<PAGE>   1
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-KSB

/ X /    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT of 1934

For the year ended December 31, 1997

/   /    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            0-10372
                        ------------------------

                              UNIDYNE CORPORATION
                      (Exact name of small business issuer
                          as specified in its charter)

<TABLE>
                 <S>                                      <C>
                          DELAWARE                                    23-2154902
                 (State or other jurisdiction             (IRS Employer Identification No.)
                 of incorporation or organization)
</TABLE>

                 118 PICKERING WAY, SUITE 104, EXTON, PA 19341
                    (Address of principal executive offices)

                                 (610) 363-8237
                          (Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X    No
                                                             ----     ----

Check if the disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this FORM
10-KSB or any amendment to this FORM 10-KSB ( ).

The issuer's net revenues for its most recent fiscal year were $22,108,308.

The aggregate market value of the issuer's voting stock held as of December 31,
1997 by non-affiliates of the issuer, based upon the average of the closing bid
and asked prices on that date, was approximately $11,036,000.

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.

Yes          No
    -------      -------





                                     Page 1
<PAGE>   2
                      APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the issuer's common equity, as of the
latest practicable date: 9,335,352 AS OF DECEMBER 31, 1997

Transitional Small Business Disclosure Format (check one ):  Yes      No  X
                                                                 ---     ---





                                     Page 2
<PAGE>   3
PART I

ITEM 1.    DESCRIPTION OF BUSINESS

INTRODUCTION

UNIDYNE Corporation, through its subsidiaries Dynamatic Corporation
("Dynamatic"), Sabina Industries ("Sabina"), Unidyne Test Systems, Inc.
("Unidyne Test"), Maxwell Emissions Test Systems, Inc. ("METS"), Unidyne
Capital, Inc.  ("Capital"), Kenosha Corporation ("Kenosha") and Maxwell
Dynamometer Systems, Inc. ("Maxwell"), manufactures vehicle testing equipment,
including emissions testing and post-manufacturing testing, specialized AC and
DC electric motors and variable speed drives and controls utilizing the Eddy
Current and DC Drive operating principles to control drive speed and power.
UNIDYNE Corporation and its subsidiaries are herein collectively referred to as
the "Company".

The Company's products are primarily marketed and sold by a Company field sales
force and independent sales agents, all supported by an in-house staff.  At
present, the Company has an established sales and distribution network with
customers located throughout the United States, Canada, Mexico and other
foreign countries.

HISTORY OF THE COMPANY

The Company was incorporated under the laws of the State of Delaware on
December 1, 1980, under the name of Blue Jay Energy Corporation, to engage in
oil and gas exploration and development.  Subsequently, the Company changed its
name to Blue Jay Enterprises, Inc. ("Blue Jay"). In or about 1986, Blue Jay
ceased operations in the oil and gas field and until 1990 confined its
activities to the winding up of matters arising out of the prior years'
operations. Blue Jay discontinued all business operations in or about 1990.

On September 2, 1996, Blue Jay completed the acquisition of all the issued and
outstanding stock of United Dynamatics, Inc. ("UDI"), a Delaware corporation,
and certain assets of Capital Idea, Inc. ("Capital Idea"), a Colorado
corporation.  After the acquisition, Blue Jay changed its name to UNIDYNE
Corporation.  Dynamatic is a wholly-owned subsidiary of UDI.  The acquisition
of UDI was treated as a reverse acquisition for accounting purposes.
Accordingly, the accompanying financial statements of the Company include
amounts for periods prior to the acquisition.

On September 2, 1996, the Company also acquired a 9% interest in Maxwell, a
Delaware corporation.  On December 31, 1996, the Company acquired the remaining
91% of Maxwell through a merger of Maxwell into a wholly-owned subsidiary of
the Company. At the date of the merger, the majority owner of the Company was
also a majority owner of Maxwell. Accordingly, the accompanying financial
statements of the Company include amounts for periods prior to the acquisition.

On September 1, 1995, UDI acquired substantially all of the operating assets of
the Eddy Current Drive Division (the "Division") of Eaton Corporation
("EATON"). Effective with the acquisition, the Division commenced operations as
Dynamatic, a wholly-owned subsidiary of UDI.  The Company's Kenosha subsidiary
also acquired on this date all of the real estate assets of the Division,
consisting of an office, laboratory, and manufacturing facility totaling
307,000 square feet situated on 13 acres of land in Kenosha, Wisconsin.

On September 30, 1997 the Company acquired all of the issued and outstanding
shares of the common stock of Sabina Industries, Incorporated, a California
corporation, which manufactures motor controls for a broad range of industrial
and commercial uses.





                                     Page 3
<PAGE>   4
In 1997 the Company formed Maxwell Emission Tests Systems, Inc. and Unidyne
Test to market dynamometers used to test automobiles and light trucks for
emissions in accordance with a United States Environmental Protection Agency
("EPA") mandate.  The organization was staffed to meet the requirements as were
identified in accordance with the various states plans to implement their
mandated program.  Some states have announced extensions  in the implementation
of their program from 1998 out in to 1999.

In 1997 the Company formed Unidyne Capital to provide sources of lease
financing to its customers.

On February 27, 1998, the Company acquired ELA Machine Co., Inc. an Illinois
corporation, a manufacturer and re-manufacturer of specialized industrial and
commercial process machinery and equipment.

PRODUCTS

Dynamatic has been manufacturing proprietary, specialized electric motors and
variable speed drives and controls for over 65 years utilizing the Eddy Current
Drive operating principle to control drive speed and power.  The variable speed
drives are used in a variety of products including stamping presses, pumps, and
special process equipment.  Dynamatic also manufactures engine dynamometers and
transmission dynamometers for a variety of large industrial customers,
primarily in the automotive, transportation, manufacturing, and processing
systems industries.

Dynamatic manufactures specialized electric motors and variable speed drives
and controls utilizing the Eddy Current Drive operating principle to control
drive speed. The variable speed drives arc used in a variety of products
including stamping presses, pumps, and special process equipment.  Dynamatic
also manufactures engine dynamometers and transmission dynamometers for a
variety of large industrial customers, primarily in the automotive and heavy
equipment industries.

Dynamatic manufactures certain key components and systems used in the products
and systems of each of the other subsidiaries.

Maxwell has been designing and building engine and chassis dynamometers for
over 50 years.  This equipment is used to test engine and chassis performance
for motor vehicles.  Maxwell's customer base is made up of heavy-duty truck,
bus and automobile manufacturers, fleet owners and transit authorities,
throughout the United States, Canada, Mexico and other foreign countries.

The EPA has created an Emission Testing Program (the "Program") which mandates
enhanced emission tests of vehicles in 22 states which have not attained the
required level of clean air as prescribed by the Clean Air Act of 1990.  Also,
six additional states have voluntarily agreed to comply with the enhanced
standards of the Program for automobile emissions testing.  The enhanced
emissions tests mandated by the Program must be performed under conditions that
more closely simulate actual driving conditions, and are most effectively
obtained by testing vehicles under load conditions, utilizing a chassis
dynamometer. The Company has developed and is manufacturing Emission Test
Stands ("ETS") which are capable of meeting the enhanced standards of the
Program.  The major components of the ETS are a specialized chassis dynamometer
designed and patented by Maxwell and emissions testing equipment and computer
controls designed and developed by Dynamatic and Maxwell. The ETS is
manufactured and assembled by Dynamatic.

Sabina designs and manufactures motor controls for a broad range of industrial
and commercial applications.  Sabina supplies major processing system designers
and manufacturers, and Fortune 500 manufacturers.  The motor control package
and system include electric motors manufactured by Dynamatic.

ELA Machine Co., Inc. manufactures and assembles specialized engineered
machinery and systems for the packaging and process industries.





                                     Page 4
<PAGE>   5
The Company has completed development and is introducing a new generation of
motor control technology  incorporating digital electronics.  The digital
control system is produced, installed and operated at lower cost than existing
systems, with more efficient performance.


SUPPLIERS

The Company currently purchases all of its materials from major vendors.  In
the past, the Company has not experienced any significant delays due to
vendors' inability to meet demand, and management believes that adequate
materials will continue to be available to meet product needs.

The Company has begun a program to maximize the extent to which subsidiaries
utilize components manufactured by other Company subsidiaries.  The Company is
initiating a program of joint purchases by subsidiaries to maximize volume
purchases and discounts.

MARKETING AND DISTRIBUTION

The Company markets and distributes its products under the Dynamatic, Maxwell,
Sabina, and H&R Manufacturing names.  Dynamatic continues to be the leading
supplier, integrator, and manufacturer of standard Eddy Current drives, custom
test stands and stamping press drives, highly engineered definite purpose
motors and Eddy Current clutches, brakes and dynamometers.  Dynamatic's
products are sold through its own in-house staff and field sales force, both
directly and through distributors throughout the United States, Canada and
other foreign countries.

