SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-K

                      ANNUAL REPORT PURSUANT TO SECTION 13
                     OF THE SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended              October 31, 1998

Commission File Number                      2-37706

                          Bowles Fluidics Corporation
             (exact name of registrant as specified in its charter)

                  Maryland                               52-0741762
    (State or other jurisdiction of                   (I.R.S. Employer
     incorporation or organization)                 Identification No.)

   6625 Dobbin Road, Columbia, Maryland                       21045
(Address of principal executive offices)                   (Zip Code)

Registrant's telephone number:                          (410) 381-0400

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

                                      None

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

                                      None

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 and (2) has been subject to such filing requirements for
the past 90 days.

                                      Yes   x        No __

The aggregate market value of the registrant's voting stock held by
non-affiliate persons and entities as of December 24, 1998, computed by
reference to the closing price for  such stock on the composite reporting system
on such date, was $908,274 based on 1,038,027 shares.

The number of shares of the registrant's common stock outstanding as of December
24, 1998, was 12,685,011.


<PAGE>


                                     PART I

Item 1.           BUSINESS

                  Bowles Fluidics Corporation was incorporated under Maryland
       law in 1961 (originally as Bowles Engineering Corporation) for the
       purpose of advancing and exploiting the technology of fluidics. For about
       ten years the principal business of the Company was research and
       development primarily under contracts with agencies of the U.S.
       government. From 1972 to 1979 its principal income was derived from the
       sale of proprietary consumer products it had developed based upon fluid
       oscillators, including massaging showers and oral irrigation devices.
       These consumer products have since been discontinued. Since 1979 its
       principal product has been proprietary windshield and rear window washer
       nozzles for the automotive industry. Late in FY 1989, the Company
       extended the automotive product line to include shipments of fluidic
       defroster nozzles. The Company also provides its automotive customers
       with tooling and application engineering services related to its
       products.

                  The Company has continued to expend efforts on the research
       and development of new fluidic products for the automotive and other
       industries. The air conditioning outlet in the instrument panel of
       automotive vehicles has been a particular focus. Prototypes have been
       developed and presented to a number of potential customers. At present,
       two customers have selected the Company as the supplier of these outlets,
       one for a vehicle scheduled to start production in August 1999 and the
       other for production in February 2000.

       Principal Products and Markets

                  The Company is the leading designer, manufacturer and supplier
       of windshield and rear window washer nozzles for passenger cars and light
       trucks in North America.  Defroster nozzles for a limited number of these
       same light vehicles are also being manufactured and sold.

                  The Company's principal market for its fluidic nozzles, both
       windshield washer and defroster, consists of North America, i.e., the
       "Big Three" U.S. automotive manufacturers and foreign transplants. The
       Company believes that it supplies about 80% of the total windshield
       washer nozzle requirements for light vehicles (cars and light trucks)
       manufactured in the United States, Canada and Mexico. The defroster
       nozzle is currently being supplied to a number of vehicle models in this
       market.

                  The Company has a licensing agreement covering Europe with a
       major German automotive parts supplier for its windshield washer systems.
       The Company itself has no international operations.


                                       2

<PAGE>


                  In North America, over 90% of the Company's production of
       nozzles is incorporated in vehicles produced by General Motors, Ford and
       Chrysler, each of whom typically represents over 10% of the Company's
       sales volume. The Company is, therefore, dependent upon the requirements
       of the U.S. automotive industry producing cars and light trucks. Although
       the Company enters into agreements with its customers to meet 100% of
       their production requirements, notice of firm shipping requirements for
       the coming week generally takes place weekly from the assembly plants and
       at somewhat longer intervals from the first-tier suppliers. The Company's
       monthly sales follow the seasonal pattern dictated by the production
       levels of its customers. Consequently, sales for the second and fourth
       quarters of the Company's fiscal year are typically higher than for the
       first and third.

                  Sales also include technical services, i.e., design, tooling,
       and prototyping services for the Company's customers. The requirements of
       the automotive customers are for designs and tools to meet the needs of
       forthcoming vehicle models or changes in existing models, as well as for
       prototypes of new products desired for testing. These sales are, for the
       most part, undertaken as a service to the customers, and the Company
       contracts these services and tools so as to recover projected costs.

       Patents and Competitive Products

                  The Company has engaged, since its inception, in research and
       development in the fields of fluidics and fluid effect devices,
       encompassing both gases and liquids. Over the past 19 years, 52 U.S.
       patents have been granted to the Company's employees and assigned to the
       Company. Ten applications are presently in process for additional U.S.
       patents. Patents in selected other countries have also been granted for
       most of the art covered by the U.S. patents. Although these patents
       embody new and novel technology or product, there is available
       competitive technology and alternative product. The extent to which the
       expiration of an individual patent may affect the Company's competitive
       position is difficult to determine.

                  In the past, U.S. patents were granted for a period of 17
       years from the date of issue. However, beginning in June 1995, those
       granted in the past can be for a period of either 17 years from date of
       issue or 20 years from date of filing the application, whichever
       expiration date is later. Those granted on applications filed after June
       1995 are for a period of 20 years from date of filing.

                  The Company's fluidic windshield washer and defroster nozzles,
       which are covered by issued U.S. and international patents, are in direct
       competition with conventional nozzles of traditional design. The Company
       believes that its products have advantages both in performance and in
       economy of assembly to the vehicle by the car manufacturers.


                                       3

<PAGE>


                  The Company is of the opinion that, in the long run, a history
       of service, delivery, quality and economic supply is the most important
       factor in binding its customers to it. Customers of the Company place a
       great deal of emphasis on quality. The Company has maintained Ford's
       preferred supplier rating (Q1 award) since 1985, has been rated an
       excellent status in a supplier assessment by General Motors, and has been
       a self-certified supplier for Chrysler since 1991. The Company's material
       testing laboratory has been accredited by General Motors since 1992.

                  In addition, the Company's customers required that the Company
       put into place a QS-9000-compliant quality system, the automotive version
       of ISO 9000. The Company went through the initial independent assessment
       in September 1996, received certification in December 1996 as a QS-9000
       supplier with ISO 9001 addendum, and has maintained that certification
       since then.

                  The Company does not grant North American licenses for its own
       patents in which it has an interest in marketing a product. The Company
       does pursue interests expressed by others in the Company's technology in
       an attempt to broaden its use. To the extent that there may be additional
       uses in markets not related to those of primary interest to the Company,
       efforts are made to license the patents for such use.

       Raw Material Sources and Availability

                  Raw materials, primarily plastic resin, are sourced within the
       United States. Their market prices were generally stable during the
       current year and adequate supply is expected to be available in the
       coming year. The resins purchased are restricted to those approved by the
       Company's customers.

       Working Capital Requirements

                  The Company's standard credit terms for receivables are net 30
       days.  Adequate levels of inventories are normally maintained in order to
       ensure compliance with the stringent delivery requirements of our
       customers.

                  The design and acquisition of production tools, which
       represent the major portion of technical services sales, normally take
       several months to complete, during which period the Company accumulates
       such costs which are included in work-in-process inventories. Sales
       invoices for these tools and services are rendered only after completion
       and customers' acceptance of qualified products produced by the tools.


