<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                        
                                  FORM 10-KSB
                                        
(Mark One)
[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934
                    For the fiscal year ended March 31, 1998

[_]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934
     For the transition period from __________ to __________


                        Commission file number: 0-28560


                            RESEARCH ENGINEERS, INC.
       (Exact name of small business issuer as specified in its charter)



              Delaware                                  22-2356861     
    (State or other jurisdiction                      (IRS. Employer 
         of incorporation)                           Identification No.)     

22700 Savi Ranch Parkway, Yorba Linda, CA                 92887
(Address of principal executive offices)                (Zip Code)


      Registrant's telephone number, including area code:  (714) 974-2500

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

                         Common Stock, $0.01 par value
                                (Title of Class)


Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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 [_]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]

State issuer's revenues for its most recent fiscal year: $12,346,000

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 23, 1998 was $11,921,833.

The number of shares outstanding of the registrant's only class of Common Stock,
$.01 par value, was 5,680,710 on June 23, 1998.

DOCUMENTS INCORPORATED BY REFERENCE:  None
<PAGE>
 
                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

Introduction

  Research Engineers, Inc. (the "Company") was incorporated in 1981 and is
currently headquartered in Yorba Linda, California. The Company is a leading
provider of technically advanced engineering software solutions.  The Company's
software products provide fully integrated easy-to-use design automation and
analysis solutions for use by engineering analysis and design professionals
worldwide. The Company's comprehensive line of structural, mechanical, civil and
process/piping engineering software products is designed to fully integrate the
functions of model generation, analysis, design drafting and data presentation.
All of the Company's products utilize a proprietary Windows-based graphics
engine, allowing the software to be used with or without third-party Computer
Aided Design ("CAD") software. The Company's products assist engineers in
performing a myriad of mission-critical engineering tasks, including the
analysis and design of industrial, commercial, transportation and utility
structures, pipelines, machinery, automotive and aerospace products, and survey,
contour and digital terrain modeling. Suggested list prices for most of the
Company's products range from approximately $995 to $7,000.

  The Company currently licenses its software products to more than 16,000
customers accounting for over 40,000 software installations and 120,000
concurrent users worldwide.  A selected list of the Company's customers include:
Bechtel Corporation, Boston Edison, British Telecom, California Department of
Resources, California Institute of Technology, Jet Propulsion Laboratories,
Exxon Corporation, Fluor Daniel, Inc., General Dynamics, NASA, Rocketdyne,
Siemens AG and Toyo Engineering. The Company's products are sold and supported
domestically and internationally through its network of branch offices,
subsidiaries and representatives in the United States, the United Kingdom,
Germany, Japan, France, Scandinavia, Australia, China, Singapore, India,
Indonesia, Korea, Thailand, Malaysia, South Africa, Mexico, Russia, the Middle
East and Latin America. The Company's structural and civil engineering products
provide eight international language options and local design codes required by
its worldwide markets.

Industry Background

  The engineering design industry is comprised of a broad range of organizations
including small, medium and large-sized engineering consulting firms,
manufacturing companies, construction/fabrication companies, utilities,
transportation companies and government agencies and is characterized by rapidly
changing market demands as a result of evolving quality/safety regulations,
increasing complexity of engineering projects, increasing demand for
interdisciplinary information integration and increasing competition.

  Historically, engineering design organizations relied on internally-developed
programs or "public-domain" software that was developed by universities for
analysis and design tasks. These programs typically ran on expensive mainframes,
minicomputers or workstations in highly centralized environments. As a result of
the increased availability of powerful desktop personal computers ("PCs") which
are capable of accommodating the needs of sophisticated engineering software,
engineering professionals have shifted from these expensive customized
hardware/software solutions to commercial, PC-based solutions.  The Company
believes that the shift to powerful PCs has resulted in an increased demand for
technically-sophisticated, easy-to-use engineering software products that
automate, simplify and integrate analysis and design functions in a cost-
effective manner. The following industry dynamics contribute to this increasing
demand:

  Increasing regulatory and compliance requirements. In recent years, the
engineering design industry has been subject to significant changes in
regulatory and compliance requirements resulting from, among other things,
natural disasters such as Hurricane Andrew and the Northridge and Loma Prieta,
California earthquakes. For example, in many of the structural engineering
segments of the industry, all newly constructed structures in a seismic or
critical wind load (hurricane/tornado) zone are required to comply with certain
mandatory design requirements irrespective of their size and complexity. In
addition, with the widespread adoption of increased quality assurance standards
such as ISO 9000, even simple consumer products, such as toys, are now subject
to strict quality and safety standards which require computerized stress test
analyses on such products. All of these 

                                       2
<PAGE>
 
regulatory requirements have significantly increased the demand for highly
accurate, cost-effective engineering analysis and design automation software.

  Increased use of engineering analysis and design software by small and medium-
sized design/manufacturing firms. Although the engineering design industry was
among the first industries to use sophisticated computer hardware and software,
a significant number of small and medium-sized design/manufacturing companies
could not fully utilize these products due to the costs involved. For example,
prior to the availability of PC-based solutions, the cost for a typical
hardware/software system capable of full-scale solid modeling functionality
would start at approximately $70,000. With the advent of moderately priced
powerful Pentium-based PCs (with large RAM and storage capabilities), equipped
with sophisticated operating systems such as Windows 95 and NT, small and
medium-sized design/manufacturing companies can now afford the systems to run
technologically advanced engineering software. This decrease in the cost of
computing power has allowed small and medium-sized design/manufacturing firms to
successfully meet the new regulatory and compliance requirements described above
in a cost-efficient manner thereby increasing competition in the engineering
design industry.

  Growth in demand for engineering analysis products with built-in graphics
functionality. Traditionally, the engineering analysis and design market has
been dependent on third-party CAD products to add graphics, visualization and
presentation capabilities to engineering software. However, the high cost of
third-party CAD software, which can range from $6,000 to $24,000, coupled with
its lack of application specific details and potential compatibility problems
has created a demand for engineering products with incorporated proprietary
fully integrated graphics and/or CAD technology.  All of the Company's products
incorporate the Company's proprietary Windows-based graphics technology to allow
for visualization, verification and drawing generation capabilities. See "--
Technology."

  Growth in international engineering software market. The international
engineering software market is growing rapidly due in large part to the
worldwide surge in infrastructure-related construction activities. The newly
industrialized and emerging growth areas of the world, including Southeast Asia,
China, India and the Latin American countries, have embarked on major
infrastructure development and construction efforts. 

  These dynamics have increased the volume and complexity of information
analysis and exchange between engineering design organizations and organizations
in related disciplines, such as construction, fabrication and production.
Consequently, engineering design firms require more powerful and better
integrated software products for their analysis and design activities. In order
to operate efficiently within this environment, engineering design organizations
must automate and integrate their mission-critical and labor-intensive
functions, including (i) model development, (ii) engineering analysis, (iii)
graphical visualization/verification, (iv) engineering design based on code
requirements and (v) report generation. Modern engineering concepts such as
"concurrent engineering" (i.e., performance of all process functions in a
concurrent manner) are becoming increasingly important in today's competitive
environment. See "--Technology."

Business Strategy

  The Company's mission is to become one of the world's leading suppliers of
stand-alone and network-based engineering software products for engineering
analysis and design professionals. The Company seeks to achieve its objectives
through the following strategies:

  Leveraging Existing Customer Relationships. The Company considers its
relationships with existing customers to be an important corporate asset.
Currently, the Company has over 16,000 customers, accounting for over 40,000
software installations and 120,000 concurrent users worldwide. The Company
continually introduces new products and upgrades to enhance and extend its
product line. The Company believes that its direct and frequent contact with its
customers provides important market intelligence, which in turn is used to
develop new, demand-driven products.

  Maintaining Leadership in Research and Development Activities. The Company
believes that it is an industry leader in designing and developing products for
the technically-sophisticated segment of the engineering analysis 

                                       3
<PAGE>
 
and design industry and in providing products that address the entire spectrum
of the engineering design process in an integrated manner. The Company is
committed to continually advancing the capability of its products, through the
incorporation of advanced technologies. The Company has established research and
development facilities in the United States, United Kingdom and India. All of
these facilities employ highly-skilled technical personnel. The Company's
offshore research and development facility in India is a key competitive
advantage, in that it produces substantially more development effort for
equivalent dollars spent in the U.S. See "--Product Development."

  Expanding the Company's Marketing, Sales and Product Support Activities. The
Company believes that its direct sales approach and extensive use of
demonstration materials is the most effective way to market and sell its
software products to engineering professionals. This market typically requires a
full understanding of product capabilities in making a purchase decision.  See
"--Sales and Marketing."  The Company continues to maintain and enhance its
telesales operation, which is used as a closing mechanism for converting leads
to sales. The Company has recently undertaken a "web marketing" initiative to
generate additional awareness for its products by posting banners on the web
pages of professional engineering societies, newsgroups and similar forums on
the Internet.  The Company's Internet strategy includes providing on-line
product demonstrations and on-line use (for a fee) of the Company's products for
discrete projects.

  Expanding International Presence. The Company intends to expand its
international presence by opening offices or acquiring businesses in those
foreign countries that provide the greatest potential for sales. In fiscal 1998,
approximately 55% of the Company's revenues were attributable to customers
located outside the United States. All of the Company's products support a
complete range of international measurement units. The Company's structural and
civil engineering products allow customers to choose from eight major
international languages and twelve market-specific design codes. The Company
intends to continually evaluate whether to create additional foreign language
versions of any of its products and/or to include specific international design
codes within a particular product based upon, among other things, the Company's
experience in particular foreign markets and the specific design
approval/validation requirements of the particular foreign market.

  Expanding Through Acquisitions. In addition to the Company's internal product
development activities, the Company has expanded, and expects to continue to
expand, its product lines, technology and product base through acquisitions
complementary to the Company's current operations. In 1990, the Company acquired
The Technical Group, a software company that developed CIVILSOFT, which is
regarded by many to be the leading engineering and surveying software in the
industry today. In 1995, the Company acquired STARDYNE, the first commercially-
available finite element analysis software, now regarded by many as an industry
standard. In March 1996, the Company acquired ADLPipe, Inc., a software company
that provided piping analysis and design solutions since 1975.  In December
1996, the Company acquired QSE (Bristol) Limited, a provider of structural
analysis and design software that expands the Company's product offerings to the
residential and light commercial markets.  In March 1997, the Company acquired
from Intrasoft, Inc. the rights to STRUCT.etc, a structural engineering software
product consisting of 88 small stand-alone software modules that are currently
in use by thousands of architects and engineers. In October 1997, the Company
acquired the animation technology assets of AXA Corporation, a private company
formerly developing animation technology for the entertainment industry. This
animation technology will be integrated into the Company's next generation
engineering software. The Company believes that additional opportunities exist
to expand its product lines by acquiring businesses, products and technologies
that complement those of the Company.

Products

  The Company's engineering analysis and design software product lines include
its core structural engineering line and its emerging civil, mechanical and
process/piping lines. All of the Company's current products use the Company's
proprietary Windows-based graphics engine that provides the most modern graphics
environment for model development, visualization/verification and drawing
generation. These products are also designed for use in conjunction with third-
party CAD drafting systems, including AutoCAD and MicroStation. Suggested list
prices for most of the Company's products range from approximately $995 to
$7,000.

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<PAGE>
 
  The following table describes the Company's core software products:


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------- 
 Product
 Category        Product Name                   Function                             Applications
-------------------------------------------------------------------------------------------------------------
<S>              <C>              <C>                                     <C>
 
Structural       STAAD/Pro        A comprehensive workflow integrated     Engineering/architectural firms,  
Engineering                       solution for the structural             consulting engineers, construction
                                  engineering design office.  Includes    companies, building designers,    
                                  STAAD Analysis/Design, STARDYNE         industrial plant designers,       
                                  Advanced Analysis, structural           offshore/marine engineering,      
                                  component design, finite element        petrochemical industry, power     
                                  engineering environment,                industry, manufacturing/ heavy    
                                  fabrication/detailing, estimation,      industries, transportation,       
                                  CAD and drawing generation.             facilities, government/municipal  
                                  Supports US and all major               agencies, etc.                     
                                  international structural design         
                                  codes.                              
                                  
                 STAAD-III        Integrated structural analysis and      Engineering/architectural    
                                  design for steel/concrete/timber        consulting firms, construction
                                  codes; static/dynamic/                  companies, government and    
                                  non-linear/seismic analysis;            municipal agencies, industrial
                                  incorporates U.S., British, German,     plant design, offshore/marine
                                  Japanese and other international        engineering, equipment       
                                  codes.                                  manufacturers, transportation
                                                                          engineering, facilities      
                                                                          engineering.                  

                 STAAD-III        Same as above  Allows users to          Same as above. 
                 Online           submit jobs for analysis via modem      
                                  on a pay-per-use basis.
                               
                                                                          
                 QSE - Quick      Integrated analysis and design for      For light industrial and     
                 Structural       2D/3D frame structures;                 residential applications.    
                 Engineering      steel/concrete design per US and        Engineering/architectural    
                                  British codes; links to detailing       consulting firms; construction
                                  software.                               companies.                    

                 FabriCAD         Full-scale structural fabrication       Construction engineering,
                                  drawing/ detailing; construction        fabrication shops, steel
                                  drawing; individual shop drawings;      detailers, mechanical equipment
                                  joint design; interference check;       fabrication.
                                  material estimation; weight       
                                  calculation.                            
                                                                          
                 STRUCT.etc       A comprehensive array of 88             For light industrial and     
                 STRUCTural       structural engineering software         residential applications.    
                 Engineering      tools ideal for efficient design and    Engineering/architectural    
                 Tool Case        analysis of steel, concrete timber      consulting firms; construction 
                                  and masonry structures.                 companies.                     
--------------------------------------------------------------------------------------------------------------------------------
Mechanical       STARDYNE         Finite element analysis of              Aerospace, nuclear, machine tools,
Engineering                       mechanical/structural components;       machinery, manufacturing,
                                  machine and equipment design;           automotive, civil/structural,
                                  static/ dynamic/non-linear/buckling/    offshore/marine, electrical,
                                  transient/random vibration/             chemical, processing,
                                  thermal/fracture/fatigue analysis.      power/energy, mining.

