<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  FORM 10-K/A
                                AMENDMENT NO. 1
                              -------------------

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

                  For the fiscal year ended December 31, 1998

                              -------------------

                        Commission File Number:  0-11625

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


           Delaware                                       04-2793022
           ---------                                      ----------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

  30 Ossipee Road, P.0. Box 9101
  Newton, Massachusetts                                  02464-9101
--------------------------------                     ------------------
(Address of principal executive offices)                 (Zip Code)

      Registrant's telephone number, including area code: (617) 969-5452
       Securities registered pursuant to Section 12(b) of the Act:  None
          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $.01 par value

Indicate by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes  X    No 
   -----     -----    

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

The aggregate market value of Common Stock held by non-affiliates of the
registrant (without admitting that any person whose shares are not included in
determining such value is an affiliate), based upon the closing sale price of
the Common Stock on March 25, 1999 as reported on the Nasdaq National Market was
$2,809,064.

The number of shares outstanding of the registrant's Common Stock as of March
25, 1999 was 6,061,307 shares.


<PAGE>
 

                    Microfluidics International Corporation

     Part II, Item 8 to the Microfluidics International Corporation's Annual 
Report on Form 10-K, filed with the Securities and Exchange Commission on April 
15, 1999 for the fiscal year ended December 31, 1998, is hereby deleted and 
replaced with Part II, Item 8 included in this Amendment No. 1. In addition a 
consent of PricewaterhouseCoopers LLP is hereby added to Item 14(a)(3) of this 
Amendment No. 1.

<PAGE>
 
                                      -25-

Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The following Consolidated Financial Statements of the Company and its
Subsidiaries appear on the following pages of this Form 10-K.


                                                                  Page

Report of Independent Auditors                                     F-1
 
Report of Independent Accountants                                  F-2
 
Consolidated Balance Sheets as of December 31, 1998 and 1997       F-3 & F-4
 
Consolidated Statements of Operations for the years ended
    December 31, 1998, 1997 and 1996                               F-5
 
Consolidated Statements of Comprehensive Income (Loss)
    for the years ended December 31, 1998, 1997 and 1996           F-5

Consolidated Statements of Cash Flows for the years ended
    December 31, 1998, 1997 and 1996                               F-6
 
Consolidated Statements of Changes in Stockholders' Equity
    for the years ended December 31, 1998, 1997 and 1996           F-7
 
Notes to Consolidated Financial Statements                         F-8
<PAGE>
 
                                      -33-

                                 PART IV

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

     (a)(1.) Consolidated Financial Statements.

          The following Consolidated Financial Statements are included in 
Item 8:

               Consolidated Balance Sheets as of December 31, 1998 and 1997

               Consolidated Statements of Operations for the years ended
               December 31, 1998, 1997 and 1996

               Consolidated Statements of Comprehensive Income (Loss) for the 
               years ended December 31, 1998, 1997 and 1996

               Consolidated Statements of Cash Flows for the years ended
               December 31, 1998, 1997 and 1996

               Consolidated Statements of Changes in Stockholders' Equity for
               the years ended December 31, 1998, 1997 and 1996

               Notes to Consolidated Financial Statements

               Report of Independent Auditors

               Report of Independent Accountants

     (a)(2.) Financial Statement Schedules.

          All schedules are omitted because they are not applicable or the
          required information is shown in the financial statements or the notes
          thereto.

    (a)(3.)  List of Exhibits.

   Exhibit
   Number   Description of Exhibit
   ------   ----------------------

   3.3(a)   Certificate of Incorporation for the Company, as amended (filed as
            Exhibit 2A to Registration Statement No. 0-11625 on Form 8-A and
            incorporated herein by reference).

<PAGE>
 
                                      -34-

   3.3(b)   Amended and Restated By-Laws for the Company (filed as
            Exhibit 3.3(b) to the Company's Annual Report on Form 10-K for the
            fiscal year ended December 31, 1996 and incorporated herein by
            reference).
 
** 3.10(a)  1987 Stock Plan (filed as Exhibit 10(g) to the Company's Annual
            Report on Form 10-K for the fiscal year ended December 31, 1987 and
            incorporated herein by reference).
 
** 3.10(b)  1988 Stock Plan (filed as Exhibit 10(g) to the Company's Annual
            Report on Form 10-K for the fiscal year ended December 31, 1988 and
            incorporated herein by reference).
 
   3.10(c)  1989 Non-Employee Directors Stock Option Plan (filed as Exhibit 
            10.1 to the Company's registration statement on Form S-8 filed
            October 22, 1996 and incorporated herein by reference).
 
   3.10(d)  Loan Agreement between The First National Bank of Boston and
            Microfluidics International Corporation dated as of December 10,
            1993 (filed as Exhibit 10.2 to Form 8-K filed on December 27, 1993
            and incorporated herein by reference.

   3.10(e)  Lease for 30 Ossipee Road, Newton Massachusetts dated May 23, 1997
            between Microfluidics International Corporation and J. Frank
            Garrity, Trustee of 1238 Chestnut Street Trust under Declaration of
            Trust dated May 23, 1969, recorded with Middlesex South Registry of
            Deeds in Book 11682, Page 384 (filed as Exhibit 3.10a to the
            Company's Form 10-Q for the quarterly period ended June 30, 1997 and
            incorporated herein by reference).
            
   3.10(f)  Letter of Understanding between Microfluidics International 
            Corporation and Worcester Polytechnic Institute dated as of April 3,
            1992 (filed as Exhibit 3.10(f) to the Company's Form 10-K for the
            fiscal year ended December 31, 1993 and incorporated herein by
            reference).

   3.10(g)  Agreement between Microfluidics International Corporation and 
            Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit
            3.10(g) to the Company's Form 10-K for the fiscal year ended
            December 31, 1993 and incorporated herein by reference) with
            amendements dated September 1, 1994 and March 31, 1995.

   3.10(h)  Amendement to agreement dated September 1, 1994 between 
            Microfluidics International Corporation and Catalytica, Inc. dated
            as of October 18, 1993 (filed as Exhibit 3.10(g) to the Company's
            Form 10-K for the fiscal year ended December 31, 1993, and
            incorporated herein by reference).
<PAGE>
 
                                      -35-

   3.10(i)  Amendment to agreement dated March 31, 1995 between Microfluidics 
            International Corporation and Catalytica, Inc. dated as of 
            October 18, 1993 (filed as Exhibit 3.10(g) to the Company's 
            Form 10-K for the fiscal year ended December 31, 1993, and
            incorporated herein by reference).

   3.10(j)  License Agreement among Microfluidics International Corporation, 
            Worcester Polytechnic Institute and Catalytica, Inc. dated as of
            October 18, 1993 (filed as Exhibit 3.10(h) to the Company's Form 
            10-K for the fiscal year ended December 31, 1993 and incorporated
            herein by reference).

** 3.10(k)  Agreement, dated July 27, 1995, between Microfluidics International
            Corporation and Michael T. Rumley (filed as Exhibit 3.10(i) to the
            Company's Form 10-K for the fiscal year ended December 31, 1995 and
            incorporated herein by reference).

** 3.10(l)  Letter, dated August 15, 1995, from Microfluidics International
            Corporation to Michael T. Rumley (filed as Exhibit 3.10(j) to the
            Company's Form 10-K for fiscal year ended December 31, 1995 and
            incorporated hereby reference).

** 3.10(m)  Letter, dated December 31, 1995 from Microfluidics International 
            Corporation to Irwin J. Gruverman (filed as Exhibit 3.10(k) to the
            Company's Form 10-K for fiscal year ended December 31, 1996 and
            incorporated herein by reference).

