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, 1997 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 $ 6.8 million based upon the closing sale price of the Company's
common stock as of December 5, 1997.

As of December 9, 1997; 986,674 common shares were outstanding.

Documents incorporated by reference:

1)       Portions of the Proxy Statement dated December 11, 1997, for the Annual
         Meeting of Shareholders to be held on January 15, 1998, 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, curing/finishing and
          glass melting.

          During the past year 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 four
          operating divisions: Drying, Thermal Solutions, Control Systems and
          Research International. 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 Humberside, England.

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

          Also refer to Note 4 and Note 7 of Item 14, Notes to Consolidated
          Financial Statements, included elsewhere in this report.

          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 2465 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 two product classes; process
              control systems and heating devices.

                    RESEARCH INTERNATIONAL DIVISION The electronics
                    manufacturing market segments addressed by the Research
                    International Division are characterized by exponential
                    growth 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.

<PAGE>


                    Research International plans to gain market share through
                    technology leadership, market driven to address customers
                    future needs and leadership in customer service and
                    satisfaction.

                    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.

                    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.

                    One of the fastest growing markets for the division's
                    products is Asia. Despite the recent fluctuations in Asian
                    financial markets, the consumer movement in the region is
                    flourishing, 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 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.
                    Over the last 12 months, several manufacturers introduced
                    new, moderately priced ink-jet printers to meet the
                    requirements of smaller 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. Research, Inc.'s new Speed-Dri,
                    which was introduced in April of this year, was designed to
                    serve smaller printers in the short-run, on-demand print
                    marketplace.

<PAGE>


                    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.

                    SYSTEMS DIVISION
                    The Systems Division has established itself worldwide as a
                    premier systems integrator and designer of control systems
                    for glass manufacturing. In this specialized market, which
                    has migrated primarily to the Pacific Rim in recent year,
                    manufacturers of glass containers, fiberglass and glass for
                    construction tend to use outside systems integrators to
                    design and periodically upgrade their melting processes.

                    The Systems Division has two market-driven strategic
                    thrusts. First, the division is building its business as a
                    systems integrator, specifying whatever hardware and
                    software components are best suited to the requirements of
                    the unit. Second, the division is expanding the market
                    penetration of its GlassMaster(TM) Control Systems for
                    combined system control of glass manufacturing, along with
                    its GlassMaster for Windows(R) software introduced last
                    year. With positive customer acceptance at installations in
                    1997, the division is now applying this product formula to
                    power control systems within the glass market. The Systems
                    Division is also working on a small-systems growth plan with
                    TSD to develop complete solutions using the Company's core
                    heat-control technology to address growth opportunities. One
                    such total solution product currently under development
                    incorporates heater, framework, control, and cooler in a
                    single package.

                    The Systems Division controls a 5 to 10 percent share of its
                    market segment, including relationships with a number of
                    premier glass manufacturers.

             (ii)   Product Investment - The Company increased expenditures for
                    research and development to 11 percent of sales, which is
                    significantly higher than the average for its industries.
                    Included in this expenditure was funding for the development
                    of a first-to-market product solution to be introduced in
                    fiscal 1998 intended to position the Company in the
                    forefront of the industry.

             (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 not deemed material to the business of
                    the Company in the aggregate.

             (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
                    short demand requirements.

             (vii)  Customers - The Company has one customer that accounted for
                    19% of net sales and 20% of accounts receivable in 1997. The
                    Company has another customer that accounted for 12% and 11%
                    of net sales during 1997 and 1996, respectively, and 10% of
                    accounts receivable as of September 30, 1997 and 1996.

             (viii) Backlog - The dollar amount of the Company's backlog of
                    orders from operations believed to be firm at September 30,
                    1997, was $2,730,000; at September 30, 1996, it was
                    $2,356,000. It is anticipated that

<PAGE>


                    $2,330,000 of the September 30, 1997 backlog 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,
                    plastics and glass manufacturing industries.

             (xi)   Research and Development - The Company incurred expenses of
                    approximately $2,581,000, $1,735,000 and $1,682,000 in
                    fiscal years 1997, 1996, and 1995, 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, 1997, the Company had 180
                    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 6, "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 5,000 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 1997.

<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:

          NAME             AGE      POSITION                       OFFICER SINCE
          ----             ----     --------                       -------------
          B.E. Bailey       49      Vice President                      1992

          D.G. Brady        55      Vice President                      1990

          R.L. Grose        47      Treasurer                           1997

          C.C. Johnson      53      President, CEO and Director         1984

          G.E. Magnuson     67      Secretary and Director;             1975
                                    Of Counsel, Lindquist & Vennum
                                    P.L.L.P.