                                       4

<PAGE>


       Research and Development

                  The Company's research and development costs, all
       Company-funded, were:

                                                 % of Sales
                                                 ----------
              FY 1998          $  866,390            4.1
              FY 1997          $1,005,183            5.3
              FY 1996          $1,175,890            6.5

                  In FY 1998, the Company's research and development efforts
       were directed primarily toward basic research and the design of new
       fluidic nozzles intended for a variety of purposes resulting in the
       filing of a number of patent applications.

                  In FY 1997 and FY 1996, the Company's research and development
       efforts were directed primarily toward the further development of fluidic
       air conditioning outlets for cars and light trucks, and the advancement
       of its knowledge of the workings of fluidic washer nozzles, including
       wind tunnel testing. These efforts resulted in a number of patent
       filings.

                  Potential sales of products still in the development stage
       cannot be predicted since product capability and customer acceptance of
       the new technology are difficult to determine.

       Employees

                  The Company averaged approximately 275 employees during FY
       1998 and employed 278 people on a full-time basis on October 31, 1998.
       The increase from the 252 employed on October 25, 1997, was primarily in
       the manufacturing departments.


       Compliance with Environmental Regulations

                  The Company believes it is in compliance with all known
       environmental regulations and has no plans for significant expenditures
       to meet these requirements in the future.

Item 2.           PROPERTIES

                  The Company entered into an amended lease in September 1993
       for, in effect, all of the space at its facility in Columbia, Maryland,
       its principal location until April 16, 2004. The lease amendment further
       provides an option to continue the lease for an additional ten years or
       to purchase the premises at 94% of fair market value at the end of the
       initial term of the lease.


                                       5

<PAGE>


                  The facility provides for the Company's current needs for
       manufacturing windshield washer and defroster nozzles at levels adequate
       to meet projected customer needs and for manufacturing committed air
       conditioning outlets. Additional space for warehousing, however, will be
       required in the near future.

                  The Columbia facilities are currently utilized as follows:

                  Manufacturing, Materials, Quality Control      66,264 sq. ft.
                  Administration and Sales                        8,883 sq. ft.
                  Laboratories and Engineering                   13,679 sq. ft.
                                                                ---------------
                      Total Area                                 88,826 sq. ft.
                                                                ================

                  Beginning April 15, 1997, the Company leased for three years
       1,617 sq. ft. of office space in Southfield, Michigan, to be used by its
       sales staff.

Item 3.           LEGAL PROCEEDINGS

                  None.

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

                  None were submitted during the fourth quarter of the Company's
       fiscal year.


                                       6


<PAGE>


                                    PART II

Item 5.           MARKET FOR REGISTRANT'S STOCK AND RELATED STOCKHOLDER
                  MATTERS

                  Stock Price and Markets

                  The common stock of the Company is traded in the
       "over-the-counter" market and is quoted on the NASD OTC Bulletin Board;
       symbol BOWE.  The preferred stock is unregistered and is not publicly
       traded.

                  The high and low bid and asked prices of the common stock over
       the last two fiscal years are listed below:

                                          Bid                    Asked
                                   -----------------       ----------------
         FY                        High          Low        High       Low
         ---                       ----          ---        ----       ---
         1997   1st Quarter        1 3/8        13/16       1 5/8     1 1/4
                2nd Quarter        1 3/8          5/8      1 9/16       3/4
                3rd Quarter        13/16         7/16         7/8      9/16
                4th Quarter        3 1/8          3/4       3 1/2       7/8

         1998   1st Quarter        1 3/4        1 1/4      2 1/16     1 3/8
                2nd Quarter        1 3/4       1 1/16       2 1/2     1 3/8
                3rd Quarter        1 3/4            1           2     1 3/8
                4th Quarter       1 1/32        23/32       1 1/2     1 1/8

                  Note:  The above quotes represent prices between dealers and
                  do not include retail mark-up, mark-down, or commissions.
                  They do not represent actual transactions.

                  On December 8, 1998, the Board of Directors of the Company
       adopted a resolution authorizing the submission to the vote of the
       stockholders of the Company of a proposed amendment to the Articles of
       Incorporation of the Company under which all outstanding shares of common
       stock will be subject to a reverse stock split at the ratio of 1,000
       shares of common stock before the reverse split to 1 share of common
       stock after the reverse split. The Board of Directors also adopted a
       resolution authorizing the redemption of all fractional shares of common
       stock resulting from the reverse stock split at the rate of $1,250 per
       post reverse split share. This proposed amendment to the Articles of
       Incorporation is pending subject to stockholder approval.

                  Following the reverse stock split and purchase of resulting
       fractional shares of common stock, it is expected that the number of
       shareholders of the Company's common stock will be reduced from
       approximately 430 (as of October 15, 1998) to less than 200.


                                       7

<PAGE>


       The number of holders of the Company's preferred stock will remain
       unchanged at approximately 18. As a result of the reduction in number of
       record shareholders below 300, the Company intends to suspend its
       obligation to file periodic reports with the Securities and Exchange
       Commission pursuant to section 15(d) of the Exchange Act of 1934.

                  Approximate Number of Equity Security Holders

                                                       Approximate Number of
                                                           Record Holders
                      Title of Class                  (as of October 31, 1998)
                      --------------                  ------------------------

                      Common Stock
                      $.10 Par Value                                389

                      Preferred Stock
                      8% Cumulative                                  18

                  Included in the number of stockholders of record are shares
       held in "nominee" or "street" name.

       Dividends

                  The Company has never paid cash dividends on its common stock.
       Payment of dividends on common stock is within the discretion of the
       Company's Board of Directors and will depend, among other factors, on
       current and forecasted earnings, investment requirements, and the
       financial condition of the Company.

                  For information concerning dividends on preferred stock, see
       Note 6 of Notes to Consolidated Financial Statements.


                                       8


<PAGE>



Item 6.           SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>
                            October 31, 1998    October 25, 1997   October 26, 1996    October 28, 1995    October 29, 1994
                            ----------------    ----------------   ----------------    ----------------    ----------------
<S><C>
Net sales                        $21,084,804         $18,842,673        $18,128,274         $16,972,876         $15,111,829

Net income                           932,186           1,142,023            884,306           1,783,875           1,727,020

Basic earnings
  per share                           .07                 .08               .06                  .14                 .14

Diluted earnings
  per share                           .06                 .07               .05                  .11                 .11

Working capital                    5,389,165           5,414,955          4,649,328           4,296,368           3,126,959

Total assets                      12,355,321          11,784,701         10,719,852           9,292,446           8,478,227

Long-term debt                        --                  --                 --                 202,811             512,831

Stockholders' equity             $ 9,378,219         $ 8,511,429        $ 7,439,552         $ 6,629,891         $ 4,907,664
</TABLE>


                                       9


<PAGE>


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

                  Results of Operations

                              FY 1998 vs. FY 1997

                  Total FY 1998 sales of $21,084,804 increased 12% over FY 1997
       sales of $18,842,673, almost all due to higher technical services sales.
       Net income for FY 1998 was $932,186, an 18% decrease from the FY 1997 net
       income of $1,142,023. The principal reasons for the decrease were higher
       manufacturing costs of the windshield washer nozzles and the unfavorable
       effect of the General Motors strike during the Company's third quarter.

