SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K


_X_   Annual report pursuant to section 13 or 15(d) of the Securities Exchange
      Act of 1934 for the fiscal year ended September 30, 1998 or

___   Transition report pursuant to section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the transition period from _______ to _______.


Commission file number 0-2387

                             RESEARCH, INCORPORATED
--------------------------------------------------------------------------------
             (Exact name of the Company as specified in its charter)

              Minnesota                                41-0908058
---------------------------------------  ---------------------------------------
   (State or other jurisdiction of         (I.R.S. Employer Identification No.)
   incorporation or organization)

P.O. Box 24064, Minneapolis, Minnesota                    55424
---------------------------------------  ---------------------------------------
(Address of principal executive office)                 (Zip Code)

(The Company's telephone number, including area code) (612) 941-3300

        Title of each class            Name of each exchange on which registered
        -------------------            -----------------------------------------

Securities registered pursuant to
Section 12(b) of the Act:

              None
-------------------------------------  -----------------------------------------


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock with a par value of
$.50 per share                                   NASDAQ Symbol RESR
-------------------------------------  -----------------------------------------

Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Paragraph 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the Company's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ___

The aggregate market value of the common shares held by nonaffiliates was
approximately $ 3 million based upon the closing sale price of the Company's
common stock as of December 11, 1998.

As of December 18, 1998; 1,266,337 common shares were outstanding.

Documents incorporated by reference:

1)    Portions of the Proxy Statement dated December 18, 1998, for the Annual
      Meeting of Shareholders to be held on January 21, 1999, are incorporated
      by reference into Part III.

<PAGE>


                             RESEARCH, INCORPORATED

                                     PART I


Item 1.     Business

      (a)   General Development of the Business

            Research, Incorporated (the "Company") is engaged in the design,
            manufacturing and sale of complete product solutions based on its
            core competencies: precise heating and control. The Company's
            primary focus is on high growth markets including Graphic Arts (ink
            drying), SMT (solder reflow for surface mount technology), (BGA)
            ball-grid array, (CSP) chip scale packaging and Plastics. BGA and
            CSP are segments of the semi-conductor industry. Applications for
            the Company's products include, solder reflow for assembly of
            surface mount printed circuit boards and chip production, ink drying
            for on demand printing, forming of plastics, tube shrinking,
            materials testing and curing/finishing.

            In fiscal 1997, the Company refocused its efforts from a
            product-driven company to a market-driven company. The global market
            for the Company's products includes the United States, Canada,
            Europe, Asia, Australia, Latin America and South America. Sales are
            made both direct and through independent sales representatives and
            distributors. The Company currently operates as one business segment
            through three operating divisions: Drying, Thermal Solutions, and
            Research International. During fiscal 1998 the Company merged the
            resources of Control Systems into the Thermal Solutions Division.
            Company operations are located in Eden Prairie, Minnesota, a suburb
            of Minneapolis, with a subsidiary, Research Incorporation Limited,
            operating as a manufacturing site and European sales office in
            Plymouth, England.

            On November 8, 1995 the Company established a Foreign Sales
            Corporation (FSC) to obtain export incentives related to Research
            Incorporated's international sales activities.

            Research, Incorporated was organized as a Minnesota corporation in
            October 1966, and prior to that date, operated as the R-I Controls
            Division of a predecessor company which was formed in 1952. Research
            Inc. is located at 6425 Flying Cloud Drive, Eden Prairie, Minnesota
            55344.

      (b)   Financial Information About Industry Segments

            The Company operates in a single industry segment, industrial
            electronic instruments and systems. Financial information concerning
            its operations has been presented in the financial statements
            referred to under Item 8.

      (c)   Narrative Description of the Business

            (1)   (i) Products and Markets - The Company is currently engaged in
                  the design, manufacture, and marketing of three product
                  classes; reflow ovens, drying systems and heating devices.

                        RESEARCH INTERNATIONAL DIVISION
                        The electronics manufacturing market segments addressed
                        by the Research International Division are characterized
                        by significant growth cycles with technology rapidly
                        accelerating to stay ahead of obsolescence. Surface
                        mount technology (SMT) and ball-grid array (BGA)
                        represent the most advanced processes for creating
                        solder-connections to silicon chips. Automation provided
                        by Research International's reflow ovens enable
                        semiconductor manufacturers and assemblers around the
                        world to remain competitive, low cost producers. The
                        microcircuits that pass through Research International's
                        reflow ovens become the electronic intelligence of
                        computer workstations, laptops and palmtops, as well as
                        cellular phones, pagers and other high demand wireless
                        communications products.

                        Research International plans to gain market share
                        through technology leadership, market driven to address
                        customers future needs and leadership in customer
                        service and satisfaction. Research International
                        accelerated expansion into Europe due to the decline of
                        Asian activity. The division added and trained thirteen
                        new industry savvy representatives to cover all of
                        Europe and to begin forging strategic alliances with key
                        customers.


                                       1

<PAGE>


                        The No-Clean feature of Research International's
                        MicriFlo(TM) and ThermaFlo(TM) ovens for SMT as well as
                        its ChipFlo(TM) oven for BGA introduced in the third
                        quarter of 1997, enables manufacturers to operate their
                        systems without costly, periodic stops (up to 24 hours
                        per month) to clean flux buildup in the heater cavities.
                        In the semi-conductor manufacturing environment, such
                        interruptions add significant costs to their operations.

                        The low velocity nitrogen convection (LVNC) feature of
                        the ChipFlo oven enables solder leads to be bonded onto
                        substrate film without flutter or air movement
                        interfering with the bonding process. Similarly, the
                        DeltaFlo 10LN oven, introduced in the second quarter of
                        1997, extends low nitrogen capabilities to fan-forced
                        convection reflow ovens for manufacturers of high volume
                        SMT circuit cards.

                        Product introduction for special applications in fiscal
                        1998 included the DeltaFlo 10LNSV and CureFlo. The
                        DeltaFlo 10LNSV has high output yet a small footprint.
                        The CureFlo cures or sets the shellac coating on circuit
                        boards to eliminate shifting of components, without
                        igniting the volatile lacquer vapors.

                        Research International in close collaboration with
                        leading SMT manufacturers is developing the Tower(TM)
                        reflow oven. The patented Tower reflow oven is one-third
                        the length of conventional reflow ovens and
                        simultaneously handles different circuit board types. It
                        is the only vertical oven with a board transport
                        situated outside the heating zones for maximum
                        reliability, and planned for commercial availability in
                        the fourth quarter of fiscal 1999.

                        Research International markets its products through
                        independent sales representatives utilizing advertising,
                        tradeshows and rapid customer response and excellent
                        customer support to gain market share.

                        DRYING DIVISION
                        The Drying Division, an offshoot of the Company's
                        Thermal Solutions Division, was formed in 1997 to focus
                        on opportunities in the ink-drying segment of the
                        graphic arts market. The printing industry's quest for
                        top speeds and enhanced productivity created the need
                        for the Drying Division's products, which dry ink
                        rapidly as it is applied.

                        Product advantages such as precise heat control that
                        preserves the integrity of the printed piece, speeds of
                        up to 1,000 feet per minute, smaller machine footprints,
                        and lower power requirements have earned the division a
                        50 percent share of the market segment it serves. The
                        division estimates the size of the overall ink drying
                        market worldwide to be approximately $800 million
                        annually.

                        The division has primarily concentrated its efforts on
                        the high-end, ink-jet printing market niche, through a
                        strategic supplier relationship with Scitex Digital
                        Printing, Inc., the world's leading supplier of ink-jet
                        printing equipment used for high-volume, high-speed
                        print applications such as lottery tickets, magazine
                        sweepstakes, and direct mail. The Drying Division has
                        created a full line of products including the
                        Speed-Dri(R) and Web-Dri(R), along with the new
                        Roll-Dri(TM), to work in tandem with Scitex printers.
                        This broad product line gives users the ability to
                        choose a dryer that gives them the appropriate
                        combination of speed, size, power, and price to ensure
                        the highest return on their investment.

                        In Asia, despite the recent fluctuations in financial
                        markets, direct mail solicitations and database
                        development are in the beginning stages, and variably
                        printed business forms are growing in importance. The
                        Drying Division has the market development strategy in
                        place to take advantage of these trends, while
                        minimizing its exposure. Scitex has expanded into the
                        Asian market and brought with it a need for high-speed
                        dryers. Because space and electricity are at a premium
                        throughout Asia, doing business in the region demands
                        that dryers run on lower power and have smaller
                        footprints. To meet these requirements, the division
                        developed the R1000 Roll-Dri, which reduces energy
                        consumption by more than 50 percent, while running at
                        high speeds.

                        Smaller printers also need high speeds in order to
                        compete. Research, Inc.'s new Speed-Dri was designed to
                        serve smaller printers in the short-run, on-demand print
                        marketplace. Several manufacturers introduced new,
                        moderately priced ink-jet printers to meet the
                        requirements of smaller


                                       2

<PAGE>


                        letter shops that serve the short-run direct mail niche.
                        Since the printers are attractively priced, users can
                        afford to offer their customers versatile ink-jet
                        production as an alternative to preprinted glued labels.

                        In 1999, the Drying Division is expanding beyond inkjet
                        based print technologies into areas such as toner based
                        imaging for forms manufacturers. The Drying Division is
                        also establishing itself as a total system integrator
                        with its new modular drying system which includes
                        components related to the entire print-production
                        process.

