Exhibit 13.01

                               2000 Annual Report

                           LIFSCHULTZ INDUSTRIES, INC.

                             DESCRIPTION OF BUSINESS

Overview

         Lifschultz Industries, Inc. (the "Company") is a public company
engaged, through its wholly owned subsidiary, Hart Scientific, Inc. ("Hart"),
and Hart's wholly owned subsidiary, Calorimetry Sciences Corporation ("CSC"), in
the development, manufacturing, and marketing of scientific and industrial
calorimetry instrumentation and industrial temperature calibration equipment.
The Company is also involved in managing the activities of a nonoperating,
wholly owned subsidiary, Lifschultz Fast Freight, Inc. ("LFF"), which has as its
principal remaining asset a lease on certain real property in New York City.
Hart was acquired by the Company in 1988, while LFF was acquired by the Company
in 1991. The Company's management anticipates that the Company's future sales
growth, to the extent it occurs, will come from growth in sales of present Hart
and CSC product lines and new products which they will introduce in the future.

History

         The Company was organized under another name in 1987 as a Delaware
corporation for the primary purpose of entering into a business combination with
a then-unknown entity. In 1988, the Company closed a public offering.

         In 1988, the Company acquired Hart, a Utah corporation formed in 1984.
Hart became a wholly owned subsidiary of the Company, and the Company changed
its own name to Hart Technologies, Inc. At that time, the management of Hart
assumed control of the Company.

         In January 1991, the Company acquired LFF, a Delaware corporation,
which was originally founded as a Chicago freight-hauling business in 1899. The
Lifschultz family members who owned LFF obtained approximately 70 percent of the
voting stock of the Company as part of the reorganization. In the
reorganization, LFF became a wholly owned subsidiary of the Company. At that
time, Lifschultz family members David K. Lifschultz and Sidney B. Lifschultz
assumed seats on the Company's Board of Directors and the Board of Directors
appointed David K. Lifschultz as Chairman and Chief Executive Officer of the
Company. They retain those positions today. The Company's name was changed at
that time to its present name.

         During the Company's 1994 fiscal year, the management of Hart elected
to separate Hart's calorimetry division from its temperature calibration
instrumentation business by incorporating CSC. CSC, a Utah corporation, is now a
wholly owned subsidiary of Hart. Dennis R. Hunter, formerly the Chairman of
Hart, now serves as President and Chief Executive Officer of CSC.


                                        1

<PAGE>



Except as otherwise  noted,  the discussion of Hart in the following  paragraphs
includes the business of CSC.

Developments in Fiscal 2000

         Total revenues for the Company rose from $16,254,000 in fiscal 1999 to
$19,334,000 in fiscal 2000, an increase of 19%. The Company's consolidated net
earnings of $1,862,000 in fiscal 1999 increased to $2,108,000 fiscal 2000, a 13%
increase. Included in the calculation of 2000 net earnings is a recognition of a
$1,249,000 deferred tax asset to be utilized in future periods (offset against
future tax liability), compared to a $1,286,000 deferred tax asset recognized
during fiscal 1999. .

Hart Scientific, Inc. and Subsidiary

         Products and Markets. Hart's business strategy is to target narrow
market niches in temperature calibration equipment and high performance
calorimetry applications, build solution-oriented products for those niches, and
capture a significant part of the market for each such product category.
Products for many different markets are developed from similar base technologies
that are proprietary to Hart. Hart has products which are marketed to the
battery industry, calibration laboratories, the plastic container industry, the
automotive plastics industry, the medical research industry, pharmaceutical
companies, the biotechnology industry, and industrial manufacturing companies of
all types. The management of Hart believes that this strategy reduces risk and
results in higher margins, lower development costs, and greater growth potential
for Hart. Hart manufactures and markets temperature calibration services,
calibration seminars, constant temperature baths, microprocessor readout devices
(thermometers), primary standards, dry-wells and a variety of other temperature
calibration devices. Products manufactured and marketed by Hart's subsidiary CSC
include biological scanning calorimeters, heat conduction calorimeters, several
specialty calorimeters, parison calorimeters, a plastics testing device, and
various custom instruments. A calorimeter is a device that measures quantities
of heat energies.

         During the last fiscal year, Hart was awarded a contract from NAVAIR, a
division of the United States Navy, for a custom temperature calibrator. The
contract is projected to total 150 units. To date, 50 have been shipped.
Management estimates that the three-year revenue from this contract will exceed
$1 million. Hart also recently introduced a new 1529 Thermometer, a precision
field thermometer targeted at the pharmaceutical and bio-medical industries.
Management currently projects first year sales of approximately $200,000.

         Customer Service and Support. Most of Hart's products carry a standard
one-year warranty and factory service guarantee. Customer service is structured
around toll-free telephone support, in-factory service, and on-site repair when
necessary.



                                        2

<PAGE>



         Product Development. Hart has typically devoted a substantial portion
of its revenues to product research and development expenditures as a percentage
of revenues have historically been relatively high at Hart. During the fiscal
year ended July 31, 2000, Hart spent approximately $$959,000 on
Company-sponsored research and development activities, compared to $786,000 in
fiscal 1999. Hart management believes such expenditures are necessary for Hart
to develop competitive new products and enhancements for its current product
line.

         Manufacturing and Operations. Hart owns a manufacturing and office
facility in American Fork, Utah, while CSC leases a manufacturing and office
facility in Spanish Fork, Utah. Currently, Hart manufactures most of its own
instruments, but does sell some instruments manufactured by other companies,
sometimes under the Hart label.

         Insurance. Hart presently carries property and casualty insurance on
the equipment used in its business. Some potential losses cannot be insured
against or cannot be insured against at reasonable premium rates. The Company
could be materially adversely affected if it or Hart were to incur an uninsured
or an under insured loss.

         Suppliers. With the exception of proprietary software, some machined
parts, and product housing units, most of the products sold by Hart are
assembled from standard off-the-shelf items which are readily available from a
variety of suppliers. To date, Hart has not experienced any major difficulty in
obtaining components; however, various parts shortages have arisen in the past
and are expected from time to time in the future, so there can be no certainty
that parts shortages would not at some point have an adverse effect on the
Company. Hart employs a purchase order system for purchasing supplies and
components and has not found it necessary to enter into any written supplier
contracts.

         Customers. Hart's customers include calibration service departments and
research departments of universities, governmental agencies, and industrial
corporations. No customer accounted for more than 10 percent of total revenues
during fiscal 2000, and the loss of any single customer would not likely cause a
material adverse effect on Hart and the Company.

         Patents, Copyrights, and Trademarks. Hart does not currently have any
patents, copyrights, or trademarks for its products except for one connector
patent held by Hart. CSC licenses some patented product designs from the Johns
Hopkins University and acquired certain proprietary product designed from
Thermodynamics during 1999. Hart generally relies on trade secrets and
confidentiality agreements to protect the proprietary aspects of its
technologies.

         Sales, Distribution, and Marketing. Hart sells its specialized
instruments directly to customers through direct mailings, including a catalog,
advertisements in technical publications, and participation in trade shows. Hart
uses traditional distribution channels such as sales representatives for its
products in Europe, Asia and other foreign markets. CSC utilizes an exclusive
distributor in Japan for some of its calorimeter products.

                                       3
<PAGE>


         Competition. Hart's temperature instrumentation products compete with
similar products from companies such as IsoTech, Techne, Scientific Electronics,
and other bath/thermometer manufacturers. Certain Hart product lines have much
higher performance specifications than most of the products in the categories
offered by competitors and tend to compete less directly with such lower
performance products. CSC primarily competes with MicroCal and Thermometrics in
the calorimetry market.

Lifschultz Fast Freight, Inc.

         Lifschultz Fast Freight, Inc. was founded in 1899 in Chicago, Illinois
to "cart" local freight by horse and wagon. Until it became a wholly owned
subsidiary of the Company in January 1991, LFF was owned by descendants of the
original founder, David Lifschultz. LFF began inter-city freight transport in
1928 and, under the management of the Lifschultz family, survived the turbulent
period from 1929 to 1960, becoming an important factor in several markets.
Subsequently, however, LFF's business began to decline until, in March 1990, LFF
sold the last of its interstate trucking operations to a group of former
employees who did business under the name "Lifschultz Fast Freight Corp.," but
later went out of business.