Maxwell markets its product through its own in-house staff. Maxwell markets its
engine and chassis dynamometers and brake testers to heavy duty truck, bus and
automobile manufacturers, fleet owners and transit authorities throughout the
United States, Canada and other foreign countries.

The ETS is marketed through in-house staff and through a Company field sales
force.  The Company is focusing  its sales and marketing efforts in the states
which have announced the earliest implementation dates of the Program.  These
are Pennsylvania, California, Virginia and New York.  Massachusetts and New
Jersey, which originally scheduled 1998 implementation dates, have announced
revised dates in 1999.

COMPETITION

The Company competes on the basis of price, service, product quality, design
and performance characteristics.

The Company competes for sales of the ETS primarily with four emissions testing
equipment integrators (ESP, Automotive Diagnostics, Snap-on/ Sun and Worldwide
Environmental).  Competition for sales of the specialized chassis dynamometer
designed for light trucks and automobiles comes primarily from two chassis
dynamometer manufacturers (Clayton Industries,  John Bean, Mustang
Dynamometer).  Maxwell competes for dynamometer sales with five dynamometer
manufacturers (Clayton Industries, Mustang Dynamometer, Superflow, MAHA, and
Schenk Pegasus).

The electric drives market is highly competitive.  Dynamatic is the world's
leading manufacturer of Eddy Current products, but continues to experience
competitive pressures from manufacturers utilizing adjustable frequency and
direct current technologies.

PATENTS

Dynamatic and Maxwell hold a number of patents.  In 1995, Maxwell designed and
patented a specialized chassis dynamometer for testing automobiles and light
trucks under the EPA's Program. Maxwell has obtained United States design and
utility patents on the chassis dynamometer which expire January 2010





                                     Page 5
<PAGE>   6
and February 2014, respectively.  The Company has also patented the chassis
dynamometer in several foreign countries.  Protection of these patents is
important to the Company's competitive position.  

TRADEMARKS

Dynamatic has registered two of its trademarks, AJUSTO-Spede TM and DYNAMATIC
TM, in the United States and several foreign countries.  All trademark filings
are monitored and renewals are applied for on a timely basis.  The trademark
DYNAMATIC was first used on April 4, 1936.

GOVERNMENT APPROVAL

In order for equipment to be used in the ETS Program, it must be certified by
each state implementing the Program.  In September 1997, the Company obtained
the first certification for test equipment in Pennsylvania.  The Company has
submitted test units for certification to California and is pursuing
certification in other states based upon scheduled Program implementation
dates.

EMPLOYEES

As of December 31, 1997, the Company employed approximately 256 people at
locations in Kenosha, WI., Exton and Hazleton, PA., and Anaheim and San
Francisco, CA.

All hourly plant employees of Dynamatic are represented by a union.  In
September 1996, Dynamatic and the union representing these employees reached an
agreement on a three year contract, which will expire on September 30, 1999.
The Company believes that its relations with its employees are satisfactory.

GOVERNMENT REGULATION

None of the Company's businesses are in regulated industries.  However, the ETS
must be certified for sale in states participating in the Program.

ITEM 2. PROPERTIES

Dynamatic's principal operating facility, located in Kenosha, Wisconsin, is
owned by Kenosha Corporation, a wholly-owned subsidiary of the Company.  The
facility is comprised of two buildings totaling 307,700 square feet, situated
on 13 acres of land.  At present, approximately 16,500 square feet is used for
office space, approximately 196,600 square feet is used as laboratory and
manufacturing for DYNAMATIC products other than ETS, and approximately 65,000
is used to manufacture and inventory the ETS.  The facility's production
capacity exceeds the Company's current needs.  Approximately 29,600 square feet
of unused office space is available for sales, marketing and administrative
functions to support the ETS sales.

The Company has 30,000 square feet of manufacturing space and 15,000 square
feet of office space at Sabina, under lease, 25,000 square feet of
manufacturing space and 5,000 square feet of office space at ELA, under lease,
and 21,500 square feet of office and factory space in Exton, Pennsylvania,
under lease.

ITEM 3. LEGAL PROCEEDINGS

The Company has been named as a defendant in a action filed by the former
stockholders of Sabina.  The complaint alleges fraud and misrepresentation in
connection with the Company's September 30, 1997 acquisition of all of the
outstanding stock of Sabina.  The complaint seeks recission and compensatory
damages in an unspecified amount.  The company has denied all allegations of
wrongdoing and is vigorously defending the action.

On November 11, 1997, the Company received a notice to levy from the United
States Internal Revenue Service and the State of Wisconsin seeking to recover
an alleged income tax liability of approximately $875,000 for the 12 months
ended August 31, 1996. The accompanying financial statements make





                                     Page 6
<PAGE>   7
provision for the full amount of this liability.  The Company will be required
to pay the amount claimed and will thereupon be entitled to an offsetting tax
refund for a substantial portion of the amount paid due to subsequent operating
losses in 1997.

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

NONE

PART II

ITEM 5.    MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The following table sets forth the high and low sales prices for the periods
indicated as reported by the NASDAQ SMALL CAP MARKET.  These prices reflect
quotations between dealers and do not include retail mark-ups, mark downs, or
commissions.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------
                          Low              High
                          ------           ------
 ------------------------------------------------------------------------
<S>                       <C>              <C>
Calendar year 1997
-------------------------------------------------------------------------
First quarter             4 7/8            6 3/8
-------------------------------------------------------------------------
Second quarter            4  1/2           10 1/8
-------------------------------------------------------------------------
Third quarter             7  1/2           11 1/8
------------------------------------------------------------------------
Fourth quarter            4                12
-------------------------------------------------------------------------

Calendar year 1996
-------------------------------------------------------------------------
First quarter             1  1/2           2
--------------------------------------------------------------------------
Second quarter            1  1/2           4
--------------------------------------------------------------------------
Third quarter             3                5
--------------------------------------------------------------------------
Fourth quarter            4                6
--------------------------------------------------------------------------
</TABLE>

At December 31, 1997, the Company had approximately 833 shareholders of record.
The Company has paid no dividends during the period of this report and no
common dividends are contemplated in the foreseeable future.

ITEM 6.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1997, AS COMPARED
             WITH DECEMBER 31, 1996.

All amounts used herein are in thousands.

Sales for the year ended December 31, 1997 were $22,108 as compared with
$16,605 for the twelve months ended December 31, 1996.  Cost of sales for the
year ended December 31,1997 was $14,904 or





                                     Page 7
<PAGE>   8
67.6% to sales as compared with $10,504 or 63.3% to sales for the year ended
December 31,1996.  The increase is primarily attributable to the acquisition of
Sabina and sales of emission test stands.  In 1997 the Company initiated
development, engineering and manufacturing of the ETS product line. Much of the
increase in Cost of Sales are attributable to this start-up.

During the year ended December 31, 1997, the Company had selling and
administrative expenses of $8,072 or 36.5% to sales as compared with selling
and administrative expenses of $5,794 or 33.1% to sales for the year ended
December 31, 1996.  During the fourth quarter of 1997, the company postponed
its plans for a proposed stock offering.  Accordingly, costs previously
incurred and deferred in the amount of approximately $810,000 were expensed and
are included in selling and administrative expenses for the year ended December
31, 1997.  This is the primary cause for the increase in expenses as a
percentage of net sales.

During the years ended December 31, 1997 and December 31, 1996, the Company had
$505, or 2.3% of sales, and $501, or 3.0% of sales of  research and development
expenditures, respectively.  Interest expenses decreased to $687 for the year
ended December 31, 1997 from $1,027 for the previous year.  This decrease
results primarily from the Company's conversion of the debt originally owed to
Eaton related to the acquisition of Dynamatic, which was exchanged for common
stock of UNIDYNE in November 1996.

The Company has recorded a tax benefit on the losses incurred for the year
ended December 31, 1997.  The Company believes these benefits will be
realizable through earnings in 1998 and tax carryback provisions which will be
available upon payment of the 1996 tax liability.  The provision recorded in
1996 was primarily a result of  losses related to the acquired Maxwell
subsidiary which were not tax benefitted prior to the date of acquisition.

The dollar increases between the years are primarily due to the acquisition of
Sabina and the introduction of the ETS product line.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of long-term and short-term liquidity are
projected cash from operations and borrowing capacity.  The Company believes
that these sources are sufficient to fund the anticipated future growth of the
Company.

During the year ended December 31, 1997, the Company used cash for operations
of $459.   Investing activities used cash of $1,384, primarily for building
improvements and ordinary equipment purchases, while financing activities
provided $2,725 net primarily from a new mortgage secured by the real estate
owned by Kenosha.

At December 31,1997, the Company had working capital of $3,700.