                        The Drying Division signed a distributor agreement with
                        Scitex Digital Printing, Inc., that provides Scitex with
                        exclusive worldwide rights to market and sell Research,
                        Inc. drying systems, when integrated with Scitex ink-jet
                        printing equipment. A manufacturing license and
                        exclusive distribution agreement was also signed with
                        Munich-based IndustrieSerVis G.m.b.H. Under this
                        agreement each company is licensed to make, use and sell
                        drying systems and custom system integration components
                        developed by the other. The agreement also grants each
                        company exclusive distribution rights for the others'
                        products.

                        THERMAL SOLUTIONS DIVISION
                        The Thermal Solutions Division (TSD) advances the
                        corporate core competency of precise heat control. TSD
                        created a family of products using IR in the brand, such
                        as the SpotIR series, infrared spot heaters and ChambIR
                        series, infrared chamber heaters. TSD addresses multiple
                        markets including plastics, metal processing, and
                        coatings as well as paper processing. TSD is one of the
                        few manufacturers using "instant on/off" infrared lamps
                        and reflectors, with advantages over competing hot-wall
                        or hot-air processes in terms of energy efficiency,
                        accuracy of focus, high heating rates, and temperature
                        control. The Thermal Solutions Division develops
                        products providing focused heat and complete product
                        solutions for customers. These products are marketed
                        through independent sales representatives who are
                        knowledgeable in the targeted markets.

                        TSD develops complete solutions using the Company's core
                        heat-control technology to address growth opportunities.
                        One such total solution product line incorporates
                        heater, framework, control, and cooler in a single
                        package.

                        During fiscal 1998, the division partnered with a
                        leading manufacturer of disposable medical devices to
                        develop and incorporate a one-of-a-kind heating
                        solution. The technology utilizes pinpoint-focused
                        infrared heat to quickly and carefully release each
                        device for its mold. This technology can be transferred
                        to other applications in which focused heat, speed,
                        cleanliness, cost savings and ease of use are project
                        drivers.

                  (ii)  Product Investment - The Company expects to continue
                        expenditures for research and development in excess of
                        10 percent of sales, which is significantly higher than
                        the average for its industries.

                  (iii) Sources and Availability of Raw Materials - Raw
                        materials essential to the business of the Company are
                        generally readily available from a number of sources.

                  (iv)  Patents and Trademarks - The Company has a number of
                        patents and is a party to certain license agreements
                        which, while deemed important, are less significant to
                        its competitive position than factors such as product
                        development, name recognition, reliable product
                        maintenance, support and knowledge of employees due to
                        the rapid technological changes in the industry.

                  (v)   Seasonality - The business of the Company is not
                        seasonal.

                  (vi)  Working Capital Requirements - The practices of the
                        Company relating to working capital items are not
                        considered unusual. The Company carries inventory to
                        support customers rapid delivery requirements.

                  (vii) Customers - During fiscal 1998 the Company had two
                        customers that accounted for 13% and 10% of net sales.
                        In fiscal 1997 the Company had two customers that
                        accounted for 19% and 12% of net sales, while in fiscal
                        1996 one customer accounted for 11% of net sales.


                                       3

<PAGE>


                        During fiscal 1998 the Company has two customers that
                        represented 12% and 11% of net accounts receivable. In
                        fiscal 1997 the Company had two customers that
                        represented 20% and 10% of net accounts receivables,
                        while in fiscal 1996 one customer represented 10% of net
                        accounts receivables.

                  (viii)Backlog - The dollar amount of the Company's backlog of
                        orders from operations believed to be firm at September
                        30, 1998, was $4,274,000; at September 30, 1997, it was
                        $2,730,000. It is anticipated that all of the backlog at
                        September 30 will be shipped in the subsequent 12-month
                        period. Backlog has no unusual significance to the
                        business of the Company.

                  (ix)  Government Contracts - Government contracts which may be
                        subject to renegotiation of profits or termination do
                        not constitute a material portion of the Company's
                        business.

                  (x)   Competition - The Company's business is highly
                        competitive, particularly in the areas of price, service
                        and product performance. Competition involves hundreds
                        of companies -- ranging from companies which are much
                        smaller than the Company to large companies in the
                        electronics, printing and plastics industries.

                  (xi)  Research and Development - The Company incurred expenses
                        of approximately $2,968,000, $2,581,000 and $1,735,000
                        in fiscal years 1998, 1997, and 1996, respectively, on
                        Company-sponsored research activities related to the
                        development of new products, new related products and to
                        the improvement of existing products. No material funds
                        were expended for customer-sponsored research
                        activities.

                  (xii) Environmental Regulations - Compliance with federal,
                        state and local provisions regulating the discharge of
                        materials into the environment or otherwise relating to
                        the protection of the environment is not expected to
                        have a material effect upon the capital expenditures,
                        earnings or competitive position of the Company.

                  (xiii)Employees - At September 30, 1998, the Company had 134
                        employees.

      (d)   Financial Information About Foreign and Domestic Operations and
            Export Sales

            (1)   The Company has a subsidiary in the United Kingdom. The
                  results of its operations were not material to the Company.
                  Export sales involve sales to customers primarily in Asia,
                  Latin America, Europe, Canada and Australia. See Note 7,
                  "Foreign Sales" of the Notes to Consolidated Financial
                  Statements.

            (2)   Not applicable.

            (3)   Not applicable.


Item 2.     Properties

            The Company's plant and office, which are owned in fee, are located
            on approximately 12 acres of property at 6425 Flying Cloud Drive,
            Eden Prairie, Minnesota. The facilities consist of 90,000 square
            feet of completely air-conditioned space deemed suitable for light
            manufacturing and office use. Management considers these facilities
            to be in good condition, well-maintained and adequate for its
            current operations. On October 4, 1996, the first quarter of fiscal
            1997, the Company completed the sale of 13.1 acres of undeveloped
            land. The Company's subsidiary in the U.K. is operated in a 20,000
            square foot leased facility.


Item 3.     Legal Proceedings

            The Company is not a party to any material pending legal
            proceedings.


Item 4.     Submission of Matters to a Vote of Security Holders

            No matters were submitted to a vote of security holders during the
            fourth quarter of fiscal 1998.


                                       4

<PAGE>


Item 4A.    Executive Officers

            None of the executive officers of the Company has any family
            relationship with any other officer, and all officers serve at the
            pleasure of the Board of Directors. The following table sets forth
            other information regarding the Company's executive officers:

<TABLE>
<CAPTION>
                 NAME                AGE        POSITION                                OFFICER SINCE
                 ----                ---        --------                                -------------
<S>                                  <C>        <C>                                          <C> 
                 B.E. Bailey         50         Vice President                               1992

                 D.G. Brady          56         Vice President                               1990

                 N.R. Cox            43         Vice President                               1998

                 R.L. Grose          48         Treasurer                                    1997

                 C.C. Johnson        54         President, CEO and Director                  1984

                 G.E. Magnuson       68         Secretary and Director;
                                                Retired Partner, Lindquist & Vennum          1975
                                                P.L.L.P.

                 K.M. O'Rourke       41         Vice President                               1993
</TABLE>


            There are no arrangements or understandings between any of the
            officers and any other person pursuant to which any of them was
            selected as an officer.

            Messrs. Johnson, Brady, Bailey, Cox, Grose and Ms. O'Rourke have
            each been employed by the Company for more than five years. Since
            1990 Mr. Magnuson is a retired partner of Lindquist & Vennum
            P.L.L.P. Mr. Magnuson has been a director and secretary of the
            Company for more than five years. Ms. O'Rourke became Vice President
            in November 1993; previously Ms. O'Rourke was Manager of Human
            Resources. Mr. Grose became Treasurer in January of 1997; previously
            he was Controller. In December 1998, Mr. Cox became Vice President;
            previously Mr. Cox was General Manager since 1996 and prior to that
            Engineering Manager.


                                       5

<PAGE>


                                     PART II

Item 5.     Market for The Company's Common Stock and Related Stockholder
            Matters

      (a) & (c) Market Information and Dividends

            The Company's Board of Directors discontinued declaring dividends
            after the dividend paid March 31, 1998.

            Dividends paid and price range per share of common stock is as
            follows:

            Beginning on October 20, 1998, the Company's common stock began
            trading on the Nasdaq SmallCap Market symbol (RESR), rather than on
            the Nasdaq National Market tier of the Nasdaq Stock Market.

<TABLE>
<CAPTION>
                                                                         Bid Price Range
                                      Dividends Paid               1998                      1997
                                     ----------------       -------------------       ----------------
            During Quarter Ended      1998       1997        High        Low          High        Low
            ------------------------------------------------------------------------------------------
<S>         <C>                      <C>        <C>         <C>         <C>           <C>        <C>
            December 31              $.056      $.056       9-3/5       6-3/5         5-2/5      3-4/5
            March 31                   .06       .056       7-1/2       4-5/8         7-3/5      4
            June 30                              .216*      6-6/16      2-6/16        7-4/5      4-2/5
            September 30                         .056       4           1-11/16       8          5-1/5
            ------------------------------------------------------------------------------------------
            TOTAL                    $.116      $.384
            =========================================
</TABLE>

            * INCLUDES A ONE-TIME SPECIAL DIVIDEND OF $.20 FROM THE SALE OF THE
            DIMENSION PRODUCT LINE AND SALE OF LAND. PRICES ADJUSTED FOR STOCK
            SPLIT, 5 FOR 4 ON DECEMBER 31, 1997.

