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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ----------------------
                                    FORM 10-K

(Mark One)
[ X ] Annual Report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 [Fee Required] for the fiscal year ended December 31,
      1997
                                       or

[   ] Transition Report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 [No Fee Required] for the transition period from
      ______ to _____________

                         Commission file number 1-11729
                             ----------------------

                           LIBERTY TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

            Pennsylvania                                 23-2295708
      (State or other jurisdiction          (I.R.S. Employer Identification No.)
     of incorporation or organization)

         555 North Lane, Lee Park                           19428
        Conshohocken, Pennsylvania                       (Zip Code)
    (Address of principal executive offices)

                                 (610) 834-0330
                         (Registrant's telephone number,
                              including area code)
        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $0.01 per share

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 _____

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

      As of March 20, 1998, the aggregate market value of voting stock held by
non-affiliates of the registrant based on the last sales price as reported by
the NASDAQ National Market was $15,012,408 (5,004,136 shares outstanding at a
closing price of $3.00 per share).
      As of March 20, 1998, the registrant had 5,004,136 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

      The registrant's Proxy Statement for the Annual Meeting of Shareholders on
June 9, 1998 is incorporated by reference in Part III of this Form 10-K to the
extent stated herein.

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                               Page 1 of 49 Pages
                            Exhibit Index at Page 45

<PAGE>


                               INDEX TO FORM 10-K
                           LIBERTY TECHNOLOGIES, INC.

                                                                         Page
                                                                      References
                                                                      ----------

PART I
ITEM 1.  BUSINESS .............................................................3

ITEM 2.  PROPERTIES...........................................................15

ITEM 3.  LEGAL PROCEEDINGS....................................................15

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................15

PART II
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         SHAREHOLDER MATTERS..................................................16

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA.................................17

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS............................................18

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................23

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE..................................23

PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................24

ITEM 11. EXECUTIVE COMPENSATION...............................................25


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT.......................................................25

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................25


PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
         REPORTS ON FORM 8-K..................................................26


                                       2
<PAGE>


                                     PART I

ITEM 1.  BUSINESS

      Liberty Technologies, Inc. ("Liberty" or the "Company"), founded in 1984,
develops, manufactures, markets and sells diagnostic, condition monitoring and
nondestructive evaluation systems and provides related services to customers in
the worldwide power, process and industrial markets. Liberty's products and
services are designed to reduce operating and maintenance costs and increase
efficiency, reliability and safety of plant operation. The Company has
established certain strategic technical and commercial alliances to advance its
business objectives. The Company believes that its focused long-term strategies,
and portfolio of products, services and technology provide the foundation from
which it may achieve its goals and objectives.

      Liberty has three key business segments to support its mission: (1)
performance and condition monitoring products, (2) RADView(TM) imaging systems,
and (3) Liberty Technical Services.

      Liberty's performance and condition monitoring products provide customers
with the tools to prevent unplanned downtime, improve asset utilization and
increase plant safety. Liberty's proprietary products gather and interpret
operating data of valves, engines, compressors, motors, and certain motor-driven
equipment. The products utilize sensors, instruments and proprietary software
that capture and log data for trending and analysis.

      RADView imaging systems concentrates exclusively on the production and
sale of the Company's RADView Digital Radiography product line. The Company
believes that RADView represents the future of industrial radiography and that
its technology offers significant advancements beyond the scope of conventional
industrial radiography, enabling faster, more accurate, lower cost and safer
methods for acquiring and analyzing radiographic information. During 1995,
Liberty released the first phase, the Film Digitizer and Workstation, which
converts existing radiographic film to a digital format. The second phase,
Filmless Radiography, which replaces conventional film with reusable phosphor
screens, was released in 1996. The Imaging Systems Division focuses on marketing
to customers in the power, process and aerospace industries.

      Liberty Technical Services provides comprehensive dynamic testing services
primarily for customers in the power industry. Dynamic testing services are
provided for many plant components, including valves, compressors, engines,
motors and certain motor-driven equipment. Special services include process
safety management support, plant inspection, computerized reporting, and
training.

      Market Overview

      The Company believes that several factors will continue to lead to a
growing market for diagnostic products and services specifically designed for
predictive maintenance. Increasing regulatory requirements, operation and
maintenance costs, and global competition have led to intensified efforts by
companies to improve the productivity, reliability and safety of their
production facilities. Unplanned production shutdowns can have particularly
severe economic consequences in process industries, which are characterized by
continuous facility operation. In addition, concern about environmental damage
and worker health is increasing attention to the safety of industrial plants
where dangerous accidents can occur if critical or safety-related equipment
fails to perform according to design. The Company also believes that the
international nuclear power and process markets will develop using the Company's
diagnostic products.

                                       3
<PAGE>

      Industrial maintenance practices have evolved from reactive to preventive
and more recently, to predictive maintenance. Previously, repairs or
refurbishments were reactive, typically in response to plant equipment failure.
This approach gave way to preventive maintenance where components were serviced
on a scheduled basis. While this approach offered some improvements, it
generally results in the rebuilding of good components while problem components
remained. New management practices focus on monitoring the condition of
equipment through inspection and predictive maintenance in order to minimize
downtime, reduce maintenance costs and improve asset utilization. An important
element of these efforts is the diagnostic testing of critical production and
safety-related equipment such as valves, turbines, motors, engines, motor-driven
systems, and compressors. These practices require more accurate and
cost-effective technologies, systems and procedures, such as those offered by
the Company to predict, detect and avoid problems with critical equipment before
failures lead to costly plant outages or hazardous situations.

      Concern for reliability and safety in the U.S. nuclear power industry
prohibits capacity expansion and therefore requires utilities to make
significant capital investments to maintain existing plants. In addition, U.S.
regulatory requirements have increased over time, particularly with respect to
safety-related equipment, where diagnostic testing is used to verify equipment
operability. Presently, international requirements for the testing of
safety-related equipment are generally less stringent than in the United States.
The Company believes, however, that increasing corporate, government and public
pressure to maintain high levels of reliability and safety in the approximately
300 nuclear power plants located outside the United States will lead to
increased diagnostic testing for these plants as well. The Company believes that
similar concerns in various other process industries are leading operators to
commit resources to ensure the reliable and safe operation of their facilities,
and that the purchase and use of diagnostic testing systems will be driven by
increased awareness of the cost effectiveness of predictive maintenance
practices.

      Another emerging trend is the replacement of film-based radiography with
filmless radiography. Filmless radiography utilizes non-hazardous, reusable
phosphor screens to more efficiently capture and store images in a digital
format which allows images to be transmitted for viewing around the world while
eliminating hazardous waste disposal issues. The trend towards filmless
radiography is expected to accelerate as industries continue to move to
paperless documentation systems. Target areas where radiography is practiced are
the aerospace, power, process, defense, automotive, electrical and electronics,
forging and casting industries.

      The trend towards outsourcing creates a demand for subcontracting to
service companies, such as Liberty Technical Services, which have the
specialized knowledge and access to labor which enables them to efficiently
provide maintenance support. Inspections of fixed assets are performed on a
routine basis to prevent equipment failure and to ensure compliance with safety
and environmental regulations.

 Strategy

      Liberty provides cost-effective, technologically advanced diagnostic,
condition monitoring and nondestructive evaluation products and services for
industries worldwide. The Company has three concurrent strategies to support its
mission:

    o  Develop value-added products and services
    o  Expand Liberty's presence world-wide
    o  Emphasize solutions-oriented customer service.


                                       4
<PAGE>



      Develop value-added products and services. Liberty develops software
intensive products and diagnostic services in response to existing and to
rapidly growing needs for diagnostic, condition monitoring and nondestructive
evaluation in the power and process industries. Technologies being sold and
developed are protected by over 60 Company-owned or licensed U.S. and foreign
patents. The Company intends to continue devoting substantial resources to
engineering and product development in order to enhance its proprietary
technological capabilities. The Company continually strives to improve the
functionality, cost effectiveness, and ease of use of its diagnostic systems.

      Expand Liberty's presence worldwide. The Company seeks to expand its
presence internationally by establishing joint ventures and marketing alliances
in the North American, European and Asian markets. The Company also intends to
establish sales, marketing and production facilities outside the United States
to the extent deemed warranted to achieve the Company's business objectives. The
Company's efforts to sell its products and services internationally is based on
its belief that growing concern for reliability and safety will lead to
increased interest in predictive maintenance and adoption of diagnostic testing
standards by power and process plant operators.

      Emphasize solutions-oriented customer service. Liberty Technical Services
provides asset management for our clients utilizing M-Health(TM), RADView, and
other nondestructive and condition monitoring testing technologies. As Liberty
develops new products, it works closely with customers who provide valuable
feedback by sharing ideas, developing and testing prototypes and analyzing
performance. The Company augments the resulting products with training,
consulting, application, and implementation services. Liberty believes that
product reputation and customer relationships play a significant role in vendor
selection. It also believes that market acceptance of new products and product
extensions is enhanced by close cooperation and engineering relationships
between the Company and its customers.

Acquisitions

      In August 1994, the Company acquired Beta Monitors & Controls Ltd. (Beta),
a Canadian-based company, whose proprietary systems analyze the mechanical
condition, performance, and vibration characteristics of engines, compressors,
motors, turbines, and industrial processes. Beta's systems include sensors and
probes, signal processors and proprietary software that capture and log data for
trending and analysis.

      In March 1994, the Company acquired Charleston, SC based Industrial NDT
Company, a supplier of nondestructive testing services in the industrial market.
This division was sold to a subsidiary of the General Electric Company on
October 30, 1997. This acquisition's services utilized visual inspection,
ultrasonic, radiographic, dye penetrant and magnetic particle technologies to
inspect equipment, such as pressure vessels, above-ground storage tanks,
pipelines, boilers and weldments. Special services included process safety
management, plant inspection, computerized reporting, and training in
nondestructive testing.

      In February 1993, the Company expanded its direct services and training
capabilities through its acquisition of Boggs Technical Services, Inc., a
supplier of valve testing, repair, diagnostic services and personnel training.