On April 2, 1998 the Company secured an Operating Line of Credit with Union
Bank of California, N.A., in the amount of $1,250 for its subsidiary, Sabina.
The maturity is June 1, 1999 and is secured by the Accounts Receivable of
Sabina.  On April 2, 1998 the Company secured a term loan with Union Bank of
California, N.A., in the amount of $200 for its subsidiary, Sabina.  The
maturity date is June 1, 2001.

In 1998, the Company expects to purchase up to $300 of machinery and equipment
for use in the manufacture of the ETS product line.  It is anticipated that
these purchases will be funded through installment debt.





                                     Page 8
<PAGE>   9
ITEM 7.      FINANCIAL STATEMENTS

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors
of UNIDYNE Corporation:

We have audited the accompanying consolidated balance sheet of UNIDYNE
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the two years then ended.  These financial statements
are the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of UNIDYNE Corporation and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the years ended December 31, 1997 and December 31, 1996 in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 5 to the
financial statements, the Company's primary line of credit expires on April 30,
1998.  The Company's current inability to secure this financing raises
substantial doubt abut the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 5.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.


                                                    /s/ ARTHUR ANDERSEN LLP

                                                    ARTHUR ANDERSEN LLP

Milwaukee, Wisconsin
April 15, 1998





                                     Page 9
<PAGE>   10
                              UNIDYNE CORPORATION
                           CONSOLIDATED BALANCE SHEET
                            AS OF DECEMBER 31, 1997
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<S>                                                                                       <C>
Assets
Current assets:
     Cash                                                                                 $   928
     Accounts receivable, less allowance of $128                                            3,794
     Inventory                                                                              9,293
     Prepaid expenses                                                                         415
     Other current assets                                                                      32
     Deferred and other refundable taxes                                                    1,094
                                                                                        ---------
             Total current assets                                                          15,556
Property, plant and equipment
     Land                                                                                     160
     Leasehold improvements                                                                   304
     Buildings                                                                              3,678
     Machinery and equipment                                                                8,788
                                                                                        ---------
                                                                                           12,930
     Accumulated depreciation                                                              (3,697)
                                                                                        ---------
                                                                                            9,233

Deferred income taxes                                                                         282
Goodwill                                                                                    2,479
Patents                                                                                     1,490
Other assets                                                                                  760
                                                                                        ---------
                                                                                            5,011


Total assets                                                                               $29,800
                                                                                        =========
</TABLE>





                                    Page 10
<PAGE>   11
<TABLE>
<S>                                                                                       <C>
Liabilities & Stockholders' Equity
Current liabilities:
     Accounts payable                                                                      $4,726
     Short-term debt                                                                        3,220
     Accrued compensation                                                                     641
     Income taxes payable                                                                   1,079
     Due to Funding Sources-Leases                                                            647
     Deferred revenue                                                                         433
     Other accrued liabilities                                                              1,112
                                                                                        ---------
             Total current liabilities                                                     11,858

Long-term debt                                                                              4,382
Post-retirement benefits - Pension                                                          2,116
Post-retirement - Health                                                                    3,552
                                                                                        ---------
                                                                                           10,050
Stockholders' Equity:
     Common  Stock, $.001 par value, 50,000,000 shares authorized and
     9,335,352 outstanding                                                                      9
     Preferred Stock, at $10 per share liquidation value, $10 par value,
     20,000,000 shares authorized, 500,000 issued and outstanding                           5,350
     Additional paid-in capital                                                            13,127
     Treasury stock                                                                            (7)
     Retained deficit                                                                     (10,587)
                                                                                     ------------
     Total stockholders' equity                                                             7,892
                                                                                     ------------
     Total liabilities and stockholders' equity                                           $29,800
                                                                                     ============
</TABLE>

See accompanying notes to consolidated financial statements.





                                    Page 11
<PAGE>   12
                              UNIDYNE CORPORATION
                       CONSOLIDATED STATEMENTS OF INCOME
                     FOR THE YEARS ENDED DECEMBER 31, 1997
                             AND DECEMBER 31, 1996
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                          ----------------------------

<TABLE>
<CAPTION>
                                                                   1997                      1996
                                                                   ----                      ----
<S>                                                            <C>                        <C>
Net sales                                                           $22,108                    $16,605
Costs of products sold                                               14,904                     10,504
                                                                -----------                -----------
Gross profit                                                          7,204                      6,101

Selling and administrative expense                                    8,072                      5,794
Research and development expense                                        505                        501
                                                                -----------                -----------
                                                                      8,577                      6,295
                                                                -----------                -----------
(Loss) from operations                                               (1,373)                      (194)

Interest Income                                                          63                        ---
Interest expense                                                       (687)                    (1,027)
                                                                -----------                -----------
(Loss) before income taxes                                           (1,997)                    (1,221)
Income tax (benefit) provision                                         (534)                       102
                                                                -----------                -----------
Net (Loss)                                                           (1,463)                    (1,323)

Preferred Dividends                                                    (350)                       ---
                                                               ------------               ------------
Loss Applicable to Common Stockholders                              ($1,813)                   ($1,323)
                                                               ------------               ------------
Basic and diluted loss per share                                     ($0.21)                    ($0.18)
                                                               ------------               ------------
                                                               ------------               ------------

Weighted average number of shares of
Common Stock                                                      8,764,936                  7,240,590
                                                               ------------               ------------
                                                               ------------               ------------
</TABLE>

          See accompanying notes to consolidated financial statements.





                                    Page 12
<PAGE>   13
                              UNIDYNE CORPORATION
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     FOR THE YEARS ENDED DECEMBER 31, 1997
                             AND DECEMBER 31, 1996
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                 Common       Preferred     Additional                        Retained         Total
                                 Stock        Stock         Paid-in          Treasury         Earnings         Stockholders'
                                                            Capital          Stock            (Deficit)        Equity
                                 ---------    ----------    -----------      ------------     -------------    ------------
<S>                                                         <C>                 <C>            <C>                 <C>
Balance at December 31, 1995           $7      $5,000        $ ---                 $---         ($7,451)           ($2,444)

Issuance of Common Stock                1                     5,919                                                  5,920

Options Exercised                       1                       501                                                    502

Net (Loss)                                                                                       (1,323)            (1,323)
                                  -------   ---------    ----------          ----------      ----------         ----------

Balance at December 31, 1996            9       5,000         6,420                   0          (8,774)             2,655

Options Exercised                                               539                                                    539

Issuance of Common Stock                                        308                                                    308

Common Stock Issued For Service                                 360                                                    360

Shares Issued for Acquisition                                 5,375                                                  5,375

Fair Value of Options Issued to Contractors                     125                                                    125

Treasury Stock Repurchases                                                           (7)                                (7)

Net (Loss)                                                                                       (1,463)            (1,463)

Preferred Dividends                               350                                              (350)             -----
                                  -------   ---------    ----------          ----------      ----------         ----------
Balance at December 31, 1997           $9      $5,350       $13,127             $    (7)       ($10,587)            $7,892
                                    =====       =====        ======             =======         =======             ======
</TABLE>

          See accompanying notes to consolidated financial statements.





                                    Page 13
<PAGE>   14
                              UNIDYNE CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                      FOR THE YEAR ENDED DECEMBER 31, 1997
                             AND DECEMBER 31, 1996
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                     1997                         1996
                                                               ----------                    ---------
<S>                                                               <C>                          <C>
Cash flows from operating activities:
    Net loss                                                      ($1,463)                     ($1,323)
    Adjustments to reconcile net loss to net cash
    flows from operating activities
    Depreciation and amortization                                   2,197                        1,239
    Deferred taxes                                                 (1,239)                        (263)
    Accrued expenses converted into equity                            874                           87
    Changes in -
         Accounts receivable, net                                      14                          837
         Inventories                                               (3,340)                        (625)
         Prepaid expenses and other assets                           (332)                         (47)
         Accounts payable                                           1,423                        1,377
         Accrued compensation                                        (414)                         451
         Accrued expenses                                             203                           (7)
         Other liabilities                                            830                          788
         Income taxes                                                 788                          ---
                                                               ----------                   ----------
Net cash provided by (used for) activities                           (459)                       2,514
                                                               ----------                   ----------
Cash flows for investing activities:
    Purchase of property, plant and equipment                      (1,592)                        (508)
    Cash obtained in acquisition                                      208                          ---
                                                               ----------                   ----------
Net cash (used for) investing activities                           (1,384)                        (508)
                                                               ----------                   ----------
Cash flows from financing activities:
    Net borrowings on revolving line-of-credit                        (79)                         279
    Repayments on subordinated debenture                              ---                         (500)
    Purchase treasury stock                                            (7)                         ---
    Issuance of Common Stock                                          451                          185
    Offering related costs                                            ---                         (438)
    Borrowings on long term debt                                    2,234                          ---
    Principal payments on long term debt                             (521)                      (1,683)
    Advances from funding sources                                    647                           ---
                                                               ----------                   ----------
    Net cash provided by (used for) financing activities            2,725                       (2,157)
                                                               ----------                    ---------
    Net increase (decrease) in cash                                   882                         (151)
    Cash, beginning of period                                          46                          197
                                                                ---------                   ----------
    Cash, end of period                                             $ 928                         $ 46
                                                                =========                   ==========
    Supplemental disclosures of cash flow information:
    Cash paid during the period for:
    Interest                                                         $687                         $898
    Income taxes                                                      ---                          129
                                                               ----------                   ----------
</TABLE>

          See accompanying notes to consolidated financial statements.