            (b)   Holders

                  The number of holders of record of the Company's common stock
                  as of December 7, 1998, was 566. The Company estimates that an
                  additional 800 shareholders own stock held for their accounts
                  at brokerage firms and financial institutions.


                                       6

<PAGE>


Item 6.     Selected Financial Data

CONSOLIDATED FINANCIAL SUMMARY

<TABLE>
<CAPTION>

(In thousands, except per share data)
For the Years ended September 30                        1998          1997          1996         1995         1994
-------------------------------------------------    ----------    ----------    ----------   ----------   ----------
<S>                                                  <C>           <C>           <C>          <C>          <C>       
Consolidated Operations:
  Net sales                                          $   16,731    $   22,843    $   19,661   $   20,923   $   18,163
  Gross profit                                            5,986        10,085         7,955        9,019        7,947
    Percent of sales                                       35.8%         44.1%         40.5%        43.1%        43.8%
Income (loss) from operations (1)                        (4,986)          551            89          903          661
Gain on sale of land                                         --         1,147            --           --           --
Gain on sale of product line                                 --            --           344           --           --
Interest income (expense), net                             (345)           (3)           25           49           64
Income (loss) before income taxes                        (5,331)        1,695           458          952          725
  Percent of sales                                        (31.9)%         7.4%          2.3%         4.6%         4.0%
Income tax provision (benefit)                           (1,813)          578           168          325          228
Net income (loss)                                    $   (3,518)   $    1,117    $      290   $      627   $      497
  Percent of sales                                        (21.0)%         4.9%          1.5%         3.0%         2.7%
-------------------------------------------------    ----------    ----------    ----------   ----------   ----------
 Earnings per Share:
    Basic                                            $    (2.82)   $     0.80    $     0.20   $     0.44   $     0.35
    Diluted                                               (2.82)         0.79          0.19         0.43         0.35
-------------------------------------------------    ----------    ----------    ----------   ----------   ----------
Cash Dividends Paid per Share                        $     .116    $     .384    $     .205   $     .176   $     .176
-------------------------------------------------    ----------    ----------    ----------   ----------   ----------
Return on Beginning
 Stockholders' Equity                                       N/A          15.3%          4.0%         9.3%         7.7%
-------------------------------------------------    ----------    ----------    ----------   ----------   ----------
Weighted Average Number of
  Shares Outstanding:
    Basic                                                 1,247         1,391         1,444        1,411        1,406
    Diluted                                               1,247         1,418         1,492        1,459        1,408
-------------------------------------------------    ----------    ----------    ----------   ----------   ----------

<CAPTION>

As of September 30                                      1998          1997          1996         1995         1994   
-------------------------------------------------    ----------    ----------    ----------   ----------   ----------

Consolidated Financial Condition:
  Net working capital                                $       41    $    3,934    $    5,091   $    5,195   $    4,952
  Current ratio                                        1.0 to 1      1.6 to 1      2.7 to 1     2.5 to 1     2.5 to 1
Property and Equipment, Net                          $    2,392    $    2,521    $    2,100   $    1,876   $    1,695
-------------------------------------------------    ----------    ----------    ----------   ----------   ----------
Total Assets                                             11,373        12,849        10,338       10,593       10,080
Total Stockholders' Equity                                3,218         6,516         7,275        7,195        6,762
-------------------------------------------------    ----------    ----------    ----------   ----------   ----------
Number of Shares Outstanding                              1,266         1,211         1,452        1,425        1,406
Book Value per Share                                 $     2.54    $     5.38    $     5.01   $     5.05   $     4.81
-------------------------------------------------    ----------    ----------    ----------   ----------   ----------
</TABLE>

(1) For fiscal 1998, loss from operations includes a $1,676 restructuring charge
and inventory write down of $697.


                                       7

<PAGE>


Item 7.     Management's Discussion and Analysis of Financial Condition and 
            Results of Operations

OVERVIEW

In fiscal 1997, the Company shifted from a product-driven to a market-driven
strategy in order to leverage its engineering expertise and to concentrate and
invest resources on customers and markets that offer the best potential return.
The Company identified key markets in which it has the potential to be a
dominant player: surface mount technology (SMT), graphic arts, and infrared. In
each area, the Company identified key customers and strategic partners with whom
it would work most closely to meet their respective needs. The Company also
identified key geographic markets, where it would make additional investments to
capitalize on growth potential. The Company believes the SMT and graphic arts
markets have the greatest potential for growth. In the SMT market, the Company
plans to gain market share by dedicating additional resources to key customers
that have ongoing needs for high-quality products and excellent customer
service.

Strategic partnerships and high levels of customer service will be key
components of the Company's market-driven strategy. While the breadth of the
Company's product lines will probably decrease as efforts are focused on
selected markets, the Company will invest in new product development at levels
that will support its goal of achieving 50% of sales from products developed in
the last three years.

CONSOLIDATED OPERATIONS

1998-1997 COMPARISON
Sales for fiscal 1998 decreased 27% from fiscal 1997. The overall decrease in
sales is attributable to the protracted Asian economic crisis and its impact on
capital expenditures of the Company's high-tech customers in the United States.
Sales to the electronics industry in the SMT market decreased 46% from the prior
year. Sales to the printing industry in the graphic arts market increased 11%; a
slower growth than fiscal 1997 due to lower than expected sales in Asia as a
result of the economic crisis in that region. Sales of core heating and control
products were down 13% due to the uncertainty caused by the Asian situation on
domestic capital equipment expenditures.

The Company has refocused its resources to expand into other geographic markets
such as Europe and is not as reliant on Asia. Management believes there will
continue to be quarter to quarter fluctuations in the SMT market. Sales of new
products introduced in the last three years accounted for 38% of sales, less
than its goal of 50% due to the loss of new product sales in Asia.

Gross profit margins decreased 8.3% due to an inventory write down of $697,000,
primarily in the SMT market, as well as the effect of additional unabsorbed
fixed costs. The inventory write down was caused by the continued pressure on
the electronics industry as the on going Asian economic turmoil affected capital
equipment expenditures of manufacturers around the world.

Selling expenses increased to 32.8% as a percent of sales in fiscal 1998 from
26.3% of sales in 1997 due to significantly lower level of sales created by the
Asian economic crisis.

Expenditures for research and development increased to 17.7% as a percentage of
sales in fiscal 1998 from 11.3% of sales in 1997 due to the lower level of sales
and the Company's plans to maintain its investments in new product development
in its major markets. The Company's goal is to generate 50% of sales from new
products developed in the last three years. The Company has shifted the emphasis
of its research and development efforts from product adaptations, extensions and
enhancements to new product solutions for its chosen markets. The Company has
focused its efforts on high potential products and markets. The Company expects
to invest more than 10% of sales on these efforts.

General and administrative expenses increased to 5.0% as a percentage of sales
in fiscal 1998 from 4.1% in 1997, however, the absolute dollars decreased
$102,000. The percentage increase was due to the lower sales volume while
spending was reduced by cost containment measures and resource realignment.

In February 1998, the Company consolidated the Control Systems business into the
Thermal Solutions Division. Control Systems dealt primarily with Asian glass
manufacturers and contributed less than 5 percent of sales in fiscal 1997. Costs
associated with the restructuring and the redeployment of Control Systems'
resources were taken as a one-time charge of $635,000 in the second quarter of
fiscal 1998. Costs associated with the restructuring primarily


                                       8

<PAGE>


consisted of severance costs. In the third quarter the Company took a
restructuring charge of $1,041,000, primarily for severance pay related to a
workforce reduction in the third quarter and asset write downs. The Company took
these actions in the quarter in response to continued pressure on the
electronics industry as the ongoing Asian economic turmoil affected capital
equipment expenditures of manufacturers around the world. The Company
aggressively reduced costs, restructured and streamlined operations while
focusing product offerings increasingly on value-added customer solutions. The
Company is focusing on resource realignment to reduce fixed costs, as well as
cash and asset management programs.

Interest expense was $345,000 in fiscal 1998 compared to $51,000 in fiscal 1997.
This increase was due to a higher borrowing position.

The effective tax rate for fiscal 1998 and 1997 was 34%.

1997-1996 COMPARISON
Sales for fiscal 1997 increased 16%. The overall increase in sales is attributed
to increased demand in the electronics industry, the Company's focus on key
customers and acceptance of new product introductions. Sales to the electronics
industry in the SMT market increased 70% over the prior year and sales to the
printing industry in the graphic arts market increased 20%. The sales increases
in the SMT and graphic arts markets were partially offset by the loss of
approximately $2,000,000 of sales of the Dimension product, which was sold in
September 1996. The increase in sales to the graphic arts market is due to the
Company's focus in fiscal year 1996 to penetrate that market. Sales (excluding
Dimension sales for 1996) increased 29.0%. Sales of new products introduced in
the last three years accounted for 57% of sales.

Gross profit margin increased 3.6% due to the product mix of sales in the SMT
market, lower warranty costs and the impact of new product introductions in the
SMT and graphic arts markets. Gross margins in 1996 were affected by initial
production costs and product warranty expense associated with new product
introductions in the SMT product line and lower gross margins from Dimension
products. Warranty expense incurred in 1996 was related to correctable,
nonrecurring retrofit changes and the integration of a new controller in the SMT
reflow oven product line. Management has implemented design review procedures
that it believes will prevent future occurrences. Gross margins on the SMT
product line are relatively lower than other product lines.