Strategic Alliances

      The Company has entered into agreements with, and continues to seek,
strategic partners to support product development and the sales and marketing of
diagnostic systems and services. The following describes the Company's current
strategic alliances:


                                       5
<PAGE>


      TECO-Westinghouse Motor Company (TECO). In January 1998, Liberty entered
into an agreement with TECO to private label Liberty's motor management products
for distribution by TECO.

      North Sea Consortium. In December 1997, Liberty entered into an agreement
to begin development of an on-line monitoring system for emergency shutdown and
isolation valves for a consortium of North Sea oil companies consisting of
Phillips Petroleum, Saga Petroleum, Staat Oil, and Norsk Hydro.

      Kodak. In December 1996, Liberty MP signed a non-exclusive agreement with
Kodak to represent RADView into the French market. Kodak receives a commission
on net sales of RADView products which it sells.

      Carl Bro. In May, 1996 Liberty signed an agreement with Carl Bro, an
inspection and condition monitoring company, to offer the complete range of
Liberty's diagnostic products and services to the Scandinavian market. Liberty
pays a commission on net sales of Liberty products to the Scandinavian market.
Liberty receives a royalty on any services sold that utilize Liberty products.

      Electricite de France (EdF). In December 1995, Liberty and EdF formed a
joint venture company, Liberty M.P. to expand the Company's presence in the
European power and process markets. Liberty M.P., with headquarters near Paris,
France, provides predictive maintenance products and related services critical
to the safe, reliable operation of electric power and industrial plants in the
European Union. Liberty M.P. utilizes technologies developed by both Liberty
Technologies and EdF. EdF is the largest utility in the world. The Company has a
51% ownership interest in Liberty M.P. For the year ended December 31, 1997,
Liberty M.P. had revenues of $1,908,000 and a net loss of $267,000.

      Framatome S.A. In March 1995, the Company entered into a 5-year
non-exclusive license which allows Framatome S.A. to provide VOTES services in
Spain, South America, China, and the United Kingdom. In January 1996, the two
companies entered into a 5-year non-exclusive license which allows Framatome
S.A. to sell the Company's VOTES product and provide related services to
Electricite de France. Liberty receives a royalty on VOTES services provided by
Framatome S.A.

      Quantex Corporation. In June 1994, Liberty entered into a ten-year
exclusive worldwide licensing agreement (with a 10-year option) with Quantex
Corporation of Rockville, Maryland that allows Liberty to manufacture, use and
sell electron radiographic imaging technology developed by Quantex in non-bone
and tissue applications. This technology, protected by 38 patents, replaces
conventional film radiography with electron transfer methods to be used for
nondestructive testing in the industrial field. The Company paid Quantex
$625,000, of which $500,000 was for the rights to the Quantex technology and
$125,000 of which was an advance against future royalties. Until Liberty has
paid Quantex $2,500,000, Liberty will pay royalties of 5% on net sales of
products and 2% on net sales of services utilizing Quantex technology.
Thereafter, until Liberty has paid Quantex $5,000,000 the royalty will be 2% of
net sales of products or services. Thereafter, the royalty will be 1% of net
sales of products or services. There is a minimum annual royalty of $50,000
commencing in June 1997.

Products and Services Currently Offered

      By combining advanced diagnostic technologies with comprehensive software
analysis, Liberty's products and services assist plant operators in various
industries in preventing unplanned downtime, improve asset utilization and
increase plant safety. Liberty's proprietary products monitor machinery
condition and performance by gathering and interpreting operating data of
valves, turbines, engines, compressors, motors, and motor-driven equipment. The
Company's computed radiography

                                       6

<PAGE>

products and services improve upon cost, safety and the environment as compared
to conventional radiography.

      In addition to product sales, the Company provides sensors, accessories,
hardware and software upgrades, and offers field services and training to its
customers. The Company also performs specialized diagnostic and consulting
services as part of customers' periodic predictive maintenance programs. The
following table outlines the products and services currently offered by the
Company:

<TABLE>
<CAPTION>


                     Products                      Initially Sold                           Applications
                     --------                      --------------                           ------------
      <S>                                               <C>             <C>
      BETA-LINK(TM)                                     1995            Gathers and transmits data using radio telemetry
                                                                        simplifying data collection
      BETA-TRAP(TM)                                     1982            Evaluates peak firing pressures and consistency
                                                                        among combustion engine cylinders
      DATA-TRAP(R)                                      1983            Vibration-based condition monitoring and analysis
                                                                        for all classes of rotating equipment
      DIESEL-TRAP(TM)                                   1994            Analysis and condition monitoring for diesel engines
      Easy Torque-Thrust Sensor (ETT)                   1997            Simple to install strain gauge sensor
      FOUDRE                                            1996            Acoustic valve leak detection instrument
      M-HEALTH(TM)                                      1988            Plant-wide machinery data collection and analysis
                                                                        system for condition monitoring and predictive
                                                                        maintenance
      Motor Nalysis Software                            1996            Database management and analysis software for motor
                                                                        instruments
      Motor Performance Analyzer                        1996            Portable instrument automatically detects early
                                                                        stage problems in electric motors
      Motor Performance Tracker                         1997            Control panel-mounted electric motor performance and
                                                                        health monitor.
      Motor Power Monitor(R)                            1993            Detects early-stage problems in motors and
                                                                        motor-driven equipment
      Quarter Turn(TM)                                  1993            Quarter turn valve diagnostic system
      QuickCheck II(R)                                  1995            Check valve testing system
      RADView(TM) Film Digitizer and Workstation        1995            Converts existing radiographic film records to a
                                                                        digital format and offers improved records
                                                                        management and image analysis
      RADView(TM) Filmless Radiography                  1996            Industrial Radiography system uses reusable phosphor
                                                                        screens instead of radiographic films
      RECIP-TRAP(R)                                     1985            Analyzes performance and health of reciprocating
                                                                        compressors and engines
      RECIP-TRAP 9240                                   1997            Multi-channel real time analyzer for engines and
                                                                        compressors
      RECIP-TRAP/Online(TM)                             1995            Monitors reciprocating machinery on line, multiple
                                                                        machines, networks data
      RT Win                                            1996            Microsoft Windows based analysis software for
                                                                        Recip-Trap and Recip-Trap 9240
      BETA-TRAP/Online(TM)                              1977            Monitors gas and diesel engine performance on-line,
                                                                        networks data, wireless display unit

                                       7

<PAGE>



      Portable Engine Balancing System (PEBS)           1997            Diesel locomotive engine, diesel ship propulsion
                                                                        systems portable diagnostic instrument
      Valve Vision                                      1996            Control valve testing instrument
      VOTES(R)100E                                      1996            Compact version of Votes for motor operated valve
                                                                        diagnostics
      VOTES(R)for Windows                               1995            Advanced valve analysis software product
      VOTES(R)Systems, Sensors and Accessories          1988            Motor operated valve diagnostic testing

                        Services
                        --------
      Customer Service and Applications                                 Sales, service and calibration of the Company's
      Engineering                                       1979(1)         products plus customer training and other technical
                                                                        services
      Liberty Technical Services                        1993            Dynamic testing includes diagnostics of critical
                                                                        plant equipment in power facilities

</TABLE>
--------------------
(1) Customer Service and Applications Engineering Services supplied originally
    by Beta, acquired by the Company in August 1994.

Products

      BETA-LINK(TM). Many proprietary products developed by the Company monitor
the condition of reciprocating and rotating engines and compressors. The
BETA-LINK simplifies data collection and eliminates the need to use a flywheel
marker data cable. It uses radio telemetry to transmit the signal from the
flywheel to a receiver attached to the engine analyzer.

      BETA-TRAP(TM). BETA-TRAP is a portable instrument used to evaluate peak
firing pressures and combustion across combustion engine cylinders. BETA-TRAP
accommodates four engines, each with up to 20 cylinders. The system handles any
internal combustion engine with indicator pressure valves. It records date and
time from an internal clock and continuously samples pressures. BETA-TRAP
displays statistics based on numerous peak firing pressures.

      DATA-TRAP(R). DATA-TRAP is a portable vibration-based condition monitoring
instrument that can be used for all classes of rotating equipment. Features
include a user-friendly design with eight push buttons and menu-driven software.
Automatic anomaly detection is enabled through fixed alarms, percentage changes,
statistical analysis and changes in spectrum components.

      DIESEL-TRAP(TM). DIESEL-TRAP is a portable instrument that uses
computerized analysis, including baseline and trending, to determine diesel
engine performance, analyze power cylinder output, timing of injection and
combustion and deviations among cylinders. Pressure and vibration data are
displayed simultaneously on the computer screen with an animated piston to see
how the graphs relate to actual piston motion.

      Easy Torque-Thrust Sensor (ETT). The Easy Torque Thrust Sensor is a
simple to install strain gauge sensor which is adaptable for various stem
diameters.

      Foudre. Foudre is a portable, non-intrusive diagnostic instrument for the
detection of leaks in all types of valves. The system utilizes acoustics,
vibration sensors, and signal processing to test the valve while in use. Foudre
technology is licensed from Electricite de France.

      M-HEALTH(TM). M-HEALTH collects plant-wide machinery data and converts it
into meaningful information for engineering, maintenance, operations and
managerial purposes. Graphing and reporting functions enable efficiency
calculations, normalized trending and future events. The system extracts
essential data from control systems either on-line or with Liberty's portable
MICRO-TRAP(TM) data collector for timely detection of degraded conditions.

      MotorNalysis(TM). MotorNalysis supports the Motor Performance Analyzer
(MPA) and Motor Performance Tracker products. It provides tools for waveform
analysis and motor comparisons. Features include data management capabilities
and communications features to enable remote monitoring.

      Motor Performance Analyzer(TM) (MPA). MPA is a portable diagnostic
instrument that provides information on the health and operating efficiencies of
induction poly-phase motors as they operate. MPA has integrated auto-analysis
software to present diagnostic information in easy to understand reports to
minimize user training.