   3.10(n)  Warrant for the Purchase of Shares of Common Stock, dated July 14, 
            1993, in favor of Ladenburg, Thalmann & Co. Inc. (filed as 
            Exhibit 3.10(l) to the Company's Form 10-K for fiscal year ended
            December 31, 1996 and incorporated herein by reference).

** 3.10(o)  Letter, dated December 31, 1996, from Microfluidics International 
            Corporation to Irwin J. Gruverman (filed as Exhibit 3.10(o) to the
            Company's Form 10-K for fiscal year ended December 31, 1996 and
            incorporated herein by reference).

   3.10(p)  Agreement between Microfluidics International Corporation and 
            Catalytica, Inc. dated January 1, 1995 regarding participation in
            and management of the Advanced Technology Program (ATP) (filed as
            Exhibit 3.10(p) to the Company's Form 10-K for fiscal year ended
            December 31, 1996 and incorporated herein by reference).

   3.10(q)  Consulting Agreement with James Little (filed as Exhibit 3.10(q) to
            the Company's Form 10-K for fiscal year ended December 31, 1996 and
            incorporated herein by reference).

   3.10(r)  Subsidiaries of the Registrant (filed as Exhibit 3.21 to the 
            Company's Form 10-K for fiscal year ended December 31, 1996 and
            incorporated herein by reference).
<PAGE>
 
                                      -36-

   3.10(s)  Letter dated December 31, 1997, from Microfluidics International 
            Corporation** to Irwin J. Gruverman and G & G Diagnostics Corp.

   3.10(t)  1988 Stock Plan as amended (filed as Exhibit 10(a) to the Company's 
            Form 10-Q for the quarterly period ended March 31, 1997 and
            incorporated herein by reference.

   3.10(u)  Asset Purchase Agreement dated as of June 19, 1998, by and among the
            Company, Epworth Manufacturing Company and Morehouse-COWLES, Inc.
            (filed as Exhibit 2.1 to Schedule 13D of Bret A. Lewis, File No.
            005-35850, and incorproated herein by reference).

   3.10(v)  Stockholders Agreement dated August 14, 1998, by and among the
            Company, J.B. Jennings and Bret A. Lewis (filed as exhibit 2.2 to
            Schedule 13D of Bret A. Lewis, File No. 005-35850, and incorporated
            herein by reference).

   3.10(w)  $500,000 Subordinated Promissory Note issued by the Company to 
            Epworth Manufacturing Company (filed as Exhibit 99.1 to the
            Company's Form 8-K on August 27, 1998, File No. 000-11625, and
            incorporated herein by reference).

   3.10(x)  $300,000 Subordinated Promissory Note issued by the Company to 
            Epworth Manufacturing Company (filed as exhibit 99.2 to the
            Company's Form 8-K on August 27, 1998, File No. 000-11625, and
            incorporated herein by reference).

   3.10(y)  Revolving credit loan between Comerica Bank and the Company dated 
            August 12, 1998 (Filed as Exhibit 10.1 to the Company's form 10-Q
            for the quarterly period ended September 30, 1998 and incorporated
            herein by reference).

   3.10(z)  Letter dated December 31, 1998 from Microfluidics International 
            Corporation to Irwin J. Gruverman.

   23(a)    Consent of Deloitte & Touche LLP.

  *23(b)    Consent of PricewaterhouseCoopers LLP

   27       Financial Data Schedule.

----------------
 *Filed herewith

**Management contracts or compensatory plan or arrangement required to be filed
  as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.
<PAGE>
 
                                      -37-

     (b)  Reports on Form 8-K.

          On October 28, 1998, the Company filed Amendment No. 2 on Form 8K/A
          amending the previous filings of August 27, 1998 and September 11,
          1998 to include pro forma financial statements required in connection
          with the Company's acquisition of substantially all of the assets of
          Epworth Manufacturing Company and Morehouse-COWLES, Inc.
 
     (c)  Exhibits.

          The Company hereby files as part of this Form 10-K the Exhibits listed
          in Item 14(a)(3) as set forth above.


     (d)  Financial Statement Schedules.

          See (a)(2) above.
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
                        ------------------------------

To the Board of Directors and
Stockholders of Microfluidics
International Corporation:

We have audited the accompanying consolidated balance sheets of Microfluidics
International Corporation and Subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, comprehensive income (loss),
changes in stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Microfluidics International Corporation and Subsidiaries as of December 31, 1998
and 1997, and the consolidated results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note N to the
consolidated financial statements, the Company incurred a net loss of
approximately $1,505,000 in 1998 and was not in compliance with certain
covenants of its revolving credit loan agreement. The Company's lender has
declared the loan in default. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note N. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.


/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Boston, Massachusetts
March 23, 1999
 

                                      F-1
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
                       ---------------------------------

To the Board of Directors and
Stockholders of Microfluidics
International Corporation:

We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for Microfluidics International Corporation
and Subsidiaries for the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Microfluidics
International Corporation and Subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.



                                    PricewaterhouseCoopers LLP


Boston, Massachusetts
February 12, 1997

                                      F-2
<PAGE>
 
/1/MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
 
 
                                                                December 31,
                                                         --------------------------
                                                             1998          1997
                                                         ------------  ------------
<S>                                                      <C>           <C>
 
ASSETS

Current Assets:
Cash and cash equivalents                                $   550,713    $4,083,214
Marketable securities                                         10,080        55,638
Accounts receivable, less allowance of $100,000
 and $40,000 in 1998 and 1997, respectively                2,284,840     1,396,088
Other receivables                                             84,845       122,550
Accounts receivable  related party                            24,417        18,439
Inventories                                                4,450,926     2,436,938
Prepaid expenses                                             164,528        26,764
                                                         -----------    ----------
  Total current assets                                     7,570,349     8,139,631
Equipment and Leasehold Improvements, at cost
  Furniture, fixtures and office equipment                   436,447       335,467
  Machinery and equipment                                    893,388       261,592
  Leasehold improvements                                     310,563       125,322
                                                         -----------    ----------
                                                           1,640,398       722,381
Less:  Accumulated depreciation and amortization            (644,065)     (570,555)
                                                         -----------    ----------
                                                             996,333       151,826
 
Goodwill (net of accumulated amortization of               6,010,130
   $154,329)
Patents, Licenses and Other Intangible assets-(net of
  accumulated amortization of $423,470 in 1998
  and $379,549 in 1997)                                      123,210       167,131
Deferred Income Taxes                                                      413,630
                                                         -----------    ----------
  Total assets                                           $14,700,022    $8,872,218
                                                         ===========    ==========
 
</TABLE>
                See notes to consolidated financial statements

                                      F-3
<PAGE>
 
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
                                                                 December 31,
                                                         --------------------------
                                                             1998          1997
                                                         ------------  ------------
<S>                                                      <C>           <C>
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
Accounts payable and other accrued expenses              $ 1,158,999   $   939,796
Accrued interest  related party                               20,164
Accrued compensation                                          78,488        76,269
Accrued vacation pay                                          98,667        37,294
Customer advances                                            166,136       280,716
Line of credit                                             4,347,782
Current portion of long term debt  related party             125,000
                                                         ------------  ------------
    Total current liabilities                              5,995,236     1,334,075
Long term debt, net of current portion - related party       675,000
Commitments and contingencies

Stockholders' Equity
    Common Stock, par value $.01 per share,
    20,000,000 shares authorized; 6,056,983
    and 5,136,804 shares issued and outstanding
    at December 31, 1998 and 1997,
    respectively                                              60,570        51,368
Additional paid-in capital                                12,491,423    10,442,840
Accumulated deficit                                       (3,865,800)   (2,360,359)
Accumulated other comprehensive income                        10,080        55,638
Less:  Treasury Stock, at cost, 235,219 and 220,719
    shares in 1998 and 1997, respectively                   (666,487)     (651,344)
                                                         -----------   -----------
 
