SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                 Form 10-QSB

[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 
    OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________

                        Commission File No. 0-28102
                                            -------

                            BONDED MOTORS, INC.
                            -------------------
              (Name of small business issuer in its charter)


         California                                     95-2698520     
-------------------------------                        ----------------
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                        Identification No.)


7522 South Maie Avenue, Los Angeles, CA                        90001
---------------------------------------                        -----
(Address of principal executive offices)                      Zip Code

Issuer's telephone number:      (213) 583-8631
                                --------------

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

                    Yes [x]            No [_]

  There were 3,066,040 shares of common stock outstanding at October 22, 1998.

<PAGE>

                             BONDED MOTORS, INC.

                                    INDEX

Part I  - Financial Information                                           Page

          Item 1. Financial Statements

          Balance Sheet as of September 30, 1998                            3

          Statements of Earnings for the three and nine month periods
            ended September 30, 1998, and 1997                              4

          Statements of Cash Flows for the nine month periods 
            ended September 30, 1998, and 1997                              5

          Notes to Financial Statements                                    6-9

          Item 2. Management's Discussion and Analysis of
            Financial Condition and Results of Operation                 10-12

Part II  - Other Information

          Item 6. Exhibits and Reports                                      13

          Signature                                                         14

                                     -2-

<PAGE>



                              BONDED MOTORS, INC.
                                 Balance Sheets
                               September 30, 1998
                                  (Unaudited)
<TABLE>
<CAPTION>

                                   Assets
<S>                                                                    <C>

Current assets:
  Cash                                                              $  146,142
  Trade accounts receivable (less allowance for
   doubtful accounts of $143,764)                                    5,158,162

  Inventories:
    Parts                                                            2,226,746
    Work in process                                                    922,959
    Finished goods                                                   6,746,254
                                                                    ----------
                                                                     9,895,959
                                                                    ----------

  Deferred tax assets                                                  573,061
  Prepaid expenses and other current assets                            348,099
                                                                    ----------
    Total current assets                                            16,121,423
                                                                    ----------

Property and equipment, at cost:
  Machinery and equipment                                            3,114,160
  Furniture and fixtures                                               552,445
                                                                    ----------
                                                                     3,666,605
  Less accumulated depreciation                                      1,510,101
                                                                    ----------
    Net property and equipment                                       2,156,504
                                                                    ----------

Goodwill, less accumulated amortization of $23,836                     188,043
Deferred tax assets                                                  1,482,822
Other assets                                                           157,380
                                                                    ----------
                                                                   $20,106,172
                                                                    ==========

                    Liabilities and Shareholders' Equity             

Current liabilities:
  Current installments of notes payable to bank (note B)            $  385,128
  Accounts payable                                                   2,843,296
  Accrued expenses                                                     579,373
  Accrued warranty obligations                                         657,000
  Income taxes payable                                                 237,527
                                                                    ----------
    Total current liabilities                                        4,702,324
                                                                    ----------

Obligation under capital leases                                         31,153
Notes payable to bank, excluding current installments (note B)         336,659
Long-term debt (note B)                                              5,213,131

Shareholders' equity (note D):
  Preferred stock, no par value.  Authorized
    1,000,000 shares; none issued and outstanding                        -
  Common stock, no par value.  Authorized
    10,000,000 shares; issued and outstanding
    3,065,540 shares                                                 5,030,319
  Additional paid-in capital                                            99,000
  Retained earnings                                                  4,793,586
  Notes receivable from exercise of stock options                     (100,000)
                                                                    ----------
    Total shareholders' equity                                       9,822,905
                                                                    ----------
                                                                  $ 20,106,172
                                                                    ==========
</TABLE>
               See accompanying notes to financial statements