      Motor Performance Tracker(TM) (MPT). MPT is a control panel-mounted
electric motor performance and health monitor. It provides continuous data on a
motor's rotor, stator, power source, motor shaft speed, torque efficiency, and
other operating parameters. MPT performs its tests while the motor is in normal
operation. There have been two patents awarded to the Company and several others
are pending on this product.

      Motor Power Monitor(R). Motor Power Monitor is a portable diagnostic
instrument designed to reliably detect early-stage mechanical and electrical
problems in both motors and motor-driven machines while the equipment is
operating. It provides accurate current and voltage measurements and computes
motor power and other key variables for multi-phase electric motors. Motor Power
Monitor will acquire data either at the motor or at the motor control center
where several motors in a plant are controlled. The system provides accurate
data useful for real-time motor health diagnostics and trending.

      Quarter Turn(TM). Quarter Turn is an extension of VOTES that measures
torque and performs diagnostics on butterfly valves. The system provides data
acquisition, signal conditioning, data processing and report generation.

      QuickCheck II(R). QuickCheck II is a fully integrated, portable, software
intensive instrument that uses the Company's proprietary technologies to
non-intrusively test all common types of check valves. A typical nuclear power
plant utilizes approximately 150 safety-related check valves, which use an
internal hinge-mounted disk or lift piston to prevent reverse flows in a pipe.
QuickCheck II reduces the need for the costly and time consuming valve
disassembly to identify needed repairs. The system uses externally mounted
accelerometers to detect structure-borne acoustic signals to diagnose metal
impacts and rubs, cavitation, disk flutter and back leakage. Additionally, the
unit's magnetic subsystem generates and senses a magnetic field within the check
valve that is used to determine the position and motion of the disk. QuickCheck
II and its technology are covered by three of the Company's U.S. patents.

      RADView(TM) Film Digitizer, Workstation and Software. The RADView Film
Digitizer converts existing film records to a digital format which reduces
records management costs, prevents information loss, and provides rapid and easy
electronic access to NDT records. Digital images are optimized and viewed on a
high resolution monitor, permanently archived on optical disks, and can be
electronically transmitted for remote viewing and analysis. Analysis software
enables dimensional and optical density measurements and features advanced
information management capabilities through a SQL database.

                                       9

<PAGE>


      RADView(TM) Filmless Radiography. Industrial radiography is utilized to
investigate the internal integrity of welds, castings, pipes, valves, and
electronic components. The Company believes that filmless radiography represents
the future of industrial radiography and that its technology offers significant
advancements beyond the scope of conventional industrial radiography. RADView
reduces exposure times and errors; eliminates film waste and expense; eliminates
use of hazardous chemicals; manages, transmits and archives images
electronically; obtains optical density and dimensional information; and
digitally optimizes images to extract more information. This technology is
protected by 38 U.S. patents under license by the Company.

      RECIP-TRAP(R) 9220 and 9240. RECIP-TRAP analyzes the mechanical condition,
and the operating performance, vibration, IR temperature, pressure and other
characteristics of reciprocating compressors and engines. Portable
instrumentation and custom software facilitate data collection, diagnostics,
trending and historical comparisons. Machinery problems are identified through
programmed alarms, percentage changes and statistical analysis. The RECIP-TRAP
9240 was released in March 1997 and provides the capability to collect data
simultaneously from multiple channels. The RECIP-TRAP 9220 allows single channel
data collection.

      RECIP-TRAP/Online(TM). RECIP-TRAP/Online(TM) continuously monitors
reciprocating machinery providing information to optimize availability, increase
plant safety and improve maintenance practices. Highly reliable sensors,
hardware, and software monitor compressor and engine cylinder pressure,
vibration and temperature. Multiple engines and compressors are monitored in one
system. Data is passed over a LAN to the central analysis workstation or to the
customer's man-machine interface or control system. Data is also accessed over
modems and Internet connections for remote site monitoring.

      RT Win. The RT Win Windows-based software is a companion product to the
Recip-Trap and Diesel-Trap. The SQL software enables customers to monitor the
performance and condition of reciprocating machinery across multiple plant
locations.

      BETA-TRAP/Online(TM). BETA-TRAP/Online(TM) continuously monitors natural
gas or diesel engines cylinder pressures used to continually optimize engine
performance, fuel and emissions. Highly reliable sensor, hardware and software
are used to collect, analyze and present engine performance information.
Wireless LAN and hardwire LAN connections make the data available for remote
site monitoring.

      Portable Engine Balancing Systems (PEBS). PEBS is a multiple channel data
acquisition instrument used to monitor information on locomotive and ship diesel
engine performance. Information is displayed in real time on an integrated
notebook computer. The user can quickly balance the engine load between
cylinders to improve fuel consumption, reduce emissions, and extend the life of
the engine.

      ValveVision(TM) ValveVision is a hand-held device that utilizes a Liberty
patented C-clamp sensor to measure the condition of control valves. The unit
interfaces via a PCMC/A interface and companion Windows-based software to
connect to any notebook personal computer.

      VOTES (R) Systems, Sensors and Accessories. Liberty's Valve Operation Test
and Evaluation System (VOTES) is the predominant system in the worldwide nuclear
power industry for testing motor-operated valves. VOTES is a fully integrated
diagnostic system that provides a comprehensive profile of a plant's motor
operated valves, including the condition of the valve's motor, gearing, control,
settings, stem, packing, bearings and other components. VOTES contributes to a


                                       10

<PAGE>


plant's predictive maintenance program by helping to optimize valve operability,
reduce maintenance costs and reduce personnel exposure to hazardous
environments. VOTES for Windows analysis software evaluates tests acquired with
the VOTES system using a Microsoft Windows(TM) platform offering many advanced
diagnostic and data management tools.

      VOTES(R) 100e. The VOTES(R) 100e is an enhancement to the Company's
VOTES(R) 100 system.

Services

      Liberty provides dynamic testing for critical plant equipment for
facilities that rely on outsourcing. The service business provides a channel for
Liberty's products into new markets.

      Liberty Technical Services. Testing services are provided for many plant
components including valves, pumps, fans, compressors, turbines, engines, motors
and motor-driven equipment. Special services include process safety management,
plant inspection, and computerized reporting.

      Customer Service and Applications Engineering. Liberty has a full staff of
field applications engineers, service technicians, training instructors, and
electrical and mechanical design engineers to assist in the sales, service and
calibration of the Company's products. Field services, training courses, and
calibration and repair services ensure maintenance activities and tests are
completed promptly and cost-effectively. Applications and customer service
engineers and technicians also respond to customer questions relating to field
testing and to calibrate and repair hardware. The Company also offers on-going
engineering and technical support and regular software upgrades through annual
maintenance contracts. This program allows for customer participation in
development programs and includes priority status for customer services,
equipment rental and technical consultation.

Products Under Development

      The Company's product development efforts focus on further enhancing the
performance and capabilities of its current products as well as on
commercializing its technologies for targeted applications in new markets.
Liberty maintains close contact with customers thereby providing valuable
feedback on product design and ideas for new products and applications to the
Company's research and development programs. The Company designs and develops
products in Conshohocken, PA and in Calgary, Alberta. The following products are
in various stages of development with no assurance that they will be
commercialized.

      Emergency Shutdown Valves (ESV) - A joint project with a consortium of
North Sea oil companies consisting of Phillips Petroleum, Saga Petroleum, Staat
Oil, and Norsk Hydro to develop an on-line monitoring system for emergency
shutdown and isolation valves.

      Motor Power Monitor (MPM) DC Capabilities - Additional capabilities of
measuring DC currents and voltages will be added to the current MPM system.

      SAMIR/VOTES(R). A joint development project, SAMIR/VOTES will combine in
one product the capabilities of Liberty's VOTES and MPM and Electricite de
France's SAMIR. Both are portable motor operated valve diagnostic systems.
Upgrade packages will be available for existing VOTES users.


                                       11

<PAGE>


Advanced Research Projects

      In the last five years, Liberty invested an average of 23% of revenues on
research and development, a portion of which is devoted to advanced research
projects. The Company is investing in knowledge-based diagnostic systems, unique
sensors, algorithm development, data compression, information displays and
phosphor imaging technology. As a market leader in certain sensor technologies,
the Company intends to maintain its leadership position by continuing
development in this area. This research is addressing probe limitations related
to environmental conditions and adding intelligent capabilities to the sensors.

Engineering and Product Development

      The Company believes that its future success will depend in large part on
its ability to enhance and broaden its existing product lines and to develop new
products. Each potential project is screened through four fundamental stages
prior to commercialization: (I) market assessment, product requirements and
planning; (ii) design; (iii) proto-typing and development; and (iv) testing and
validation. Throughout the development process the Product Manager, together
with a multi-disciplinary team of technical and business personnel, oversees
each major project.

      Expenditures for engineering and product development in fiscal 1997, 1996
and 1995 were approximately $4.2 million, $4.5 million, and $4.6 million (of
which $1.7 million was capitalized software development costs in 1995), or
approximately 18%, 26% and 21% of total revenues, respectively. No software
development costs were capitalized in 1996 and 1997. Of such amounts,
approximately $0.7 million, $0.2 million and $0.1 million, respectively, were
funded by customers of the Company or third parties.

Sales and Marketing

      The Company sells its systems and services through a direct sales force
located in the United States, Canada, and Europe. The Company's principal office
is in Conshohocken, Pennsylvania. Other offices including sales and service are
located in Calgary, Alberta; Houston, TX; North Charleston, SC; Williamsburg,
VA; and Cheshire, England. LMP is located outside Paris, France. In addition,
the Company has entered into third party distribution agreements with
distributors in various locations around the world to expand its international
sales.

      The Company markets its systems and services through trade shows, on-going
customer communications programs, promotional material, direct mail, public
relations and advertising. Several times a year, the Company sponsors user-group
meetings, to which current and prospective customers are invited. These
meetings, which focus on the applications of the Company's systems, are an
important element of the Company's marketing efforts. In addition, the Company's
customer service and applications engineering groups are important elements in
providing support to customers and gathering information on current product
performance and future product development.

