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 26, 1996
                          ------------------------------------------------------

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  31,  1996,  computed  by
reference to the closing price for such stock on the composite  reporting system
on such date, was $3,581,205 based on 2,438,267 shares.

The number of shares of the registrant's common stock outstanding as of December
31, 1996, was 12,610,011.


<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  continues  to pursue its  purpose of  advancing  the
        technology  of fluidics  (see  Research  and  Development  below).  Such
        efforts are directed  toward the  development of products for which,  in
        the opinion of management, substantial markets exist.


        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  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 is
        also open to opportunities  presented to it in other parts of the world.
        The Company  believes that it supplies about 75% 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 four  vehicle  models in this
        market.

              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 fiscal year, beginning in November and ending in the
        following October,  follows closely the length and timing of the typical
        model year for an automobile or light truck.  The Company's annual sales
        follow the seasonal  pattern  dictated by the  production  levels of its
        customers.

                                       2

<PAGE>

              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  direct
        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 18 years,  45 U.S.
        patents have been granted to the Company's employees and assigned to the
        Company.  Five  applications are presently in process for U.S.  patents.
        Foreign  patents  have  also been  granted,  in  countries  in which the
        Company  has an  interest,  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  foreign  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.

              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, has been a
        self-certified  supplier for Chrysler since 1991, and achieved a Quality
        Excellence  Award from Chrysler with a 98% rating in 1995. The Company's
        material testing  laboratory has been accredited by General Motors since
        1992. In addition, the Company's customers mandated that the Company put
        into place a QS-9000 compliant quality system, the automotive version of
        ISO 9000, to be assessed and, if qualified, registered by an independent
        organization.  Chrysler  required  registration by July 1997 and General
        Motors by December 1997. The Company went through initial  assessment in
        September  1996 and  received  certification  in  December  as a QS-9000
        supplier with ISO 9001 addendum.

              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.

                                       3

<PAGE>

        Foreign Affiliates and Licensing


              The Company has no foreign  affiliates.  The Company has licensing
        agreements with foreign companies with respect to certain of its foreign
        patents.  Income from such  agreements was $16,215 in FY 1996, down from
        $21,770 in FY 1995.


        Raw Material Sources and Availability

              Raw materials,  primarily  plastic  resin,  are sourced within the
        United  States.  The market was stable  during the current  year with no
        significant  price  changes,  and  adequate  supply  is  expected  to be
        available in the coming year.  The resins  purchased  are  restricted to
        those approved by our customers.


        Working Capital Requirements

              The  Company's  standard  credit terms for  receivables  is 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 has to make progress
        payments which are included in  work-in-process  inventories.  Sales for
        these  tools  and  services  are  rendered  only  after  completion  and
        customers' acceptance of qualified products produced by the tools.

        Research and Development

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

                             FY 1996      $1,175,890
                             FY 1995      $  636,970
                             FY 1994      $  842,332

              In FY 1996, the Company's  research and  development  efforts were
        expanded and directed  primarily toward the advancement of its knowledge
        of the workings of its fluidic  washer  nozzles,  including  wind tunnel
        testing,  and in addition the  development  of fluidic air  conditioning
        outlets for cars and light trucks.  With regard to the latter  products,
        to date the  Company  has  received  one  contract  for the  design  and
        development for one vehicle with a major customer.

              In FY 1993,  1994, and 1995, its research and development  efforts
        were primarily directed toward the improvement of the characteristics of
        natural  gas  and  propane  burners  utilizing   fluidic  devices.   The
        applications,  however, did not prove out due to marketing and technical
        problems.  During these years, efforts were also directed toward various
        product  development,   product  improvement,  and  process  improvement
        projects related to the automotive industry.

              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.

                                       4

<PAGE>

        Employees

              The Company  averaged  approximately  246 employees during FY 1996
        and  employed 242 people on a full-time  basis on October 26, 1996.  The
        increase from the 223 employed on October 28, 1995, was primarily in the
        engineering  and support  departments  in  response  to the  increase in
        research and development and application engineering activities.


        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

              In September  1993,  the Company  entered into an amendment to its
        original  lease  agreement  for  62,600  sq.  ft. of space in a building
        located in Columbia,  Maryland,  its sole  location.  The amended  lease
        provided for the  Company's  occupancy  of the premises  until April 16,
        2004,  and the  addition  in  September  1993 of 14,226  sq.  ft. and in
        February  1994 of 12,000 sq. ft. The Company is now the sole occupant of
        the premises.  In an addendum to the lease,  the landlord agreed to make
        certain  improvements  to the premises  financed by a supplement  to the
        rent.  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 first termination of the lease.

              The facility,  which now totals  88,826 sq. ft.,  provides for the
        Company's  needs  for  manufacturing  windshield  washer  and  defroster
        nozzles at levels adequate to meet near-term  projected  customer needs.
        In addition to the capacity for supporting more manufacturing equipment,
        the enlarged premises allow for larger engineering capabilities.

              The facilities are currently utilized as follows:

              Manufacturing, Materials, Quality Control       60,560 sq. ft.
              Administration and Sales                         8,538 sq. ft.
              Laboratories and Engineering                    19,728 sq. ft.

                  Total Area                                  88,826 sq. ft.