    Total stockholders' equity                             8,029,786     7,538,143
                                                         -----------   -----------
 
    Total liabilities and stockholders' equity           $14,700,022   $ 8,872,218
                                                         ===========   ===========
</TABLE>
                See notes to consolidated financial statements

                                      F-4
<PAGE>
 
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
 
 
                                               Years ended December 31,
                                        ------------------------------------
                                           1998        1997         1996
                                       -----------  -----------  -----------
<S>                                    <C>          <C>          <C>
 
Revenues                               $ 8,869,679  $ 7,105,706  $ 6,273,768
                                       
Cost of goods sold                       4,954,826    3,265,593    2,847,224
Research and development                   935,880      459,240      450,477
Selling, general and administrative      4,077,436    2,977,577    2,625,184
                                       -----------   ----------   ----------
Total cost and expenses                  9,968,142    6,702,410    5,922,885
                                       -----------   ----------   ----------
                                       
Income (loss) from operations           (1,098,463)     403,296      350,883
Interest expense                          (149,043)
Interest income                            119,492      159,256      100,612
Other income                                             50,012       50,009
Gain on sale of investments                 36,203       91,863
                                       -----------    ----------   ---------- 
Income (loss) before income taxes       (1,091,811)     704,427      501,504
Income tax benefit (provision)            (413,630)     403,630
                                       -----------    ----------   ---------- 
                                       
Net income (loss)                      $(1,505,441)  $ 1,108,057  $  501,504
                                       ===========   ===========  ==========
                                       
Basic earnings per share:              
                                       
Average shares outstanding:basic         5,296,923     4,914,722   4,941,711
                                       ===========   ===========  ==========
 
Net income (loss) per share            $      (.28)  $       .23  $      .10
                                       ===========   ===========  ==========

Diluted earnings per share:

Average shares outstanding:diluted       5,296,923     4,966,998   4,948,506
                                       ===========   ===========  ==========
 
Net income (loss) per share            $      (.28)  $       .22  $      .10
                                       ===========   ===========  ==========

CONSOLIDATED STATEMENTS OF 
  COMPREHENSIVE (LOSS) INCOME 
NET INCOME (LOSS)                      $(1,505,441)  $ 1,108,057  $  501,504 


Unrealized depreciation on 
  marketable securities                     (45,558)      (11,799)         --
                                        -----------   -----------  ----------
                                   
Comprehensive Income (Loss)             $(1,550,999)  $ 1,096,258  $  501,504 
                                        ===========   ===========  ========== 
</TABLE>


                See notes to consolidated financial statements
                
                                      F-5
<PAGE>
 
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE> 
<CAPTION>
                                                               Years ended December 31,
                                                               ------------------------ 
                                                           1998          1997         1996
                                                       -----------    ----------   ----------
<S>                                                    <C>            <C>          <C> 
Cash flows from  operations:                        
Net income (loss)                                      $(1,505,441)   $1,108,057   $  501,504
Reconciliation of net income (loss) to net cash     
 (used) provided by operations:                     
Depreciation and amortization                              321,251       105,383       95,101
Issuance of common stock for employee compensation                        30,000       24,000
Bad debt expense                                            30,000        19,877       10,000
Gain on sale of investments                                (36,203)      (91,863)
Income tax (benefit) provision                             413,630      (403,630)
Increase (decrease) in cash due to change in        
 (net of acquistions):                              
 Receivables and other receivables                         391,768       102,852      111,214
 Inventories                                               766,258      (145,170)     164,621
 Prepaid expenses                                          (48,615)       (4,906)      40,295
 Current liabilities                                    (1,592,042)      569,274       67,896
                                                       -----------    ----------   ----------
Net cash (used) provided by operations                  (1,259,394)    1,289,874    1,014,631
                                                    
Cash flows from (used by) investing activities:     
Proceeds from sale of investments                           36,203        91,863
Excess of cost over assets purchased (goodwill)         (3,339,459)
Business assets acquired, net of cash received          (3,102,216)
Purchase of fixed assets and leasehold improvements       (233,062)      (68,439)     (21,636)
                                                       -----------    ----------   ----------
Net cash from (used) provided by investing activities   (6,638,534)       23,424      (21,636)
                                                    
Cash flows from financing activities:     
Proceeds from line of credit                             4,347,782
Issuance of common stock under employee stock       
 purchase plan                                               7,724        21,788       21,861
Issuance of common stock under stock option         
 plan                                                       25,061        16,964        9,663
Treasury stock purchased                                   (15,143)     ( 55,390)    (141,383)
                                                       -----------    ----------   ----------
Net cash (used) provided by financing activities         4,365,424       (16,638)    (109,859)
                                                    
Net increase (decrease) in cash and cash                       
 equivalents                                            (3,532,504)    1,296,660      883,136
Cash and cash equivalents at beginning of year           4,083,214     2,786,554    1,903,418
                                                       -----------    ----------   ----------
Cash and cash equivalents at end of year               $   550,710    $4,083,214   $2,786,554
                                                       ===========    ==========   ========== 
                                                    
Supplemental disclosure of cash flow information:   
                                                    
Assets acquired in exchange for notes and           
  common stock                                         $ 2,825,000
                                                       ===========
Cash paid for interest                                 $   100,861             0            0
                                                       ===========    ==========   ==========
Cash paid for corporate taxes                                    0             0            0
                                                       ===========    ==========   ==========
</TABLE>
                See notes to consolidated financial statements

                                      F-6
<PAGE>
 
MICROFLUIDICS INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                                                Accumulated
                              Number of     Common                                Other -   Number of
                              Shares of    Stock at  Additional                 Comprehen-  Shares of
                              Common         par      paid-in      Accumul-        sive     Treasury   Treasury
                              Stock         value     capital    lated deficit    Income      Stock     Stock       Total
-----------------------------------------------------------------------------------------------------------------------------
<S>                           <C>         <C>       <C>          <C>            <C>         <C>        <C>         <C> 
Balance at December 31, 1995  5,058,203   $50,582   $10,319,350  $ (3,969,920)  $   83,640    107,019  $ (454,571) $6,029,081
-----------------------------------------------------------------------------------------------------------------------------
Change in unrealized
   depreciation on
   marketable securities                                                           (16,203)                           (16,203)
Stock options exercised           6,550        66         9,597                                                         9,663
Stock in lieu of salary          16,000       160        23,840                                                        24,000
Proceeds from employee stock
   purchase plan                 14,028       140        21,721                                                        21,861
Treasury stock                                                                                 85,100   (141,383)    (141,383)
Net income                                                            501,504                                         501,504
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996  5,094,781    50,948    10,374,508    (3,468,416)        67,437  192,119   (595,954)   6,428,523
-----------------------------------------------------------------------------------------------------------------------------
Change in unrealized
   depreciation on
   marketable securities                                                            (11,799)                          (11,799)
Stock options exercised           9,175        91        16,873                                                        16,964
Stock in lieu of salary          20,000       200        29,800                                                        30,000
Proceeds from employee stock
  purchase plan                  12,848       129        21,659                                                        21,788
Treasury stock                                                                                 28,600    (55,390)     (55,390)
Net income                                                          1,108,057                                       1,108,057
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997  5,136,804    51,368    10,442,840    (2,360,359)        55,638  220,719   (651,344)   7,538,143
-----------------------------------------------------------------------------------------------------------------------------
Change in unrealized
   depreciation on
    marketable securities                                                            (45,558)                         (45,558)
Stock options exercised          16,250       163        24,898                                                        25,061
Proceeds from employee
    stock purchase plan           3,929        39         7,685                                                         7,724
Issuance of stock in
   conjunction with
   purchase of Epworth
   and Morehouse
   Divisions                    900,000     9,000     2,016,000                                                     2,025,000
Treasury stock                                                                                 14,500    (15,143)     (15,143)
Net Loss                                                           (1,505,441)                                     (1,505,441)
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998  6,056,983   $60,570   $12,491,423  $ (3,865,800)  $     10,080  235,219  $(666,487)  $8,029,786
-----------------------------------------------------------------------------------------------------------------------------
</TABLE> 

                 See notes to consolidated financial statements

                                      F-7
<PAGE>
 
                    MICROFLUIDICS INTERNATIONAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                        
A.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     1.  Consolidation

          The consolidated financial statements of Microfluidics International
          Corporation ("the Company") include the accounts of the Company and
          its wholly owned subsidiaries, Microfluidics Corporation ("MFC") and
          MediControl Corporation ("MediControl").

