or the Guarantor other
     than holders of Senior Debt, based upon the respective amounts owed to each
     holder or creditor, in the remaining assets of Numatics or the Guarantor.
     In any of the foregoing events, there can be no assurance that Numatics or
     any or all of  the Guarantors would have sufficient assets to pay amounts
     due on the Series B Notes. As a result, holders of Series B Notes may
     receive less, ratably, than the holders of other debt of Numatics or of a
     Guarantor, including Senior Debt.

          The Company derives a significant portion of its revenue from
     Numatics' foreign subsidiaries, which have not guaranteed the Series B
     Notes. Holders of indebtedness of, and


                                       5
<PAGE>
 
     trade creditors of, those foreign subsidiaries generally would be entitled
     to payment of their claims from the assets of the affected subsidiaries
     before any of those assets are made available for distribution to Numatics.
     The indenture governing the Series B Notes permits the incurrence of
     substantial additional indebtedness by Numatics' foreign subsidiaries and
     permits investments by Numatics or other subsidiaries in those
     subsidiaries. In the event of a bankruptcy, liquidation, or reorganization
     of a subsidiary that has not guaranteed the Series B Notes, holders of any
     of that subsidiary's indebtedness will have a claim to the assets of the
     subsidiary that is prior to Numatics' interest in those assets. As of
     December 31, 1998, the total liabilities of subsidiaries that have not
     guaranteed the Series B Notes was $12.8 million.

          Dependence upon John Welker.  The Company's continued success will be
     substantially dependent upon the efforts of  John Welker.  Mr. Welker has
     been Numatics' Chairman, President, and Chief Executive Officer since the
     1990 Buyout.  He also owns over 74% and controls the vote of 94% of
     Numatics' outstanding common stock, which means he is in a position to
     elect its Board of Directors and to control its management, policies, and
     operations. When he acts in his capacity as a Numatics shareholder, Mr.
     Welker does not owe fiduciary duties to holders of Series B Notes or other
     Numatics' investors.

          The Company could be adversely affected if Mr. Welker were to become
     unwilling or unable to continue as head of  Numatics' management team. It
     is an event of default under the New Credit Facility if Mr. Welker ceases
     to be the President and Chief Executive Officer of Numatics or ceases to
     have the ability to elect a majority of its directors and if he is not
     replaced by a person satisfactory to the New Credit Facility lenders. The
     Company maintains $15 million of key-man life insurance on Mr. Welker's
     life, but that amount would not be sufficient to retire all existing
     indebtedness under the New Credit Facility should it become necessary to do
     so.

          Possible Inability to Repurchase Series B Notes upon a Change in
     Control. The indenture governing the Series B Notes requires Numatics to
     offer to repurchase all outstanding Series B Notes at 101% of their
     principal amount plus accrued and unpaid interest to the date of repurchase
     if a Change in Control (as defined in the indenture) should occur.
     However, there can be no assurance that sufficient funds will be available
     at the time of any Change of Control to make any required repurchases of
     Series B Notes tendered or that restrictions in the New Credit Facility
     will allow Numatics to make the required repurchases.

          The Company also is permitted under the indenture to enter into
     certain transactions, including certain recapitalizations, that would not
     constitute a Change of Control but would increase the amount of outstanding
     Senior Debt or indebtedness on a parity with the Series B Notes.

          Absence of Patent Protection. The Company relies on unpatented
     proprietary technology to produce its core products, particularly its
     "lapped spool and sleeve" pneumatic valve manufacturing technology.  To
     protect its trade secrets and other proprietary information, the Company
     requires employees, consultants, advisors, and collaborators who have
     access to this technology to enter into confidentiality agreements and
     limits access to certain of its proprietary processes. However, there can
     be no assurance

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<PAGE>
 
     that these agreements or procedures will provide meaningful protection for
     the Company's trade secrets, know-how, or other proprietary information in
     the event of any unauthorized use, misappropriation, or disclosure of such
     trade secrets, know-how, or other proprietary information. If the Company
     is unable to maintain the proprietary nature of its technology,
     particularly its "lapped spool and sleeve" valve manufacturing technology,
     the Company could be materially adversely affected.

     Industry Overview
     -----------------

          The fluid power industry has grown out of manufacturers' needs to
     automate repetitive tasks that previously had been performed manually. The
     industry can generally be divided into two major segments: hydraulics (use
     of liquids) and pneumatics (use of air or inert gas). While hydraulics can
     produce higher forces and, in some applications, better control, pneumatics
     generally provide faster speeds, lower cost, greater ease of use, and a
     more environmentally clean process. The Company competes only in the
     pneumatic segment of the fluid power market.

          Major components utilized in the pneumatic fluid power process include
     valves, actuators (cylinders), and air preparation equipment. A pneumatic
     system begins when air enters a compressor and the volume of air is
     reduced. The air then flows through a dryer and excess moisture is removed.
     (Typically, a pneumatic system contains a single compressor and an air
     dryer.) The dry air then flows through a system header to multiple
     workstations in a plant. At a workstation, the dry air flows initially
     through an FRL (filter, regulator, and lubricator). In the FRL, a filter
     removes particulates from the air, a regulator reduces and stabilizes
     downstream pressure, and a lubricator adds the appropriate amount of oil to
     the air, when necessary. This conditioned air then enters a valve.

          A valve is the primary pneumatic component that  controls the intake
     and withdrawal of air into the actuator, with the valve's movement
     typically controlled by a solenoid. In the Company's "lapped spool and
     sleeve" valve, the position of the spool determines the direction of the
     air as it flows into the actuator. The flow of air from the valve causes
     the actuator rod to extend or retract, thereby moving a specific load. In
     many cases, an automated component, such as a gripper or guiding unit, may
     be attached to the actuator for material handling purposes.

          In the United States (the Company's principal market), sales of
     directional control valves make up the largest segment of pneumatic valve
     sales, and 4-way valves are the dominant type of directional control valves
     utilized. Because of their versatility, base mounted valves make up the
     large majority of pneumatic valve sales in the United States.

          Certain market segments to which the Company sells its products have
     been reducing the number of suppliers they deal with, including pneumatic
     component suppliers. As a result, companies within these market segments
     increasingly have used suppliers that can provide a full line of pneumatic
     components. Continuing the product line expansion begun by the Company's
     predecessor  in the late 1980s, the Company now offers its customers a full
     line of pneumatic components, including valves, actuators, and specialty
     products such as air preparation products, specialty valves, and grippers
     and guiding units. Management believes its array of products provides a
     competitive advantage against single component suppliers.

                                       7
<PAGE>
 
          Applications for pneumatic fluid power are numerous and diverse and
     can be found in virtually every major industry. Some of the largest
     industries that use pneumatic fluid power systems include packaging,
     automotive, machine tool, material handling, food and beverage, textile,
     printing, electronics/semiconductor, robotics, paper, and medical
     equipment. Pneumatic components primarily are used in automated
     manufacturing applications, but also can serve other functions, as do
     certain of the Company's specialty valves used in oxygen concentrators sold
     by medical equipment manufacturers. Management believes there are a number
     of general industry trends favoring the increasing use of automation, such
     as greater emphasis on productivity, factory utilization, and continuing
     cost reduction efforts.

     Products
     --------

          The Company offers a complete line of pneumatic components, which can
     be described in three groups: valves, actuators, and specialty products.
     The Company's core product historically has been pneumatic valves. Over
     recent years, the Company has expanded into additional product lines. While
     the Company's net sales in core valve products have increased significantly
     over the past five years, its overall dependence on valves has decreased
     through its product diversification strategy. The table that follows
     illustrates this diversification trend since 1993.

 
                                                   1993            1998
                                                   ----            ----
 
            Net Sales...................     $85.0 million     $139.4 million
 
            Valves......................           79.3%            59.6%
            Actuators...................            7.3%            12.7%
            Specialty Products..........           13.4%            27.7% 
                                                  -----            -----
         Total..........................          100.0%           100.0%

          Valves. The Company is widely regarded as a leading manufacturer of
     high quality pneumatic valves used in fluid power applications. In a
     pneumatic system, the valve controls the flow of compressed air to an
     actuator (cylinder). The valve is the most important and complex component
     in any pneumatic system.

          The Company's success is largely derived from its proprietary "lapped
     spool and sleeve" technology developed by the Company's founder in the
     1950s. The original design is used in the Company's valves today. However,
     the "lapped spool and sleeve" manufacturing process has been improved
     continuously. The inner (spool) and outer (sleeve) components are a matched
     set, with the sleeve remaining stationary and the spool moving inside it to
     produce the switching of air flow. The sealing of the spool and sleeve is
     accomplished by the minute clearance between the two parts, measured in
     millionths of an inch, rather than by using soft rubber seals as in other
     designs. This minute clearance provides an air bearing, which avoids any
     metal-to-metal contact and allows frictionless movements, virtually
     eliminating heat and wear. This results in extremely long product life.
     Numatics' "lapped spool and sleeve" has been found to operate within
     original manufacturing tolerances after more than one billion cycles.


                                       8
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          The patent on the "lapped spool and sleeve" product expired in 1973.
     However, the process for manufacturing the "lapped spool and sleeve" to the
     required tolerances remains a trade secret. The Company continues to
     closely guard this trade secret and limits the number of visitors and
     employees who have access to the manufacturing process. Several competitors
     have attempted to imitate the process, but management believes none has
     been able to duplicate the "lapped spool and sleeve" to the same high
     quality tolerances.

          The Company manufactures a wide variety of valves, most of which can
     broadly be described as directional control, 4-way valves. Additionally,
     the Company manufactures and markets 3-way valves and a variety of other
     valves for specific customer applications.