Selling expenses as a percent of sales dropped 1.3% due to reduced reliance on
independent sales representatives in the graphic arts market and the sale of the
Dimension product line partially offset by investments to develop new customer
relationships.

Expenditures for research and development increased to 11.3% as a percentage of
sales in 1997 from 8.8% of sales in 1996 due to the Company's plan to increase
its investment in new product development in its major markets and funding of
the Tower, a first-to-market product solution, introduced in fiscal 1998. These
investments are in line with the Company's goal to generate 50% of sales from
new products developed in the last three years.

General and administrative expense increased to 4.1% as a percentage of sales in
1997. This increase was due to costs associated with hiring and training
additional personnel to support the Company's growth during a tight labor
market. The Company expects the labor shortage to continue to impact these
costs. The Company will also invest in new business systems and processes in the
future with the expectation that these expenses will be leveraged and provide
future productivity improvements.

Net income for 1997 includes a one-time gain on sale of land of $1,147,000. The
gain on the sale of land is net of $312,000 of expenses such as site preparation
and professional fees.

The effective tax rate for 1997 was 34%, compared to 37% in 1996. The decrease
is due to the increase in research and development spending and the associated
legislation enacted in 1997.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital was $41,000 at the end of fiscal 1998 as compared
to $3,934,000 in 1997. The Company's current ratio at September 30, 1998 and
1997, was 1.0 and 1.6, respectively.

The decrease in working capital is due to the cash used in operating activities.
Decreases in accounts receivable, inventories, and an increase in deferred
revenues were offset by cash used due to the net loss. Accounts receivables


                                       9

<PAGE>


decreased due to lower sales. Inventories were lower due to the Company's
ability to utilize inventories that were built up to meet customers quick
delivery requirements. Deferred revenue was generated from customer advances
which were a result of the Company's efforts to aggressively manage cash during
the Asia economic crisis. The increase in cash used in investing activities was
due to property and equipment purchases which were incurred primarily before the
Asia economic downturn. In March 1998 the Company discontinued paying dividends.

The Company has recorded a $493,000 tax receivable, resulting from recognition
of a net operating loss (NOL) carryback, which is expected to be received in the
second quarter of fiscal 1999. Further, to help improve cash flows, the Company
now receives customer advances for significant orders and recorded $623,000 of
customer advances at September 30, 1998.

The Company has a secured bank line of credit of $5,000,000 with interest
charged at the prime rate. The line is secured by substantially all the
Company's assets. At September 30, 1998, the Company had borrowings outstanding
of $4,100,000. The Company did not meet certain net worth, debt to equity and
net income covenants at September 30, 1998 and has received a waiver of those
covenants from its lender. This credit facility terminates January 29, 1999. A
short-term note payable of $766,000 was paid off on January 15, 1998. The
Company has no long-term debt.

On December 17, 1998, the Company signed a new three-year loan and security
agreement with a bank. The new agreement provides for total borrowings of up to
$8 million subject to lending formulas based on eligible receivables,
inventories, certain long-term assets and other terms specified in the
agreement. This new credit facility consists of a line of credit with interest
charged at 2.25% above prime and four term loans with interest charged initially
at 2.75% above prime. The agreement contains certain restrictive covenants and
any outstanding borrowings are secured by substantially all of the Company's
assets. The Company expects to close and draw on the new loan by January 29,
1999.

The Company's management believes its cash flow from operations and borrowing
facilities will be sufficient to meet the Company's financing requirements for
the foreseeable future. The Company believes that success in its industries
requires substantial financial flexibility due to customer expectations and
rapidly changing technologies.

YEAR 2000

The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
equipment, software, devices and products with imbedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a shut down in the
Company's manufacturing operations, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.

STATE OF READINESS
The Company has undertaken various initiatives to evaluate the Year 2000
readiness of the products sold by the Company ("Products"), the information
technology systems used in the Company's operations ("IT Systems"), its non-IT
systems, such as power to its facilities, HVAC systems, building security,
voicemail and other systems, as well as the readiness of its customers and
suppliers. The Company has identified eleven Year 2000 target areas that cover
the entire scope of the Company's business and has internally established a
teams committed to completing an 8-step Compliance Validation Process ("CVP")
for each target area. The team is expected to fully complete this process on or
before September 1, 1999. The table below identifies the Company's target areas
as well as the 8-step CVP with its


                                       10

<PAGE>


expected timeline. Although some Phase 2 remediation activities have been
started or completed, most team activity is currently focused towards the
process of completing Phase 1.

<TABLE>
<CAPTION>
         YEAR 2000 TARGET AREAS                   COMPLIANCE VALIDATION PROCESS
         ----------------------                   -----------------------------
<S>                                    <C>                           <C>
                                                 PHASE 1
                                                 -------
1.  Business Computer Systems          1.  Team Formation            Expected Completion:
2.  Technical Infrastructure           2.  Inventory Assessment
3.  End-User Computing                 3.  Compliance Assessment     End of Q2 Fiscal 1999
4.  Manufacturing Equipment            4.  Risk Assessment
5.  Test Lab
6.  Telecommunications                           PHASE 2
7.  Research & Development                       -------
8.  Logistics                          5.  Resolution/Remediation    Expected Completion:
9.  Facilities                         6.  Validation
10. Customers                          7.  Contingency Plan          End of Q4 Fiscal 1999
11. Suppliers/Key Service Providers    8.  Sign-Off Acceptance
</TABLE>

With respect to the Company's relationships with third parties, the Company
relies both domestically and internationally upon various vendors, governmental
agencies, utility companies, telecommunications service companies, delivery
service companies and other service providers. Although these service providers
are outside of the Company's control, the Company is in the process of mailing
letters to those with whom its believes its relationships are material and is
verbally communicating with some of its strategic customers and vendors to
determine the extent to which interfaces with such entities are vulnerable to
Year 2000 issues and whether products and services purchased from or by such
entities are Year 2000 ready. The Company intends to complete follow-up
activities, including but not limited to site surveys, phone surveys and
mailings, with significant vendors and service providers as part of the Phase 2
validation.

COSTS TO ADDRESS YEAR 2000 ISSUES
To date, the Company has not incurred any material expenditures in connection
with identifying or evaluating Year 2000 compliance issues. The Company has
incurred the majority of its costs from the recent installation of an update to
its business computer system consisting primarily of Year 2000 software upgrades
as well as the opportunity cost of time spent by employees of the Company
evaluating Year 2000 compliance matters. Because the Company did not accelerate
the installation of the software upgrades, it does not consider the costs
related thereto to be charges for Year 2000 compliance. Presently, the Company
does not have specific estimates for the cost of other upgrades and enhancements
to its IT Systems but will provide such by the completion of Phase 1 when they
are expected to be available. The Company does anticipate that these estimates
will be reasonable and presently expects such to be within the Company's fiscal
1999 budget. At this time, the Company does not possess information necessary to
estimate the potential financial impact of Year 2000 compliance issues relating
to its non-IT Systems, Products, vendors, customers and other third parties.
Such impact, including the effect of a Year 2000 business disruption, could have
a material adverse impact on the Company's financial condition and results of
operations.

RISKS OF YEAR 2000 ISSUES
Because the Company is still in the discovery and evaluation phase of assessing
its overall Year 2000 exposure, it cannot at this time state with certainty that
the Year 2000 issues will not have a material adverse impact on its financial
condition, results of operations and liquidity. Although the Company considers
them unlikely, the Company believes that the following several situations, not
in any particular order, make up the Company's "most reasonably likely worst
case Year 2000 scenarios":

1. Disruption of a Significant Customer's Ability to Accept Products or Pay
   Invoices

The Company's significant customers are large, well-informed customers, mostly
in the surface mount technology and printing industries, who are disclosing
information to their vendors that indicates they are well along the path toward
Year 2000 compliance. These customers have demonstrated their awareness of the
Year 2000 issue by issuing requirements of their suppliers and indicating the
stages of identification and remediation which they consider


                                       11

<PAGE>


adequate for progressive calendar quarters leading up to the century mark. The
Company's significant customers, moreover, are substantial companies that the
Company believes would be able to make adjustments in their processes as
required to cause timely payment of invoices.

2.  Disruption of Supply Materials

The Company is in the process of surveying its vendors with regard to their Year
2000 readiness, and will assess and catalog the responses to the survey. The
Company is hopeful of receiving adequate responses from critical vendors and
many non-critical vendors within the first two quarters of fiscal 1999. The
Company expects to work with vendors that show a need for assistance or that
provide inadequate responses, and in many cases expects that survey results will
be refined significantly by such work. Where ultimate survey results show that
the need arises, the Company will arrange for back-up vendors before the
changeover date.

3.  Disruption of the Company's IT Systems

The Company has completed a scheduled upgrade of its current business software
systems to be Year 2000 compliant. Year 2000 testing of end-user computing
hardware and software will occur sometime during fiscal 1999. For this reason,
the Company considers that disruption of its IT Systems is unlikely.

4.  Disruption of the Company's Non-IT Systems

The Company is currently conducting a comprehensive assessment of all non-IT
systems, including among other things its manufacturing systems and operations,
with respect to both embedded processors and obvious computer control. For some
systems, upgrades are already scheduled and it is expected that the Phase 1
assessments will highlight by the end of the second quarter of fiscal 1999 any
further remediation needs. Considering the nature of the equipment and systems
involved, the Company expects that the timing of assessment to be such that it
will be able to complete any remediation efforts on a reasonably short schedule,
and in any case before arrival of the Year 2000. The Company also believes that,
after such assessment and remediation, if any disruptions do occur, such will be
dealt with promptly and will be no more severe with respect to correction or
impact than would be an unexpected breakdown of well-maintained equipment.