                 VISUAL SOLID     3D solid modeling in design             Same as above.              
                                  automation; integrated with finite      
                                  element analysis                                      
--------------------------------------------------------------------------------------------------------------------------------
Process/Piping
Engineering      ADLPIPE          Analysis, design and code checking      Power, process, industrial plant
                                  of piping systems; static/dynamic/      design.
                                  seismic/non-linear analysis;
                                  transient/thermal analysis; supports
                                  U.S., British and other
                                  international codes.
--------------------------------------------------------------------------------------------------------------------------------
Civil            CIVILSOFT        Surveying, contouring, roads/highway    Civil engineering consulting
Engineering                       design, site, design, digital,          firms; government/municipal 
                                  terrain, modeling, earthwork            agencies; utilities;        
                                  calculations, water network design,     transportation; facilities; 
                                  sewer/storm drainage systems,           construction companies.     
                                  hydraulics/hydrology.                                                
-------------------------------------------------------------------------------------------------------------
</TABLE>

                                       5
<PAGE>
 
  Structural Engineering. The Company's structural engineering products may be
used to analyze and design almost any type of structure, including, among
others, buildings (residential and commercial), bridges, industrial structures,
utility structures, transportation structures and transmission towers. Because
of the broad analytic nature of this software, users of the Company's structural
engineering product line include a wide range of organizations from Fortune 500
companies to individual consulting engineers.  The Company's structural
engineering product line primarily consists of STAAD, a stand-alone integrated
structural analysis and design software with drafting capabilities. The STAAD
user base currently consists of over 6,000 companies worldwide with more than
20,000 installations.  Of the top 500 architectural/engineering companies ranked
in the April 14, 1997 issue of Engineering News-Record (a McGraw-Hill
publication), all of the top ten, 24 of the top 25 and 44 of the top 50 are
STAAD users. In Engineering News-Record's most recent bi-annual survey of the
structural engineering segment of the architectural engineering and construction
market, STAAD was ranked third in terms of usage and likelihood of purchase.
The first and second ranked software were CAD products offered by AutoCAD and
Intergraph, neither of which offer structural engineering analysis and design.
While most of the users of STAAD are in the structural consulting engineering
business, STAAD is also used by construction companies, architects, mechanical
constructors/fabricators, government agencies, utilities, petroleum producers,
facility development/maintenance groups and the manufacturing industry.

  In November 1997, the Company released STAAD/Pro, its "next-generation"
structural engineering software. STAAD/Pro extends the range of STAAD to include
the entire structural design process  modeling, visualization, verification,
analysis, design, detailing and drawing. With its applicability to a broader
range of professionals in the engineering and design process, the Company plans
to use STAAD/Pro to launch its corporate licensing program during fiscal 1999.

  The Company also offers STAAD Online. This product provides all the
functionality of STAAD but is sold to the customer on a pay-per-use basis.  A
customer is provided a package free-of-charge, which includes the STAAD input
generator, post processor software and all the necessary utilities for remote
connection. The customer uses the STAAD input generator to create an input file
that is transferred to the STAAD Online server, via modem, for processing. Upon
completion of analysis, the results are transferred back to the customer's PC.
The customer is billed based on the size of the input file. The Company has
positioned this product for the smaller engineering firm which may only need to
utilize STAAD on a limited basis.

  The Company entered into a workflow integration arrangement with Intergraph,
Inc., the industry's leading supplier of drawing and drafting software, whereby
the two companies developed program enhancements that allow STAAD to operate
from within Intergraph products. These enhancements reinforce the two-way link
between the software packages, giving structural engineers seamless access to
structural member data and a smoother workflow for modeling structural members.
The first version of the integrated software was released in September 1997.

  During fiscal 1997, the Company expanded its structural engineering product
line with the addition of two new products: Quick Structural Engineering (QSE)
and STRUCTural Engineering Tool Case (STRUCT.etc). QSE consists of a suite of
integrated analysis and design modules for frame structures. Additionally, QSE
provides the engineer with a detailing mode whereby a structural model can be
quickly transferred into a complete two-dimensional or three-dimensional
detailed drawing. STRUCT.etc provides customers a comprehensive array of 88
structural engineering software tools ideal for the efficient design and
analysis of steel, concrete timber and masonry structures. Both QSE and
STRUCT.etc are aimed at the residential and light commercial market segments.

  During fiscal 1998, the Company began distribution of FabriCAD, a 3D
structural steel detailing and production system that leads the detailer from
model generation to finished detail drawings and output reports. Sharing
resources from a vast pool of engineering and graphical software from the
Company has allowed FabriCAD to become a powerful alternative to expensive
detailing/fabrication software.

  Mechanical Engineering. The Company's mechanical engineering product line was
added in 1995 with the acquisition of STARDYNE, a general purpose finite element
analysis software. STARDYNE was the world's first commercial finite element
analysis software and has been serving the mechanical engineering segment of the
industry since 1968. STARDYNE has been enhanced and integrated with other
products of the Company and is currently used by more than 2,000 companies
worldwide. For example, STARDYNE has been used by: Rockwell, 

                                       6
<PAGE>
 
to analyze the Apollo spacecraft command module; Rocketdyne, to analyze rocket
engines for the space shuttles; and toy manufacturers, to design and test new
products.

  To enhance its mechanical engineering product line, the Company has developed
and introduced VISUAL SOLID, a full-scale three-dimensional solid modeling
software. VISUAL SOLID assists engineering professionals in developing an entire
three-dimensional model on a PC.  Based on the Windows, Windows 95 and Windows
NT environments, VISUAL SOLID includes a graphics-based, intuitive, easy-to-use
interface and full-scale editing facilities. VISUAL SOLID's comprehensive model
development facilities include, among other facilities, Boolean operations,
shape change operators, parametric editing and part assemblies. In addition,
VISUAL SOLID is equipped with its own rendering engine and engineering drawing
generation modules. Fully integrated with STARDYNE, VISUAL SOLID allows
engineering professionals to automate the entire process of product design,
including model development, verification/visualization, engineering
calculations and design drawings.

  The Company has also acquired distribution rights to a product called FEMKIT
that entered the Company into the finite element modeling market.  FEMKIT
provides a Windows native finite element engineering environment with interfaces
available for several popular third-party software products.

  Process/Piping Engineering. The Company's process/piping engineering product,
marketed under the name ADLPIPE, is used in the analysis and design of piping
systems to obtain stresses and displacements under pressure, thermal and other
static/dynamic loading conditions. The Company acquired this technology from
ADLPipe, Inc. in March 1996, and adapted the product to Windows, making it the
industry's first Windows native process/piping product. Approximately 2,000
companies currently use ADLPIPE, worldwide. Since its introduction in 1975,
ADLPIPE has been used worldwide by more than 20,000 users.

  Civil Engineering. The Company's civil engineering software products, marketed
under the name CIVILSOFT, address all aspects of civil engineering, including
survey, contour and digital terrain modeling, hydraulics, hydrology and
water/sewer network design and analysis.  During fiscal 1997, the Company
released the first phase of its WINCIVIL product line, which runs independently
of expensive third-party CAD products. The Company believes that its civil
engineering products comprise one of the industry's most versatile and
comprehensive suites of civil engineering software. Over 6,500 companies
currently use the Company's civil engineering software products worldwide, with
more than 9,000 installations.

  Animation Technology. The Company recently acquired the animation technology
assets of AXA Corporation, a private company that developed animation technology
for the entertainment industry. The AXA products are currently being distributed
as stand-alone products. Eventually, the animation technology will be integrated
into the Company's next generation engineering software.

Customers

  Research Engineers currently has over 16,000 customers accounting for over
40,000 software installations and 120,000 concurrent users worldwide. In fiscal
1998, 55% of the Company's revenues were generated from customers outside the
United States.

Sales and Marketing

  The Company markets and sells its engineering analysis and design software
products through a direct sales approach consisting of three distinct phases.
First, the Company uses extensive print advertising, trade show participation
and direct mail campaigns to generate sales leads. Second, in response to
product inquiries generated through these activities, the Company provides
elaborate evaluation/demonstration software packages complete with full user
manuals and working programs. Finally, the Company's telesales professionals are
used to close the sales.  The Company's telesales professionals work in
conjunction with the Company's engineers in order to provide complete coverage
of business and technical issues in the sales cycle. The Company believes that
this type of direct sales approach, using extensive demonstration materials
prior to closing a sale, is the best way to market its products to engineering
professionals, who typically require a full understanding of product capability
in making a purchase decision. The Company also utilizes this type of sales
approach in connection with its marketing and sales of 

                                       7
<PAGE>
 
product enhancements, upgrades and new products to current customers. The
Company continues to maintain and enhance its telesales operation, which is used
as a closing mechanism for converting leads to sales. The Company has recently
undertaken a "web marketing" initiative to generate additional awareness for its
products by posting banners on the web pages of professional engineering
societies, newsgroups and similar forums on the Internet. The Company's Internet
strategy includes providing on-line product demonstrations and on-line use (for
a fee) of the Company's products for discrete projects.

  The Company conducts sales and training seminars worldwide to provide current
and potential customers with additional information about its products.  During
fiscal 1998, the Company focused these efforts in Southeast Asia and conducted
seminars in Singapore, Bangkok, Manila, Hong Kong, Kuala Lumpur, Jakarta,
Shanghai, Beijing, Shenzhen, Bombay, Delhi, Madras and Calcutta. In addition,
the Company conducted a 21-city roadshow in the United States during fiscal 1998
to introduce STAAD/Pro to both existing and potential customers. In fiscal 1999,
the Company is scheduled to conduct sales and training seminars in the United
States, United Kingdom, Japan, France, Germany, Spain, Scandinavia, Singapore,
Malaysia, Thailand, Indonesia, India, China and Mexico. Since 1987, the Company
has also organized Annual User Conferences for its customers. These events,
which are attended by worldwide users, are intended to serve as a forum for the
exchange of ideas and information. The Company has also been successful in
placing its products in various colleges and universities, including Harvard
University, Massachusetts Institute of Technology and California Institute of
Technology, as a means of introducing its products to future generations of
professionals.

  The Company sells and supports its products internationally through its
extensive international infrastructure, consisting of branch offices,
subsidiaries and representatives located worldwide. Currently, the Company has
numerous sales representatives and technical support personnel located in the
United Kingdom, Germany, Japan, France, Scandinavia, Australia, China, India,
Singapore, Indonesia, Korea, Thailand, Malaysia, South Africa, Mexico, Russia,
the Middle East and Latin America. Most of the Company's foreign sales
representatives and technical support personnel are local nationals. The
Company's structural and civil engineering products allow customers to choose
from among eight major international languages and twelve local design codes.

Support and Training

  The Company believes that providing its customers with direct support services
helps ensure that customers obtain the maximum benefits offered by its products.
The Company believes that its support programs also enhance the Company's
relationships with customers. Purchasers of the Company's software are typically
provided 120 days of product support without charge and a multimedia training
CD-ROM. For support after the 120-day period, customers can elect to purchase
ongoing support either on a one-year contract basis or on an as-used fee basis.
To provide quality technical support worldwide, the Company employs highly
qualified engineers and software specialists and maintains product support
centers in the United States (Orange County, California and Boston,
Massachusetts), United Kingdom, France, Germany, Scandinavia, Singapore, Japan,
China, India, Australia, Indonesia, Korea, Thailand, Malaysia, South Africa,
Mexico, Russia, the Middle East and Latin America. Many of the Company's support
professionals have advanced degrees. In addition, the Company maintains a World
Wide Web site on the Internet and provides e-mail technical support to its
users. Customers also receive a technical newsletter which is distributed
quarterly by the Company and is designed primarily to apprise customers of
technological enhancements and new products offered by the Company.

Product Development

  The Company offers a broad range of products that are designed to keep pace
with technological and regulatory developments in the marketplace and address
the increasingly sophisticated needs of its customers. The Company continually
focuses on expanding its existing product line offerings with acquired, upgraded
and new products. The Company specifically seeks opportunities to expand its
product offerings through acquisitions. All of the Company's acquired products
are incorporated into the Company's product lines with the goal of providing
seamless data transfer and functional integration. Product development
activities include, among others, adding new engineering analysis capabilities,
implementing new design codes, enhancing existing engineering databases,
developing new ease-of-use features, enhancing user interfaces, implementing
emerging technologies, exploiting new hardware capabilities and platform
developments, and providing improved interfaces with related third-party
products.

                                       8
<PAGE>
 
  The Company's product development group includes experts in structural
engineering, mechanical engineering, civil engineering, piping/process
engineering, advanced mathematical techniques, numerical methods, computer
graphics and operating system technology. The Company has established research
and development facilities in the United States, United Kingdom and India. The
Company's overseas offices contribute significantly to the development and
maintenance of local engineering design codes that are offered in certain of the
Company's products. The Company's offshore research and development facility in
India is used to develop certain core technologies that require significant man-
hours. Due to the availability of skilled technical personnel at a fraction of
the cost for comparable personnel in the United States, this offshore research
and development facility affords the Company the opportunity to obtain
substantially more development effort for equivalent dollars spent in the United
States.  The Company believes that the use of its offshore research and
development facility provides a significant competitive advantage. In addition,
the Company works closely with leading universities in computer-aided
engineering, including the Massachusetts Institute of Technology and the
University of Pennsylvania. The Company has sponsored research projects and
procured technologies from a number of prominent universities including
Vanderbilt University and Worcester Polytechnic.

  The Company releases enhanced versions of its software products on an on-going
basis. The Company works closely with its existing and prospective customers to
determine their requirements and to design enhancements and new products to meet
their needs. The Company believes that a substantial number of its product
enhancements in recent years have been developed as a result of the ideas and
suggestions of its customers.

  To ensure that the Company's products meet the requirements of its users and
to ensure that the Company's software development, validation and maintenance
processes meet applicable regulatory guidelines on software development, the
Company has established an extensive quality assurance and quality control
process. Application specialists, who generally have advanced experience with
the Company's products, handle the "alpha" or internal testing of a new product,
while the "beta" testing of a new product is conducted both internally and by
selected customers and consultants. The Company has a separate documentation
group that is dedicated to creating and updating the documentation for each
product, with a particular emphasis on making such documentation more
comprehensive and user-friendly.

  During fiscal years 1998 and 1997, the Company spent $2.1 million and $1.6
million, respectively, on product research and development activities. These
amounts represented 17.1% and 14.9%, respectively, of net revenues in each of
those years.

Technology

  The Company's software products automate engineering calculations that are
performed by structural, mechanical, civil and process/piping engineers. The key
technology components of the Company's products are: (i) the mathematical models
of the system, (ii) the engineering databases, (iii) the numerical algorithms,
(iv) the software architecture, (v) the graphical user environment and (vi) the
use of preferred operating systems.

  Mathematical Models. The mathematical model in an engineering analysis
includes the geometry of the system, physical properties of the components and
external influences such as loads. The model of an engineering system such as an
industrial building, machine component or pipeline may involve hundreds or
thousands of algebraic equations that may be linear or non-linear depending upon
the nature of the problem. The Company's products are comprehensive in their
analysis and modeling capabilities. For example, STARDYNE offers a wide range of
analysis options that include static, dynamic, second order, transient,
harmonic, thermal, buckling, time history, response/shock spectra, fatigue and
fracture analysis. Similarly, STAAD's comprehensive loading facilities include
static, dynamic, seismic, second order, moving loads, wind loads, thermal loads
and loads due to movement of supports. The models are based on the fundamental
laws of physics and mechanics, including static and dynamic equilibrium. In
addition, the user is allowed extensive control on the analysis and design
process through user specifiable parameters.

  Engineering Databases. The Company's products are equipped with databases
containing engineering properties of all relevant commonly used materials and
structural sections. For example, STARDYNE's material library contains data for
28 different linear and non-linear materials that can be used in a wide range of
industries 

                                       9
<PAGE>
 
including aerospace, automotive, power, machinery, energy, mining, marine and
manufacturing. STAAD's steel section databank contains properties of structural
sections from ten different countries throughout the world. The user can specify
the required data from the engineering databases which saves significant
modeling time and ensures accuracy. In applicable situations, the user is
allowed to create and save data for customized use.