          All significant intercompany transactions have been eliminated.

     2.  Cash Equivalents

          The Company considers securities with maturities of three months or
          less, when purchased, to be cash equivalents.

     3.  Marketable Securities

          The Company's marketable securities are categorized as available for
          sale securities as defined by the Statement of Financial Accounting
          Standards No. 115, "Accounting for Certain Investments in Debt and
          Equity Securities" (SFAS 115). Unrealized holding gains and losses are
          included as a component of accumulated other comprehensive income
          until realized. For the purpose of computing realized gains and
          losses, cost is identified on a specific identification basis.

     4.  Inventories

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

                                      F-8
<PAGE>
 
     5.  Equipment and Leasehold Improvements

          The Company's equipment and leasehold improvements are recorded at
          cost.  Depreciation is computed on the straight-line method, based
          upon useful lives of three to five years.  Leasehold improvements are
          amortized on the straight-line method based upon the shorter of the
          estimated useful lives or remaining life of the lease.  Expenditures
          for maintenance and repairs are expensed as incurred.  Upon retirement
          or sale of property and equipment, the cost of the disposed asset and
          the related accumulated depreciation are removed from the accounts and
          any resulting gain, or loss is credited or charged to operations.

     6.  Patents, Licenses, and Other Intangible Assets

          Patents, patent applications, rights and goodwill are stated at
          acquisition cost.  Amortization is recorded using the straight-line
          method over the shorter of the legal lives or useful life of the
          assets.  The Company periodically reviews the carrying value of
          intangible assets and impairments are recognized if the expected
          future operating cash flows derived from such intangible assets is
          less than their carrying value.

     7.  Income Taxes

          The Company provides for income taxes based on the provisions of
          Statement of Financial Accounting Standards (SFAS) No. 109,
          "Accounting for Income Taxes," which requires recognition of deferred
          tax assets and liabilities based on the expected future tax
          consequences of events that have been included in the financial
          statements or tax returns.  Under this method, deferred tax assets and
          liabilities are determined based upon the difference between the
          financial statement and tax basis of assets and liabilities using
          enacted tax rates in effect for the year in which the differences are
          expected to be reversed.  Under SFAS No. 109, the effect on deferred
          tax assets and liabilities of a change in tax rates is recognized as
          income or loss in the period that includes the enactment date.

     8.  Revenue Recognition

          Product sales and related cost of sales are reflected in income when
          goods are shipped.

     9.  Comprehensive Income (Loss)

          In June, 1997, the Financial Accounting Standards Board ("FASB")
          issued SFAS 130, "Reporting Comprehensive Income". SFAS 130 requires
          that certain components of stockholders' equity from non owner sources
          be identified as "Other Comprehensive Income." For the years ended
          December 31, 1998 and December 31, 1997, the Company's comprehensive
          income (loss) was comprised of the impact of changes in unrealized 
          depreciation on marketable securities and net income.

                                      F-9
<PAGE>
 
     10. Earnings (Loss) per Share

          Basic Earnings Per Share (EPS) is computed by dividing net income
          available to common stockholders by the weighted average number of
          common shares outstanding for the period. Diluted EPS reflects the
          potential dilution that could occur if securities or other contracts
          to issue common stock were exercised or converted into common stock or
          resulted in the issuance of common stock.

          A reconciliation of the numerators and denominators of the basic and
          diluted EPS computations is shown below. Options to purchase 354,910,
          893,873, and 1,074,105, shares of common stock were outstanding for
          the years ended 1998, 1997 and 1996, respectively, but were excluded
          from the computation of diluted EPS because the options' exercise
          price was greater than the average market price of common shares. All
          options outstanding during 1998 were excluded from the computation of
          diluted EPS because the effect of such options would have been
          antidilutive.
<TABLE> 
<CAPTION> 
                                               1998          1997       1996
                                               ----          ----       ----
<S>                                         <C>          <C>         <C> 
Weighted average Shares             
 Outstanding: Basic                          5,296,923    4,914,722   4,941,711
                                             =========    =========   =========
                                    
Basic Earnings per Share:           
                                    
Net income (loss) per share                  $    (.28)   $     .23   $     .10
                                             =========    =========   =========
Weighted average Shares Outstanding: Basic   5,296,923    4,914,722   4,941,711
                                    
Effect of Dilutive stock options                    --       52,276       6,795
                                             ---------    ---------   ---------
                                    
Average Shares Outstanding: Diluted          5,296,923    4,966,998   4,948,506
                                             =========    =========   ========= 
                                    
Net income (loss) per  share                 $    (.28)   $     .22   $     .10
                                             =========    =========   =========
</TABLE> 
  11.  Use of Estimates

          The process of preparing consolidated financial statements in
          conformity with generally accepted accounting principles requires the
          use of estimates and assumptions that affect the reported amounts of
          assets and liabilities at the date of the financial statements and the
          reported amounts of revenues and expenses during the reporting period.
          Actual results could differ from these estimates.

12.       New Accounting Pronouncements

          In June, 1998, the Financial Accounting Standards Board issued SFAS
          No. 133, "Accounting for Derivative Instruments and Hedging
          Activities", which is effective for the Company's quarter ended March
          31, 2000. SFAS No.133 significantly modifies Accounting and Reporting
          Standards for derivatives and hedging Activities. The impact of SFAS
          No.133, if any, on the Company has not yet been determined.


                                      F-10

<PAGE>

13.       Fair Value of Financial Instruments

          Marketable securities are carried at fair value, based on quoted
          market prices, in the accompanying consolidated balance sheets. The
          carrying amount of cash and cash equivalents, accounts receivable,
          accounts payable and accrued liabilities approximates fair value due
          to the short term nature of these accounts. The carrying value of the 
          Company's debt obligations also approximate fair value.


14.       Certain 1997 Amounts have been reclassified to conform with the 1998 
          presentations

 
B.        INDUSTRY SEGMENT AND MAJOR CUSTOMERS:

          The Company has one business segment: the development, manufacture,
          marketing and sale of process and formulation equipment. The Company's
          sales are primarily to companies with processing needs in the
          chemical, pharmaceutical, food, cosmetic, and biotechnology
          industries.

          Mizuho Industrial Co. Ltd. (a distributor) accounted for 8% of
          revenues in 1998, 20% of revenues in 1997 and 17% of revenues in 1996.
          Another customer (Avon Products, Inc.) accounted for 8% of revenues in
          1998. One other distributor (Inland Machinery Manufacturing, Ltd.)
          accounted for 8% of revenues in 1998, 6% of revenues in 1997, and 10%
          of revenues in 1996. A reduction or delay in orders from Mizuho or
          other significant customers could have a material adverse effect on
          the Company's business, financial condition, or results of operations.
          Sales in Europe were approximately $832,000, $1,453,000, and $772,000,
          and sales in Asia were approximately $924,000, $1,582,000, and
          $1,288,000 in 1998, 1997 and 1996, respectively, of the total
          revenues.

