Exhibit 13.01

                               1999 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
instrumentation  and  instrument  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  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. Except as otherwise noted, the discussion of
Hart in the following paragraphs includes the business of CSC.




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Developments in Fiscal 1999

         Total consolidated  revenues for  the  Company rose from $15,651,000 in
fiscal 1998 to  $16,254,000  in fiscal  1999,  an increase of 4%. The  Company's
consolidated  net earnings of $1,033,000 in fiscal 1998  increased to $1,862,000
in fiscal  1999,  and 80%  increase.  Included  in the  calculation  of 1999 net
earnings is a recognition  of a $1,286,000  deferred tax asset to be utilized in
future  periods  (offset  against  future  tax  liability),  which is a $742,000
increase  over the  $544,000  deferred  tax asset  recognized  in  fiscal  1998.
Earnings  before  income tax  increased  from  $1,137,000 in fiscal year 1998 to
$1,231,000  in fiscal  year  1999,  an 8%  increase.  An 11%  growth in sales in
domestic markets was partially offset by a reduction in sales to export markets,
particularly  the Far East where sales  dropped to 67% of the sales  realized in
1998 for that  region.  Management  attributes  the decline in export sales to a
generally  weakened  foreign  economy  following the "Asian"  monetary crisis of
early 1998, a situation that will hopefully improve over the next several years.

Hart Scientific, Inc. and Subsidiary

         Products  and Markets.  Hart's  business  strategy is to target  narrow
market niches in temperature  calibration  equipment,  build a solution-oriented
product 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,  and  the  biotechnology  industry.  The
management  of Hart  believes  that this  strategy  reduces  risk and results in
higher margins,  lower development costs, and greater growth potential for Hart.
Products   manufactured  and  marketed  by  Hart  include  biological   scanning
calorimeters,  heat conduction  calorimeters,  several  specialty  calorimeters,
ultra-stable  constant  temperature  baths,  microprocessor-based  thermometers,
parison calorimeters, a plastics testing device, and various custom instruments.
A calorimeter is a device that measures  quantities of heat energies.  Hart also
offers  related  software  products,   temperature   calibration   services  and
calibration seminars.

         Customer Service and Support.  Most of Hart's products carry a standard
one-year warranty and factory service guarantee.  Customer service is structured
around an "800  number"  toll-free  line and  in-factory  service,  with on-site
repair when necessary.

         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




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year ended July 31, 1999, Hart spent approximately $786,000 on Company-sponsored
research and development activities, compared to $1,077,000 in fiscal 1998. 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 leases a manufacturing  and office
facility in American Fork,  Utah,  while CSC leases a  manufacturing  and office
facility  in  Provo,  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  significant
difficulty  in obtaining  components.  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   research   departments   of
universities,  governmental agencies, and industrial  corporations.  No customer
accounted for more than 10 percent of total revenues during fiscal 1999, 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. CSC licenses some patented
product designs from Applied Thermodynamics and the Johns Hopkins University.

         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
is also exploring other distribution channels for its products, particularly for
the European market. CSC utilizes an exclusive  distributor in Japan for some of
its calorimeter products.

         Competition.  Hart's temperature  instrumentation products compete with
similar  products from companies  such as 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.




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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 $513,000 in fiscal 1999.

Employees

         As of September  30, 1999,  Hart  employed 71 full-time and 5 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 16 full-time
employees and two part time  employees in its  office/manufacturing  facility in
Provo,  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
28,000 square foot building in American Fork, Utah.  Beginning in 1996, Hart has
leased the building  for a 10-year term with a monthly rent  starting at $13,000
per month with 3% annual  increases at the  discretion of the landlord after the
first  three  years of the lease.  The  building  was built in 1996,  is in good
condition,  and is  currently  adequate  for  Hart's  needs.  Hart is  currently
expanding at its present location by adding  approximately 22,000 square feet of
space, which the Company plans to occupy in 2000.

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

         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




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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.

Comparison of 1999 versus 1998

         Net Sales

         Total  revenues  for  the  Company  increased  4%  in  fiscal  1999  to
$16,254,000  versus  $15,651,000  in fiscal 1998.  Hart revenues for fiscal 1999
were  $15,899,000  versus  $15,148,000  in fiscal  1998,  a 5% 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.)

         LFF had  $513,000 in revenues  during the 1999 fiscal year  compared to
$502,000 in fiscal year 1998.  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.




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         Exports made up 25% of total  Company  revenues in fiscal 1999 compared
to 30% in fiscal 1998 and 35% in fiscal 1997.  Export  shipments to the Far East
decreased  significantly  during the 1999 fiscal year.  This  continues the same
trend from last fiscal year.  Management  expects  lower sales and  shipments to
this export market for at least the next fiscal year and possibly longer.  Other
export markets have shown mixed results during the year. Economic  uncertainties
in many export markets and the world in general make it difficult to predict the
impact that these markets will have on Hart's revenues.

         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.

         Gross Profit

         Gross profit  margins for Hart were 44% in fiscal 1999  compared to 51%
in fiscal 1998.  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  decreased in fiscal 1999 primarily due to a product
shipment mix of lower margin products.

         Operating Expenses

         General  and  administrative  (G&A)  expenses at Hart were 21% of total
revenues in fiscal 1999 versus 24% during fiscal 1998. Actual spending decreased
by 10% or  $406,000.  G&A  expenses  at LFF were  $497,000 in fiscal 1999 versus
$593,000  in  fiscal  1998.  With low  unemployment  in  Utah,  the  company  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  decreased  from 9.5% of revenues in fiscal
1998 to 8.5% of revenues in fiscal 1999.  Actual spending  decreased by $90,000.
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 increase in this market  environment and management  expects this will be the
case.