          K.M. O'Rourke     40      Vice President                      1993

          G.W. Sangster     68      Vice President                      1976


          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, Sangster and Ms. O'Rourke have each
          been employed by the Company for more than five years. Mr. Johnson
          became President and Chief Executive Officer in July of 1992; Mr.
          Magnuson was a partner with Lindquist & Vennum P.L.L.P until January
          1995, at which time he became Of Counsel for Lindquist & Vennum
          P.L.L.P. Mr. Magnuson has been a director and secretary of the Company
          for more than five years. Mr. Brady became Vice President in November
          1990; Mr. Bailey became Vice President in November 1991;. 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. He was hired in November 1992.

<PAGE>


                                     PART II

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

     (a) & (c)  Market Information  and Dividends

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

          Stock is traded on the over-the-counter market, NASDAQ symbol (RESR)

<TABLE>
<CAPTION>
                                                                   Bid Price Range
                                                                   ---------------
                                   Dividends Paid            1997                   1996
                                   --------------            ----                   ----

         During Quarter Ended      1997       1996      High        Low        High        Low
         --------------------------------------------------------------------------------------
<S>                                <C>       <C>        <C>        <C>         <C>        <C>
         December 31               $.07      $.055      6-3/4      4-3/4       9-1/2      7-1/2
         March 31                   .07       .070      9-1/2      4-7/8       8          6-1/2
         June 30                   .27*       .070      9-3/4      5-1/2       8          6-1/2
         September 30               .07       .070      10         6-1/2       8-1/4      6
         --------------------------------------------------------------------------------------
         TOTAL                     $.48      $.265
         =========================================
</TABLE>
          * INCLUDES A ONE-TIME SPECIAL DIVIDEND OF $.20 FROM THE SALE OF THE
            DIMENSION PRODUCT LINE AND SALE OF LAND.

     (b)  Holders

          The number of holders of record of the Company's common stock as of
          December 2, 1997, was 600. The Company estimates that an additional
          330 shareholders own stock held for their accounts at brokerage firms
          and financial institutions.

<PAGE>


Item 6.   Selected Financial Data

CONSOLIDATED FINANCIAL SUMMARY

<TABLE>
<CAPTION>

(In thousands, except per share data)
For the Years ended September 30                        1997          1996         1995         1994         1993
------------------------------------------------   ---------     ---------    ---------    ---------    ---------
<S>                                                <C>           <C>          <C>          <C>          <C>      
Consolidated Operations:
  Net sales                                        $  22,843     $  19,661    $  20,923    $  18,163    $  15,613
  Gross profit                                        10,085         7,955        9,019        7,947        6,989
    Percent of sales                                    44.1%         40.5%        43.1%        43.8%        44.8%
  Income from operations                                 551            89          903          661          533
  Gain on sale of land                                 1,147          --           --           --           --
  Gain on sale of product line                          --             344         --           --           --
  Interest income (expense)                               (3)           25           49           64           87
  Income before income taxes                           1,695           458          952          725          620
    Percent of sales                                     7.4%          2.3%         4.6%         4.0%         4.0%
  Income tax provision                                   578           168          325          228          217
  Net income                                       $   1,117     $     290    $     627    $     497    $     403
    Percent of sales                                     4.9%          1.5%         3.0%         2.7%         2.6%
------------------------------------------------   ---------     ---------    ---------    ---------    ---------
    Total Earnings per Share                       $     .98     $     .24    $     .56    $     .44    $     .36
------------------------------------------------   =========     =========    =========    =========    =========
Cash Dividends Paid per Share                      $     .48     $    .265    $     .22    $     .22    $     .22
Return on Beginning
  Stockholders' Equity                                  15.3%          4.0%         9.3%         7.7%         6.4%
------------------------------------------------   ---------     ---------    ---------    ---------    ---------
Weighted Average Number of
  Shares Outstanding (in thousands)                    1,135         1,194        1,129        1,125        1,125
------------------------------------------------   ---------     ---------    ---------    ---------    ---------


As of September 30                                      1997          1996         1995         1994         1993
------------------------------------------------   ---------     ---------    ---------    ---------    ---------
Consolidated Financial Condition:
  Net working capital                              $   3,934     $   5,091    $   5,195    $   4,952    $   4,902
  Current ratio                                     1.6 to 1      2.7 to 1     2.5 to 1     2.5 to 1     2.9 to 1
Property and Equipment, net                        $   2,521     $   2,100    $   1,876    $   1,695    $   1,570
------------------------------------------------   ---------     ---------    ---------    ---------    ---------
Total Assets                                       $  12,849     $  10,338    $  10,593    $  10,080    $   9,132
Total Stockholders' Equity                             6,516         7,275        7,195        6,762        6,498
------------------------------------------------   ---------     ---------    ---------    ---------    ---------
Number of Shares Outstanding                             969         1,161        1,140        1,125        1,125
Book Value per Share                               $    6.72     $    6.27    $    6.31    $    6.01    $    5.78
------------------------------------------------   ---------     ---------    ---------    ---------    ---------