C.        MARKETABLE SECURITIES:

          At December 31, 1998 and 1997, respectively, the Company held 0 and
          3,940 shares of PolyMedica Industries, Inc., a publicly traded
          company, at zero cost through its wholly owned subsidiary MediControl.
          The Company also, as a result of a spinoff by PolyMedica Industries,
          Inc., held 6,720 shares in another publicly traded company, Cardiotech
          International, Inc. The total market value of these marketable
          securities at December 31, 1998 and 1997 was $10,080 and $55,638,
          respectively.

          In both 1998 and 1997, the Company sold shares of PolyMedica
          Industries, Inc. (3,940 in 1998 and 10,000 in 1997), at a gain of
          $36,203 and $91,863 respectively.


D.        INVENTORY

          The components of inventories are as follows at December 31:

<TABLE> 
<CAPTION> 
 
                                   1998         1997
                                ----------   ---------- 
<S>                          <C>           <C>              
           Raw materials       $1,875,881   $1,277,094
           Work in process      1,075,711      649,946
           Finished goods       1,499,334      509,898
                               ----------   ----------
                               $4,450,926   $2,436,938
                               ==========   ========== 
</TABLE> 

E.        PATENTS, LICENSES AND OTHER INTANGIBLE ASSETS

          The Company purchased the rights and title of certain liposome and
          microemulsion technology devices from Arthur D. Little in 1985.  The
          unamortized license fee and patent are included in intangible assets
          and are being amortized using the straight line method over the useful
          life of the patent, 17 years.  Patents and other intangible assets
          were purchased in 1991 as a result of a share exchange by MediControl
          stockholders. These patents and other intangible assets were being
          amortized using the straight line method over five years.  In
          addition, in 1995, the Company capitalized $96,680 of patent costs
          related to the cooperative-venture described in Note L.  Amortization
          charged to expense was $43,920 in 1998, 1997, and 1996.

F.        ACQUISITION OF ASSETS

          On August 14, 1998, (the "Closing Date"), the Company purchased
          substantially all of the assets (the "Transferred Assets") and assumed
          certain liabilities of Epworth Manufacturing Company of South Haven,
          Michigan ("Epworth") and Morehouse-COWLES, Inc. of Fullerton,
          California ("Morehouse" and together with Epworth, the "Sellers")
          pursuant to an Asset Purchase Agreement (the "Agreement") dated as of
          June 19, 1998 by and among the Company, Epworth and Morehouse. Messrs.
          J.B. Jennings and Bret A. Lewis are the sole stockholders of both
          Epworth and Morehouse (the"Principals"). Epworth and Morehouse each
          manufactures and distributes a product line of crushing/grinding,
          mixing, dissolving and dispersion systems for solid or solids
          materials processing that are marketed together under the EMCO U.S.A.
          trade name. The Company intends to continue the operations of Epworth
          and Morehouse, each as a separate division of the Company, and to
          continue the use of the Transferred Assets to manufacture and
          distribute crushing/grinding, mixing, dissolving and dispersion
          systems. The Transferred Assets included cash and cash equivalents,
          accounts and notes receivables, inventories, machinery and equipment,
          intellectual property rights, furniture and fixtures and leasehold
          interests and improvements.

                                      F-11
<PAGE>
 
          In accordance with the Agreement, the Company paid or delivered to the
          Sellers the following as consideration for the purchase price of the
          Transferred Assets (the "Purchase Price"): (i) $5,508,480 in cash,
          (ii) two subordinated promissory notes in the aggregate principal
          amount of $800,000 (the "Promissory Notes") and (iii) 900,000 shares
          (a value of $2,025,000) of the Company's restricted common stock, 
          $.01 par value share, subject to the restrictions set forth in a
          stockholders agreement among MFIC and the Principals dated August 14,
          1998 (the "Stockholders Agreement"). The Company also incurred
          approximately $500,000 in expenses. In addition, the Company assumed
          approximately $1,930,000 which amount was comparable to the accounts
          payable and accrued liabilities set forth on the Sellers' balance
          sheets as of December 31, 1997 (the "Assumed Liabilities"), certain of
          which were also paid on the Closing Date. The consideration paid by
          the Company for the Transferred Assets was determined through arms-
          length negotiations between the Company and the Sellers. The
          acquisition has been accounted for under the purchase method of
          accounting.

          As a result of the acquisition, the Company paid an amount in excess
          of the fair market value of the assets purchased less liabilities
          assumed (goodwill). This amount is to be amortized over a fifteen year
          period, which the Company determined to be the proper term.

          If the acquisition had occurred as of January 1, 1997, pro-forma
          information for the years ended December 31, 1998 and 1997 would be as
          follows:

<TABLE> 
<CAPTION> 
                                              Years ended                 
                                               December 31                
                                        -------------------------         
                                            1998         1997             
                                        ------------  -----------         
<S>                                     <C>          <C> 
          Revenues                      $14,719,874   $18,824,327         
                                        ===========   ===========         
          Net Income (loss)             $(2,066,436)  $   938,455         
                                        ===========   ===========         
          Earnings (loss) per share:                                      
               Basic:                   $      (.39)          .16         
                                        ===========   ===========         
               Diluted:                 $      (.39)          .16         
                                        ===========   ===========         
                                                                              
</TABLE> 


G.        SUBORDINATED DEBT AND LINE OF CREDIT

          The Company delivered to Jennings and Lewis (the Sellers), two
          subordinated promissory notes in the aggregate principal amount of
          $800,000: one for $300,000, and the other for $500,000. The $300,000
          note has interest due quarterly, at 10% per annum, with principal
          payments of twelve equal installments of $25,000 each commencing
          September 30, 2001. The $500,000 note has interest due quarterly at
          10% per annum, with principal payments of twenty equal installments
          of $25,000 each commencing December 31, 1998.

          The Company paid $1,897,509 from its working capital and borrowed
          $4,096,050 from Comerica Bank, its primary lender, in order to finance
          the purchase and payoff certain of the assumed liabilities. The
          revolving loan, security and ancillary agreements with Comerica Bank
          (the "Revolving Loan Agreement") provide up to $5,000,000 in loans at
          a rate of prime minus 5/8% with monthly interest payments and the
          outstanding principal amount due on September 1, 2001. The line of
          credit is secured by substantially all the assets of the Company.
          During the period the line of credit is outstanding the Company may
          not pay any dividends to stockholders.The line of credit expires on
          September 1, 2001. The outstanding principal balance at December 31,
          1998 under the Revolving Loan Agreement is $4,347,782 and currently
          bears interest at a rate of 7.125% per annum.
 
          At December 31, 1998, the Company was not in compliance with certain 
          covenants of the Revolving Loan Agreement and, accordingly, has
          reclassified all amounts due to current liabilities. See Note N for
          further information.

  
                                      F-12
<PAGE>
 
H.        EMPLOYEE BENEFITS

          Effective January 1, 1990, the Company offered a 401(k) profit-sharing
          plan (the "Plan"), to its employees.  All Company and related entity
          employees who are eighteen years of age and have completed one hour of
          service are eligible to participate in the Plan.  Employees may
          contribute from 1% to 20% of their compensation.  Until 1997, the
          Company's contribution was discretionary, with contributions made from
          time to time as management deemed advisable. The Company made matching
          contributions of $23,842 and $17,466 in 1998 and 1997, respectively,
          and no matching contributions during 1996. Plan administration
          expenses of $3,464, $1,500, and $3,564 were incurred by the Company in
          1998, 1997, and 1996, respectively. The Company instituted a cafeteria
          plan in 1992, giving the employees certain pre-tax advantages on
          specific payroll deductions.