                                     -3-

<PAGE>

                                        BONDED MOTORS, INC.
                                      Statements of Earnings
                                            (Unaudited)
<TABLE>
<CAPTION>
                                                For the Three Months Ended   For the Nine Months Ended
                                                         September 30                September 30
                                                     1998          1997         1998          1997
                                                 ------------------------    ------------------------
<S>                                                   <C>           <C>          <C>          <C>
Net sales                                        $10,807,015    6,576,528    $30,617,667   17,924,622
Cost of sales                                      8,622,708    5,504,917     24,440,356   14,272,545
                                                  ----------   ----------     ----------   ----------
      Gross profit                                 2,184,307    1,071,611      6,177,311    3,652,077

Selling, general and administrative expenses       1,336,788    1,008,445      4,203,289    2,762,817
                                                  ----------   ----------     ----------   ----------
      Earnings from operations                       847,519       63,166      1,974,022      889,260

Other (expense) income:
  Interest expense                                  (108,903)     (49,806)      (364,582)     (96,341)
  Interest income                                      2,088        4,084          6,259       12,244
  Other                                                 -          (3,100)        (1,896)      (3,100)
                                                  ----------   ----------     ----------   ----------
      Earnings before income taxes                   740,704       14,344      1,613,803      802,063

Income tax (expense)                                (262,501)     198,029       (531,064)     121,690
                                                  ----------   ----------     ----------   ----------
      Net earnings                               $   478,203      212,373    $ 1,082,739      923,753
                                                  ==========   ==========    ===========   ==========

Basic earnings per share                         $      .16          .07            .35          .31
Diluted earnings per share                              .15          .07            .34          .30
                                                  ==========   ==========    ===========   ==========

Weighted average common shares outstanding         3,062,000    3,033,000      3,052,000    3,016,000
                                                  ==========   ==========    ===========   ==========
Weighted average common and common equivalent 
   shares outstanding                              3,133,000    3,100,000      3,168,000    3,115,000
                                                  ==========   ==========    ===========   ==========

</TABLE>
                          See accompanying notes to financial statements

                                                 -4-

<PAGE>

                                  BONDED MOTORS, INC.
             Statements of Cash Flow For the Nine Months Ended September 30
                                      (Unaudited)
<TABLE>
<CAPTION>
                                                                   1998        1997
                                                                   ----        ----
<S>                                                                <C>          <C>
Cash flows from operating activities: 
  Net earnings                                                  $1,082,739     923,753
                                                                 ---------   ---------
  Adjustments to reconcile net earnings to net cash used in
   operating activities: 
    Depreciation and amortization                                  217,930     133,931
    Stock option compensation expense                               99,000        -
    Loss on sale of property and equipment                           1,896       3,100
    (Increase) decrease in assets:
      Accounts receivable                                       (1,429,632) (2,130,783)
      Inventories                                               (2,618,998) (1,103,183)
      Prepaid expenses and other assets                           (316,038)    (64,356)
      Deferred tax assets                                         (366,987)   (545,424)
    Increase (decrease) in liabilities:
      Accounts payable                                           1,171,066     716,361
      Accrued expenses                                             151,765     151,870
      Obligation under capital leases                               31,153        - 
      Accrued warranty obligations                                 247,000      45,000
      Income taxes payable                                         415,227     144,736
                                                                 ---------   ---------
        Total adjustments                                       (2,396,618) (2,648,748)
                                                                 ---------   ---------
        Net cash used in operating activities                   (1,313,879) (1,724,995)
                                                                 ---------   ---------
Cash flows from investing activities:
      Purchases of equipment                                      (772,917)   (699,975)
      Acquisition of Wheeler Manufacturing                            -       (667,318)
      Proceeds from sale of equipment                                  500       7,800
                                                                 ---------   ---------
        Net cash used in investing activities                     (772,417) (1,359,493)
                                                                 ---------   ---------