          The Company's valve sales were $83.9 million, $90.0 million, and $83.0
     million in 1996, 1997, and 1998, respectively.

          Actuators. In a pneumatic system, the actuator serves as an "arm" for
     an automated task, allowing an object to be moved. In 1988, Numatics'
     predecessor company began offering actuators (cylinders) to complement its
     well-established line of valves. These were standard tie-rod cylinders,
     made to National Fluid Power Association specifications.  The Company
     continued the actuator business after the 1990 Buyout.

          During 1994, the Company introduced its "M" series actuator, a non-
     repairable miniature cylinder. In 1995, it introduced a new rodless
     cylinder based on technology acquired in connection with its purchase for
     $2.0 million of 12.0% of the stock of Univer, the largest manufacturer of
     pneumatic products in Italy with sales in 1997 of approximately $30.0
     million.  Newer products include rotary actuators and a variety of small
     actuators.

          The Company's actuator sales were $13.1 million, $16.3 million, and
     $17.8 million in 1996, 1997, and 1998, respectively.

          Specialty Products. The Company's specialty products include air
     preparation products, such as FRLs and air dryers, and other specialty
     products, such as specialty valves and grippers and guiding units. Air
     preparation products condition the air for use in the pneumatic system.
     Specialty valves are miniature valves for custom applications. Grippers and
     guiding units are material handling components, often serving as the
     "hands" of an automated process.

          Numatics' predecessor began offering FRLs in 1987, and the Company
     continued that business after the 1990 Buyout. For several years, FRLs have
     been produced for the Company under a private label arrangement by an
     independent manufacturer. In 1997, the Company began manufacturing some of
     its own FRL products, which are expected to replace a majority of the
     private label products within the next few years.

          The Company's other specialty products are manufactured through
     Numatics' domestic subsidiaries Ultra Air Products, Inc., MicroSmith, Inc.,
     Numatech, Inc., Numation, Inc., and  Micro-Filtration, Inc.

          Ultra Air Products manufacturers air dryers used to remove water from
     compressed air systems.  It distributes its products primarily through
     industrial compressor distributors,

                                       9
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     rather than through the Company's valve distribution network, which has
     presented the Company with some opportunities for cross-selling between the
     two distributor groups.

          MicroSmith designs and fabricates electronic componentry.  The Company
     uses this componentry in its valve products and also markets it to
     independent customers.

          Numatech manufactures specialty valves, many of which have been
     designed by the Company for specific customer applications. Numatech's
     principal products include miniature valves used primarily in the medical
     and electronics industries. Management believes these valves have potential
     applications in other industries.

          Numation manufactures grippers and guiding units for the materials
     handling industry, and Micro-Filtration manufactures coalescing filtration
     products that remove contaminants from an air line.

          The Company's specialty products sales were $35.0 million, $40.7
     million, and $38.6 million in 1996, 1997, and 1998, respectively.

     Engineering
     -----------

          The Company is widely recognized as an innovator in the design,
     engineering, and manufacture of pneumatic components. The Company has a
     dedicated group of engineers, both domestically and internationally.
     Beginning with the "lapped spool and sleeve," the Company has continued to
     produce engineering innovations which include the following:

          . On-board electronics, which allow electronic signals to be passed
            through a single input/output source at faster transmission speeds

          . Electrical plug-in connections, which allow assembly of systems
            without the need for costly wiring

          . Integral speed controls and integral pressure controls, which are
            mounted between the valve and manifold to provide a complete control
            package

          . Manifolding, which reduces piping and space and allows factory
            assembly, reducing cost

          . Direct solenoid, which eliminates unnecessary pilot valves,
            improving reliability due to fewer parts

          . Die cast magnesium valves, providing maximum weight reduction and
            cost savings

          . "Nu-Plex," the first fully integrated serial control system for
            fluid power applications.

          . Aluminum cast valve bodies, which reduces the weight and cost of
            valves that had previously been made of bronze, cast iron, and
            brass

                                      10
<PAGE>
 
          . "Numasizing," the first precise method of determining component size
            so as to accurately match desired performance with a valve
            configuration that uses the smallest amount of energy to get the job
            done.

          The Numasizing process is based on a computerized database containing
     empirical data from more than 250,000 test firings of pneumatic cylinders
     under different conditions. Numasizing is used at all of the Company's
     locations throughout the world. The Company conducts seminars on Numasizing
     for its customers and offers its distributors a proprietary program to
     enable them to use Numasizing in helping to design efficient systems for
     their customers.

     Customers, Marketing, and Distribution
     --------------------------------------

          The Company's customers consist of end users, machinery manufacturers
     (which incorporate the Company's products in their machines), and
     distributors. As is common practice in the U.S. market, end users and
     machinery manufacturers generally purchase the Company's products through
     its network of distributors.  Alternatively, in international markets,
     customers typically purchase directly from the Company. In some cases, the
     end user will specify the Company's products, regardless of distribution
     channel. The products sold by the Company are utilized in a diverse group
     of industries, and no one customer accounted for more than 4.2 % of total
     net sales in 1998.

          Approximately 53.0% of the Company's net sales in 1998 were from sales
     to distributors. The Company believes it maintains excellent relationships
     with its distributor network, which consists of over 100 distributors,
     including over 70 in North America, 14 in Europe, 14 in Asia and 6 in South
     America. Some of these distributors have been with the Company at least 40
     years, and the average tenure of its distributors in the United States is
     20 years.

          The Company's North American distributors are pneumatics specialists
     who sell only pneumatic components and do not sell hydraulic components. In
     most cases, the Company's products represent these distributors' principal
     source of income. Additionally, the only pneumatic valves these
     distributors carry are Numatics' valves. The Company maintains an
     interactive relationship with its distributors, conducting periodic
     meetings in several cities and intensive training programs while
     encouraging feedback. The Company employs 8 regional managers in North
     America to train and assist its distributors. The Company's distributors
     purchase products from the Company and maintain their own inventories.

          The Company has a direct sales force of 132 employees, who sell to
     over 9,000 direct customers worldwide, of which a significant portion are
     outside the United States.  The Company also has maintained direct selling
     efforts with certain large end users and machinery manufacturers in North
     America.

     Manufacturing
     -------------

          The Company has eight domestic manufacturing facilities, including six
     in

                                      11
<PAGE>
 
     Michigan and one each in Ohio and Tennessee.  The Company also has
     manufacturing plants in Ontario, Canada and in Germany.  The Company's core
     valve products primarily are manufactured in its Highland, Michigan
     facility, which also is the Company's  headquarters.  The final machining
     and matching of the Company's proprietary "lapped spool and sleeve" valve
     components are carried out in a specially designed, temperature and
     humidity controlled area.  This process is highly confidential.  Visitors
     and employees who do not require access are not permitted in the facility,
     nor are equipment suppliers. All equipment setup for such operations is
     performed by the Company's own employees.

          The Company has adopted "lean manufacturing" and "kaizen" initiatives
     to improve quality, production efficiencies and customer service by
     reducing waste, inventory levels, floor space and lead times. The Company
     believes its commitment to continuous improvement will further enhance its
     competitive position and allow the Company to execute its growth strategy
     while minimizing the need for significant additional capacity. The Company
     has converted many facilities from a traditional batch process to a flow
     system utilizing manufacturing "cells" based on specific product
     categories. Although in the relatively early stage of implementation, the
     Company's lean manufacturing initiatives  already have resulted in facility
     consolidation, improved manufacturing throughput, increased on time
     shipping performance, and supplier rationalization.

          The Company stresses quality control in all of its manufacturing and
     distribution facilities, and each valve is individually tested to meet
     specific tolerances before it can be shipped. Currently, the facilities in
     Germany and Canada are ISO certified.  The majority of the Company's
     domestic facilities were ISO certified by the end of 1998, and all its
     facilities are scheduled to be ISO certified by mid-2000.  The Company
     believes that achieving ISO certification at each of its manufacturing
     facilities is a significant factor in maintaining its competitive position.

     Components and Raw Materials
     ----------------------------

          The principal raw materials and components used in manufacturing the
     Company's products are aluminum castings, stainless steel, solenoids, and
     screw machine parts. All of these items are readily available from multiple
     suppliers, and the Company also produces a substantial portion of its own
     requirements of solenoids and screw machine parts. The Company purchases a
     significant portion of its aluminum castings from Taiwanese suppliers
     through its subsidiary in Taiwan, which has a dedicated staff of
     professionals responsible for sourcing and quality control. The Company has
     never experienced significant difficulty in acquiring needed parts and raw
     materials, and management believes the Company is not substantially
     dependent on any particular supplier.

     Competition
     -----------

          The markets in which the Company operates are highly competitive.
     Competition is based primarily on quality, price, timely delivery, service,
     and breadth of product line. The markets in which the Company competes are
     highly fragmented, and many of its competitors do not currently offer the
     full range of products sold by the Company. The Company has competed
     successfully in its core pneumatic valve business, and it has been able to
     increase net sales with its actuators and specialty products as well.
     However, some of the Company's competitors are significantly larger and
     have greater financial and other

                                      12
<PAGE>
 
     resources than the Company, which may afford them more flexibility in
     competing with the Company in the future.

          The Company has the largest U.S. market share in its core product of
     directional control, base mounted, 4-way pneumatic valves.  The Company's
     most significant  competitors in North America are Parker Hannifin, SMC
     Pneumatics and MAC Valves. Some of the Company's major competitors in the
     valve market outside North America are SMC Pneumatics, Festo, and CKD.  The
     actuator and specialty products markets have different competitors such as
     Norgren IMI, Wilkerson, Phd., Robohand, Lee, and Clippard. 