</TABLE>

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

<PAGE>


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

OVERVIEW
In 1996, 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 four key markets in which it has the potential to be a
dominant player: surface mount technology (SMT), graphic arts, glass, 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, particularly Asia, where it
would make additional investments to capitalize on the enormous 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. In the
graphic arts market, the Company plans to increase its in-house sales staff and
reduce its reliance on independent sales representatives who work with a variety
of products and industries. The Company will retain relationships with
representatives who are knowledgeable and focused in this market.

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 product line 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. The Company believes that this commitment of additional resources
will result in increased future sales and profitability.

The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The Company has evaluated
the risks associated with the "Year 2000" problem and has determined that the
cost of addressing the Year 2000 issue will be an immaterial event for the
Company and will not affect the Company's consolidated financial position or
results of operations.

CONSOLIDATED OPERATIONS

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. Management believes there will continue to be quarter-to-quarter
fluctuations in the SMT market with the electronics industry overall projected
to grow 20% per year. Such fluctuations have been typical in the electronics
industry as demand for electronic products, such as personal computers, has
fluctuated. The increase in sales to the graphic arts market is due to the
Company's focus last year 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

<PAGE>


funding of a first-to-market product solution to be 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. The Company has shifted the
emphasis of its research and development efforts from a product adaptations,
extensions and enhancements to new product solutions for its chosen markets.
This will require significant investment and development of new customer
relationships. The Company expects to invest in excess of 10% of sales on these
efforts.

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. 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.

Interest expense was $4,000 in 1997 compared to interest income of $25,000 in
1996. This change is due primarily to lower investment balances in the first
half of the year and the borrowing position in the second half of 1997.

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.

1996-1995 COMPARISON
Sales decreased 6.0% due to significantly lower sales in the SMT market, which
counteracted sales gains achieved in other product lines. The decline in sales
to the SMT market is attributed to demand in the electronics industry, which is
expected to improve. Fluctuations in demand in this industry are considered
typical. Sales of new products introduced in the last three years accounted for
48% of sales in 1996.

The gross profit margin on sales decreased 2.6% due to product mix and the
impact on new product introductions, initial production costs, and new product
warranty expense in the SMT product line. Gross margins on the SMT product lines
are relatively lower that those on other product lines.

Warranty expense increased 1.1% as a percentage of sales. The increase is
unusually high and is related to nonrecurring expenditures on new product
installations. Management does not expect this trend to continue.

Selling expenses are up .5% as a percentage of sales due to the lower volume.
Expenditures for research and development increased .8% as a percentage of sales
due to the Company's increased investment in new product development.

Interest income decreased in fiscal 1996 due primarily to lower investment
balances.

On September 27, 1996, the Company sold its Dimension product line in order to
concentrate on products and markets in which management believes the Company has
potential to be a dominant player. The Dimension is an industrial process
controller designed for applications requiring sophisticated control without a
mainframe computer. While Dimension is an excellent product, it served a broad
market, of which the Company controlled only a small percentage. Eurotherm is a
market leader with the resources to support this product. Eurotherm will supply
the Company with Dimension systems, which the Company will continue to use as
part of its total system solution packages for its customers.


LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital was $3,934,000 at the end of 1997 as compared to
$5,091,000 in 1996. The Company's current ratio at September 30, 1997 and 1996,
was 1.6 and 2.7, respectively. The net change in working capital was due to
proceeds from the sale of land in October 1996 of $1,530,000, offset by the
repurchase of common stock of $1,532,000, and increases in inventory and
accounts receivable. The increase in accounts receivable is due

<PAGE>


to timing of shipments and higher volume. The increase in inventory was due to
new products awaiting customer acceptance in both the SMT and graphic arts
markets, and the ability to meet customer expectations for shorter delivery
terms.

The warranty reserves have increased to reflect anticipated exposure in the SMT
reflow ovens. These ovens have the highest level of new product sales and their
warranty period was increased during the first quarter of fiscal 1997. The
reserve for product warranties represents management's estimate of warranty
expense over the next six to twelve months. The Company's experience has been
that most warranty charges occur at the time of product introduction or are due
to nonrecurring events. The reserve estimate also considers the amount of new
product introductions.

A portion of the Company's sales are generated in Asian markets that are
currently experiencing significant changes in currency valuations, which may
have an impact on the Company's future results.