  Numerical Algorithms. Engineering analysis models require sophisticated
underlying technology to solve large systems of linear/nonlinear algebraic and
differential equations. Solving these equations accurately and in a time and
cost efficient manner is key to the success of any analysis project. The Company
believes that its technology for solving these equations provides it with a
competitive advantage. A major focus of the Company's research and development
activities is the maximization of the computer's memory and storage resources
for numerical solution of equations. All of the Company's products have
benefited from proprietary research and development conducted in the fields of
numerical solutions, data compression/storage and disk caching technologies. The
solution technology in STARDYNE has been developed and perfected over a period
of almost thirty years since the product was first introduced in 1968.
Similarly, the solution techniques used in STAAD, ADLPIPE and CIVILSOFT have
been tested and proven in real life engineering projects for more than ten years
in each case.

  Software Architecture. The Company's engineering software products are based
on the principle of "concurrent engineering." Under this methodology, the
engineer can perform all the functions of the process, such as, model
development, analysis, design, visualization, verification and drawing
generation in a "concurrent" manner. An underlying relational database unifies
the process and manages the flow of information within the electronic loop. The
Company believes that this unique blend of modern database technology with
sophisticated engineering algorithms provides for substantial competitive
advantage.

  Graphical User Environment. STAAD, QSE, FabriCAD, STRUCT.etc, STARDYNE,
CIVILSOFT, ADLPIPE and VISUAL SOLID are equipped with powerful and user-friendly
graphical user environments based on the principles of "concurrent engineering."
With implementation of modern graphics, CAD and database technologies, the
graphical user environment provides visual model generation, verification,
animation and extensive plotting/printing facilities. The Company believes that
the visual approach implemented in its software allows the engineer to be
significantly more productive and efficient.

  Operating Systems and Hardware Platforms. The Company supports its products on
a wide range of hardware platforms and operating systems. STAAD, STARDYNE and
ADLPIPE are supported on PCs and UNIX-based workstations including Sun
Microsystems, Hewlett Packard, Digital Equipment Corporation, Silicon Graphics,
IBM, RISC and Intergraph, while QSE, FabriCAD, STRUCT.etc and VISUAL SOLID are
supported on PCs only. All of the Company's products are available in single
user, network-based and client-server modes. The Company believes that engineers
performing computer-aided engineering analysis prefer operating systems similar
to Microsoft Windows. The Company has released new versions of its products for
use on Windows 95 and Windows NT, which are 32 bit operating systems designed
for network servers, high-end personal computers and workstations. The Company
believes that the enhanced speed, memory management capabilities and
multitasking operation of the Windows 95 and Windows NT operating systems make
them the best choice for the Company's technology-driven software products. The
Company's current research and development efforts are focused on developing
enhanced versions of its current products to take full advantage of the Windows
95, Windows NT and emerging 32-bit operating systems.

Competition

  The engineering software industry is intensely competitive and rapidly
changing. A number of companies offer products that target the same markets as
the Company. Some of the Company's competitors and potential competitors have
larger technical staffs, more established and larger marketing and sales
organizations and significantly greater financial resources than the Company.

  The principal bases for competition in this industry include product
functionality, product reliability, price/performance characteristics, ease of
product use, availability of products on popular computer platforms, ability to
accurately model complex projects, end-user support and documentation, ability
to keep pace with technological advances, corporate reputation and financial
stability. The Company believes that its high caliber 

                                       10
<PAGE>
 
development effort, demonstrated understanding of the needs of the engineering
design industry, ability to attract and retain customers, capability to develop,
acquire and implement emerging technologies, ability to provide technical
support and demonstrated capability to provide attractive price points for its
products represent significant competitive advantages.

  The Company's products compete, on occasion, with analysis tools that are
internally developed by a number of engineering firms. Increasingly, companies
in the engineering design industry have come to recognize that it is inefficient
and uneconomical for them to continue to develop and support engineering
analysis software internally.  Many of them are currently replacing their
internally developed software with commercial engineering analysis software
tools, such as those provided by the Company.

  The Company believes that it competes favorably in the engineering design and
analysis market based upon the combination of technical power and ease-of-use of
its software products, its integrated product line and its ability to provide
local customer support on a direct basis. In order to maintain its market
leadership and competitive position, the Company's intent is to continue (i) to
develop its solution technologies, (ii) to further integrate emerging
technologies (such as 3D solid modeling), (iii) to enhance the scope of product
applications, (iv) to focus on emerging hardware/software platforms (such as
Windows 95, Windows NT and other 32-bit operating systems) and (v) to improve
upon the ease-of-use of its software products.

  There can be no assurance that competitors will not develop products that are
superior to the Company's products or that achieve greater market acceptance.
The Company's future success will depend significantly upon its ability to
increase its market share and license additional products and product
enhancements to existing customers. There can be no assurance that the Company
will be able to compete successfully or that competition will not have a
material adverse effect on the Company's results of operations.

Intellectual Property and Proprietary Rights

  The Company relies primarily on a combination of contract, copyright,
trademark and trade secret laws, license and confidentiality agreements and
software security measures to protect its proprietary technology. The Company
distributes its products under "shrink-wrap" software license agreements, which
grant end-users licenses to (rather than ownership of) the Company's products
and which contain various provisions intended to protect the Company's ownership
and confidentiality of the underlying technology. In addition, the Company's
software is distributed with a third-party "hardware lock" to ensure copyright
protection. The Company also requires all of its employees and other parties
with access to its confidential information to execute agreements prohibiting
the unauthorized use or disclosure of the Company's technology. In addition, the
Company periodically reviews its proprietary technology for patentability,
although the Company does not have any current patents with the exception of two
patents acquired as part of the AXA asset purchase. Despite these precautions,
the Company believes that existing laws provide limited protection for the
Company's technology and that it may be possible for a third party to
misappropriate the Company's technology or to independently develop similar
technology. In addition, effective copyright and trade secret protection may not
be available in every jurisdiction where the Company distributes products,
particularly in foreign countries where the laws generally offer no protection
or less protection than those of the United States. Moreover, "shrink-wrap"
licenses, which are not signed by the end-user, may be unenforceable in certain
jurisdictions.

  The Company believes that, due to the rapid pace of technological innovation
and change within the engineering industry, legal protections afforded the
Company's technology are less significant in affecting the Company's business
and results of operations than factors such as the reputation of the Company,
the knowledge, ability and experience of Company personnel, the frequency of
product enhancements and the timeliness and quality of the Company's customer
service and support.

  The Company is not engaged in any material disputes with other parties with
respect to the ownership or use of the Company's proprietary technology.
However, there can be no assurance that other parties will not assert technology
infringement claims against the Company in the future. The litigation of such a
claim may involve significant expense and management time. In addition, if any
such claim were successful, the Company could be required to pay monetary
damages and may also be required to either refrain from distributing the
infringing product or obtain a license from the party asserting the claim (which
license may not be available on commercially 

                                       11
<PAGE>
 
reasonable terms). As the number of software products in the industry increases
and the functionality of these products further overlap, the Company believes
that software developers may become increasingly subject to infringement claims.

  STAAD, QSE, FabriCAD, STRUCT.etc, CIVILSOFT, ADLPIPE, and VISUAL SOLID are
trademarks of the Company.  STARDYNE(R) is a registered trademark of the
Company.

Employees

  As of March 31, 1998, the Company had 102 employees, of which 98 were full-
time employees, including 37 in product development and related support
services, 24 in sales and marketing and 37 in finance and administration.  41 of
the Company's full-time employees were located in the United States and 57 were
located internationally.

ITEM 2.  DESCRIPTION OF PROPERTY.

  The Company's corporate headquarters are located in Yorba Linda, California,
in a company-owned facility consisting of approximately 41,000 square feet of
office and warehouse space. In March 1997, the Company borrowed $1,800,000 from
Union Bank of California. These borrowings are secured by the Company's
corporate headquarters in Yorba Linda, California. The loan is payable in equal
monthly installments of principal plus interest at 2.25% over the LIBOR Base
Rate (8.06% at March 31, 1998) with a balloon payment due at maturity in April
2007. The current principal balance at March 31, 1998 was $1,765,000.

  The Company recently completed construction of a 22,000 square foot research
and development facility in Calcutta, India.  In addition, the Company leases
office space in various other locations domestically and internationally where
its operations are located.  The Company believes that its existing facilities
are adequate to meet its current needs and that suitable additional or
alternative space will be available in the future on commercially reasonable
terms.

ITEM 3.  LEGAL PROCEEDINGS.

  The Company is not presently involved in any legal proceedings.

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

  During the quarter ended March 31, 1998, no matters were submitted for vote to
the Company's common stockholders.


                                    PART II
                                        
ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

  The Company's Common Stock has been traded on the Nasdaq National Market
(ticker symbol RENG) since July 26, 1996 when the Company completed its initial
public offering of 1,495,000 shares of Common Stock.  Prior to the initial
public offering, the Company's Common Stock was not publicly traded.

  As of June 23, 1998, there were approximately 27 holders of record of the
Company's Common Stock.  Within the holders of record of the Company's Common
stock are depositories such as Cede & Co. that hold shares of stock for
brokerage firms which, in turn, hold shares of stock for beneficial owners.

  The Company has reinvested earnings in the business and has never paid any
dividends to holders of the Company's Common Stock.  The declaration and payment
of dividends are at the sole discretion of the Board of Directors and will
depend upon the Company's profitability, financial condition, cash requirements,
future prospects and other factors deemed relevant by the Board of Directors.

                                       12
<PAGE>
 
  The high and low closing sales prices of a share of the Company's Common
Stock, as reported by The Nasdaq National Market, for each quarter of fiscal
1998 and for the third and fourth quarters of fiscal 1997 and the second quarter
of fiscal 1997 (covering the period from July 26, 1996 through September 30,
1996), the only quarters in fiscal 1997 in which the Company's shares of Common
Stock were publicly traded, are as follows:

<TABLE>
<CAPTION>
 
                                               Fiscal 1998                Fiscal 1997
                                           -------------------        -------------------
                                              Low       High             Low       High
                                           -------------------        -------------------
<S>                                        <C>          <C>           <C>          <C>
1st Quarter (April 1 - June 30)               $2.63      $4.13            n/a         n/a
2nd Quarter (July 1 - September 30)            3.00       4.25          $5.19       $8.50
3rd Quarter (October 1 - December 31)          2.63       4.00           2.75        8.25 
4th Quarter (January 1 - March 31)             2.50       6.13           2.75        3.88
</TABLE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.

General

  Research Engineers, Inc. is a leading provider of technically-sophisticated
stand-alone and network-based engineering software products that provide fully-
integrated easy-to-use design automation and analysis solutions for use by
engineering analysis and design professionals worldwide. The Company's
comprehensive line of Windows-based engineering software products includes
STAAD, the Company's structural analysis and design software, as well as
mechanical, civil and process/piping engineering products. The Company's
software products assist engineers in performing a myriad of mission-critical
engineering tasks, including the analysis and design of industrial, commercial,
transportation and utility structures, pipelines, machinery, automotive and
aerospace products, and survey, contour and digital terrain modeling.

  From inception to 1985, STAAD-III was offered primarily through time-sharing
services.  The Company began marketing its products directly to users in 1985 in
connection with the Company's release of the first PC-version of STAAD-III.
During 1986, the Company began its international expansion with the
establishment of a United Kingdom affiliate. An additional affiliate was
established in India during the same year in conjunction with the establishment
of the Company's offshore research and development facility.  The Company
acquired both of these commonly-controlled affiliates in fiscal 1996. In
November 1995, the Company acquired its German distributor, EGIS GmbH, and
established its German subsidiary, Research Engineers GmbH.  The Company
currently has branch offices, subsidiaries, distributors and representatives in
the United States, United Kingdom, Germany, Japan, France, Scandinavia,
Australia, China, Singapore, India, Indonesia, Korea, Thailand, Malaysia, South
Africa, Mexico, Russia, and the Middle East and Latin America.

  In June 1995, the Company acquired the rights to the STARDYNE software
product.  This acquisition enabled the Company to expand into the mechanical
engineering software market. In September 1995, the Company acquired the assets
and business of Das Consulting, Inc., a Massachusetts-based sales, marketing and
support organization. This acquisition enabled the Company to expand its sales
and support services, by establishing a branch office of the Company on the East
Coast. In March 1996, the Company acquired all of the assets and assumed the
business of ADLPipe, Inc., a Massachusetts-based developer of process/piping
engineering software.  The acquisition of this business enabled the Company to
add a complimentary product line to its existing structural, mechanical and
civil engineering software product lines. In addition, in fiscal 1997 the
Company purchased all of the outstanding stock of QSE (Bristol) Limited, a
structural engineering software manufacturer and marketer, and acquired rights
to STRUCT etc. from Intrasoft, Inc. QSE's structural engineering product and
STRUCT etc. further extended the Company's core product line by addressing the
lower-end residential and light commercial/industrial construction market
segment. In October 1997, the Company acquired the animation technology assets
of AXA Corporation, a private company that developed animation technology for
the entertainment industry. This animation technology will be integrated into
the Company's next generation mechanical engineering software.

                                       13
<PAGE>
 
  On July 26, 1996, the Company consummated its initial public offering ("IPO")
of 1,300,000 shares of its common stock at $5.00 per share (1,495,000 shares
after exercise of the underwriters over-allotment option on September 3, 1996).
The net proceeds of the offering (including exercise of the underwriters over-
allotment option), after deducting underwriter's commissions and offering costs
were approximately $6,469,000. A portion of the proceeds was used to repay debt,
to acquire QSE (Bristol) Limited, to fund research and development and to
support the Company's continued expansion.

  The Company derives its revenues principally from sales of its engineering
software products and, to a lesser extent, from sales of software maintenance
contracts relating to its products. Software product revenues are recognized
upon shipment. Product maintenance revenues are amortized over the length of the
maintenance contract, which is usually twelve months. Inflation has not had a
significant impact on the Company's operating results to date, nor does the
Company expect it to have a significant impact during fiscal 1999. As the
Company continues to expand its international operations, its exposure to gains
and losses on foreign currency transactions continues to increase. The Company
plans to consider limiting such exposure by the purchase of forward exchange
contracts and/or hedging all material foreign currency-denominated receivables
by specific hedge contracts.

Results of Operations

  The following table sets forth, for the periods indicated, certain statement
of income data expressed as a percentage of net revenues.