     International Operations
     ------------------------

          Numatics, Ltd. in Ontario, Canada and Numatics GmbH in Germany operate
     manufacturing facilities, both of which are ISO certified.  Numatics, Ltd.
     markets a full line of the Company's products to the Canadian market and
     manufactures, among other products, lockout valves for the Company's
     worldwide needs. Numatics GmbH manufactures some of the Company's products
     and markets a full line of Numatics' components to customers in Europe and
     Africa. Numatics GmbH maintains a dedicated engineering staff which works
     together with the Company's North American engineering personnel. Numatics'
     other foreign operations primarily are sales and distribution facilities.

          International sales accounted for approximately 18.3% of the Company's
     1998 net sales, and international assets accounted for approximately 18.6%
     of its total assets as of December 31, 1998.  For additional financial
     information regarding foreign sales and exports, see Note 6 of the notes to
     the Company's audited consolidated financial statements filed as exhibit
     99.1 to this Form 10-K.

     Employees
     ---------

          At February 28, 1999, the Company had 918 employees. Approximately 100
     of those employees at that time were represented by the United Auto Workers
     under a contract expiring on March 17, 2002.   The Company considers its
     employee relations to be good.

     Environmental Matters
     ---------------------

          The Company's plant on North Milford Road in Highland, Michigan, is
     the site of a groundwater contamination problem that became known in the
     early 1980s. The contamination was caused by a chemical (trichloroethylene)
     that was used for many years to degrease parts but which has not been used
     at the site since the early 1970s. A soil vapor extraction system was used
     to clean up the soil contamination, and a pump and treat system has been
     installed to purge the groundwater. The soil cleanup has been completed,
     but completion of the groundwater remediation is expected to take
     approximately another nine years. Based on past expenditures and its
     current evaluation of site conditions, the management expects to spend
     approximately $75,000 annually to complete the groundwater remediation. The
     Company has recorded a reserve for these future expenditures, which at
     December 31, 1998 was approximately $700,000.  Management believes this
     reserve will be adequate to complete the remediation, although actual
     expenditures will depend on actual site conditions and other factors and
     are subject to change.

                                      13
<PAGE>
 
          In 1989, a fluid spill site containing PCBs was discovered at the
     Company's East Highland Road facility in Highland, Michigan. The source of
     the PCBs is  believed to be a transformer that was accidentally ruptured in
     1973 while sitting on the ground awaiting disposal. The area of the spill
     has been disturbed by subsequent paving of a portion of the area and soil
     removal following a non-PCB waste oil spill. Management estimates that
     future soils remedial work at this site will cost approximately $250,000 to
     $300,000.

          In 1982, a spill of chromic acid and water occurred at the site of the
     Company's Owosso, Michigan facility. Soils contaminated by this spill have
     been remediated, and groundwater tested on a monthly basis. Test data shows
     no future remediation is required. The Company has submitted a closure
     report to the Michigan Department of Environmental Quality and is awaiting
     agency approval of the report.

          The sites discussed above are the only sites where the Company to date
     has identified any environmental contamination. However, most of the
     Company's facilities have been in operation for many years, and several of
     the facilities have undergone little or no invasive testing to determine
     the presence or absence of environmental contamination.  Except as
     discussed above concerning the three identified sites, compliance by the
     Company with federal, state, and local laws and regulations pertaining to
     the discharge of material into the environment has not had any material
     effect upon the Company conducting its business, and management currently
     does not anticipate that compliance with these laws and regulations in the
     future will have any material effect upon the Company in conducting its
     business. However, due to the nature of its current operations (and those
     of its predecessor), and the history of industrial  uses at some of its
     facilities, the Company does face some risk of additional exposure to
     environmentally-related liabilities.


     ITEM 2.  PROPERTIES

          The Company conducts its business in Company-owned facilities,
     totaling approximately 350,350 square feet, and leased facilities, totaling
     approximately 101,900 square feet, of office, engineering, manufacturing
     and warehouse space. All of these facilities are suitable to meet the
     current capacity needs of the Company's various business units. Leases
     expire at various times through 2003, and the Company generally has
     extension options.

          The table that follows provides additional information concerning each
     of these facilities.

                                      14
<PAGE>
 
<TABLE> 
<CAPTION> 

LOCATION               SQUARE FEET        TYPE OF INTEREST              USES
--------               -----------        ----------------              ----
<S>                    <C>               <C>                     <C> 
United States
N. Milford Rd.,                                                   Company headquarters;
 Highland, MI             76,000              Owned                 valve components
 
 Franklin, TN             68,000              Owned               Actuators
 
 Sandusky, MI             57,300              Owned               Valves and solenoids
 
 Lapeer, MI               40,000              Owned               FRLs
 
 Detroit, MI              36,000              Leased              Air dryers
 
 Owosso, MI               22,100              Owned               Valve part processing;
                                                                  warehousing
 
 Wixom, MI                12,400              Leased              Specialty valves
 
 E. Highland Rd.,
 Highland, MI             12,250              Owned               Warehousing
 
 Westlake, OH             12,000              Leased              Grippers and guiding units

 Wixom, MI                 8,400              Owned               Distribution facility
 
 Scottsdale, AZ            2,900              Leased              Electronic componentry
                                                                  design and fabrication
 
 Rochester, NY             2,700              Leased              Distribution facility
 
 International
 St. Augustin, Germany    33,300              Owned               Valves and actuators
 
 London, ON, Canada       21,700              Owned               Valves and actuators
 
 Leighton Buzzard,
  England                 11,300              Owned               Distribution and sales
 
 Taipei, Taiwan            8,000              Leased              Distribution and sales
 
 Brescia, Italy            7,700              Leased              Distribution and sales
 
 Vancouver, BC, Canada.    6,000              Leased              Distribution and sales
 
 Puebla, Mexico            5,000              Leased              Distribution and sales
 
 Montreal, QB, Canada      3,600              Leased              Distribution and sales
 
 Paris, France             3,400              Leased              Distribution and sales
 
 Waardenburg,
  The Netherlands          1,600              Leased              Distribution and sales
 
 Budapest, Hungary           600              Leased              Distribution and sales

</TABLE> 

                                      15
<PAGE>
 
     ITEM 3.  LEGAL PROCEEDINGS

          Various legal matters arising during the normal course of business are
     pending against the Company. Management does not expect that the ultimate
     liability, if any, of these matters will have a material effect on future
     consolidated financial statements.

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

          No matter was submitted to a vote of Numatics' shareholders during the
     quarter ended December 31, 1998.

 
                                    PART II
 
     ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
              STOCKHOLDER MATTERS

               Numatics' only authorized class of equity security is its common
     stock.  On March 29, 1999, there were nine holders of the outstanding
     shares of the common stock, all but one of whom were Numatics employees.
     The common stock has no public trading market,  all of outstanding shares
     are subject to transfer restrictions, and the shares held by employees are
     subject to a Numatics repurchase option.  See item 11 under "Compensation
     Committee Interlocks and Insider Participation."

               To date, no dividends have been paid on the common stock, except
     for a $6 million extraordinary dividend paid on March 26, 1998 with a
     portion of the proceeds of the Interim Note Offering that closed on March
     24, 1998.  The agreements governing the New Credit Facility and the
     indenture governing the Series B Notes substantially limit the payment of
     future dividends on the common stock, and no such dividends are expected to
     be declared or paid for the foreseeable future.

                                      16
<PAGE>
 
     ITEM 6.  SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>
Selected Financial Data (in thousands)

                                                                           Year Ended December 31
                                                  1998             1997             1996             1995             1994
<S>                                              <C>              <C>              <C>              <C>              <C>
INCOME STATEMENT DATA
Net Sales                                          $139,415         $147,097         $132,015         $125,808         $104,649
Cost of sales                                        87,956           93,785           81,676           77,967           64,284
                                                   --------         --------         --------         --------         --------
Gross profit                                         51,459           53,312           50,339           47,841           40,365
Marketing, engineering, general and
administrative expenses                              30,771           31,830           28,253           29,567           23,964
 
Michigan single business tax (1)                       (609)             945              885              872              708
                                                   --------         --------         --------         --------         --------
Operating income                                     21,297           20,537           21,201           17,402           15,693
Interest and other financing
expenses                                             15,927           17,021           16,763            5,560            3,036
Other (income) expense                                  236            1,348              535            1,436             (119)
                                                   --------         --------         --------         --------         --------
Income before income taxes and
extraordinary item                                    5,134            2,168            3,903           10,406           12,776
Income tax provision                                  2,283              904            1,895            4,837            5,358
                                                   --------         --------         --------         --------         --------
Income before extraordinary item                      2,851            1,264            2,008            5,569            7,418
Extraordinary item, net of income
tax (2)                                               4,918               --              --               --                --
                                                   --------         --------         --------         --------         --------
Net income (loss)                                  $ (2,067)        $  1,264         $  2,008         $  5,569         $  7,418
                                                   ========         ========         ========         ========         ========
 
OTHER FINANCIAL DATA
Cash provided by (used in)
 operating activities                              $  7,578         $ 11,047         $ 13,096         $  6,142         $ 10,700
Cash used in investing activities                    (6,913)          (7,808)          (5,392)          (6,750)          (4,378)
Cash provided by (used in)
 financing activities                                  (245)          (3,391)          (7,429)             201           (6,285) 
EBITDA (3)                                           26,137           25,931           25,811           24,167           23,090
Depreciation and amortization                         5,449            5,000            4,489            6,413            6,820
Capital expenditures                                  6,605            7,881            5,594            3,744            4,379
 
BALANCE SHEET DATA
Working capital                                    $ 37,724         $ 27,469         $ 28,189         $ 28,109         $ 22,495
Total assets                                        109,212           98,535           93,987           93,441           75,967
Total long-term debt (4)                            160,375          135,696          136,273          138,523           33,776
Total shareholders' equity
(deficit) (4)                                       (75,292)         (69,930)         (70,864)         (72,637)          19,944
Preferred stock dividend (5)                             --               --               --            1,200            1,023
Common stock dividend                                 6,000               --               --               --               --

</TABLE>

______________________

    (1) The Michigan Single Business Tax is a state tax which is calculated
based on operating activity and capital expenditure levels and is in lieu of a
state income tax.