                                    Page 14
<PAGE>   15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:  The accompanying consolidated financial
statements include the accounts of UNIDYNE Corporation and its subsidiaries
Dynamatic Corporation, Sabina Industries Incorporated, Maxwell Dynamometer
Systems, Inc., Kenosha Corporation, UNIDYNE Capital, Inc., Maxwell Emission
Test Systems, Inc., and UNIDYNE Test Systems, Inc. (the "Company").  The
financial statements have been prepared in accordance with generally accepted
accounting principles and necessarily include amounts based on judgments and
estimates made by management.  Actual results could differ from those
estimates.

The Company Produces specialized electric motors and controls through its
Dynamatic and Sabina subsidiaries.  The Company also manufactures engine and
chassis dynamometers and related emission test stands ("ETS") through Dynamatic
and Maxwell.

On September 2, 1996, Blue Jay Enterprises, Inc. ("Blue Jay") acquired all the
issued and outstanding stock of UDI, a Delaware corporation, and certain assets
of Capital Idea, Inc., ("Capital Idea") a related patty.  After the
acquisition, Blue Jay changed its name to UNIDYNE Corporation (the "Company").
Because Blue Jay was a public registrant with no operations, the acquisition of
UDI was treated as a reverse acquisition for accounting purposes.  Accordingly,
the accompanying financial statements for the Company include amounts for
periods prior to the acquisition.

On September 2, 1996, the Company also acquired a 9% interest in Maxwell
Dynamometer Systems, Inc ("Maxwell"), a Delaware corporation, in exchange for
160,500 shares of the Company's common stock, par value $.00l per share (the
"Common Stock").  On December 31,1996, the Company acquired the remaining 91%
(81% from Capital Idea and 10% from minority interest shareholders) of Maxwell
in exchange for 192,332 shares of the Common Stock and 500,000 shares of the
Company's Class A Convertible Preferred Stock with a liquidation value of $10
per share and a 7% cumulative dividend (the "Preferred Stock"). The majority
owner of the Company was also the majority owner of Maxwell.  Therefore, the
accompanying financial statements have been restated to include the accounts of
Maxwell for all periods presented.

Inventories: Inventories are stated at the lower of cost (first-in, first-out)
or market and consist of the following (000's);

<TABLE>
         <S>                                       <C>
         Raw materials and manufactured            $7,974
         parts
         Work in process                              976
         Finished goods                               343
                                                ---------
                                                   $9,293
</TABLE>

The value of inventory includes costs for material, labor and production
overhead.

Property, Plant and Equipment:   Property, plant and equipment acquired in
connection with purchase acquisitions are recorded at the fair market value as
of the date of the acquisition.  All other property, plant and equipment
acquired is stated at cost.  Depreciation and amortization are being recorded
on a straight-line basis over the estimated lives of the assets which range
from 4 to 10 years for machinery and equipment and 7 to 25 years for buildings.

Deferred Revenue:   The Company recognizes revenue on its service contracts
over the life of the related contract.  Unearned amounts are recorded as
deferred revenue on the accompanying Balance Sheet.

Due to funding sources-Leases:   The Company facilitates financing of the sale
of its ETS equipment to interested customers through two third-party leasing
agencies.  Under the terms of the agreements with these agencies, the Company
receives advanced funding for units that are sold, but the customer's financing
has not yet been approved.  These advances are reflected as liabilities until
the customer's financing is approved, after which the funding is used to reduce
the related account receivable.  The Company is not subject to any recourse
provisions for the products they sell.

Research and Development: Research and development costs are charged to expense
as incurred.

Earnings Per Share: Basic Earnings per share is calculated based on the average
number of common shares outstanding.  Diluted earnings per share include the
dilutive effects of any common stock equivalents or convertible securities.





                                    Page 15
<PAGE>   16
NOTE 2:   ACQUISITIONS

The Company acquired Maxwell through an exchange of stock with the majority
owner of Maxwell and with unrelated minority shareholders of Maxwell.  Since
the majority owner of the Company was also a majority owner of Maxwell, the
acquisition of those shares was treated as a reorganization.  Accordingly, the
accompanying financial statements for the Company include the results of
Maxwell from 1996, using the historical basis of Maxwell's assets and
liabilities.

As part of the acquisition of Maxwell, the Company acquired certain technology
and patents relative to a chassis dynamometer, which will be used in the
Company's automobile emissions testing products.  The patent has been valued by
an independent appraiser and has an economic life of eight years.  For
accounting purposes, the patent was initially reflected in the financial
statement at $1,676,000 (the excess purchase price over cost relative to
non-affiliates) and is being amortized over its economic life ($186,000 in
1997).





                                    Page 16
<PAGE>   17
On September 30, 1997, the Company acquired all of the outstanding stock of
Sabina in exchange for 500,000 shares of Company common stock. The acquisition
was recorded using the purchase accounting method.  Accordingly, the
accompanying financial statements for the Company include amounts that have
been restated at their fair market value and activity for the period since the
acquisition.  The fair value of the consideration given was $5,375,000, based
on the market value of the Company's stock at the date of acquisition.  A
summary of the purchase price allocation is as follows:

<TABLE>
            <S>                                             <C>
            Cash                                            $   218,000
            Accounts Receivable                               2,009,000
            Inventory                                         2,370,000
            Other Assets                                         88,000
            Fixed Assets                                        528,000
            Goodwill                                          2,504,000
            Current Liabilities                              (1,664,000)
            Debt                                               (678,000)
                                                       ---------------
                                                             $5,375,000
</TABLE>

The company is amortizing the goodwill recorded in conjunction with the Sabina
acquisition over 25 years.  The following unaudited proforma data presents the
consolidated results of operations as if the acquisition occurred at the
beginning of the periods presented.

<TABLE>
            <S>                                  <C>                        <C>
                                                      1997                   1996
                                                      ----                   ----
            Net Sales                            $29,644,000                $27,392,000
            Net Loss                              (1,739,000)                (1,404,000)
            Loss Per Share                             (0.19)                     (0.18)
</TABLE>

In February, 1998, the Company acquired ELA Machine Co., Inc., through the
issuance of 75,000 shares of common stock.  The fair value of the consideration
given was $525,000.


NOTE 3:  EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). The
standard requires the disclosure of two earnings per share amounts, "basic
earnings per share of common stock" and "diluted earnings per share of common
stock".   The computation of diluted earnings per share is similar to the
Company's previous computation of "primary earnings per share of common stock."

Basic earnings per share of common stock is computed by dividing net earnings
from operations available to common stockholders by the weighted average number
of common shares outstanding during the period.   Diluted earnings per share of
common stock is computed by dividing net earnings from operations by the
average number of common shares and other dilutive equity securities.

The following shares were used to calculate basic and diluted earnings per
share:
<TABLE>
<CAPTION>
                                                                           December 31, 1997            December 31, 1996
                                                                           ----------------             -----------------
    <S>                                                                         <C>                          <C>
    Weighted average shares of common stock outstanding                         8,764,936                     7,240,590
</TABLE>

The shares outstanding used to compute diluted earnings per share for 1997 and
1996 excluded all outstanding convertible securities.  The convertible
securities were excluded because their inclusion in the computation would have
been anti-dilutive.

NOTE 4:  OTHER ASSETS

In 1996, the Company incurred approximately $438,000 in professional fees
relating to a proposed common stock offering.  The Company had deferred those
costs in anticipation of a 1997 offering.  In the fourth quarter of 1997 the
Company postponed its plans for the offering.  Accordingly, the deferred
offering costs were expensed and are included in Selling and Administrative
Expenses in the accompanying Statement of Income for 1997.





                                    Page 17
<PAGE>   18
NOTE 5:  DEBT

The Company's long-term debt, as of December 31, 1997, consists of the
following (000's):

<TABLE>
         <S>                                  <C>
         Revolving line of credit             $ 2,692
         Bank Term Notes                        2,132
         Mortgage Note                          2,500
         Other Long Term Debt                     278
                                              -------
                                              $ 7,602
         Less Current Portion                   3,220
                                              -------
                                              $ 4,382
</TABLE>

The company has a 9.5% term note (the "Note") with a bank.  The note is secured
by a General Business Security Agreement and is payable in equal monthly
principal payments of $32,833 through December 30, 2002.  The interest rate is
variable based on the bank's index rate.