<TABLE> 
<CAPTION> 

                                                    Year Ended March 31,      
                                                    -------------------- 
                                                      1998        1997   
                                                    --------    -------- 
   <S>                                              <C>         <C>      
   Net revenues                                        100.0 %     100.0 %
   Cost of revenues                                      6.5 %       7.8 %
                                                    --------    -------- 
                                                                         
   Gross profit                                         93.5 %      92.2 %
                                                    --------     -------- 

   Selling, general and administrative expenses         72.3 %      66.6 %
   Research and development expenses                    17.1 %      14.9 %
   In-process research and development expenses          3.6 %       6.5 %
                                                    --------     -------
 
   Operating income                                      0.5 %       4.2 %
 
   Interest income                                       0.4 %       0.4 %
   Other income                                          0.4 %       0.6 %
                                                    --------     -------
 
   Income before income taxes                            1.3 %       5.2 %
 
   Provision for income taxes                            0.6 %       3.2 %
                                                    --------     -------
   Net income                                            0.7 %       2.0 %
                                                    --------     -------
 
</TABLE>

  Net Revenues. Net revenues for the fiscal year ended March 31, 1998 increased
by $1,323,000 (12%) to $12,346,000, as compared to $11,023,000 for the fiscal
year ended March 31, 1997. The Company's total revenues consist of software
product sales and software maintenance and support. As a percentage of total
revenues, software product revenues represented 85.9% for the fiscal year ended
March 31, 1998 down 0.9% from 86.8% for the fiscal year ended March 31, 1997.
The Company's product maintenance revenues increased by $281,000 (19%) to
$1,736,000, as compared to $1,455,000 for the fiscal year ended March 31, 1997,
primarily due to the Company's larger worldwide installed product base.

  The increase in net revenues was primarily attributable to (i) the Company's
introduction of STAAD/Pro, a comprehensive structural design office solution
that began shipment during the third quarter of fiscal 1998, (ii) the Company's
acquisition of the AXA product line and (iii) continued market acceptance of the
32-bit Windows 95 and Windows NT versions of the Company's software products.
Most of this growth occurred over the first three 

                                       14
<PAGE>
 
quarters of fiscal 1998, with a 26.5% increase in net revenues during that nine-
month period, driven by growth in Europe and Southeast Asia. During fiscal 1998,
however, Southeast Asia experienced a significant decline due to the economic
conditions in the area, the effect of which the Company began to experience in
the fourth quarter of fiscal 1998, and as a result, sales in that market for the
entire year were less than in fiscal 1997. While North American revenues during
fiscal 1998 increased by a modest 10.7%, North American revenues for the fourth
quarter of fiscal 1998 were up 33.4% from the same period in fiscal 1997, which
was primarily the result of the introduction of STAAD/Pro. International net
revenues as a percentage of total net revenues were 55% for both the fiscal
years ended March 31, 1998 and 1997.

  The Company's domestic revenues and sales to foreign customers originated in
the U.S. are denominated in U.S. Dollars. However, revenues and expenses for the
Company's foreign subsidiaries and sales offices are usually recorded in the
applicable foreign currency and translated with any applicable foreign exchange
adjustments. There were no foreign exchange gains or losses which were material
to the Company's financial results during the fiscal years ended March 31, 1998
and 1997.

  Gross profit.  Gross profit increased as a percentage of net revenues by 1.3%
to 93.5% for the fiscal year ended March 31, 1998 as compared to 92.2% for the
fiscal year ended March 31, 1997.  This increase was attributable to the
increase in sales volume combined with a slight decrease in cost of revenues.
Costs of goods sold are not normally significant as a percentage of net revenues
due to the nature of the Company's products.

  Selling, general and administrative expense. Selling, general and
administrative expense increased by $1,582,000 (22%) to $8,929,000 in the fiscal
year ended March 31, 1998 as compared to $7,347,000 for the fiscal year ended
March 31, 1997, and increased as a percentage of net revenues from 66.7% to
72.3%.  Selling expenses increased as a result of the higher commissions
associated with higher net revenues in the oversees markets and expanded
worldwide sales operations.  In order to increase revenues and quickly gain
market acceptance in the Asia-Pacific markets, the Company has had to offer
substantial financial incentives in the form of commissions to various foreign-
based dealers, a trend that the Company expects to continue into the near
future.  See "--Outlook."  General and administrative expenses increased
primarily due to the addition of personnel and expenses as a result of the QSE
acquisition which occurred at the end of fiscal 1997, the amortization of
goodwill related to the QSE acquisition, professional fees and expenses
associated with being a public company, costs incurred to obtain certification
of the Company's software in Japan, and a $315,000 increase in the allowance for
doubtful accounts.  Fiscal 1998 reflects a full year of expenses related to QSE
versus only one quarter in fiscal 1997.  The increase in the allowance for
doubtful accounts is in response to delayed payment for product shipped to key
Asian markets. Payment from the Company's customers in these markets has been
hampered by difficulty in obtaining favorable foreign exchange resulting in
approximately $927,000 in past due receivables from Asian customers at March 31,
1998. The Company expects these receivables to be collected during fiscal 1999
net of the allowance for doubtful accounts which was increased by $315,000
during fiscal 1998.

  Research and development expense. Research and development expense increased
by $476,000 (29%) to $2,115,000 for the fiscal year ended March 31, 1998 as
compared to $1,639,000 for the fiscal year ended March 31, 1997, and increased
as a percentage of net revenues to 17.1% from 14.9%. Research and development
expenses consist primarily of software developers' wages. The increase was
primarily attributable to an increase in the number of software developers in
the United Kingdom as a result of the QSE acquisition, and in the United States
and India as a result of bringing the Company's STAAD/Pro product to market.

  In-process research and development. The in-process research and development
expense of $450,000 and $715,000 for the fiscal years ended March 31, 1998 and
1997, respectively, relates to the acquisition of the animation software assets
of AXA Corporation during October 1997 and the acquisition of QSE (Bristol)
Limited during December 1996.  Included in the assets acquired were costs of
$450,000 and $715,000 related to AXA and QSE, respectively, of in-process
research and development. In the opinion of management, the technological
feasibility of the acquired development had not yet been established and the
technology had no future alternative uses at the time of the acquisition, and
accordingly, these amounts were expensed in the periods of acquisition.

  Other income.  Net interest income increased by $6,000 to $49,000 in the
fiscal year ended March 31, 1998 as compared to $43,000 for the fiscal year
ended March 31, 1997. The slight increase in

                                       15
<PAGE>
 
interest income was a result of the repayment of portions of the Company's debt
following the acquisition of QSE, and the resulting decrease in interest
expense.

  Income taxes.  Income tax expense decreased by $279,000 to $69,000 in the
fiscal year ended March 31, 1998 as compared to $348,000 for the fiscal year
ended March 31, 1997.

Liquidity and Capital Resources

  The Company currently finances its operations (including capital expenditures)
primarily through cash flows from operations as well as its cash and short-term
investment balances.

  The Company's principal sources of liquidity at March 31, 1998 consisted of
$1,340,000 of cash, $1,626,000 of short-term investments and approximately
$500,000 available under a line of credit with Union Bank of California.  The
Company's short-term investments consist of $99,000 of United States government
agency securities, classified as held-to-maturity and $1,527,000 of common stock
marketable equity securities, certificates of deposit and mutual funds,
classified as available-for-sale.

  The decrease in total cash and investments during the fiscal year ended March
31, 1998 was primarily attributable to the purchase of certain assets of AXA,
the repurchase of 26,290 shares of the Company's Common Stock in accordance with
Amendment No. 1 to the Agreement and Plan of Reorganization between the Company
and ADLPipe, Inc., and the purchase of $918,000 in capital assets, primarily
consisting of the building in India and additional computer equipment for this
new facility. Additional factors contributing to the decrease in cash and
investments were increases in accounts receivable and other assets, decreases in
accrued expenses and bank debt, offset by an increase in deferred maintenance
revenue.

  The Company has a $500,000 line of credit with Union Bank of California. The
line of credit bears interest at the prime rate, is collateralized by
substantially all of the assets of the Company and expires on December 1, 1998.
As of March 31, 1998, there were no amounts of principal or accrued interest
outstanding relating to this line of credit.  The Company plans to negotiate a
renewal to the line of credit; however, there can be no assurances that these
negotiations will be successful.

  In March 1997, the Company borrowed $1,800,000 from Union Bank of California.
These borrowings are secured by the Company's corporate headquarters in Yorba
Linda, California.  The loan is payable in equal monthly installments of
principal plus interest at 2.25% over the LIBOR Base Rate (8.06% at March 31,
1998) with a balloon payment due at maturity in April 2007.

  During fiscal 1998, the Company experienced a decrease in Southeast Asia
revenues as a result of a downturn in economic conditions in key Asian markets.
Payment from the Company's customers in these markets has been hampered by
difficulty in obtaining favorable foreign exchange resulting in approximately
$927,000 in past-due receivables at March 31, 1998. The Company expects these
receivables to be collected during fiscal 1999 net of the allowance for doubtful
accounts which was increased by $315,000 during fiscal 1998.

  The Company believes that its current cash and cash equivalents, short-term
investment balances, cash generated from operations and availability under the
Company's line of credit will provide adequate working capital to fund the
Company's operations at currently anticipated levels through at least March 31,
1999.  To the extent that such amounts are insufficient to finance the Company's
working capital requirements, the Company will be required to raise additional
funds through public or private equity or debt financings.  There can be no
assurance that such additional financings will be available, if needed, or, if
available, will be on terms satisfactory to the Company.

Outlook

  Certain statements contained in this "Outlook" are "forward-looking
statements" that involve risks and uncertainties. The actual future results of
the Company could differ materially from these statements.  Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in this report, 

                                       16
<PAGE>
 
uncertainties regarding market acceptance of new products, and product
enhancements, delays in the introduction of new products, and risks associated
with managing the Company's growth.

  The Company's operating results have fluctuated in the past and may fluctuate
significantly in the future.  Future results could be impacted by factors such
as customer order delays, a slower growth rate in the market, increased
competition or adverse changes in general economic conditions in any of the
countries in which the Company does business.  While no single customer
accounted for more than 10% of revenues, the loss of a major distributor or a
reduction in orders from a major distributor could have a significant impact on
the results of operations in any particular quarter.

  A significant portion of the Company's revenue is from international markets,
particularly the Asia-Pacific Market. The Company anticipates that sales to
customers outside the U.S. will continue to account for a significant portion of
its total revenues in the foreseeable future.  As a result, the Company's
financial results could be impacted by weakened general economic conditions,
such as the recent condition in Southeast Asia as discussed above, differing
technological advances or preferences, volatile foreign exchange rates and
government trade restrictions in any country in which the Company does business.
The Company has been able to bill most of its international customers in U.S.
currency, significantly limiting the foreign exchange risk.  However, there can
be no assurance that the Company will be able to continue this practice as sales
to international customers grow.

  The Company has increasingly relied on distributors and representatives to
market its products, particularly in the Asia-Pacific Market.  The Company's
revenue in any particular quarter may be negatively impacted by a lower than
anticipated performance of any significant distributor or representative, or the
distributor or representative's inability to sell-through product previously
purchased.  The Company does not offer a right of return to distributors or
representatives.  The Company does, however, provide extended payment terms (up
to 90 days) and commissions to these distributors and representatives.
Commissions range from 20% to 70% of gross sales.  These commissions are
recorded at the time of sale and are reflected in selling expenses in the
consolidated statements of income.  Sales in other regions (North America and
Europe) are generally made without commissions.  The dollar amount of
commissions has increased throughout fiscal 1998 as sales to distributors and
representatives have increased.  The Company is in the process of assessing the
costs and benefits of continuing to offer these commissions and is evaluating
means whereby the amounts can be reduced.  Means by which commissions may be
reduced include, but are not limited to, opening additional foreign sales
offices, establishing new foreign subsidiaries and renegotiating current
commission amounts with foreign distributors and representatives.  The Company
may, however, find it necessary in the future to continue to provide commissions
at current levels or possibly increase them in order to expand international
sales, which could negatively impact operating income.

  The Company's success is dependent on its ability to continue to develop,
enhance and market new products to meet its customers' sophisticated needs in a
timely manner and which are consistent with current technological developments.
In an attempt to meet the needs of a broader range of professionals in the
engineering and design process, the Company plans to use STAAD/Pro to launch its
corporate licensing program during fiscal 1999, the success of which is
dependent on the timing of the program's introduction and its acceptance within
the market.  The Company's success also depends in part on its ability to
attract and retain technical and other key employees who are in great demand, to
protect the intellectual property rights of its products and to continue key
relationships with third-party developers. The CAD and Computer Aided
Engineering ("CAE") software industry is highly competitive. The entire industry
may experience pricing and margin pressure which as a result could adversely
affect the Company's operating results and financial position.  In addition,
certain of the Company's expenses are based, in part, on its future revenue
expectations. The Company continues to increase its operating expense levels to
meet the growing customer demand for the Company's products and services. If
revenue is below expectations, operating results could be adversely and
materially affected. Net income may be disproportionately affected by an
unexpected reduction in revenue because certain expenses are generally committed
in advance.

  To expand its markets, the Company's business strategy includes growth through
acquisitions.  Identifying and pursuing acquisition opportunities and
integrating acquired products and businesses requires a significant amount of
management time and skill.  There can be no assurance that the Company will be
able to identify suitable acquisition candidates, consummate any acquisition on
acceptable terms or successfully integrate any acquired business into the
Company's operations.  There also can be no assurance that any future
acquisition will not have an adverse effect 

                                       17
<PAGE>
 
upon the Company's operating results, particularly in the fiscal quarters
immediately following consummation of the acquisition while the acquired
business is being integrated into the Company's operations.

  The trading price of the Company's stock, like other software and technology
stocks, is subject to significant volatility due to factors impacting the
overall market which are unrelated to the Company's performance.  The historical
results of operations and financial position of the Company are not necessarily
indicative of future financial performance.  If revenues or earnings fail to
meet securities analysts' expectations, there could be an immediate and
significantly adverse impact on the trading price of the Company's common stock.

  The Company has not experienced a material adverse impact of such risks or
uncertainties, with the exception of those discussed above. No assurance can be
given that these risks and uncertainties will not affect the Company's future
results of operations or its financial position.

Impact of Year 2000

  Many existing software programs use only two digits to identify the year in
the date field. If such programs are not corrected, date data concerning the
Year 2000 could cause many computer applications to fail, lock-up or generate
erroneous results.

  The Company is in the process of identifying and assessing its mission-
critical systems related to the Year 2000 and will commit the resources
necessary to resolve any potential Year 2000 issues. Although the Company is
addressing such issues in what it considers to be sufficient time prior to
century rollover, there can be no assurance that there will be no interruption
of operations or other limitations of system functionality, or that the Company
will not incur substantial costs to avoid such occurrences. The Company has
determined that it will not need to modify or replace significant portions of
its software sold to customers, as it does not contain any date-specific
material.

  The Company is currently assessing the cost to remediate its Year 2000 issues.
Although the actual cost to remediate these issues is not yet fully known, based
upon information to date, it is expected that the remediation will not have a
material impact on the Company's financial condition or operating results.

Impact of Recently Issued Accounting Standards

  In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, adoption in fiscal 1999 will
have no impact on the Company's net income or stockholders' equity.  SFAS No.
130 requires unrealized gains or losses on the Company's investments and the
foreign currency translation adjustments, which currently are reported in
stockholders' equity, to be included in other comprehensive income and the
disclosure of total comprehensive income.  The Company will adopt SFAS No. 130
in the first quarter of fiscal 1999.