    (2) In 1998, represents $1.6 million (net of income taxes) write off of 
deferred financing costs, $2.1 million (net of income taxes)for the 
amortization of the previously unamortized discount on the Old Subordinated 
Notes and $1.2 million (net of income taxes) for prepayment penalties 
associated with the repayment of the Old Subordinated Notes.

    (3) "EBITDA" represents the sum of operating income plus depreciation and
amortization (less amortization of deferred financing costs) and Michigan Single
Business Tax. 1997 EBITDA was adversely affected by special charges consisting
of: (a) fees related to a onetime lean manufacturing consulting project of $1.1
million; (b) costs related to an unsuccessful acquisition attempt of $0.5
million; and (c) facility closing and moving costs totaling $0.3 million.
Information regarding EBITDA is presented because management believes (i) it is
a widely accepted financial indicator of a company's ability to incur and
service debt, (ii) it reflects the non-cash effect on earnings of amortization
and depreciation expense, and (iii) it is the basis on which compliance with
certain of the financial covenants contained in the New Credit Facility is
proncipally determined. However, EBITDA does not purport to represent cash
provided by operating activities as reflected in the Company's consolidated
statements of cash flow, is not a measure of financial performance under
generally accepted accounting principles, and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles. Also, the measure of EBITDA may
not be comparable to similar measures reported by other companies. 
       
    (4) Shareholders' deficit and increase in long-term debt results
primarily from the 1995 Recapitalization.

    (5) Preferred stock was redeemed in 1995.


     ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
              AND RESULTS OF OPERATIONS

          The following discussion should be read in conjunction with the
     Company's financial statements and the notes thereto, included elsewhere in
     this report.

     Overview
     --------

          The Company is a leading global manufacturer and marketer of pneumatic
     components.  The Company's net sales are principally derived from the sale
     of its products worldwide to over 9,000 customers, including a network of
     over 100 distributors.  In recent years, the Company has diversified its
     revenue base through its expanded product lines and increase in
     international sales.  In the U.S., the Company's products are principally
     sold through a network of 52 distributors who purchase and stock
     Numatics' products.  In non-U.S. markets, a majority of sales are derived
     from direct customers.

                                      17
<PAGE>
 
          The Company's cost of sales consists primarily of raw materials,
     labor, manufacturing overhead and purchased product costs.  The Company has
     generally had success in passing through price increases in raw materials
     to its customers, although there can be no assurance that it will be able
     to continue to do so.  The Company has implemented "lean manufacturing" and
     "kaizen" initiatives, which it believes can provide benefits through
     reduced waste, lower inventory levels and better utilization of plant floor
     space.  While the Company has experienced growth through its expanded
     product lines, certain new products generally have lower gross margins
     during periods of development and introduction than the Company's
     traditional valve products.

          Marketing, engineering, general and administrative expenses have been
     impacted in recent years by, among other things, the opening of certain
     sales offices in Europe, as the Company identifies opportunities to further
     grow its international net sales.  In 1997, marketing, engineering, general
     and administrative expenses included costs related to a facility closure
     and the move of a major facility.

     Results of Operations
     ---------------------

     Year Ended December 31, 1998 Compared with Year Ended December 31, 1997

          Net Sales.  The Company's net sales for 1998 decreased 5.2%, or $7.7
     million, from $147.1 million in 1997 to $139.4 million in 1998. Net sales
     in North America decreased 4.8%, or $5.7 million, while international sales
     decreased 7.2%, or $2.0 million.  This decrease is a result of the overall
     softness felt in the pneumatic market, which started during the second
     quarter of 1998.

          Gross Profit.  Gross profit for 1998 increased to 36.9% of net sales
     from 36.2% in 1997.  This improvement is a result of cost containment
     efforts undertaken to help offset the lower sales volume caused by the
     softness in the pneumatic market.

          Marketing, Engineering, General and Administrative.  Marketing,
     engineering, general and administrative costs decreased $1.1 million in
     1998, ending the year at $30.8 million.  This decrease is a result of cost
     containment efforts undertaken to help offset the lower sales volume caused
     by the softness in the pneumatic market.

          Single Business Tax.  Single business tax for 1998 was a credit of
     $0.6 million compared to an expense of $0.9 million in 1997.  The credit
     resulted from filing amended returns in March 1998 for the years 1992 to
     1996 due to a tax ruling that redefined the reported sales that are
     included in the calculation of the tax, which favorably impacted the
     Company.

          Operating Income.  Operating income in 1998 was $21.3 million, or
     15.3% of sales, compared to $20.5 million, or 14.0% of sales, in 1997.
     This $0.8 million increase is principally attributed to reduced single
     business tax expense, as explained above.

          Interest and Other Financing Expenses.  Interest rate reductions
     achieved through refinancing the Old Subordinated Note

                                      18
<PAGE>
 
     in March 1998 resulted in a $1.1 million reduction in interest expense in
     1998 compared to 1997.

          Other (Income) Expense.  Other expense consists primarily of
     unrealized foreign exchange gains and losses.  The $1.1 million reduction
     in expense for 1998 compared to 1997 is a result of the weakening of the
     U.S. dollar against major foreign currencies.

          Income Taxes.  The Company's income taxes at the statutory rate differ
     from its recorded income tax expense due to international rate differences
     and other various differences.  At December 31, 1998, the Company had net
     operating loss carryforwards of approximately $2.5 million, primarily at
     its German subsidiary.  Those loss carryforwards  expire in 2009.

          Extraordinary Item.  The extraordinary item in 1998 resulted from the
     write off of unamortized debt financing costs related to the refinancing of
     the Company's debt of $1.6 million, net of taxes, a write off of previous
     unamortized discount on the Old Subordinated Debt of $2.1 million, net of
     taxes, and a prepayment penalty of $1.2 million, net of taxes.  The amount
     is reported net of $2.5 million tax benefit.

          Net Income (Loss).  Due to the factors discussed above, including the
     extraordinary item related to the early retirement of debt, net income
     decreased $3.3 million, to a loss of $2.1 million for 1998.

     Year Ended December 31, 1997 Compared with Year Ended December 31, 1996


          Net Sales.  The Company's net sales for 1997 increased 11.4%, or $15.1
     million, to $147.1 million from $132.0 million in 1996.  International net
     sales increased 9.0%, or $2.3 million despite the strengthening of the U.S.
     dollar relative to the German mark and certain other foreign currencies.
     North American net sales increased 12.0%, or $12.8 million.  The majority
     of the increase, both in North America and internationally, can be
     attributed to new product releases and expanded market penetration.

          Gross Profit.  Gross profit for 1997 increased 5.9%, or $3.0 million,
     to $53.3 million from $50.3 million in 1996.  The increase in gross profit
     was attributable to higher net sales in 1997 compared to 1996.  As a
     percentage of net sales, gross profit declined to 36.2% in 1997 compared to
     38.1% in 1996.  The decline in gross profit percentage was primarily the
     result of pricing pressures on product sales at the Company's European
     operations due to difficult economic conditions in Europe.  Additionally,
     costs associated with a facility move and new product startup costs
     contributed to the lower gross margin percentage in 1997.

          Marketing, Engineering, General and Administrative.  Marketing,
     engineering, general and administrative expenses for 1997 increased 12.7%,
     or $3.6 million, to $31.8 million from $28.3 million in 1996.  As a
     percentage of net sales, marketing, engineering, general and administrative
     expenses increased to 21.6% in 1997 compared to 21.4% in 1996.  The
     increase in marketing, engineering, general and administrative expenses for
     1997 was primarily attributable to expenses associated with a special lean
     manufacturing project consulting fee, costs related to the closure of a
     facility and the move of a facility.  The remainder of the increase was
     principally due to higher marketing and engineering costs to support the
     Company's product lines and geographic expansion.

                                      19
<PAGE>
 
          Operating Income.  Principally as a result of the foregoing, operating
     income in 1997 decreased 3.1%, or $0.7 million, to $20.5 million from $21.2
     million in 1996.  As a percentage of net sales, operating income decreased
     to 14.0% in 1997 compared to 16.1% in 1996.

          Interest Expense.  Interest expense in 1997 increased 3.1%, or $0.5
     million, to $16.5 million from $16.0 million in 1996 due to the issuance of
     additional Old Subordinated Notes in 1997.  This increase was partially
     offset by a reduction in bank debt in 1997.

          Other (Income) Expense.  Other expenses increased 152.0%, or $0.8
     million, to $1.3 million from $0.5 million in 1996.  Included in other
     expenses for 1997 is a $1.2 million unrealized foreign exchange loss
     related to intercompany loans.

          Net Income.  Due to the factors discussed above, net income decreased
     37.1%, or $0.7 million, to $1.3 million from $2.0 million in 1996.

     Liquidity and Capital Resources
     -------------------------------

          Historically, the Company has utilized cash from operations and
     borrowings under its credit facilities to satisfy its operating and capital
     needs and to service its indebtedness.