         Research and  development  expenditures at Hart were $786,000 in fiscal
1999 versus  $1,077,000 in fiscal 1998.  Hart  continues to develop new products
and improve existing products. To remain competitive,  R&D spending is likely to
increase in the future.




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         Net Earnings

         Net  earnings  for the Company  were  $1,862,000  in fiscal 1999 versus
$1,033,000 for fiscal 1998.  Included in the calculation of 1999 net earnings is
a  recognition  of a  $1,286,000  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  1998  included  the  recognition  of a
$544,000 deferred tax asset to be utilized in future periods.

         Earnings  of the  Company  before  income  tax  for  fiscal  1999  were
$1,231,000  versus  $1,137,000  for fiscal 1998,  an 8%  increase.  Hart had net
pretax  income of  $1,623,000  for the  current  fiscal year versus a net pretax
income of $1,490,000  for fiscal 1998, a 9% increase.  Management  believes that
general  increases in revenue and cost  controls  accounted  for the increase in
operating earnings.

         A $631,000  tax  benefit  was  realized  by the Company in 1999, due in
part to a  recognition  of a  $1,286,000  deferred  tax asset to be  utilized in
future  periods.   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 a portion of the Company's tax loss carryforward (which, for tax
reporting purposes,  currently is $5,949,000) should be recognized as a deferred
tax asset in accordance with Financial  Accounting Standard (FAS) No. 109 in the
1999  fiscal  year.   This  had  the  effect  of  increasing   net  earnings  by
approximately  $1,286,000  in 1999.  If it were to be  determined  in the future
years that the Company's  remaining  unrecorded  tax loss  carryforward  is more
likely  than  not  to  be  utilized,  similar  recognition  of  such  tax  loss
carryforward  would could have the result of increasing  assets and net earnings
in such years.

         The LFF subleases are carried on the balance sheet as an asset equal in
value to the cash expected to be generated by the subleases  over their 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  ($513,000  in fiscal  1999),  they have no impact upon the
statement  of earnings of the  Company.  LFF  expenses,  such as  salaries,  are
actually covered by the cash flow from the subleases and 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.

Comparison of 1998 versus 1997

         Net Sales

         Total  revenues  for  the  Company  increased  28% in  fiscal  1998  to
$15,651,000  versus  $12,214,000  in fiscal 1997.  Hart revenues for fiscal 1998
were  $15,148,000  versus  $11,725,000  in fiscal  1997,  a 29% increase for the
current fiscal year. Management believes the increase in revenues in fiscal 1998




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was  primarily  attributable  to  increased  shipments  of some of  Hart's  more
expensive  products and a general  growth in the shipments of most other product
lines.

         LFF had  $502,000 in revenues  during the 1998 fiscal year  compared to
$486,000 in fiscal year 1997.  These revenues were generated  primarily from its
New York subleases.

         Exports made up 30% of total  Company  revenues in fiscal 1998 compared
to 35% in fiscal 1997.  Export shipments and sale of more expensive  instruments
to the Far East  decreased  significantly  during the second  half of the fiscal
year. Other export markets showed mixed results during the year.

         Gross Profit

         Gross profit  margins for Hart were 51% in fiscal 1998  compared to 49%
in fiscal 1997.  Management believes that gross margins increased in fiscal 1998
primarily due to a product shipment mix of higher margin products.

         Operating Expenses

         General  and  administrative  (G&A)  expenses at Hart were 24% of total
revenues in fiscal 1998 versus 26% during fiscal 1997. Actual spending increased
by 21% or  $634,000.  G&A  expenses  at LFF were  $593,000 in fiscal 1998 versus
$545,000 in fiscal 1997.

         Marketing  expenses  at Hart  decreased  from 10% of revenues in fiscal
1997 to 9% of revenues in fiscal  1998.  Actual  spending  increased  by 18%, or
$215,000, resulting primarily from sales catalog production costs.

         Research and development expenditures at Hart were $1,077,000 in fiscal
1998 versus  $866,000 in fiscal 1997. Hart continues to develop new products and
improve existing products.

         Net Earnings

         Net  earnings  for the Company  were  $1,033,000  in fiscal 1998 versus
$1,292,000  for  fiscal  1997.  The  Company's  net  earnings  in 1998  included
recognition  of a $544,000  deferred tax asset.  In contrast,  the Company's net
earnings in 1997 included a recognition of a deferred tax asset in the amount of
$780,000 and an extraordinary  gain of $314,000 from  extinguishment  of debt at
LFF.

         Earnings of the Company  before income tax and  extraordinary  gain for
fiscal 1998 were  $1,137,000  versus  $235,000 for fiscal 1997, a 384% increase.
Hart had net pretax  income of $1,490,000  for the 1998 fiscal year versus a
net pretax  income of $546,000  for fiscal  1997,  a 173%  increase.  Management




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believes that general increases in revenue, increased shipments of higher priced
instruments with better margins,  and a higher percentage of revenue produced in
direct  sales  markets  with  higher  margins  accounted  for the  increase  in
operating earnings.

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 1999 were  $980,000 and
$778,000 in fiscal 1998.

         Hart  carries a line of credit  with Key Bank N.A..  Hart had a maximum
borrowing capacity of $650,000 as of July 31, 1999. At that time,  approximately
$500,000  of the credit  lines was  available  for use.  Use of this credit line
varies with product  shipments and other factors.  Management  believes 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, 1999.

         The  Company's  current  ratio as of July 31, 1999 was 3.50 to 1 versus
3.44 to 1 on July 31, 1998.  The ratio of total debt to total assets at July 31,
1999 was .20 versus .20 on July 31, 1998.

         As of July 31,  1999,  the  Company's  working  capital was  $6,394,000
versus $5,035,000 on July 31, 1998.

         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.