The Company has lines of credit with banks with a maximum borrowing limit of
$4.2 million, limited by predetermined percentages of eligible receivables and
inventory.  As of December 31, 1997, the Company had borrowed the maximum
available based on the borrowing base limitations.  The principal line of
credit, with a maximum borrowing limit of $3.0 million expires April 30, 1998.
The Company is currently conducting the renewal process of this line with the
current lender.  This lender has provided financing to the Company since
inception (September 1, 1995).  Management believes that it will be successful
in securing the renewal of this line or obtaining alternative financing in a
timely manner.  The interest on the lines were 9.75% at December 31, 1997.

The Company has a 9.61% note on the land and buildings located in Kenosha,
Wisconsin.  The Note is payable in monthly installments of $23,483 in interest
and principal through December 2007.

Subsequent to year-end, the Company secured an operating line of credit for its
Sabina subsidiary in the amount of $1.25 million and a related term loan in the
amount of $.2 million.  The operating line matures in June 1999, and the term
loan matures in June 2001.

The above debt agreements require the Company to meet certain debt covenant
ratios including the maintenance of a minimum current ratio, working capital,
net worth and debt to net worth ratio.  The Company is currently in compliance
with these covenants.

Annual principal payments required under long-term debt obligations are as
follows (000's):

<TABLE>
                                 <S>               <C>
                                 1998              $3,220
                                 1999                 736
                                 2000                 736
                                 2001                 726
                                 2002                 703
                                 Thereafter         1,481
</TABLE>





                                    Page 18
<PAGE>   19
NOTE 6:  PENSION PLANS

The Company has non-contributory defined benefit pension plans covering the
majority of employees. Plans covering salaried employees provide benefits that
are based on years of service and final average compensation. Benefits for
hourly employees are generally based on years of service.  Company policy is to
fund at least the minimum amount required by applicable regulations.

The components of pension expense for the years ended December 31, 1997 and
December 31, 1996 follow (000's):

<TABLE>
<CAPTION>
                                                                        Year Ended                        Year Ended
                                                                    December 31, 1997                 December 31, 1996
                                                                    -------------------------         ------------------------
            <S>                                                              <C>                              <C>
            Service Cost                                                     $310                              $170
            Interest cost on projected benefit
            Obligation                                                        151                               126
            Actual return on assets                                           (11)                               (3)
                                                                        ---------                         ---------
                                                                             $450                              $293
</TABLE>

The pension liability recognized in the balance sheet at December 31, 1997
follows (000's):

    Accumulated pension benefit obligation:

<TABLE>
            <S>                                    <C>
            Vested                                 $ 1,944
            Non-vested                                  31
                                                ----------
                                                     1,975
            Value of future salary projections         622
                                                ----------
            Projected benefit obligation             2,597
            Fair value of plan assets                  469
                                                ----------
            Funded Status                            2,128
            Unrecognized prior service cost           (331)
            Unrecognized gain                          319
                                               ----------
                                                    $2,116
</TABLE>

For the years ended December 31, 1997 and 1996, measurement of the projected
benefit obligation was based on a discount rate of 7%.  The expected
compensation growth rate for both of these years was 3%.





                                    Page 19
<PAGE>   20
NOTE 7:  POST-RETIREMENT BENEFIT PLANS OTHER THAN PENSIONS

Generally, employees become eligible for post-retirement benefits other than
pensions, primarily health care and life insurance, upon retirement.  These
benefits are payable for life, although the Company retains the right to modify
or terminate the plans providing these benefits.  The plans are contributory,
with retiree contributions adjusted annually and contain other cost sharing
features, including deductibles and co-payments.  Company policy is to pay the
claims as incurred.

Expense for post retirement benefits other than pensions for the yeas ended
December 31, 1997 and December 31, 1996 follows (000's):

<TABLE>
<CAPTION>
                                                                    Year Ended                Year Ended
                                                                    December 31, 1997         December 31, 1996
                                                                    ------------------------  ----------------------------
            <S>                                                              <C>                      <C>
            Service Cost                                                     $128                     $  84
            Interest cost on accumulated obligation                           323                       200
                                                                             -------                  -------
                                                                             $451                      $284
</TABLE>

The liability for post retirement benefit plans other than pensions recognized
in (000's):

<TABLE>
         <S>                                                    <C>
         Accumulated post-retirement benefit obligation:
            Retirees                                            $ 508
            Fully eligible plan participants                    1,340
            Other active plan participants                      1,775
                                                                -------
         Subtotal                                               3,623
                                                                -------
         Unrecognized net gain (loss)                             (71)
                                                                -------
                                                               $3,552
</TABLE>

The medical trend assumption was 11.2% grading down to 4% over 9 years.  A one
percentage - point increase in the assumed health care cost trend rate  would
increase the accumulated post retirement benefit obligation as of December 31
1997 and net post retirement health care cost for the year ended December 31,
1997 by approximately $660,000 and $61,000, respectively.  The discount rate
used to determine the accumulated post retirement benefit obligation for the
years ended December 31, 1997 and 1996 was 7%.

NOTE 8:  INCOME TAXES

The provision (credit) for income taxes for the years ended December 31, 1997
and 1996 consists of the following in (000's):

<TABLE>
<CAPTION>
                                                 Year Ended                           Year Ended
                                              December 31, 1997                  December 31, 1996
                                              ------------------------          ------------------------
         <S>                                      <C>                           <C>
         Current -
            U.S. Federal                          $  571                        $  233
            State                                    134                           132
                                                 ---------------                ---------------
                                                      705                          365
         Deferred                                  (1,239)                        (263)
                                                 ---------------                ---------------
         Total Tax Provision                        ($534)                       $  102
                                                 ===============                ===============
</TABLE>





                                    Page 20
<PAGE>   21

The effective tax rate reconciled to the statutory U.S. Federal Rate as
follows:


<TABLE>
<CAPTION>
                                                    1997               1996
                                                 ---------          ----------
         <S>                                     <C>                <C>
         Statutory Rate                            (34.0%)            (34.0%)
         State Income Taxes                         (2.3)               6.6
         Non-deductible expenses                     3.3                ---
         Tax Interest and Penalties                  7.3                ---
         Maxwell Losses not benefitted               ---               28.4
         Non-Deductible Interest                     ---                5.3
         Other                                      (1.0)               1.4
                                                 ----------         ---------
                                                   (26.7%)              7.7%
                                                 ----------         ---------
                                                 ----------         ---------
</TABLE>

The deferred taxes reflected on the accompanying Balance Sheet relate primarily
to various liabilities that are not deductible currently for tax purposes and
Net Operating Loss Carrryforwards.  The deferred tax assets include NOL's of
approximately $1,871,000 generated since the original acquisition from EATON.
In addition, Maxwell has approximately $4,000,000 of NOL carry forwards that
are fully reserved for through a valuation allowance.

On November 11, 1997, the Company received a notice to levy from the United
States Internal Revenue Service and State of Wisconsin seeking to recover an
alleged income tax liability of approximately $875,000 for the twelve months
ended August 31, 1996.  The accompanying financial statements include
provisions for the full amount of this liability including accrued interest and
penalties.


NOTE 9:   STOCKHOLDERS' EQUITY

In connection with the original acquisition of the Division from EATON
Corporation ("EATON"), the Company issued a $4.5 million non-interest offering
note payable to EATON.  The Company was required to repay this note an amount
equal to 18% of Dynamatic's annual earnings before interest and taxes.  The
present value of the liability was reflected in the financial statements at
$3,000,000 at October 31, 1996.  In November 1996, the Company and EATON
amended the agreement pursuant to which the Company purchased the Division
assets from EATON (the "Amendment").  Pursuant to the Amendment, the Company
was relieved of the obligation to make payment on the $4.5 million note payable
to EATON.  In exchange, the Company issued 750,000 shares of its Common Stock
to EATON.

In connection with the acquisition of the 19% minority interest in Maxwell, the
Company recorded common stock and additional paid-in capital of $1,678,000.
This represented the fair value of the Company's Common Stock at the date of
issuance exchange for the 19% interest in Maxwell.

In connection with the acquisition of the 81% of Maxwell that was owned by the
majority owners of the Company, the Company issued 500,000 shares of Preferred
Stock.  The Preferred Stock is redeemable at the Company's option after January
2002 at $11 per share.  In addition, the Preferred Stock is convertible into
500,000 shares of common Stock.  In connection with the acquisition of certain
assets of Capital Idea, the Company recorded additional paid-in capital of
$1,088,000.  The assets contributed were various receivables from Maxwell.