          Cash provided by operating activities was $7.6 million in 1998,
     compared to $11.0 million in 1997.  This $3.5 million reduction is
     primarily due to interest payments on the Company's subordinated
     indebtedness, offset by cash generated by the Company's trade accounts
     receivable.  Working capital was $37.7 million at December 31, 1998,
     compared with $27.5 million at December 31, 1997.  This $10.2 million
     increase is primarily attributable to a $5.1 million increase in
     inventories relating to buildups associated with new product introductions,
     as well as to higher inventory levels resulting from decreased sales
     levels, a $2.3 million increase in other current assets, and a $3.6 million
     decrease in the current portion of long-term debt.

          Net cash used in investing activities in 1998 was $6.9 million,
     compared to $7.8 million in 1997.  This $0.9 million decrease reflects the
     Company's construction in 1997 of a new 68,000 square foot manufacturing
     facility for its actuator operations in Franklin, Tennessee.

          Net cash used in financing activities was $0.1 million, compared to
     $3.3 million in 1997.  The 1998 amount includes the net results of
     refinancing the Company's debt together with the payment of a $6.0 million
     dividend on Numatics' common stock.

          Total assets were $109.2 million at December 31, 1998, compared to
     $98.5 million at December 31, 1997.  This increase includes the increased
     working capital assets mentioned above, together with a $2.6 million
     increase in net property, plant, and equipment.  Total debt outstanding was
     $160.4 million at December 31, 1998, compared to $142.8 million at December
     31, 1997.  This increase was caused by the costs and expenditures
     associated with the refinancing of the Company's debt, together with the
     $6.0 million dividend.

                                      20
<PAGE>
 
          On March 24, 1998, Numatics issued $115,000,000 of 9 5/8% senior
     subordinated notes (subsequently exchanged for the Series B Notes), the
     proceeds of which were utilized to repay the Old Subordinated Notes and pay
     the $6.0 million dividend, with the balance being paid against the
     Company's outstanding bank debt. At the same time, the Company entered into
     a new bank credit facility (the "New Credit Facility"), which included (i)
     term loans of $29.0 million, $4.0 million and $2.0 million to Numatics and
     its German and Canadian subsidiaries, respectively and (ii) revolving
     credit facilities, including letters of credit, of $32.0 million and $3.0
     million to Numatics and its German subsidiary, respectively. The revolving
     credit facilities permit each of Numatics and its German subsidiary to
     borrow up to the lesser of the total amount of its respective revolving
     credit facility or a borrowing base computed as a percentage of inventory
     and accounts receivable. Interest on term loans to Numatics' Canadian and
     German subsidiaries and on the revolving facilities accrues at an annual
     rate based on an applicable margin over NBD Bank's prime rate, or LIBOR.
     Management estimates that the borrowing base limitations would have limited
     the Company's revolving credit availability to approximately $28.4 million
     as of December 31, 1998. All borrowings under the revolving credit
     facilities mature in March 2004. The term loans are payable in quarterly
     installments, which quarterly installments totaled $1.6 million in 1998,
     and will total $2.5 million for 1999, $3.0 million for 2000, $3.5 million
     for 2001, $4.0 million for 2002, $4.9 million for 2003, $8.4 million for
     2004, and $7.1 million for 2005. The New Credit Facility is guaranteed by
     all of Numatics' domestic subsidiaries, and the facility and those
     guarantees are secured by substantially all the assets of Numatics and its
     domestic subsidiaries and, with respect to the loans to Numatics' foreign
     subsidiaries, by substantially all the assets of such subsidiaries. The New
     Credit Facility includes certain financial and operating covenants, which
     among other things restrict the ability of the Company to incur additional
     indebtedness, make investments, and take other actions.

     Impact of the Year 2000 Issue
     -----------------------------

          The Year 2000 Issue is the result of computer programs being written
     using two digits rather than four to define the applicable year.  Any of
     the Company's computer programs that have date-sensitive software may
     recognize a date using "00" as the year 1900 rather than the year 2000.
     This could result in a system failure or miscalculations causing
     disruptions of operations, including, among other things, a temporary
     inability to process transactions, send invoices, or engage in similar
     normal business activities.

          The Company implemented an assessment project to address the Year 2000
     Issue including information technology (IT) and non-IT systems.  The
     Company has determined that it will be required to modify or replace
     significant portions of its software so that its computer systems will
     properly utilize dates beyond December 31, 1999.  The Company has contracts
     in place with external resources and has allocated internal resources to
     replace or reprogram and test the software for Year 2000 modifications.
     The Company has initiated remediation and testing and is implementing an
     action plan to address the Year 2000 Issue. Management estimates that the
     majority of testing will be completed by the end of the second quarter of
     1999 and that the Year 2000 project will be completed by the end of the
     third quarter of 1999.  A number of third party audits are being performed
     and others are planned.  Management presently believes that, with
     modifications to existing software and

                                      21
<PAGE>
 
     conversions to new software, the Year 2000 Issue can be mitigated. However,
     if such modifications and conversions are not made, or not completed
     timely, the Year 2000 Issue could cause production interruptions that could
     have a material impact on the operations of the Company. The Company is
     developing contingency plans and will continue to do so throughout the
     program.

          The Company has initiated formal communications with its significant
     suppliers and large customers to determine the extent to which the Company
     is vulnerable to those third parties' failure to remediate their own Year
     2000 Issue.  While management expects a successful resolution of all
     issues, there can be no guarantee that the systems of other companies on
     which the Company's systems rely will be converted in a timely manner, or
     that a failure to convent by another company, or a conversion that is
     incompatible with the Company's systems, would not have a material adverse
     effect on the Company.  The Company has determined it has no exposure to
     contingencies related to the Year 2000 Issue for the products it has sold.

          The Company plans to complete the Year 2000 project by the end of the
     third quarter, 1999.  The total cost of the Year 2000 project is estimated
     to be $4.2 million and is being funded through operating cash flows.  Of
     the total project cost, approximately $3.0 million is attributable to the
     purchase of new software and hardware, which will be capitalized.  The
     remaining $1.2 million represents maintenance and repair of existing
     systems and other project costs and will be expensed as incurred over the
     next year.  As of December 31, 1998, the Company had expended approximately
     $2.6 million related to the assessment activities, the development of a
     remediation plan, and the implementation of the remediation plan in
     connection with its Year 2000 project.

          The costs of the project and the date on which the Company plans to
     complete the Year 2000 modifications are based on management's best
     estimates, which were derived utilizing numerous assumptions of future
     events including the continued availability of certain resources, third
     party modification plans, and other factors.  However, there can be no
     guarantee that these estimates will be achieved, and actual results could
     differ materially from those plans.  Specific factors that might cause such
     material differences include, but are not limited to, the availability and
     cost of personnel trained in this area, the ability to locate and correct
     all relevant computer codes, and similar uncertainties.

     Other Matters
     -------------

          As further discussed in item 11, under "Compensation Committee
     Interlocks and Insider Participation," Numatics, Mr. Welker, and all of the
     Company's other employee-shareholders are parties to an agreement under
     which the Company has the option, but not the obligation, to redeem the
     shares of any such shareholder upon the happening of certain events,
     including death, disability, or termination of employment. This agreement
     covers 94.0% of the Numatics' shares currently outstanding (100.0% at
     December 31, 1997). At December 31, 1998, the total redemption value of
     these optioned shares was $39.9 million. The indenture governing the Series
     B Notes contains substantial limitations on Numatics' ability to redeem
     shares but does permit redemptions, including limited cash redemptions, in
     certain cases. If one of the triggering events were to occur, the Numatics
     Board of Directors would decide whether to exercise the option based on the
     facts and circumstances existing at that time. In making such a
     determination, the Board could be expected to

                                      22
<PAGE>
 
     consider the following factors, among others: the limitations contained in
     the Indenture, the Company's ability to pay or finance the redemption
     price, the Company's other anticipated cash needs, and other then-existing
     business and economic conditions.

          Each of the management shareholders of certain Numatics subsidiaries
     (Numation, Numatech, Micro-Filtration, Ultra Air, and Microsmith) is
     required to sell his subsidiary shares to Numatics (or the subsidiary) upon
     such shareholder's (i) death, (ii) permanent disability or (iii)
     termination of employment with the Company. The price to be paid by the
     Company for such shares will be determined by a formula based upon a
     multiple of  earnings of the relevant subsidiary. The obligations of the
     Company to purchase such shares are not subject to any limitations.
     However, the payment of these amounts may be prohibited by the terms of the
     Indenture. Currently, the amounts that would be payable under these
     agreements are not material to the Company.

     ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          Information with respect to the levels of indebtedness subject to
     interest rate fluctuation is contained in Note 2 to the consolidated
     financial statements filed with this Form 10-K as exhibit 99.1.
     Information with respect to the Company's level of business outside the
     United States that is subject to foreign currency exchange rate market risk
     is contained in Note 6  to those consolidated financial statements under
     the caption "Segment and Geographic Information."  Those note hereby are
     incorporated in this item by reference.

     Interest Rate Risk
     ------------------


          The Company is subject to market risk associated with adverse changes
     in interest rates and foreign currency exchange rates, but does not hold
     any market risk sensitive instruments for trading purposes. The Company had
     total debt of $160.4 million at December 31, 1998, of which $44.2 million
     was variable rate debt. The Company measures its interest rate risk by
     estimating the net amount by which potential future net earnings would be
     impacted by hypothetical changes in market interest rates related to all
     interest rate sensitive assets and liabilities. Assuming a hypothetical 20%
     increase from the interest rates in effect as of December 31, 1998 and
     consistent levels of debt and cash, the estimated reduction in future
     earnings, net of tax, would be approximately $ 0.5 million.