         LFF has an operating lease, expiring at the end of September, 2002 on
its former New York trucking terminal. The operating lease provides for a
nominal rental during such time as LFF occupies the current premises. During the
Company's 1994 fiscal year, LFF entered into two subleases covering portions of
the New York Terminal for eight years at a base rental of $450,000 per year
(plus adjustments tied to the Consumer Price Index). These subleases produced an
annual rent to LFF of $522,000 in fiscal 2000.

Employees

         As of September 30, 2000, Hart employed 76 full-time and nine part-time
employees, all of whom are employed in Hart's office/manufacturing facility in
American Fork, Utah. Also as of September 30, 1999, CSC employed 17 full-time
employees and three part time employees in its office/manufacturing facility in
Spanish Fork, Utah. LFF employs one full-time employee and one part-time
employee in its New York City office.

Office Space

         Hart office, research, and manufacturing operations are located in a
50,500 square foot building in American Fork, Utah. Beginning in 2000, Hart
purchased the building and associated land for approximately $2,341,000 and
spent an additional $317,000 on capital improvements. The building, which was
originally built in 1996 and expanded in 1999, is in good condition and is
currently adequate for Hart's needs.

         CSC moved into a new 12,000 square foot  office/manufacturing  space in
Spanish Fork Utah in November  1999.  CSC leases those premises under a ten year
lease at a monthly cost of $7,000 during the first year with 2% annual increases


                                       4
<PAGE>

thereafter. The building is of new construction and currently adequate for CSC's
needs.

         The Company and LFF are presently housed in offices totaling
approximately 5,000 square feet in a warehouse building adjacent to the LFF New
York terminal property. The right to occupy these offices is included as part of
the lease of the New York terminal property, but LFF is required to share the
cost of utilities and maintenance with a co-tenant in the building. The
properties are in adequate condition for the Company's needs.

Regulation and Environmental Compliance

         The Company is subject to various local, state, and federal laws and
regulations including, without limitation, regulations promulgated by federal
and state environmental and health agencies, the Federal Occupational Safety and
Health Administration, and laws pertaining to the hiring, treatment, safety, and
discharge of employees. The Company's manufacturing operations must also meet
federal, state, and local regulatory standards in the areas of labor, safety,
and health. Historically, regulatory compliance has not had a material adverse
effect on the Company's sales or operations. The Company believes it is in
compliance with applicable laws, including laws related to the handling and use
of environmentally hazardous materials.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

         The Company designs, manufactures, and markets scientific and
industrial instrumentation and instrument calibration equipment. Historically,
the Company's growth has come from an expanding base of new customers and from
increasing sales to existing customers. The Company's current and future growth
is largely dependent upon its ability to continue increasing instrument sales to
new and existing customers and its ability to successfully introduce and market
new or enhanced products. The Company anticipates that over the next 12 months,
its primary business strategy and emphasis will be on expanding domestic and
international instrument sales.

Net Sales

         Total revenues for the Company increased 19% in fiscal 2000 to
$19,334,000 versus $16,254,000 in fiscal 1999. Hart revenues for fiscal 2000
were $18,809,000 versus $15,899,000 in fiscal 1999, an 18% increase for the
current fiscal year. (The financial figures given in this discussion for Hart
include the financial figures for its wholly owned subsidiary CSC, unless
specifically stated otherwise.)

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<PAGE>



         LFF had $525,000 in revenues during the 2000 fiscal year compared to
$513,000 in fiscal year 1999. These revenues were generated primarily from its
New York subleases. This revenue will increase annually through 2002 with modest
adjustments for inflation tied to the Consumer Price Index.

         Exports made up 31% of total Company revenues in fiscal 2000 compared
to 25% in fiscal 1999, contributing significantly to this year's growth in
revenues. Hart sales to the Far East did show a strong recovery during the
fiscal year increasing from $1,124,000 in fiscal 1999 to $2,198,000 in fiscal
2000.

         Management expects that future growth in revenues, to the extent it
occurs, will come primarily from increased sales to existing customers and
continued marketing efforts to reach new customers both domestically and in
export markets.

Gross Profit

         Gross profit margins for Hart were 47% in fiscal 2000 compared to 44%
in fiscal 1999. These margins vary primarily due to shifts in the product mix
shipped and the sales channels used. Products sold through Hart's own direct
sales force have higher margins than products sold through distributors and
representatives of Hart (primarily exports). Products manufactured by Hart tend
to have better profit margins than products redistributed by Hart. Management
believes that gross margins increased in fiscal 2000 primarily due to a product
shipment mix of higher margin products and efforts for reduced costs.

Operating Expenses

         General and administrative (G&A) expenses at Hart were 19% of total
revenues in fiscal 2000 versus 21% during fiscal 1999. Actual spending increased
by 12% or $401,000. G&A expenses at LFF were $511,000 in fiscal 2000 versus
$497,000 in fiscal 1999. With very low unemployment in Utah, Hart is
experiencing increased personnel costs, a trend the Company expects to continue
in the near future. The Company hopes to off-set such increased costs through
increased efforts at improving personnel productivity.

         Marketing expenses at Hart increased from 8.5% of revenues in fiscal
1999 to 10% of revenues in fiscal 2000. Actual spending increased by $551,000.
The market environment for Hart's products is becoming increasingly competitive
as other companies recognize market potential in Hart's market niches and as
Hart expands into other market niches with competitors already in place. In the
future, marketing costs as a percentage of revenue could reasonably be expected
to continue to increase in this market environment and management expects this
will be the case. Hart currently intends to focus a significant part of its
marketing efforts on improving its sales of higher cost/higher margin products
in export markets.



                                       6

<PAGE>


         Research and development expenditures at Hart were $959,000 in fiscal
2000 versus $786,000 in fiscal 1999. Hart continues to develop new products and
improve existing products. To remain competitive, R&D spending is also likely to
increase in the future.

         Net Earnings

         Net earnings for the Company were $2,108,000 in fiscal 2000 versus
$1,862,000 for fiscal 1999 an increase of 13%. Included in the calculation of
2000 net earnings is a $351,000 tax benefit realized by the Company in 2000, due
in part to a recognition of a $1,249,000 deferred tax asset to be utilized in
future periods (offset against future tax liability). In contrast, the Company's
calculation of net earnings in fiscal 1999 included the recognition of a
$1,286,000 deferred tax asset. Under applicable accounting standards, if a tax
loss carryforward is more likely than not to be utilized in future years then
such loss should be recognized as an asset and a current income item. It was
determined that the remaining portion of the Company's tax loss carryforward
(which, for tax reporting purposes, currently is $4,287,000) should be
recognized as a deferred tax asset in accordance with Financial Accounting
Standard (FAS) No. 109 in the 2000 fiscal year.

         Earnings of the Company before income tax for fiscal 2000 were
$1,757,000 versus $1,231,000 for fiscal 1999, a 43% increase. Hart had net
pretax income of $2,199,000 for the current fiscal year versus a net pretax
income of $1,623,000 for fiscal 1999, a 35% increase. Management believes that
general increases in revenue, higher margin product mix and cost controls
accounted for the increase in operating earnings.

         The LFF real estate sublease is carried on the balance sheet as an
asset equal in value to the cash expected to be generated by the sublease over
its life. As the sublease revenues are received the sublease asset is amortized
by a like amount. The net effect is that, while these revenues generate cash
flow for use by LFF for expenses ($522,000 in fiscal 2000), they have no
positive impact upon the statement of earnings of the Company. LFF cash
expenses, such as salaries, are covered by the cash flow from the LFF sublease
and supplemental payments from Hart, but these LFF cash expenses reduce the
overall operating profit of the Company because any LFF revenues from the
subleases are offset, on an accounting basis, by the amortization of the
leasehold asset.

Liquidity and Capital Resources

         The Company has historically financed its growth through cash from
operations and occasional borrowings under a secured line of credit. Net cash
flows provided by operating activities during fiscal 2000 were $1,065,000 and
$980,000 during fiscal 1999.

         Hart carries a line of credit with Key Bank N.A. Hart had a maximum
borrowing capacity of $1,015,000 as of July 31, 2000. At that time,
approximately $865,000 of the credit line was available for use. Use of this
credit line varies with product shipments and other factors. Management believes

                                       7
<PAGE>

that its line of credit will be sufficient for Company purposes in the near
future. The line of credit requires that the Company maintain certain financial
ratios and levels of working capital, all of which were met as of July 31, 2000.