I.        INCOME TAXES

          The provision (benefit) for income taxes for the years ended are as
follows:

<TABLE> 
<CAPTION> 
                           Federal      State        Total

<S>                      <C>          <C>        <C> 
December 31, 1998:

 Current                  $       0    $      0   $       0
 Deferred                   351,630      62,000     413,630
                          ---------    --------   ---------
   Total                  $ 351,630    $ 62,000   $ 413,630
                          =========    ========   =========
 
  December 31, 1997:
Current                   $   9,544    $    456   $  10,000
Deferred                   (365,482)    (48,148)   (413,630)
                          ---------    --------   ---------
  Total                   $(355,938)   $(47,692)  $(403,630)
                          =========    ========   =========

  December 31, 1996:
Current                   $       -    $      -   $       -
Deferred                          -           -           -
                          ---------    --------   ---------
    Total                 $       0    $      0   $       0
                          =========    ========   =========
</TABLE> 

                                      F-13
<PAGE>
 
The approximate tax effect of each type of temporary difference and operating 
loss carryforward is as follows at December 31:
<TABLE>
<CAPTION>
 
                                                               1998          1997         1996
                                                           ------------  ------------  ------------
        <S>                                                <C>           <C>           <C>
          Net operating loss                               $  1,277,669  $  1,015,976  $  1,012,386
          Research and development credit                       188,159       183,344       183,344
          Inventory capitalization                              306,343       172,773       144,063
          Accruals and allowances                                79,467        74,518        31,348
          Marketable securities                                  (4,032)      (22,255)      (26,975)
          Depreciation and amortization                          (2,034)      (10,726)      (15,338)
                                                           ------------  ------------  ------------
          Net deferred tax asset before
                     valuation allowance                      1,845,692     1,413,630     1,328,828
          Valuation allowance                                 1,845,692    (1,000,000)   (1,328,828)
                                                           ------------  ------------  ------------
 
          Net deferred tax asset after
                 valuation allowance                       $          0  $    413,630  $          0
                                                           ============  ============  ============
</TABLE>

          The Company has a federal net operating loss tax (NOL) carryforward of
          approximately $3,844,000 and research and development tax credit
          carryforwards of approximately $188,000 expiring at various dates
          beginning in 2001 through 2018. Ownership changes may result in future
          limitations on the utilization of net operating losses and research
          and development tax credit carryforwards.

          Based on the financial results known at December 31, 1998, the Company
          has established a valuation allowance against the deferred tax asset
          due to the uncertainty of earning sufficient taxable income to realize
          the benefit of these assets. Therefore the Company has increased the
          valuation allowance by $845,692 in 1998. Due to profitable operations
          both in 1997 and 1996, respectively the Company decreased the
          valuation allowance by $328,828 and $114,716.

          The following schedule reconciles the difference between the federal
          income tax rate and the effective income tax rate for the years ended
          December 31,
<TABLE>
<CAPTION>
 
                                             1998     1997     1996
                                           --------  -------  -------
<S>                                        <C>       <C>      <C>
          Federal income tax rate            (34.0)%    34.0%    34.0%
          State income tax net                (6.0)      6.0        -
          Permanent differences                 .4       0.7      2.7 
          Unbenefitted NOL                                --    (36.7) 
          Change in valuation allowance       77.5     (98.0)       -
                                           -------    ------   ------
 
          Total effective tax rate            37.9%    (57.3)%      0%
                                           =======    ======   ======
</TABLE>

                                      F-14
<PAGE>
 
J.        STOCKHOLDER'S EQUITY:

          The Company adopted the 1988 Stock Plan as the successor plan to the
          1987 Stock Plan, which, as amended at the 1997 stockholder's meeting,
          authorizes the grant of Stock Rights for up to 2,350,000 shares of
          Common Stock and the 1989 Non-Employee Director Stock Option Plan
          which, as amended at the 1996 stockholders' meeting, authorizes the
          grant of nonqualified stock options for up to 500,000 shares of common
          stock.

          Additionally, the Company has an employee stock purchase plan. Under
          the employee stock purchase plan, participants are granted options to
          purchase the Company's common stock twice a year at the lower of 85%
          of market value at the beginning or end of each period. Calculation of
          the number of options granted, and subsequent purchase of these
          shares, is based upon voluntary payroll deductions during each six
          month period. The number of options granted to each employee under
          this plan, is limited to a maximum amount of 1000 for each six month
          period. The number of shares issued pursuant to this plan totaled
          3,929 in 1998, 12,848 in 1997 and 14,028 in 1996.

          The Company applies APB Opinion No. 25 and related interpretations
          in accounting for its plans. FASB Statement No. 123 "Accounting For
          Stock-Based Compensation"("SFAS 123") was issued by the FASB in 1995
          and, if fully adopted, changes the method for recognition of cost on
          plans similar to those of the Company. Adoption of SFAS 123 is
          optional. Proforma disclosures as if the Company adopted the cost
          recognition requirements under SFAS 123 are presented below.
 
          The Company's stock option plans provide for the granting of
          nonqualified stock options that (i) are granted at prices which equate
          to or are above the market value of the stock on the date of the
          grant; (ii) vest ratably over a three and one half to four year
          service vesting period and (iii) expire ten years subsequent to award.

          A summary of the status of the Company's stock options as of December
          31, 1998, 1997, and 1996 and changes during the year ended on those
          dates is presented below:

<TABLE> 
<CAPTION> 
                                                            1998                     1997                  1996
                                                       Wgtd. Avg.               Wgtd Avg.             Wgtd. Avg.
                                           Shares     Exer. Price     Shares  Exer. Price     Shares  Exer Price
                                       ----------     -----------  ---------  -----------  ---------  ----------
<S>                                    <C>            <C>          <C>        <C>          <C>        <C>   
Outstanding, at beginning                                                                            
 of year                                  946,150           $2.37  1,080,900        $2.62    996,600       $3.09
Option shares:                                                                                       
 Granted                                1,701,625            1.34    114,000         1.75    369,300        1.65
 Exercised                                 16,250            1.54     45,175         1.44      6,550        1.48
 Cancelled                              1,214,938            2.38    203,575         2.57    278,450        3.12
                                       ----------           -----  ---------        -----  ---------       -----
Outstanding, at end of year             1,416,587           $1.15    946,150        $2.37  1,080,900       $2.62
                                       ==========           =====  =========        =====  =========       =====
</TABLE>

           In October, 1998 the Board of Directors approved a vote to reprice
           1,591,225 employee stock options. The options were originally issued
           between January 1990 through January 1998 and had original grant
           prices ranging between $1.16 and $6.25. The grant price for these
           options was lowered to $1.13 which reflects the market value of the
           stock as of the reprice date. The repriced options vest over either
           a three or four year period, depending upon when the original
           grants were issued. No compensation expense is required to be
           recorded.

<TABLE> 
<CAPTION> 
The table below summarizes options outstanding and exercisable at, December 31, 1998:

                                     Options Outstanding                              Options Exercisable
                           ----------------------------------------------   ---------------------------------------
                                               Weighted
                                                Average       Weighted          Exercisable            Weighted
                                               Remaining      Average              As of               Average
           Range of            Number of      Contractual     Exercise          December 31,           Exercise
        Exercise Price          Options         Life           Price               1998                 Price
      ------------------   ---------------  -------------- --------------   ------------------     ----------------
      <S>                  <C>              <C>             <C>             <C>                    <C> 
          1.00-2.25           1,411,387           8.5        $  1.17              349,710            $   1.16
          2.26-5.88               5,200            .6           3.53                5,200                3.53
                           ---------------  -------------- --------------   ------------------     ----------------
       Total                  1,416,587           8.5        $  1.15              354,910            $   1.19
                           ---------------  -------------- --------------   ------------------     ----------------
</TABLE> 
  

                                     F-15
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                     1998         1997        1996
                                                  -----------  ----------  ----------
<S>                                               <C>          <C>         <C>
 
Price Range of Outstanding Options at Year End    $ 1.00-5.88  $1.47-6.25  $1.16-7.44
 
Options Exercisable at Year End                       354,910     522,000     496,763
                                                  -----------  ----------  ----------
Options Available for Future Grant                    766,438   1,253,125     582,550
                                                  ===========  ==========  ==========
 
Weighted Average Fair Value of Options
Granted During the Year                           $      1.22  $     0.84  $     0.88
                                                  -----------  ----------  ----------
 
</TABLE>
The fair value of each option granted during 1998, 1997 and 1996 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: (i) dividend yield of 0%; (ii) expected volatility of
146%; (iii) risk-free interest rate of 5.25% in 1998, 5.51% in 1997, and 4.50%
in 1996 and (iv) expected life of five years in 1998 and 1997, and four years 
for 1996.