Year 2000

         Many  existing  computer  programs,  worldwide,  use  only the last two
digits to refer to a year. Such computer  programs may not properly  recognize a
year  beginning  with "20" instead of the current "19". If not  corrected,  many
computer  applications could fail or create incorrect results. This phenomena is
often  referred to as the "Year  2000" or "Y2K"  problem.  There is  substantial
concern that if the Year 2000 problem is not adequately addressed,  there may be
widespread problems with computer applications in all areas of use.

         With  regard to the  Company,  if the  Company's  internal  systems and
products do not correctly  recognize date  information  when the year changes to
2000, there could be an adverse impact on the Company's operations.  The Company
has completed a review of its products and internal systems.



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         Company  management  believes  that the internal  systems of Lifschultz
Industries, the holding company, and LFF, its non-operating subsidiary, will not
be materially  affected by the Year 2000 problem  because their  operations  are
minimal.  Review by Hart to date indicates that its internal information systems
(for inventory control, sales, invoicing,  purchasing,  manufacturing,  payroll,
etc.), its local area network software,  and many of its personal  computers are
Year 2000 compliant.  The Company currently expects that all replacement work to
make its internal  information  systems Year 2000 compliant will be completed by
the end of 1999.

         At this  time,  management  of Hart  does not  expect  any  significant
adverse  effects  from the Year 2000 problem  with regard to its  products.  The
majority of its products do not use a date. The remaining products that do use a
date have been  tested for Year 2000  compliance  and appear to comply,  or will
comply by  resetting  the date after  December  31,  1999.  Due to the  inherent
limitations of real-time clock devices and system BIOS, however,  future testing
could exhibit different results.  Additionally,  in some cases,  problems may be
unforeseen, and occur regardless of the testing that is done. Company management
currently  believes that if such problems do arise they can be corrected without
a material adverse effect on the overall financial performance of the Company.

         The  Company  has also begun the  process  of  assessing  the  possible
effects of Year 2000 problems on its  significant  vendors,  which could in turn
affect the Company's operations.  Hart has begun the process of contacting their
larger vendors to determine  their Year 2000  compliance.  To date, some vendors
have not responded to requests for information, and management is not sure when,
if ever, such vendors will respond. At the present time, the Company is not able
to  determine  the extent to which its  customers or vendors will have Year 2000
difficulties and cannot  accurately  assess the potential for adverse effects on
the Company's operations or financial condition.

         Because  of the  widespread  nature of the Year 2000  problems  and the
difficulty of analyzing the potential impact of third parties  experiencing Year
2000 problems, the Company has formulated a simple contingency plan. In summary,
the plan  includes a list of  alternative  suppliers  the Company may be able to
order parts from in the event that current  suppliers  are unable to  completely
fill  Company  demand  for  parts.  In  addition,  Hart  has also  reviewed  the
possibility of using manual systems as a supplement to its computerized internal
systems  including its network and operating  software  programs.  Hart has also
made a list of all of the facility systems that can be operated manually.

         Although  the  Company  has  taken   action  to  identify   alternative
suppliers,  in some cases  there may not be  sufficient  alternative  sources to
completely  eliminate all adverse  consequences  of the Year 2000  problems,  or
eliminate shortages of parts for certain products. The Company believes that the
largest risk comes from the  possibility  that other  companies may order larger
quantities of certain materials and parts that they would normally purchase as a




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hedge  against Year 2000  problems.  This type of action  could cause  temporary
increases in demand for these  materials and parts,  thus  creating  unnecessary
shortages.  There is no way to assess the  possibility  of this  occurring.  The
Company is monitoring parts availability.

         The  Company's  expenses  addressing  Year 2000 issues to date have not
been material to the  Company's  operations  or financial  results.  The Company
currently estimates that its Year 2000 costs related to its internal systems and
products  will range from $5,000 to $20,000.  The  estimated  costs are based on
management's  best  projections,  yet  there  can  be no  guarantee  that  these
forecasts will be achieved and actual results could differ materially from those
anticipated.  Management  anticipates  that these  costs will be funded  through
operating cash flows. The Company has not yet been able to estimate the costs it
may  incur as a result  of its  vendors  and  customers  experiencing  Year 2000
difficulties.

                  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
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




<PAGE>

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.

                 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                 53         Chairman and                                        1991
                                                 CEO of the Company
                                                 (also President and
                                                 Director of LFF)

Dennis R. Hunter                    48         President, Director, and CFO                        1988
                                                 of the Company (also CEO,
                                                 President, and Chairman of
                                                 CSC and Director of Hart)

Sidney B. Lifschultz                87         Director of the Company                             1991

Joseph C. Fatony                    52         Director of the Company                             1998

James E. Solomon                    49         Director of the Company and Hart                    1995

James C. Triplett                   49         Chairman and CEO of Hart                            1988

J. Randall Owen                     41         President and COO of Hart                           1994

Michael Hirst                       50         Vice President and                                  1988
                                                 Director of Hart

</TABLE>

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




<PAGE>


                    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
high and low closing sales prices of the Company's  Common Stock,  and are drawn
from Nasdaq  reports  rounded to the nearest cent.  The prices shown for periods
prior to 1998 are  adjusted  to reflect  the  Company's  reverse  stock split in
January 1998.


<TABLE>
<CAPTION>
                                      Fiscal 1998                               Fiscal 1999

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

     <S>                             <C>            <C>                        <C>          <C>

     1st Quarter                     $ 6.25         $ 3.125                    $ 6.50       $ 3.125

     2nd Quarter                     $ 6.25         $ 3.125                    $ 6.88       $ 3.125

     3rd Quarter                     $10.00         $ 4.375                    $ 5.44       $ 4.375

     4th Quarter                     $ 8.75         $ 5.625                    $ 6.25       $ 5.625

</TABLE>


         As of September 10, 1999 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 3
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, 1999 and 1998 and for each of the two years ended
July  31,  1999  and  1998  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.