         The Company's current ratio as of July 31, 2000 was 3.81 to 1, versus
3.50 to 1 as of July 31, 1999. The ratio of total debt to total assets at July
31, 2000 was .30, versus .20 on July 31, 1999. This ratio of total debt to
assets increased primarily due to the addition of a long-term mortgage to
finance the purchase of Hart's manufacturing facility in American Fork, Utah.

         On March 27, 2000, Hart purchased its manufacturing facility in
American Fork Utah for $2,341,000. A mortgage of $2,300,000 was provided by Key
Bank, N.A. The mortgage is a variable rate mortgage based on the prime rate,
with payments amortized over 20 years, and is due in 10 years. Hart entered into
an interest rate hedge agreement with an affiliate of Key Bank that, in effect,
fixes the interest rate on the mortgage at approximately 9.6%

         As of July 31, 2000, the Company's working capital was $7,550,000,
versus $6,394,000 as of July 31, 1999.

         The Company has no material commitments for capital expenditures.

         Under the Company's current plans, the Company believes that the
existing cash, unused borrowing facilities and cashflow from operations will
provide sufficient liquidity and enable it to meet its working capital
requirements during the next year.

Summarized Quarterly Data (unaudited)

       Following is a summary of the  quarterly  results of  operations  for the
       years ended July 31, 2000 and 1999:
<TABLE>
<CAPTION>


$ in thousands, except per share amounts                         First    Second     Third    Fourth     Total
----------------------------------------------------------------------------------------------------------------
<S>                                                             <C>       <C>       <C>       <C>       <C>

2000
Net sales                                                       $ 3,871   $ 4,620   $ 5,356   $ 5,487   $ 19,334
Earnings before income taxes                                        244       332       755       426      1,757
Income tax (expense) benefit *                                      (29)      (28)      (17)      425        351
Net earnings                                                        215       304       738       851      2,108
Net earnings per common share - basic                              0.19      0.27      0.66      0.80       1.92
Net earnings per common share - diluted                            0.17      0.25      0.57      0.73       1.72

1999
Net sales                                                       $ 3,626   $ 3,920   $ 4,068   $ 4,640   $ 16,254
Earnings before income taxes                                        319       365       315       232      1,231
Income tax (expense) benefit **                                     (32)      (30)      (12)      705        631
Net earnings                                                        287       335       303       937      1,862
Net earnings per common share - basic                              0.26      0.30      0.32      0.82       1.70
Net earnings per common share - diluted                            0.24      0.28      0.27      0.77       1.56

</TABLE>

     *  In the fourth quarter of 2000, the Company recorded a benefit  resulting
        from the removal of the valuation allowance associated with deferred tax
        assets held by the Company.

     ** In the fourth quarter of 1999, the Company recorded a benefit  resulting
        from the removal of a portion of the valuation allowance associated with
        deferred tax assets held by the Company.

         Due to the small size of the Company, quarterly revenues,  expenses and
profits are subject to wide  variations and do not  necessarily  indicate future
performance. Inventory adjustments, marketing expense timing, payroll timing and
other  items,  which  may  or  may  not  be  amortized,  can  cause  significant
fluctuations in the quarterly financial results.

Year 2000

         The coming of year 2000 produced no significant computer-related events
for the company. Only one low volume thermometer product showed a printing error
in the date header due to Y2K software issues. The problem was easily corrected
with a software patch, and no other significant problems of any type were
encountered. All of the company's vendors and suppliers performed well with the
exception of one minor part shortage, which was managed without creating
shipping delays. The total cost for Y2K contingent liability was less than the
$20,000 forecasted.

Forward-Looking Statements and Factors That May Affect Future Results of
Operations

         The statements made herein that include the terms "may", "will",
"management believes"," estimate", "project", "anticipate", "expect", and
similar words are forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995 (the "1995 Act"). Such statements are
deemed by the Company to be covered by and to qualify for the safe harbor
protection provided by the Private Securities Litigation Reform Act of 1995 (the
"1995 Act"). Investors and prospective investors in the Company should
understand that several factors govern whether any forward-looking statement
contained herein will be or can be achieved. Any one of those factors could

                                       8
<PAGE>


cause actual results to differ materially from those projected herein. These
forward-looking statements include plans and objectives of management for future
operations. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties, including those
described in the Company's 1999 Form 10-KSB and other filings with the
Securities and Exchange Commission. These forward-looking statements are based
on assumptions, among others, that the Company a) will be able to successfully
increase its share of the scientific instrument market, introduce new product
lines to existing customers, enter new markets, and continue developing new
products, and b) will continue to manufacture and market at current margins high
quality products at competitive prices. Assumptions relating to the foregoing
and other forward-looking statements involve judgments with respect to, among
other things, future economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of those assumptions could prove inaccurate
and, therefore, there is and can be no assurance that the results contemplated
in any such forward-looking statement will be realized. Budgeting and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revision. The impact of actual experience and
business developments may cause the Company to alter its marketing, capital
expenditure plans or other budgets, which may in turn affect the Company's
result of operations. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of any such statement
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.

         Due to factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Past financial performance should not be considered a reliable indicator
of future performance and investors should not use historical trends to
anticipate results or trends in future periods.


                                       9

<PAGE>



                DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         The following table sets forth certain information concerning directors
and executive officers of the Company:
<TABLE>
<CAPTION>

                                                                                       Began Service as an
Name                                Age        Positions Held                          Officer or Director
----                                ---        --------------                          -------------------

<S>                                 <C>        <C>                                                 <C>
David K. Lifschultz                 54         Chairman and                                        1991
                                                 CEO of the Company
                                                 (also President and
                                                 Director of LFF)

Dennis R. Hunter                    49         President, Director, and CFO                        1988
                                                 of the Company (also CEO,
                                                 President, and Chairman of
                                                 CSC and Director of Hart)

Sidney B. Lifschultz                88         Director of the Company                             1991

Joseph C. Fatony                    53         Director of the Company                             1998

James E. Solomon                    50         Director of the Company and Hart                    1995

James C. Triplett                   50         Chairman and CEO of Hart                            1988

J. Randall Owen                     42         President and COO of Hart                           1994

Michael Hirst                       51         Vice President and                                  1988
                                                 Director of Hart

</TABLE>

         For further information on these individuals, including biographies,
please refer to the Company's Proxy Statement.

                    MARKET FOR THE COMPANY'S COMMON STOCK AND
                           RELATED STOCKHOLDER MATTERS

         The Company's Common Stock has been listed on the Nasdaq SmallCap
Market since 1991. It trades under the symbol LIFF. The prices below are for the

                                       10

<PAGE>

high and low closing sales prices of the Company's Common Stock, and are drawn
from Nasdaq reports rounded to the nearest cent. The closing price as of October
27 was $16.125.
<TABLE>
<CAPTION>

                                      Fiscal 2000                               Fiscal 1999

     Price Range                      High           Low                        High         Low
     -----------                      ----           ---                        ----         ---

     <S>                             <C>            <C>                        <C>          <C>
     1st Quarter                     $ 9.563        $ 5.75                     $ 6.50       $ 3.125

     2nd Quarter                     $12.25         $ 7.25                     $ 6.88       $ 3.125

     3rd Quarter                     $13.00         $ 9.00                     $ 5.44       $ 4.375

     4th Quarter                     $14.75         $ 9.00                     $ 6.25       $ 5.625
</TABLE>

         As of October 5, there were approximately 329 record holders of Common
Stock (which includes brokerage firms and their affiliates holding certificates
in "street name" for a larger number of beneficial owners) and 2 holders of
Company preferred stock.

         No cash dividends have been paid on any class of the Company's capital
stock since inception.

                              FINANCIAL STATEMENTS

         The consolidated financial statements of Lifschultz Industries, Inc.
and subsidiaries at July 31, 2000 and 1999 and for each of the two years ended
July 31, 2000 and 1999 appearing at the end of this Annual Report to
Shareholders have been examined by the Company's independent auditors, as and to
the extent set forth in their reports appearing therein.