In connection with its proposed common stock offering, the Company retained an
investment banking firm to perform various services.  As part of the
consideration given to this firm, the Company issued a warrant to purchase
150,000 common shares at $1.80 per share and 150,000 common shares at $4.00 per
share.  Effective December 31, 1997, the firm exchanged 100,000 shares issuable
under warrant for certain accrued investment banking services through May 1998.
$360,000 related to the serviced provided and warrant value was expensed in
1997 as part of the postponed offering.  As of December 31, 1997, 50,000 and
150,000 shares remain subject to the warrant agreement at $1.80 and $4.00 per
share, respectively.

During 1997, the Company issued 157,416 shares of common stock in exchange for
$539,189 of  accrued compensation and options to purchase common stock.

NOTE 10:   RELATED PARTY TRANSACTIONS

The Company had a consulting agreement with a company affiliated with a
director/shareholder. In the agreement required





                                    Page 21
<PAGE>   22
payments of $100,000 per year.  This agreement was terminated effective August
1997.  The amount charged expense for the years ended December 31, 1996 and
1997 was $100,000 and $67,000, respectively.

The Company was provided administrative services by a company affiliated with
an officer/director through August 31, 1996.  For year ended December 31, 1996,
the Company recorded administrative expense of $62,000.

The Company expended $32,000 and $90,000 for the years ended December 31, 1996
and 1997, respectively for legal fees to a firm having member who is a director
of the company.

Legal fees to Lison & Griffin for the year ended December 31, 1997 were
$113,705.  Mr. Lison converted $25,000 into UNIDYNE Corporation common stock
through the exercise of options.

The Company sub-leases its Exton, Pennsylvania facility from a
shareholder/director.  The amount paid by the Company is a pass-through payment
to the ultimate landlord.  The amounts charged to expense for the years ended
December 31, 1996 and 1997 were $92,400 and $97,200 respectively.

On December 31, 1996 the Company acquired 81% of Maxwell from a
director/shareholder in exchange for 500,000 shares of the Preferred Stock.

The Company believes that all related party transactions were on terms
equivalent to terms which would have existed if the participants had been
unrelated.

NOTE 11:   STOCK BASED COMPENSATION

In 1997, the Company established the 1997 Stock Option Plan (the "1997 Plan")
for certain employees, directors, and certain other individuals.

In 1996, the Company established a Stock Option Plan for certain employees and
directors (the "1996 Plan") and an employee stock purchase plan ("the "Plan").
The Company accounts for these plans under APB Opinion No. 25, pursuant to
which compensation cost is recognized based on the interest value of the option
issue. Had compensation cost for these plans been determined in accordance with
FASB Statement No. 123, the Company's net loss and loss per share would have
been as follows:

<TABLE>
<CAPTION>
                                                         Year Ended                Year Ended
                                                      December 31, 1997         December 31, 1996
            <S>                  <C>                        <C>                    <C>
            Net Loss:            As reported                ($1,463,000)           ($1,323,000)
                                 Pro forma                   (3,533,000)            (1,987,000)
            Loss per Share:      As Reported                    (0.21)                 (0.18)
                                 Pro forma                      (0.40)                 (0.27)
</TABLE>

The pro forma compensation expense was determined using the Black-Scholes
Option Pricing Model.  The Company used an expected life of 5 years for the
options, stock volatility of 55.7%, zero dividend yield and a weighted average
risk free interest rate of 6.36% in determine a weighted average option value
of $2.09 per share.

In 1996, the Company granted the maximum number of 1,100,000 options under the
1996 Stock Option Plan.  Options granted under the 1996 Stock Option Plan
constituted both incentive stock options and nonqualified stock options at
prices not less than fair market value at the date of grant.  Option shares
become exercisable at various dates  and expire five years from the date of the
grant.  In 1996, the Company issued 154,538 shares of the Common Stock upon
exercise of a portion of the options, in exchange for accrued salaries and fees
total $502,050.

In 1997 the Company adopted an Omnibus Stock Incentive Plan authorizing up to
2,000,000 shares over a ten-year period and option amounts determined by the
Board of Directors at the time of the grant of the options.  1,000,000 options
were granted under this plan, with option prices ranging from $6.00 to $9.00
per share, over a period of five years from the time of their grant date and
subject to other provisions of the plan.  19,329 of these options were
exercised in 1997 at $6.00 per share in exchange for accrued fees of $115,974.





                                    Page 22
<PAGE>   23
The following table summarizes the activity related to the Company's stock
options:

<TABLE>
<CAPTION>
                                                                                                Weighted
                                                 Options            Price Range               Average Price
         <S>                                     <C>                <C>                           <C>
         Balance,  December 31, 1995
         Granted                                 1,100,000          $3.00 - $3.35                 $3.16
         Exercised                                (154,538)               $3.25                   $3.25
                                                --------------
         Balance, December 31, 1996                 946,462         $3.00 - $3.25                 $3.14
         Granted                                  1,285,000         $6.00 - $9.00                 $6.24
         Exercised                                (153,416)         $3.00 - $6.00                 $3.51
         Forfeited                                (365,000)         $6.00 - $9.00                 $6.48
                                                ---------------
         Balance, December 31, 1997              1,713,046          $3.00 - $9.00                 $4.73
</TABLE>

In 1996, employees purchased 27,400 shares of Common Stock under the Plan at
$4.00 per share, during and subscription period which ended December 23, 1996.
The subscription period for employee purchases under the Plan is no longer
open.

NOTE 12:   COMMITMENTS AND CONTINGENCIES

The Company has been named as a defendant in an action filed by the former
stockholders of Sabina.  The complaint alleges fraud and misrepresentation in
connection with the Company's September 30, 1997 acquisition of all of the
outstanding stock of Sabina.  The complaint seeks recession and compensatory
damages in an unspecified amount.  The company has denied all allegations of
wrongdoing and is vigorously defending the action.

The Company, in the normal course of business, is party to various claims with
regard to its products and other matters.  Management believes that the
ultimate resolution of these matters will not have a material impact on the
Company's financial position.

The Company leases various office equipment under noncancelable operating
leases.  Future minimum lease payments are as follows (000's):

<TABLE>
                          <S>               <C>
                          1998              $300,000
                          1999               288,000
                          2000               214,000
                          2001               115,000
                          2002               115,000
</TABLE>


Rental expense for the year ended December 31, 1996 and 1997 totaled $403,000
and $508,000, respectively.


ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS

The following individuals are the present directors and executive officers of
the Company. The term of office for each director is listed below. All
Directors have served since their election on September 2, 1996, except for
John Lison who was elected March 10, 1997.
<TABLE>
<CAPTION>
                                                                                                TERM
NAME                      AGE     POSITION                                                    (YEARS)
----------                ------  --------------                                              ------------
<S>                       <C>     <C>                                                         <C>
C. Eugene Hutcheson       55      Chief Executive Officer, Chairman of the Board              Two
                                           President

Charlotte E. Doremus      54      Chief Administrative Officer, Secretary, Treasurer          Three
                                           Director

Elliott L. Avery          52      President & Chief Operating Officer                         N/A
</TABLE>





                                    Page 23
<PAGE>   24

<TABLE>
<S>                       <C>     <C>                                                         <C>
David M. Barrett, Esq.    60      Director                                                    Two

Dr. Frank B. Holze        60      Director                                                    One

John M. Lison, Esq.       53      Director                                                    Three

Delbert A. Warosh         60      President of Dynamatic                                      N/A
</TABLE>

C. EUGENE HUTCHESON has been Chief Executive Officer and Chairman of the Board
of Directors since September 2, 1996 and was President from September 2, 1996
through February 27, 1998.  Mr. Hutcheson serves as Chairman and Chief
Executive Officer of the Company's subsidiaries.  Mr. Hutcheson is Chairman,
CEO, and President of Capital Idea, Inc..  Previously, he was the Chairman and
President of CIDCO Group, Inc., which developed and patented products for the
packaging and container industry.

CHARLOTTE E. DOREMUS has been Chief Administrative Officer, Secretary,
Treasurer and Director of the Company since September 2, 1996 and of UDI and
Kenosha Corporation since their inception in 1995.  Ms. Doremus is also
Secretary/Treasurer and a Director of Maxwell and Capital Idea. Ms.  Doremus
has been an investor in start-up companies for more than ten years. Ms. Doremus
has also been an Assistant to the Research Director and head of the Portfolio
Review Department at Argus Research Corp., and a Registered Representative and
Portfolio Analyst for Dean Witter Reynolds in New York City.

ELLIOTT L. AVERY is President and Chief Operating Officer of the Company
effective February 27, 1998.  Mr. Avery was President and Treasurer of ELA
Machine Co., Inc..  Avery has been active in turnaround and re-structuring
processes in manufacturing business.  Formerly Avery served as a Group Vice
President of Atcor, Inc. for eight years.

DAVID M. BARRETT, Esq. is a senior partner of the law firm of Barrett &
Schuler, Washington, D.C. Mr. Barrett has been an instructor in law at Notre
Dame Law School. He has been an Assistant United States Attorney for the
District of Columbia and has been appointed Independent Counsel for an
investigation of a member of the Cabinet of the President of the United States.