                  Product sales of light vehicle windshield washer and defroster
       nozzles increased 1.5% or $275,409 to $18,385,923 in FY 1998 from
       $18,110,514 in FY 1997. Sales of washer nozzles provided an increase of
       $595,206, while those of defroster nozzles decreased $319,797 due to
       declining sales of the related older vehicle models. Sales of washer
       nozzles to the Big Three U.S. car manufacturers were approximately equal
       to the prior year. The Company's third quarter sales of both washer and
       defroster nozzles in FY 1998 were significantly affected by the strike at
       the General Motors auto plants in June and July.

                  The Company's operating plans for the 1999 fiscal year assume
       that production requirements for light vehicle production in North
       America will be approximately equal to FY 1998.

                  Technical services sales increased 269% to $2,698,880 in FY
       1998 from $732,159 in FY 1997. In FY 1998 tooling and design services
       included those related to the new air conditioning outlets scheduled to
       start production for two vehicles during the next two fiscal years and
       those for newly designed washer nozzles for future car production, both
       of which were an increase over the prior year.

                  For the 1999 fiscal year, technical services are forecasted to
       be somewhat higher than FY 1998 due to continuing tooling sales related
       to the new air conditioning outlets and washer nozzles.

                  Gross profit on total sales declined 15% to $4,938,956 in FY
       1998 from $5,777,299 in FY 1997.  As a percentage of total sales, gross
       profit was 23.4% in FY 1998 versus 30.7% in FY 1997. Manufacturing costs
       were higher as a number of newly designed washer nozzles began production
       and a number of initiatives were taken including the introduction of cell
       manufacturing to improve the manufacturing processes. The decline in
       sales due to the General Motors strike also caused the gross profit to
       decline. In addition, the significantly larger


                                       10

<PAGE>


       technical sales in FY 1998 versus FY 1997 which have essentially no
       profit margin negatively impacted the gross profit percentage on total
       sales.

                  Selling, general and administrative expenses declined 13% in
       FY 1998 from FY 1997 due to the savings from the elimination of the
       higher sales commissions paid to the manufacturer's representatives and
       their replacement with the Company's own sales force in the Detroit area.

                  Research and development costs decreased 14% to $866,390 in FY
       1998 from $1,005,183 in the prior year due to a decline in the spending
       on the design and development of the automotive air conditioning outlets.
       The Company's plans call for the maintenance of this level of R&D
       spending in FY 1999.

                  Interest income declined in FY 1998 due principally to lower
       cash and cash equivalents and investments available for sale.  Other
       income increased because of higher royalties and license income generated
       by the sales of the Company's licensee outside North America.

                  The provision for income taxes of $575,953 in FY 1998 reflects
       the lower income before taxes as compared to FY 1997.  The effective
       income tax rate for FY 1998 was higher than FY 1997 due to increases in
       state taxes.


                              FY 1997 vs. FY 1996

                  Total FY 1997 sales of $18,842,673 increased 4% above FY 1996
       sales of $18,128,274. Net income for FY 1997 rose to $1,142,023,
       representing a 29% gain over FY 1996 net income of $884,306. Adjusting
       for the FY 1996 nonrecurring accrual of $760,000, (which reduced the
       Company's after-tax net income by $465,400) for the expenses related to
       the termination of the sales agreement with its manufacturer's
       representatives, net income for FY 1997 declined 15% principally due to
       higher application engineering and tooling costs.

                  Product sales of light vehicle windshield washer and defroster
       nozzles increased 5% to $18,110,514 in FY 1997 from $17,292,030 in FY
       1996. Higher volume of shipments of newly and previously designed washer
       nozzles to the Big Three U.S. car manufacturers as well as the transplant
       manufacturers in the U.S. was the reason for the gain, even though
       defroster outlet sales declined due to discontinuation of certain models.
       This 5% increase compares favorably with the 2% gain in North American
       light vehicle production during the same period.

                  In contrast to the increase in product sales for FY 1997,
       technical services sales decreased 12% to $732,159 from FY 1996's
       $836,244.  Sales of tooling for new windshield washer nozzles were down
       due to deferrals in the completion and approvals of these tooling
       programs.


                                       11

<PAGE>


                  Gross profit on total sales declined 6% to $5,777,299 in FY
       1997. The margin on sales diminished to 30.7% in FY 1997 from 33.8% in
       the previous fiscal year. The declines occurred principally due to
       increased application engineering expenses associated with the
       customization of new windshield and rear window washer nozzles. In
       addition, higher tooling costs over and above amounts billed to customers
       were incurred for the development and support of both washer nozzle and
       air conditioning outlet tooling projects.

                  Selling, general and administrative expenses declined $548,359
       or 15% in FY 1997 from FY 1996 because of the accrual in fiscal year 1996
       of $760,000 for expenses related to the termination of the Company's
       sales agreement with its manufacturer's representatives. Excluding this
       nonrecurring accrual, selling, general and administrative expenses
       increased 7% in fiscal year 1997 principally due to professional fees for
       services related to strategic and financial planning for the Company.

                  Research and development costs decreased 15% to $1,005,183
       from $1,175,890 the previous fiscal year.  Spending on various new
       product programs was cut back and larger amounts were spent on the design
       and development of the automotive air conditioning outlets.

                  In FY 1997, the provision for income taxes was $657,420,
       reflecting the higher income before taxes and approximately the same
       effective tax rate as in the previous fiscal year.

       Liquidity and Capital Resources

                  Current assets at the 1998 fiscal year end were $7,825,174
       compared with $8,195,361 at the end of the prior fiscal year. The decline
       of $370,187 was principally related to the decline of $584,385 in cash
       and cash equivalents and investments available for sale partially offset
       by the addition of the income taxes receivable of $194,213.

                  Inventories rose by 6% during the fiscal year.  Finished goods
       were built up  to reach more comfortable levels to meet the stringent
       customer service requirements, and the tooling work-in-process declined
       since the tools were completed and approved for sale.

                  Current liabilities declined 12% or $344,397 as the remaining
       payments were made during FY 1998 for the liability associated with the
       termination of the Company's sales agreement with its manufacturer's
       representatives.

                  The current ratio of 3.2:1 at the 1998 fiscal year end
       increased in comparison to the 2.9:1 ratio at the 1997 fiscal year end
       principally due to the decline in current liabilities.


                                       12

<PAGE>


                  Cash provided by operating activities in the amount of
       $1,493,822 in fiscal year 1998 resulted principally from net income of
       $932,186 plus the non-cash charges for depreciation and amortization of
       $1,091,634 offset by an increase in working capital of $843,803.

                  Funds were used for capital expenditures in the amount of
       $2,014,132 principally for production and computer equipment. The Company
       expects to spend approximately the same amount for capital expenditures
       in FY 1999. During the year, the Company sold $1,586,735 of U.S. Treasury
       Bills to meet working capital and capital expenditure requirements.

                  The Company's $1,000,000 short-term line of credit was not
       utilized during the fiscal year 1998 and had no balance outstanding at
       October 31, 1998.  The preferred stock dividend was declared and paid in
       January 1998.

                  The Company's cash flow, financial position, and credit
       facilities should provide an adequate base for working capital and
       production investment requirements resulting from projected production
       rates by North American automotive manufacturers, additional market
       penetration, and potential new products near term, including air
       conditioning outlets.