     Foreign Currency Risk
     ---------------------

          The Company mitigates its foreign currency exchange rate risk
     principally by establishing local production and sales facilities in the
     markets it serves and by invoicing customers in the same currency as the
     source of the products.  The Company also monitors its foreign currency
     exposure in each country and implements strategies to respond to changing
     economic and political environments.

          As of December 31, 1998, the Company's net assets (defined as current
     assets less current liabilities) subject to foreign currency translation
     risk are $17.0 million.  The potential decrease in net assets from a
     hypothetical 10% adverse change in quoted foreign currency exchange rates
     would be approximately $1.7 million.

                                      23
<PAGE>
 
          The sensitivity analysis presented assumes a parallel shift in foreign
     currency exchange rates.  Exchange rates rarely move in the same direction.
     This assumption may overstate the impact of changing exchange rates on
     individual assets and liabilities denominated in a foreign currency.

     ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          The information required by this item is incorporated in this item by
     reference to the Company's audited consolidated financial statements filed
     with this Form 10-K as exhibit 99.1.

     ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE.

          None.

                                    PART III

     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          The table that follows sets forth the name, age at December 31, 1998,
     and position with the Company of each person who currently is a Numatics
     director or an executive officer of the Company. Information concerning the
     business experience for at least the past five years of each of the persons
     named is provided after the table. All Numatics directors are elected for
     terms of one year and until their successors are elected and qualified.
 
 
            Name                     Age               Position
            ----                     ---               --------
 
            John H. Welker           58       Chairman, President and Chief
                                              Executive Officer
 
            Robert P. Robeson        52       Vice President, Treasurer,
                                              Secretary and Chief Financial
                                              Officer
 
            David K. Dodds           50       Vice President--Sales & Marketing
 
            Henry Fleischer          75       Vice President--Research &
                                              Development
 
            Donald E. McGeachy       63       Vice President--Engineering
 
            David M. Tenniswood      62       Director
 
            Albert A. Koch           56       Director
 
            John P. Musat            53       Director
 
            Tim R. Palmer            41       Director
 





                                      24
<PAGE>
 
          John H. Welker has been with Numatics (and its predecessor) for a
     total of 33 years.  He has been Numatics' Chairman of the Board, President,
     and CEO since 1990. He was President of Numatics' predecessor from 1983
     until the 1990 Buyout and prior to 1983 held a variety of management
     positions within that predecessor company.

          Robert P. Robeson joined Numatics' predecessor as Chief Financial
     Officer in 1988. He continued in that capacity with Numatics in 1990 and
     also was named Vice President, and its Treasurer and Secretary. Prior to
     joining Numatics' predecessor, Mr. Robeson was CFO of Gelman Sciences, a
     publicly traded company.

          David K. Dodds has been Vice President-Sales & Marketing since 1994.
     Prior to that, he was President of Numatics, Ltd., the Company's Canadian
     subsidiary, a position he was appointed to in 1980.

          Henry Fleischer has been Vice President-Research & Development since
     1992. He joined Numatics' predecessor in 1968 as Chief Engineer and held a
     variety of positions from then until the 1990 Buyout and his subsequent
     appointment to Vice President in 1992.

          Donald E. McGeachy has been Vice President-Engineering since 1992. He
     has been with Numatics (or its predecessor) since 1964, was the
     predecessor's Chief Engineer from 1975 until the 1990 Buyout and continued
     as Numatics' Chief Engineer until 1992.

          David M. Tenniswood was Vice President-European Operations of the
     Company from 1996 through March 31, 1998. He has been a Numatics Director
     since 1990. Prior to 1996, Mr. Tenniswood was President of the Controls
     Group at MascoTech for ten years.

          Albert A. Koch has been a Numatics Director since 1990. He has been a
     Managing Principal of Jay Alix & Associates since 1995. Prior to joining
     Jay Alix & Associates, he was a Managing Director of Equity Partners of
     America, Ltd. (investment banking and financial consulting).

          John P. Musat has been a Numatics Director since 1996. He is a Senior
     Vice President at MascoTech Forming Technologies-Braun and has been with
     them since 1982.

          Tim R. Palmer has been a Numatics Director since 1997. He currently is
     a Managing Director of Charlesbank Capital Partners LLC, which manages the
     private equity and real estate investment portfolios of the Harvard
     University endowment fund. He has been with Charlesbank Capital Partners
     LLC since 1990 and also serves on the boards of The WMF Group, Ltd. and
     several private companies.

                                      25
<PAGE>
 
     ITEM 11.  EXECUTIVE COMPENSATION

     Summary Compensation Information
     --------------------------------

          The table that follows provides information, for the Company's last
     completed fiscal year and its fiscal year ended December 31, 1997
     concerning the compensation of John H. Welker, Numatics' CEO, and the four
     other individuals who were the highest paid executive officers of Numatics
     during 1998.

                      Summary Compensation Table
<TABLE> 
<CAPTION> 
                                                          Annual Compensation (1)
                                                         -----------------------
                                                                                            All Other 
           Name and Principal Position                Year      Salary       Bonus       Compensation (2)
           ---------------------------                ----      -------      -----       ----------------      
<S>                                                  <C>       <C>         <C>              <C>
          John H. Welker.........................     1998      $301,020    $110,500          $5,000
           Chairman, President and CEO                1997       251,020     160,500           5,000
 
          Robert P. Robeson....................       1998       137,600      62,470           5,000
           Vice President, Treasurer,                 1997       134,600      62,008           5,000
           and CFO
 
          David K. Dodds.........................     1998       127,760      55,022           5,000
           Vice President--Sales                      1997       125,760      56,444           5,000
           and Marketing
 
          Donald E. McGeachy................          1998       109,800      44,523           4,977
           Vice President--Engineering                1997       107,800      48,430           5,000

          Henry Fleischer...................          1998        97,520      41,575           4,689
           Vice President                             1997        95,520      42,911           4,681
           Research & Development

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

          (1) Does not include perquisites and other personal benefits provided
     to  named executives, the incremental cost of which to the Company in each
     case was less than 10% of the pertinent executive's salary and bonus for
     the year.

          (2) For each executive and in each year, includes a $2,000 Company
     contribution to the Company's deferred contribution and employee savings
     plan and a Company matching contribution to that plan based on the
     executive's contribution.


     Welker Employment Agreement
     ---------------------------

          Numatics has an agreement with John Welker for his employment as CEO
     through December 31, 2003.  Under this agreement, he is entitled to salary
     at specified rates ($300,000 for 1998, $325,000 for 1999, increasing
     annually thereafter to $440,000 for 2003), and to a cash performance bonus
     supplementing his salary determined pursuant to a formula based on the
     Company's operating performance relative to its operating budget. The
     agreement also contemplates that Numatics' Board of Directors annually will
     consider whether he should be paid a discretionary bonus, whether or not a
     performance bonus also is payable.

                                      26
<PAGE>
 
          During the term of the agreement, Numatics is entitled to terminate
     Mr. Welker's employment at any time for any reason, upon 60 days' prior
     notice to him, and also is entitled to terminate him for "cause" or in
     certain cases of "permanent disability" (as defined in the agreement), upon
     less prior notice. If the Company were to terminate him not for cause or
     permanent disability, or terminated him for permanent disability without
     having maintained certain disability insurance in effect for his benefit,
     he would be entitled to continuation of his regular salary for a one-year
     period commencing on his termination date. In addition, if Mr. Welker were
     to die while employed by the Company, the equivalent of his regular salary
     for a 60-day period thereafter would be payable to his estate.

          The agreement imposes non-competition obligations upon Mr. Welker
     during his employment and for one year thereafter and also imposes
     confidentiality obligations upon him, which continue for five years after
     his employment termination date.

     Deferred Compensation Plan
     --------------------------

          In connection with the 1990 Buyout, Numatics adopted a "top-hat" non-
     qualified deferred compensation plan, under which a small group of
     management-level employees could become entitled to receive future
     distributions of equity interests in Numatics if certain conditions
     thereafter were satisfied. In connection with the 1995 Recapitalization,
     the plan was amended to change the type of distributions to be made under
     the plan to cash, limit the employees eligible to participate in the plan
     to those then participating, specify a fixed distribution amount for each
     participating employee, and change the terms and conditions for payouts.

          In general, under the plan as currently in effect, if a plan
     participant's employment with the Company continues until his death,
     retirement at or after age 65, or disability (determined as specified in
     the plan), or if a participant remains in active Company service through
     the later of (a) November 29, 2002 or (b) the twelfth anniversary of the
     commencement of his employment and his employment thereafter terminates
     other than in an Involuntary Discharge for Cause (as defined in the plan),
     which involuntary discharge would cause the forfeiture of his right to any
     distribution, then Numatics would become obligated to pay his distribution,
     without interest, in regular installments over a five-year period
     commencing within 60 days of his employment termination date. Similar five-
     year installment payment obligations also would arise under the plan with
     respect to all  participants if Numatics elected to terminate the plan or
     if a Company Change in Control (as defined in the plan) should occur.

          However, the current terms of the plan also provide for a pro rata
     reduction in the amounts of annual installment payments to distributees and
     for lengthening the installment payment period, if Numatics becomes
     obligated to make payments to more than one distributee at the same time,
     to the extent (if any) necessary to prevent total annual payments to the
     distributees in excess of 3.0% of the Company's prior year earnings before
     interest, taxes, depreciation, and amortization. In addition, the plan
     provides that no distribution payments whatsoever may be made prior to
     January 31, 2004.