CONTINGENCY PLANS
While the Company recognizes the need for contingency planning, it has not yet
developed any specific contingency plans for potential Year 2000 disruptions.
The aforementioned 8-step Compliance Validation Process, however, does include
contingency planning by the team and such plans, as developed, will be carefully
reviewed by the Company. The Company does anticipate developing contingency
plans for its most critical areas, but details of such plans will depend on the
Company's final assessment of the problem as well as the evaluation and success
of its remediation efforts. Future disclosures will include contingency plans as
they become available.

CHANGES IN PERSONNEL
A vice president of the Company who was responsible for the Company's Year 2000
compliance efforts, among other matters, retired from the Company in the third
quarter of fiscal 1998. With respect to covering the Company's Year 2000 issues,
the Company has replaced this former employee with a senior-level manager who is
familiar with the technological issues and challenges involved with the Year
2000 and who has accepted both responsibility and authority for all aspects of
the Company's compliance. Regarding the Year 2000, the Company's new Operations
Manager, who serves as the Company's Year 2000 Compliance Manger, reports
directly to the Company's President and Chief Executive Officer and works
closely with legal and, where needed, technical advisors.

For further information regarding the current year items impacting cash flows,
see the Company's Consolidated Statements of Cash Flows.

INFLATION

In the past three years, inflation has not had a significant effect on
operations.


FORWARD-LOOKING STATEMENTS

The statements included herein that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. There are certain important
factors that could cause actual results to differ materially from those
anticipated by some of the statements made herein. Investors are cautioned that
all forward-looking statements involve risks and uncertainty. Some of the
factors


                                       12

<PAGE>


that could affect results are the effectiveness of new product introductions,
the product mix of our sales, the amount of sales generated or volatility in the
major markets, competition, currency fluctuations, availability of labor,
general economic conditions, market cycles, dependence on capital expenditures
of contract manufactures in SMT, product cancellations or rescheduling, loss of
a significant customer, interruptions in the Company's operations or those of
any of its suppliers or major customers as such may be caused by problems
arising from the Year 2000.

Item 7A.    Quantitative and Qualitative Disclosure About Market Risk

            The Company does not hold any derivative financial instruments,
            derivative commodity instruments or other financial instruments. The
            Company engages neither in speculative nor derivative trading
            activities. As of September 30, 1998, the Company had $4.1 million
            of debt outstanding with a variable interest rate (see Note 2 to the
            financial statements). A fluctuation in the underlying interest rate
            on this debt at its current balance would not have a material effect
            on the Company's financial condition or results of operations.

Item 8.     Financial Statements and Supplementary Data

            The Company's consolidated financial statements, together with the
            report of the Company's independent public accountants, Arthur
            Andersen LLP, are included in Item 14.

Item 9.     Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosures

            None.


                                       13

<PAGE>


                                    PART III


Items 10.,  Pursuant to General Instruction G (3), the information required by
11., 12.,   Item 10 - Directors and Executive Officers of the Company,
and 13.     Item 11 - Executive Compensation,
            Item 12 - Security Ownership of Certain Beneficial Owners and
            Management, and
            Item 13 - Certain Relationships and Related Transactions, except
            that portion of Item 10 relating to executive officers of the
            Company, which is set forth in Item 4A of this report, is hereby
            incorporated by reference from the Company's definitive Proxy
            Statement, to be filed with the Commission with respect to the
            Annual Meeting of Shareholders to be held on January 21, 1999.


                                       14

<PAGE>


                                     PART IV


Item 14.  Exhibits, Financial Statements, Schedules, and Reports on Form 8-K

                                                                          Page #
                                                                          ------
  (a) (1)   Financial Statements:

            The following consolidated financial statements of
            Research, Incorporated and the Report of the Independent
            Public Accountants thereon, are filed as part of this Form
            10-K.

            (i)   Report of Independent Public Accountants                  18

            (ii)  Consolidated Balance Sheets as of September 30, 1998
                  and 1997                                                  19

            (iii) Consolidated Statements of Operations and
                  Consolidated Statements of Stockholders' Equity for
                  the years ended September 30, 1998, 1997, and 1996      20, 21

            (iv)  Consolidated Statements of Cash Flows for the years
                  ended September 30, 1998, 1997, and 1996                  22

            (v)   Notes to Consolidated Financial Statements              23-28

      (2)   Financial Statement Schedule

            The following financial statement schedule is filed with
            this report:

            (i)   Schedule II -Valuation and qualifying accounts            29

            All schedules except those listed above are omitted because they are
            not applicable or not required, or because the required information
            is included in the financial statements or notes thereto.

      (3)   Exhibits

            (3.1)  Articles of Incorporation - Incorporated by
                   reference to Exhibit (3.1) of the Company's Form
                   10-K for the period ended September 30, 1994

            (3.2)  Bylaws - Incorporated by reference to Exhibit (3.2)
                   of the Company's Form 10-K for the period ended
                   September 30, 1994

            (4.1)  Line of Credit Agreement between Norwest Bank
                   Minnesota N.A. and the Company dated October 13,
                   1997. Incorporated by reference to exhibit (4.1) of
                   the Company's Form 10K for the period ended
                   September 30, 1997

            (4.2)  Revolving Note Agreement between Norwest Bank
                   Minnesota N.A. and the Company dated October 13,
                   1997. Incorporated by reference to exhibit (4.1) of
                   the Company's Form 10K for the period ended
                   September 30, 1997

            (4.3)  Waiver of Covenant and Credit Agreement from Norwest
                   Bank Minnesota N.A. dated December 17, 1998

            (4.4)  Loan and Security Agreement between Coast Business
                   Credit, a division of Southern Pacific Bank and the
                   Company dated December 17, 1998

            (10.1) 1991 Stock Plan - Incorporated by reference to
                   registration statement on Form Form S-8, file No.
                   33-75256 (filed February 14, 1994)


                                  15

<PAGE>


            (10.2) Form S-8 filed 11-5-97 - Employee Stock Purchase
                   Plan Incorporated by reference to Exhibit 4.1 of
                   registration statement, on Form S-8, file 333-39567

            (21.1) Subsidiaries of the Company

            (23.1) Consent of Arthur Andersen LLP

            (27.0) Financial Data Schedule

  (b)   Reports on Form 8-K:

        No reports on form 8-K were filed in the quarter ended September 30,
        1998.


                                  16

<PAGE>


                              SIGNATURES


Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                   RESEARCH, INCORPORATED



                                   By /s/ Claude C. Johnson
                                      ------------------------------------
                                   Claude C. Johnson, President and CEO


                                   By /s/ Richard L. Grose
                                      ------------------------------------
                                   Richard L. Grose, Treasurer




Date: December 18, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated:


Signature                     Title                            Date

/s/ Claude C. Johnson.        President, CEO and Director      December 18, 1998
----------------------
Claude C. Johnson *

/s/ Richard L. Grose.         Treasurer                        December 18, 1998
--------------------.
Richard L. Grose **

/s/ J. G. Colwell, Jr.        Director                         December 18, 1998
----------------------
John G. Colwell, Jr.

/s/ E.  L. Lundstrom          Director                         December 18, 1998
--------------------
Edward L. Lundstrom

/s/ G. E. Magnuson            Director                         December 18, 1998
------------------
Gerald E. Magnuson

/s/ C. G. Schiefelbein        Director                         December 18, 1998
----------------------
Charles G. Schiefelbein


 *  Principal executive officer
* * Principal financial officer


                                  17

<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To Research, Incorporated:

We have audited the accompanying consolidated balance sheets of Research,
Incorporated (a Minnesota corporation) and Subsidiary as of September 30, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1998. These consolidated financial statements and supplemental schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
supplemental schedule 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 financial position of Research, Incorporated and
Subsidiary as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed as a part of Item 14 in this
Form 10-K is presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.