       Impact of Year 2000

                  The management of the Company has considered the impact of the
       changeover before, during and after midnight, December 31, 1999, to
       January 1, 2000, on the handling of data and information, any related
       software, and functions of operations. Inadequate handling of the
       changeover could have a significant impact on the Company as follows:

                  a)   business systems - internal computer information system,
       CAD/CAM engineering design systems, payroll and personnel systems, and
       electronic data interchange (EDI) systems;

                  b)   manufacturing, warehouse and support equipment;

                  c)   technical infrastructure, e.g. network, computer server,
       personal computers, and telephone systems;

                  d)   production, service, and other suppliers;

                  e)   environmental support systems, e.g. security and
       maintenance systems;

                  f)   dedicated research and development systems.

                  The changeover will have no direct impact on the Company's
       products themselves.


                                       13

<PAGE>


                  The Company's management has addressed each one of the above
       issues where the impact applies and has in general either updated the
       system, acquired a new system, tested the system and found compliance, or
       been assured by the equipment or software manufacturer that the related
       items were in compliance. A timetable was established in 1997, and all
       the necessary steps have been taken and completed with respect to the
       Company's internal systems. The Company's suppliers have been surveyed to
       assess the status of their systems, focusing on those with the largest
       potential impact on the Company. Questionable areas with respect to the
       Company's customers and suppliers continue to be addressed.

                  Aside from the acquisition of new systems which were
       considered to be necessary and timely for the future successful
       functioning of the business, the costs of the steps taken were not
       material to the Company's profitability or financial condition.

                  The most reasonable likely worst cases if the changeover were
       not handled properly by the Company's systems or its suppliers would be
       loss of power and/or communications for a temporary period which would
       impact production. Since the Company provides its products to and
       communicates daily with the auto companies' assembly plants or their
       other suppliers, this loss could be a serious problem. The Company plans
       to build inventory to meet this short-term contingency and consider
       alternative means of communications. Any significant loss of revenue
       would be directly related to lost production by the North American auto
       companies, which is not considered probable and cannot be estimated at
       this time.

       Forward-Looking Statements

                  This report contains certain forward-looking statements
       subject to risks and uncertainties which could cause actual results to
       differ materially from those anticipated. Readers are cautioned not to
       place undue reliance on those forward-looking statements which speak only
       as of the date of this report.


                                       14


<PAGE>


Schedule A:  Relationship to Net Sales

<TABLE>
<CAPTION>
                                                                                                         Percent Change of Dollars
                                                                                                         -------------------------
                                                                                                              Period-to-Period
                                                                        Percentage of Net Sales            Increase or (Decrease)
                                                                    -------------------------------      -------------------------
                                                                    FY 1998     FY 1997     FY 1996      1997-1998       1996-1997
                                                                    -------     -------     -------      ---------       ---------
<S><C>
Net sales                                                            100.0       100.0       100.0          11.9             3.9

Direct labor, material and other product-related costs                76.5        69.3        66.2          23.6             8.7

Selling, general and administrative expenses                          12.8        16.4        20.1         (13.0)          (15.1)

Research and development costs                                         4.1         5.3         6.5         (13.8)          (14.5)
                                                                     -----       -----       -----
Operating income                                                       6.6         8.9         7.2         (17.6)           27.8

Interest income                                                        0.3         0.6         0.5         (39.1)           31.5

Other income (expense) net                                             0.3        --          --            --               --
                                                                     -----       -----       -----
Net income before taxes                                                7.2         9.5         7.7         (16.2)           29.4
                                                                     =====       =====       =====
</TABLE>


                                       15


<PAGE>




Item 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                                                                Page
                                                                                                ----
<S><C>
                  Report of Independent Accountants...............................................17

                  Financial Statements:

                             Consolidated Statements of Income....................................18

                             Consolidated Balance Sheets..........................................19

                             Consolidated Statements of Changes in Stockholders' Equity...........20

                             Consolidated Statements of Cash Flows................................21

                             Notes to Consolidated Financial Statements...........................22
</TABLE>


                                       16


<PAGE>


                       REPORT OF INDEPENDENT ACCOUNTANTS

December 16, 1998

To the Board of Directors and Stockholders
       Bowles Fluidics Corporation

                  In our opinion, the accompanying consolidated balance sheets
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows present fairly, in all material respects, the financial
position of Bowles Fluidics Corporation as of October 31, 1998, and October 25,
1997, and the results of its operations and its cash flows for each of the three
fiscal years in the period ended October 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.


                                       PricewaterhouseCoopers LLP


                                       17


<PAGE>


BOWLES FLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                      For the Years Ended
                                                ---------------------------------------------------------------
                                                October 31,              October 25,               October 26,
                                                   1998                      1997                     1996
                                                -----------              -----------              ------------
<S><C>
Net sales                                       $21,084,804              $18,842,673              $ 18,128,274

       Cost of sales                             16,145,848               13,065,374                11,996,305
                                                 ----------               ----------               -----------
Gross profit                                      4,938,956                5,777,299                 6,131,969

       Selling, general and
              administrative expenses             2,691,141                3,094,769                 3,643,128
       Research and development
              costs                                 866,390                1,005,183                 1,175,890
                                                 ----------               ----------               -----------
Operating income                                  1,381,425                1,677,347                 1,312,951

       Interest income                               71,530                  117,541                    89,401
       Other income (expense), net                   55,184                    4,555                   (11,417)
                                                 ----------               ----------               -----------
Income before taxes                               1,508,139                1,799,443                 1,390,935

       Provision for income taxes                   575,953                  657,420                   506,629
                                                 ----------               ----------               -----------
Net income                                          932,186                1,142,023                   884,306

       Preferred stock dividends
              accrued                               (74,646)                 (74,646)                  (74,645)
                                                 ----------               ----------               -----------
Income applicable to common
       shareholders                             $   857,540              $ 1,067,377              $    809,661
                                                 ==========               ==========               ===========
Basic earnings per share                        $       .07              $       .08              $        .06
                                                 ==========               ==========               ===========
Diluted earnings per share                      $       .06              $       .07              $        .05
                                                 ==========               ==========               ===========
</TABLE>



The accompanying notes are an integral part of these financial statements.


                                       18

<PAGE>



BOWLES FLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                          October 31,                   October 25,
                                                             1998                           1997
                                                          -----------                   -----------
<S><C>
ASSETS
Current
       Cash and cash equivalents                       $   1,734,261                $      755,525
       Investments available for sale                           --                       1,563,121
       Accounts receivable                                 3,233,775                     3,112,063
       Income taxes receivable                               194,213                          --
       Inventories                                         2,263,144                     2,130,615
       Other current assets                                  399,781                       634,037
                                                         -----------                   -----------
              Total current assets                         7,825,174                     8,195,361
                                                         -----------                   -----------
Property and equipment, net                                4,408,404                     3,494,335

Other assets                                                 121,743                        95,005
                                                         -----------                   -----------
Total assets                                           $  12,355,321                $   11,784,701
                                                         ===========                   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current
       Accounts payable - trade                        $   1,109,902                $    1,122,437
       Accrued expenses                                    1,326,107                     1,609,807
       Income taxes payable                                     --                          48,162
                                                         -----------                   -----------
              Total current liabilities                    2,436,009                     2,780,406

Other liabilities                                            541,093                       492,866
                                                         -----------                   -----------
Total liabilities                                          2,977,102                     3,273,272
                                                         -----------                   -----------
Commitments and contingencies

Stockholders' equity
       8% Convertible preferred stock                        933,080                       933,080
       Common stock                                        1,268,501                     1,264,001
       Additional paid-in capital                          2,732,833                     2,728,083
       Retained earnings                                   4,443,805                     3,586,265
                                                         -----------                   -----------
Total stockholders' equity                                 9,378,219                     8,511,429
                                                         -----------                   -----------
Total liabilities and stockholders' equity             $  12,355,321                $   11,784,701
                                                         ===========                   ===========
</TABLE>


The accompanying notes are an integral part of these financial statements.