Cash flows from financing activities:
  Net proceeds from exercise of stock options                      157,000     165,000
  Borrowings from bank                                          16,750,665   3,152,805
  Repayments of notes payable to related parties                  (100,000)       -
  Repayments of bank borrowings                                (14,872,270)       -
                                                                 ---------   ---------
      Net cash provided by financing activities                  1,935,395   3,317,805
                                                                 ---------   ---------
      Net increase (decrease) in cash                             (150,901)    233,317

Cash at beginning of period                                        297,043      73,498
                                                                 ---------   ---------
Cash at end of period                                           $  146,142     306,815
                                                                 =========   =========


Supplemental disclosure of cash flow information:
  Cash paid for:
   Interest                                                     $  364,582      96,341
   Income taxes                                                    482,824     278,998
                                                                 =========   =========

</TABLE>

               See accompanying notes to financial statements

                                         -5-

<PAGE>

                            BONDED  MOTORS,  INC.
                        NOTES TO FINANCIAL STATEMENTS
                                 (UNAUDITED)


(NOTE A)  The Company and its Significant Accounting Policies:

Bonded Motors (the Company), remanufactures automobile engines primarily for
domestic and Japanese imported cars and light trucks in the United States for
resale to automotive retailers, end users and installers.

Basis of Presentation

The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to form 10-QSB.  Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.  In the opinion of
Management, all adjustments (consisting of normal recurring journals)
considered necessary for a fair presentation have been included.  Operating
results for the nine and three month periods ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998.  For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-KSB
for the year ended December 31, 1997.

Acquisition and Goodwill

The financial statements include the net assets of an automotive engine
remanufacturing firm (Wheeler Manufacturing of Macon, Georgia) purchased at
their fair market value on the acquisition date in August, 1997.  This purchase
included manufacturing machinery and equipment, plant equipment, office
furniture, fixtures and equipment, automotive parts inventory and supplies,
and other items customarily used in the operation of a business.  The excess
of acquisition costs over the fair value of net assets acquired is included in
and has been allocated to goodwill.  Goodwill is amortized on a straight-line
basis over a ten year period.  The fair value of the assets acquired were as
follows:


                   Inventories                     $137,676
                   Plant Machinery & Equipment     $317,762
                   Goodwill                        $211,880
                                                   --------
                   Total Purchase Cost             $667,318
                                                   ========

                                     -6-

<PAGE>

Deferred Costs

The Company has deferred certain costs in relation to a Securities and
Exchange registration recorded earlier this year.  These costs may be offset
against the proceeds of an offering being currently contemplated.  If the
contemplated offering is not consummated during this fiscal year,  those
deferred costs will be expensed during the fourth quarter, 1998.

Revenue Recognition and Core Accounting

Revenue is recognized upon shipment of product, net of a provision for core
returns.  The Company's customers are encouraged to return their old,
rebuildable core as a credit against the identical engine purchased.  The
Company identifies the returned core to the original customer invoice and
issues a credit memo equal to the core charge reflected on the original
invoice.  These core returns, recorded as a reduction in net sales, were
$9,116,010 and $4,975,943 during the nine months ended September 30, 1998 and
1997 respectively, and $3,797,576 and $1,815,717 during the three months ended
September 30, 1998 and 1997 respectively.

Cores returned from customers are recorded into inventory on the same basis as
the Company records purchases of cores from independent core suppliers, at the
lower of average cost or market (net realizable value).  Customer core returns
provide approximately 55% of the Company's core requirements, and independent
core suppliers provide the remaining 45% of the Company's core requirements.

Earnings per Share

The Financial Accounting Standards Board issued statement No.128, "Earnings
per Share" (SFAS No.128), in March 1997 and effective for fiscal years ending
after December 15, 1997.  The Company adopted SFAS No.128 in 1997.  This
statement requires the presentation of "Basic" earnings per share which
represents net earnings divided by the weighted average shares outstanding,
excluding all common stock equivalents.  A dual presentation of "Diluted"
earnings per share reflecting the dilutive effects of all common stock
equivalents is also required.  Figures for 1997 have been restated for the
effects of the adoption of SFAS No. 128.  