The Company has an unsecured bank line of credit of $3,000,000. At September 30,
1997, the Company had borrowings outstanding of $1,466,000 at the prime rate
under the line of credit and short-term note payable of $766,000 at 8.5% due
January 15, 1998. The borrowings were used to finance the Company's repurchase
of common stock and meet working capital requirements. The Company expects to
utilize the line of credit to finance operations through 1998. The Company has
no long-term debt.

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 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, and general economic conditions.


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.


<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 15, 1998.

<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              15

              (ii)   Consolidated Balance Sheets as of September 30,
                     1997 and 1996                                         16

              (iii)  Consolidated Statements of Operations and
                     Consolidated Statements of Stockholders' Equity
                     for the years ended September 30, 1997, 1996, and
                     1995                                                17, 18

              (iv)   Consolidated Statements of Cash Flows for the
                     years ended September 30, 1997, 1996, and 1995        19

              (v)    Notes to Consolidated Financial Statements          20-25

          (2) Financial Statement Schedule

              The following financial statement schedule is filed with
              this report:

              (i)    Schedule II -Valuation and qualifying accounts        26

              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 note
              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                                                27-36

              (4.2)  Revolving Note Agreement between Norwest Bank
                     Minnesota N.A. and the Company dated October 13,
                     1997                                                37-38

              (10.1) 1991 Stock Plan - Incorporated by reference to
                     registration statement on Form Form S-8, file No.
                     33-75256 (filed February 14, 1994)
 
              (10.2) Stock Redemption Agreement Dated May 28, 1997
                     between the Company and Shareholders -
                     Incorporated by reference to Form 8-K Report
                     dated May 28, 1997, filed on June 10, 1997.

              (10.3) Promissory Note Dated May 28, 1997 between the
                     Company and Shareholders - Incorporated by
                     reference to Form 8-K Report dated May 28, 1997,
                     filed on June 10, 1997.

<PAGE>


                                                                         Page#
                                                                         -----
              (10.4) Security Agreement Dated May 28, 1997 between the
                     Company and Shareholders - Incorporated by
                     reference to Form 8-K Report dated May 28, 1997,
                     filed on June 10, 1997.

              (10.5) 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                           39

              (23.1) Consent of Arthur Andersen LLP                        40

              (27.0) Financial Data Schedule                               41

          (b) Reports on Form 8-K:

              No reports on form 8-K were filed in the quarter ended September
              30, 1997.

<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 12, 1997

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 12, 1997
-------------------------
Claude C. Johnson *

/s/ Richard L. Grose.          Treasurer                       December 12, 1997
-------------------------
Richard L. Grose **

/s/ J. R. Anderson             Director                        December 12, 1997
-------------------------
James R. Anderson

/s/ J. G. Colwell, Jr.         Director                        December 12, 1997
-------------------------
John G. Colwell, Jr.

/s/ E.  L. Lundstrom           Director                        December 12, 1997
-------------------------
Edward L. Lundstrom

/s/ G. E. Magnuson             Director                        December 12, 1997
-------------------------
Gerald E. Magnuson

/s/ C. G. Schiefelbein         Director                        December 12, 1997
-------------------------
Charles G. Schiefelbein


 * Principal executive officer
* *Principal financial officer


<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, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 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.


                                         /s/ Arthur Andersen LLP
                                         -----------------------
                                         ARTHUR ANDERSEN LLP


Minneapolis, Minnesota,
October 27, 1997

<PAGE>


CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                            As of September 30
                                                                      -----------------------------
ASSETS                                                                        1997             1996
------------------------------------------------------------------    ------------     ------------
<S>                                                                   <C>              <C>         
CURRENT ASSETS:
 Cash and cash equivalents                                            $  1,204,827     $  1,841,147
 Accounts receivable, net of reserves of $150,000                        3,979,299        2,366,814
 Inventories                                                             4,485,830        3,474,488
 Prepayments, primarily deferred income taxes                              596,465          471,310
------------------------------------------------------------------    ------------     ------------

     Total current assets                                               10,266,421        8,153,759
------------------------------------------------------------------    ------------     ------------

PROPERTY AND EQUIPMENT, at cost:
 Land and land improvements                                                221,927          212,852
 Building                                                                2,182,492        2,073,024
 Machinery and equipment                                                 4,534,825        3,863,381
 Less accumulated depreciation                                          (4,418,279)      (4,048,814)
------------------------------------------------------------------    ------------     ------------

     Net property and equipment                                          2,520,965        2,100,443
------------------------------------------------------------------    ------------     ------------

OTHER ASSETS                                                                61,320           84,214
------------------------------------------------------------------    ------------     ------------

         Total assets                                                 $ 12,848,706     $ 10,338,416
==================================================================    ============     ============