                                       19


<PAGE>


BOWLES FLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                     Preferred Stock             Common Stock
                                                ------------------------     --------------------  Additional
                                                Shares                    Shares                     Paid-in       Retained
                                   Total        (000's)      Amount      (000's)      Amount         Capital       Earnings
                                -----------     -------     --------     -------      ------         -------      ----------
<S><C>
Balance October 28, 1995         $6,629,891       933       $933,080      12,610    $1,261,001      $2,726,583    $1,709,227

Preferred stock dividends           (74,645)                                                                         (74,645)

Net income                          884,306                                                                          884,306
                                 ----------       ------    --------      ------    ----------      ----------    ----------
Balance October 26, 1996          7,439,552       933        933,080      12,610     1,261,001       2,726,583     2,518,888

Stock options exercised               4,500                                   30         3,000           1,500

Preferred stock dividends           (74,646)                                                                         (74,646)

Net income                        1,142,023                                                                        1,142,023
                                 ----------       ------    --------      ------    ----------      ----------     ---------
Balance October 25, 1997          8,511,429       933        933,080      12,640     1,264,001       2,728,083     3,586,265

Stock options exercised               9,250                                   45         4,500           4,750

Preferred stock dividends           (74,646)                                                                         (74,646)

Net income                          932,186                                                                          932,186
                                 ----------       ------    --------      ------    ----------      ----------    ----------
Balance October 31, 1998         $9,378,219       933       $933,080      12,685    $1,268,501      $2,732,833    $4,443,805
                                  =========       ===        =======      ======     =========       =========     =========
</TABLE>

The accompanying notes are an integral part of these financial statements.


                                       20


<PAGE>


BOWLES FLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                              For the Years Ended
                                                             October 31,         October 25,         October 26,
                                                                1998                1997                1996
                                                             -----------         -----------          ---------
<S><C>
Cash flows from operating activities:
       Net income                                            $   932,186         $ 1,142,023          $  884,306
              Adjustments to reconcile net income
              provided by operating activities:
                     Depreciation and amortization             1,091,634             960,346             750,449
                     Deferred income taxes                       332,759              (5,900)           (241,315)
                     (Gain)/Loss on disposal of assets             4,660              21,089               3,088
                     Accretion of interest on investments        (23,614)            (45,269)            (31,659)
                                                              ----------          ----------           ---------
                                                               2,337,625           2,072,289           1,364,869
                                                              ----------          ----------           ---------
              Change in operating accounts:
                     Accounts receivable                        (121,712)           (336,405)            (14,264)
                     Inventories                                (132,529)           (144,550)            (86,719)
                     Other assets                                (26,447)            (74,958)           (122,381)
                     Accounts payable                            (12,535)             17,926             109,090
                     Accrued expenses                           (283,700)           (189,549)            537,235
                     Income taxes                               (242,375)              8,162             (71,441)
                     Other liabilities                           (24,505)            156,433             428,049
                                                              ----------          ----------           ---------
                                                                (843,803)           (562,941)            779,569
                                                              ----------          ----------           ---------
Net cash provided by operating activities:                     1,493,822           1,509,348           2,144,438
                                                              ----------          ----------           ---------
Cash flows from investing activities:
       Capital expenditures                                   (2,014,132)         (1,027,780)         (1,321,331)
       Purchase of investments                                     --             (1,540,015)           (566,664)
       Patents and trademarks                                    (32,347)             (4,433)              --
       Proceeds from sale of equipment                            10,054               1,441               --
       Proceeds from sale of investments                       1,586,735             600,000             700,000
                                                              ----------          ----------           ---------
Net cash used in investing activities                           (449,690)         (1,970,787)         (1,187,995)
                                                              ----------          ----------           ---------
Cash flows from financing activities:
       Principal payment of debt                                   --                   --              (271,669)
       Preferred stock dividends                                 (74,646)            (74,646)            (74,645)
       Proceeds from issuance of common stock                      9,250               4,500               --
                                                              ----------          ----------           ---------
Net cash used by financing activities                            (65,396)            (70,146)           (346,314)
                                                              ----------          ----------           ---------
Net increase(decrease) in cash and cash
equivalents                                                      978,736            (531,585)            610,129

Cash and cash equivalents:
       - Beginning of period                                     755,525           1,287,110             676,981
                                                              ----------          ----------           ---------
       - End of period                                       $ 1,734,261         $   755,525          $1,287,110
                                                              ==========          ==========           =========
</TABLE>


The accompanying notes are an integral part of these financial statements.


                                       21

<PAGE>


BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Summary of Significant Accounting Policies

      General. The Company and its wholly owned subsidiary, Fluid Effects
      Corporation, operate on a 52/53-week fiscal year which ends on the last
      Saturday of October. The fiscal year 1998 has 53 weeks and fiscal years
      1997 and 1996 have 52 weeks. Assets and liabilities, and revenues and
      expenses, are recognized on the accrual basis of accounting. Fluid Effects
      Corporation was merged into the Company as of April 6, 1998.

      Cash Equivalents.  Cash equivalents are highly liquid investments with
      original maturities of 90 days or less.

      Investments.  Investments, which are available for sale, consist of U.S.
      Treasury Bills with original maturities over 90 days, but not greater than
      365 days, and are carried at cost plus accrued interest, which
      approximates market.

      Inventory Pricing.  Inventories are carried at the lower of cost
      (first-in, first-out) or market.

      Property, Equipment and Depreciation.  The cost of property and equipment
      is depreciated over the estimated useful life of the related assets.
      Depreciation is computed on the straight-line method for all assets based
      on the following estimated lives:

                                                                   Years
                                                                   -----
           Production machinery and equipment                      3-10
           Office furniture and equipment                          5-7
           Laboratory and machine shop equipment                   3-10
           Leasehold improvements                                  lease term

           Depreciation expense for the fiscal years ended 1998, 1997, and 1996
      was $1,085,349, $939,678, and $711,282 respectively.

      Patents. Costs associated with obtaining United States patents are
      capitalized and amortized using the straight-line method over the life of
      the patent beginning with the date of issue or date of filing the
      application. The Company initially charges all costs associated with the
      acquisition of U.S. and foreign patents to expense, then capitalizes those
      costs related to U.S. patents upon issuance of those patents.