Customers

      Current customers for the Company's products are companies in the domestic
and international power, industrial, and transportation markets. In 1997 and
1996, the Company's foreign operations and export sales accounted for
approximately $3.5 million and $4.6 million, or 15% and 26%, respectively, of
total revenues. In 1995, foreign operations and export sales accounted for less
than 10% of total revenues. In 1996, 1995 and 1994, no customer accounted for


                                       12

<PAGE>

10% or more of total revenues. Because of the Company's typical pattern of
revenues, its growth and the increase in its customer base, the Company does not
believe that the loss of any particular customer would have a material adverse
effect on the Company's business. However, due to the variability in the size
and timing of orders for both products and services from the Company's
customers, the Company's operating results may vary significantly from quarter
to quarter.

Backlog

      The Company typically fills orders for commercial products within 30 days,
although certain product orders require more time to complete, depending on
customer schedules for planned facility maintenance and product availability.
Customers usually purchase products on an as-needed basis, and thus, the Company
generally has less than two months' revenues in product backlog. Due to the
variable nature of service contracts, the Company generally carries about three
month's revenues in service backlog. The Company does not believe that backlog
is a meaningful indicator of future revenues.

Patents and Intellectual Property

      The Company relies primarily on a combination of patent, copyright,
trademark and trade secret laws, employee and third-party nondisclosure
agreements and other intellectual property protection methods to protect its
products and proprietary technologies. The Company believes that their patents
and intellectual property provide Liberty with a competitive advantage. The loss
of any single item, however, would not have a significant impact on the Company.
The Company currently owns 24 U.S. patents (one expires in 1998, 23 expire
between 2007 and 2016) and 17 foreign patents (expire between 2008 and 2012) and
in addition has assigned four U.S. and two foreign patent to EPRI in return for
exclusive worldwide marketing and licensing rights for STARS ABM. The RADView
technology is protected by 38 U.S. patents (expire between 2006 and 2009) under
license from Quantex Corporation. In addition, the Company currently has
thirteen U.S. and twelve foreign (including one to be assigned to EPRI) patent
applications pending. The Company's software is protected under copyright laws.

      Although the Company continues to implement measures to protect its
intellectual property and intends to defend its proprietary rights, policing
unauthorized use of the Company's technology or products, including instances
where the Company believes infringement has occurred, is difficult and often not
economically justifiable. There can be no assurance that the Company's efforts
to protect its intellectual property will be successful.

Manufacturing and Quality Assurance

      All Liberty products currently are manufactured in the Conshohocken, PA
facility. The Company also intends to establish production facilities outside
the United States to the extent deemed warranted to achieve the Company's
business objectives.

      The Company's manufacturing operation consists primarily of final assembly
and testing of materials, electronic components and subsystems produced by the
Company or purchased from suppliers. Sensors, calibrators and RADView phosphor
screens are manufactured from basic components and raw materials. The Company
has established comprehensive quality assurance programs in all areas, including
procurement, manufacturing, engineering, design and development of both hardware
and software. Raw materials, parts, subassemblies and fully configured finished
products undergo rigorous functional and quality assurance testing. Because of
the critical safety-related applications in which the Company's products are


                                       13

<PAGE>


used, customers and industry sponsored monitoring groups regularly inspect and
audit the Company's operations as part of the vendor certification programs
required by federal law and by individual customers' quality assurance programs.

      The Company has multiple sources of supply for most critical components
used in its products. As part of its Total Quality Management program, the
Company seeks to build a close working relationship with a small number of
component vendors for particular products, which in certain circumstances may
cause the Company to utilize a single source of supply. In situations where the
Company relies on a single source of supply, the Company believes that an
adequate quantity of components will be available to meet its needs for the
foreseeable future.

Competition

      The Company believes that cost effectiveness of diagnostic testing systems
is an important competitive factor in the market for diagnostic products and
services for the process industries. In addition, other competitive factors
include product performance, accuracy, reliability and ease of use. Overall, the
market for process industry equipment diagnostics is highly fragmented, with
many firms providing systems or services to monitor a single physical variable,
such as equipment vibration, heat emission or metal wear. A small number of
firms offer monitoring or diagnostic capabilities for several physical
variables, and certain firms control a substantial share of particular specialty
markets such as vibration monitoring. Firms engaged in the overall industrial
diagnostics market may be viewed as potential competitors of the Company.

      Liberty believes that competition in the diagnostic testing market for the
power and process industries is based on product performance, accuracy,
reliability, ease of use, and integration into existing systems. The Company
believes that its systems are the most effective diagnostic systems for motor
operated valves and check valves currently in use in the nuclear power industry
and for reciprocating engines and compressors in the petrochemical industries.
In addition, the Company believes its industrial electric motor diagnostic
products will be differentiated through its extensive on-line monitoring and
diagnostic capabilities. Certain of the Company's current competitors, some of
which are affiliated with multinational technology companies, have access to
substantially greater financial, research and development, sales and marketing,
and production resources than the Company.

      Liberty believes its digital radiography solution for the industrial
market is unique. Major competitors are large radiographic film product
manufacturers. However, Liberty believes the RADView product line will be
competitive based on pricing and performance characteristics.

Employees

      As of December 31, 1997, the Company employed approximately 125 persons of
whom 14 were engaged in sales and marketing, 39 in engineering and product
development, 20 in manufacturing and quality assurance, 33 in technical service
and support and 19 in finance and administration. None of the Company's
employees are subject to a collective bargaining agreement. The Company believes
that its employee relations are good.


                                       14
<PAGE>


ITEM 2.  PROPERTIES

      Liberty leases approximately 40,000 square feet for its principal
administrative, marketing, manufacturing and product development and support
facility in Conshohocken, Pennsylvania, under an agreement which expires in
December 2000. The Company also leases a 20,000 square foot facility in Houston,
Texas for sales, product support, and service under an agreement which expires
in February 2001. In addition, approximately 6,600 square feet is leased for
product development and sales functions in Calgary, Alberta under an agreement
which expires in May 2001. Other locations for sales and service operations are
leased in St. Joseph, Michigan; North Charleston, South Carolina; and
Williamsburg, Virginia; under agreements expiring at various times through 1999.
Liberty M.P. leases office space near Paris, France. The Company believes that
its facilities are adequate for the foreseeable future and that suitable
additional or alternative space will be available on commercially reasonable
terms when needed in the future.


ITEM 3.  LEGAL PROCEEDINGS

      The Company is not a party to any material pending legal proceedings, nor,
to the Company's knowledge, is any material legal proceeding threatened.


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

      Approval for the sale of the Company's nondestructive testing and
evaluation services business (NDE Business) and the adoption of the Asset
Purchase Agreement providing for the sale of the NDE Business was submitted to a
vote of the Company's shareholders on October 9, 1997. The sale of the NDE
Business was approved by the shareholders at a special meeting of the
shareholders on October 30, 1997.


                                       15

<PAGE>


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

      Since the Company's initial public offering commenced on March 31, 1993,
the Common Stock has been traded on the Nasdaq National Market under the trading
symbol "LIBT". The following table sets forth the high and low closing sale
prices for the Common Stock as reported by Nasdaq for the periods indicated.
These prices do not include retail mark-ups, mark-downs or commissions.

                                                High       Low
                 1996                           ----       ---
                 ----
                 First Quarter                 6.125      4.375
                 Second Quarter                8.625      5.500
                 Third Quarter                 6.250      3.188
                 Fourth Quarter                4.250      2.500

                 1997
                 ----
                 First Quarter                 4.375      2.625
                 Second Quarter                3.688      2.500
                 Third Quarter                 4.250      2.625
                 Fourth Quarter                3.750      2.125

      On March 20, 1998, the closing sale price for the Company's Common Stock
was $3.00 per share. As of that date, there were 203 record holders of the
Common Stock, and the Company estimates that there were approximately 1,500
beneficial holders of the Common Stock.

      The Company currently intends to retain any future earnings to fund
operations and the continued development of its business and, therefore, does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future. Future cash dividends, if any, will be determined by the Company's Board
of Directors, and will be based upon the Company's earnings, capital
requirements, financial condition and other factors deemed relevant by the Board
of Directors.

      The Company did not sell any equity securities during the year ended
December 31, 1997 that were not registered under the Securities Act.


                                       16


<PAGE>



Item 6. Selected Consolidated Financial Data

The selected historical consolidated financial data presented below has been
derived from the Company's consolidated financial statements for each of the
years indicated. The data set forth below is qualified by reference to and
should be read in conjunction with the consolidated financial statements and
notes thereto and management's discussion and analysis of financial condition
and results of operations included as items 7 and 8, respectively, in this
Annual Report on Form 10-K.

<TABLE>
<CAPTION>

Statement of Operations Data (1):                                    Year Ended December 31
                                                              (In thousands, except per share data)
                                               --------------------------------------------------------------
                                                 1997          1996         1995         1994(2)      1993
                                               --------      --------     ---------     --------     --------
<S>                                            <C>           <C>          <C>           <C>          <C>
Revenues:

    Product                                    $ 14,123      $ 12,456     $  12,474     $  9,049     $ 12,397
    Service                                       8,507         5,091         9,368        9,338        6,161
                                               --------      --------     ---------     --------     --------
                                                 22,630        17,547        21,842       18,387       18,558
                                               --------      --------     ---------     --------     --------

Cost of revenues:

    Product                                       6,028         4,243         5,364        3,335        3,380
    Service                                       6,321         4,370         6,621        6,570        3,862
                                               --------      --------     ---------     --------     --------
                                                 12,349         8,613        11,985        9,905        7,242
                                               --------      --------     ---------     --------     --------
    Gross profit:
      Product                                     8,095         8,213         7,110        5,714        9,017
      Service                                     2,186           721         2,747        2,768        2,299
                                               --------      --------     ---------     --------     --------
                                                 10,281         8,934         9,857        8,482       11,316
                                               --------      --------     ---------     --------     --------

Operating expenses:

    Engineering and product development           4,169         4,528         2,868        3,123        3,393
    Selling, general and administrative           9,353         8,739         7,977        5,919        4,577
    Non-recurring charges (3)                     2,279            --         4,428           --           --
                                               --------      --------     ---------     --------     --------
                                                 15,801        13,267        15,273        9,042        7,970
                                               --------      --------     ---------     --------     --------
        Operating income (loss)                  (5,520)       (4,333)       (5,416)        (560)       3,346
 Interest income (expense), net                    (551)         (203)          (60)          98          169
                                               --------      --------     ---------     --------     --------
        Income (loss) before income taxes,
          minority interest, change in
          accounting principle and
          discontinued operations                (6,071)       (4,536)       (5,476)        (462)       3,515
Income tax provision (benefit)                   (2,311)           30        (1,263)        (151)       1,106
                                               --------      --------     ---------     --------     --------
        Income (loss) before minority
          interest, change in accounting
          principle and discontinued
          operations                             (3,760)       (4,566)       (4,213)        (311)       2,409
Minority interest in loss of joint venture         (134)          (50)           --           --           --
                                               --------      --------     ---------     --------     --------
        Income (loss) before change in
          accounting principle and
          discontinued operations                (3,626)       (4,516)       (4,213)        (311)       2,409
Change in accounting principle                       --            --            --           --          100
                                               --------      --------     ---------     --------     --------
        Income (loss) before discontinued
           operations                            (3,626)       (4,516)       (4,213)        (311)       2,509
Discontinued operations, net of tax                  88         1,944         1,571          207           --
Gain on sale of discontinued operations, net
    of tax                                        2,641            --            --           --           --
                                               --------      --------     ---------     --------     --------
Net income (loss)                              $   (897)     $ (2,572)    $  (2,642)    $   (104)    $  2,509
                                               ========      ========     =========     ========     ========
Basic income (loss) per share (4):
    Before accounting change and
       discontinued operations                 $   (.72)     $   (.91)    $    (.85)    $   (.06)    $   0.58
    Accounting change                                --            --            --           --         0.02
    Discontinued operations                         .02           .39           .32           04           --
    Gain on sale of discontinued operations         .53            --            --           --           --
                                               --------      --------     ---------     --------     --------
                                               $   (.18)     $   (.52)    $    (.53)    $   (.02)    $   0.60
                                               ========      ========     =========     ========     ========

Diluted net income (loss) per share (4)        $   (.18)     $   (.52)    $    (.53)    $   (.02)    $   0.54
                                               ========      ========     =========     ========     ========
Shares used in computing basic income (loss)
   per share (4)                                  5,007         4,970         4,943        4,859        4,154
                                               ========      ========     =========     ========     ========
Shares used in computing diluted net income
   (loss) per share (4)                           5,007         4,970         4,943        4,859        4,637
                                               ========      ========     =========     ========     ========

Balance Sheet Data:
    Cash and investments                       $  2,444      $    324     $     356     $  1,083     $  9,175
    Working capital                               9,816         7,536         5,773        6,967       15,226
    Total assets                                 18,434        23,658        23,803       24,403       19,875
    Total debt                                      282         5,988         2,551          566          371
    Shareholders' equity                         13,125        13,973        16,410       18,954       17,502

</TABLE>

--------------
(1)  See Note 3 to the Notes to the consolidated financial statements for
     information on the sale of the NDE Business in 1997. The results of the NDE
     Business have been treated as discontinued operations for all periods
     presented.
(2)  See Note 2 of Notes to the Consolidated Financial Statements for
     information on acquisitions in 1994.
(3)  In 1997, the Company recorded non-recurring charges related to the
     write-off of goodwill and other intangible assets. In 1995, the Company
     recorded non-recurring charges related to the write-off of capitalized
     software development costs and a corporate restructuring. See Notes 2 and 4
     of Notes to the consolidated financial statements.
(4)  See Note 1 of Notes to the Consolidated Financial Statements.


                                       17

<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

Cautionary Statement

When used in this Annual Report on Form 10-K and in other written or oral public
statements by the Company and Company officers and management, the words
"estimate," "project," "intend," "believe," "anticipate" and similar expressions
are intended to identify forward-looking statements regarding events and
financial trends which may affect the Company's future operating results and
financial position. Such statements are subject to risks and uncertainties that
could cause the Company's actual results and financial position to differ
materially. Such factors include, among others: (i) the Company's ability to
identify appropriate acquisition candidates, complete acquisitions on
satisfactory terms, or successfully integrate acquired business; (ii) the
Company's ability to obtain financing on satisfactory terms and the degree to
which the Company is leveraged, including the extent to which currently
outstanding options are exercised; (iii) the sensitivity of the Company's
business to general economic conditions; (iv) the timely development, production
and acceptance of new products; (v) continued acceptance in the marketplace,
competition and buying patterns of customers; (vi) the timing of orders from,
and shipments to , major customers; (vii) changes in product/service revenue
mix; (viii) the absence of a significant order backlog; (ix) factors associated
with international sales such as the relative strength of the dollar when
compared to the currencies of the countries into which the Company exports
products; (x) the Company's ability to remain in compliance with the numerous
environmental, health and safety requirements to which it is subject; (xi)
changes in accounting principles, policies or guidelines; and (xii) other
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices. Additional factors
are described in the Company's other public reports filed with the Securities
and Exchange Commission. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to publicly release the result of any revisions
of these forward-looking statements to reflect events or circumstances after the
date they are made or to reflect the occurrence of unanticipated events.

Results of Operations

1997 Compared to 1996

         Total Revenues. Total revenues increased from $17.5 million in 1996 to
$22.6 million in 1997, or 29%. Product revenues increased from $12.5 million in
1996 to $14.1 million in 1997, or 13%, primarily due to a $0.9 million increase
in condition monitoring product sales into the domestic nuclear and industrial
markets and a $0.3 million increase in RADView(TM) sales. Service revenues
increased from $5.1 million in 1996 to $8.5 million in 1997, or 67%, primarily
as a result of higher revenues from nuclear services and increased revenues from
external funding sources of approximately $0.8 million.

         Cost of Revenues. Cost of revenues increased from $8.6 million in 1996
to $12.3 million in 1997, or 43%. As a percentage of total revenues, cost of
revenues increased from 49% in 1996 to 55% in 1997. Cost of product revenues
increased as a percentage of product revenues from 34% in 1996 to 43% in 1997.
Cost of service revenues decreased as a percentage of service revenues from 86%
in 1996 to 74% in 1997 as a result of increased higher margin technical service
revenues and improved nuclear service margins. Gross profit increased from $8.9
million in 1996 to $10.3 million in 1997, or 15%. As a percentage of total
revenues, gross profit decreased from 51% in 1996 to 45% in 1997. The Company
expects that the gross profit percentage will vary from period to period

                                       18

<PAGE>


depending primarily on the mix of products and services sold.

         Engineering and Product Development Expenses. Total engineering and
product development expenses decreased from $4.5 million to $4.2 million, or 8%,
from 1996 to 1997. The decrease is due to a reduction in internally funded
development. As a percentage of total revenues, engineering and product
development expenses decreased from 26% in 1996 to 18% in 1997.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $8.7 million in 1996 to $9.4 million in
1997, or 7%, and decreased as a percentage of total revenues from 50% in 1996 to
41% in 1997. The increase in expenditures resulted primarily from the addition
of $0.3 million in Liberty M.P. operating expenses, which was in the startup
phase during 1996, and costs associated with the introduction of the new motor
monitoring products. The decrease as a percentage of revenues is a result of the
increase in revenues.

         Non-recurring Charges. During 1997, the Company recorded a charge of
$2.3 million for the write-off of goodwill related to the acquisition of Beta
Monitors and Controls and other miscellaneous intangible assets.

         Interest Expense, net. Net interest expense was $0.2 million in 1996 as
compared to $0.6 million in 1997. The increase was a result of increased
short-term bank financing to fund working capital during 1997.

         Income Tax Provision (Benefit). The Company recorded an income tax
provision of $30,000 in 1996 as compared to a benefit of $2.3 million for 1997.
In 1996, the Company recorded a valuation allowance of $0.9 million due to
uncertainties regarding the realizability of the net deferred tax asset at
December 31, 1996. As a result of the gain on the sale of the NDE Business in
October 1997, the Company utilized net operating loss carryforwards for which
the valuation allowance had been recorded. Accordingly, the Company recorded an
income tax benefit of $0.9 million for the year ended December 31, 1997, related
to the reversal of the valuation allowance. For the year ended December 31,
1997, the effective income tax rate from continuing operations used to record
the tax benefit was 38.1% compared to an effective income tax rate of 0.7% in
1996. In 1997, the favorable impact of the reversal of the valuation allowance
was partially offset by the write down of goodwill related to the acquisition of
Beta Monitors and Controls, which is not deductible for tax purposes. In 1996,
the federal tax benefit was offset by the valuation allowance recorded.

         Loss from continuing operations. Loss from continuing operations
decreased from $4.5 million in 1996 to $3.6 million in 1997, or $0.91 and $0.72
loss per share in 1996 and 1997, respectively. The increase in the loss from
continuing operations in 1997 reflects increased gross profits as compared to
1996, and the reversal of the valuation allowance of $0.9 million on the
deferred tax asset, offset by the write down of intangible assets and the
increase in operating expenses and interest expense.

         Income from discontinued operations, net of tax. Net income from
discontinued operations decreased from $1.9 million to $88,000 for the year
ended December 31, 1996 and 1997, respectively, primarily as a result of lower
revenues and gross profit margins and higher operating expenses during the 1997
period versus the comparable 1996 period. Income from discontinued operations
for the year ended December 31, 1997 reflects the operations of the NDE Business
through October 30, 1997.

         Loss per share. Loss per share decreased from $0.52 in 1996 to $0.18
loss per share in 1997. The number of shares used in calculating earnings per
share increased to 5,007,000 in 1997 from 4,970,000 in 1996 due to the issuance

                                       19

<PAGE>


of shares in connection with the exercise of stock options and the sale of stock
through the Company's Employee Stock Purchase Plan.

1996 Compared to 1995

         Total Revenues. Total revenues decreased from $21.8 million in 1995 to
$17.6 million in 1996, or 20%. Service revenues decreased from $9.4 million in
1995 to $5.1 million in 1996, or 46%, primarily as a result of lower nuclear
service revenues as customers reduced their maintenance outages.