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

CURRENT LIABILITIES:
 Notes payable                                                        $  2,231,998     $       --
 Accounts payable                                                        1,689,153        1,277,805
 Accrued liabilities:
  Salaries and benefits                                                    728,374          474,040
  Warranty                                                                 350,000          250,000
  Real estate taxes                                                        155,000          125,000
  Other                                                                    303,971          463,650
 Federal and state income taxes payable                                    873,739          472,467
------------------------------------------------------------------    ------------     ------------

     Total current liabilities                                           6,332,235        3,062,962
------------------------------------------------------------------    ------------     ------------

STOCKHOLDERS' EQUITY:
 Common stock, $.50 par value, 5,000,000 shares authorized,
  969,174 and 1,161,243 shares issued and outstanding
  at September 30, 1997 and 1996, respectively                             484,587          580,622
 Additional paid-in capital                                                428,258          275,470
 Foreign currency translation                                               39,752           17,816
 Retained earnings                                                       5,563,874        6,401,546
------------------------------------------------------------------    ------------     ------------

     Total stockholders' equity                                          6,516,471        7,275,454
------------------------------------------------------------------    ------------     ------------

         Total liabilities and stockholders' equity                   $ 12,848,706     $ 10,338,416
==================================================================    ============     ============

</TABLE>

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

<PAGE>


CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

For the Years Ended September 30                                      1997            1996           1995
----------------------------------------------------------    ------------     -----------    -----------
<S>                                                           <C>              <C>            <C>        
Net Sales                                                     $ 22,843,081     $19,661,182    $20,922,505
Cost of Sales                                                   12,758,030      11,705,817     11,904,004
----------------------------------------------------------    ------------     -----------    -----------

  Gross profit                                                  10,085,051       7,955,365      9,018,501
----------------------------------------------------------    ------------     -----------    -----------

Expenses:
  Selling                                                        6,013,914       5,431,240      5,674,288
  Research and development                                       2,580,770       1,735,204      1,681,779
  General and administrative                                       939,174         700,460        759,385
----------------------------------------------------------    ------------     -----------    -----------

     Total expenses                                              9,533,858       7,866,904      8,115,452
----------------------------------------------------------    ------------     -----------    -----------

Income From Operations                                             551,193          88,461        903,049
Gain on Sale of Land                                             1,147,094            --             --
Gain on Sale of Product Line                                          --           344,400           --
Interest Income (Expense), net                                      (3,522)         24,969         49,060
----------------------------------------------------------    ------------     -----------    -----------

Income Before Income Tax Provision                               1,694,765         457,830        952,109
Income Tax Provision                                               578,000         168,000        325,000
----------------------------------------------------------    ------------     -----------    -----------

Net Income                                                    $  1,116,765     $   289,830    $   627,109
==========================================================    ============     ===========    ===========

Net Income Per Common Share                                   $       0.98     $      0.24    $      0.56
==========================================================    ============     ===========    ===========

Weighted Average Common Shares Outstanding                       1,134,701       1,193,789      1,128,848
==========================================================    ============     ===========    ===========

</TABLE>

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

<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>        
Balances,
  September 30, 1994      1,125,118     $ 562,559     $145,440    $ 13,656     $ 6,040,177     $ 6,761,832
    Options exercised        14,500         7,250       51,875        --              --            59,125
    Foreign currency
      translation              --            --           --        (4,703)           --            (4,703)
    Net income                 --            --           --          --           627,109         627,109
    Dividends                  --            --           --          --          (248,574)       (248,574)
----------------------------------------------------------------------------------------------------------
Balances,
  September 30, 1995      1,139,618       569,809      197,315       8,953       6,418,712       7,194,789
    Options exercised        21,625        10,813       78,155        --              --            88,968
    Foreign currency
      translation              --            --           --         8,863            --             8,863
    Net income                 --            --           --          --           289,830         289,830
    Dividends                  --            --           --          --          (306,996)       (306,996)
----------------------------------------------------------------------------------------------------------
Balances,
  September 30, 1996      1,161,243       580,622      275,470      17,816       6,401,546       7,275,454
    Options exercised        45,450        22,725      152,788        --              --           175,513
    Foreign currency
      translation              --            --           --        21,936            --            21,936
    Stock repurchase       (237,519)     (118,760)        --          --        (1,413,238)     (1,531,998)
    Net income                 --            --           --          --         1,116,765       1,116,765
    Dividends                  --            --           --          --          (541,199)       (541,199)
----------------------------------------------------------------------------------------------------------
Balances,
  September 30, 1997        969,174     $ 484,587     $428,258    $ 39,752     $ 5,563,874     $ 6,516,471
==========================================================================================================