           Management reviews all of the patent costs and writes off any patents
      which are considered to be of no foreseeable economic benefit to the
      Company.  The Company recognizes income from patent licenses in accordance
      with the respective payment terms of each license agreement.


                                       22

<PAGE>


BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    (continued)

      Income Taxes. The Company uses the asset and liability method for
      accounting for income taxes. Under this method, deferred income taxes are
      recognized for the tax consequences of temporary differences by applying
      enacted statutory tax rates applicable to future years to differences
      between the financial statements carrying amounts and the tax bases of
      existing assets and liabilities.

      Use of Estimates. The preparation of financial statements in conformity
      with generally accepted accounting principles requires management to make
      estimates and assumptions that affect the amounts reported in the
      financial statements and accompanying notes. Actual results could differ
      from those estimates.

      Reclassifications.  Certain 1996 and 1997 amounts have been reclassified
      to conform to the 1998 presentation.

      Concentrations of Credit Risk. Financial instruments which potentially
      subject the Company to concentrations of credit risk consist primarily of
      accounts receivable and cash investments. The Company's customer base
      includes the significant U.S. automotive manufacturers and a large number
      of automotive parts suppliers. The Company does not require collateral for
      its trade accounts receivable. However, the Company's credit evaluation
      process and reasonably short collection terms help to mitigate any
      concentration of credit risk. The Company also has cash investment
      policies that limit the amount of credit exposure to any one financial
      institution and require placement of investments in financial institutions
      evaluated as highly creditworthy.

2.    Inventories

           Inventories are comprised of:

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

            Raw material                        $  720,084          $  620,567
            Work and tooling in progress           791,805           1,016,845
            Finished goods                         751,255             493,203
                                                ----------          ----------
                 Total                          $2,263,144          $2,130,615
                                                 =========           =========

      Tooling in progress includes costs accumulated under short-term contracts
      to produce tooling for certain of the Company's customers of $598,193 and
      $865,700 in 1998 and 1997 respectively.


                                       23

<PAGE>


BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.    Property and Equipment, net

           Property and Equipment, net, is comprised of:

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

Production machinery and equipment             $6,328,351            $4,946,390
Office furniture and equipment                  2,502,438             2,321,844
Laboratory and machine shop equipment           1,586,801             1,428,516
Leasehold improvements                            894,816               812,120
                                              -----------            ----------
     Total property and equipment              11,312,406             9,508,870
Less accumulated depreciation                  (6,904,002)           (6,014,535)
                                                ---------             ---------
     Property and equipment, net               $4,408,404            $3,494,335
                                                =========             =========


4.    Line of Credit

           In May 1996, the Company entered into a fourth amended and restated
      agreement with Mercantile-Safe Deposit & Trust Company to reaffirm and
      extend its $1,000,000 line of credit until May 8, 1997, on an unsecured
      basis. At the Company's request and the Bank's discretion the line of
      credit was extended until May 8, 1999, and may be reaffirmed each year
      thereafter. The interest rate is Mercantile's prime rate, floating, which
      was 8% as of October 31, 1998. In addition, a 3/8% annual fee is assessed
      on the unused portion of this credit facility. Advances on the line of
      credit are limited to 85% of eligible accounts receivable and 40% of
      finished goods inventory. No amount was outstanding on this credit line at
      October 31, 1998, or October 25, 1997.

           In addition to the maintenance of certain financial ratios, the
      covenants of the fourth amended loan agreement require the Company's
      tangible net worth to be not less than $2,000,000 as of the close of each
      fiscal year.


5.    Debt

           No debt was outstanding as of October 31, 1998, and October 25, 1997.
      In February 1996 the unpaid balance of the then outstanding loan from
      Mercantile-Safe Deposit & Trust Company was paid in total.


                                       24

<PAGE>


BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.    Stockholders' Equity

           The 8% convertible preferred stock of the Company at October 31,
      1998, and October 25, 1997, consists of 3,000,000 authorized shares, par
      value $1.00 per share, with 933,080 shares issued and outstanding on both
      dates.

             The common stock of the Company at October 31, 1998, and October
      25, 1997, consists of 17,000,000 authorized shares, par value $.10 per
      share.  On October 31, 1998, the shares issued and outstanding were
      12,685,011, whereas on October 25, 1997, they were 12,640,011.

             The Company's preferred stock provides for an annual dividend of
      $.08 per share from the net earnings of the Company and is cumulative only
      for those years in which the Company has earnings, and $1.00 per share in
      liquidation before any distribution can be made to holders of common
      stock. If any dividends payable on the preferred stock with respect to any
      fiscal year of the Company are not paid for any reason, the rights of the
      holders of the preferred stock to receive payment of such dividends shall
      not lapse or terminate; but unpaid dividends shall accumulate and shall be
      paid without interest to the holders of the preferred stock when and as
      authorized by the Board of Directors before any dividends shall be paid on
      any other class of stock.

             The Company's preferred stock may at the option of the holder, at
      any time dividends are current, be converted into common stock of the
      Company at the conversion rate of four shares of common for each share of
      preferred. Additionally, the preferred stock is redeemable at par in whole
      or in part at the option of the Board of Directors at any time the
      dividends are current after a period of 10 years subsequent to issue. At
      October 31, 1998, 683,080 shares have been outstanding for more than 10
      years and dividends are current, and thus can be redeemed. The common
      stock has one (1) vote per share and the preferred stock has four (4)
      votes per share.

             Reserved Shares. As of and for the three fiscal years in the period
      ended October 31, 1998, there were 300,000 shares of common stock reserved
      for issuance in connection with the Company's stock option plans. None of
      the authorized shares of common stock are reserved for conversion of
      preferred stock. Under the laws of the State of Maryland, the
      authorization of the preferred stock in itself provides the authorization
      of common stock necessary for conversion.

             Quasi-reorganization.  Effective October 29, 1994, the Board of
      Directors approved a quasi-reorganization which had the impact of
      eliminating the retained earnings deficit as an adjustment to additional
      paid-in capital.


                                       25

<PAGE>


BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.    Income Taxes

           The Company and its subsidiary file a consolidated federal income tax
      return and separate state income tax returns.  The provision for income
      taxes consisted of the following:

                                  1998             1997          1996
                                --------         --------     ----------
Federal:
         Current                $195,218         $620,131      $678,938
         Deferred                292,675           (6,100)     (222,600)
                                --------        ---------      --------
                                 487,893          614,031       456,338
                                --------        ---------      --------
State:
         Current                  47,976           43,189        68,791
         Deferred                 40,084              200       (18,500)
                                --------        ---------      --------
                                  88,060           43,389        50,291
                                --------        ---------      --------
                                $575,953         $657,420      $506,629
                                 =======          =======       =======

           The components of the deferred tax asset and liability for 1998 and
      1997 were as follows:

<TABLE>
<CAPTION>
                                                                1998              1997
                                                              --------           --------
<S><C>
Deferred tax assets:
         Accrued vacation and retirement programs            $  43,818         $   83,600
         Non-deductible reserves                               261,882            490,600
                                                               -------            -------
                Total deferred tax assets                      305,700            574,200
                                                               -------            -------
Deferred tax liabilities:
         Property and equipment                               (368,000)          (303,700)
                                                               -------            -------
                Total deferred tax liabilities                (368,000)          (303,700)
                                                               -------            -------
                Net deferred tax asset (liability)           $ (62,300)        $  270,500
                                                                =======           =======
</TABLE>


           Reconciliation of the provisions for income taxes at the U.S. federal
      statutory rate to the effective tax expense were as follows:

                                   1998             1997               1996
                                -------------     ------------      ---------

U.S. statutory income tax          $512,767         $611,811         $472,918
State taxes, net of federal
  income tax benefit                 58,736           28,637           33,711
Other, net                            4,450           16,972             --
                                   --------         --------         --------
                                   $575,953         $657,420         $506,629
                                   ========         ========         ========

           Cash paid for income taxes was $489,000, $584,000, and $877,000 for
      1998, 1997, and 1996 respectively.