              In its production operations, the Company generally utilizes tools
        purchased  for the account of its  customers  and used for their  unique
        requirements.  The  Company  has also  designed  and  built  for its own
        account  specialized   assembly  and  test  equipment  to  meet  quality
        assurance and economic performance requirements.

Item 3.  LEGAL PROCEEDINGS

              During FY 1994 and 1996, the Company  discovered in the market two
        instances  of  windshield   washer  nozzles  which  infringed  upon  its
        windshield  washer  patents.  As a result,  the Company  filed suits for
        patent infringement in the United States District Court for the District
        of Maryland.  One suit was settled favorably to the Company in June 1995
        and the other is still proceeding.

                                       5

<PAGE>

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

              None.

Item 5.

        5a. 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
                               ----           ---          ----           ---
  1996    1st Quarter           5/8           3/8            1            3/4
          2nd Quarter           3/8           3/8           3/4           3/4
          3rd Quarter           3/8           3/8           3/4           5/8
          4th Quarter           7/8           1/8          1-1/4          7/16

  1995    1st Quarter           3/8           1/4           7/8           3/4
          2nd Quarter           7/8           1/4          1-3/8          3/4
          3rd Quarter           3/4           1/2          1-3/8           1
          4th Quarter           3/4           1/2          1-3/8           1

              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.


        5b. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

                                                    Approximate Number of
                                                        Record Holders
                   Title of Class                  (as of October 26, 1996)
                 ------------------                ------------------------

                 Common Stock
                   $.10 Par Value                             428

                 Preferred Stock
                   8% Cumulative                               33

              Included in the number of  stockholders  of record are shares held
        in "Nominee" or "Street" name.

                                       6

<PAGE>

        5c. 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
        earnings,  capital requirements and the operating financial condition of
        the Company.

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

                                       7

<PAGE>

Item 6.  SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>
                        October 26, 1996    October 28, 1995    October 29, 1994    October 30, 1993    October 31, 1992
                        ----------------    ----------------    ----------------    ----------------    ----------------
<S> <C>
Net sales                    $18,128,274        $16,972,876          $15,111,829         $12,299,037         $9,996,970

Net income                       884,306          1,783,875            1,727,020           1,076,040          1,040,637

Primary earnings
  per share                    .06                .13                  .13                 .08                .08

Fully diluted earnings
  per share                    .05                .11                  .11                 .07                .08

Working capital                4,649,328          4,296,368            3,126,959           1,791,192          1,315,788

Total assets                  10,719,852          9,292,446            8,478,227           6,231,132          4,880,510

Long-term debt                  --                  202,811              512,831             584,612          1,028,293

Stockholders' equity         $ 7,439,552        $ 6,629,891          $ 4,907,664         $ 3,246,590         $2,242,198
</TABLE>

                                       8

<PAGE>

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


        Results of Operations

                               FY 1996 vs FY 1995

              Total  sales  in FY 1996  rose 7% over FY 1995,  reaching  another
        record for the Company of  $18,128,274  compared with  $16,972,876 in FY
        1995.  Income  before taxes,  however,  decreased 53% from FY 1995 to FY
        1996. Net income also declined to $884,306 from $1,783,875 in FY 1995, a
        50% reduction.  Profitability  was  significantly  affected by increased
        spending  for  application  engineering  and  research  and  development
        expenses  and  for an  accrual  for the  costs  of  terminating  a sales
        agreement.

              Product  sales of light  vehicle  windshield  washer and defroster
        nozzles  increased 8% to $17,292,030  in FY 1996 from  $15,960,301 in FY
        1995.  Higher volume of shipments of new products to the Company's major
        customers  was the  major  reason  for the  increase,  which  more  than
        compensated  for a 3%  decline in total  North  American  light  vehicle
        production for the fiscal year 1996 versus 1995.

              In contrast,  technical services sales in FY 1996 decreased 17% to
        $836,244 from FY 1995's $1,012,575.  Sales of tooling for new windshield
        washer and  defroster  nozzles  were down  significantly  as there was a
        lower rate of culmination of programs for these products. However, sales
        were  recorded  for the first  time for  prototype  tooling  for new air
        conditioning outlets for one automotive customer.

              Gross profit on total sales declined to 34% in FY 1996 from 36% in
        FY 1995.  The  gross  profit on  product  sales  declined  due to higher
        manufacturing  expenses mainly related to the modification and repair of
        injection molding tooling.  Additionally,  application engineering costs
        directed to the customization of new air conditioning  outlets increased
        significantly.  In contrast,  the gross loss on technical services sales
        declined  for FY 1996  compared to FY 1995  because of cost  containment
        efforts  applied  to the  tooling  programs  for new  windshield  washer
        nozzles.

              Selling,  general and administrative expenses increased $1,033,217
        or 40% in FY 1996 from FY 1995 principally because of increases in sales
        commissions.  These  commissions in FY 1996 include accruals of $760,000
        related to the planned  termination  in May 1997 of the Company's  sales
        agreement  with  its  manufacturer's  representatives.  The  Company  is
        reorganizing  its  sales  force  using  its own  employees  rather  than
        independent  representatives.  Aside from this special accrual, expenses
        increased 10% due to higher patent,  personnel,  and computer  expenses,
        partially caused by the efforts to obtain QS-9000  certification and the
        implementation of a new information system.