</TABLE>

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

<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

For the Years Ended September 30                                                 1997            1996            1995
----------------------------------------------------------------------    -----------     -----------     -----------
<S>                                                                       <C>             <C>             <C>        
 Operating Activities:
  Net income                                                              $ 1,116,765     $   289,830     $   627,109
  Adjustments to reconcile net income to
    net cash provided by (used in) operating activities:
      Depreciation and amortization                                           529,876         463,429         433,376
      Deferred income taxes                                                   (26,000)         (2,000)        (20,000)
      Gain on sale of land                                                 (1,147,094)           --              --
      Gain on sale of product line                                               --          (344,400)           --
      Changes in operating elements:
        Accounts receivable                                                (1,612,485)      1,781,093        (150,491)
        Inventories                                                        (1,111,342)       (852,042)       (125,214)
        Prepayments, primarily deferred income taxes                          (28,155)        (66,201)       (104,099)
        Accounts payable and accrued liabilities                              353,554        (736,333)        (87,208)
        Federal and state income taxes payable                                330,272        (142,588)        187,447
----------------------------------------------------------------------    -----------     -----------     -----------

    Net cash provided by (used in) operating activities                    (1,594,609)        390,788         760,920
----------------------------------------------------------------------    -----------     -----------     -----------

 Investing Activities:
  Proceeds from sale of land, net                                           1,529,543            --              --
  Proceeds from sale of product line                                             --         1,000,000            --
  Maturities of short-term investments                                           --              --           701,679
  Property and equipment additions, net                                      (921,032)       (650,352)       (569,908)
  Other                                                                        (6,472)          2,312          (5,326)
----------------------------------------------------------------------    -----------     -----------     -----------

    Net cash provided by investing activities                                 602,039         351,960         126,445
----------------------------------------------------------------------    -----------     -----------     -----------

Financing Activities:
  Cash dividends paid                                                        (541,199)       (306,996)       (248,574)
  Issuance of common stock                                                    175,513          88,968          59,125
  Repurchase of common stock                                                 (765,998)           --              --
  Net borrowing under line of credit                                        1,465,998            --              --
----------------------------------------------------------------------    -----------     -----------     -----------

    Net cash provided by (used in) financing activities                       334,314        (218,028)       (189,449)
----------------------------------------------------------------------    -----------     -----------     -----------

Foreign Currency Translation                                                   21,936           8,863          (4,703)
----------------------------------------------------------------------    -----------     -----------     -----------

Cash and Cash Equivalents:
  Net increase (decrease) in cash and cash equivalents                       (636,320)        533,583         693,213
  Beginning of year                                                         1,841,147       1,307,564         614,351
----------------------------------------------------------------------    -----------     -----------     -----------

  End of year                                                             $ 1,204,827     $ 1,841,147     $ 1,307,564
======================================================================    ===========     ===========     ===========

Supplemental Cash Flow Information:
  Non-cash financing activity:
    Repurchase of common stock through
     issuance of note payable                                             $   766,000     $      --       $      --
======================================================================    ===========     ===========     ===========

</TABLE>

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

<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:

                                                 1997              1996
---------------------------------------------------------------------------
Trade receivables, net                     $3,739,741        $2,260,915
Costs in excess of billings
   on percentage-of-completion
   contracts                                  239,558           105,899
---------------------------------------------------------------------------
Total                                      $3,979,299        $2,366,814
===========================================================================

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:

                                                 1997              1996
---------------------------------------------------------------------------
Manufactured subassemblies
   and purchased parts                     $3,070,262        $2,406,077
Work in process                             1,415,568         1,068,411
---------------------------------------------------------------------------
Total                                      $4,485,830        $3,474,488
===========================================================================

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 - The Company has one customer that accounted for 19% of
net sales and 20% of accounts receivable in 1997. The Company has another
customer that accounted for 12% and 11% of net sales during 1997 and 1996,
respectively and 10% of accounts receivable as of September 30, 1997 and 1996.

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

<PAGE>


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.

NET INCOME PER COMMON SHARE - Net income per common share is computed by
dividing net income by the weighted average number of common shares and common
share equivalents of outstanding employee stock options.

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.


2. DEBT OBLIGATIONS:

LINE OF CREDIT: During 1997, the Company had a $3,000,000 unsecured bank line of
credit which carried an interest rate equal to the bank's base (prime) rate with
no compensating balance requirements. Subsequent to September 30, 1997, the line
of credit has been renewed for $5,000,000 with similar terms. As of September
30, 1997, the Company was in compliance with the terms of the line of credit,
including covenants relating to current ratio, tangible net worth, debt to
tangible net worth, and earnings. At September 30, 1997, the Company had
borrowings outstanding of $1,466,000. In 1996 and 1995, the Company had no
borrowings against the line of credit.