<PAGE>
                  LIFSCHULTZ INDUSTRIES, INC. AND SUBSIDIARIES

                 CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

                             JULY 31, 1999 AND 1998



<PAGE>







                  Lifschultz Industries, Inc. and Subsidiaries

                   Index to Consolidated Financial Statements

<TABLE>
<CAPTION>


                                                                                                          Page

<S>                                                                                                           <C>

Report of Independent Certified Public Accountants                                                            FS-1

Consolidated financial statements

    Balance sheets                                                                                            FS-2

    Statements of earnings                                                                                    FS-3

    Statements of shareholders' equity                                                                        FS-4

    Statements of cash flows                                                                                  FS-5

    Notes to consolidated financial statements                                                                FS-7

</TABLE>


<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, 1999 and 1998,
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  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the 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,  1999  and  1998,  and the
consolidated  results of their operations and their  consolidated cash flows for
the  years  then  ended  in  conformity  with  generally   accepted   accounting
principles.


                                                /S/GRANT THORNTON LLP



Provo, Utah
October 1, 1999

                                      FS-1
<PAGE>
<TABLE>
<CAPTION>


                                             Lifschultz Industries, Inc. and Subsidiaries

                                                      CONSOLIDATED BALANCE SHEETS

                                                               July 31,

                                                                ASSETS

                                                                                               1999           1998
                                                                                           ------------   ------------
<S>                                                                                       <C>            <C>

CURRENT ASSETS
    Cash and cash equivalents                                                             $  1,175,000   $    989,000
    Marketable securities                                                                      993,000        805,000
    Trade accounts receivable, net                                                           3,059,000      2,468,000
    Related party receivable                                                                    51,000         79,000
    Deferred income taxes                                                                      323,000        234,000
    Inventories                                                                              3,190,000      2,386,000
    Other current assets                                                                       159,000        136,000
                                                                                           ------------   ------------

           Total current assets                                                              8,950,000      7,097,000





                                                                                             1,598,000      2,066,000
PROPERTY HELD FOR LEASE, NET





PROPERTY AND EQUIPMENT, NET                                                                  1,181,000        972,000





LAND                                                                                           170,000        100,000




DEFERRED INCOME TAXES                                                                        1,222,000        550,000
                                                                                           ------------   ------------

                                                                                          $ 13,121,000   $ 10,785,000
                                                                                           ============   ============



</TABLE>

        The accompanying notes are an integral part of these statements.

                                        FS-2


<PAGE>
<TABLE>
<CAPTION>








                                                 LIABILITIES AND SHAREHOLDERS' EQUITY

                                                                                               1999           1998
                                                                                          -------------  -------------
<S>                                                                                      <C>            <C>

CURRENT LIABILITIES
    Note payable to bank                                                                 $    150,000   $    154,000
    Accounts payable                                                                          688,000        519,000
    Income taxes payable                                                                      149,000         34,000
    Accrued liabilities                                                                     1,528,000      1,318,000
    Note payable to shareholder                                                                     -          3,000
    Current maturities of capital lease obligations                                            39,000         32,000
    Current maturities of long-term obligation                                                  2,000          2,000
                                                                                          -------------  -------------

           Total current liabilities                                                        2,556,000      2,062,000

LONG-TERM OBLIGATION, less current maturities                                                   5,000          7,000

CAPITAL LEASE OBLIGATIONS, less current maturities                                             92,000        110,000

COMMITMENTS                                                                                         -              -



SHAREHOLDERS' EQUITY
    Convertible preferred stock, par value $0.01;
      authorized 100,000 shares
       Series A; issued and outstanding 5,200 shares
         in 1999and 1998.                                                                           -              -
       Series E; issued and outstanding 21,231 shares
         in 1999 and 1998                                                                           -              -
    Common stock, par value $0.001;  authorized 1,650,000 shares;
      issued 1,117,519 shares in 1999 and 1998                                                  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)
    Accumulated deficit                                                                      (436,000)    (2,298,000)
                                                                                          -------------  -------------


           Total shareholders' equity                                                      10,468,000      8,606,000
                                                                                          -------------  -------------

                                                                                         $ 13,121,000   $ 10,785,000
                                                                                          =============  =============
</TABLE>



<PAGE>
<TABLE>
<CAPTION>


                                             Lifschultz Industries, Inc. and Subsidiaries

                                                  CONSOLIDATED STATEMENTS OF EARNINGS

                                                          Year ended July 31,


                                                                                               1999           1998
                                                                                           -------------  -------------
<S>                                                                                       <C>            <C>
Net sales                                                                                 $ 16,254,000   $ 15,651,000

Costs and expenses
    Cost of products sold                                                                    8,828,000      7,416,000
    Selling, general and administrative                                                      5,370,000      5,967,000
    Research and development                                                                   786,000      1,077,000
    Interest                                                                                    39,000         54,000
                                                                                           -------------  -------------

                                                                                            15,023,000     14,514,000
                                                                                           -------------  -------------

           Earnings before income taxes                                                      1,231,000      1,137,000

Income tax expense (benefit)                                                                  (631,000)       104,000
                                                                                           -------------  -------------

           NET EARNINGS                                                                   $  1,862,000   $  1,033,000
                                                                                           =============  =============


Net earnings per common share - basic                                                     $       1.70   $       0.95
                                                                                           =============  =============

Net earnings per common share - diluted                                                   $       1.56   $       0.88
                                                                                           =============  =============
</TABLE>







        The accompanying notes are an integral part of these statements.