Had compensation cost for the Company's 1998,1997 and 1996 grants for stock-
based compensation plans been determined consistent with SFAS 123, the Company's
net income (loss), and diluted net income (loss) per share for 1998, 1997 and
1996 would approximate the proforma amounts below:
<TABLE>
<CAPTION>
 
                                       As Reported                               Proforma
                                      ------------                               --------
                                   1998         1997       1996              1998         1997       1996
                               ------------  ----------  --------        ------------  ----------  --------
<S>                            <C>           <C>         <C>             <C>           <C>         <C>
Net Income/(Loss)              $(1,505,441)  $1,108,057  $501,504        $(1,843,511)  $1,013,667  $357,235
                               ===========   ==========  ========        ===========   ==========  ========
                                                                 
Diluted Net Income/(Loss)                                        
  per Share                    $      (.28)  $      .22  $    .10        $      (.35)  $      .20  $    .07
                               ===========   ==========  ========        ===========   ==========  ========
</TABLE>

In connection with financial advisory services rendered to the Company in 1993
the Company granted a warrant to purchase up to 75,000 shares at a per share
purchase price of $4.50 commencing on July 14, 1994 and exercisable until July
14, 1998. The warrant was not exercised by the expiration Date.

At December 31, 1998, the Company has reserved 2,850,000 shares for issuance
under the above mentioned stock plans. 

                                      F-16
<PAGE>
 
K.   COMMITMENTS AND CONTINGENCIES:

     At December 31, 1998 the Company had operating leases for the rental of its
     facilities which require the following minimum payments for the next five
     years:
 
           Minimum Payments
           ----------------
 
           1999            $  443,080
           2000               451,080
           2001               321,830
           2002               232,080
           2003               169,800
                           ==========

     Rent expense for 1998, 1997, and 1996 was approximately $282,000, $170,000,
     and $150,000, respectively.  The current leases are due to terminate at
     various times through August 2006.  

L.   COOPERATIVE VENTURE:

     In 1992, the Company formed a cooperative venture with Worcester
     Polytechnic Institute to develop, patent, and license for commercial
     application the Microfluidizer processing technology in certain fields.
     Expenditures for this venture were approximately $ 0 both in 1997 and 1996.
     The costs in connection with patent applications of $96,680 have been
     included in intangible assets.

     In October of 1993, the Company signed a license and research and
     development agreement with Catalytica, Inc., as joint licensee, to further
     the studies of the venture with Worcester Polytechnic Institute, as
     licensor. The Company spent $286,256 and $216,301 in 1997 and
     1996,respectively , for this venture. The Company was reimbursed $137,403
     and $103,824 in 1997 and 1996, respectively, from a government grant
     awarded jointly to Catalytica, Inc. and the Company in relation to this
     project. The remainder of the expenditures were included in research and
     development expense. The cooperative venture was terminated in 1998.

                                      F-17
<PAGE>
 
M.   RELATED PARTY TRANSACTIONS

     During 1998, 1997 and 1996, the Company and an entity G&G Diagnostics
     Corporation (G&G) controlled by Mr. Gruverman, the Company's Chairman,
     entered into an arrangement whereby such entity reimbursed the Company for
     a portion of certain administrative expenses. The Company was reimbursed
     approximately $76,363, $74,125, and $72,610, by G&G during 1998, 1997 and
     1996, respectively. At December 31, 1998 and 1997, G&G owed the Company
     $24,417 and $18,439 respectively.

     As was indicated in Note G, the Company delivered to Jennings and Lewis
     (the Sellers), two subordinated promissary notes in the aggregate principal
     amount of $800,000, one for $300,000, and the other one for $500,000. The
     $300,000 note has interest due quarterly, at 10% per annum, with principal
     payments of twelve equal installments of $25,000 each commencing September
     30, 2001. The $500,000 note has interest due quarterly at 10% per annum,
     with principal payments of twenty equal installments of $25,000 each
     commencing December 31, 1998.

     Interest expense on the subordinated debt (see Note G) for 1998 was
     $30,465. A payment of an aggregate of $45,164 was paid to the Noteholders
     subsequent to December 31, 1998 consisting of interest of $20,164, and a
     principle payment of $25,000.

     Amortization of the debt over the next five years and thereafter is as
     follows:
<TABLE> 
<CAPTION> 
                      Amount
                      ------
<S>                <C> 
     1999           $125,000
     2000            100,000
     2001            150,000
     2002            100,000
     2003            100,000
     Thereafter      225,000
</TABLE> 
     The Company rents its Michigan facilities from entities (B-2 Enterprises
     Inc. and JLJ Properties, Inc.) controlled by Messrs. Jennings and Lewis. 
     In 1998, the Company paid these entities approximately $62,280 in rent. 
     In addition, the Company is responsible for all real estate taxes for the
     properties, and to maintain adequate insurance.

N.   SUBSEQUENT EVENT AND MANAGEMENT'S PLANS

     In 1998, the Company incurred a net loss of approximately $1,505,000 and
     was not in compliance with certain covenants of its Revolving Credit Loan
     Agreement ("Loan Agreement"). On March 23, 1999, the Company's lender
     advised the Company that it was in default of the Loan Agreement and
     instructed the Company to cease all payments on the Subordinated Promissory
     Notes. The lender also purported to reduce the line of credit to
     $4,000,000. The Company is currently functioning under a standstill
     agreement that expires on April 19, 1999. These matters raise substantial
     doubt about the Company's ability to continue as a going concern.

     The Company and its lender are negotiating a forbearance agreement to the
     Loan Agreement. In addition, management has developed and is executing a
     plan to return to profitability and positive cash flow. The plan includes
     renegotiating the terms of the Loan Agreement, if possible, seeking to
     obtain sufficient new capital or subordinated debt, manufacturing cost
     reduction programs, reductions in the number of personnel at all three
     Company locations, reduction in discretionary spending and salaries for key
     officers and combining the salesforce for all product lines.

     There can be no assurance that the Company will be successful in its
     attempt to renegotiate its Loan Agreement on terms acceptable to the
     Company and the lender or to execute its plan to return to profitability
     and positive cash flow. The financial statements do not include any
     adjustments that might result from the outcome of this uncertainty.

     On March 11, 1999, the Board of Directors voted to approve an amendment to
     the Company's 1986 Employee Stock Purchase Plan (the "ESPP") to increase
     the aggregate number of shares of Common Stock which may be offered under
     the ESPP from 150,000 to 300,000. This amendment is being submitted for
     stockholder approval at the Company's 1999 Annual Meeting of Stockholders.

                                     F-18
<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, in the city of Newton,
Commonwealth of Massachusetts, on the 16th day of April, 1999.