                                       11

<PAGE>

                  LIFSCHULTZ INDUSTRIES, INC. AND SUBSIDIARIES

                 CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

                             JULY 31, 2000 AND 1999



<PAGE>







                  Lifschultz Industries, Inc. and Subsidiaries

                   Index to Consolidated Financial Statements



                                                                          Page


Report of Independent Certified Public Accountants                         1

Consolidated financial statements

    Balance sheets                                                         3

    Statements of earnings                                                 4

    Statements of shareholders' equity                                     5

    Statements of cash flows                                               6

    Notes to consolidated financial statements                             8


<PAGE>











                              REPORT OF INDEPENDENT
                              ---------------------
                          CERTIFIED PUBLIC ACCOUNTANTS
                          ----------------------------


Board of Directors
Lifschultz Industries, Inc.


We have  audited the  accompanying  consolidated  balance  sheets of  Lifschultz
Industries,  Inc. and  Subsidiaries  (the Company) as of July 31, 2000 and 1999,
and the related  consolidated  statements of earnings,  shareholders' equity and
cash  flows  for the  years  then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position  of  Lifschultz
Industries,  Inc.  and  Subsidiaries  as of July  31,  2000  and  1999,  and the
consolidated  results of their operations and their  consolidated cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.


GRANT THORNTON LLP

Provo, Utah
September 22, 2000


<PAGE>



                        CONSOLIDATED FINANCIAL STATEMENTS


<PAGE>


                  Lifschultz Industries, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                                    July 31,

                                     ASSETS
<TABLE>
<CAPTION>


                                                                                               2000           1999
                                                                                           ------------   -----------

<S>                                                                                       <C>            <C>

Current assets
    Cash and cash equivalents                                                             $    888,000   $  1,175,000
    Marketable securities                                                                    1,143,000        993,000
    Trade accounts receivable, net                                                           3,213,000      3,059,000
    Related party receivable                                                                    89,000         51,000
    Deferred income taxes                                                                      168,000        323,000
    Inventories                                                                              4,558,000      3,190,000
    Other current assets                                                                       182,000        159,000
                                                                                          ------------   ------------

           Total current assets                                                             10,241,000      8,950,000



PROPERTY HELD FOR LEASE, NET                                                                 1,076,000      1,598,000



PROPERTY AND EQUIPMENT, net                                                                  3,442,000      1,181,000



LAND                                                                                           560,000        170,000



OTHER ASSETS, NET                                                                              483,000              -



DEFERRED INCOME TAXES                                                                        1,815,000      1,222,000
                                                                                          ------------   ------------

                                                                                          $ 17,617,000   $ 13,121,000
                                                                                          ============   ============
</TABLE>






        The accompanying notes are an integral part of these statements.

                                        3


<PAGE>


                      LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>


                                                                                               2000          1999
                                                                                         ------------   ------------
<S>                                                                                      <C>            <C>

Current liabilities
    Note payable to bank                                                                 $    150,000   $    150,000
    Accounts payable                                                                          431,000        688,000
    Income taxes payable                                                                       38,000        149,000
    Accrued liabilities                                                                     1,969,000      1,528,000
    Current maturities of capital lease obligations                                            55,000         39,000
    Current maturities of long-term obligations                                                48,000          2,000
                                                                                         ------------   ------------

           Total current liabilities                                                        2,691,000      2,556,000

long-term obligationS, less current maturities                                              2,245,000          5,000

capital lease obligations, less current maturities                                            105,000         92,000

Commitments                                                                                         -              -

Shareholders' equity
    Convertible preferred stock, par value $0.01;
      authorized 100,000 shares
       Series A; issued and outstanding 5,200 shares
         in 2000 and 1999                                                                           -              -
       Series E; issued and outstanding 552 shares
         in 2000 and 1999                                                                           -              -
    Common stock, par value $0.001; authorized 1,650,000 shares;
      issued 1,121,655 shares in 2000 and 1,117,519 shares in 1999                              1,000          1,000
    Additional paid-in capital                                                             11,060,000     11,060,000
    Treasury stock, at cost (22,560 common shares)                                           (157,000)      (157,000)
    Retained earnings (accumulated deficit)                                                 1,672,000       (436,000)
                                                                                         ------------   ------------

           Total shareholders' equity                                                      12,576,000     10,468,000
                                                                                         ------------   ------------

                                                                                         $ 17,617,000   $ 13,121,000
                                                                                         ============   ============

</TABLE>


<PAGE>


                  Lifschultz Industries, Inc. and Subsidiaries

                       CONSOLIDATED STATEMENTS OF EARNINGS

                               Year ended July 31,

<TABLE>
<CAPTION>



                                                                                                2000          1999
                                                                                          ------------   ------------

<S>                                                                                       <C>            <C>
Net sales                                                                                 $ 19,334,000   $ 16,254,000

Costs and expenses
    Cost of products sold                                                                    9,951,000      8,828,000
    Selling, general and administrative                                                      6,540,000      5,370,000
    Research and development                                                                   959,000        786,000
    Interest                                                                                   127,000         39,000
                                                                                          ------------   ------------

                                                                                            17,577,000     15,023,000
                                                                                          ------------   ------------

           Earnings before income taxes                                                      1,757,000      1,231,000

Income tax benefit                                                                             351,000        631,000
                                                                                          ------------   ------------

           NET EARNINGS                                                                   $  2,108,000   $  1,862,000
                                                                                          ============   ============


Net earnings per common share - basic                                                     $       1.92   $       1.70
                                                                                          ============   ============

Net earnings per common share - diluted                                                   $       1.72   $       1.56
                                                                                          ============   ============

</TABLE>








        The accompanying notes are an integral part of these statements.

                                        4


<PAGE>


                  Lifschultz Industries, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                       Years ended July 31, 2000 and 1999

<TABLE>
<CAPTION>


                                                                       Additional                     Retained
                                   Common        Preferred Stock        paid-in        Treasury       earnings
                                   Stock       Series A    Series E     capital         stock        (deficit)        Total
                                -----------   ----------  ----------  ------------     --------      ----------   ------------

<S>                             <C>            <C>         <C>        <C>            <C>           <C>            <C>
Balance at August 1, 1998       $    1,000     $     -     $     -    $ 11,060,000   $ (157,000)   $ (2,298,000)  $  8,606,000

Net earnings                             -           -           -               -            -       1,862,000   $  1,862,000
                                ----------     -------     -------    ------------   ----------    ------------   ------------

Balance at July 31, 1999             1,000           -           -      11,060,000     (157,000)       (436,000)    10,468,000

Net earnings                             -           -           -               -            -       2,108,000      2,108,000
                                ----------     -------     -------    ------------   ----------    ------------   ------------

Balance at July 31, 2000        $    1,000     $     -     $     -    $ 11,060,000   $ (157,000)   $  1,672,000   $ 12,576,000
                                ==========     =======     =======    ============   ==========    ============   ============

</TABLE>



        The accompanying notes are an integral part of these statements.

                                        5


<PAGE>



                  Lifschultz Industries, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                               Year ended July 31,
<TABLE>
<CAPTION>


                                                                                            2000           1999
                                                                                       ------------   ------------

<S>                                                                                    <C>            <C>

Increase (decrease) in cash and cash equivalents
    Cash flows from operating activities
       Net earnings                                                                    $  2,108,000   $  1,862,000
       Adjustments to reconcile net earnings to net
         cash provided by operating activities
           Depreciation and amortization                                                    376,000        309,000
           Amortization of leasehold interest                                               522,000        468,000
           Provision for bad debts                                                           26,000         12,000
           Provision for inventory reserves                                                 (20,000)             -
           Deferred income taxes                                                           (438,000)      (761,000)
           (Gain) loss on sale of property and equipment                                      7,000         (2,000)
           Changes in assets and liabilities
               Trade accounts receivable                                                   (180,000)      (603,000)
               Related party receivable                                                     (38,000)        28,000
               Inventories                                                               (1,348,000)      (804,000)
               Other current assets                                                         (23,000)       (23,000)
               Accounts payable                                                            (257,000)       169,000
               Accrued liabilities                                                          441,000        210,000
               Income taxes payable                                                        (111,000)       115,000
                                                                                       ------------   ------------

                  Total adjustments                                                      (1,043,000)      (882,000)
                                                                                       ------------   ------------

                  Net cash provided by
                    operating activities                                                  1,065,000        980,000
                                                                                       ------------   ------------