                                       ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,
October 30, 1998


                                  18

<PAGE>


CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                         As of September 30
                                                                    -----------------------------
ASSETS                                                                   1998             1997
-----------------------------------------------------------------   ------------     ------------
<S>                                                                 <C>              <C>         
CURRENT ASSETS:
 Cash and cash equivalents                                          $    108,647     $  1,204,827
 Accounts receivable, net of reserves of $150,000                      2,897,503        3,979,299
 Income tax receivable                                                   493,241               --
 Inventories                                                           3,943,157        4,485,830
 Deferred income tax benefit                                             537,000          405,000
 Prepayments                                                             215,784          191,465
-----------------------------------------------------------------   ------------     ------------

     Total current assets                                              8,195,332       10,266,421
-----------------------------------------------------------------   ------------     ------------

PROPERTY AND EQUIPMENT, at cost:
 Land and land improvements                                              235,569          221,927
 Building                                                              2,298,694        2,182,492
 Machinery and equipment                                               4,339,268        4,534,825
 Less accumulated depreciation                                        (4,481,995)      (4,418,279)
-----------------------------------------------------------------   ------------     ------------

     Net property and equipment                                        2,391,536        2,520,965
-----------------------------------------------------------------   ------------     ------------

OTHER ASSETS
 Deferred income tax benefit                                             786,000               --
 Other assets                                                                 --           61,320
-----------------------------------------------------------------   ------------     ------------

     Total other assets                                                  786,000           61,320
-----------------------------------------------------------------   ------------     ------------

     Total assets                                                   $ 11,372,868     $ 12,848,706
=================================================================   ============     ============


LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------

CURRENT LIABILITIES:
 Notes payable                                                      $  4,100,000     $  2,231,998
 Accounts payable                                                      1,692,062        1,689,153
 Deferred revenues                                                       623,196               --
 Accrued liabilities:
  Salaries and benefits                                                  326,645          728,374
  Warranty reserve                                                       350,000          350,000
  Real estate taxes                                                      160,000          155,000
  Restructuring reserves                                                 602,723               --
  Income taxes                                                                --          873,739
  Other                                                                  299,748          303,971
-----------------------------------------------------------------   ------------     ------------

     Total current liabilities                                         8,154,374        6,332,235
-----------------------------------------------------------------   ------------     ------------

COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY:
 Common stock, $.50 par value, 5,000,000 shares authorized,
  1,266,337 and 1,211,468 shares issued and outstanding
  at September 30, 1998 and 1997, respectively                           633,168          605,734
 Additional paid-in capital                                              591,906          307,111
 Foreign currency translation                                             92,097           39,752
 Retained earnings                                                     1,901,323        5,563,874
-----------------------------------------------------------------   ------------     ------------

     Total stockholders' equity                                        3,218,494        6,516,471
-----------------------------------------------------------------   ------------     ------------

     Total liabilities and stockholders' equity                     $ 11,372,868     $ 12,848,706
=================================================================   ============     ============
</TABLE>

THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED BALANCE SHEETS.


                                  19

<PAGE>


CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

For the Years Ended September 30                   1998             1997             1996
-------------------------------------------    ------------     ------------     ------------
<S>                                            <C>              <C>              <C>         
Net Sales                                      $ 16,730,935     $ 22,843,081     $ 19,661,182
Cost of Sales                                    10,745,255       12,758,030       11,705,817
-------------------------------------------    ------------     ------------     ------------

  Gross profit                                    5,985,680       10,085,051        7,955,365
-------------------------------------------    ------------     ------------     ------------

Expenses:
  Selling                                         5,490,800        6,013,914        5,431,240
  Research and development                        2,967,803        2,580,770        1,735,204
  General and administrative                        837,670          939,174          700,460
  Restructuring (Note 3)                          1,676,000               --               --
-------------------------------------------    ------------     ------------     ------------

     Total expenses                              10,972,273        9,533,858        7,866,904
-------------------------------------------    ------------     ------------     ------------

Income (Loss) From Operations                    (4,986,593)         551,193           88,461
Interest Income                                          --           47,890           24,969
Interest Expense                                   (344,871)         (51,412)              --
Gain on Sale of Land (Note 3)                            --        1,147,094               --
Gain on Sale of Product Line (Note 3)                    --               --          344,400
-------------------------------------------    ------------     ------------     ------------

Income (Loss) Before Income Taxes                (5,331,464)       1,694,765          457,830
Income Tax Provision (Benefit)                   (1,813,000)         578,000          168,000
-------------------------------------------    ------------     ------------     ------------

Net Income (Loss)                              $ (3,518,464)    $  1,116,765     $    289,830
-------------------------------------------    ------------     ------------     ------------

Net Income (Loss) Per Common Share:
     Basic                                     $      (2.82)    $       0.80     $       0.20
     Diluted                                          (2.82)            0.79             0.19

Weighted Average Common Shares Outstanding:
     Basic                                        1,246,530        1,391,145        1,444,000
     Diluted                                      1,246,530        1,418,376        1,492,236
</TABLE>

THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED STATEMENTS.


                                  20

<PAGE>


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                            Common Stock          Additional    Foreign
                                            ------------           Paid-In      Currency      Retained
                                       Shares         Amount       Capital     Translation    Earnings         Total
------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>          <C>            <C>           <C>           <C>            <C>        
Balance, September 30, 1995          1,424,523    $   712,262    $    54,862   $     8,953   $ 6,418,712    $ 7,194,789
    Stock options exercised             27,031    $    13,515    $    75,453            --            --         88,968
    Foreign currency translation            --             --             --         8,863            --          8,863
    Net income                              --             --             --            --       289,830        289,830
    Dividends                               --             --             --            --      (306,996)      (306,996)
------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996          1,451,554        725,777        130,315        17,816     6,401,546      7,275,454
    Stock options exercised             56,813         28,407        147,106            --            --        175,513
    Foreign currency translation            --             --             --        21,936            --         21,936
    Stock repurchase                  (296,899)      (148,450)        29,690            --    (1,413,238)    (1,531,998)
    Net income                              --             --             --            --     1,116,765      1,116,765
    Dividends                               --             --             --            --      (541,199)      (541,199)
------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997          1,211,468        605,734        307,111        39,752     5,563,874      6,516,471
    Stock options exercised             32,030         16,014        210,385            --            --        226,399
    Employee stock purchase plan        22,839         11,420         74,410            --            --         85,830
    Foreign currency translation            --             --             --        52,345            --         52,345
    Net loss                                --             --             --            --    (3,518,464)    (3,518,464)
    Dividends                               --             --             --            --      (144,087)      (144,087)
------------------------------------------------------------------------------------------------------------------------
 Balance, September 30 1998          1,266,337    $   633,168    $   591,906   $    92,097   $ 1,901,323    $ 3,218,494
========================================================================================================================
</TABLE>

THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.


                                  21

<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

For the Years Ended September 30                                            1998            1997           1996
----------------------------------------------------------------------   -----------    -----------    -----------
<S>                                                                      <C>            <C>            <C>        
 Operating Activities:
  Net income (loss)                                                      $(3,518,464)   $ 1,116,765    $   289,830
  Adjustments to reconcile net income (loss) to
    net cash provided by (used in) operating activities:
      Depreciation and amortization                                          675,709        529,876        463,429
      Deferred income taxes                                                 (918,000)       (26,000)        (2,000)
      Gain on sale of land                                                        --     (1,147,094)            --
      Gain on sale of product line                                                --             --       (344,400)
      Changes in current operating elements:
        Accounts receivable, net                                           1,081,796     (1,612,485)     1,781,093
        Inventories                                                          542,673     (1,111,342)      (852,042)
        Prepayments                                                          (24,319)       (28,155)       (66,201)
        Accounts payable and accrued liabilities                            (398,043)       353,554       (736,333)
        Deferred revenues                                                    623,196             --             --
        Restructuring reserves                                               602,723             --             --
        Income taxes payable (receivable)                                 (1,366,980)       330,272       (142,588)
----------------------------------------------------------------------   -----------    -----------    -----------

    Net cash provided by (used in) operating activities                   (2,699,709)    (1,594,609)       390,788
----------------------------------------------------------------------   -----------    -----------    -----------

 Investing Activities:
  Proceeds from sale of land                                                      --      1,529,543             --
  Proceeds from sale of product line                                              --             --      1,000,000
  Property and equipment purchases                                          (489,303)      (921,032)      (650,352)
  Other                                                                        4,343         (6,472)         2,312
----------------------------------------------------------------------   -----------    -----------    -----------

    Net cash provided by (used in) investing activities                     (484,960)       602,039        351,960
----------------------------------------------------------------------   -----------    -----------    -----------

Financing Activities:
  Borrowings under line of credit                                          5,534,002      1,665,998             --
  Payments on line of credit                                              (3,666,000)      (200,000)            --
  Issuance of common stock                                                   312,229        175,513         88,968
  Repurchase of common stock                                                      --       (765,998)            --
  Cash dividends paid                                                       (144,087)      (541,199)      (306,996)
----------------------------------------------------------------------   -----------    -----------    -----------

    Net cash provided by (used in) financing activities                    2,036,144        334,314       (218,028)
----------------------------------------------------------------------   -----------    -----------    -----------

Foreign Currency Translation                                                  52,345         21,936          8,863
----------------------------------------------------------------------   -----------    -----------    -----------

Cash and Cash Equivalents:
  Net increase (decrease) in cash and cash equivalents                    (1,096,180)      (636,320)       533,583
  Beginning of year                                                        1,204,827      1,841,147      1,307,564
----------------------------------------------------------------------   -----------    -----------    -----------

  End of year                                                            $   108,647    $ 1,204,827    $ 1,841,147
======================================================================   ===========    ===========    ===========

Supplemental Cash Flow Information:
 Non-cash financing activity:
  Repurchase of common stock through
   issuance of note payable                                              $        --    $   766,000    $        --
 Cash paid for:
  Interest                                                               $   287,598    $    29,636    $        --
  Income taxes                                                           $    31,000    $   161,000    $   356,000
======================================================================   ===========    ===========    ===========
</TABLE>

THE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED STATEMENTS.


                                  22

<PAGE>


              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
Research, Incorporated and its wholly owned subsidiary, Research Incorporation
Limited (collectively, the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.

FOREIGN CURRENCY TRANSLATION - The assets and liabilities of the Company's
Subsidiary are translated into U.S. dollars using current exchange rates at the
end of the period. Statements of operations items are translated at average
exchange rates prevailing during the period.

CASH & CASH EQUIVALENTS - Cash equivalents represent money market investments
that have an original maturity of three months or less. Cash and cash
equivalents are recorded at cost, which approximates fair value.