                                        FS-3


<PAGE>
<TABLE>
<CAPTION>


                                             Lifschultz Industries, Inc. and Subsidiaries

                                            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                              For the years ended July 31, 1999 and 1998


                                                                                     Common
                                        Preferred Stock              Additional       Stock
                             Common   ----------------------------    Paid-in     Subscriptions  Treasury   Accumulated
                             Stock    Series A  Series B  Series E    Capital      Receivable     Stock      Deficit        Total
                           --------  ---------  -------- ---------  ------------  ------------- ----------  -----------    --------

<S>                        <C>       <C>        <C>       <C>       <C>           <C>           <C>        <C>           <C>
Balance at August 1, 1997  $  1,000  $      -   $     -   $     -   $ 11,042,000  $    (15,000) $(157,000) $(3,331,000)  $ 7,540,000
Stock issued upon
   exercise of options            -         -         -         -         10,000             -          -            -        10,000

Tax effect of stock
   options exercised              -         -         -         -          8,000             -          -            -         8,000

Compensation to officers          -         -         -         -              -        15,000          -            -        15,000

Net earnings                      -         -         -         -              -             -          -    1,033,000     1,033,000
                           --------  ---------  --------  --------  ------------  ------------- ---------- ------------  -----------

Balance at July 31, 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
                           ========  =========  ========  ========  ============  ============= ========== ============  ===========
</TABLE>





        The accompanying notes are an integral part of these statements.

                                        FS-4


<PAGE>

<TABLE>
<CAPTION>


                                             Lifschultz Industries, Inc. and Subsidiaries

                                                 CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                          Year ended July 31,


                                                                                            1999           1998
                                                                                        ------------   ------------
<S>                                                                                    <C>            <C>

Increase (decrease) in cash and cash equivalents
    Cash flows from operating activities
       Net earnings                                                                    $  1,862,000   $  1,033,000
       Adjustments to reconcile net earnings to net
         cash provided by operating activities
           Depreciation and amortization                                                    309,000        262,000
           Amortization of leasehold interest                                               468,000        500,000
           Provision for bad debts                                                           12,000        (15,000)
           Compensation to officers                                                               -         15,000
           Deferred income taxes                                                           (761,000)        (4,000)
           (Gain) loss on sale of property and equipment                                     (2,000)         3,000
           Changes in assets and liabilities
               Trade accounts receivable                                                   (603,000)      (615,000)
               Related party receivable                                                      28,000        (49,000)
               Inventories                                                                 (804,000)      (498,000)
               Other current assets                                                         (23,000)         6,000
               Accounts payable                                                             169,000         46,000
               Accrued liabilities                                                          210,000        161,000
               Income taxes payable                                                         115,000        (67,000)
                                                                                        ------------   ------------

                  Total adjustments                                                        (882,000)      (255,000)
                                                                                        ------------   ------------

                  Net cash provided by
                    operating activities                                                    980,000        778,000
                                                                                        ------------   ------------

    Cash flows from investing activities
       Purchase of property and equipment                                                  (569,000)      (412,000)
       Proceeds from sale of property and equipment                                           3,000          6,000
       Purchase of marketable securities                                                   (982,000)      (786,000)
       Proceeds from maturities of marketable securities                                    794,000        557,000
                                                                                        ------------   ------------

                  Net cash used in
                    investing activities                                                   (754,000)      (635,000)
                                                                                        ------------   ------------





</TABLE>





                                   (continued)

                                        FS-5


<PAGE>

<TABLE>
<CAPTION>

                                             Lifschultz Industries, Inc. and Subsidiaries

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                                                          Year ended July 31,


                                                                                            1999           1998
                                                                                        ------------   ------------
<S>                                                                                    <C>            <C>

    Cash flows from financing activities
       Net change in note payable to bank                                                    (4,000)         1,000
       Proceeds from issuance of long term debt                                                   -         10,000
       Principal payments on long-term obligations                                           (2,000)       (48,000)
       Principal payments on note payable to shareholder                                     (3,000)             -
       Principal payments on capital lease obligations                                      (31,000)       (28,000)
       Net proceeds from issuance of common stock                                                 -         10,000
                                                                                        ------------   ------------

                  Net cash used in
                    financing activities                                                    (40,000)       (55,000)
                                                                                        ------------   ------------

                  Net increase in cash
                    and cash equivalents                                                    186,000         88,000

Cash and cash equivalents at beginning of year                                              989,000        901,000
                                                                                        ------------   ------------

Cash and cash equivalents at end of year                                               $  1,175,000   $    989,000
                                                                                        ============   ============

Supplemental disclosures of cash flow information

Cash paid during the year for
    Interest                                                                           $     39,000   $     54,000
    Income taxes                                                                            106,000         42,000

</TABLE>


Noncash investing and financing activities

During 1999 and 1998,  the Company  entered into capital  leases for $19,000 and
$46,000 of equipment, respectively.

During  1998,  common  stock  subscriptions  receivable  totaling  $15,000  were
relieved in exchange for compensation to officers.

Also  during  1998,  the tax effect of  exercising  stock  options was an $8,000
increase to additional paid-in-capital.












        The accompanying notes are an integral part of these statements.





<PAGE>


                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998




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), and Calorimetry Sciences Corporation (Calorimetry),  which is a
       wholly-owned   subsidiary   of   Hart.   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
            -----------------

       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.

       Calorimetry  is engaged in the design,  manufacturing  and  marketing  of
       scientific instruments.

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

       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 1999 and 1998.

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

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


                                      FS-7
<PAGE>


                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


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 is 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
       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.   Research and development
            ------------------------

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

       9.   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.

       10.  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.  Potential common shares included in the dilutive
       earnings  per  share  calculation   include  stock  options  granted  and
       convertible preferred stock.

       11.  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.



<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

       12.  Use of estimates
            ----------------

       In preparing  the  Company's  financial  statements  in  conformity  with
       generally accepted accounting principles,  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.