NOTE PAYABLE - The Company has a $766,000 note payable with interest at a rate
of 8.5% due January 15, 1998. This note resulted from the Company's common stock
repurchase during 1997 and is collateralized by certain assets of the Company.


3. INCOME TAXES:

The income tax provision consists of the following:

                                     1997             1996              1995
-------------------------------------------------------------------------------
Current federal                  $599,000         $201,000          $315,000
Current state                       2,000            2,000            27,000
Foreign                             3,000          (33,000)            3,000
-------------------------------------------------------------------------------
                                  604,000          170,000           345,000
Deferred income taxes             (26,000)          (2,000)          (20,000)
-------------------------------------------------------------------------------
Income tax provision             $578,000         $168,000          $325,000
===============================================================================


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

                                    1997              1996              1995
-------------------------------------------------------------------------------
Statutory federal rate               34%               34%               34%
State taxes, net of federal
  income tax provision                -                 -                 2
Other, net                            -                 3                (2)
-------------------------------------------------------------------------------
Effective tax rate                   34%               37%               34%
===============================================================================

Income taxes paid                $161,000          $356,000          $212,000
===============================================================================

<PAGE>


The Company has recorded the following net deferred taxes:

As of September 30                           1997             1996
----------------------------------------------------------------------
Current deferred taxes:
   Gross assets                          $376,000         $283,000
   Gross liabilities                          ---           (1,000)
----------------------------------------------------------------------
      Total current deferred taxes        376,000          282,000
----------------------------------------------------------------------
Noncurrent deferred taxes:
   Gross assets                            29,000           25,000
   Gross liabilities                     (148,000)         (76,000)
----------------------------------------------------------------------
      Total noncurrent
         deferred taxes                  (119,000)         (51,000)
----------------------------------------------------------------------
Net deferred taxes                       $257,000         $231,000
======================================================================


The tax effect of significant temporary differences representing deferred tax
assets and liabilities is as follows as of September 30:

                                             1997             1996
----------------------------------------------------------------------
Depreciation and amortization           $(148,000)       $(109,000)
Inventory reserves                        122,000          100,000
Accounts receivable reserves               51,000           51,000
Warranty reserves                         136,000           85,000
Accruals and other, net                    96,000          104,000
----------------------------------------------------------------------
Net deferred taxes                       $257,000         $231,000
======================================================================

The Company did not record any valuation allowance against deferred tax assets
at September 30, 1997 or 1996.


4. STOCKHOLDERS' EQUITY:

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 through borrowing under the
Company's line-of-credit facility.

STOCK DIVIDEND - On November 5, 1997, the Board of Directors declared a 5 for 4
split in the form of a 25 percent stock dividend to stockholders of record on
December 31, 1997. The Company has not recorded the stock dividend in the
accompanying consolidated financial statements. If the Company had recorded the
stock dividend, the Company's net income per common share would have been the
following pro forma amounts for the year ended September 30:

                                      1997          1996          1995
--------------------------------------------------------------------------
Net income per common share:
  As reported                         $.98          $.24          $.56
  Pro forma                            .77           .19           .44
--------------------------------------------------------------------------

STOCK-BASED COMPENSATION - In 1991, the Company implemented a stock option plan
(the Plan). A total of 210,000 shares or common stock were reserved for issuance
to directors, officers, and key employees. The stock options have been granted
at fair market value as determined by the Board of Directors at the date of
grant. The stock options 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.

The Company counts 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:

<PAGE>


                                         1997             1996
------------------------------------------------------------------
Net income:
    As reported                    $1,116,765         $289,830
    Pro forma                       1,093,783          279,852
Net income per 
 common share:
    As reported                          $.98             $.24
    Pro forma                             .96              .23
------------------------------------------------------------------

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 1997 and 1996:

ASSUMPTIONS AS OF THE GRANT DATE
------------------------------------------------
Risk-free interest rate                 5.77%
Expected lives                          5.00
Expected volatility                       40%
------------------------------------------------

Options outstanding at September 30, 1997, have an exercise price ranging
between $4.75 and $7.75.