ACCOUNTS RECEIVABLE - Accounts receivable consisted of the following at
September 30:

                                            1998             1997
--------------------------------------------------------------------
Trade receivables, net                $2,646,772       $3,739,741
Costs in excess of billing
   on percentage-of-completion
   contracts                             250,731          239,558
--------------------------------------------------------------------
Total                                 $2,897,503       $3,979,299
====================================================================

INVENTORIES - Inventories are stated at the lower of first-in, first-out, cost
or market and include direct labor costs, materials and overhead. Inventories
consisted of the following at September 30:

                                            1998             1997
--------------------------------------------------------------------
Manufactured subassemblies
   and purchased parts                $2,228,521       $3,070,262
Work in process                        1,714,636        1,415,568
--------------------------------------------------------------------
Total                                 $3,943,157       $4,485,830
====================================================================

DEPRECIATION - Depreciation of property and equipment is computed principally
using accelerated methods for both financial and income tax reporting purposes.
Depreciation is charged to operations over the estimated useful lives of the
property and equipment as follows:

                                                            Years
--------------------------------------------------------------------
Land improvements                                              20
Building                                                       33
Machinery and equipment                                   3 to 10
====================================================================

REVENUE RECOGNITION - Sales and related cost of sales are recorded at the time
of shipment, except for system contracts, which are recognized on a
percentage-of-completion basis. Revenues on such contracts are recognized as the
work progresses, based on the estimated gross profit for each contract.
When a loss is anticipated on a contract, the full amount of the loss is
provided currently.

SIGNIFICANT CUSTOMERS - During fiscal 1998 the Company had two customers that
accounted for 13% and 10% of net sales. In fiscal 1997 the Company had two
customers that accounted for 19% and 12% of net sales, while in fiscal 1996 one
customer accounted for 11% of net sales.

During fiscal 1998 the Company has two customers that represented 12% and 11% of
net accounts receivable. In fiscal 1997 the Company had two customers that
represented 20% and 10% of net accounts receivables, while in fiscal 1996 one
customer represented 10% of net accounts receivables.


                                  23

<PAGE>


WARRANTIES - The Surface Mount Technology (SMT) products are under warranty
against defects in material and workmanship for a two-year period with an
extended warranty on three components. The Company's other products are
generally under warranty for a one-year period. Estimated warranty costs are
accrued in the same period as products are shipped. An analysis of reserves for
product warranties is performed on a quarterly basis by reviewing the status of
new product introductions, trends of warranty expense by product, and internal
management information to identify known or potential defects and the estimated
warranty exposure.

INCOME TAXES - Deferred income tax assets or liabilities are recognized for the
differences between financial and income tax reporting basis of assets and
liabilities based on enacted tax rates and laws.

USE OF ESTIMATES - The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Ultimate results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENTS - SFAS No. 130, "Reporting Comprehensive Income,"
issued in June 1997 and effective for fiscal years beginning after December 15,
1997, requires the Company to report and display comprehensive income and its
components. Comprehensive income is defined as changes in equity of a business
enterprise during a period except those resulting from investments by owners and
distributions to owners. The Company will adopt SFAS No. 130 in the first
quarter of fiscal 1999.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information, "will be effective for fiscal years beginning after December 15,
1997. SFAS No. 131 requires disclosure of business and geographic segments in
the consolidated financial statements of the Company. The Company will adopt
SFAS No. 131 in fiscal 1999 and is currently analyzing the impact it will have
on the disclosures in its financial statements.


2. DEBT OBLIGATIONS:

LINE OF CREDIT - During fiscal 1998, the Company had a $5,000,000 secured bank
line of credit which carried an interest rate equal to the bank's prime rate
(8.25%) at September 30, 1998. The line is secured by substantially all of the
Company's assets. At September 30, 1998, and 1997 the Company had borrowings
outstanding of $4,100,000 and $1,466,000 respectively. The Company was not in
compliance with certain net worth, debt to equity and net income covenants at
September 30, 1998 and has received a waiver of those covenants from its lender.

NOTE PAYABLE - At September 30, 1997, the Company had a $766,000 note payable
with interest at a rate of 8.5%. The note was paid in January 1998.

NEW CREDIT FACILITY APPROVED SUBSEQUENT TO SEPTEMBER 30, 1998 - On December 17,
1998, the Company signed a new three-year loan and security agreement with a
bank. The new agreement provides for total borrowings of up to $8 million
subject to lending formulas based on eligible receivables, inventories, certain
long-term assets and other terms specified in the agreement. This new credit
facility consists of a line of credit with interest charged at 2.25% above prime
and four term loans with interest charged initially at 2.75% above prime. The
agreement contains certain restrictive covenants and any outstanding borrowings
are secured by substantially all of the Company's assets. The Company expects to
close and draw on the new loan by January 29, 1999.


3. NONRECURRING GAINS AND LOSSES:

SALE OF LAND - During fiscal 1997, the Company sold a parcel of undeveloped land
for $1,530,000. The net gain recognized on the sale was $1,147,000 and is shown
as Gain on Sale of Land in the accompanying Consolidated Statements of
Operations.

SALE OF PRODUCT LINE - During fiscal 1996, the Company sold its Dimension
product line, including associated equipment, for a total sales price of
$1,000,000. The net gain recognized on the sale was approximately $344,000 and
is shown as Gain on Sale of Product Line in the accompanying Consolidated
Statements of Operations. An agreement was also signed with the buyer allowing
the Company to purchase the Dimension product on a discounted basis for a
minimum of three years.


                                  24

<PAGE>


RESTRUCTURING - During fiscal 1998 the Company announced the realignment of its
business due to industry conditions in capital equipment markets and continued
pressure on the electronics industry as the ongoing Asian economic turmoil
affected capital equipment expenditures of manufacturers around the world.

In February the Company consolidated the resources of its Control Systems
business into the Thermal Solutions Division. The Control Systems, which dealt
primarily with Asian glass manufacturers, contributed less than 5 percent of
sales in fiscal 1997. In July, the Company announced additional workforce
reductions, mainly in manufacturing and support areas, and these were
accomplished primarily through a voluntary layoff. The total workforce
reductions were 25%. Costs associated with the restructuring are reflected in
the statement of operations and total $1,676,000, primarily for severance costs.
Additionally, the Company has written down inventory by $697,000 to reflect
exiting certain lines of product and excess inventory. This inventory change has
been included in cost of goods sold.


4. STOCKHOLDERS' EQUITY:

EARNINGS PER SHARE DATA - In the fiscal year ended September 30, 1998, the
Company adopted SFAS No. 128 "Earnings per Share, " which requires disclosure of
basic earnings per share ("EPS") and diluted EPS, which replaces the former
primary EPS and fully diluted EPS. Basic EPS is computed by dividing net income
by the weighted average number of shares of common stock outstanding during the
year. Diluted EPS is computed similarly to EPS as previously reported except
that, when applying the treasury stock method to common equivalent shares, the
Company must use its average share price for the period rather than the more
dilutive "greater of the average share price or end-of-period share price."

As a result of the adoption of SFAS No. 128, the Company's reported earnings per
share for all prior periods were restated. The effect of this accounting change
on reported EPS data is as follows:

<TABLE>
<CAPTION>
Years Ended September 30,                                                 1998                1997               1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                 <C>                 <C>   
Primary EPS as reported                                                $ (2.82)            $   .79             $  .19
Effect of SFAS No. 128                                                     .00                 .01                .01 
                                                                      ------------------------------------------------
Basic EPS as restated                                                  $ (2.82)            $   .80             $  .20 
                                                                      ================================================
Fully diluted EPS as reported                                          $ (2.82)            $   .77             $  .19
Effect of SFAS No. 128                                                     .00                 .02                .00 
                                                                      ------------------------------------------------
Diluted EPS as restated                                                $ (2.82)            $   .79             $  .19 
                                                                      ================================================
</TABLE>

A reconciliation of EPS calculations under SFAS No. 128 is as follows:

<TABLE>
<CAPTION>
Years Ended September 30, (In thousands, except per share amounts)        1998                1997               1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                  <C>                 <C>   
Net income (loss)                                                     $ (3,518)            $ 1,117             $  290
                                                                      ================================================
Weighted average common shares outstanding - Basic                       1,247               1,391              1,444
Effect of dilutive securities:
        Stock option plans                                                   0                  27                 48
                                                                      ------------------------------------------------
Weighted average common shares outstanding - Diluted                     1,247               1,418              1,492
                                                                      ================================================
Net income (loss) per share - Basic                                   $  (2.82)            $   .80             $  .20
                                                                      ================================================
Net income (loss) per share - Diluted                                 $  (2.82)            $   .79             $  .19
                                                                      ================================================
</TABLE>

STOCK SPLIT - On November 5, 1997, the Company's Board of Directors approved a
five-for-four stock split effected in the form of a stock dividend. The stock
split has been retroactively reflected in the accompanying consolidated
financial statements and related notes. All share and per share data have been
restated to reflect the stock split.

STOCK REPURCHASE - On May 28, 1997, the Company repurchased 237,519 shares of
common stock at a price of $6.45 per share from a major stockholder through the
issuance of a note payable to the stockholder and borrowing under the Company's
line-of-credit facility.

STOCK-BASED COMPENSATION - The Company has a stock option plan (the Plan). A
total of 210,000 shares or common stock have been reserved for issuance to
directors, officers, and key employees. Stock options have been granted at their
fair market value as determined by the Board of Directors at the date of grant.
The stock options


                                  25

<PAGE>


expire after five years from the date of grant and are exercisable at a rate of
25% per year on a cumulative basis, beginning one year after the date of grant.