                                    MICROFLUIDICS INTERNATIONAL CORPORATION


                                    By:  /s/ Irwin J. Gruverman
                                         ------------------------
                                         Irwin J. Gruverman
                                         Chairman of the Board,
                                         Chief Executive Officer
                                         and Secretary
<PAGE>
 
                                 Exhibit Index


   Exhibit
   Number   Description of Exhibit
   ------   ----------------------

   3.3(a)   Certificate of Incorporation for the Company, as amended (filed as
            Exhibit 2A to Registration Statement No. 0-11625 on Form 8-A and
            incorporated herein by reference).

   3.3(b)   Amended and Restated By-Laws for the Company (filed as
            Exhibit 3.3(b) to the Company's Annual Report on Form 10-K for the
            fiscal year ended December 31, 1996 and incorporated herein by
            reference).
 
** 3.10(a)  1987 Stock Plan (filed as Exhibit 10(g) to the Company's Annual
            Report on Form 10-K for the fiscal year ended December 31, 1987 and
            incorporated herein by reference).
 
** 3.10(b)  1988 Stock Plan (filed as Exhibit 10(g) to the Company's Annual
            Report on Form 10-K for the fiscal year ended December 31, 1988 and
            incorporated herein by reference).
 
   3.10(c)  1989 Non-Employee Directors Stock Option Plan (filed as Exhibit 
            10.1 to the Company's registration statement on Form S-8 filed
            October 22, 1996 and incorporated herein by reference).
 
   3.10(d)  Loan Agreement between The First National Bank of Boston and
            Microfluidics International Corporation dated as of December 10,
            1993 (filed as Exhibit 10.2 to Form 8-K filed on December 27, 1993
            and incorporated herein by reference).

   3.10(e)  Lease for 30 Ossipee Road, Newton Massachusetts dated May 23, 
            1997 between Microfluidics International Corporation and J. Frank
            Garrity, Trustee of 1238 Chestnut Street Trust under Declaration of
            Trust dated May 23, 1969, recorded with Middlesex South Registry of
            Deeds in Book 11682, Page 384 (filed as Exhibit 3.10a to the 
            Company's Form 10-Q for the quarterly period ended June 30, 1997 and
            incorporated herein by reference).
 
   3.10(f)  Letter of Understanding between Microfluidics International 
            Corporation and Worcester Polytechnic Institute dated as of April 3,
            1992 (filed as Exhibit 3.10(f) to the Company's Form 10-K for the
            fiscal year ended December 31, 1993 and incorporated herein by
            reference).

   3.10(g)  Agreement between Microfluidics International Corporation and 
            Catalytica, Inc. dated as of October 18, 1993 (filed as Exhibit
            3.10(g) to the Company's Form 10-K for the fiscal year ended
            December 31, 1993 and incorporated herein by reference) with
            amendements dated September 1, 1994 and March 31, 1995.

   3.10(h)  Amendement to agreement dated September 1, 1994 between 
            Microfluidics International Corporation and Catalytica, Inc. dated
            as of October 18, 1993 (filed as Exhibit 3.10(g) to the Company's
            Form 10-K for the fiscal year ended December 31, 1993, and
            incorporated herein by reference).

<PAGE>
 
   3.10(i)  Amendment to agreement dated March 31, 1995 between Microfluidics 
            International Corporation and Catalytica, Inc. dated as of October
            18, 1993 (filed as Exhibit 3.10(g) to the Company's Form 10-K for
            the fiscal year ended December 31, 1993, and incorporated herein by
            reference).

   3.10(j)  License Agreement among Microfluidics International Corporation, 
            Worcester Polytechnic Institute and Catalytica, Inc. dated as of
            October 18, 1993 (filed as Exhibit 3.10(h) to the Company's Form 10-
            K for the fiscal year ended December 31, 1993 and incorporated
            herein by reference).

** 3.10(k)  Agreement, dated July 27, 1995, between Microfluidics International
            Corporation and Michael T. Rumley (filed as Exhibit 3.10(i) to the
            Company's Form 10-K for the fiscal year ended December 31, 1995 and
            incorporated herein by reference).

** 3.10(l)  Letter, dated August 15, 1995, from Microfluidics International 
            Corporation to Michael T. Rumley (filed as Exhibit 3.10(j) to the
            Company's Form 10-K for fiscal year ended December 31, 1995 and
            incorporated hereby reference).

** 3.10(m)  Letter, dated December 31, 1995 from Microfluidics International 
            Corporation to Irwin J. Gruverman (filed as Exhibit 3.10(k) to the
            Company's Form 10-K for fiscal year ended December 31, 1996 and
            incorporated herein by reference).

   3.10(n)  Warrant for the Purchase of Shares of Common Stock, dated July 14, 
            1993, in favor of Ladenburg, Thalmann & Co. Inc. (filed as Exhibit
            3.10(l) to the Company's Form 10-K for fiscal year ended December
            31, 1996 and incorporated herein by reference).

** 3.10(o)  Letter, dated December 31, 1996, from Microfluidics International 
            Corporation to Irwin J. Gruverman (filed as Exhibit 3.10(o) to the
            Company's Form 10-K for fiscal year ended December 31, 1996 and
            incorporated herein by reference).

   3.10(p)  Agreement between Microfluidics International Corporation and 
            Catalytica, Inc. dated January 1, 1995 regarding participation in
            and management of the Advanced Technology Program (ATP) (filed as
            Exhibit 3.10(p) to the Company's Form 10-K for fiscal year ended
            December 31, 1996 and incorporated herein by reference).

   3.10(q)  Consulting Agreement with James Little (filed as Exhibit 3.10(q) to
            the Company's Form 10-K for fiscal year ended December 31, 1996 and
            incorporated herein by reference).

   3.10(r)  Subsidiaries of the Registrant (filed as Exhibit 3.21 to the 
            Company's Form 10-K for fiscal year ended December 31, 1996 and
            incorporated herein by reference).
<PAGE>
 
   3.10(s)  Letter dated December 31, 1997, from Microfluidics International 
            Corporation** to Irwin J. Gruverman and G & G Diagnostics Corp.

   3.10(t)  1988 Stock Plan as amended (filed as Exhibit 10(a) to the Company's 
            Form 10-Q for the quarterly period ended March 31, 1997 and
            incorporated herein by reference.

   3.10(u)  Asset Purchase Agreement dated as of June 19, 1998, by and among the
            Company, Epworth Manufacturing Company and Morehouse-COWLES, Inc.
            (filed as Exhibit 2.1 to Schedule 13D of Bret A. Lewis, File No.
            005-35850, and incorproated herein by reference).

   3.10(v)  Stockholders Agreement dated August 14, 1998, by and among the
            Company and J.B. Jennings and Bret A. Lewis (filed as exhibit 2.2 to
            Schedule 13D of Bret A. Lewis, File No. 005-35850, and incorporated
            herein by reference).

   3.10(w)  $500,000 Subordinated Promissory Note issued by the Company to 
            Epworth Manufacturing Company (filed as Exhibit 99.1 to the
            Company's Form 8-K on August 27, 1998, File No. 000-11625, and
            incorporated herein by reference.)

   3.10(x)  $300,000 Subordinated Promissory Note issued by the Company to 
            Epworth Manufacturing Company (filed as exhibit 99.2 to the
            Company's Form 8-K on August 27, 1998, File No. 000-11625, and
            incorporated herein by reference).

   3.10(y)  Revolving credit loan between Comerica Bank and the Company dated 
            August 12, 1998 (Filed as Exhibit 10.1 to the Company's form 10-Q
            for the quarterly period ended September 30, 1998 and incorporated
            herein by reference).

   3.10(z)  Letter Dated December 31, 1998 from MicroFluidics International 
            Corporation To Irwin J. Gruverman.
 
   23(a)    Consent of Deloitte & Touche LLP.

  *23(b)    Consent of PricewaterhouseCoopers LLP

   27       Financial Data Schedule.


_____________________
 *Filed herewith

**Management contracts or compensatory plan or arrangement required to be filed
  as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.