       13.  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
       approximates their fair values due to their short-term nature.

       14.  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.

       15.  Certain reclassifications
            -------------------------

       Certain reclassifications have been made to the 1998 financial statements
       to conform with the 1999  presentation.  These  reclassifications  had no
       effect on total assets or net income.


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 $544,000 at July 31, 1999.

       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,  1999  and  1998,   this  allowance  was  $22,000  and  $15,000
       respectively.


<PAGE>


                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


NOTE B - CREDIT CONCENTRATION AND EXPORT SALES - CONTINUED

       2.   Export sales
            ------------
<TABLE>
<CAPTION>

       Export sales consist of the following:

                                                                                  1999          1998
                                                                              -----------   -----------


<S>                                                                          <C>           <C>
        Europe                                                               $ 2,161,000   $ 2,136,000
        Far East                                                               1,124,000     1,682,000
        Middle East                                                              161,000       236,000
        North America                                                            369,000       282,000
        South America                                                            283,000       359,000
                                                                              -----------   -----------

                                                                             $ 4,098,000   $ 4,695,000
                                                                              ===========   ===========

</TABLE>

NOTE C - INVENTORIES
<TABLE>
<CAPTION>

       Inventories consist of the following:


                                                                                  1999           1998
                                                                              ------------   -----------

<S>                                                                          <C>            <C>
        Raw materials                                                        $ 2,115,000    $ 1,306,000
        Work in process                                                          788,000        947,000
        Finished goods                                                           175,000         31,000
        Demonstration units                                                      192,000        102,000
        Less inventory reserves                                                  (80,000)             -
                                                                              ------------   -----------

                                                                             $ 3,190,000    $ 2,386,000
                                                                              ============   ===========
</TABLE>



NOTE D - PROPERTY HELD FOR LEASE
<TABLE>
<CAPTION>

       Property held for lease consists of the following:
                                                                                  1999          1998
                                                                              -----------   -----------

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

        Less
            Accumulated amortization                                           4,276,000     3,808,000
            Valuation allowance to adjust to
              undiscounted cash flows                                          1,626,000     1,626,000
                                                                              -----------   -----------
                                                                               5,902,000     5,434,000
                                                                              -----------   -----------

                                                                             $ 1,598,000   $ 2,066,000
                                                                              ===========   ===========
</TABLE>


<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


NOTE D - PROPERTY HELD FOR LEASE - CONTINUED

       The Company leases a 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

<TABLE>
<CAPTION>

       Property  and  equipment  and  estimated  useful  lives  consist  of  the
following:


                                                                   Years         1999          1998
                                                                 ---------    ----------   -----------

<S>                                                                 <C>      <C>          <C>
        Furniture and fixtures                                      3-5      $ 1,202,000  $   960,000
        Machinery and equipment                                     5-10         773,000      562,000
        Equipment held under capital lease                           10          249,000      260,000
        Leasehold improvements                                      5-8          351,000      284,000
                                                                             -----------  -----------

                                                                               2,575,000    2,066,000
        Less accumulated depreciation
           and amortization                                                    1,394,000    1,094,000
                                                                              ----------  -----------

                                                                             $ 1,181,000  $   972,000
                                                                              ==========   ===========
</TABLE>


NOTE F - NOTE PAYABLE TO BANK

       The note payable to bank consists of a line of credit issued to Hart with
       interest  at prime plus 1.5  percent (8  percent at July 31,  1999).  The
       line, which is scheduled for renewal in December 1999, is  collateralized
       by  Hart  common  stock,  trade  accounts  receivable,  inventories,  and
       equipment.  Available borrowings under this line of credit are limited to
       85  percent  of  eligible  trade  accounts  receivable  and 30 percent of
       eligible  inventories,  not to  exceed  $650,000.  As of July  31,  1999,
       $500,000 was available under the line.




<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


NOTE G - LONG-TERM OBLIGATIONS

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

       The  Company  has  capital  lease  obligations  with a  corporation.  The
       balances  at July  31,  1999  and  1998,  total  $131,000  and  $142,000,
       respectively,  and bear interest at approximately  nine percent per year.
       Payments of approximately  $4,000 are due monthly and the obligations are
       due in full between  February of 2002 and June of 2003.  The  obligations
       are collateralized by the leased equipment.

       The Company has accumulated  amortization  relating to the capital leases
       (Note  E)  of  $59,000  and  $35,000  as  of  July  31,  1999  and  1998,
       respectively. Amortization expense on capital leases approximated $24,000
       and $20,000 for 1999 and 1998, 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, 1999:

<TABLE>
<CAPTION>

<S>          <C>                                                                  <C>
             Year ending July 31,
                 2000                                                             $  49,000
                 2001                                                                49,000
                 2002                                                                35,000
                 2003                                                                15,000
                 2004                                                                 2,000
                 Thereafter                                                               -
                                                                                   ---------

             Total minimum leases payments                                          150,000

             Less amount representing interest                                       19,000
                                                                                   ---------

             Present value of net minimum lease payments                            131,000

             Less current maturities                                                 39,000
                                                                                   ---------

             Capital lease obligations                                            $  92,000
                                                                                   =========
</TABLE>



<PAGE>


                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


NOTE G - LONG-TERM OBLIGATIONS - CONTINUED

       2.  Debt
           ----

       The  Company  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 and due October 2002.
<TABLE>
<CAPTION>

       Aggregate maturities of long-term debt are as follows:


             <S>                                                                  <C>
             Year ending July 31,
                 2000                                                             $   2,000
                 2001                                                                 2,000
                 2002                                                                 2,000
                 2003                                                                 1,000
                 Thereafter                                                               -
                                                                                   ---------

                                                                                  $   7,000
                                                                                   =========
</TABLE>


NOTE H - OPERATING LEASES

       The Company  leases  laboratory and office space under  operating  leases
       expiring in various  years  through  2009.  The lease  payments  increase
       throughout the term of leases at three percent annually.