  In December 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which requires the Company to disclose
certain information about reportable operating segments in complete sets of
financial statements.  The Company will adopt SFAS No. 131 in fiscal 1999, the
impact of which is not expected to be material to the Company's financial
statements.

  In October 1997, the Accounting Standards Executive Committee ("AcSEC") of the
AICPA issued Statement of Position ("SOP") 97-2, Software Revenue Recognition,
which supercedes SOP 91-1.  SOP 97-2 distinguishes between significant and
insignificant vendor obligations as a basis for recording revenue with a
requirement that each element of a software licensing arrangement be separately
identified and accounted for based on relative fair values of each element.  The
Company will adopt SOP 97-2 in the first quarter of fiscal 1999, the impact of
which is not expected to be material to the Company's financial statements.

                                       18
<PAGE>
 
ITEM 7.  FINANCIAL STATEMENTS.

Index to Consolidated Financial Statements
<TABLE> 
<CAPTION> 
<C> <S>                                                                      <C>
1.  Independent Auditors' Report                                              20

2.  Consolidated Financial Statements

     Consolidated Balance Sheet as of March 31, 1998                          21
 
     Consolidated Statements of Income for the years ended
     March 31, 1998 and 1997                                                  22
 
     Consolidated Statements of Stockholders' Equity for the years ended
     March 31, 1998 and 1997                                                  23
 
     Consolidated Statements of Cash Flows for the years ended
     March 31, 1998 and 1997                                                  24
 
     Notes to Consolidated Financial Statements                               26
</TABLE>

                                       19
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Research Engineers, Inc.:

We have audited the consolidated financial statements of Research Engineers,
Inc. and subsidiaries as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 Research Engineers,
Inc. and subsidiaries as of March 31, 1998, and the results of their operations
and their cash flows for the years ended March 31, 1998 and 1997, in conformity
with generally accepted accounting principles.

                          /s/ KPMG PEAT MARWICK LLP


Orange County, California
May 13, 1998

                                       20
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheet

                                 March 31, 1998

               (In thousands, except share and per share amounts)


<TABLE>
<CAPTION>
                                Assets
<S>                                                               <C> 
Current assets:
 Cash and cash equivalents                                        $   1,340
 Short-term investments                                               1,626
 Accounts receivable (net of allowance for doubtful accounts 
  of $354)                                                            2,228
 Deferred income taxes                                                  611
 Notes and related party loans receivable                               107
 Prepaid expenses and other current assets                              400
                                                                  ---------

      Total current assets                                            6,312

Property, plant and equipment, net                                    3,088
Goodwill (net of accumulated amortization of $492)                    1,096
Other assets                                                            954
                                                                  ---------
                                                                  $  11,450
                                                                  =========

                Liabilities and Stockholders' Equity

Current liabilities:
 Current portion of long-term bank debt                           $     122
 Accounts payable                                                       344
 Accrued expenses                                                       492
 Income taxes payable                                                   434
 Deferred maintenance revenue                                         1,026
 Other                                                                   33
                                                                  ---------
      Total current liabilities                                       2,451

Long-term bank debt                                                   1,789
Deferred income taxes                                                    72
                                                                  --------- 
      Total liabilities                                               4,312
                                                                  ---------

Commitments and contingencies
 
Stockholders' equity:
  Preferred stock, par value $.01.  Authorized 5,000,000 shares;
   issued and outstanding none                                            -
  Common stock, par value $.01.  Authorized 20,000,000 shares;
   issued and  outstanding 5,677,710 shares                              57
  Additional paid-in capital                                          6,593
  Retained earnings                                                     639
  Unrealized loss on investments                                         (2)
  Foreign currency translation adjustment                              (149)
                                                                  ---------
      Total stockholders' equity                                      7,138
 
                                                                  $  11,450
                                                                  =========
</TABLE> 
 
See accompanying notes to consolidated financial statements.

                                       21
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

                       Consolidated Statements of Income

                      Years ended March 31, 1998 and 1997

               (In thousands, except share and per share amounts)


<TABLE>
<CAPTION>
                                                           1998           1997
                                                       ----------      ---------
<S>                                                    <C>             <C> 
Net revenues:
 Product sales                                         $   10,610      $   9,568
 Maintenance and support                                    1,736          1,455
                                                       ----------      ---------
      Total net revenues                                   12,346         11,023
Cost of revenues                                              799            857
                                                       ----------      ---------
      Gross profit                                         11,547         10,166
                                                       ----------      ---------
Operating expenses:
 Selling, general and administrative                        8,929          7,347
 Research and development                                   2,115          1,639
 In-process research and development                          450            715
                                                       ----------      ---------
      Total operating expenses                             11,494          9,701
                                                       ----------      ---------
      Operating income                                         53            465
                                                       ----------      ---------
Other income:
 Interest, net                                                 49             43
 Other                                                         55             62
                                                       ----------      ---------
      Total other income                                      104            105
                                                       ----------      ---------
Income before income taxes                                    157            570
Income tax expense                                             69            348
                                                       ----------      ---------
      Net income                                       $       88      $     222
                                                       ==========      =========
 
Net income per common share:
  Basic                                                $     0.02      $    0.04
                                                       ==========      =========
  Diluted                                              $     0.02      $    0.04
                                                       ==========      =========
Common shares used in computing net income per 
 common share:
  Basic                                                 5,695,457      5,200,411
                                                       ==========      =========
  Diluted                                               5,784,740      5,314,814
                                                       ==========      =========
</TABLE> 

See accompanying notes to consolidated financial statements.

                                       22
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

                Consolidated Statements of Stockholders' Equity

                      Years ended March 31, 1998 and 1997

                      (In thousands, except share amounts)


<TABLE>
<CAPTION>
                                    Common Stock                                                              Foreign 
                                -----------------------         Additional                    Unrealized      currency
                                Number of         Par             paid-in       Retained    gain/(loss) on   translation 
                                 shares          value            capital       earnings    on investments   adjustment     Total
                                ---------        -----          ----------      ---------   --------------   -----------    ------ 
<S>                             <C>              <C>            <C>             <C>         <C>              <C>            <C> 
Balance, March 31, 1996         4,206,000        $  42          $     331       $     329       $    -       $   (21)       $  681 
Foreign currency translation            -            -                  -               -            -            98            98 
Issuance of common stock        1,495,000           15              6,454               -            -             -         6,469 
Unrealized gain on investments          -            -                  -               -            6             -             6 
Net income                              -            -                  -             222            -             -           222 
                                ---------        -----          ----------      ---------       ------       -------        ------  

Balance, March 31, 1997         5,701,000           57              6,785             551            6            77         7,476 
Foreign currency translation            -            -                  -               -            -          (226)         (226)
Repurchase of common  stock       (26,290)           -               (200)              -            -             -          (200)
Exercise of stock options           3,000            -                  8               -            -             -             8 
Unrealized loss on investments          -            -                  -               -           (8)            -            (8)
Net income                              -            -                  -              88            -             -            88 
                                ---------        -----          ----------      ---------       ------       -------        ------  

Balance, March 31, 1998         5,677,710        $  57          $   6,593       $     639       $   (2)      $  (149)       $7,138 
                                =========        =====          =========       =========       ======       =======        ======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       23
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                      Years ended March 31, 1998 and 1997

                                 (In thousands)

<TABLE>
<CAPTION>
 
                                                                                     1998           1997
                                                                                   ---------     ---------
<S>                                                                                <C>           <C> 
Cash flows from operating activities:
 Net income                                                                           $   88       $   222
 Adjustments to reconcile net income to net cash provided by (used in)
  operating activities:
    In-process research and development                                                  450           715
    Depreciation and amortization                                                      1,076           728
    Changes in operating assets and liabilities, (net of acquisitions):
     Accounts receivable                                                                 (90)         (974)
     Deferred income tax asset                                                          (278)            8
     Notes and related party loans receivable                                            (44)          (23)
     Prepaid expenses and other current assets                                            68          (300)
     Other assets                                                                       (783)         (311)
     Accounts payable                                                                     37          (166)
     Deferred maintenance revenue                                                        239           101
     Income taxes payable                                                                165            35
     Accrued expenses                                                                    (86)           31
     Other current liabilities                                                           (24)         (106)
     Other long-term liabilities                                                          --          (126)
                                                                                   ---------     ---------

          Net cash provided by (used in) operating activities                            818          (166)
                                                                                   ---------     ---------

Cash flows from investing activities:
 Purchase of property, plant and equipment                                              (918)         (621)
 Purchase of short-term investments                                                   (3,544)       (3,386)
 Sale/maturity of short-term investments                                               3,611         1,691
 Proceeds from repayment of related party note receivable                                 --            48
 Payments to acquire companies, net of cash acquired                                    (550)       (1,536)
                                                                                   ---------     ---------

          Net cash used in investing activities                                       (1,401)       (3,804)
                                                                                   ---------     ---------

Cash flows from financing activities:
 Proceeds from issuance of bank debt                                                      21         1,979
 Repayment of bank debt                                                                 (259)       (1,960)
 Repayment of stockholder loans                                                           --          (565)
 Common stock issuance                                                                     8         6,469
 Common stock repurchase                                                                (200)           --
                                                                                   ---------     ---------

          Net cash (used in) provided by financing activities                           (430)        5,923
                                                                                   ---------     ---------

 Effect of exchange rate changes on cash and cash equivalents                           (226)           98
          (Decrease)/increase in cash and cash equivalents                            (1,239)        2,051

Cash and cash equivalents, beginning of year                                           2,579           528
                                                                                   ---------     ---------
Cash and cash equivalents, end of year                                             $   1,340     $   2,579
                                                                                   =========     =========
</TABLE>

                                  (Continued)

                                       24
<PAGE>
 
                  RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

                Consolidated Statements of Cash Flows, Continued


<TABLE>
<CAPTION>
                                                         1998          1997
                                                        ------        ------
<S>                                                     <C>           <C> 
Supplemental cash flow information:
 Amounts paid for:
   Interest                                             $  154        $  169
   Income taxes                                            137           432

Non-cash transactions:
 Unrealized (loss)/gain on investments                  $   (8)       $    6

 Payments to acquire companies, net of cash acquired:
   Assets acquired                                         100         1,245
   Liabilities assumed                                      --          (424)
   Purchased research and development                      450           715
                                                        ------        ------
 
                                                        $  550        $1,536
                                                        ======        ======
</TABLE> 

See accompanying notes to consolidated financial statements.

                                       25
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements


(1) Summary of Significant Accounting Policies


    Organization


    Research Engineers, Inc. (the "Company") was incorporated in New Jersey in
    1981 and is currently headquartered in Yorba Linda, California. The Company
    develops and markets structural, mechanical, civil and process/piping
    engineering software products worldwide.

    The Company entered into a merger agreement, dated April 26, 1996 with
    Research Engineers, Inc., a Delaware corporation, and a wholly-owned
    subsidiary of the Company ("Surviving Company"). On the effective date of
    the merger, each share of Research Engineers, Inc. common stock issued and
    outstanding was converted into 4.42148552 shares, $.01 par value common
    stock of the Surviving Company. In conjunction, the Surviving Company
    authorized a total of 20,000,000 shares of common stock and 5,000,000 shares
    of preferred stock, both at $.01 par value. All share and per share amounts
    in the accompanying consolidated financial statements have been restated to
    give retroactive effect to the stock split.


    Principles of Consolidation


    The consolidated financial statements include the accounts of Research
    Engineers, Inc. and its wholly-owned subsidiaries. All significant
    transactions among the consolidated entities have been eliminated upon
    consolidation.


    Fair Value of Financial Instruments


    Statement of Financial Accounting Standard ("SFAS") No. 107, Disclosures
    About Fair Value of Financial Instruments, requires management to disclose
    the estimated fair value of certain assets and liabilities defined by SFAS
    No. 107 as financial instruments. Financial instruments are generally
    defined by SFAS No. 107 as cash or a contractual obligation that both
    conveys to one entity a right to receive cash or other financial instruments
    from another entity, and imposes on the other entity the obligation to
    deliver cash or other financial instruments to the first entity. At March
    31, 1998, management believes that the carrying amounts of cash and cash
    equivalents, short-term investments, receivable and payable amounts, and
    accrued expenses approximate fair value because of the short maturity of
    these financial instruments. The Company believes that the carrying value of
    its bank debt approximates its fair value as the interest rate approximates
    a rate that the Company could obtain under similar terms at the balance
    sheet date.


    Revenue Recognition


    Revenue from software sales is recognized upon shipment provided that no
    significant post-contract support obligations remain outstanding and
    collection of the resulting receivable is deemed probable. The Company's
    sales do not provide a specific right of return, and actual returns have
    been insignificant. At the time of sale, the Company typically provides 120-
    day initial maintenance and support to the customer. Costs relating to this
    initial 120-day support period, which include primarily telephone support,
    are not considered material. After the initial support period, customers can
    choose to purchase ongoing maintenance contracts that include telephone, e-
    mail and other support, and the right to purchase upgrades at a discounted
    price. Revenue from these maintenance contracts is deferred and amortized
    using the straight-line method over the life of the contract, usually twelve
    months.


    In October 1997, the Accounting Standards Executive Committee ("AcSEC") of
    the AICPA issued Statement of Position ("SOP") 97-2, Software Revenue
    Recognition, which supercedes SOP 91-1. SOP 97-2 distinguishes between
    significant and insignificant vendor obligations as a basis for recording
    revenue with a requirement that each element of a software licensing
    arrangement be separately identified and accounted for 

                                       26
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


    based on relative fair values of each element. The Company will adopt SOP 
    97-2 in the first quarter of fiscal 1999, the impact of which is not
    expected to be material to the financial statements.


    Foreign Currency Translation


    The financial position and results of operations of the Company's foreign
    subsidiaries are translated using the local currency as the functional
    currency. Assets and liabilities of the subsidiaries are translated at the
    exchange rate in effect at each year-end. Statement of income accounts are
    translated at the average rate of exchange prevailing during the year.
    Translation adjustments arising from the use of differing exchange rates
    from period to period are included in the cumulative translation adjustment
    account in stockholders' equity. Gains and losses resulting from foreign
    currency transactions are included in income and are not material for fiscal
    1998 and 1997.


    Software Development Costs and Purchased Technology


    The Company capitalizes costs related to the development of certain software
    products. Capitalization of costs begins when technological feasibility has
    been established and ends when the product is available for general release
    to customers. Included in other assets are capitalized costs of
    approximately $944,000 as of March 31, 1998. Approximately $366,000 of this
    amount represents the cost of software developed by third parties on behalf
    of the Company. The remaining $578,000 represents purchased technology.
    Additions to capitalized software during fiscal 1998 and 1997 were $625,000
    and $413,000, respectively, and accumulated amortization on capitalized
    software as of March 31, 1998 and 1997 was $275,000 and $126,000,
    respectively.

    Capitalized software development costs and purchased technology are
    amortized using the straight-line method over three to five years, or the
    ratio of actual sales to anticipated sales, whichever is greater.
    Amortization of software development costs and purchased technology charged
    to operations was approximately $213,000 and $39,000 for the years ended
    March 31, 1998 and 1997, respectively.