              Research and development costs increased to $1,175,890 in FY 1996,
        a $538,920 or 85% increase over the prior year. The Company discontinued
        its  efforts  to  develop   fluidic   nozzles  for  natural  gas  burner
        appliances. It redirected those same resources plus additional personnel
        and outside contractors to the development of automotive air conditioner
        outlets,  improvements in the design of windshield  washer nozzles,  and
        fluidic technology research.

                                       9

<PAGE>

              In  FY  1996,   the  provision  for  income  taxes  was  $506,629,
        reflecting  the lower income before taxes and somewhat  lower  effective
        tax rate of 36.4% versus 39% for FY 1995.

                               FY 1995 vs FY 1994

              Total sales in FY 1995 improved 12% over FY 1994, reaching another
        new record for the Company of $16,972,876  compared with  $15,111,829 in
        FY 1994.  Income before taxes increased 22% from FY 1994 to FY 1995. Net
        income in FY 1995 improved 3% to $1,783,875 from $1,727,020 for FY 1994.
        Net income  increased  at a lower rate than income  before  taxes as the
        result  of the  higher  effective  income  tax rate at 39% in FY 1995 as
        compared with 28% in FY 1994.

              Sales of component  products  rose 19% to  $15,960,301  in FY 1995
        from $13,365,761 in FY 1994. As a result of the addition and enhancement
        of windshield  washer products and new defroster  nozzle  products,  the
        Company's  increase in shipments of component  products was greater than
        the zero growth in total North American vehicle  production  experienced
        by our customers  during the fiscal year 1995. The gross profit on sales
        of component  products declined to 43% in FY 1995 from 47% in FY 1994 as
        engineering activities related to customizing new washer nozzle products
        expanded and various manufacturing expenses increased.

              Technical  services  sales in FY 1995  decreased 42% to $1,012,575
        from FY 1994's $1,746,068.  The shipments of tools for future automotive
        products  declined  in FY  1995,  reflecting  the  culmination  of fewer
        tooling  programs for new windshield  washer and defroster  nozzles.  In
        addition, the FY 1994 sales included $250,000 of revenue from a specific
        application  engineering customer contract.  The loss in this segment of
        the business at the gross profit  level  increased to $704,656  from the
        prior year's loss of $372,000.  This deterioration occurred primarily as
        a result of the lack of last  year's  $250,000  of revenue  referred  to
        above,  costs of which were incurred in prior years.  Also, higher costs
        were  incurred  in FY 1995 from  extra  tool work  necessary  to achieve
        operational  capability as well as additional time required for customer
        approval of the tools for use in parts production.

              Selling,  general and administrative expenses remained the same as
        the prior year and as a percentage of sales were 15.4% in FY 1995 versus
        17.2%  in FY 1994.  Sales  and  marketing  expenses  rose due to  higher
        commissions  as a result of the  increase in component  sales.  However,
        general  and  administrative  expenses  were  lower  than last year as a
        result of decreases in U.S. and foreign patent costs.

              The  Company  in FY 1995  continued  to  invest  in  research  and
        development  projects,  although the dollar  amount was 24% less than FY
        1994.  Emphasis was placed on applying fluidic technology to natural gas
        burner  nozzles as well as various other  improvements  to the Company's
        present products and manufacturing systems.

              Interest  expense  was lower in FY 1995 as a result of lower  debt
        levels.  Other  income was higher due to an increase in interest  income
        from larger investments of available cash and higher interest rates.

                                       10

<PAGE>

              In FY  1995,  the  provision  for  income  taxes  was  $1,148,902,
        resulting in an effective tax rate of 39%,  approximately  the statutory
        rate. In FY 1994, after the remaining available research and development
        and investment tax credit carryovers from prior years were utilized, the
        Company's  effective  tax rate was 28%.  (See Note 6 of the Notes to the
        Consolidated Financial Statements.)


        Liquidity and Capital Resources

              Current  assets at 1996 fiscal year end were  $7,183,195  compared
        with  $6,324,208 at the 1995 fiscal year end.  Liquidity of these assets
        improved  as cash  and cash  equivalents,  short-term  investments,  and
        receivables  rose to $4,640,605  from  $4,117,888 from the positive cash
        flow during FY 1996.

              Inventories  rose 5% to meet projected  requirements  for sales of
        nozzle products.  The tooling work in process decreased  compared to the
        prior year, as there were fewer tools being built for future products.

              Current liabilities  increased 25%, reflecting the current portion
        of the  special  sales  commission  accrual  plus  normal  increases  in
        operational accounts payables and other accruals.

              The current ratio of 2.8:1 at the 1996 fiscal year end declined in
        comparison  to the 3.1:1  ratio at the 1995  fiscal  year end due to the
        addition of the current portion of the special sales commission  accrual
        at the end of the 1996 fiscal year end.

              Cash provided by operating  activities in the amount of $2,144,438
        in FY 1996  resulted  principally  from net  income  of  $884,306,  plus
        non-cash  charges for  depreciation  and  amortization  of $750,449  and
        accrual of the special sales  commissions  of $760,000  ($465,400 net of
        income taxes).