    Cash flows from investing activities
       Purchase of land                                                                    (390,000)             -
       Purchase of property and equipment                                                (2,552,000)      (569,000)
       Proceeds from sale of property and equipment                                          19,000          3,000
       Purchase of marketable securities                                                 (1,346,000)      (982,000)
       Proceeds from maturities of marketable securities                                  1,196,000        794,000
       Purchase of other assets                                                            (522,000)             -
                                                                                       ------------   ------------

                  Net cash used in
                    investing activities                                                 (3,595,000)      (754,000)
                                                                                       ------------   ------------

</TABLE>






                                   (Continued)

                                        6


<PAGE>


                  Lifschultz Industries, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                               Year ended July 31,
<TABLE>
<CAPTION>


                                                                                            2000           1999
                                                                                       ------------   ------------

<S>                                                                                    <C>            <C>
    Cash flows from financing activities
       Net change in note payable to bank                                                         -         (4,000)
       Proceeds from issuance of long term obligations                                    2,300,000              -
       Principal payments on long-term obligations                                          (14,000)        (2,000)
       Principal payments on note payable to shareholder                                          -         (3,000)
       Principal payments on capital lease obligations                                      (43,000)       (31,000)
                                                                                       ------------   ------------

                  Net cash provided by (used in)
                    financing activities                                                  2,243,000        (40,000)
                                                                                       ------------   ------------

                  Net increase (decrease) in cash
                    and cash equivalents                                                   (287,000)       186,000

Cash and cash equivalents at beginning of year                                            1,175,000        989,000
                                                                                       ------------   ------------

Cash and cash equivalents at end of year                                               $    888,000   $  1,175,000
                                                                                       ============   ============

Supplemental disclosures of cash flow information
-------------------------------------------------

Cash paid during the year for
    Interest                                                                           $    127,000   $     39,000
    Income taxes                                                                            148,000        106,000

Noncash investing and financing activities
------------------------------------------

During 2000 and 1999,  the Company  entered into capital  leases for $72,000 and
$19,000 of equipment, respectively.

</TABLE>





        The accompanying notes are an integral part of these statements.

                                        7


<PAGE>


                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999




NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       A summary of the significant  accounting policies consistently applied in
       the preparation of the  accompanying  consolidated  financial  statements
       follows.

       1.   Principles of consolidation
            ---------------------------

       The consolidated financial statements of Lifschultz Industries,  Inc. and
       Subsidiaries (the Company) include the accounts of Lifschultz Industries,
       Inc. a non-operating holding company, and its wholly-owned  subsidiaries,
       Hart  Scientific,  Inc.  (Hart),  Lifschultz  Fast  Freight,  Inc.  (Fast
       Freight),  Calorimetry  Sciences  Corporation  (Calorimetry),  which is a
       wholly-owned  subsidiary  of Hart,  and  Energetic  Genomics  Corporation
       (EGC), which is a 50 percent owned subsidiary of Calorimetry. EGC is also
       50  percent  owned  by  the  officers  of  Calorimetry.  All  significant
       intercompany transactions and balances have been eliminated.  The Company
       currently only has one line of business from which it derives revenues.

       2.   Business activity
            -----------------

       The Company's business activities include the following:

       a)  Hart is engaged in the design,  manufacturing,  and marketing of high
           precision calibration instruments and sensors for use in laboratories
           and  industry.   Hart  is  also  engaged  in  related   research  and
           development projects.

       b)  Calorimetry is engaged in the design,  manufacturing and marketing of
           scientific instruments for use in laboratories and industry.

       c)  Fast Freight is currently a non-operating freight-hauling company.

       d)  EGC is in the process of organization.

       3.   Cash and cash equivalents
            -------------------------

       The Company  considers  all highly  liquid  investments  with an original
       maturity of three months or less when purchased to be cash equivalents.

       4.   Marketable securities
            ---------------------

       Investments are comprised of government  securities,  which mature in one
       year or less and are classified as available-for-sale. Available-for-sale
       securities  are  measured  at fair  value with net  unrealized  gains and
       losses  reported  in equity.  There were no  significant  net  unrealized
       holding gains or losses during 2000 and 1999.

       5.   Inventories
            -----------

       Inventories are valued at the lower of cost or market using the first-in,
       first-out method.


                                       8
<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

       6.   Property and equipment
            ----------------------

       Property and equipment are stated at cost.  Expenditures  for maintenance
       and  repairs  are  charged  to  operations  as  incurred,  whereas  major
       replacements   and   improvements   are  capitalized   and   subsequently
       depreciated or amortized. For financial reporting purposes,  depreciation
       and amortization are provided on a straight-line basis over the lesser of
       the  estimated  useful lives of the assets or the life of the  respective
       lease, if applicable.  Accelerated  methods of depreciation  are used for
       tax purposes.

       7.   Property held for lease
            -----------------------

       Property held for lease represents a non-operating  trucking terminal and
       warehouse  under a lease and is  carried at the  undiscounted  cash flows
       which result from the underlying sublease. The property held for lease is
       being amortized through the year 2002, which is the life of the sublease.

       8.   Other assets
            ------------

       Other assets consist of a patent,  purchased equipment designs, and other
       identifiable intangible assets. They are being amortized over a period of
       ten to fifteen years, using the straight-line method.

       9.   Research and development
            ------------------------

       Research and development costs have been charged to expense as incurred.

       10.  Revenue recognition and deferred revenue
            ----------------------------------------

       Sales are  recorded  when the product is shipped to a customer.  Payments
       received for unshipped  products are recorded as deferred revenue and are
       included in accrued liabilities.

       11.  Earnings per share
            ------------------

       Basic earnings per common share are based on the weighted-average  number
       of shares outstanding during each year. Diluted earnings per common share
       are based on shares outstanding (computed as under basic) and potentially
       dilutive  common shares.  Potentially  dilutive common shares included in
       the diluted earnings per share calculation  include stock options granted
       and convertible preferred stock.

       12.  Income taxes
            ------------

       The Company utilizes the liability method of accounting for income taxes.
       Under the liability  method,  deferred taxes are determined  based on the
       difference  between the  financial  statement and tax bases of assets and
       liabilities  using  enacted tax rates in effect in the years in which the
       differences are expected to reverse.  An allowance  against  deferred tax
       assets is  recorded  in whole or in part when it is more  likely than not
       that such tax benefits will not be realized.


                                       9
<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

       13.  Use of estimates
            ----------------

       In preparing  the  Company's  financial  statements  in  conformity  with
       accounting principles generally accepted in the United States, management
       is required to make  estimates and  assumptions  that affect the reported
       amounts of assets and  liabilities,  the disclosure of contingent  assets
       and liabilities at the date of the financial statements, and the reported
       amounts of revenues  and  expenses  during the  reported  period.  Actual
       results could differ from those estimates.

       14.  Fair value of financial instruments
            -----------------------------------

       The carrying value of the Company's cash and cash equivalents, marketable
       securities,   trade   receivables,   notes  payable  and  trade  payables
       approximate their fair values due to their short-term nature.

       15.  Common stock
            ------------

       The Company  records  amounts  received  upon the  exercise of options by
       crediting  common stock and  additional  paid-in-capital.  No charges are
       reflected in the  consolidated  statements of earnings as a result of the
       grant or exercise of stock  options.  The Company  realizes an income tax
       benefit from the exercise of certain stock options.  This benefit results
       in a  decrease  in  current  income  taxes  payable  and an  increase  in
       additional paid-in-capital.

       16.  Certain reclassifications
            -------------------------

       Certain reclassifications have been made to the 1999 financial statements
       to conform with the 2000  presentation.  These  reclassifications  had no
       effect on total assets or net earnings.


NOTE B - CREDIT CONCENTRATION AND EXPORT SALES

       1.   Credit concentration
            --------------------

       The Company  maintains  cash balances at several  financial  institutions
       located in the United States. Accounts at each institution are secured by
       the Federal  Deposit  Insurance  Corporation  up to  $100,000.  Uninsured
       balances aggregate to approximately $600,000 at July 31, 2000.