    Cash and Cash Equivalents


    The Company considers all highly liquid investments with maturities of three
    months or less at the date of purchase to be considered cash equivalents.


    Short-Term Investments


    The Company's short-term investments consist of United States government
    agency securities, classified as held-to-maturity, and common stock
    marketable equity securities, certificates of deposit and mutual funds,
    classified as available-for-sale. In accordance with SFAS No. 115,
    Accounting for Certain Investments in Debt and Equity Securities,
    investments classified as available-for-sale have been recorded at fair
    value and investments classified as held-to-maturity are reported at
    amortized cost. Unrealized gains or losses on investments classified as
    available-for-sale as of March 31, 1998 have been recorded as a separate
    component of stockholders' equity; there were no material unrealized holding
    gains or losses on investments classified as held-to-maturity as of March
    31, 1998. All realized gains and losses are computed on the specific
    identification basis.

    Income Taxes

    The Company provides for income taxes using the asset and liability method.
    Deferred tax assets and liabilities arise from temporary differences between
    the tax basis of assets and liabilities and their reported 

                                       27
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


    amounts in the consolidated financial statements that will result in taxable
    or deductible amounts in future years.


    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 reported amounts of assets and liabilities at
    the date of financial statements and the reported amounts of revenues and
    expenses during the reporting period. Actual results could differ from those
    estimates.


    Net Income per Share and Pro-Forma Net Income per Share

    In December 1997, the Financial Accounting Standards Board ("FASB") issued
    Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
    Share ("EPS"). SFAS No. 128 replaced the calculation of primary and fully
    diluted EPS with basic and diluted EPS. Unlike primary EPS, basic EPS
    excludes any dilutive effects of common stock equivalents, such as options
    and warrants. Diluted EPS is very similar to the previously reported fully
    diluted EPS. All EPS amounts for all periods have been restated to conform
    to the SFAS No. 128 requirements (see Note 12).


    Property, Plant and Equipment

    Property, plant and equipment are stated at cost. Depreciation is calculated
    using the straight-line method over the following useful lives:


                     Buildings                         39 years
                     Leasehold improvements             5 years
                     Computer equipment                 5 years 
                     Computer software                  3 years   
                     Office equipment and furniture   5-7 years


   Long-Lived Assets

   Long-lived assets to be held and used and goodwill are reviewed for events or
   changes in circumstances that indicate that their carrying value may not be
   recoverable through cash flows.  If the Company determines that the carrying
   value of a given asset is deemed not to be recoverable, the asset will be
   adjusted to its fair market value.


   Goodwill

   The Company amortizes costs in excess of the fair value of net assets of
   businesses acquired using the straight-line method over the estimated useful
   lives of the businesses acquired, usually a period of five years. Goodwill
   amortization was $307,000 and $167,000 for the years ended March 31, 1998 and
   1997, respectively.


   Stock-Based Compensation

   Prior to April 1, 1996, the Company accounted for its stock option plans in
   accordance with Accounting Principles Board ("APB") Opinion No. 25,
   Accounting for Stock Issued to Employees, and related interpretations. As
   such, compensation expense would be recorded on the date of grant only if the
   current market price of the underlying stock exceeded the exercise price. On
   April 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
   Compensation, which permits entities to recognize as expense over the vesting
   period the fair value of all stock-based awards on the date of grant.
   Alternatively, SFAS No. 123 also allows

                                       28
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


     entities to apply the provisions of APB Opinion No. 25 and provide pro-
     forma net income and pro-forma net income per share disclosures for
     employee stock option grants made as if the fair-value-based method defined
     in SFAS No. 123 had been applied. The Company has elected to continue to
     apply the provisions of APB Opinion No. 25 and provide the pro-forma
     disclosure provisions of SFAS No. 123.


     Reclassifications

     Certain reclassifications have been made to the 1997 financial statements
     to conform to the 1998 presentation.


(2)  Acquisitions


     The Company effected one acquisition in each of the fiscal years 1998 and
     1997. These acquisitions were accounted for using the purchase method of
     accounting and, accordingly, the results of operations of the acquired
     assets and assumed liabilities have been included with those of the Company
     subsequent to effective dates of the respective acquisitions. All assets
     acquired and liabilities assumed were recorded at their estimated fair
     market values at the date of acquisition in the consolidated balance sheet.


     AXA Corporation


     On October 3, 1997, the Company purchased certain assets of AXA Corporation
     ("AXA"), a software developer and marketer. The purchase price of the
     acquired assets was a cash payment of $550,000. On the date of acquisition,
     the Company determined that no alternative future use existed for the
     research and development in progress acquired and charged $450,000 to
     operations.


     The purchase price allocation for the acquisition of certain assets of AXA
     is summarized as follows (in thousands):


<TABLE>
<CAPTION>
 
                                                       AXA
                                                   ------------
           <S>                                     <C>
           Property and equipment                   $         3
           Goodwill                                          97
           In-process research   
            and development                                 450
                                                    -----------
                                                    $       550
                                                    ===========
</TABLE>



     QSE (Bristol) Limited


     On December 3, 1996, the Company acquired all of the outstanding stock of
     QSE (Bristol) Limited, a software manufacturer and marketer. The purchase,
     for approximately $1,590,000 in cash, was made by Research Engineers
     (Europe) Limited, the Company's United Kingdom subsidiary. On the date of
     acquisition, the Company determined that no alternative future use existed
     for the research and development in progress acquired and charged $715,000
     to operations.

                                       29
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


   The purchase price allocation for the acquisition of QSE (Bristol) Limited is
   summarized as follows (in thousands):


<TABLE>
<CAPTION>
 
                                                      QSE
                                                   ---------
<S>                                                <C>
Current assets, including cash of $54               $    278
Property and equipment                                    44
Goodwill                                                 977
In-process research                        
 and development                                         715
Current liabilities                                     (334)
Non-current liabilities                                  (90)
                                                    --------
                                                    $  1,590
                                                    ========
</TABLE>



(3)  Short-Term Investments


     The Company's fixed maturity short-term investments that are classified as
     held-to-maturity at March 31, 1998 consist entirely of debt securities
     issued by the United States or its agencies and are recorded at an
     amortized cost of approximately $99,000, which also approximates fair
     value. There were no material unrealized holding gains or losses at March
     31, 1998.

     The Company's investments that are classified as available-for-sale at
     March 31, 1998 are recorded at an aggregate fair value of $1,527,000 and
     consisted primarily of common stock marketable equity securities,
     certificates of deposit and mutual funds. The net unrealized holding losses
     at March 31, 1998 were approximately $2,000 and have been accounted for as
     a separate component of stockholders' equity.


(4)  Property, Plant and Equipment


     Property, plant and equipment, at cost, as of March 31, 1998 consists of
     the following (in thousands):


<TABLE>
             <S>                                            <C>        
             Land                                           $      539 
             Building                                            1,985 
             Office and computer equipment, software                   
             and furniture                                       1,454 
                                                            ---------- 
                                                                 3,978 
                                                                       
             Accumulated depreciation                             (890)
                                                            ---------- 
                                                                       
             Net property, plant and equipment              $    3,088 
                                                            ========== 
</TABLE>

                                       30
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


(5)  Line of Credit and Bank Debt


     Long-term bank debt consists of the following at March 31, 1998 (in
     thousands):


<TABLE>
<S>                                                                                          <C>   
Mortgage payable to bank, monthly payments of principal plus interest at 2.25% over the
 LIBOR Base Rate (8.06% at March 31, 1998) through maturity of April 2007, secured by
 real estate owned by the Company                                                            $ 1,765
 
Loan payable to bank, monthly payments of principal plus interest at 0.5% over the bank's
 prime rate (9.00% at March 31, 1998) through maturity of April 2000, secured by certain
 computer equipment owned by the Company                                                         125
 
 
Other                                                                                             21
                                                                                             -------
     Total                                                                                     1,911

     Less current portion                                                                        122
                                                                                             -------
    
                                                                                             $ 1,789
                                                                                             =======
</TABLE>


   On December 1, 1997, the Company obtained a $500,000 line of credit from a
   bank expiring on December 1, 1998.  There were no amounts outstanding at
   March 31, 1998.  The credit facility bears interest at the bank's prime rate
   (8.5% at March 31, 1998) and is collateralized by all assets of the Company.

   The line of credit contains certain restrictive covenants, all of which have
   been complied with at March 31, 1998.

   The long-term bank debt matures in each of the following years ending March
   31 (in thousands):


<TABLE>
              <S>                                      <C>          
              1999                                    $   122      
              2000                                        104      
              2001                                         52      
              2002                                         52      
              2003                                         56      
              Thereafter                                1,525      
                                                      -------      
                                                                   
                                                      $ 1,911      
                                                      =======       
</TABLE>



(6)  Stockholders' Equity


     Initial Public Offering

     On July 26, 1996, the Company completed its initial public offering of
     1,300,000 shares of its common stock at $5.00 per share (1,495,000 shares
     after exercise of the underwriters over-allotment option on September 3,
     1996). The net proceeds of the offering (including exercise of the
     underwriters over-allotment option) after deducting underwriter's
     commissions and offering costs were approximately $6,469,000.

                                       31
<PAGE>

                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued

 
     Stock Repurchase

     On December 16, 1997, in accordance with Amendment No. 1 to the Agreement
     and Plan of Reorganization dated March 8, 1996 between the Company and 
     ADLPipe, Inc., the Company repurchased 26,290 shares of common stock for
     $200,000.

     Stock Option Plans

     In April 1996, the Company adopted the Research Engineers, Inc. 1996 Stock
     Option Plan (the "1996 Plan"). The 1996 Plan provides for the granting of
     Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQOs) of up
     to 294,000 shares of the Company's common stock. These options will
     generally vest over 3 years, though the vesting periods vary from person to
     person. The options are exercisable subject to continued employment and
     other conditions. The 1996 Plan will terminate in April 2006. As of March
     31, 1998, there were 41,900 options available for grant under the 1996 Plan
     and 78,833 were exercisable.

     In November 1996, the Board of Directors approved the repricing of 247,750
     of the Company's stock options granted under the 1996 Plan which had
     exercise prices higher than the then market price of the Company's common
     stock. The options were repriced from $5.00 to $2.75.

     The following is a summary of stock option activity related to the 1996
     Plan (number of shares in thousands):


<TABLE>
<CAPTION>
                                                                    
                                                            Weighted          
                                                             average          
                                         Number             exercise          
                                        of shares             price           
                                     ------------       --------------         
<S>                                  <C>                <C>
Outstanding at April 1, 1996                   -               $    -
Granted                                       292                 2.75
Forfeited                                     (19)                2.75
Outstanding at April 1, 1997                  273                 2.75 
Granted                                        16                 3.00
Exercised                                      (3)                2.75
Forfeited                                     (34)                2.75
                                           ------              -------
Outstanding at March 31, 1998                 252                 2.76
                                           ======              =======
</TABLE>


   In February 1997, the Company adopted the Research Engineers, Inc. 1997 Stock
   Option Plan (the "1997 Plan").  The 1997 Plan provides for the granting of
   Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQOs) of up to
   300,000 shares of the Company's common stock.  These options will generally
   vest over 3 years, though the vesting periods vary from person to person.
   The options are exercisable subject to continued employment and other
   conditions.  The 1997 Plan will terminate in February 2007.  As of March 31,
   1998, there were 84,400 options available for grant under the 1997 Plan and
   17,667 were exercisable.

   The following is a summary of stock option activity related to the 1997 Plan
   (number of shares in thousands):


<TABLE>
<CAPTION>
                                                                    
                                                                    Weighted
                                                                    average
                                                 Number             exercise
                                                of shares            price  
                                             ------------           --------
<S>                                          <C>                    <C>
Outstanding at April 1, 1996                           -             $    -
Granted                                                53               2.75
Forfeited                                              -                  -
Outstanding at April 1, 1997                           53               2.75
Granted                                               185               2.96
Forfeited                                             (22)              2.92
                                                   ------
Outstanding at March 31, 1998                         216               2.90
                                                   ======            =======
</TABLE>

                                       32
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


   During fiscal 1998, the Company granted 20,000 stock options outside of the
   above described plans. These options vest at the rate of 2,500 options per
   quarter with an exercise price of $2.81.

   As discussed in Note 1, the Company accounts for its stock options based on
   the intrinsic value of a grant as of the date of the grant in accordance with
   APB No. 25.  Accordingly, no compensation expense has been recognized in 1998
   or 1997 for options granted.  Had compensation cost been recognized in
   accordance with the fair value provisions of SFAS No. 123, pro-forma and
   assumption information would have been as follows for the fiscal years ended
   March 31,:


<TABLE>
<CAPTION>
                                                                                
                                                       1998              1997
                                                     ---------        ---------
<S>                                                  <C>              <C>
Net income -- as reported                            $  88,000        $ 222,000
Net (loss)/income -- pro-forma                        (143,000)          72,000
                                                     =========        =========
Basic net income per share -- as reported                 0.02             0.04
Basic net (loss)/income per share -- pro-forma           (0.03)            0.01
Diluted net income per share -- as reported               0.02             0.04
Diluted net (loss)/income per share -- pro-forma         (0.02)            0.01
                                                     =========        =========
Weighted average fair value of options granted       $    2.91        $    1.34
                                                     =========        =========
Black-Scholes option pricing model assumptions:
  Dividend yield                                            --               --
  Expected volatility                                       48%              48%
  Risk-free interest rate                                 5.57%            5.50%
  Expected option lives (in years)                           5                5
</TABLE>


     At March 31, 1998, the range of exercise prices and the weighted average
     remaining contractual life of outstanding options were $2.75 - $3.00 and
     8.64 years, respectively.


(7)  Related Party Transactions


     In July 1991, the Company loaned $25,000 to a stockholder, officer and
     director, with principal and accrued interest originally due in December
     1996. The note's maturity date was extended to March 1999. Interest accrues
     at the rate of 1% per annum. The note is included in notes and related
     party loans receivable on the consolidated balance sheet.

     In October 1996, the Company loaned $37,500 to a stockholder, with
     principal and accrued interest originally due in October 1997. The note's
     maturity date was extended to March 1999. Interest accrues at the rate of
     8% per annum. The stockholder has pledged his common stock in the Company
     as collateral for this note. The note is included in notes and related
     party loans receivable on the consolidated balance sheet.

                                       33
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued

(8)  Retirement Plan

     The Company has adopted a qualified cash or deferred 401(k) retirement
     savings plan.  The plan covers all employees who have attained age 21.  The
     Company makes matching contributions to this plan based on 100% of the
     employees' elective contributions up to a maximum of 6% of compensation.
     For the years ended March 31, 1998 and 1997, Company contributions in the
     amount of $81,000 and $74,000, respectively, were paid to the plan.

(9)  Commitments

     The Company leases certain facilities and equipment under noncancelable
     operating leases.  The facility leases include options to extend the lease
     terms and provisions for payment of property taxes, insurance and
     maintenance expenses.

     At March 31, 1998, future minimum annual rental commitments under these
     lease obligations were as follows (in thousands):


<TABLE>
<CAPTION>

           Year ending March 31:                  
           <S>                             <C> 
             1999                          $  395 
             2000                             348 
             2001                             322 
             2002                             275 
             2003                             264 
             Thereafter                       432 
                                           ------ 
                                           $2,036 
                                           ======  
</TABLE>


     Rent expense was $350,000 and $315,000 for the years ended March 31, 1998
     and 1997, respectively.