                                       26

<PAGE>


BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.    Earnings per Share

             Effective October 26, 1997, the Company adopted Statement of
      Financial Accounting Standard No. 128 "Earnings per Share" ("SFAS 128").
      SFAS 128 replaced the presentation of primary earnings per share (EPS) and
      fully diluted EPS with a presentation of basic EPS and diluted EPS. All
      earnings per share amounts presented in the financial statements here have
      been restated in accordance with SFAS 128.

             Basic earnings per share is determined based on the weighted
      average number of common shares outstanding during the periods. Diluted
      earnings per share is determined based on the weighted average number of
      common shares outstanding and potential dilution of securities that could
      share in earnings.

             The following table sets forth the computation of basic and diluted
      earnings per share:

<TABLE>
<CAPTION>
                                                                                            For the Years Ended
                                                                          -------------------------------------------------------
                                                                               October 31,      October 25,        October 26,
                                                                                 1998              1997                1996
                                                                          -----------------   ---------------    ----------------
<S><C>
Numerator:
Numerator for basic earnings per share:
Income applicable to common
shareholders                                                                $   857,540         $ 1,067,377        $   809,661
Effect of dilutive securities:
     Preferred Stock Dividends                                                   74,646              74,646             74,646
                                                                           ------------         -----------        -----------
Numerator for diluted earnings per share
     Income applicable to common shareholders after assumed conversion

                                                                            $   932,186         $ 1,142,023        $   884,306
                                                                             ----------          ----------         ----------
Denominator:
Denominator for basic earnings per share:
     Weighted average shares outstanding
     during the period                                                       12,660,294          12,633,764         12,610,011
Effect of dilutive securities:
     Employee Stock Options                                                      32,160              48,607             91,887
     Assumed Conversion of Preferred Stock                                    3,732,320           3,732,320          3,732,320
                                                                            -----------         -----------        -----------
Denominator for diluted earnings per
share                                                                        16,424,774          16,414,691         16,434,218
                                                                             ----------          ----------         ----------
Earnings per Share:
                 Basic                                                    $         .07        $        .08       $        .06
                                                                                    ===                 ===                ===

                 Diluted                                                  $         .06       $        .07       $        .05
                                                                                    ===                ===                ===
</TABLE>


                                       27

<PAGE>


BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.    Commitments and Contingencies

           The Company leases its facilities under non-cancelable operating
       leases which expire in 2004 for Columbia, Maryland, and in 2000 for
       Southfield, Michigan.  As of October 31, 1998, minimum annual aggregate
       rentals are as follows:


                    Year Ended                      Amount
                    ----------                      ------
                       1999                      $  594,929
                       2000                         572,831
                       2001                         561,646
                       2002                         561,646
                       2003                         561,646
                    thereafter                      257,421
                                                -----------
Total minimum future rental payments             $3,110,119

           Rent expense under all leases for 1998, 1997, and 1996 was $666,908,
      $644,008, and $626,565 respectively.

           Management is unaware of any pending legal proceedings which would
      have a material adverse effect on the financial statements of the Company.

10.   Employee Benefit Plans

           On November 1, 1990, the Company adopted a defined contribution
      (401k) plan covering substantially all of its employees. Contributions and
      costs were determined by matching 50% of employee contributions up to 4%
      of each covered employee's earnings. As of April 1, 1994, the Company
      increased its matching contribution to 50% of the employee contributions
      up to 6% of each covered employee's earnings. The Company's contributions
      to the plan were $169,685, $151,314, and $119,640 in 1998, 1997, and 1996
      respectively.

           The Company has agreed to retirement programs for certain former
      officers providing for the payment of certain retirement benefits. The
      unfunded present value, at a discount rate of 7.5%, of these benefits
      accumulated as of October 31, 1998, amounts to approximately $323,000, of
      which $264,000 is included in other liabilities. Expenses related to these
      programs were $41,090 in 1998, $46,476 in 1997, and $44,000 in 1996.


                                       28

<PAGE>


BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.   Stock Options

           In May 1992, the Company adopted its key employee incentive stock
      option plan. Activity in the Company's incentive stock option plan was as
      follows:

                                               1998         1997        1996
                                             -------      -------     ------

Options outstanding, beginning of year         70,000      180,000     180,000
Options granted                                  --           --          --
Options exercised                             (45,000)     (30,000)       --
Options expired                               (25,000)     (80,000)       --
                                             ---------   ----------    -------
Options outstanding, end of year                 --         70,000     180,000
                                             =========   ==========    =======

           Options activities are at exercise prices ranging from $.15 to $.65
      per share.

             Statement of Accounting Standards No. 123 "Accounting for
      Stock-Based Compensation" (FAS 123) became effective for the Company in
      1997. As allowed by FAS 123, the Company has elected to continue to follow
      Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
      to Employees" (APB 25), in accounting for its stock option plans. FAS 123
      requires the Company to present pro forma information as if the Company
      had accounted for stock options granted since December 15, 1995, under the
      fair value method of FAS 123. No pro forma information has been presented
      by the Company as no stock options have been issued since December 15,
      1995, the effective date of FAS 123.

12.        Termination of Sales Agreement

           During the fiscal year 1996, the Company accrued $760,000 ($465,400
      net of income taxes) for the termination in May 1997 of the sales
      agreement with its manufacturer's representatives.  The payments commenced
      in May 1997 and were completed at May 14, 1998.

13.        Major Customers

           Over 90% of the Company's production of nozzles is incorporated in
      vehicles produced by General Motors, Ford, and Chrysler, each of whom
      typically represents over 10% of the Company's sales volume. The Company
      is, therefore, substantially dependent upon the North American production
      requirements of these three automotive companies. In addition, the
      Company's customers required that a QS-9000-compliant quality system be
      developed and registered by an independent organization. In September
      1996, the Company was assessed by Underwriters Laboratories Inc., received
      QS-9000 certification with ISO 9001 addendum as of December 20, 1996, and
      has maintained that certification since then.



                                       29

<PAGE>


BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.        New Accounting Pronouncements

           The Financial Accounting Standards Board has issued the following
      Statements of Financial Standards ("FAS") which are not yet effective for
      the Company:

           o  FAS No. 131, Disclosures about Segments of an Enterprise and
              Relative Information

              This statement becomes effective for fiscal years beginning after
              December 15, 1997, and changes the way public companies report
              information about segments of their business in their financial
              statements and requires them to report selected segment
              information in their quarterly reports to stockholders. The
              Company intends to adopt the disclosure requirement by this
              statement for the year ending October 30, 1999.

           o  FAS No. 133, Accounting for Derivative Instruments and Hedging
              Activities

              This statement becomes effective for fiscal years beginning after
              June 15, 1999. This standard establishes accounting and reporting
              standards for derivative instruments and hedging activities. The
              Company does not believe this new standard will have any impact on
              the Company upon adoption.