The weighted average common shares outstanding for nine month periods ended
September 30, 1998 and 1997 were 3,052,000 and 3,016,000, respectively.
For purposes of diluted earnings per share, the incremental common equivalent
shares due to outstanding stock options and warrants during the nine month
period ended September 30, 1998 and 1997 were 116,000 and 99,000, respectively.
No adjustments to net income were made for the purpose of computing diluted
earnings per share.

                                     -7-

<PAGE>

(NOTE B) Long-Term Debt:

In January 1998, the Company entered into an amended credit agreement
(Agreement) providing for a revolving line of credit for borrowings up to
$7,500,000 through May 1, 2000.  Borrowings under the Agreement bear interest
at LIBOR (5.84% at December 31, 1997) plus 2.0% or at prime (8.50% at
December 31, 1997).  Borrowings under the line of credit are secured by the
Company's assets.  Total amounts outstanding under the revolving line of
credit at September 30, 1998 were $5,213,131.  The Company had available
borrowings under the line of credit of $2,286,869 at September 30, 1998.

The Agreement also provides for an acquisition facility for borrowings up to
$8,000,000 for a period of two years from the date of funding.  This facility
is to be used for general corporate purposes and in the event the Company
enters into an acquisition in the automotive industry.  Borrowings under the
credit agreement bear interest at prime plus 0.25% or LIBOR plus 2.25% or cost
of funds plus 2.25% and are secured by the assets of the Company and of the
acquired company.  At September 30, 1998, $721,787 had been drawn down and were
outstanding under this facility.  The Company had available borrowings under
this facility of $7,278,213 at September 30, 1998.

The Agreement includes various financial covenants, the more significant of
which are tangible net worth, debt coverage ratio, senior debt to tangible net
worth and quick ratio.  The Company was in compliance with all such covenants
as of September 30, 1998.  

(NOTE C)  Income Taxes:

Income taxes for the interim periods were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to
ongoing review and evaluation by management.

(NOTE D)  Stockholders' Equity and Stock Options:

In April 1996, the Company completed an underwritten initial public offering
of 1,000,000 shares of its common stock, at a public offering price of $5.875
per share (the Offering).  The net proceeds from the Offering of approximately
$4,436,151 were used in part to repay a portion of the Company's debt, and the
balance was used to fund working capital requirements.

The Company adopted a stock option plan in January 1996 which provides for the
issuance of options to employees, officers and directors of the Company to
purchase up to an aggregate of 400,000 shares of common stock. In 1997, the
plan was amended to increase the number of shares of common stock that could
be purchased to an aggregate of 600,000 shares.  In 1996, the Company issued
255,000 options with exercise prices ranging between $5.50 and $6.50, the
estimated fair market value at date of grant, with vesting periods of between
one and three years and exercise dates of between one and five years from the

                                     -8-

<PAGE>

date of issuance of the option.  In 1997, the Company issued 185,000 with
exercise prices ranging between $8.625 and $10.00, the estimated fair market
value at date of grant, with vesting periods of between one and three years
and exercise dates of between one and five years from the date of issuance of
the option.  During 1997, 34,600 options were exercised for total proceeds of
$194,900 and 7,500 options were canceled upon termination of employment by one
of the employees.  In February 1998, the Company granted stock options for
70,000 shares at a price of $9.50, the estimated fair market value as of the
date of the grant, to the officers. In July 1998, the Company granted stock
options for 4,000 shares at a price of $9.625, the estimated fair market value
as of the date of the grant, to the employees.  During 1998, 28,000 options
were exercised for total proceeds of $157,000 and 10,000 options were canceled
upon termination of employment by one of the employees. 

Under the Company's 1996 Incentive Stock Plan, in June, 1998 the Company
granted stock options for 25,000 shares with an exercise price of $7.75, to
consultants for services rendered.