       Financial  instruments  which  potentially  subject the Company to credit
       risk concentration  consist primarily of trade accounts  receivable.  The
       Company  sells  to  customers   utilizing   scientific   and   industrial
       instrumentation and instrument  calibration  equipment located throughout
       the world. The Company sells substantially to recurring customers wherein
       the customer's ability to pay has previously been evaluated.  The Company
       generally  does  not  require  collateral.  The  majority  of  its  trade
       receivables are unsecured. Allowances are maintained for potential credit
       losses, and such losses have been within  management's  expectations.  At
       July  31,  2000  and  1999,   this  allowance  was  $47,000  and  $21,000
       respectively.


                                       10
<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999


NOTE B - CREDIT CONCENTRATION AND EXPORT SALES - CONTINUED

       2.   Export sales
            ------------

       Export sales consist of the following:
<TABLE>
<CAPTION>

                                                                                  2000          1999
                                                                              -----------   -----------

        <S>                                                                  <C>           <C>
        Europe                                                               $ 2,336,000   $ 2,161,000
        Far East                                                               2,198,000     1,124,000
        Middle East                                                              122,000       161,000
        North America                                                            707,000       369,000
        South America                                                            564,000       283,000
                                                                             -----------   -----------

                                                                             $ 5,927,000   $ 4,098,000
                                                                             ===========   ===========
</TABLE>


NOTE C - INVENTORIES

       Inventories consist of the following:
<TABLE>
<CAPTION>

                                                                                  2000            1999
                                                                              ------------   ------------

        <S>                                                                  <C>            <C>
        Raw materials                                                        $ 2,559,000    $ 2,115,000
        Work in process                                                          537,000        788,000
        Finished goods                                                         1,253,000        175,000
        Demonstration units                                                      269,000        192,000
        Inventory reserves                                                       (60,000)       (80,000)
                                                                             ------------   ------------

                                                                             $ 4,558,000    $ 3,190,000
                                                                             ============   ============
</TABLE>


NOTE D - PROPERTY HELD FOR LEASE

       Property held for lease consists of the following:
<TABLE>
<CAPTION>

                                                                                  2000          1999
                                                                             -----------   -----------

        <S>                                                                  <C>           <C>
        Leasehold interest                                                   $ 7,500,000   $ 7,500,000

        Less
            Accumulated amortization                                           4,798,000     4,276,000
            Valuation allowance to adjust to
              undiscounted cash flows                                          1,626,000     1,626,000
                                                                             -----------   -----------
                                                                               6,424,000     5,902,000
                                                                             -----------   -----------

                                                                             $ 1,076,000   $ 1,598,000
                                                                             ===========   ===========

</TABLE>

                                       11

<PAGE>
                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999



NOTE D - PROPERTY HELD FOR LEASE - CONTINUED

       The Company  leases a trucking  terminal and  warehouse  for nominal rent
       through  September  2002.  This  leasehold  interest  is  carried  on the
       Company's  balance sheet at the undiscounted cash flows expected from the
       property  through  subleases  over the  life of the  related  lease.  The
       leasehold interest and related  improvements are being amortized over the
       life of the related lease, which expires in September 2002. Noncancelable
       subleases related to this property,  presently in place,  provide for the
       Company to receive payments  approximating  $500,000 per year, subject to
       annual Consumer Price Index increases, through September 2002.


NOTE E - PROPERTY AND EQUIPMENT

       Property  and  equipment  and  estimated  useful  lives  consist  of  the
       following:
<TABLE>
<CAPTION>


                                                                   Years         2000          1999
                                                                 ---------    ----------   -----------

        <S>                                                         <C>      <C>          <C>
        Furniture and fixtures                                      3-5      $ 1,525,000  $ 1,202,000
        Machinery and equipment                                     5-10         752,000      773,000
        Equipment held under capital leases                          10          323,000      249,000
        Building                                                     30        2,095,000            -
        Leasehold improvements                                      5-8          405,000      351,000
                                                                             -----------  -----------
                                                                               5,100,000    2,575,000
        Less accumulated depreciation
           and amortization                                                    1,658,000    1,394,000
                                                                             -----------  -----------

                                                                             $ 3,442,000  $ 1,181,000
                                                                             ==========   ===========
</TABLE>



NOTE F - OTHER ASSETS

       Other  assets  consist  of  various   identifiable   intangible   assets.
       Accumulated amortization was $39,000 at July 31, 2000.


NOTE G - NOTE PAYABLE TO BANK

       The note payable to bank consists of a line of credit issued to Hart with
       interest at prime plus 1 percent  (10.5  percent at July 31,  2000).  The
       line, which is scheduled for renewal in December 2000, is  collateralized
       by trade accounts receivable and inventories.  Available borrowings under
       this line of  credit  are  limited  to the  aggregate  of 80  percent  of
       eligible   trade   accounts   receivable   and  50  percent  of  eligible
       inventories,  not to exceed $650,000.  As of July 31, 2000,  $500,000 was
       available under the line.

       Calorimetry  also has a line of credit with a bank with interest at prime
       plus  1.25  percent  (10.75  percent  at  July  31,  2000).  The  line is
       collateralized by trade accounts  receivable and inventories.  As of July
       31,  2000,  there  were  no  borrowings  under  the  line  with  $365,000
       available.

                                       12
<PAGE>
                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999



NOTE H - LONG-TERM OBLIGATIONS

       1.  Capital Leases
           --------------

       The Company has capital lease  obligations  with leasing  companies.  The
       balances  at July  31,  2000  and  1999,  total  $160,000  and  $131,000,
       respectively,  and bear interest from approximately 5.45 to 9.24 percent.
       Payments of approximately  $5,600 are due monthly and the obligations are
       due  in  full  between  February  of  2002  and  December  of  2004.  The
       obligations are collateralized by the leased equipment.

       The Company has accumulated  amortization relating to the equipment under
       capital  leases of  $91,000  and  $59,000  as of July 31,  2000 and 1999,
       respectively. Amortization expense on capital leases approximated $32,000
       and $24,000 for 2000 and 1999, respectively.

       The following is a schedule by year of future  minimum lease  payments of
       the capital lease obligations  together with the present value of the net
       lease payments at July 31, 2000:

             Year ending July 31,
                 2001                                                  $  67,000
                 2002                                                     57,000
                 2003                                                     34,000
                 2004                                                     21,000
                 2005                                                      8,000
                 Thereafter                                                    -
                                                                       ---------

             Total minimum lease payments                                187,000

             Less amount representing interest                            27,000
                                                                       ---------

             Present value of net minimum lease payments                 160,000

             Less current maturities                                      55,000
                                                                       ---------

             Capital lease obligations, less current maturities        $ 105,000
                                                                       =========

       2.  Debt
           ----

       The Company has a note payable to a financial  institution  at prime rate
       (9.5 percent at July 31, 2000) collateralized by commercial property, and
       is payable in monthly installments of $21,990 including interest with the
       remaining balance due April 2010.

       In  connection  with the note,  the Company has entered  into an interest
       rate swap  agreement with the financial  institution  for the term of the
       loan.  The agreement in effect  causes the variable  interest rate on the
       loan to become a fixed rate loan  payable at 9.0  percent  interest.  The
       potential  risk involved  with the swap  agreement is if the Company pays
       off the loan prior to the due date, the  difference  between the set rate
       of 9.0  percent  and the prime rate at the date of payoff  would  require
       either a payment to or from the  financial  institution  for the computed
       difference.

                                       13

<PAGE>
                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999



NOTE H - LONG-TERM OBLIGATIONS - CONTINUED

       The Company also has a 7.29  percent  note payable to a finance  company,
       collateralized  by a vehicle which is payable in monthly  installments of
       $200 including interest with the final payment due October 2002.

       Aggregate maturities of long-term debt are as follows:

             Year ending July 31,
             --------------------
                 2001                                               $     48,000
                 2002                                                     52,000
                 2003                                                     57,000
                 2004                                                     61,000
                 2005                                                     67,000
                 Thereafter                                            2,008,000
                                                                    ------------

                                                                       2,293,000

                 Less current maturities                                  48,000
                                                                    ------------

                 Long term obligations, less current maturities     $  2,245,000
                                                                    ============


NOTE I - OPERATING LEASES

       The Company leases  laboratory and office space under an operating  lease
       expiring in 2009. The lease payments on the building increase  throughout
       the term of the lease at two percent  annually.  The Company  also leases
       office equipment under operating leases expiring in 2003.