              Funds  were  used  for  capital  expenditures  in  the  amount  of
        $1,321,331  principally  for  additional  computer  equipment,  building
        improvements  for enlarged  office  space,  and assembly and  laboratory
        equipment.  The Company  purchased  $566,664 of U.S.  Treasury bills and
        sold $700,000 of such bills.

              The  principal  payment  of term  loan  debt  during  FY 1996  was
        $271,668,  the prepayment of all outstanding bank debt in February 1996.
        The  Company's  $1,000,000  short-term  line of credit was not  utilized
        during the fiscal  year 1996 and had no balance  outstanding  at October
        26, 1996. The preferred stock dividend was declared and paid in December
        1995.

              The Company's  credit  facilities  and financial  position  should
        provide  an  adequate  base for  sales  and  production  resulting  from
        forecasted  production rates by the U.S. car  manufacturers,  additional
        market  penetration,   and  near-term  requirements  for  potential  new
        products resulting from R & D efforts.

                                       11

<PAGE>

        Fiscal Year 1997


              The  Company's  operating  plans assume that  industry  production
        levels for the 1997 fiscal  year as a whole will be  somewhat  less than
        the FY 1996 levels,  in line with external  market  forecasts,  but that
        there  will  be  additional  production  requirements  for  new  nozzles
        expected to be added in the course of the fiscal year,  resulting in the
        Company's anticipating windshield washer nozzle sales slightly below the
        1996  fiscal  year.  However,  defroster  nozzle  sales are  expected to
        decline significantly in FY 1997 as certain products were discontinued.

              Present  knowledge of customer plans  indicates that the Company's
        billings  for  technical  services  related to the  introduction  of new
        products and new or revised windshield washer nozzles will increase from
        the FY 1996 level.

              The  automotive  parts  industry  has become more  competitive  in
        general due to  consolidation of suppliers,  customers'  expectations of
        higher quality and more service, and price pressures.

              The Company's  customers mandated that a QS-9000 compliant quality
        system be  developed  and  registered  by an  independent  organization.
        Chrysler  required  registration  by July  1997 and  General  Motors  by
        December 1997. The Company received  certification as a QS-9000 supplier
        with ISO 9001  addendum in December  1996.  QS-9000 is a quality  system
        standard  developed  by the three  major U.S.  automotive  manufacturers
        based on the ISO 9000 International  Standard but incorporating  general
        automotive and specific customer requirements.  Management believes that
        the Company's technology coupled with a QS-9000 compliant quality system
        should provide a solid platform for future competitiveness and growth.

              Research and development expenditures are planned to remain at the
        same level or decrease in FY 1997.  Efforts will  continue to be made in
        the  development  of new product  lines,  principally  air  conditioning
        outlets for light vehicles, and for the improvement of windshield washer
        nozzles,  which would result in a  significant  increase in  application
        engineering expenses.

                                       12

<PAGE>

Item 7 (continued) SCHEDULE A:  RELATIONSHIP TO NET SALES



<TABLE>
<CAPTION>
                                                                                            Percent Change of Dollars
                                                                                       ------------------------------------
                                                                                                 Period to Period
                                                Percentage of Net Sales                       Increase or (Decrease)
                                     -----------------------------------------------    -----------------------------------
                                      FY 1996          FY 1995           FY 1994          1995-1996          1994-1995
<S> <C>
Net sales                              100.0            100.0             100.0               6.8              12.3

Direct labor, material and other
  product-related costs                 66.2             63.9              60.9              10.5              18.0

Selling, general and administrative
  expenses                              20.1             15.4              17.2              39.6               0.2

Research and development costs           6.5              3.8               5.6              84.6             (24.4)
                                       -----            ------            ------

Operating income                         7.2             16.9              16.3             (54.3)             16.6

Interest expense                        --               (0.2)             (0.6)            (84.5)            (56.3)

Other revenue and (expense) net          0.5              0.6                .2             (14.8)            223.4
                                       -----            ------            ------

Net income before taxes                  7.7             17.3              15.9             (52.6)             21.9
                                       =====            =====             =====
</TABLE>

                                       13

<PAGE>




                                     Item 8

                              FINANCIAL STATEMENTS

                           BOWLES FLUIDICS CORPORATION

                       FOR THE YEAR ENDED OCTOBER 26, 1996



                                       14

<PAGE>

BOWLES FLUIDICS CORPORATION

INDEX
FOR THE YEAR ENDED OCTOBER 26, 1996


                                                                            Page

Report of Independent Accountants                                            16

Financial Statements:
     Consolidated Statements of Income                                       17

     Consolidated Balance Sheets                                             18

     Consolidated Statements of Changes in Stockholders' Equity              19

     Consolidated Statements of Cash Flows                                   20

     Notes to Consolidated Financial Statements                              21

                                       15

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

                                   ----------



To the Board of Directors
       and Stockholders,
       Bowles Fluidics Corporation

                  We have audited the accompanying  consolidated  balance sheets
of Bowles Fluidics Corporation as of October 26, 1996, and October 28, 1995, and
the related consolidated  statements of income, changes in stockholders' equity,
and cash flows for each of the three fiscal  years in the period  ended  October
26, 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 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, the consolidated financial statements referred
to above present fairly,  in all material  respects,  the financial  position of
Bowles  Fluidics  Corporation  as of October 26, 1996, and October 28, 1995, and
the results of its  operations  and its cash flows for each of the three  fiscal
years in the period  ended  October  26,  1996,  in  conformity  with  generally
accepted accounting principles.