DR. FRANK B. HOLZE founded and manages Holze International Investment, a
Monaco-based investment consulting firm. Dr. Holze was with ITT Corporation for
12 years. Subsequently, Dr. Holze was Vice President and a member of the board
of management in Europe for the Thyssen-Bornemisza Group, which is based in
Monaco, and was general manager of a number of the Group's companies.

JOHN M. LISON, Esq., is founder and managing partner of Chicago-based law firm,
Lison and Griffin, P.C. where he oversees the firm's finance, government
relations, acquisitions and re-structuring practices.  Lison formerly served as
Vice President, Secretary, and General Counsel for Atcor, Inc., a manufacturing
company.  Prior to that, Lison was Vice President, Legal for Heizer
Corporation.

DELBERT A. WAROSH has been President of Dynamatic since June 1996.  Mr. Warosh
has held various management positions at Dynamatic over the past 31 years.
Prior to his appointment as President, Mr. Warosh was the Plant General
Manager.  

ITEM 10.         EXECUTIVE COMPENSATION

The following table provides certain summary information concerning the
compensation paid or accrued by the Company to or on behalf of its Chief
Executive Officer and other named executive officers of the Company for
services rendered in all capacities to the Company and its subsidiaries for the
year ended December 31, 1997, December 31, 1996 and the four months ended
December 31, 1995.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                           SUMMARY COMPENSATION TABLE (1)
-------------------------------------------------------------------------------------------------------------------------------
                                  ANNUAL COMPENSATION                   LONG TERM COMPENSATION AWARD  PAYOUTS
                                 ---------------------                  --------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
NAME AND                                                        OTHER         RESTRICTED
PRINCIPAL                                                       ANNUAL        STOCK      OPTIONS/                  ALL OTHER
POSITION                       YEAR      SALARY         BONUS   COMPENSATION  AWARDS     SARS       LTIP PAYOUTS   COMPENSATION
--------------                 --------  -------------- ------  ------------  ---------- ---------  -------------- ------------
-------------------------------------------------------------------------------------------------------------------------------
                               <S>       <C>            <C>     <C>           <C>        <C>        <C>            <C>
                               1997      271,015(5)(6)  ---     ---           ---        ---        ---            ---
-------------------------------------------------------------------------------------------------------------------------------

</TABLE>




                               Page 24
<PAGE>   25
<TABLE>
<S>                            <C>       <C>            <C>     <C>           <C>        <C>        <C>            <C>
C. Eugene Hutcheson            1996      $234,000       ---     ---           ---        ---        212,500        ---
Chief Executive Officer,       ------------------------------------------------------------------------------------------------
Chairman of the Board          1995      128,000(2)     ---     ---           ---        ---        ---            ---
of Directors, President and
Director
-------------------------------------------------------------------------------------------------------------------------------
                               1997      251,298(5)     ---     ---           ---        ---        ---            ---
                               ------------------------------------------------------------------------------------------------
Charlotte E. Doremus           1996      204,000 (5)    ---     ---           ---        ---        212,500        ---
Chief Administrative Officer
                               ------------------------------------------------------------------------------------------------
Secretary, Treasurer and       1995        68,000       ---     ---           ---        ---        ---            ---
Director
-------------------------------------------------------------------------------------------------------------------------------
                               1997      (3)            ---     ---           ---        ---        50,000         ---
                               ------------------------------------------------------------------------------------------------
Dr. Frank B. Holze-            1996      (3)            ---     ---           ---        ---        31,000         ---
Director                       ------------------------------------------------------------------------------------------------
                               1995      (3)            ---     ---           ---        ---        ---            ---
-------------------------------------------------------------------------------------------------------------------------------
                               1997      (4)            ---     ---           ---        ---        50,000         ---
                               ------------------------------------------------------------------------------------------------
David M. Barrett, Esq.         1996      (4)            ---                   ---        ---        241,000        ---
Director                       ------------------------------------------------------------------------------------------------
                               1995      (4)            ---                   ---        ---        ---            ---
-------------------------------------------------------------------------------------------------------------------------------
                               1997      125,000        ---                   ---        ---        100,000        ---
                               ------------------------------------------------------------------------------------------------
Delbert A. Warosh              1996      114,000        ---                   ---        ---        ---            ---
President-Dynamatic            ------------------------------------------------------------------------------------------------
                               1995       33,000        ---                   ---        ---        ---            ---
-------------------------------------------------------------------------------------------------------------------------------
John M. Lison                  1997      (7)            ---                   ---        ---        100,000        ---
Director
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  The compensation information for 1995 is for the period from inception
     (September 1, 1995) to December 31, 1995.

(2)  Excludes a fee of $125,000 for services rendered in connection with the
     acquisition of the Division.

(3)  Excludes consulting fees for the year ended December 31, 1997, December
     31, 1996 and the four months ended December 31, 1995 of $66,664, $100,000
     and $67,000,   respectively.  Dr. Holze converted $90,909 into Unidyne
     Corporation common stock through the exercise of options.  The consulting
     agreement with Dr. Holze terminated August 31, 1997.

(4)  Excludes legal fees to Barrett and Schuler for the year ended December 31,
     1997, December 31, 1996 and the four months ended December 31, 1995 of
     $126,000, $156,000 and $44,500,  respectively.  Mr. Barrett converted
     $100,000 into Unidyne common stock through the exercise of options.

(5)  Includes accrued salaries for previous years due from Maxwell Dynamometer,
     Inc. $64,765 for each of the parties noted above, Ms. Doremus and Mr.
     Hutcheson.  These accrued salaries were converted into Unidyne Corporation
     common stock through the exercise of options.

(6)  $43,750 of Unidyne Corporation base compensation for Mr. Hutcheson was
     converted into Unidyne Corporation common stock through the exercise of
     options.

(7)  Excludes legal fees to Lison & Griffon for the year ended December 31,
     1997 of $113,705.  Mr. Lison converted $25,000 into Unidyne Corporation
     common stock through the exercise of options.





                                    Page 25

<PAGE>   26
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                  OPTIONS/ SAR GRANTS IN LAST FISCAL YEAR
                                  ---------------------------------------
---------------------------------------------------------------------------------------------------
                                                  % OF TOTAL
                                NUMBER OF         OPTIONS
                                SECURITIES        GRANTED TO      EXERCISE
                                UNDERLYING        EMPLOYEES IN    PRICE PER       EXPIRATION
NAME                            OPTIONS           FISCAL YEAR     SHARE           DATE
----                            ----------        ------------   ----------       ----------
---------------------------------------------------------------------------------------------------
<S>                            <C>                                <C>             <C>
Dr. Frank B. Holze              50,000                            6.00            March 31, 2002
---------------------------------------------------------------------------------------------------
David M. Barrett                50,000                            6.00            March 31, 2002
---------------------------------------------------------------------------------------------------
John M. Lison                  100,000                            6.00            March 31, 2002
---------------------------------------------------------------------------------------------------
Del Warosh                     100,000                            6.00            June 11, 2002
---------------------------------------------------------------------------------------------------
</TABLE>





                                    Page 26
<PAGE>   27
ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following persons are known by the Company to be the beneficial owners of
more than five percent of Registrant's Common Stock as of December 31, 1997.

<TABLE>
             <S>                                   <C>                              <C>
                                                            Amount(1)
             Name and Address                               and Nature               Percentage
             of Beneficial Owner                            of Ownership             of Class
             --------------------------                     -----------------        ---------------
             Capital Idea, Inc.                             5,106,860(2)             49%
             118 Pickering Way, Suite 104
             Exton, PA 19341

             C. Eugene Hutcheson                            5,316,360(3)             51%
             UNIDYNE Corporation
             118 Pickering Way, Suite 104
             Exton, PA  19341

             Charlotte E. Doremus                           5,316,360(4)             51%
             UNIDYNE Corporation
             118 Pickering Way, Suite 104
             Exton, PA  19341

             David M. Barrett                               1,014,866(5)             10%
             1000 Thomas Jefferson  St., NW
             Suite 305
             Washington, D.C.  20007

             Frank B. Holze                                 1,258,653(6)(7)          12%
             26 BIS Boulevard
             Princess Charlotte
             MC 98000 Monaco
</TABLE>

---------------------

(1)      Unless otherwise indicated, all ownership is direct.

(2)      Includes 500,00 shares which Capital Idia has the right to acquire
         upon conversion of the Company's Class B Convertible Preferred Stock
         (the "Preferred Stock")

(3)      Includes 91,495 shares which Mr. Hutcheson has the right to acquire
         within sixty days through the exercise of options, 4,603,860 shares
         owned by Capital Idea, of which Mr. Hutcheson is Chairman of the Board
         of Directors and Chief Executive Officer and a 50% shareholder, and
         500,000 shares which Capital Idea has the right to acquire upon
         conversion of the Company's Class B Convertible Preferred Stock (the
         "Preferred Stock").