       Minimum  future rental  payments  under  noncancelable  operating  leases
       having  remaining  terms in excess of one year as of July 31, 2000 are as
       follows:

             Year ending July 31,
             --------------------
                 2001                                                $    87,000
                 2002                                                     88,000
                 2003                                                     90,000
                 2004                                                     91,000
                 2005                                                     93,000
                 Thereafter                                              390,000
                                                                     -----------

                                                                     $   839,000
                                                                     ===========

       Building and equipment rent expense totaled $199,000 and $220,000 for the
       years ended July 31, 2000 and 1999, respectively.


                                       14

<PAGE>
                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999



NOTE J - ACCRUED LIABILITIES

       Accrued liabilities consist of the following:
<TABLE>
<CAPTION>

                                                                                  2000         1999
                                                                              -----------   -----------

        <S>                                                                  <C>           <C>
        Payroll, payroll taxes and benefits                                  $   507,000   $   471,000
        Bonuses                                                                1,076,000       615,000
        Warranties                                                                75,000       147,000
        All other                                                                311,000       295,000
                                                                             -----------   -----------

                                                                             $ 1,969,000   $ 1,528,000
                                                                             ===========   ===========
</TABLE>


NOTE K - INCOME TAXES

       Components of income tax expense (benefit) consist of the following:
<TABLE>
<CAPTION>


                                                                                   2000            1999
                                                                             -------------   ------------
        <S>                                                                  <C>             <C>

        Current
            Federal                                                          $     20,000    $     29,000
            State                                                                  67,000         101,000
                                                                             -------------   ------------
                                                                                   87,000         130,000
                                                                             -------------   ------------

        Deferred
            Federal                                                              (383,000)       (659,000)
            State                                                                 (55,000)       (102,000)
                                                                             -------------   ------------
                                                                                 (438,000)       (761,000)
                                                                             ------------    ------------

        Total taxes (benefit)                                                $   (351,000)   $   (631,000)
                                                                             =============   ============
</TABLE>


       The provision for income taxes differs from the statutory  Federal income
       tax rate due to the following:
<TABLE>
<CAPTION>

                                                                                   2000            1999
                                                                             -------------   ------------

        <S>                                                                  <C>             <C>
        Income taxes computed at federal statutory rate of 34%               $    598,000    $    418,000
        State taxes, net of federal benefit                                       118,000          91,000
        Realization of net operating loss carryforward
           and change in valuation allowance                                   (1,249,000)     (1,286,000)
        Non-deductible expenses                                                   170,000         146,000
        Other                                                                      12,000               -
                                                                             ------------    -------------

                   Total income taxes (benefit)                              $   (351,000)   $   (631,000)
                                                                             =============   ============
</TABLE>

                                       15

<PAGE>
                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999



NOTE K - INCOME TAXES - CONTINUED

       The tax effects of temporary  differences which give rise to deferred tax
       assets and liabilities are as follows:
<TABLE>
<CAPTION>


                                                                                  2000            1999
                                                                             ------------   ------------

        <S>                                                                  <C>            <C>

        Current deferred tax assets (liabilities)
            Deferred compensation                                            $    106,000   $    128,000
            Allowance for doubtful accounts                                        18,000          9,000
            Inventory reserves                                                     22,000         30,000
            Accrued expenses                                                       53,000         88,000
            Contributions carryforward                                                  -         43,000
            Uniform inventory capitalization                                      (33,000)        27,000
            Other                                                                   2,000         (2,000)
                                                                             ------------   ------------

                   Net current tax assets                                    $    168,000   $    323,000
                                                                             ============   ============

        Long-term deferred tax assets (liabilities)
            Net operating loss carryforwards                                 $  1,599,000   $  2,219,000
            Excess book depreciation and amortization                                   -         20,000
            Alternative minimum tax credit carryforward                           216,000        183,000
            Valuation allowance                                                         -     (1,200,000)
                                                                             ------------   ------------

                   Net long-term tax assets                                  $  1,815,000   $  1,222,000
                                                                             ============   ============
</TABLE>


       At July 31, 2000,  the Company has net operating loss  carryforwards  for
       tax reporting purposes of approximately $4,287,000 which expire from 2004
       through the year 2007.

       During 2000,  management  evaluated the  prospects for future  profitable
       operations of the Company.  Because the Company has  generated  operating
       profits for the last several years and current budget  forecasts  project
       profits  continuing  into  the  future,   generally  accepted  accounting
       principles  require the deferred tax asset  related to the net  operating
       loss  carryforwards  to be  reflected  on the  balance  sheet (net of its
       respective  valuation  allowance)  since it appears  more likely than not
       that the deferred tax asset relating to net operating loss  carryforwards
       will be realized in the future. The valuation allowance on deferred taxes
       was  decreased  $1,200,000  during  2000,  to adjust for this  evaluation
       regarding the  realizability of the deferred tax asset and other deferred
       tax assets and liabilities.

                                       16


<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999


NOTE L - CAPITAL STOCK

       Convertible preferred stock
       ---------------------------

       The Series A preferred  stock is  convertible at the option of the holder
       into 0.2 shares of common stock,  has voting rights equal to one vote for
       each share of common stock as if converted, participates in all dividends
       declared  by  the  Board  of  Directors,  as  if  converted,  and  has  a
       liquidation  preference  over all other  series of  preferred  and common
       stock of $0.01 per share of Series A preferred stock. At July 31, 2000, a
       total of 5,200  shares  of  Series A  preferred  stock  were  issued  and
       outstanding.

       The Series E preferred  stock is  convertible at the option of the holder
       into 0.2 shares of common stock.  The Series E preferred stock has voting
       rights equal to one vote for each share of common stock, as if converted,
       and participates in all dividends declared by the Board of Directors,  as
       if converted.  The Series E preferred stock has liquidation  rights after
       the Series A preferred  stock but before  common stock.  The  liquidation
       preference is $10.87 per share of Series E preferred  stock.  At July 31,
       2000,  a total of 552 shares of Series E preferred  stock were issued and
       outstanding.


NOTE M - STOCK OPTIONS, WARRANTS, AND PUT OPTION

       1.   Stock options
            -------------

       The Company's board of directors has the authority to grant stock options
       to  employees,   officers  and  non-employees.   The  stock  options  are
       considered  non-qualified  for income tax purposes.  As of July 31, 2000,
       the Company had granted  stock  options to various  officers,  directors,
       employees and other  non-employees  of the Company covering the aggregate
       number  of  167,000  shares  of the  Company's  common  stock.  Except as
       explained below, options vest immediately upon grant.

       Options issued in connection with the Company's  leasehold  interest vest
       ratably at a rate of one option for every nine common  shares issued as a
       result of a) the exercise of employee  stock options  outstanding  at the
       date of the agreement  (approximately 23,000 such options are outstanding
       at July 31,  2000 and 1999) and b) the  conversion  of Series A preferred
       stock (5,200 shares are convertible  into 1,040 common shares at July 31,
       2000).  Once  exercisable,  these  options will have a price of $0.05 per
       share.  At July 31,  2000,  such  options to  purchase  671  shares  were
       exercisable.  Vesting of the options is complete upon  exercisability and
       Company notification to option-holders of such exercisability.

       Options covering 1,000 shares were granted to an employee in exchange for
       services during 2000.  These options are immediately  exercisable with an
       exercise price of $7.25, and expire in 2010.

                                       17

<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999


NOTE M - STOCK OPTIONS, WARRANTS, AND PUT OPTION - CONTINUED

       2. Fair market value of options granted
          ------------------------------------

       The Company has  adopted  only the  disclosure  provisions  of  Financial
       Accounting  Standard No. 123,  "Accounting for Stock-Based  Compensation"
       (FAS 123).  Therefore,  the Company accounts for stock based compensation
       under  Accounting  Principles  Board  Opinion  No.  25,  under  which  no
       significant  compensation cost has been recognized.  Had the compensation
       cost for the stock based compensation been determined based upon the fair
       value of the options at the grant date  consistent  with the  methodology
       prescribed  by FAS 123, the Company's net earnings and earnings per share
       would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>

                                                                                      2000           1999
                                                                                  -----------    -----------
         <S>                                                                     <C>            <C>

         Net earnings
             As reported                                                         $  2,108,000   $  1,862,000
             Pro forma                                                              2,101,000      1,849,000

         Net earnings per common share - basic
             As reported                                                         $       1.92   $       1.70
             Pro forma                                                                   1.91           1.69

         Net earnings per common share - diluted
             As reported                                                         $       1.72   $       1.56
             Pro forma                                                                   1.72           1.55
</TABLE>


       These pro forma amounts may not be representative  of future  disclosures
       because  they do not take  into  effect  pro forma  compensation  expense
       related to grants made before fiscal 1997.  The fair value of options was
       estimated  at  the  date  of  grant  using  the  Black-Scholes   American
       option-pricing model with the following weighted-average  assumptions for
       2000: expected volatility of 222 percent; risk-free interest rate of 6.50
       percent; and expected life of 10 years. The  weighted-average  fair value
       of options granted was $7.25 in 2000.