                                             Coopers & Lybrand L.L.P.



Baltimore, Maryland
December 20, 1996

                                       16

<PAGE>

BOWLES FLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                              For The Years Ended
                                          -------------------------------------------------------------
                                            October 26,            October 28,            October 29,
                                               1996                   1995                   1994
                                          ----------------       ---------------        ---------------
<S> <C>
Net sales                                      $18,128,274           $16,972,876            $15,111,829

     Cost of sales                              11,996,305            10,852,940              9,200,976
                                          ----------------       ---------------        ---------------
Gross profit                                     6,131,969             6,119,936              5,910,853

     Selling, general and
       administrative expenses                   3,643,128             2,609,911              2,603,491
     Research and development costs              1,175,890               636,970                842,332
                                          ----------------       ---------------        ---------------
Operating income                                 1,312,951             2,873,055              2,465,030

     Interest expense                               (6,018)              (38,871)               (88,991)
     Other income, net                              84,002                98,593                 30,487
                                          ----------------       ---------------        ---------------
Income before taxes                              1,390,935             2,932,777              2,406,526

     Provision for income taxes                    506,629             1,148,902                679,506
                                          ----------------       ---------------        ---------------
Net income                                         884,306             1,783,875              1,727,020

     Preferred stock dividends accrued             (74,646)              (74,648)               (74,646)
                                          -----------------      ---------------        ---------------

Income applicable to
     common shareholders                  $        809,660     $       1,709,227        $     1,652,374
                                          ================     =================        ===============

Primary earnings per share                $            .06     $            .13         $           .13
                                          ================     ================         ===============

Fully diluted earnings per share          $            .05     $            .11         $           .11
                                          ================     ================         ===============
</TABLE>

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

                                       17

<PAGE>

BOWLES FLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                    October 26,             October 28,
                                                       1996                    1995
                                                  ---------------         --------------
<S> <C>
ASSETS

Current
     Cash and cash equivalents                    $     1,287,110         $      676,981
     Investments available for sale                       577,837                679,513
     Accounts receivable                                2,775,658              2,761,394
     Inventories                                        1,986,065              1,899,346
     Other current assets                                 556,525                306,974
                                                  ---------------         --------------

       Total current assets                             7,183,195              6,324,208
                                                  ---------------         --------------

Property and equipment, net                             3,428,765              2,821,804

Other assets                                              107,892                146,434
                                                  ---------------         --------------

Total assets                                      $    10,719,852         $    9,292,446
                                                  ===============         ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current
     Accounts payable - trade                     $     1,104,511         $      995,421
     Accrued expenses and other liabilities             1,389,356                852,121
     Income taxes payable                                  40,000                111,441
     Current portion of long-term debt                    -                       68,857
                                                  ---------------         --------------

         Total current liabilities                      2,533,867              2,027,840

Long-term debt                                            -                      202,811
Other liabilities                                         746,433                431,904
                                                  ---------------         --------------

Total liabilities                                       3,280,300              2,662,555
                                                  ---------------         --------------

Commitments and contingencies

Stockholders' Equity

     8% Convertible preferred stock                       933,080                933,080
     Common stock                                       1,261,001              1,261,001
     Additional paid-in capital                         2,726,583              2,726,583
     Retained earnings
         ($2,407,467 deficit eliminated
         at 10/29/94) Note 6                            2,518,888              1,709,227
                                                  ---------------         --------------

Total stockholders' equity                              7,439,552              6,629,891
                                                  ---------------         --------------

Total liabilities and stockholders' equity        $    10,719,852         $    9,292,446
                                                  ===============         ==============
</TABLE>

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

                                       18

<PAGE>

BOWLES FLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                    Preferred Stock          Common Stock
                                                ----------------------- -----------------------     Additional      Retained
                                                 Shares                   Shares                      Paid-in       Earnings
                                    Total       (000's)      Amount      (000's)        Amount        Capital       (Deficit)
                                    -----       -------      ------      -------        ------     -------------  ------------
<S> <C>
Balance October 30, 1993          $3,246,590       933      $933,080      12,549      $1,254,881      $5,193,116   $(4,134,487)

Stock options exercised                8,700                                  41           4,120           4,580

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

Net income                         1,727,020                                                                         1,727,020

Quasi-reorganization effective
     October 29, 1994 (Note 6)          -                                                             (2,407,467)    2,407,467
                                 -----------     ------    ---------      ------   -------------  --------------    ----------

Balance October 29, 1994          $4,907,664       933      $933,080      12,590      $1,259,001      $2,715,583    $       --


Stock options exercised               13,000                                  20           2,000          11,000

Preferred stock dividends            (74,648)                                                                          (74,648)

Net income                         1,783,875                                                                         1,783,875
                                 -----------     ------    ---------       -----   -------------  --------------     ----------

Balance October 28, 1995          $6,629,891        933     $933,080      12,610      $1,261,001      $2,726,583    $1,709,227
                                 -----------     ------    ---------      ------   -------------  --------------     ----------

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

Net income                           884,307                                                                           884,307
                                 -----------      -----    ---------     -------   -------------  --------------     ----------