(4)      Includes 167,957 shares which Ms. Doremus has the right to acquire
         within sixty days through the exercise of options, 4,603,860 shares
         owned by Capital Idea, of which Ms. Doremus is a director, Secretary
         and Treasurer, and a 50% shareholder, and 500,000 shares which Capital
         Idea has the right to acquire upon conversion of the Preferred Stock.

(5)      Includes 247,923 shares which Mr. Barrett has the right to acquire
         within sixty days through the exercise of options.  Mr Barrett has
         38,838 options remaining to be exercised.

(6)      Includes 500,000 shares owned by Darnley Holdings, Ltd., a Bahamian
         corporation, of which Mr. Holze is Director.

(7)      Dr. Holze has 38,848 remaining options.





                                    Page 27
<PAGE>   28
The following is certain information regarding the Common Stock of the Company
beneficially owned by each of its directors and executive officers and all
directors and executive officers as a group as of December 31, 1997.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                                             Amount(1)
         Name and Address                                                    and Nature         Percentage
         of Beneficial Owner                       Position                  of Ownership       of Class
         -------------------------                 ----------               -----------------    ---------------
--------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                       <C>                     <C>
C. Eugene Hutcheson                                Chairman of the                   5,316,360(2)         51%
                                                   Board of Directors,
                                                   Chief Executive
                                                   Officer and President
--------------------------------------------------------------------------------------------------------------------------
David M. Barrett                                   Director                          1,014,866(3)         10%
--------------------------------------------------------------------------------------------------------------------------
Frank B. Holze                                     Director                          1,258,653(4)         12%
--------------------------------------------------------------------------------------------------------------------------
Charlotte E. Doremus                               Chief Administrative              5,316,360(5)         51%
                                                   Officer,
                                                   Secretary, Treasurer
                                                   and a Director
--------------------------------------------------------------------------------------------------------------------------
Delbert A. Warosh                                  President of                      103,000                1%
                                                   Dynamatic
--------------------------------------------------------------------------------------------------------------------------
John M. Lison                                      Director                          100,000                1%
--------------------------------------------------------------------------------------------------------------------------
Directors and executive
officers as a group                                                                  8,005,379             75%
--------------------------------------------------------------------------------------------------------------------------

</TABLE>

--------------------
(1)      Unless otherwise indicated, all ownership is direct.

(2)      Includes 91,495 shares which Mr. Hutcheson has the right to acquire
         within sixty days through the exercise of options, 4,603,860 shares
         owned by Capital Idea, of which Mr. Hutcheson is Chairman of the Board
         of Directors and Chief Executive Officer and a 50% shareholder, and
         500,000 shares which Capital Idea has the right to acquire upon
         conversion of the Preferred Stock.

(3)      Includes 247,923 shares which Mr. Barrett has the right to acquire
         within sixty days through the exercise of options.

(4)      Includes 500,000 shares owned by Darnley Holdings, Ltd., a Bahamian
         corporation, of which Mr.  Holze is Director.

(5)      Includes 167,957 shares which Ms. Doremus has the right to acquire
         within sixty days through the exercise of options, 4,603,860 shares
         owned by Capital Idea, of which Ms. Doremus is a director, Secretary
         and Treasurer, and a 50% shareholder, and 500,000 shares which Capital
         Idea has the right to acquire upon conversion of the Preferred Stock.





                                    Page 28
<PAGE>   29
ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company was provided legal services by the firm Barrett and Schuler.  David
M. Barrett, Esq., a director of the Company, is a partner in the firm.  The
Company paid or accrued $126,000 for the year ended December 31, 1997.

The  Company had a consulting agreement with Dr. Frank B. Holze, a director of
the Company.  Effective September 2, 1995, which expired August 31, 1997.  The
company paid or accrued $66,664 for the year ended December 31, 1997 for
services rendered

The Company was provided legal services by the firm Lison and Griffon.  John M.
Lison, Esq., a director of the Company, is a partner in the firm.  The Company
paid or accrued $113,705 for the year ended December 31, 1997.      ($56,000 in
1996)

The Company sub-leases its Exton, Pennsylvania facility from Capital Idea.  The
amount paid by the Company equals the amount paid by Capital Idea to the
landlord.  The amounts charged to expense for the twelve months ended December
31, 1997 was $93,600.

ITEM 13.     EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
         Exhibit No.                        Description
         --------------                    ---------------
         <S>                 <C>
         3.1                 Amended and Restated Certificate of Incorporation
                             of the Company.*

         3.2                 Amended and Restated Bylaws of the Company.*

         10.1                First Amended Purchase and Sale Agreement, dated
                             July 31, 1996, among Robert M. Bernstein, Blue Jay
                             Enterprises, Inc. and certain shareholders of
                             UDI.*

         10.2                Second Amended to Purchase and Sale Agreement,
                             dated September 2, 1996, among Robert M.
                             Bernstein, Blue Jay Enterprises, Inc. and certain
                             shareholders of UDI.*

         10.3                Second Amended Purchase and Sale Agreement, dated
                             September 2, 1996, among Robert M. Bernstein, Blue
                             Jay Enterprises, Inc. and Capital Idea, Inc.'

         16.1                Letter of Jones, Jensen & Co.*

         19.1                Section 14(c)Information Statement, dated August
                             12, 1996.*

         19.2                Form 8-K, dated September 13, 1996.*

         19.3                Form 8-K/A, dated September 17, 1996.*

         19.4                Form 8-K, dated January 15, 1997.*

         19.5                Form 8-K/A, dated March 31, 19971.*

         23                  Consent of Independent Public Accountants

         27.1                Financial Data Schedule.**
</TABLE>

-----------------

#        Filed previously and incorporated herein by reference.
**       Filed herewith.

         (b)    The Company filed a Report on Form 8-K on June 7,1996. Item 5
                of such Form 8-K reported on the Company's execution of
                agreements to purchase all or the issued and outstanding Common
                Stock of UDI and certain other assets.

         (c)    The Company filed a Report on Form 8-K on September 9, 1996.
                Item 4 of such Form 8-K reported on the Change in Registrant's
                Certifying Accountants.  Item 5 of such Form 8-K reported on
                the Company's





                                    Page 29
<PAGE>   30
                amendment of its Certificate of Incorporation and By-Laws.  The
                Company filed a Report on Form 8-K/A on September 17,1996
                amending the Form 8-K.

         (d)    The Company filed a Report on Form 8-K on September 13, 1996.
                Item 1 of such Form 8-K reported on the Changes in Control of
                Registrant.  Item 2 of such Form 8-K reported on the
                Acquisition or Disposition of Assets. The Company filed a
                Report on Form 8-K/A on November 14, 1996 providing financial
                information relating to the Assets acquired.

         (e)    The Company filed a Report on Form 8-K on January 15, 1997.
                Item 2 of such Form 8-K reported on the Company's acquisition
                of the common stock of Maxwell Dynamometer Systems, Inc. which
                it did not previously own.  The Company filed a Report on Form
                8-K/A on March 31, 1997 providing financial information
                relating to the Assets acquired.

ITEM 14.        PLEDGED ASSETS, BANK LINES OF CREDIT, LONG-TERM DEBT AND FAIR
                VALUE DISCLOSURE

The long-term debt and line of credit agreements contain various covenants,
including meeting certain financial ratio expectations, limitations on loans
and advances from the Company and limitations on the purchase of property and
equipment.  At December 31, 1997 Sabina Industries, Inc. had not received a
written waiver regarding the default resulting from the change in ownership of
the Company.  Due to this default, the balance of the note payable at December
31, 1997 was classified as currently due.  This note was paid in full on April
9, 1998.

ITEM 15.        SUBSEQUENT EVENT

On April 2, 1998 the Company secured an Operating Line of Credit with Union
Bank of California, N.A., in the amount of $1,250, for its subsidiary, Sabina.
The maturity is June 1, 1999 and is secured by the Accounts Receivable of
Sabina.



SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

<TABLE>
<S>                                          <C>
                                                   UNIDYNE CORPORATION

Date:                                              /s/ C. Eugene Hutcheson
                                                   ------------------------------------
                                                   C. Eugene Hutcheson, Chairman,
                                                   Chief Executive Officer
</TABLE>

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

<TABLE>
<S>                                          <C>
Date:                                              /s/ C. Eugene Hutcheson
                                                   --------------------------------------
                                                   C. Eugene Hutcheson, Chairman, Chief
                                                   Executive Officer


Date:                                              /s/ Charlotte E. Doremus
                                                   ----------------------------------------
                                                   Charlotte E. Doremus, Secretary and
                                                   Treasurer
</TABLE>





                                    Page 30