     The Company leases space to third parties in a Company-owned building under
     operating leases. Certain leases contain renewal options and provide for
     reimbursement of certain operating expenses. The tenant that represented
     the significant portion of rental income did not renew their lease which
     expired in October 1997. Rental income for the year ended March 31, 1998
     and 1997, included in other income in the accompanying consolidated
     statements of income, was $71,000 and $99,000, respectively.

     Employment Agreements

     The Company has entered into employment agreements with three officers of
     the Company that provide for minimum annual salaries aggregating $520,000.
     The agreements expire on May 31, 2001. In the event of termination of a
     contract by the Company without cause, the Company would be required to pay
     continuing salary payments for specified periods in accordance with the
     agreements.

                                       34
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued

(10) Income Taxes

     The components of income (loss) before income taxes are as follows for the 
year ended March 31, (in thousands):
<TABLE>
<CAPTION>
                                            1998                   1997         
                                       ---------------        ---------------   
           <S>                         <C>                    <C>               

           The Americas                $        (1,406)       $          (506)
           Foreign                               1,563                  1,076
                                       ---------------        ---------------
     
               Total                   $           157        $           570
                                       ===============        ===============
</TABLE> 
     The provision for income taxes is comprised of the following for the year
     ended March 31, (in thousands):

<TABLE>
<CAPTION>
                                            1998                   1997         
                                       ---------------        ---------------   
           <S>                         <C>                    <C>               
           Current:                                                             
              Federal                  $            --        $           144   
              State                                 70                     51   
              Foreign                              288                    145   
                                       ---------------        ---------------   
                                                   358                    340   
           Deferred:                                                       
              Federal                             (216)                    16   
              State                                (71)                   (14)  
              Foreign                               (2)                     6   
                                       ---------------        ---------------   
                                                  (289)                     8   
                                       ---------------        ---------------   
                                                                                
                 Total                 $            69        $           348   
                                       ===============        =============== 
</TABLE>

     The reported provision for income taxes differs from the amount computed by
     applying the statutory federal income tax rate of 34% to income before
     taxes as follows (in thousands):


<TABLE>
<CAPTION>
                                             Year ended March 31,
                                            -----------------------
                                             1998             1997
                                            ------           ------
<S>                                         <C>              <C> 
   Income tax at statutory rate             $   53           $  194
   State taxes, net of federal benefits         --               24
   Research and development credits             --              (30)
   Foreign income tax rate differential         36              (25)
   In-process research and development          --              243
   Provision to return adjustment              (16)             (85)
   Other                                        (4)              27
                                            ------           ------
     Total                                  $   69           $  348
                                            ======           ======
</TABLE> 

                                       35
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued

   The Company provides deferred income taxes for temporary differences between
   assets and liabilities recognized for financial reporting and income tax
   purposes.  The tax effects of temporary differences at March 31, 1998 are as
   follows (in thousands):

<TABLE>
<CAPTION>
<S>                                       <C> 
Deferred tax assets:
 Cash to accrual adjustment               $   186
 State taxes                                   24
 Accrued vacation                              30
 Allowance for doubtful accounts              119
 Amortization of goodwill                     244
 Foreign tax credit carryforward                6
 Other                                          2
                                          -------
      Total deferred tax assets               611
                                          -------
Deferred tax liabilities:
 Depreciation                                 (68)
 Other                                         (4)
                                          -------
      Total deferred tax liabilities          (72)
                                          -------
      Net deferred tax asset              $   539
                                          =======
</TABLE>


   In assessing the realizability of the net deferred tax assets, management
   considers whether it is more likely than not that some or all of the deferred
   tax assets will not be realized. The ultimate realization of deferred tax
   assets is dependent upon either the generation of future taxable income
   during the periods in which those temporary differences become deductible or
   the carryback of losses to recover income taxes previously paid during the
   carryback period. As of March 31, 1998, the Company had not provided a
   valuation allowance to reduce the net deferred tax assets due to the
   Company's expectation of future taxable income against which the deferred tax
   asset may be utilized.

   Undistributed earnings of certain of the Company's foreign subsidiaries are
   considered to be indefinitely reinvested and, accordingly, no provision for
   United States federal and state income taxes has been provided thereon.  Upon
   distribution of those earnings in the form of dividends or otherwise, the
   Company would be subject to both federal income taxes (subject to an
   adjustment for foreign tax credits) and withholding taxes payable to the
   various foreign countries.

                                       36
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


(11) Foreign Operations

     The Company's operations are based worldwide through foreign subsidiaries
     and branch offices in Germany, India, the United Kingdom, and Asia-Pacific.
     The following are significant components of worldwide operations by
     geographic location:

<TABLE>
<CAPTION>
 
                                            For the year ended March 31
                                      -------------------------------------
                                        1998                         1997
                                      --------                     --------
                                                  (in thousands)
<S>                                   <C>                          <C>  
             Net revenue
The Americas                          $  5,527                     $  4,992
Europe                                   3,553                        2,608
Asia-Pacific                             3,266                        3,423

     Total net revenue                $ 12,346                     $ 11,023
                                      ========                     ========

      Operating income/(loss)
The Americas                          $ (1,029)                    $    103
Europe                                     382                           83
Asia-Pacific                             1,150                          994
In-process research and development       (450)                        (715)
                                      --------                     --------
     Total operating income           $     53                     $    465
                                      ========                     ========

        Identifiable Assets
The Americas                          $  7,178                     $  8,995
Europe                                   2,120                        1,802
Asia-Pacific                             2,152                          882
                                      --------                     --------
     Total identifiable assets        $ 11,450                     $ 11,679
                                      ========                     ========

            Export Sales
The Americas                          $  3,489                     $  2,872
                                      ========                     ========
</TABLE> 

                                       37
<PAGE>
 
                   RESEARCH ENGINEERS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


(12) Earnings Per Share

     The following table illustrates the computation of basic and diluted net
     income per share for the years ended March 31, (in thousands):

<TABLE>
<CAPTION>
                                                     1998           1997    
                                                   -------        -------   
<S>                                                <C>            <C>       
     Numerator:                                                             
     Numerator for basic and diluted net income                             
      per share -- net income                      $    88        $   222   
                                                   =======        =======   
                                                                            
     Denominator:                                                           
     Denominator for basic net income per share--
      average number of common shares                                       
      outstanding during the year                    5,695          5,200   
                                                                            
     Incremental common shares attributable to                              
      exercise of outstanding options                   90            115
                                                   -------        -------   
     Denominator for diluted net income per                                 
      share                                          5,785          5,315  
                                                   =======        =======  
     Basic net income per share                    $  0.02        $  0.04  
                                                   =======        =======  
     Diluted net income per share                  $  0.02        $  0.04  
                                                   =======        =======   
</TABLE> 


     Warrants issued to the underwriters as part of the Company's initial public
     offering to purchase 130,000 shares of common stock at $6.00 per share were
     outstanding during fiscal 1998 and 1997 but were not included in the
     computation of diluted EPS because the warrants' exercise price was greater
     than the average market price of the common shares and, therefore, the
     effect would be antidilutive (see Note 6).

                                       38
<PAGE>
 
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None



                                    PART III


ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

Directors, Executive Officers and Key Employees

  The directors, executive officers and key employees of the Company are as
follows:


<TABLE>
<CAPTION>
       Name          Age                      Position
       ----          ---                      --------
<S>                  <C>   <C>                   
Amrit K. Das........  51   Chairman of the Board, President, Chief Executive
                           Officer and Director

Jyoti Chatterjee....  42   Executive Vice President, Chief Operating Officer and
                           Director

Wayne Blair.........  58   Chief Financial Officer, Treasurer and Secretary

Clara Young.........  43   Vice President Administration

Dan W. Heil.........  65   Director

Bruce E. Cummings...  49   Director

Santanu Das.........  25   Manager of New Technology and Director

Steve Owen..........  39   Director of European Operations

John Putnam.........  40   Manager of Marketing and Advertising
</TABLE> 

Amrit K. Das is the founder of the Company and has served as its President,
Chief Executive Officer and as a Director since its inception in 1981. Mr. Das
holds a B.S. in Civil/Structural Engineering from Calcutta University, India and
an M.S. in Structural Engineering from the University of South Carolina.

Jyoti Chatterjee has served as the Company's Executive Vice President,
Chief Operating Officer and as a Director since April 1990. Prior to that Mr.
Chatterjee served as Chief Consulting Engineer for the Company from 1985 to
1990. Mr. Chatterjee holds a B.S. in Structural Engineering from the Indian
Institute of Technology and an M.S. in Structural Engineering from the
University of Pennsylvania.

Wayne Blair has served as the Company's Chief Financial Officer, Treasurer
and Secretary since September 1997. Prior to that Mr. Blair was the Chief
Financial Officer for National Electronics Corporation from 1994 to 1997.  From
1992 to 1994, Mr. Blair was the Chief Financial Officer for Satellite Technology
(currently STM Wireless, Inc.).  Mr. Blair holds a B.S. in Accounting from
California State University, Long Beach.

Clara Young has served as Vice President Administration of the Company
since December 1987. Prior to that Ms. Young served as program analyst with The
Technical Group, Inc. from December 1982 to December 1987. Ms. Young holds a
B.S. in Computer Science from California State University, Fullerton.

Dan W. Heil has served as a Director of the Company since 1990. Mr. Heil
has been the President and Chief Executive Officer of Willdan Associates, an
engineering and planning company, since its founding in 1965. Mr. Heil holds a
B.S. in Civil Engineering from Stanford University.

Bruce E. Cummings has served as a Director of the Company since 1996. Mr.
Cummings is the Principal of Bruce Cummings Associates, management and marketing
consultants. Prior to that, Mr. Cummings was the President and Chief Executive
Officer of Portrait Display Labs, Inc., a manufacturer of special purpose
computer monitors, which he co-founded, from 1992 to June 1997. From January
1991 to July 1992, Mr. Cummings was Vice President of Corporate Marketing for
Macromedia. Mr. Cummings is currently a member of the Advisory Board for Europe

                                       39
<PAGE>
 
Direct, the European Direct Marketing Conference. Mr. Cummings holds a B.S. in
Marketing from California State University at Long Beach.

Santanu Das has served as Manager of New Technology of the Company since May
1997 and as a Director since September 1996. Prior to that Mr. Das served as a
Senior Engineering Analyst for the Company from 1991 to April 1997. Mr. Das
holds a B.S. in Structural Engineering from the University of Southern
California and an M.S. in Structural Engineering from the Massachusetts
Institute of Technology. Santanu Das is the son of Amrit Das, the Company's
President and Chief Executive Officer.

Stephen Owen has served as the Company's Director of European Operations since
1987. Mr. Owen holds a B.S. in Civil Engineering from the University College
Swansea, United Kingdom.

John Putnam has served as the Company's Manager of Marketing and Advertising
since 1991. For the six year period prior to that, Mr. Putnam held various
marketing and advertising positions with The Technical Group, Inc., including
marketing and advertising manager for CIVILSOFT (a division of The Technical
Group, Inc.). Mr. Putnam holds a B.A. in political science/public administration
from California State Polytechnic University, Pomona, and an M.B.A. from the
University of Redlands.

  All directors hold office until the next annual stockholders' meeting or until
their respective successors are elected or until their earlier death,
resignation or removal. Officers are appointed by, and serve at the discretion
of, the Board of Directors.

Compliance with Beneficial Ownership Reporting Rules

  Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), requires the Company's executive officers and directors, and persons who
beneficially own more than 10% of a registered class of the Company's Common
Stock to file initial reports of ownership and reports of changes in ownership
with the Securities and Exchange Commission ("Commission"). Such officers,
directors and stockholders are required by Commission regulations to furnish the
Company with copies of all such reports that they file.

  Based solely upon a review of copies of such reports furnished to the Company
during its fiscal year ended March 31, 1998 and thereafter, or any written
representations received by the Company from a director, officer or beneficial
owner of more than 10% of the Company's Common Stock ("reporting persons") that
no other reports were required, the Company believes that, during the Company's
1998 fiscal year, all Section 16(a) filing requirements applicable to the
Company's reporting persons were complied with except that each of Amrit Das,
the Company's President and Chief Executive Officer, Santanu Das, the Company's
Manager of New Technology and Director, and Sormistha Das, a beneficial owner of
more than 10% of the Company's Common Stock, inadvertently failed to file on a
timely basis a Form 4 with respect to the transfer of shares of Common Stock by
Amrit Das to Santanu Das and Sormistha Das on January 16, 1998.  On June 29,
1998, each of Amrit Das, Santanu Das and Sormistha Das filed a Form 4 with
respect to the transfer of shares of Common Stock on January 16, 1998.


ITEM 10.  EXECUTIVE COMPENSATION.

Executive Compensation

  There is shown below information concerning the annual and long-term
compensation for services in all capacities to the Company of the Company's
Chief Executive Officer and the other executive officers of the Company whose
aggregate cash compensation exceeded $100,000 (collectively, the "Named
Executives") during the fiscal years ended March 31, 1998, 1997 and 1996.

                                       40
<PAGE>
 
                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                                       Long-Term                      
                                                                                      Compensation                    
                                                  Annual                              ------------
                                               Compensation                              Awards                       
                                              ---------------                         ------------
                                                                                       Securities                     
                                                                  Other Annual         Underlying        All Other    
      Name and                         Salary       Bonus        Compensation(1)         Options        Compensation  
 Principal Position         Year        ($)          ($)              ($)                  (#)              ($)       
--------------------        ----      -------       ------       ---------------       ----------       ------------  
<S>                         <C>       <C>           <C>          <C>                   <C>              <C>  
Amrit K. Das                1998      260,000          ---           66,071               ---             15,824(2)   
  President and Chief       1997      249,200          ---           78,379              25,000           15,824(2)   
  Executive Officer         1996      228,000          ---            ---                 ---             15,564(2)   
                                                                                                                      
Jyoti Chatterjee            1998      156,000          ---            ---                15,000            9,360(3)   
  Executive Vice President  1997      136,560          ---            ---                48,000            8,194(3)   
  and Chief Operating       1996       99,840       20,912(4)         ---                 ---              6,340(3)   
  Officer                                                                                                              
                                                                                                                      
Clara Young                 1998      104,000          ---            ---                 7,500            6,240(3)   
  Vice President of         1997       93,920          ---            ---                18,500            5,808(3)   
  Administration            1996       74,720        6,528(5)         ---                 ---              4,474(3)    
</TABLE> 
___________
(1) The costs of certain benefits are not included because they did not exceed,
    in the case of each Named Executive, the lesser of $50,000 or 10% of the
    total annual salary and bonus as reported above.
(2) Represents 401(k) contributions made by the Company as well as $6,324 for
    each year disclosed of premiums paid by the Company pursuant to a split-
    dollar life insurance policy established by the Company for the benefit of
    Mr. Das.
(3) Represents 401(k) contributions made by the Company on behalf of the Named
    Executive.
(4) Represents a performance bonus of 23,116 shares of restricted Common Stock
    of the Company, valued at approximately $20,912 (as determined by the Board
    of Directors of the Company), granted to Mr. Chatterjee in September 1995.
(5) Represents a performance bonus of 7,216 shares of restricted Common Stock of
    the Company, valued at approximately $6,528 (as determined by the Board of
    Directors of the Company), granted to Ms. Young in September 1995.