Information regarding stock options is shown below for the year ended September
30:

<TABLE>
<CAPTION>
                                                    1998                               1997                             1996
                                              AVERAGE WEIGHTED                   AVERAGE WEIGHTED                 AVERAGE WEIGHTED
STOCK OPTIONS                     SHARES       EXERCISE PRICE       SHARES        EXERCISE PRICE       SHARES      EXERCISE PRICE
------------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>               <C>             <C>               <C>               <C>             <C>   
Outstanding, beginning           154,063           $4.74           140,938           $ 4.14            140,625         $ 3.50
    Granted                       37,000            6.63            73,750             4.58             35,625           6.11
    Exercised                    (32,030)           4.20           (56,813)            3.09            (27,031)          3.35
    Expired                           --              --            (2,875)            3.97                 --             --
    Canceled                      (7,501)           4.78              (938)            4.93             (8,281)          4.67       
------------------------------------------------------------------------------------------------------------------------------------
Outstanding, end                 151,532           $5.35           154,063           $ 4.74            140,938         $ 4.14       
------------------------------------------------------------------------------------------------------------------------------------
Exercisable, end                  49,354           $5.02            43,125           $ 4.39             76,250         $ 3.29       
------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value
    of options granted                             $2.11                             $  .74                            $ 1.40       
====================================================================================================================================
</TABLE>

The Company accounts for the options under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for the options
been determined consistent with Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and net income per common share would have been the following pro forma
amounts for the year ended September 30:

<TABLE>
<CAPTION>
                                                         1998              1997             1996
--------------------------------------------------------------------------------------------------
<S>                                               <C>                <C>                <C>     
Net income (loss):
    As reported                                   $(3,518,464)       $1,116,765         $289,830
    Pro forma                                     $(3,550,431)       $1,096,824         $279,852
Net income (loss) per common share-diluted:
    As reported                                        $(2.82)             $.79             $.19
    Pro forma                                          $(2.85)             $.77             $.19
==================================================================================================
</TABLE>

The fair market value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model. The following weighted average
assumptions were used for grants in fiscal 1998, 1997 and 1996:

<TABLE>
<CAPTION>

Assumptions as of the grant date                         1998              1997             1996
--------------------------------------------------------------------------------------------------
<S>                                                     <C>               <C>              <C>  
Risk-free interest rate                                 5.41%             5.89%            5.51%
Expected lives                                          5.00              5.00             5.00
Expected volatility                                       47%               38%              43%
==================================================================================================
</TABLE>

Options outstanding at September 30, 1998, have an exercise price ranging
between $4.00 and $6.625.

EMPLOYEE STOCK PURCHASE PLAN
During fiscal 1997, the Shareholders approved an Employee Stock Purchase Plan.
Under the terms of the plan, employees may purchase stock at 85% of Market Price
at the beginning or end of a six month phase; whichever price is lower. There
were 100,000 shares authorized for this plan. As of September 30, 1998, 22,975
shares have been issued.


5. INCOME TAXES:

The income tax provision (benefit) consists of the following:

<TABLE>
<CAPTION>
                                                         1998              1997             1996
--------------------------------------------------------------------------------------------------
<S>                                               <C>                  <C>              <C>     
Current federal                                     $(749,000)         $599,000         $201,000
Current state                                           2,000             2,000            2,000
Foreign                                                    --             3,000          (33,000)
--------------------------------------------------------------------------------------------------
                                                     (747,000)          604,000          170,000
Deferred income taxes                              (1,066,000)          (26,000)          (2,000)
--------------------------------------------------------------------------------------------------
Income tax provision (benefit)                    $(1,813,000)         $578,000         $168,000
==================================================================================================
</TABLE>


                                  26

<PAGE>


A reconciliation of the statutory federal rate to the effective tax rate is as
follows:

                                      1998              1997              1996
--------------------------------------------------------------------------------

Statutory federal rate                (34%)              34%               34%
State taxes, net of federal
  income tax provision                  -                 -                 -
Other, net                              -                 -                 3
--------------------------------------------------------------------------------
Effective tax rate                    (34%)              34%               37%
================================================================================

The Company has recorded the following net deferred taxes:

As of September 30                                      1998              1997
--------------------------------------------------------------------------------
Reserves and other accruals                         $241,000          $376,000
Net operating loss carryforward                      194,000                --
Restructuring reserves                               102,000                --
--------------------------------------------------------------------------------
      Total current deferred taxes                   537,000           376,000
--------------------------------------------------------------------------------
Net operating loss carryforward                      466,000                --
Depreciation and amortization                       (146,000)         (148,000)
Restructuring reserve                                306,000                --
Reserves and other accruals                          160,000            29,000
--------------------------------------------------------------------------------
      Total noncurrent deferred taxes                786,000          (119,000)
--------------------------------------------------------------------------------
Net deferred taxes                                $1,323,000          $257,000
================================================================================

The Company has a net operating loss carryforward of $1,932,000 as of September
30, 1998.


6. RETIREMENT BENEFITS:

The Company has a profit sharing retirement plan that provides deferred
compensation benefits for eligible employees. The annual contribution to the
plan is discretionary and is determined in accordance with policies established
by the Board of Directors. The Board of Directors authorized contributions of
$186,000, $232,000, and $160,000 for fiscal 1998, 1997 and 1996, respectively.
Contributions for fiscal 1998 and 1996 included 401(k), while 1997 included both
401(k) and discretionary profit sharing.


7. FOREIGN SALES:

Export sales to customers in various foreign countries totaled $4,811,000,
$11,174,000 and $6,976,000 in fiscal 1998, 1997 and 1996, respectively. Sales to
customers in Asia totaled $1,789,000, $3,709,000 and $4,542,000 in fiscal 1998,
1997 and 1996, respectively. Sales to customers in Latin America totaled
$1,030,000, $3,990,000 and $613,000 in fiscal 1998, 1997, and 1996,
respectively. Sales to European customer were $1,696,000, $2,445,000 and
$1,042,000 in fiscal 1998, 1997 and 1996, respectively

                                           1998           1997            1996
--------------------------------------------------------------------------------
        Asia                            $ 1,789        $ 3,709         $ 4,542
        Latin America                     1,030          3,990             613
        Europe                            1,696          2,445           1,042
        Other                               296          1,030             779
--------------------------------------------------------------------------------
        Total                           $ 4,811       $ 11,174         $ 6,976
================================================================================


                                  27

<PAGE>


8 UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA):


<TABLE>
<CAPTION>
                                    1st           2nd           3rd           4th           1998
1998 Quarterly Results            Quarter       Quarter       Quarter       Quarter         Total
-------------------------------  ----------    ----------    ----------    ----------    ----------
<S>                              <C>           <C>           <C>           <C>           <C>       
Consolidated Operations:
  Net sales                      $    4,868    $    3,215    $    4,308    $    4,340    $   16,731
  Gross profit                        2,315         1,000         1,076         1,595         5,986
  Loss before income taxes             (265)       (2,211)       (2,370)         (485)       (5,331)
  Net loss                       $     (180)   $   (1,548)   $   (1,599)   $     (191)   $   (3,518)
  Earnings per Share:
    Basic                        $     (.15)   $    (1.24)   $    (1.28)   $     (.15)   $    (2.82)
    Diluted                            (.15)        (1.24)        (1.28)         (.15)        (2.82)

===================================================================================================

<CAPTION>
                                    1st           2nd           3rd           4th           1997
1997 Quarterly Results            Quarter       Quarter       Quarter       Quarter         Total
-------------------------------  ----------    ----------    ----------    ----------    ----------

Consolidated Operations:
  Net sales                      $    4,873    $    5,816    $    5,622    $    6,532    $   22,843
  Gross profit                        2,063         2,680         2,475         2,867        10,085
  Gain from sale of land              1,147            --            --            --         1,147
  Income before income taxes          1,102           249           114           230         1,695
  Net Income                     $      686    $      153    $       69    $      209    $    1,117
  Earnings per Share:
    Basic                        $      .47    $      .10    $      .05    $      .17    $      .80
    Diluted                             .47           .10           .05           .16           .79

===================================================================================================
</TABLE>


                                  28

<PAGE>


                        RESEARCH, INCORPORATED
                              SCHEDULE II
                   VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                            Balance,                                                    Balance,
                                           Beginning                                                    End of
                                           of Period          Additions         Deductions              Period
                                          -----------        -----------        -----------             -------
<S>                                       <C>                <C>                <C>                     <C>    
Allowance for doubtful accounts (1):

     Year ended September 30, 1996        $   150,000        $     5,480        $    (5,480)            150,000

     Year ended September 30, 1997            150,000             12,563            (12,563)            150,000

     Year ended September 30, 1998            150,000             13,116            (13,116)            150,000



Restructuring reserve (2):

     Year ended September 30, 1996        $        --        $        --        $        --         $        --

     Year ended September 30, 1997                 --                 --                 --                  --

     Year ended September 30, 1998                 --          1,676,000         (1,073,277)            602,723

</TABLE>


(1)   Doubtful account deductions represent amounts determined to be
      uncollectible and charged against the reserve net of collections on
      accounts previously written off.

(2)   Restructuring reserve deduction represent amounts actually paid for
      restructuring costs.


                                  29