The Company also adopted a directors' plan in January 1996 which provides for
the issuance of options to outside directors of the Company to purchase up to
an aggregate of 50,000 shares of common stock.  In 1996, 20,000 options were
issued with exercise prices of $6.50, the estimated fair market value at date
of grant. In 1997, 6,000 options were issued with exercise prices ranging
between $7.25 and $7.375, the estimated fair market value at date of grant.
During 1997, 10,000 options were canceled. 

During 1996, the Company issued 100,000 warrants to purchase common stock to
the Company's underwriters on completion of the Company's initial public
offering.  These warrants have exercise prices of $7.05 per share, the then
estimated fair market value, vesting over one year, with a five-year term.

                                     -9-

<PAGE>

                       PART I - FINANCIAL INFORMATION

Item 2.            MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere herein.

RESULTS OF OPERATIONS:

Net sales for the nine months and three months ended September 30, 1998
increased $12,693,045 or 70.8% and $4,230,487 or 64.3%, respectively, over
the comparable periods a year earlier.  For such nine month periods the
increase was from $17,924,622 to $30,617,667 and for such three month periods
the increase was from $6,576,528 to $10,807,015.  These increases are
attributable to internal growth with the Company's traditional customer base,
and the addition of Genuine Parts/NAPA, for whom the Company is now the
primary remanufactured engine supplier.  In March, 1998, the Company closed
its Harrisburg, Pennsylvania distribution center and transferred those goods
to its new Albany, New York distribution center. (its Macon, Georgia
manufacturing plant was purchased in August, 1997, its Auburn, Washington
distribution center was opened in December, 1994 , its Cincinnati, Ohio
distribution center was opened in August, 1996, and its Denver, Colorado
distribution center was opened in January, 1997.)

Cost of goods sold for the nine and three months ended September 30, 1998
increased $10,167,811 or 71.2% and $3,117,791 or 56.6%, respectively, over the
comparable periods a year earlier.  For such nine month periods the increase
was from $14,272,545 to $24,440,356 and for such three month periods the
increase was from $5,504,917 to $8,622,708.  These increases are attributable
to additional costs during the recent periods in connection with increased
production.  Cost of goods sold as a percentage of net sales increased over
the nine month periods from 79.6% to 79.8% and decreased over the three month
periods from 83.7% to 79.8%.  The Company believes that this increase in cost
of goods sold for the nine months ended is primarily attributable to the labor
and overhead costs associated with the expansion of the Company's production
capacity, as well as expensed start-up costs associated with the new Macon,
Georgia manufacturing facility.  The decrease in costs for the three months
periods was due primarily to more efficient materials handling and to a
greater absorption of direct labor and related overhead expenses as a result
of increased production.

Selling, general and administrative expenses for the nine and three months
ended September 30, 1998 increased $1,440,472 or 52.1% and $328,343 or 32.6%,
respectively, over the comparable periods a year earlier.  Selling, general
and administrative expenses as a percentage of sales decreased from 15.4% to

                                     -10-

<PAGE>

13.7% for the comparable nine month periods and decreased from 15.3% to 12.4%
for the comparable three month periods.  The decreases are primarily 
attributable to higher revenues. 

Earnings from operations for the nine and three months ended September 30, 1998
increased $1,084,762 or 122.0% and increased $784,353 or 1241.7%, respectively,
over the comparable periods a year earlier.

Interest expense for the nine month and three months ended September 30, 1998
increased $268,241 or 278.4% and increased $59,097 or 118.7%, respectively,
over the comparable periods a year earlier.  The increase was primarily
attributable to borrowings for the nine months ended September 30, 1998 due
to a build up of inventory and accounts receivable, which are attributable to
sales increases and due to the acquisition of Wheeler Manufacturing.