          Eight of the Company's employees participate in this plan, including
     all of the named executives.  The distribution amounts for the named
     executives are as follows: Mr.

                                      27
<PAGE>
 
     Welker, $2,643,546; Mr. Robeson, $105,398; Mr. Dodds, $151,757; 
     Mr. Fleischer, $130,656; Mr. McGeachy, $151,757.

     Directors' Compensation
     -----------------------

          Numatics pays a meeting fee of $1,600 to each director not also
     employed by the Company for each meeting of the Numatics Board of Directors
     that he attends. Employee directors are not paid any additional
     compensation for Board service. Mr. Palmer's compensation is paid to
     Charlesbank Capital Partners LLC pursuant to that company's policies.

     Compensation Committee Interlocks and Insider Participation
     -----------------------------------------------------------

          All decisions concerning the 1998 compensation of the Company's
     executive officers were made by the Numatics Board of Directors.  The
     current directors, Messrs. Welker, Tenniswood, Koch, Musat and Palmer,
     served on the Board throughout 1998; no other person served as a director
     at any time during the year.  Except as described below, no current or
     former officer and no current employee of Numatics or of any of its
     subsidiaries participated in deliberations of the Board concerning
     executive compensation during 1998.

          Mr. Welker is the controlling shareholder of Numatics and its
     Chairman, CEO, and President.  Until March 24, 1998, Mr. Tenniswood also
     was an executive officer of the Company.  None of the other directors is or
     ever has been an officer or employee of Numatics or of any of its
     subsidiaries.

          Mr. Palmer is a Managing Director of an affiliate of the company that
     held the Old Subordinated Notes, which were prepaid from the proceeds of
     the offering of Interim Notes.

          Numatics advanced $185,000 to Mr. Welker during 1996 to purchase the
     stock of a departing executive, all of which loan remains outstanding. In
     February 1998, Numatics advanced an additional $400,000 to Mr. Welker, all
     of which also remains outstanding. These loans are unsecured, bear interest
     at 6.5% per annum, and are payable on demand.

          Numatics, Mr. Welker, each other current executive officer of the
     Company, and all of its other employees who own Numatics' stock are party
     to a shareholder agreement that gives Numatics the option, but not the
     obligation, to purchase the shares of any shareholder party, including Mr.
     Welker, if the shareholder ceases to be a Company employee due to his
     death, his Total and Permanent Disability or Involuntary Discharge Without
     Cause (each as defined in the agreement), his retirement at or after age
     65, or his resignation (if after the later of (i) November 29, 2002 or (ii)
     the twelfth anniversary of his date of hire by Numatics or its predecessor)
     for a redemption price to be determined by a formula intended to
     approximate the shares' fair market value at the time of employment
     termination. This agreement covers 94.0% of  the outstanding shares of
     Numatics common stock, 74.12% of which are held by Mr. Welker.

                                      28
<PAGE>
 
     ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Over 5% Owners
     --------------

          So far as is known to the Company, the only persons who are beneficial
     owners (within the meaning of SEC Rule 13d-3) of over 5.0% of Numatics'
     outstanding common shares are: (a) John H. Welker, whose ownership
     information is set forth below under "Management and Directors" and who
     maintains an address at the Company's principal executive office; and (b)
     Harvard Private Capital Holdings, Inc. (the address of which is c/o
     Charlesbank Capital Partners LLC, 600 Atlantic Avenue, Boston,
     Massachusetts 02210), which holds 1,276.60 shares, representing 6.0% of the
     outstanding shares.

     Management and Directors
     ------------------------

          The table that follows sets forth the beneficial ownership (for
     purposes of SEC Rule 13d-3) of shares of Numatics' common stock by each
     Numatics director, each executive officer named in the Summary Compensation
     Table above, and all directors and current executive officers as a group.
<TABLE>
<CAPTION>
 
          Name of Beneficial Owner                Shares Owned        Percentage Owned
          ------------------------                ------------        ----------------
         <S>                                       <C>                  <C>
 
          John H. Welker(1)                          20,000.00             94.00%
          Robert P. Robeson                             627.13              2.95%
          David K. Dodds                                903.05              4.24%
          Henry Fleischer                               777.61              3.65%
          Donald E. McGeachy                            903.05              4.24%
          David M. Tenniswood                                0                --
          Albert A. Koch                                     0                --
          John P. Musat                                      0                --
          Tim R. Palmer(2)                                   0                --
          All directors and executive officers
           as a group (9 persons)(1)(2)              20,000.00             94.00%

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

          (1) Mr. Welker has sole voting and dispositive power over 15,769.57
     (74.12%)  of the reported shares, which are his own, and sole voting  power
     over all other outstanding shares, excluding those owned by Harvard Private
     Capital Holdings, pursuant to a voting agreement among Numatics, Mr. Welker
     and all of Numatics' other shareholders who are Company employees.

          (2) Excludes shares owned by Harvard. Mr. Palmer is a Managing
     Director of an affiliate of Harvard Private Capital Holdings. He disclaims
     beneficial ownership of these shares.

     ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The information required in response to this item is included under
     item 12 and incorporated herein by this reference.

                                      29
<PAGE>
 
                                    PART IV

     ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

          (a)  1. Financial Statements. (All contained in Exhibit 99.1 to this
     report. Page numbers shown below.) 

                  Consolidated Financial Statements
                  Numatics, Incorporated
                  Years ended December 31, 1998, 1997, and 1996
                  with Report of Independent Auditors
                  -----------------------------------

                                                                  Page in
                                                                  Exhibit 99.1
                                                                  ------------

                  Report of Independent Auditors                         1
                  Consolidated Balance Sheets                            2
                  Consolidated Statements of Operations                  4
                  Consolidated Statements of Stockholders' Equity
                      (Deficiency)                                       5
                  Consolidated Statements of Cash Flows                  6
                  Notes to Consolidated Financial Statements             7

               2. Financial Statement Schedule.

                  Schedule II - Valuation and Qualifying Accounts
                  (found at page F-1 of this report)

               3.  Exhibits.  The following exhibits are filed with this Form
     10-K or incorporated herein by reference:


Exhibit No.                      Description
-----------                      -----------

*3.1.1           Article of Incorporation of Numatics, as amended

*3.1.2           Bylaws of Numatics

*3.2.1           Articles of Incorporation of Numation, Inc., as amended

*3.3.2           Bylaws of Numation, Inc., as amended

*3.2.1           Articles of Incorporation of Numatech, Inc., as amended

*3.3.2           Bylaws of Numatech, Inc., as amended

*3.4.1           Articles of Incorporation of Micro-Filtration, Inc. as amended

*3.4.2           Bylaws of Micro-Filtration, Inc., as amended

*3.5.1           Articles of Incorporation of Ultra Air Products, Inc. as
                    amended

*3.5.2           Bylaws of Ultra Air Products, Inc., as amended

*3.6.1           Articles of Incorporation of Microsmith, Inc., as amended

*3.6.2           Bylaws of Microsmith, Inc., as amended

*3.7.1           Articles of Incorporation of I.A.E. Incorporated

*3.7.2           Bylaws of I.A.E. Incorporated

*4.1.1           Indenture, dated as March 23, 1998, among Numatics, the
                    Guarantors identified there, and First Trust National 
                    Association, as trustee (including forms of Interim Notes 
                    and related Subsidiary Guarantees)

*4.1.2           A/B Exchange Registration Rights Agreement, dated as of March
                    23, 1998, among Numatics, the Guarantors, and the initial
                    purchasers of the Interim Notes

*4.1.3           Form of Series B Notes (including related Subsidiary
                    Guarantees by the Guarantors indentified in Indenture)

4.1.4            Supplemental Indenture, dated as of January 25, 1999, by 
                 which Empire Air Systems, Inc.  became a Guarantor
                   
*4.2.1           Amended and Restated Loan Agreement, dated March 23, 1998,
                    among Numatics, Numatics GmbH, Numatics, LTD., NBD Bank, as
                    Administrative Agent, BankBoston, N.A., as Documentation
                    Agent, and the Lenders party thereto
 
*4.2.2           Amended and Restated Guaranty Agreement, dated as of March 23,
                    1998, by Numatics and the Guarantors in favor of NBD Bank,
                    as Administrative Agent, and BankBoston, N.A., as
                    Documentation Agent

 4.2.3           Form of Empire Air Systems Guaranty Agreement by Empire Air
                    Systems, Inc. in favor of NBD Bank, as administrative agent

*10.1            Purchase Agreement dated March 18, 1998 among the initial
                    purchasers of the Interim Notes, Numatics, and the
                    Guarantors

*10.2.1          Securities Purchase Agreement, dated as of January 3, 1996,
                    between Numatics and Harvard Private Capital Holdings

*10.2.2          Numatics, Incorporated Tag-Along and Drag-Along Agreement,
                    dated January 3, 1996, among Numatics, Harvard Private
                    Capital Holdings, and shareholders of Numatics

*10.2.3          Registration Agreement, dated as of January 3, 1996, between
                    Numatics and Harvard Private Capital Holdings

*10.2.4          Form of Guaranty Agreement between Harvard Private Capital
                    Holdings and I.A.E. Incorporated, dated as of March 23, 1998
                    (Each of the other guarantors has executed an Amended and
                    Restated Guaranty Agreement in substantially the same form.)