         Product revenues remained flat at $12.5 million in both 1995 and 1996.
Sales of condition monitoring products into the domestic nuclear and industrial
markets decreased $2.5 million, offset by an increase of $1.0 million in
international condition monitoring sales and an increase of $1.5 million in
RADView(TM) sales.

         Cost of Revenues. Cost of revenues decreased from $12.0 million in 1995
to $8.6 million in 1996, or 28%. As a percentage of total revenues, cost of
revenues decreased from 55% in 1995 to 49% in 1996. Cost of product revenues as
a percentage of product revenues decreased from 43% in 1995 to 34% in 1996,
primarily as a result of the elimination of the amortization of capitalized
software from costs of sales in 1996 and the consolidation of manufacturing
operations in the beginning of 1996. Cost of service revenues as a percentage of
service revenues increased from 71% in 1995 to 86% in 1996 as a result of a
decrease in nuclear service margins. Gross profit decreased from $9.9 million in
1995 to $8.9 million in 1996, or 10%. As a percentage of total revenues, gross
profit increased from 45% in 1995 to 51% in 1996.

         Engineering and Product Development Expenses. Engineering and product
development expenses increased from $2.9 million in 1995 to $4.5 million in
1996, or 58%, primarily as a result of software development costs which did not
meet the criteria for capitalization. During 1995 the Company capitalized
software development expenditures of $1.7 million. At the end of 1995 the
Company wrote off the balance of capitalized software and did not capitalize any
additional software development costs in 1996 due to the rapidly changing
technology environment in which the Company operates and its impact on product
life cycles.

         Excluding the impact of software development costs capitalized during
1995, total engineering and product development costs including capitalized
software development expenditures remained relatively flat, decreasing from $4.6
million to $4.5 million, or 2%, from 1995 to 1996. As a percentage of total
revenues, engineering and product development expenses, including capitalized
expenditures, increased from 21% in 1995 to 26% in 1996, reflecting the lower
revenues in 1996.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $8.0 million in 1995 to $8.7 million in
1996, or 10%, and increased as a percentage of total revenues from 37% in 1995
to 50% in 1996. The increase in expenditures resulted primarily from the
addition of $0.7 million of operating expenses of Liberty M.P., which became
operational at the beginning of 1996.

         Non-recurring Charges. The Company incurred restructuring charges of
$0.8 million during 1995 as a result of the consolidation of its two product
divisions, including manufacturing, into a single products business unit, and
its two service subsidiaries into a single service division as of December 31,
1995.

                                       20

<PAGE>


         The Company wrote off $3.7 million of capitalized software costs during
1995. This write-off of the software development costs was due to the rapidly
changing technology environment in which the Company operates and its impact on
product life cycles. Therefore, as the Company continues to develop and enhance
the software components of its products, the future amounts of capitalized
software are expected to be minimal.

         Interest Expense, net. Net interest expense was $0.1 million in 1995
and $0.2 million in 1996. The increase was a result of increased short-term bank
financing to fund working capital during 1996.

         Income Tax Provision (Benefit). The Company recorded an income tax
benefit of $1.3 million in 1995 and an income tax provision of $30,000 in 1996.
The net tax expense in 1996 represents state income taxes and foreign taxes from
certain of the Company's subsidiaries. The federal income tax benefit for 1996
($0.9 million) was offset by a valuation allowance of the same amount.

         Loss from continuing operations. Loss from continuing operations
increased from $4.2 million in 1995 to $4.6 million in 1996, or $0.85 and $0.91
loss per share in 1995 and 1996, respectively. The loss from continuing
operations in 1995 reflects the effect of the non-recurring charges, as
discussed above. The loss from continuing operations in 1996 reflects lower
gross profit and operating income and the valuation allowance of $0.9 million
recorded on the deferred tax asset.

         Income from discontinued operations, net of tax. Net income from
discontinued operations increased from $1.6 million to $1.9 million for the
years ended December 31, 1995 and 1996, respectively, primarily as a result of
higher revenues and gross profit margins during the 1996 period versus the
comparable 1995 period.

         Loss per share. Loss per share decreased from $0.53 in 1995 to $0.52
loss per share in 1996. The number of shares used in calculating earnings per
share increased to 4,970,000 in 1996 from 4,943,000 in 1995 due to the issuance
of shares in connection with the exercise of stock options and the sale of stock
through the Company's Employee Stock Purchase Plan.

Liquidity and Capital Resources

         For the past three years, the Company has financed its working capital
requirements and capital expenditures and acquisitions through operations, bank
debt and the proceeds of its initial public offering.

1997 Compared to 1996

         The Company had cash and short term investments of $2.4 million and
$0.3 million at December 31, 1997 and 1996, respectively.

         Net cash used by operations in 1997 was $3.3 million compared to $2.0
million in 1996. The increase is a result of an increase in accounts receivable
and a decrease in income taxes payable related to taxes from the sale of the NDE
Business.

         Net cash provided by investing activities in 1997 was $11.5 million
compared to $2.2 million used by investing activities in 1996. The increase is
primarily due to $12.1 million of proceeds generated from the sale of the NDE
Business. Additionally, investment in fixed assets decreased from $1.8 million
in 1996 to $0.5 million in 1997.


                                       21

<PAGE>


         Net cash used by financing activities in 1997 was $6.1 million compared
to net cash provided by financing activities of $4.1 million in 1996, primarily
due to borrowings against the Company's bank line of credit in 1996 as compared
to repayment of the line 1997.

1996 Compared to 1995

         The Company had cash of $0.3 million and $0.4 million at December 31,
1996 and 1995, respectively.

         Net cash used by operations in 1996 was $2.0 million compared to cash
provided by operating activities of $0.9 million in 1995. The decrease is
primarily a result of a higher net loss as adjusted for deprecation and
amortization, deferred income taxes and the write-off of capitalized software; a
buildup of inventory levels in the second half of 1996 in preparation for the
release of new products; and lower accrued expenses. These changes were offset
by lower accounts receivable in 1996.

         Net cash used by investing activities in 1996 was $2.2 million compared
to $3.7 million in 1995. The 1995 activity included a final payment for the
acquisition of INDT and the capitalization of software development costs.
Investment in fixed assets increased from $1.5 million in 1995 to $1.8 million
in 1996.

         Net cash provided by financing activities in 1996 was $4.1 million
compared to $2.1 million in 1995. The cash provided in 1996 and 1995 was due
primarily to the additional borrowings against the Company's bank line of
credit.


Liquidity

         In March 1998, a commercial bank offered to provide the Company with a
two-year line of credit of up to $5.0 million. The line of credit is subject to
the Company's acceptance of the Bank's proposed commitment letter and to the
finalization of the appropriate loan documents. Borrowing under the line would
be limited to 80% of qualified accounts receivable, as defined, and would be
collateralized by a pledge of substantially all of the Company's assets.
Additionally, the Company would be required to maintain compliance with certain
financial and non-financial covenants, as defined. Borrowings under this
facility would bear interest at the bank's prime rate plus 1.5%.

         During 1997 and 1996, the Company had a $7.5 million line of credit
facility with a commercial bank (the "Bank"). The line was fully repaid with a
portion of the proceeds from the sale of the NDE Business. The Bank, however,
subsequently exercised its right not to make future advances under the credit
facility.

         The Company believes that its current cash and short-term investment
resources, internally generated funds and proposed line of credit will be
sufficient to fund the Company's operations, debt and lease obligations and
expected capital expenditures for the next twenty-four months and, to the belief
of management, on a longer term basis. Additional financing may be required for
the Company to consummate any material business acquisitions, none of which are
currently contemplated.

Inflation

      Inflation has not had a significant impact on the Company.


                                       22

<PAGE>


Year 2000 Compliance

      The Company has been evaluating its information technology infrastructure
for year 2000 compliance. The majority of the Company's internal information
systems are fully compliant and will function properly beyond the year 1999. The
Company has been communicating with suppliers, financial institutions and others
to determine the current level of compliance and to coordinate conversion to
systems which are year 2000 compliant wherever necessary. To the extent the
Company's significant suppliers, financial institutions and customers do not
successfully achieve year 2000 compliance on a timely basis, the Company's
business or operations could be adversely affected. The total cost of the
software and implementation of any changes that may be required is estimated to
be immaterial and will be expensed as incurred.

      Computer software is an integral part of many of the Company's products.
The Company has evaluated each of its products and has determined that the
majority of them will function properly beyond the year 1999. Several of the
Company's products require modifications be made to insure their functionality
in the year 2000. The projects to insure compliance are scheduled to be
completed at dates starting in the second quarter of 1998, with final completion
of all projects by the end of 1998. The cost of completing these projects is
estimated to be less than $100,000 and will be expensed as incurred.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The information required by this Item is set forth on pages F-1 through
F-18 hereto and is incorporated by reference herein.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        None.

                                       23


<PAGE>


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by Item 10 relating to directors of the Company
is presented under the caption "Nomination and Election of Directors" of the
Company's definitive Proxy Statement for the 1998 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission not later than April 29,
1997 and is hereby incorporated by reference herein.

      The Company's executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board.

      The following sets forth information concerning the individuals who serve,
as of April 14, 1997, as executive officers of the Company:

      Name                Age          Position
      ----                ---          --------

R. Nim Evatt              56           President; Chief Executive Officer
                                       and Chairman of the Board

Daniel G. Clare           39           Vice President, Finance;
                                       Chief Financial Officer; Treasurer

      Mr. Evatt joined the Company as Executive Vice President and Chief
Operating Officer in April 1991. Mr. Evatt was elected President and Chief
Executive Officer and a Director in October 1991 and Chairman of the Board in
April 1992. From 1988 to 1990, Mr. Evatt was President of ICC Technologies,
Inc., which develops, manufactures and markets co-generation and desiccant
cooling systems. From 1986 to 1988, he was President of CE Environmental, Inc.,
an environmental services company, and from 1984 to 1986, he was Vice President
of Marketing at Combustion Engineering, Inc., an engineering and manufacturing
company. Mr. Evatt held a variety of technical, sales and marketing positions at
General Electric Company from 1968 to 1984, including General Manager of the
Europe/Africa/Middle East Services Department from 1982 to 1984.