       Minimum  future rental  payments  under  noncancelable  operating  leases
       having  remaining  terms in excess of one year as of July 31, 1999 are as
       follows:

<TABLE>
<CAPTION>

             <S>                                                                  <C>
             Year ending July 31,
                 2000                                                             $   231,000
                 2001                                                                 251,000
                 2002                                                                 258,000
                 2003                                                                 265,000
                 2004                                                                 272,000
                 Thereafter                                                           741,000
                                                                                   ----------

                                                                                   $ 2,018,000
                                                                                   ==========

</TABLE>

       Rent expense totaled $220,000 for the years ended July 31, 1999 and 1998.

       The Company has a right of first refusal to purchase certain of this real
       estate at approximate market value.




<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998



NOTE I - ACCRUED LIABILITIES

<TABLE>
<CAPTION>

       Accrued liabilities consist of the following:

                                                                                  1999         1998
                                                                              -----------   -----------

        <S>                                                                  <C>           <C>
        Payroll, payroll taxes and benefits                                  $   471,000   $   403,000
        Bonuses                                                                  615,000       535,000
        Warranties                                                               147,000       159,000
        Other                                                                    295,000       221,000
                                                                              -----------   -----------

                                                                             $ 1,528,000   $ 1,318,000
                                                                              ===========   ===========
</TABLE>


NOTE J - INCOME TAXES
<TABLE>
<CAPTION>


       Components of income tax expense (benefit) consist of the following:

                                                                                   1999            1998
                                                                              -------------   ------------
        <S>                                                                  <C>             <C>
        Current
            Federal                                                          $     29,000    $     25,000
            State                                                                 101,000          83,000
                                                                              -------------   ------------
                                                                                  130,000         108,000
                                                                              -------------   ------------
        Deferred
            Federal                                                              (659,000)         (3,500)
            State                                                                (102,000)           (500)
                                                                              -------------   ------------
                                                                                 (761,000)         (4,000)
                                                                              -------------   ------------

       Total taxes (benefit)                                                 $   (631,000)   $    104,000
                                                                              =============   ============

</TABLE>


<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


NOTE J - INCOME TAXES - CONTINUED

<TABLE>
<CAPTION>

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

                                                                                  1999          1998
                                                                              -----------   -----------

        <S>                                                                  <C>           <C>
        Income taxes computed at federal statutory rate of 34%               $  418,000    $  387,000
        State taxes, net of federal benefit                                      91,000        83,000
        Realization of net operating loss carryforward
         and change in valuation allowance                                   (1,286,000)     (530,000)
        Non-deductible expenses                                                 146,000       161,000
        Other                                                                         -         3,000
                                                                              -----------  ------------

                   Total income taxes (benefit)                              $ (631,000)   $  104,000
                                                                              ===========   ===========
</TABLE>


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

<TABLE>
<CAPTION>

                                                                                  1999            1998
                                                                              ------------   ------------

         <S>                                                                 <C>            <C>
         Current deferred tax assets
            Deferred compensation                                            $    128,000   $    119,000
            Allowance for doubtful accounts                                         9,000          2,000
            Inventory reserves                                                     30,000              -
            Accrued expenses                                                       88,000         92,000
            Contributions carryforward                                             43,000         38,000
            Uniform inventory capitalization                                       27,000        (17,000)
            Other                                                                  (2,000)             -
                                                                              ------------   ------------

                   Net current tax assets                                    $    323,000   $    234,000
                                                                              ============   ============

        Long-term deferred tax assets
            Net operating loss carryforwards                                 $  2,219,000   $  2,867,000
            Excess book depreciation and amortization                              20,000         16,000
            Alternative minimum tax credit carryforward                           183,000        153,000
            Less valuation allowance                                           (1,200,000)    (2,486,000)
                                                                              ------------   ------------

                   Net long-term tax assets                                  $  1,222,000   $    550,000
                                                                              ============   ============
</TABLE>



<PAGE>

              Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


NOTE J - INCOME TAXES - CONTINUED

       At July 31, 1999,  the Company has net operating loss  carryforwards  for
       tax reporting purposes of approximately $5,949,000 which expire from 2004
       through the year 2007.

       During 1999,  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 a major portion of the deferred tax asset  relating to net operating
       loss  carryforwards  will  be  realized  in  the  future.  The  valuation
       allowance on deferred  taxes was  decreased  $1,286,000  during 1999,  to
       adjust for this evaluation  regarding the  realizability  of the deferred
       tax asset and other deferred tax assets and liabilities.


NOTE K - CAPITAL STOCK

       1.   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, 1999,
       5,200 shares of series A preferred stock were issued and outstanding.

       In  February  of 1998,  all series B  preferred  stock was  cancelled  by
       amendment to the articles of incorporation of the Company.

       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, B, C and D preferred  stock but before  common  stock.  The
       liquidation  preference is $10.87 per share of Series E preferred  stock.
       At July 31,  1999, a total of 21,231  shares of series E preferred  stock
       were issued and outstanding.



<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998



NOTE K - CAPITAL STOCK - CONTINUED

       2.   Cumulative nonvoting preferred shares
            -------------------------------------

       In  February  of 1998,  the series C ten  percent  cumulative  non-voting
       preferred  stock  and  series  D  eight  percent  cumulative   non-voting
       preferred   stock  were   canceled  by   amendment  to  the  articles  of
       incorporation of the Company.