Pre-tax income for the nine and three months ended September 30, 1998 increased
$811,740 or 101.2% for the nine month periods and increased $726,360 or 5063.9%
for the three month periods from the year earlier. After tax earnings increased
$158,986 or 17.2% for the nine month periods and increased $265,830 or 125.2%
for the three month periods from a year earlier, due to the items mentioned
above.

LIQUIDITY AND CAPITAL RESOURCES:

The Company's operations have been financed principally by borrowings under a
bank credit facility and cash flows from operations.  At September 30, 1998,
the Company's working capital was $11,419,099.

Net cash used by operating activities during the nine months ended
September 30, 1998 of $1,313,879 was primarily to finance an increase in
accounts receivable and inventory, due to increased sales during the period.

Net cash used by investing activities for the nine month periods ended
September 30, 1998 of $772,417 was primarily for the purchase of new equipment.

Net cash provided by financing activities for the nine month periods ended
September 30, 1998 of $1,935,395 was primarily from recent borrowings from the
bank, and cash received upon the exercise of stock options.

In January 1998, the Company entered into an amended credit agreement
(Agreement) providing for a revolving line of credit for borrowings up to
$7,500,000 through May 1, 2000.  Borrowings under the Agreement bear
interest at LIBOR (5.84% at December 31, 1997) plus 2.0% or at prime (8.5% at

                                     -11-

<PAGE>

December 31, 1997).  Borrowings under the line of credit are secured by the
Company's assets.  Total amounts outstanding under the revolving line of credit
at September 30, 1998 were $5,213,131.  The Company had available borrowings
under the line of credit of $2,286,869 at September 30, 1998.

The Agreement also provides for an acquisition facility for borrowings up to
$8,000,000 for a period of two years from the date of funding.  This facility
is to be used for general corporate purposes and in the event the Company
enters into an acquisition in the automotive industry.  Borrowings under the
credit agreement bear interest at prime plus 0.25% or LIBOR plus 2.25% or cost
of funds plus 2.25% and are secured by the assets of the Company and of the
acquired company.  At September 30, 1998, $721,787 had been drawn down and
were outstanding under this facility.  The Company had available borrowings
under this facility of $7,278,213 at September 30, 1998.

The Company's accounts receivable as of September 30, 1998 was $5,158,162.
This represents an increase of $1,429,632 or 38.3% over accounts receivable
on December 31, 1997, and is due to increased sales.

The Company's inventory as of September 30, 1998 was $9,895,959 which
represents an increase of $2,618,998 or 36.0% over inventory as of
December 31, 1997.  The increase is primary attributable to the Company's
increasing finished goods inventory at all distribution centers.  In addition,
the Company maintains a large inventory at its Los Angeles facility in
anticipation of increased demand for the Company's products in 1998.

In 1996 and prior years, quarterly inventory values were estimated based upon
historical values.  At fiscal year ended December 31, 1996, a physical
inventory was taken and an adjustment of $447,977 to inventory valuations
was made.  Because quarterly physical inventories were not taken throughout
1996, no quarterly adjustments could be calculated.

Beginning the first quarter of 1997, physical inventories have been taken on a
quarterly basis, resulting in no significant inventory valuation adjustment at
year ended 1997.  This procedure continues throughout 1998.

The Company believes that internally generated funds, the available borrowings
under its existing credit facilities and the proceeds from its initial public
offering will provide sufficient liquidity and enable it to meet its current
and foreseeable working capital requirements. 

                                     -12-

<PAGE>

                         PART II - OTHER INFORMATION


Item 6. Exhibits and Reports on Form 8-K

     (a)   Exhibits:
             None

     (b)   Reports on Form 8-K
             None

                                     -13-

<PAGE>

                                 SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934,
the registrants caused this report to be signed on its behalf by the
undersigned, thereunder duly authorized.


                                        Bonded Motors, Inc.




Dated: October 22, 1998                 By:/S/PAUL SULLIVAN
                                           -------------------------
                                           Paul Sullivan
                                           Chief Financial Officer

                                     -14-