Stock Option Grants in 1998

  The following table sets forth information concerning individual grants of
stock options made pursuant to the Company's 1996 Stock Option Plan and 1997
Stock Option Plan during fiscal 1998 to each of the Named Executives. The
Company has never granted any stock appreciation rights.


                       OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                          Individual Grants
                      -----------------------------------------------------
                      Number of                                           
                      Securities                                          
                      Underlying   Percent of Total   Exercise  
                       Options      Options Granted   or Base   
                       Granted     to Employees in     Price     Expiration 
     Name                (#)         Fiscal Year       ($/Sh)       Date     
     ----             ----------   ----------------   --------   ----------  
<S>                   <C>          <C>                <C>        <C>  
Amrit K. Das.......      ---              ---           ---          ---
Jyoti Chatterjee...    15,000            0.07%         $3.00       5/1/07  
Clara Young........     7,500            0.04%         $3.00       5/1/07
</TABLE> 

                                       41
<PAGE>
 
Option Exercises and Fiscal Year-End Values

  Shown below is information with respect to the number of shares of the
Company's Common Stock acquired upon exercise of options, the value realized
therefor, the number of unexercised options at March 31, 1998 and the value of
unexercised in-the-money options at March 31, 1998 for the Named Executives in
the Summary Compensation Table above. The Named Executives did not hold any
stock appreciation rights during fiscal 1998.

                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                                                     
                                                                              Number of Securities      Value of Unexercised
                                                                             Underlying Unexercised         In-the-Money
                                                                               Options at Fiscal          Options at Fiscal
                                 Shares                                           Year-End(#)               Year-End ($)
                               Acquired on                  Value                 Exercisable/              Exercisable/
         Name                  Exercise(#)               Realized($)             Unexercisable              Unexercisable
----------------------   -----------------------   -----------------------   ----------------------    -----------------------
<S>                      <C>                       <C>                       <C>                      <C>
Amrit K. Das..........             ---                       ---                8,333 / 16,667            21,333 /  42,667
Jyoti Chatterjee......             ---                       ---               16,000 / 47,000            40,960 / 116,570
Clara Young...........             ---                       ---                6,167 / 19,833            15,787 /  48,898
</TABLE>


Directors' Compensation

  The Company's directors do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at Board of
Directors and committee meetings.


Employment Agreements

  As of May 1, 1996, the Company entered into five-year employment agreements
with each of Amrit Das, Jyoti Chatterjee and Clara Young. Those agreements,
which became effective upon the closing of the Company's initial public offering
of its Common Stock, provide that Mr. Das, Mr. Chatterjee and Ms. Young will
receive minimum base annual salaries of $260,000, $156,000 and $104,000,
respectively. Each employment agreement also provides for the grant of an annual
bonus with such bonuses, if any, to be determined by the Compensation Committee
of the Board of Directors.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

  The following table sets forth as of June 23, 1998, certain information with
respect to (i) each director of the Company, (ii) the Named Executives and (iii)
all directors and executive officers of the Company as a group, and (iv) each
person known to the Company to be the beneficial owner of more than 5% of the
Company's Common Stock. The information with respect to each person specified is
as supplied or confirmed by such person or based upon statements filed with the
Commission.

                                       42
<PAGE>
 
<TABLE> 
<CAPTION> 
Name and Address           Amount and Nature of Beneficial     Percent of Class
of Beneficial Owner         Ownership of Common Stock (1)      of Common Stock
-------------------         -----------------------------      ---------------
<S>                        <C>                                 <C>    
Amrit K. Das (2)(3)(4)             1,286,759                         22.6%

Jyoti Chatterjee (2)(3)(5)           165,312                          2.9%

Clara Young (2)(6)                    30,853                           *

Dan W. Heil (3)(7)                    99,288                          1.7%

Bruce E. Cummings (3)(8)               5,000                           *

Santanu Das (3)(9)                 1,303,783                         22.8%

Sormistha Das                        931,462                         16.4%
1043 Taylor Court
Anaheim Hills, CA 92808

All Directors and Executive        2,890,995                         50.1%
Officers of the Company as
a Group (7 persons) (10)
</TABLE> 
_______________
* Less than 1%

(1)  Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission and generally includes voting or
     investment power with respect to securities. Except as indicated by
     footnote, and subject to community property laws where applicable, the
     persons named in the table above have sole voting and investment power with
     respect to all shares of Common Stock shown as beneficially owned by them.
     Shares of Common Stock subject to options currently exercisable, or
     exercisable within 60 days after June 23, 1998, are deemed to be
     outstanding in calculating the percentage ownership of a person or group
     but are not deemed to be outstanding as to any other person or group.
(2)  Named executive officer of the Company. The address of each executive
     officer is c/o Research Engineers, Inc., 22700 Savi Ranch Parkway, Yorba
     Linda, CA.
(3)  Director of the Company. The address of each director is c/o Research
     Engineers, 22700 Savi Ranch Parkway, Yorba Linda, CA.
(4)  Includes 1,276,759 shares of Common Stock held by the A. and P. Das Living
     Trust and 10,000 shares of Common Stock underlying options which are
     exercisable as of June 23, 1998 or within 60 days after such date. Does not
     include 931,462 shares of Common Stock held by Mr. Das' daughter, Sormistha
     Das, or 1,303,783 shares of Common Stock beneficially held by Mr. Das' son,
     Santanu Das. Mr. Das disclaims beneficial ownership of the shares of Common
     Stock held by Sormistha Das and Santanu Das.
(5)  Includes 32,667 shares of Common Stock underlying options which are
     exercisable as of June 23, 1998 or within 60 days after such date.
(6)  Includes 13,167 shares of Common Stock underlying options which are
     exercisable as of June 23, 1998 or within 60 days after such date.
(7)  Includes 5,000 shares of Common Stock underlying options which are
     exercisable as of June 23, 1998 or within 60 days after such date.
(8)  Represents 5,000 shares of Common Stock underlying options which are
     exercisable as of June 23, 1998 or within 60 days after such date.
(9)  Includes 28,333 shares of Common Stock underlying options which are
     exercisable as of June 23, 1998 or within 60 days after such date. Mr. Das
     is the son of Amrit Das, the Company's President and Chief Executive
     Officer.
(10) Includes 94,167 shares of Common Stock underlying options which are
     exercisable as of June 23, 1998 or within 60 days after such date.

                                       43
<PAGE>
 
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

  On May 1, 1996, Amrit Das transferred, assigned and surrendered to the Company
2,626 ordinary equity shares of Research Engineers Private Limited, a
corporation organized and existing under the laws of India ("RE India"), which
represents 99.88% of the issued and outstanding shares of RE India. Pending the
receipt of permission for the transfer from the Central Government of India,
which occurred in January 1997, Mr. Das had assigned all of the rights,
privileges and benefits in and to these shares to the Company.

  In July 1996, the Company repaid a loan to Amrit Das, the Company's Chief
Executive Officer and President.  The  terms of the $271,000 loan, which
originated in March 1994, were as follows: interest at 9% per annum and payable
on March 1, 1999.

  In July 1996, an advance of $309,000, including principal and accrued
interest, was repaid to Amrit Das, the Company's President and Chief Executive
Officer. The advance was made to the Company in connection with the acquisition
of the Technical Group, Inc. in 1990, in the amount of $200,000.

  In August 1996, the Company repaid two notes aggregating approximately
$1,705,000. These notes were made in connection with the acquisition of the
Company's facility in Yorba Linda, California in February 1994 and were
personally guaranteed by Amrit Das, the Company's President and Chief Executive
Officer, and Purabi Das, Mr. Das' wife.

  In December 1996, the Company repaid the aggregate outstanding principal and
accrued interest on a note executed by Wells Fargo Bank, N.A. in May 1994.  The
note, which had an aggregate principal amount of $140,000 and accrued interest
at a variable rate equal to Wells Fargo's money market funds rate plus 3.5% per
annum, was collateralized by a blanket security interest with respect to the
general assets of the Company and personally guaranteed by Amrit Das and Purabi
Das.

  In March 1997, the Company repaid two loans aggregating approximately $147,000
to Santanu K. Das and Sormistha Das, the son and daughter of Amrit Das, both of
whom are stockholders of the Company.  The original terms of the loans, which
originated in March 1994 were as follows: interest at 9% per annum and payable
on March 1, 1999.


ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

     (a) Exhibits

            10.1    Research Engineers, Inc. 1996 Stock Option Plan*

            10.2    Form of Nonqualified Stock Option Agreement pertaining to
                    the Plan (schedule of options issued pursuant to the Plan
                    attached thereto)*

            10.17   Agreement and Plan of Reorganization dated as of March 8,
                    1996, by and among the Registrant ADLPipe, Inc., a
                    Massachusetts corporation, Chiin-Kun Hou and Peter E. Lewis*

            10.23   Employment Agreement dated May 1, 1996, by and between the
                    Registrant and Amrit K. Das*

            10.24   Employment Agreement dated May 1, 1996, by and between the
                    Registrant and Jyoti Chatterjee*

            10.25   Employment Agreement dated May 1, 1996, by and between the
                    Registrant and Clara Y. M. Young*

                                       44
<PAGE>
 
            10.27   Research Engineers, Inc. 1997 Stock Option Plan**

            10.28   Business Loan agreement dated October 15, 1996 between the
                    Company and Union Bank of California N.A.**

            10.29   Security agreement dated October 3, 1996 between the Company
                    and Union Bank of California N.A.**

            10.30   Promissory Note dated October 15, 1996 made to the order of
                    Union Bank of California N.A.**

            10.31   Promissory Note dated March 20, 1997 in the principal amount
                    of $1,800,000 made payable to Union Bank of California
                    N.A.**

            10.32   Promissory Note dated October 15, 1996 in the principal
                    amount of $500,000 made payable to Union Bank of California
                    N.A.**

            10.33   Amendment No. 1, dated December 20, 1996, to Agreement and
                    Plan of Reorganization, by and among the Registrant ADLPipe,
                    Inc., a Massachusetts corporation, Chiin-Kun Hou and Peter
                    E. Lewis**

            10.34   AXA, Inc. Asset Purchase Agreement***

            23      Consent of Independent Auditors

            27.1    Financial Data Schedule


     (b) Reports on Form 8-K

            None
----------------------
*     Filed as an exhibit to Registrant's Registration Statement on Form SB-2
      dated May 21, 1996 or amendment thereto dated June 14, 1996 (Registration
      No. 333-4844-LA).

**    Filed as an exhibit to Registrant's Form 10-KSB for the fiscal year ended
      March 31, 1997 and filed with Securities and Exchange Commission on June
      30, 1997, or amendment thereto filed on August 19, 1997.

***   Filed as an exhibit to Registrant's Form 10-QSB for the quarterly period
      ended December 31, 1997 and filed with the Securities and Exchange
      Commission on February 13, 1998.

                                       45
<PAGE>
 
                                 SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

 
                                           RESEARCH ENGINEERS, INC
Dated: June 29, 1998
                                           By: /s/ AMRIT K. DAS
                                           -------------------------------------
                                           Amrit K. Das, Chief Executive Officer


     In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.



<TABLE>
<CAPTION>
          Name                                           Title                              Date
----------------------------------           -------------------------------           --------------
<S>                                          <C>                                       <C> 
/s/ AMRIT K. DAS                             Chairman of the Board,                    June 29, 1998
----------------------------------           President, Chief Executive
Amrit K. Das                                 Officer and Director
                                             (principal executive officer)
             
/s/ JYOTI CHATTERJEE                         Executive Vice President,                 June 29, 1998
----------------------------------           Chief Operating Officer and
Jyoti Chatterjee                             Director
 
/s/ WAYNE BLAIR                              Secretary and Chief Financial             June 29, 1998
----------------------------------           Officer (principal financial
Wayne Blair                                  and accounting officer)
                                      
/s/ SANTANU DAS                              Director                                  June 29, 1998
----------------------------------  
Santanu Das                         
 
/s/ DAN W. HEIL                              Director                                  June 29, 1998
---------------------------------- 
Dan W. Heil
 
/s/ BRUCE CUMMINGS                           Director                                  June 29, 1998
---------------------------------- 
Bruce Cummings                     
</TABLE> 

                                       46
<PAGE>
 
                                 EXHIBIT INDEX
                                 -------------
 
Exhibit No.                              Description          
-----------                              -----------             

 10.1          Research Engineers, Inc. 1996 Stock Option Plan*

 10.2          Form of Nonqualified Stock Option Agreement pertaining to the
               Plan (schedule of options issued pursuant to the Plan attached
               thereto)*

 10.17         Agreement and Plan of Reorganization dated as of March 8, 1996,
               by and among the Registrant ADLPipe, Inc., a Massachusetts
               corporation, Chiin-Kun Hou and Peter E. Lewis*

 10.23         Employment Agreement dated May 1, 1996, by and between the
               Registrant and Amrit K. Das*

 10.24         Employment Agreement dated May 1, 1996, by and between the
               Registrant and Jyoti Chatterjee*

 10.25         Employment Agreement dated May 1, 1996, by and between the
               Registrant and Clara Y. M. Young*

 10.27         Research Engineers, Inc. 1997 Stock Option Plan**

 10.28         Business Loan agreement dated October 15, 1996 between
               the Company and Union Bank of California N.A.**

 10.29         Security agreement dated October 3, 1996 between the Company
               and Union Bank of California N.A.**

 10.30         Promissory Note dated October 15, 1996 made to the order of
               Union Bank of California N.A.**

 10.31         Promissory Note dated March 20, 1997 in the principal amount of
               $1,800,000 made payable to Union Bank of California N.A.**

 10.32         Promissory Note dated October 15, 1996 in the principal amount
               of $500,000 made payable to Union Bank of California N.A.**

 10.33         Amendment No. 1, dated December 20, 1996, to Agreement and Plan
               of Reorganization, by and among the Registrant ADLPipe, Inc., a
               Massachusetts corporation, Chiin-Kun Hou and Peter E. Lewis**

 10.34         AXA, Inc. Asset Purchase Agreement***

 23            Consent of Independent Auditors

 27.1          Financial Data Schedule
----------------
*     Filed as an exhibit to Registrant's Registration Statement on Form SB-2
      dated May 21, 1996 or amendment thereto dated June 14, 1996 (Registration
      No. 333-4844-LA).
**    Filed as an exhibit to Registrant's Form 10-KSB for the fiscal year ended
      March 31, 1997 and filed with Securities and Exchange Commission on June
      30, 1997, or amendment thereto filed on August 19, 1997.
***   Filed as an exhibit to Registrant's Form 10-QSB for the quarterly period
      ended December 31, 1997 and filed with the Securities and Exchange
      Commission on February 13, 1998.

                                       47