       3.   Reverse stock split
            -------------------

       During 1998,  the  Company's  common stock was split  one-for-fifty  in a
       reverse stock split.  The Company amended their articles of incorporation
       to reflect  1,650,000  common shares  authorized due to the reverse stock
       split. The Company also retained the par value for common stock at $0.001
       per  share.  All  amounts  relating  to common  stock in these  financial
       statements have been adjusted for the split.


NOTE L - 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, 1999,
       the Company had granted  stock  options to various  officers,  directors,
       employees and other  non-employees  of the Company covering the aggregate
       number  of  170,000  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 (Note
       D) vest  ratably at a rate of one option  for every  nine  common  shares
       (pre-reverse  stock  split)  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, 1999 and
       1998) and b) the conversion of Series A preferred stock (5,200 shares are
       convertible into 1,040 common shares at July 31, 1999). These options are
       exercisable at the then existing par value of the common stock ($.05). At
       July 31,  1999,  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  40,000  shares were granted to an officer  during 1998
       with an  exercise  price of $4.625  and are  exercisable  when the market
       value of the  Company's  common stock has a closing price at or above $12
       per share. These options expire in 2013.



<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


NOTE L - 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>



                                                                                     1999           1998
                                                                                     -----          ----
         <S>                                                                   <C>            <C>
         Net earnings
             As reported                                                       $   1,862,000  $   1,033,000
             Pro forma                                                             1,849,000        924,000

         Net earnings per common share - basic
             As reported                                                       $        1.70  $        0.95
             Pro forma                                                                  1.69           0.85

         Net earnings per common share - diluted
             As reported                                                       $        1.56  $        0.88
             Pro forma                                                                  1.55           0.79
</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
       1998: expected volatility of 172 percent; risk-free interest rate of 5.83
       percent; and expected life of 14.7 years. The weighted-average fair value
       of options granted was $3.97 in 1998.


<PAGE>


                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


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

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

       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.

       Information with respect to the Company's stock options at July 31, 1999:
<TABLE>
<CAPTION>

                                                                                              Weighted-average
                                                Stock options         Exercise price           Exercise price
                                                -------------         --------------          ----------------
       <S>                                          <C>               <C>                            <C>

       Outstanding at August 1,
       1997                                         112,000           $0.050 to 3.150                $1.760
             Granted                                 71,000            3.215 to 4.625                 3.970
             Exercised                               (6,000)               1.565                      1.565
             Canceled/expired                        (7,000)               1.565                      1.565
                                                     -------                                         ------
       Outstanding at July 31,
       1998                                         170,000             0.50 to 4.625                 2.690
             Granted                                      -                  -                            -
             Exercised                                    -                  -                            -
             Canceled/expired                             -                  -                            -
                                                  ----------
       Outstanding at July 31,
       1999                                         170,000             0.50 to 4.625                 2.690
                                                  ==========
       Exercisable at July 31,
       1999                                         121,000           $ 0.50 to 4.625                $2.690
                                                  ==========
</TABLE>



       Additional information about stock options outstanding and exercisable at
       July 31, 1999:

<TABLE>
<CAPTION>

       Options outstanding
       -------------------

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

       <S>                         <C>               <C>                      <C>

       $ 0.050                       8,000           $ 0.050                      8.1
         1.565                      71,000             1.565                   3.6 to 8.1
         3.215                      51,000             3.215                  5.3 to 13.6
         4.625                      40,000             4.625                      13.8
                                   -------
                                   170,000
                                   =======
</TABLE>

<PAGE>


                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


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

<TABLE>
<CAPTION>

       Options exercisable
       -------------------
                                                  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
                                                  -------
                                                  121,000
                                                  =======
</TABLE>

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

       Pursuant to an employee agreement (Note M), 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 rate of 5,260 shares or options per
       year for three years. The agreement expires in August of 2003.


NOTE M - 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 three  individuals,
       provide  for annual  salaries  of $225,000  (plus a five  percent  annual
       increase),  $231,000 (plus a five percent  annual  increase) and $226,000
       and are for terms of two to five years  providing  for  severance,  which
       could be as much as 50 percent of the remaining base compensation (or one
       year's  salary  whichever  is greater) if the  individual  is  terminated
       without cause.  The other two contracts  with annual  salaries of $82,000
       and $285,000 (plus a five percent  annual  increase) have longer terms of
       six to 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 eight or more years
       and some have been employed more than twelve years.  One individual has a
       put option under the agreement (Note L).  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. No provision for any
       severance  payments under these employment  contracts has been made as of
       July 31, 1999.




<PAGE>


                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


NOTE N - 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 50 percent of employee contributions. The
       Company's  matching  contributions vest at a rate of 20 percent per year.
       The Company contributed  approximately  $135,000 and $121,000 to the plan
       during the fiscal years ended July 31, 1999 and 1998, respectively.


NOTE O - RELATED PARTY TRANSACTIONS

       During  1999 and  1998,  the  Company  purchased  $114,000  and  $103,000
       respectively,  of  inventory  from an  entity  owned by the  spouse of an
       officer of the Company.


NOTE P - EARNINGS PER COMMON SHARE

       The  following  shows the shares used in  computing  earnings  per common
       share including dilutive potential common stock:

<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>


<PAGE>

                  Lifschultz Industries, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             July 31, 1999 and 1998


NOTE P - EARNINGS PER COMMON SHARE - CONTINUED
<TABLE>
<CAPTION>

                                                                             For the Year Ended July 31, 1998
                                                             ----------------------------------------------------------
                                                                                  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           $     1,033,000            1,090,932     $          0.95
                                                             ================                         =================

Effect of dilutive securities

    Stock options                                                                         82,794
    Convertible preferred stock                                                            5,286
                                                                                       ---------

Net earnings per common share - diluted


    Net earnings available to common shareholders           $     1,033,000            1,179,012     $          0.88
                                                             ================          =========      =================

</TABLE>

<PAGE>