      Mr. Clare joined the Company as Vice President, Finance, Chief Financial
Officer and Treasurer in March 1995. Previously, Mr. Clare held various
financial management positions in Martin Marietta/General Electric (GE)
Aerospace. Previously he held positions throughout GE, including the Plastics
Group, GE Capital Corporation, the Corporate Audit Staff and the Power Delivery
Division.

                                       24


<PAGE>


ITEM 11. EXECUTIVE COMPENSATION

       The information required by Item 11 is presented under the caption
"Executive Compensation" of the Company's definitive Proxy Statement to be filed
with the Commission not later than April 29, 1998 and is hereby incorporated by
reference herein.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by Item 12 is presented under the caption
"Security Ownership of Certain Beneficial Owners and Management" of the
Company's definitive Proxy Statement to be filed with the Commission not later
than April 20, 1998 and is hereby incorporated by reference herein.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by Item 13 is presented under the caption
"Certain Transactions" of the Company's definitive Proxy Statement to be filed
with the Commission not later than April 20, 1998 and is hereby incorporated by
reference herein.

                                       25


<PAGE>


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (a)  Financial Statements and Financial Statement Schedules.

                  (1)      The Consolidated Financial Statements of the Company
                           and its subsidiaries filed as part of this Report are
                           listed in the attached Index to Consolidated
                           Financial Statements and Financial Statement
                           Schedules.

                  (2)      The Schedules to the Consolidated Financial
                           Statements of the Company and its subsidiaries filed
                           as part of this Report are listed in the attached
                           Index to Consolidated Financial Statements and
                           Financial Statement Schedules.

                  (3)      The exhibits filed as part of this Report are listed
                           in the Index to Exhibits immediately following the
                           Consolidated Financial Statements included in this
                           Report.

         (b)  Reports on Form 8-K. During the fourth quarter of 1997, the
              Company filed a report on Form 8-K on October 7, 1997, reporting
              that the Company had entered into an Amended and Restated Rights
              Agreement. Also, on November 13, 1997, the Company filed a report
              on Form 8-K reporting the sale of the NDE Business and including
              unaudited pro forma financial statements for the period ended June
              30, 1997 and the year ended December 31, 1996.


                                       26


<PAGE>
                   LIBERTY TECHNOLOGIES, INC. AND SUBSIDIARIES


         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE



                                                                       Page
                                                                       ----

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                F-2

CONSOLIDATED BALANCE SHEETS                                             F-3

CONSOLIDATED STATEMENTS OF OPERATIONS                                   F-4

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY                         F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS                                   F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              F-7

CONSOLIDATED FINANCIAL STATEMENT SCHEDULE:

      II.    VALUATION AND QUALIFYING ACCOUNTS                         F-18


                                      F-1


<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Liberty Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Liberty
Technologies, Inc. (a Pennsylvania corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements and schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.

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

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

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Financial Statements and Financial Statement Schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

                                                ARTHUR ANDERSEN LLP

Philadelphia, Pa.
    February 3, 1998


                                      F-2


<PAGE>


LIBERTY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                               --------------------------------

                                ASSETS                                             1997                 1996
                                ------                                         -----------           ----------
<S>                                                                            <C>                   <C>
Current assets:
    Cash and cash equivalents........................................          $     2,444           $      324
    Accounts receivable, net of allowance for doubtful
     accounts of $111 and $61........................................                6,307                5,502
    Inventories......................................................                3,568                3,654
    Escrow receivable, net...........................................                1,385                   --
    Refundable income taxes..........................................                  611                  230
    Deferred income taxes............................................                  340                  352
    Prepaid expenses and other.......................................                  181                  329
    Net assets of discontinued operations............................                   --                6,552
                                                                               -----------           ----------
              Total current assets...................................               14,836               16,943
Property and equipment, net..........................................                2,154                2,657
Goodwill, net........................................................                  103                2,256
Deferred income taxes................................................                  246                  327
Other assets.........................................................                1,095                1,475
                                                                               -----------           ----------
                                                                               $    18,434           $   23,658
                                                                               ===========           ==========
                 LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Line of credit...................................................          $        --           $    5,725
    Current maturities of long-term debt.............................                   37                   46
    Book overdraft...................................................                   --                  472
    Accounts payable.................................................                1,938                2,200
    Accrued compensation and benefits................................                  638                  496
    Other accrued expenses...........................................                1,232                  374
   Unearned revenue..................................................                  303                   12
    Income taxes payable.............................................                  872                   82
                                                                               -----------           ----------
              Total current liabilities..............................                5,020                9,407
                                                                               -----------           ----------
Long-term debt.......................................................                  245                  217
                                                                               -----------           ----------
Due to minority shareholder..........................................                   44                   61
                                                                               -----------           ----------
Commitments (Note 8)
Shareholders' equity:
    Series A Preferred stock, $.001 par value, 10,000 shares
       authorized, none issued.......................................                   --                   --
    Common stock, $.01 par value, 10,000,000 shares
       authorized, 5,027,987 and 5,018,987 shares issued,
       and 5,020,239 and 4,989,915 outstanding.......................                   50                   50
    Additional paid-in capital.......................................               17,215               17,242
    Accumulated deficit .............................................               (4,075)              (3,178)
    Treasury stock at cost...........................................                  (40)                (149)
    Cumulative translation adjustment................................                  (25)                   8
                                                                               -----------           ----------
              Total shareholders' equity.............................               13,125               13,973
                                                                               -----------           ----------
                                                                               $    18,434           $   23,658
                                                                               ===========           ==========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-3
<PAGE>
LIBERTY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                  --------------------------------------------------

                                                                         1997              1996             1995
                                                                  ---------------   ---------------  ---------------
<S>                                                               <C>               <C>              <C>
Revenues:
   Product....................................................    $        14,123   $        12,456  $        12,474
   Service....................................................              8,507             5,091            9,368
                                                                  ---------------   ---------------  ---------------
                                                                           22,630            17,547           21,842
                                                                  ---------------   ---------------  ---------------

Cost of revenues:
   Product....................................................              6,028             4,243            5,364
   Service....................................................              6,321             4,370            6,621
                                                                  ---------------   ---------------  ---------------
                                                                           12,349             8,613           11,985
                                                                  ---------------   ---------------  ---------------
              Gross profit....................................             10,281             8,934            9,857
                                                                  ---------------   ---------------  ---------------

Operating expenses:
   Engineering and product development........................              4,169             4,528            2,868
   Selling, general and administrative........................              9,353             8,739            7,977
   Non-recurring charges (Note 3).............................              2,279              --              4,428
                                                                  ---------------   ---------------  ---------------
                                                                           15,801            13,267           15,273
                                                                  ---------------   ---------------  ---------------

              Operating loss..................................             (5,520)           (4,333)          (5,416)

Interest expense, net.........................................               (551)             (203)             (60)
                                                                  ---------------   ---------------  ---------------

              Loss before income taxes, minority interest and
                discontinued operations.......................             (6,071)           (4,536)          (5,476)

Income tax provision (benefit)................................             (2,311)               30           (1,263)
                                                                  ----------------  ---------------  ----------------

              Loss before minority interest and discontinued
                operations....................................             (3,760)           (4,566)          (4,213)

Minority interest in loss of joint venture....................               (134)              (50)             --
                                                                  ---------------   ---------------  ---------------

              Loss before discontinued operations.............             (3,626)           (4,516)          (4,213)

Income from discontinued operations, net of tax of
     $167, $54, and $154......................................                 88             1,944            1,571

Gain on sale of discontinued operations, net of tax of $3,232.              2,641               --               --
                                                                  ---------------   ---------------  ---------------

Net loss......................................................    $         ( 897)  $        (2,572) $        (2,642)
                                                                  ===============   ===============  ===============

Basic and diluted income (loss) per share
     Continuing operations....................................    $          (.72)   $         (.91) $          (.85)
     Discontinued operations..................................                .02               .39              .32
     Gain on sale of discontinued operations..................                .53               --               --
                                                                  ---------------   ---------------  ---------------
                                                                  $          (.18)   $         (.52) $          (.53)
                                                                  ===============   ===============  ===============

Weighted average shares outstanding...........................              5,007             4,970            4,943
                                                                  ===============   ===============  ===============

</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>

LIBERTY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)

<TABLE>
<CAPTION>
                                                                  Common Stock
                                                            --------------------        Additional     Retained
                                                              Number                     Paid-in       Earnings
                                                            of Shares     Amount         Capital       (Deficit
                                                            ---------     ------       ----------      --------
<S>                                                         <C>           <C>          <C>             <C>
Balance, December 31, 1994..........................        4,994,112     $   50       $ 17,212        $  2,036

  Exercise of stock options.........................            9,250        -               16            -

  Shares issued for employee stock purchase plan....              -          -              (33)           -

  Currency translation adjustment ..................                         -          -             -

  Net loss..........................................              -          -             -             (2,642)
                                                            ---------     ------       --------        --------

Balance, December 31, 1995..........................        5,003,362         50         17,195            (606)

  Exercise of stock options.........................           15,625        -               67            -

  Shares issued for employee stock purchase plan....              -          -              (20)           -

  Net loss..........................................              -          -              -            (2,572)
                                                            ---------     ------       --------        --------

Balance, December 31, 1996..........................        5,018,987         50         17,242          (3,178)

  Exercise of stock options including income tax
    benefit.........................................            9,000        -               29            -

  Shares issued for employee stock purchase plan,
    including income tax benefit....................              -          -              (56)           -

  Currency translation adjustment ..................              -          -               -             -

  Net loss..........................................              -          -               -             (897)
                                                            ---------     ------       --------        --------

Balance, December 31, 1997..........................        5,027,987     $   50       $ 17,215        $ (4,075)
                                                            =========     ======       ========        ========

(TABLE CONTINUED)
                                                                Treasury Stock
                                                          ----------------------       Cumulative         Total
                                                            Number                     Translation      Shareholders'
                                                          of Shares       Amount       Adjustment         Equity
                                                          ---------       ------       -----------      ------------