Balance October 26, 1996          $7,439,552        933     $933,080      12,610   $   1,261,001  $    2,726,583    $2,518,888
                                 ===========      =====    =========     =======   =============  ==============    ==========
</TABLE>

The accompanying notes are an integral part of these financial statements

                                       19

<PAGE>

BOWLES FLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                              For The Years Ended
                                                    ------------------------------------------
                                                     October 26,   October 28,    October 29,
                                                        1996          1995           1994
                                                    ------------   -----------    ------------
<S> <C>
Cash flows from operating activities:
     Net income                                     $  884,306     $ 1,783,875    $ 1,727,020
         Adjustments to reconcile net income
         provided by operating activities:
              Depreciation and amortization            750,449         661,024        624,099
              Deferred income taxes                   (241,315)        (36,500)          -
              (Gain)/Loss on disposal of assets          3,088          (2,267)         8,496
              Accretion of interest on investments     (31,659)        (14,125)          -
                                                     ---------      ----------     ----------
                                                     1,364,869       2,392,007      2,359,615
                                                     ---------      ----------     ----------
         Change in operating accounts:
              Accounts receivable                      (14,264)       (844,509)      (204,165)
              Inventories                              (86,719)       (202,846)      (365,409)
              Other assets                            (122,381)       (111,535)        42,927
              Accounts payable                         109,090         (70,656)       152,015
              Accrued expenses                         537,235          57,314        152,382
              Income taxes payable                     (71,441)       (431,715)       468,156
              Other liabilities                        428,049          63,150         27,124
                                                     ---------      ----------     ----------
                  Change in operating accounts         779,569      (1,540,797)       273,030
                                                     ---------      ----------     ----------
Net cash provided by operating activities            2,144,438         851,210      2,632,645
                                                     ---------      ----------     ----------
Cash flows from investing activities:
     Capital expenditures                           (1,321,331)       (962,597)      (938,246)
     Purchase of investments                          (566,664)     (1,143,566)      (484,807)
     Patents and trademarks                            -               (32,556)          -
     Proceeds from sale of equipment                   -                31,025           -
     Proceeds from sale of investments                 700,000         962,985           -
                                                     ---------      ----------     ----------
Net cash used in investing activities               (1,187,995)     (1,144,709)    (1,423,053)
                                                     ---------      ----------     ----------
Cash flows from financing activities:
     Principal payment of debt                        (271,668)       (525,102)      (603,657)
     Proceeds from issuance of debt                       -               -           365,000
     Preferred stock dividends                         (74,646)        (74,648)       (74,646)
     Proceeds from issuance of common stock               -             13,000          8,700
                                                      --------      ----------     ----------
Net cash used by financing activities                 (346,314)       (586,750)      (304,603)
                                                      --------      ----------     ----------
Net increase(decrease) in cash and cash equivalents    610,129        (880,249)       904,989
Cash and cash equivalents
     - Beginning of period                             676,981       1,557,230        652,241
                                                      --------       ---------     ----------
     - End of period                                 1,287,110     $   676,981    $ 1,557,230
                                                    ==========      ==========     ==========
</TABLE>

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

                                       20

<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.  All  years  presented  are  52  weeks.  Assets  and
     liabilities, and revenues and expenses, are recognized on the accrual basis
     of accounting.

     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 1996,  1995, and 1994,
     was $711,282, $612,294 and $577,811, 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.

     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.

                                       21

<PAGE>

BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 2.  Inventories

         Inventories are comprised of:
                                                   1996            1995
                                                ----------      ----------
                  Raw Material                  $  678,494      $  703,864
                  Work and tooling in process      242,369         416,090
                  Finished Goods                 1,065,202         779,392
                                                ----------      ----------
                          Total                 $1,986,065      $1,899,346
                                                ==========      ==========


 3.  Property and Equipment, net

         Property and Equipment, net, is comprised of:

                                               October 26,        October 28,
                                                  1996               1995
                                               -----------        -----------
     Production machinery and equipment        $ 4,397,018        $ 4,047,602
     Office furniture and equipment              1,992,152          1,580,026
     Laboratory and machine shop equipment       1,395,837          1,159,087
     Leasehold improvements                        796,928            539,274
                                               -----------        -----------
         Total property and equipment            8,581,935          7,325,989
     Less accumulated depreciation              (5,153,170)        (4,504,185)
                                               -----------        -----------
         Property and equipment, net           $ 3,428,765        $ 2,821,804
                                               ===========        ===========


 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,  and to set forth
     the Company's and the Bank's  decision to continue the line of credit on an
     unsecured  basis.  At the Company's  request and the Bank's  discretion the
     line of credit may be affirmed as of May 8, 1997, and each year thereafter.
     The interest rate is Mercantile's prime rate, floating, which was 8 1/4% as
     of October  26,  1996.  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 26,
     1996, or on October 28, 1995.

         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.