*10.2.5          Agreement, dated as of March 23, 1998, between Numatics and
                    Harvard Private Capital Holdings

*10.3            Amended and Restated Stock Transfer Agreement, dated December
                    28, 1995, among Numatics, John H. Welker, individually and
                    as trustee of the John H. Welker Trust u/a dtd December 28,
                    1995, David K. Dodds, Donald E. McGeachey, Henry Fleischer,
                    individually and as trustee of the Henry Fleischer Trust u/a
                    dtd March 10, 1993, Robert P. Robeson, John A. Acuff, Bruce
                    W. Hoppe, David King, and Philip Robinson

+10.3.1          First Amendment, dated June 30, 1998, to Amended and Restated
                    Stock Transfer Agreement

*10.4            Voting Agreement, dated as November 29, 1990, among Numatics
                    (under its former name, Numatics Acquisition Corporation)
                    and certain shareholders of Numatics

*10.5            Employment Agreement, dated January 3, 1996, between Numatics
                    and John H. Welker**

*10.6            Employment Agreement, dated September 15, 1996, between
                    Numatics and David M. Tenniswood**

*10.7            Numatics, Incorporated Amended and Restated Deferred
                    Compensation Plan, adopted December 28, 1995, and related
                    acknowledgements by Eligible Employees (as therein
                    defined)**

 21.1            List of subsidiaries of Numatics

*27.1            Financial Data Schedule

*99.1            Consolidated Financial Statements--Numatics, Incorporated--
                    Years ended December 31, 1998, 1997 and 1996 with Report of
                    Independent Auditors

________________________

* Incorporated by reference to exhibit (having the same exhibit number) to
  Registration Statement on Form S-4 filed on April 29, 1998
  (File No. 333-51355)

+ Incorporated by reference to Amendment No. 1 to Registration Statement on Form
  S-4 filed on July 10, 1998 (File No. 333-51355)

**Indicates contract or compensatory plan or arrangement with one or more
  Numatics executive officers and/or directors



          (b)   Reports on Form 8-K.  No reports on Form 8-K were filed by
     Numatics during the three months ended December 31, 1998.


                                      30
<PAGE>
 


<TABLE> 
<CAPTION>  

                         SCHEDULE II - Valuation and Qualifying Accounts
                                    (in thousands)

Column A                     Column B      Column C      Column D      Column E
                                            Addition
                             Balance at    Charged to                  Balance at   
                             Beginning of  Costs and     Deductions-    End of
Description                  Period        Expenses       Describe      Period
--------------------------------------------------------------------------------
<S>                              <C>           <C>            <C>          <C>      
Year ended December 31,1998
 Accounts receivable allowance     60            32            34 (1)        58
 Inventory reserve                892           282           180 (2)       994
 Deferred tax asset valuation 
 allowance                       1066             0           601 (3)       465
 
Year ended December 31, 1997
 Accounts receivable allowance    132           102          174  (1)        60
 Inventory reserve               1029           509          646  (2)       892
 Deferred tax asset valuation
 allowance                       1371             0          305  (3)      1066

Year ended December 31, 1996    
 Accounts receivable allowance    222            76          166  (1)       132
 Inventory reserve               1218           223          412  (2)      1029
 Deferred tax asset valuation
 allowance                        274          1097            0           1371

(1) Uncollectible accounts charged off net of recoveries
(2) Reduction in inventory reserves for inventory disposed of during the year
(3) Utilization of foreign net operating loss carry-forwards.  
</TABLE> 
  


                                      F-1
<PAGE>
 
                                  SIGNATURES


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

          NUMATICS, INCORPORATED


          By:/s/ John H. Welker
             --------------------------------
                 John H. Welker
                 President and Chief Executive
                 Officer

          Date:  March 31, 1999
                 


          Pursuant to the requirements of Section 13 or 15(d) of the Securities
     Exchange Act of 1934, this report has been signed below by the following
     persons on behalf of the registrant and in the capacities and on the dates
     indicated.



                Name                  Capacity                      Date
                ----                  --------                      ----

 /s/  John H. Welker         President and Chief Executive       March 31,1999
---------------------------- Officer and Director
      John H. Welker                             

 /s/  Robert P. Robeson      Vice President, Treasurer and       March 31,1999
---------------------------- Chief Financial Officer (also
     Robert P. Robeson       principal accounting officer)

                             Director                            March__, 1999
----------------------------
   David M. Tenniswood

                              
                             Director                            March__, 1999
----------------------------
    Albert A. Koch

 /s/ John P. Musat           Director                            March 31,1999
----------------------------
     John P. Musat


/s/ Tim R. Palmer            Director                            March  31,1999
----------------------------
    Tim R. Palmer 


                                      S-1


<PAGE>
 
                                 Exhibit Index


Exhibit No.                      Description
-----------                      -----------

*3.1.1           Article of Incorporation of Numatics, as amended

*3.1.2           Bylaws of Numatics

*3.2.1           Articles of Incorporation of Numation, Inc., as amended

*3.3.2           Bylaws of Numation, Inc., as amended

*3.2.1           Articles of Incorporation of Numatech, Inc., as amended

*3.3.2           Bylaws of Numatech, Inc., as amended

*3.4.1           Articles of Incorporation of Micro-Filtration, Inc. as amended

*3.4.2           Bylaws of Micro-Filtration, Inc., as amended

*3.5.1           Articles of Incorporation of Ultra Air Products, Inc. as
                    amended

*3.5.2           Bylaws of Ultra Air Products, Inc., as amended

*3.6.1           Articles of Incorporation of Microsmith, Inc., as amended

*3.6.2           Bylaws of Microsmith, Inc., as amended

*3.7.1           Articles of Incorporation of I.A.E. Incorporated

*3.7.2           Bylaws of I.A.E. Incorporated

*4.1.1           Indenture, dated as March 23, 1998, among Numatics, the
                    Guarantors there identified, and First Trust National 
                    Association, as trustee (including forms of Interim Notes 
                    and related Subsidiary Guarantees)

*4.1.2           A/B Exchange Registration Rights Agreement, dated as of March
                    23, 1998, among Numatics, the Guarantors, and the initial
                    purchasers of the Interim Notes

*4.1.3           Form of Series B Notes (including related Subsidiary
                    Guarantees by the Guarantors identified in Indenture)

4.1.4            Supplemental Indenture, dated as of January 25, 1999,   
                    Numatics, by which Empire Air Systems, Inc.,became a 
                    Guarantors
                    
*4.2.1           Amended and Restated Loan Agreement, dated March 23, 1998,
                    among Numatics, Numatics GmbH, Numatics, LTD., NBD Bank, as
                    Administrative Agent, BankBoston, N.A., as Documentation
                    Agent, and the Lenders party thereto

                                      E-1
<PAGE>
 
*4.2.2           Amended and Restated Guaranty Agreement, dated as of March 23,
                    1998, by Numatics and the Guarantors in favor of NBD Bank,
                    as Administrative Agent, and BankBoston, N.A., as
                    Documentation Agent

4.2.3            Form of Empire Air Systems Guaranty Agreement by Empire Air
                    Systems, Inc. in favor of NBD Bank, as administrative agent

*10.1            Purchase Agreement dated March 18, 1998 among the initial
                    purchasers of the Interim Notes, Numatics, and the
                    Guarantors

*10.2.1          Securities Purchase Agreement, dated as of January 3, 1996,
                    between Numatics and Harvard Private Capital Holdings

*10.2.2          Numatics, Incorporated Tag-Along and Drag-Along Agreement,
                    dated January 3, 1996, among Numatics, Harvard Private
                    Capital Holdings, and shareholders of Numatics

*10.2.3          Registration Agreement, dated as of January 3, 1996, between
                    Numatics and Harvard Private Capital Holdings

*10.2.4          Form of Guaranty Agreement between Harvard Private Capital
                    Holdings and I.A.E. Incorporated, dated as of March 23, 1998
                    (Each of the other guarantors has executed an Amended and
                    Restated Guaranty Agreement in substantially the same form.)

*10.2.5          Agreement, dated as of March 23, 1998, between Numatics and
                    Harvard Private Capital Holdings

*10.3            Amended and Restated Stock Transfer Agreement, dated December
                    28, 1995, among Numatics, John H. Welker, individually and
                    as trustee of the John H. Welker Trust u/a dtd December 28,
                    1995, David K. Dodds, Donald E. McGeachey, Henry Fleischer,
                    individually and as trustee of the Henry Fleischer Trust u/a
                    dtd March 10, 1993, Robert P. Robeson, John A. Acuff, Bruce
                    W. Hoppe, David King, and Philip Robinson

+10.3.1          First Amendment, dated June 30, 1998, to Amended and Restated
                    Stock Transfer Agreement

*10.4            Voting Agreement, dated as November 29, 1990, among Numatics
                    (under its former name, Numatics Acquisition Corporation)
                    and certain shareholders of Numatics

*10.5            Employment Agreement, dated January 3, 1996, between Numatics
                    and John H. Welker**

                                      E-2
<PAGE>
 
*10.6            Employment Agreement, dated September 15, 1996, between
                    Numatics and David M. Tenniswood**

*10.7            Numatics, Incorporated Amended and Restated Deferred
                    Compensation Plan, adopted December 28, 1995, and related
                    acknowledgements by Eligible Employees (as therein
                    defined)**

 21.1            List of subsidiaries of Numatics
 
 27.1            Financial Data Schedule

*99.1            Consolidated Financial Statements--Numatics, Incorporated--
                    Years ended December 31, 1998, 1997 and 1996 with Report of
                    Independent Auditors

________________________

* Incorporated by reference to exhibit (having the same exhibit number) to
  Registration    Statement on Form S-4 filed on April 29, 1998
  (File No. 333-51355)

+ Incorporated by reference to Amendment No. 1 to Registration Statement on Form
  S-4 filed on July 10, 1998 (File No. 333-51355)

**Indicates contract or compensatory plan or arrangement with one or more
  Numatics executive officers and/or directors

                                      E-3