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

<TABLE>
<CAPTION>
                                                            1997                                1996
                                                AVERAGE WEIGHTED                    AVERAGE WEIGHTED
STOCK OPTIONS                           SHARES    EXERCISE PRICE         SHARES       EXERCISE PRICE
----------------------------------------------------------------------------------------------------
<S>                                   <C>             <C>              <C>                   <C>   
Outstanding, beginning of period       112,750         $ 5.18           112,500               $ 4.38
    Granted                             59,000           5.72            28,500                 7.64
    Exercised                          (45,450)          3.86           (21,625)                4.19
    Expired                             (2,300)          4.96                ---                 ---
    Canceled                              (750)          6.17            (6,625)                5.83
----------------------------------------------------------------------------------------------------
Outstanding, end of period             123,250         $ 5.92           112,750               $ 5.18
----------------------------------------------------------------------------------------------------
Exercisable, end of period              34,500         $ 5.48            61,000               $ 4.15
----------------------------------------------------------------------------------------------------
Weighted average fair value
    of options granted                                 $ 1.11                                 $ 1.94
----------------------------------------------------------------------------------------------------

</TABLE>


5. 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
$232,000, $160,000 and $268,000 for 1997, 1996 and 1995, respectively.
Contributions for 1997 and 1995 included 401(k) and discretionary profit
sharing, while 1996 included only 401(k).


6. FOREIGN SALES:

Export sales to customers in various foreign countries totaled $11,174,000,
$6,976,000 and $6,762,000 in 1997, 1996 and 1995, respectively. Sales to
customers in Asia totaled $3,709,000, $4,542,000 and $4,475,000 in 1997, 1996
and 1995, respectively. Sales to customers in 1997 in Latin America and Europe
were $3,990,000 and $2,445,000, respectively.

7. NONRECURRING TRANSACTIONS:

<PAGE>


SALE OF LAND - On October 4, 1996, 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 - On September 27, 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.


8. NEW ACCOUNTING PRONOUNCEMENT:

In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share", which changes the way companies calculate their earnings
per share (EPS). SFAS No. 128 replaces primary EPS with basic EPS and fully
diluted EPS with diluted EPS. Basic EPS is computed by dividing reported income
by the weighted average shares outstanding, excluding potentially dilutive
securities while diluted EPS includes the dilutive securities. The Company is
required to adopt SFAS No. 128 in fiscal 1998, at which time, all prior period
EPS data is to be restated. If the Company had adopted SFAS No. 128, the effect
on reported income per share data would have been as follows for the year ended
September 30:

                                    1997            1996          1995
--------------------------------------------------------------------------
Primary EPS, as reported            $.98            $.24          $.56
Effect of SFAS No. 128               .03             .02            --
--------------------------------------------------------------------------
Basic EPS, as restated             $1.01            $.26          $.56
--------------------------------------------------------------------------

Diluted EPS under SFAS No. 128 would have been substantially unchanged from
primary EPS as reported.


9. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for 1997 and 1996 is as listed on the
following page.

<PAGE>


9
QUARTERLY FINANCIAL DATA (UNAUDITED): Summarized quarterly financial data for
1997 and 1996 is as follows:

<TABLE>
<CAPTION>

1997 Quarterly Results
                                                                1st           2nd           3rd           4th          1997
(In thousands, except net income per share)                   Quarter       Quarter       Quarter       Quarter        Total
--------------------------------------------------------    ----------    ----------    ----------    ----------    -----------
<S>                                                         <C>           <C>           <C>           <C>           <C>       
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:
  Net Income per Share                                      $     0.58    $     0.13    $     0.06    $     0.20    $     0.98
  Weighted average common shares outstanding                     1,181         1,210         1,187         1,044         1,135
===============================================================================================================================

1996 Quarterly Results
                                                                1st           2nd           3rd           4th          1996
(In thousands, except net income per share)                   Quarter       Quarter       Quarter       Quarter        Total
--------------------------------------------------------    ----------    ----------    ----------    ----------    -----------

Consolidated Operations:
  Net sales                                                 $    4,380    $    5,258    $    5,793    $    4,230    $   19,661
  Gross profit                                                   1,804         2,129         2,294         1,728         7,955
  Gain on sale of product line                                    --            --            --             344           344
  Income before income taxes                                        47            57           201           153           458
Net Income                                                  $       27    $       39    $      121    $      103    $      290
Earnings per Share:
  Net Income per Share                                      $     0.02    $     0.03    $     0.10    $     0.09    $     0.24
  Weighted average common shares outstanding                     1,199         1,197         1,197         1,191         1,194
===============================================================================================================================

</TABLE>

<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, 1995           150,000            10,305           (10,305)          150,000

     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



Reserve for product warranties:

    Year ended September 30, 1995            150,000           401,547          (401,547)          150,000

    Year ended September 30, 1996            150,000           680,452          (580,452)          250,000

    Year ended September 30, 1997            250,000           420,061          (320,061)          350,000



Reserve for inventory obsolescence:

    Year ended September 30, 1995            169,844           146,737          (122,386)          194,195

    Year ended September 30, 1996            194,195           216,328          (117,523)          293,000

    Year ended September 30, 1997            293,000           271,109          (164,109)          400,000

</TABLE>

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