                                       22


<PAGE>


BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 5.  Debt

     Balances as of October 26, 1996, and October 28, 1995, are as follows:

                         1996                    1995
                     ------------            ------------
                     $    --                 $    271,668
                     ============            ============

         In June 1993,  the Company  entered into a  third  amended and restated
     loan agreement  with  Mercantile-Safe  Deposit & Trust  Company  for a term
     loan   facility   for  a   period  up  to   seven  years  in   the  maximum
     amount  of  $1,100,000.  Advances  under this  agreement  were made for the
     purchase of  specified capital  equipment and leasehold improvements.  This
     loan  facility  was  cross-collateralized  and  cross-defaulted   with  all
     other  loans with Mercantile and was subject to certain loan covenants.  In
     December  1993, the  Company borrowed $365,000 under this facility.  During
     fiscal 1994, a  fixed interest  rate of  8 3/4%  was elected for  borrowing
     under  this  agreement through  April  1997.  The  unpaid  balance  of  the
     outstanding  loan was paid in total in February 1996.

           Cash  paid  for  interest  during  1996,  1995,  and 1994 was $6,018,
     $37,586, and $91,079 respectively.

 6.  Stockholders' Equity

           The 8%  convertible  preferred  stock of the  Company at October  26,
     1996, and October 28, 1995,  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 26, 1996,  and October 28,
     1995,  consists of 17,000,000  authorized shares, par value $.10 per share,
     with 12,610,011 shares issued and outstanding on both dates.

           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 26, 1996,  683,080  shares have been  outstanding  for more than 10
     years and  dividends  are current,  and thus can be  converted.  The common
     stock has one (1) vote per share and the preferred stock has four (4) votes
     per share.

                                       23

<PAGE>

BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 6.  (continued)

           Reserved  Shares.  As of and for the three fiscal years in the period
      ended October 26, 1996, 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.

           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:

                                     1996           1995           1994
                                   -------        -------        -------
      Options outstanding,
          beginning of year        180,000        200,000        314,400
      Options granted                 -              -              -
      Options exercised               -           (20,000)       (41,200)
      Options expired                 -              -           (73,200)
                                   -------        -------        -------
      Options outstanding,
          end of year              180,000        180,000        200,000
                                   =======        =======        =======

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

           In 1995, the Financial  Accounting  Standards Board issued  Statement
      No.  123,  "Accounting  for Stock  Based  Compensation."  The  Company has
      determined  that it will retain its current  accounting  for stock options
      granted;  therefore, the adoption of this new standard in fiscal 1996 will
      not impact the Company's financial position or results of operations.

           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.

                                       24

<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:

                                1996             1995             1994
                              --------         --------         --------
           Federal:
             Current         $ 678,938        $1,019,525        $540,000
             Deferred         (222,600)          (30,100)           -
                             ---------        ----------        --------
                               456,338           989,425         540,000
                             ---------        ----------        --------
           State:
             Current            68,791           164,377         139,506
             Deferred          (18,500)           (4,900)           -
                             ---------        ----------        --------
                                50,291           159,477         139,506
                             ---------        ----------        --------
                             $ 506,629        $1,148,902        $679,506
                             =========        ==========        ========

      The  components  of the deferred tax asset and liability for 1996 and 1995
      were as follows:

                                                          1996          1995
                                                        --------      --------
      Deferred tax asset:
           Accrued vacation and retirement programs    $ 190,300     $ 167,800
           Non-deductible reserves                       387,100       121,700
                                                       ---------      --------
                  Total deferred tax asset               577,400       289,500
                                                       ---------      --------

      Deferred liability:
           Property and equipment                       (312,800)     (266,000)
                                                       ---------      --------
                  Total deferred tax liability          (312,800)     (266,000)
                                                       ---------      --------

                  Net deferred tax asset               $ 264,600     $  23,500
                                                       =========     =========

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

                                                 1996       1995       1994
                                               --------  ----------  ---------
      U.S. statutory income tax                $472,918  $  997,145  $ 818,219
      State tax, net of federal income tax
           benefit                               33,711     151,757     92,074
      Utilization of investment and research
           and development credit carryforwards    -           -      (226,000)
      Other                                        -           -        (4,787)
                                               --------  ----------  ---------
                                               $506,629  $1,148,902  $ 679,506

           Cash paid for income taxes was $877,000, $1,617,000, and $118,000 for
      1996, 1995, and 1994, respectively.

                                       25

<PAGE>

BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 8.   Earnings per Share

           Primary  earnings per share are based on the weighted  average number
      of common  shares and the effects of shares  issuable  under stock options
      based on the  treasury  stock  method.  Fully  diluted  earnings per share
      assumes  that the  preferred  stock is  converted  to common  stock at the
      beginning of the year.

           The number of shares used for  computing  primary  earnings per share
      was  12,701,898,  12,706,408,  and  12,672,647,  in 1996,  1995, and 1994,
      respectively.  The  number  of  shares  used in  computing  fully  diluted
      earnings per share was  16,473,390,  16,445,005  and  16,404,967  in 1996,
      1995, and 1994, respectively.

 9.   Commitments and Contingencies

           The Company  leases its  facility  under a  non-cancelable  operating
      lease  which  expires in 2004.  As of October  26,  1996,  minimum  annual
      aggregate rentals are as follows:

                  Year Ended                         Amount
                  ----------                       -----------
                       1997                         $  561,648
                       1998                            561,648
                       1999                            561,648
                       2000                            561,648
                       2001                            561,648
                  thereafter                         1,404,120
                                                    ----------
      Total minimum future rental payments          $4,212,360
                                                    ==========

           Rent expense under all leases for  1996,1995, and 1994 was $626,565,
      $622,671, and $598,427, respectively.