15.        Proposed Reverse Stock Split

           On December 8, 1998, the Board of Directors of the Company adopted a
      resolution authorizing the submission to the vote of the stockholders of
      the Company of a proposed amendment to the Articles of Incorporation of
      the Company under which all outstanding shares of common stock will be
      subject to a reverse stock split at the ratio of 1000 shares of common
      stock before the reverse split to 1 share of common stock after the
      reverse split. The Board of Directors also adopted a resolution
      authorizing the redemption of all fractional shares of common stock
      resulting from the reverse stock split at the rate of $1,250 per post
      reverse split share. This proposed amendment to the Articles of
      Incorporation is pending subject to stockholder approval.


                                       30


<PAGE>




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

           None.


                                       31


<PAGE>


                                    PART III

Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors of the Registrant

           Information is included in the Proxy Statement for the Annual Meeting
           of Stockholders scheduled for March 11, 1999.

Executive Officers of the Registrant

<TABLE>
<CAPTION>
         Name, Age and Position:     Business Experience During Past Five Years:
<S><C>
         William Ewing III           Chairman of the Board since July 1996.  Responsible for the formation of overall
         Chairman of the Board       corporate policy and planning.  Member of Board of Directors since 1985.
         of Directors                Previously Vice President and Treasurer of Reeves Industries, Inc., 1995-1997,
            Age 52                   and Managing Director of Chemical Bank, 1992-1994.

         Ronald D. Stouffer          President since March 1994.  Responsible for execution of the Company's policies
         President                   and for the Company's operations.  Executive Vice President responsible for
         Chief Executive Officer     engineering and manufacturing from 1982 to 1994.  Member of Board of Directors
            Age 67                   since 1978.  Joined the Company in 1967.


         Eric W. Koehler             Appointed Executive Vice President and member of Board of Directors December 17,
         Executive Vice President    1997, in charge of marketing, sales, and engineering functions. Previously Vice
            Age 36                   President, Marketing, since March 1994, responsible for marketing and sales
                                     functions. Director of Marketing, 1990-1994. Joined the Company in 1989.

         Melvyn J. L. Clough         Vice President, Operations, since joining the Company in November 1995.
         Vice President,             Responsible for manufacturing operations including industrial engineering and
         Operations                  tooling.  Previously Engineering Manager for  A. Raymond, Inc., 1992-1995.
            Age 51

         Richard W. Hess             Vice President, Automotive Products Engineering, since April 1998.  Responsible
         Vice President,             for the Company's engineering of automotive products.  Previously Vice
         Engineering                 President, Engineering, since joining the Company in 1992.
            Age 55
</TABLE>

                                       32

<PAGE>


Executive Officers of the Registrant (continued)

<TABLE>
<CAPTION>
         Name, Age and Position:     Business Experience During Past Five Years:
<S><C>
         Eleanor M. Kupris           Vice President, Administration, since 1982.  Corporate Secretary since March
         Secretary and Vice Presi-   1992.  Responsible for purchasing and personnel.  Joined the Company in 1966.
         dent, Administration
            Age 57

         David A. Quinn              Vice President, Finance, and Treasurer since joining the Company in October
         Vice President,             1993.  Responsible for treasury, accounting and financial planning functions.
         Finance, and Treasurer      Previously CFO for Bruning Paint Company, 1991-1993.
            Age 62

         Dharapuram N. Srinath       Vice President, Advanced Engineering, since April 1998.  Responsible for the
         Vice President,             development of new products, other than automotive, and research and
         Advanced Engineering        development.  Previously Vice President, Quality Assurance, from March 1995, and
            Age 47                   Director of Quality Assurance and Product Reliability, 1992-1995. Joined the
                                     Company in 1978.

         Arlene M. Hardy             Corporate Controller since 1990.  Responsible for accounting functions.  Joined
         Corporate Controller        the Company in 1986.
            Age 51
</TABLE>


         The names, ages and positions of all of the executive officers of the
         Company are listed above, along with their business experience during
         the past five years. Officers are appointed annually by the Board of
         Directors at its meeting immediately following the Annual Meeting of
         Stockholders. There are no family relationships among any of the
         officers of the Company, nor any arrangements or understanding between
         any such officers and another person pursuant to which they were
         elected as officers.

Item 11.   EXECUTIVE COMPENSATION

           Information is included in the Proxy Statement for the Annual Meeting
      of Stockholders scheduled for March 11, 1999.

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           Information is included in the Proxy Statement for the Annual Meeting
      of Stockholders scheduled for March 11, 1999.

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           Information is included in the Proxy Statement for the Annual Meeting
      of Stockholders scheduled for March 11, 1999.


                                       33


<PAGE>


                                    PART IV

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

           (a)  1    Financial Statements

                        Included in Part II of this report:

                           Report of Independent Accountants

                           Consolidated Statements of Income for the three years
                           ended October 31, 1998, October 25, 1997, and October
                           26, 1996

                           Consolidated Balance Sheets at October 31, 1998, and
                           October 25, 1997

                           Consolidated Statements of Changes in Stockholders'
                           Equity for the three years ended October 31, 1998,
                           October 25, 1997, and October 26, 1996

                           Consolidated Statements of Cash Flows for the three
                           years ended October 31, 1998, October 25, 1997, and
                           October 26, 1996

                           Notes to Consolidated Financial Statements

           (a)  2          Financial Statements Schedules

                           Schedules are omitted because of the absence of
                           conditions under which they are required or because
                           the required information is given in the financial
                           statements or notes thereto.

           (b)  Reports on Form 8-K

                        A Form 8-K was filed on October 6, 1998, during the
                fourth quarter of the Company's fiscal year indicating the
                unanimous election at an informal meeting of the Board of
                Directors on July 14, 1998, and confirmed at a meeting of the
                Board on September 22, 1998, of Frederic Ewing II, James
                Parkinson, and Neil T. Ruddock to the Board of Directors to
                serve until the next Annual Meeting of Stockholders.


                                       34


<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.

                                       BOWLES FLUIDICS CORPORATION

                                       BY:

                                  Chairman of
                                 the Board and
                                    Director
________________________                            ____________________________
William Ewing III                                                 Date

                                 President and
                                    Director
________________________                            ____________________________
Ronald D. Stouffer                                                Date

                                   Executive
                               Vice President and
                                    Director
________________________                            ____________________________
Eric W. Koehler                                                   Date

                                 Vice President
                                    Finance
________________________                            ____________________________
David A. Quinn                                                    Date

                              Corporate Controller
________________________                            ____________________________
Arlene M. Hardy                                                   Date

                                    Director
________________________                            ____________________________
David C. Dressler                                                 Date

                                    Director
________________________                            ____________________________
Frederic Ewing II                                                 Date

                                    Director
________________________                            ____________________________
Jim Parkinson                                                     Date

                                    Director
________________________                            ____________________________
Neil T. Ruddock                                                   Date

                                       35