       Option pricing models require the input of highly sensitive  assumptions,
       including the expected stock price volatility.  Also, the Company's stock
       options have characteristics significantly different from those of traded
       options,  and changes in the subjective input  assumptions can materially
       affect  the fair  value  estimate.  Management  believes  the best  input
       assumptions  available  were  used to  value  the  options  and  that the
       resulting option values are reasonable.


                                       18
<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999


NOTE M - STOCK OPTIONS, WARRANTS, AND PUT OPTION - CONTINUED

       Information  with respect to the Company's stock options at July 31, 2000
       is as follows:
<TABLE>
<CAPTION>

                                                                                               Weighted
                                                    Number                                     average
                                                      of                                       exercise
                                                   options           Exercise price             price
                                                   -------           --------------            --------
         <S>                                        <C>             <C>                       <C>

         Outstanding at August 1,
           1998                                     166,000         $0.050 to 4.625           $  2.69
             Granted                                      -                 -                       -
             Exercised                                    -                 -                       -
             Canceled/expired                             -                 -                       -
                                                    -------                                   -------

         Outstanding at July 31, 1999               166,000         $0.050 to 4.625              2.69
             Granted                                  1,000              7.250                   7.25
             Exercised                                    -                 -                       -
             Canceled/expired                             -                 -                       -
                                                    -------                                   -------

         Outstanding at July 31, 2000               167,000         $0.050 to 7.250           $  2.72
                                                    =======                                   =======

         Exercisable at July 31, 2000               162,000         $0.050 to 7.250           $  2.88
                                                    =======                                   =======
</TABLE>


       Additional information about stock options outstanding and exercisable at
       July 31, 2000 follows:

       Options outstanding
       -------------------
<TABLE>
<CAPTION>


                                                                                           Weighted-
                                                                                            average
                                                                                           remaining
                                                Number          Weighted-average          contractual
              Exercise price                  outstanding        exercise price           life (years)
              --------------                  -----------        --------------           ------------

               <S>                              <C>                  <C>                   <C>
               $ 0.050                            4,000              $ 0.050                   7.1
                 1.565                           71,000                1.565                0.7 to 7.1
                 3.215                           51,000                3.215               4.3 to 12.5
                 4.625                           40,000                4.625                   12.8
                 7.250                            1,000                7.250                   9.6
                                                -------

                                                167,000
                                                =======
</TABLE>


                                       19

<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999


NOTE M - STOCK OPTIONS, WARRANTS, AND PUT OPTION - CONTINUED

       Options exercisable
       -------------------
<TABLE>
<CAPTION>

                                                    Number                 Weighted-average
                     Exercise price              exercisable                exercise price
                     --------------              -----------               ----------------
                       <S>                          <C>                         <C>

                       $ 0.050                        1,000                     $ 0.050
                         1.565                       69,000                       1.565
                         3.215                       51,000                       3.215
                         4.625                       40,000                       4.625
                         7.250                        1,000                       7.250
                                                    -------

                                                    162,000
                                                    =======
</TABLE>


       3. Put option
          ----------

       Pursuant to an employment agreement,  an officer of the Company has a put
       option  which  may be  exercised  during a  three-year  period  following
       termination or expiration of the agreement. Under the option, the officer
       may require  Calorimetry  to  repurchase  up to 15,780  shares of Company
       stock and stock  options  owned by the  officer at prices  from $5.94 per
       share to $7.50 per share at a maximum of 5,260 shares or options per year
       for three years. The agreement expires in August of 2003.


NOTE N - COMMITMENTS

       The Company has employment and severance agreements with certain officers
       and managers of the Company.  Salaries  covered by these agreements range
       from  $82,000  to  $285,000  annually.  Contracts  with two  individuals,
       provide for annual salaries of $225,000 and $231,000 (plus a five percent
       annual  increase).  The two remaining  contracts have annual  salaries of
       $82,000 and $285,000 (plus a five percent annual increase),  terms of ten
       years,  and  severance,  which  could  be as  much as 50  percent  of the
       remaining base salary (or one year's salary  whichever is greater) if the
       individual is  terminated  without  cause.  All the officers and managers
       covered by  contracts  have been with the  Company for nine or more years
       and some have been employed more than thirteen years.  One individual has
       a put option under the agreement (Note M). Additionally, provisions exist
       in  the  contracts  to  provide  for   immediate   payment  of  remaining
       compensation plus additional  amounts totaling $300,000 if a successor of
       the Company fails to honor the respective contracts.

       The Company  made a  sale/acquisition  agreement  with a certain  officer
       during fiscal 2000.  The agreement  provides that if Hart or  Calorimetry
       are sold or acquired  for an amount  exceeding  $25 million  within three
       years of the agreement  date, the officer is to be paid 10 percent of the
       acquisition value exceeding $25 million.

       No  provision  for  severance  payments  under  any of  these  employment
       contracts has been made as of July 31, 2000.

                                       20

<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999


NOTE O - EMPLOYEE BENEFIT PLAN

       The Company has established an employee savings plan under Section 401(k)
       of the Internal Revenue Code. This plan covers employees who are at least
       21 years of age and work at least  1,000  hours  per  year.  The  Company
       matches at its discretion up to 6.6 percent of compensation which equates
       to 50 percent of actual employee  contributions.  The Company's  matching
       contributions  vest  at a  rate  of 20  percent  per  year.  The  Company
       contributed  approximately  $144,000  and $135,000 to the plan during the
       fiscal years ended July 31, 2000 and 1999, respectively.


NOTE P - RELATED PARTY TRANSACTIONS

       During  2000 and  1999,  the  Company  purchased  $130,000  and  $114,000
       respectively,  of  inventory  from an  entity  owned by the  spouse of an
       officer of the Company.


NOTE Q - EARNINGS PER COMMON SHARE

       The  following  shows the shares used in  computing  earnings  per common
       share including potentially dilutive common shares:
<TABLE>
<CAPTION>


                                                                      For the Year Ended July 31, 2000
                                                    ----------------------------------------------------------
                                                                       Weighted-average
                                                      Net Earnings            shares             Per-share
                                                       (numerator)        (denominator)            amount
                                                    ----------------   -------------------   -----------------
<S>                                                <C>                        <C>           <C>

Net earnings per common share - basic


    Net earnings available to common shareholders  $     2,108,000            1,097,716     $          1.92
                                                   ================                         =================

Effect of dilutive securities

    Stock options                                                               123,613
    Convertible preferred stock                                                   1,150
                                                                              ---------

Net earnings per common share - diluted


    Net earnings available to common shareholders  $     2,108,000            1,222,480     $          1.72
                                                   ===============            =========     ===============
</TABLE>


                                       21

<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 2000 and 1999


NOTE Q - EARNINGS PER COMMON SHARE - CONTINUED

<TABLE>
<CAPTION>

                                                                        For the Year Ended July 31, 1999
                                                    ----------------------------------------------------------
                                                                         Weighted-average
                                                      Net Earnings            shares             Per-share
                                                       (numerator)        (denominator)            amount
                                                    ----------------   -------------------   -----------------
<S>                                                <C>                        <C>           <C>

Net earnings per common share - basic


    Net earnings available to common shareholders  $     1,862,000            1,094,959     $          1.70
                                                   ===============                          ===============

Effect of dilutive securities

    Stock options                                                                93,639
    Convertible preferred stock                                                   5,286
                                                                              ---------

Net earnings per common share - diluted


    Net earnings available to common shareholders  $     1,862,000            1,193,884     $          1.56
                                                   ================           =========     ===============
</TABLE>

                                       22