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

                                       26

<PAGE>

BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 $119,640,  $101,286 and $76,892, in 1996, 1995, and 1994,
      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 26, 1996, amounts to approximately  $360,000, of
      which $301,000 is included in other liabilities. Expenses related to these
      programs were $44,000 in 1996, $102,000 in 1995, and $62,000 in 1994.

11.   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 will commence in May
      1997.

12.   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  mandated  a  QS-9000  compliant  quality  system  be
      developed and registered by an independent organization. Chrysler required
      registration  by July  1997  and  General  Motors  by  December  1997.  In
      September 1996, the Company was assessed by Underwriters Laboratories Inc.
      and received QS-9000  certification  with ISO 9001 addendum as of December
      20, 1996.

                                       27

<PAGE>

BOWLES FLUIDICS CORPORATION


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

       None

                                       28

<PAGE>

PART III


Item 10a. - 10c.  DIRECTORS OF THE REGISTRANT INCLUDED IN PROXY MATERIALS

Item 10b., d., e., & f.     EXECUTIVE OFFICERS OF THE REGISTRANT:

<TABLE>
<CAPTION>
b. Name, Age and Position       e. Business Experience During Past Five Years
   ----------------------          ------------------------------------------
<S> <C>
   William Ewing III               Chairman since July 1996.  Responsible for the formation of
   Chairman                        overall corporate policy and planning.  Member of Board of
     Age 50                        Directors since 1985.  Currently Vice President and Treasurer of
                                   Reeves Industries, Inc., 1995-present.  Previously Managing
                                   Director of Chemical Bank, 1992-1994, and, prior to that,
                                   Managing Director of Manufacturers Hanover Trust Company.


   Ronald D. Stouffer              President since March 1994.  Responsible for execution of the
   President                       Company's policies and for the Company's operations.  Executive
   Chief Executive Officer         Vice President responsible for engineering and manufacturing from
     Age 65                        1982 to 1994.  Joined the Company in 1967.


   Melvyn J. L. Clough             Vice President, Operations, since joining the Company in November
   Vice President,                 1995.  Responsible for all manufacturing operations including
   Operations                      industrial engineering and tooling. Previously Engineering
     Age 49                        Manager for A. Raymond, Inc.,  1992-1995,  and  various
                                   positions with TRW Fasteners Division to Engineering
                                   Manager, 1982-1992.


   Richard W. Hess                 Vice President,  Engineering,  since joining the Company in
   Vice President                  1992.  Vice  President,  Responsible  for the Company's  total
   Engineering                     engineering department, including research and development and
     Age 53                        applications engineering. Previously Director of Engineering
                                   with Automated Packaging Systems, Inc., 1990-1992.


   Eric W. Koehler                 Vice President, Marketing, since March 1994.  Responsible for
   Vice President,                 marketing and sales functions.  Director of Marketing,
   Marketing                       1990-1994.  Joined the Company in 1989.
     Age 34


   Eleanor M. Kupris               Vice President, Administration, since 1982.  Corporate Secretary
   Secretary and Vice President,   since March 1992.  Responsible for purchasing and personnel.
   Administration                  Joined the Company in 1966.
     Age 55
</TABLE>

                                       29

<PAGE>

Item 10b., d., e., & f.  (continued)

<TABLE>
<CAPTION>
b. Name, Age and Position       e. Business Experience During Past Five Years
   ----------------------          ------------------------------------------
<S> <C>
   David A. Quinn                  Vice President, Finance, since joining the Company in October
   Vice President,                 1993.  Responsible for treasury, accounting and financial
   Finance                         planning functions.  Previously CFO for Bruning Paint Company,
     Age 60                        1991-1993, and Group Vice President-Finance for The Black &
                                   Decker Corporation, 1989-1991.


   Dharapuram N. Srinath           Vice President, Quality Assurance, since March 1995.  Responsible
   Vice President,                 for quality assurance and reliability functions.  Director of
   Quality Assurance               Quality Assurance and Product Reliability, 1992-1995; Director of
     Age 45                        Technology, 1990-1992.  Joined the Company in 1978.


   Arlene M. Hardy                 Corporate Controller since 1990.  Responsible for accounting
   Corporate Controller            functions.  Joined the Company in 1986.
     Age 49
</TABLE>


d. 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 the  annual  meeting  of  directors,  immediately  following  the annual
   meeting of shareholders. 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 INCLUDED IN PROXY MATERIALS.

Item 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT INCLUDED
         IN PROXY MATERIALS.

Item 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS INCLUDED IN PROXY
         MATERIALS.

                                       30

<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 26, 1996, October 28, 1995, and October 29,
                      1994

                      Consolidated Balance Sheets at October 26, 1996, and
                      October 28, 1995

                      Consolidated Statements of Changes in Stockholders' Equity
                      for the three years ended  October 26, 1996,  October 28,
                      1995,  and October 29, 1994

                      Consolidated  Statements of Cash Flows for the three years
                      ended October 26, 1996, October 28, 1995, and October 29,
                      1994

                      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.


       (a)   3  Exhibits

                  Exhibit 11 -

                      Schedule  showing  computations  of earnings per share for
                      each of three years ended  October 26, 1996,  October 28,
                      1995,  and October 29, 1994.


       (b)      Reports on Form 8-K

                      None

                                       31