Balance, December 31, 1994..........................        65,578       $  (344)       $   -           $ 18,954

  Exercise of stock options.........................          -             -               -                 16

  Shares issued for employee stock purchase plan....       (19,367)          107            -                 74

  Currency translation adjustment ..................                                          8                8

  Net loss..........................................          -             -               -             (2,642)
                                                          --------       -------        -------         --------

Balance, December 31, 1995..........................        46,211          (237)             8           16,410

  Exercise of stock options.........................          -             -               -                 67

  Shares issued for employee stock purchase plan....       (17,139)           88            -                 68

  Net loss..........................................          -             -               -             (2,572)
                                                          --------       -------        -------         --------

Balance, December 31, 1996..........................        29,072          (149)             8           13,973

  Exercise of stock options including income tax
    benefit.........................................          -             -               -                 29

  Shares issued for employee stock purchase plan,
    including income tax benefit....................       (21,324)          109            -                 53

  Currency translation adjustment ..................          -             -               (33)             (33)

  Net loss..........................................          -             -               -               (897)
                                                          --------       -------        -------         --------

Balance, December 31, 1997..........................         7,748       $   (40)       $   (25)        $ 13,125
                                                          ========       =======        =======         ========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-5

<PAGE>
LIBERTY TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                  ----------------------------------------------
                                                                         1997            1996             1995
                                                                  ---------------   ---------------  -----------
<S>                                                               <C>                  <C>              <C>
Cash flows from operating activities:
   Net loss...................................................    $          (897)      $    (2,572)     $    (2,642)

   Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
       Depreciation and amortization..........................              1,709             1,924            2,518
       Deferred income taxes..................................             (1,030)              284             (931)
       Gain on sale of NDE Business...........................             (2,641)               --               --
       Minority interest in loss of joint venture.............               (134)              (50)              --
       Write-off intangible assets............................              2,279                --            3,670
       Changes in assets and liabilities, net of effect from
         divestiture -
                  Accounts receivable.........................               (726)              551           (2,865)
                  Inventories.................................                (90)           (1,975)            (406)
                  Refundable income taxes.....................               (381)               67              (24)
                  Prepaid expenses and other..................                178               (31)             (19)
                  Other assets................................                 (8)               63              (10)
                  Accounts payable............................               (170)              451              738
                  Accrued expenses............................               (388)             (403)             706
                  Income taxes payable........................             (1,301)               46              190
                  Unearned revenue............................                291              (328)             (58)
                                                                  ---------------   ---------------- ----------------
                    Net cash provided by (used in) operating
                     activities..............................              (3,309)           (1,973)             867
                                                                  ---------------   ---------------- ----------------
Cash flows from investing activities:
   Purchases of property and equipment........................               (542)           (1,844)          (1,526)
   Proceeds from sale of NDE Business.........................             12,115                --               --
   Purchases of technology licenses...........................                (50)             (100)              --
   Capitalization of software development costs...............                 --                --           (1,745)
   Payment for purchase of acquisitions, net of cash acquired
     and common stock issued..................................                 --                --             (500)
   Other......................................................                 --              (224)             118
                                                                  ---------------   ---------------- ---------------
                    Net cash provided by (used in) investing
                     activities..............................              11,523            (2,168)          (3,653)
Cash flows from financing activities:                             ---------------   ---------------  ---------------
   Payments of long-term debt ................................                (48)             (134)            (240)
   Net borrowings (repayments) under line of credit...........             (5,725)            3,525            2,200
   Increase (decrease) in book overdraft......................               (472)              472               --
   Proceeds from exercise of stock options and warrants.......                 14                67               16
   Proceeds from Employee Stock Purchase Plan.................                 53                68               75
   Investment from minority shareholder in joint venture......                117               111               --
                                                                  ---------------   ---------------  ---------------
                    Net cash provided by (used in) financing
                     activities...............................             (6,061)            4,109            2,051
                                                                  ---------------   ---------------      -----------
Effect of foreign exchange rate changes on cash...............                (33)               --                8
                                                                  ---------------   ---------------      -----------
Net increase (decrease) in cash and cash equivalents..........              2,120               (32)            (727)
Cash and cash equivalents, beginning of year..................                324               356            1,083
                                                                  ---------------   ---------------      -----------
Cash and cash equivalents, end of year........................    $         2,444   $           324      $       356
                                                                  ===============   ===============      ===========

</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
   ------------------------------------------

Background
----------

Liberty Technologies, Inc. (the Company), founded in 1984, develops,
manufactures, markets and sells diagnostic, condition monitoring and
nondestructive evaluation systems and provides related services to customers in
worldwide aerospace, automotive, chemical, petrochemical, and power industries.
The Company's products are designed to reduce operating and maintenance costs
and increase efficiency, reliability and safety of plant operations. The Company
has established certain strategic technical and commercial alliances to advance
its business objectives.

Principles of Consolidation
---------------------------

The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and its 51% owned joint venture, Liberty Maintenance
Predictive (Liberty M.P.). Minority interest represents the minority
shareholder's proportionate share of the equity in the Company's consolidated
joint venture (See Note 13). All intercompany transactions and balances have
been eliminated in consolidation.

Use of Estimates
----------------

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

Cash and Cash Equivalents
-------------------------

For purposes of the statements of cash flows, cash and cash equivalents include
cash in checking accounts, highly liquid investments and short-term investments
with an initial maturity term of three months or less.

Inventories
-----------

Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories include the cost of materials, freight, direct labor and
manufacturing overhead. Inventories are summarized as follows:

                                                         December 31,
                                               ---------------------------------
                                                   1997                1996
                                               ------------     ----------------

          Raw materials & work in process      $   3,125,000    $      3,171,000
          Finished goods                             443,000             483,000
                                               -------------    ----------------

                                               $   3,568,000    $      3,654,000
                                               =============    ================
                                      F-7
<PAGE>

Property and Equipment
----------------------

Property and equipment are recorded at cost. Additions or improvements are
capitalized, while repairs and maintenance are charged to expense. Depreciation
is computed on straight-line methods for financial reporting purposes and on
accelerated methods for income tax purposes. Machinery and equipment and
furniture and fixtures are depreciated over their estimated useful lives of 3 to
7 years. Leasehold improvements and capitalized leases are amortized over the
shorter of the useful life of the related asset or the lease term. Upon
retirement or disposition, the applicable property amounts are relieved from the
accounts, and any gain or loss is recorded in the statement of income.

Software Development Costs
--------------------------

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("SFAS No. 86"), the Company capitalizes certain product development
costs related to the development of new software and significant enhancements to
existing software. The capitalization of such costs begins when a project
reaches technical feasibility, and ceases when the product is available for
general release. Capitalized software development costs are amortized on a
straight-line basis over the estimated economic life of the product (usually
three years), beginning with its release to customers. Product maintenance costs
are charged to expense as incurred.

For the year ended December 31, 1995 the Company capitalized $1,745,000 of
software development costs relating to new product lines and recorded
amortization expense of $733,000. As of December 31, 1995 the Company wrote off
capitalized software costs totaling $3,670,000. The write-off of the software
development costs was due to the rapidly changing technology environment in
which the Company operates and its impact on product life cycles. In accordance
with SFAS No. 86, no software development costs were capitalized in 1997 and
1996.

Goodwill
--------

Goodwill is being amortized on a straight-line basis over 10 years.  As of
December 31, 1997 and 1996, accumulated amortization was $110,000 and $496,000,
respectively.

Impairment of Long-Lived Assets
-------------------------------

In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets for Long-Lived Assets to be
Disposed of," which the Company adopted effective January 1, 1996. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by a company be reviewed for possible impairments whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. SFAS No. 121 also requires that long-lived assets and certain
identifiable intangibles held for sale be reported at the lower of carrying
amount or fair values less cost to sell.

The Company continually evaluates whether later events and circumstances have
occurred that indicate that the remaining useful life for long-lived assets and
intangible assets may warrant revision or that he remaining balance may not be
recoverable. When factors indicate that such assets should be evaluated for
possible impairment the Company uses an estimate of the related undiscounted
cash flow in measuring whether the asset is recoverable. For the year ended


                                      F-8
<PAGE>

December 31, 1997, the Company recorded a charge of $1,966,000 for the write-off
of goodwill related to the acquisition of Beta Monitors and Controls Ltd. (see
Note 2).

Revenue Recognition
-------------------

Product revenues are recognized when products are shipped and service revenues
are recognized as earned when the related services are performed. Included in
service revenues are royalties, license fees and research funding of $968,000,
$231,000, and $132,000 for the years ended December 31, 1997, 1996, and 1995,
respectively. A provision for expected future product warranty claims is
estimated by management based on the Company's prior claim experience.

Concentration of Credit Risk
----------------------------

The Company sells its products and services primarily to the domestic and
international power and process industries. Financial instruments that
potentially subject the Company to credit risk consist primarily of trade
accounts receivable. For the years ended December 31, 1997, 1996 and 1995, no
single customer accounted for more than 10% of total revenues. For the year
ended December 31, 1997 and 1996, the Company's foreign operations and export
sales accounted for approximately $3.5 million and $4.6 million, or 15% and 26%
of total revenues, respectively. For the year ended December 31, 1995 foreign
operations and export sales accounted for less than 10% of total revenues. There
is no single geographic area of significant concentration.

Fair Value of Financial Instruments
-----------------------------------

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses, and debt
instruments. The values of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses are considered to be representative of
their respective fair values. Based on the terms of the Company's debt
instruments that are outstanding as of December 31, 1997, the carrying values
are considered to approximate their respective fair values. See Notes 6 and 7
for the terms and carrying values of the Company's various debt instruments.

Income Taxes
------------

Income taxes are calculated using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax basis of assets and
liabilities and are measured using enacted tax rates that are expected to be in
effect when the differences reverse.

Earnings Per Share
------------------

In 1997, the Company adopted SFAS No. 128, "Earnings per Share". This statement
requires that the Company report basic and diluted earnings (loss) per share for
all periods reported. Basic net income (loss) per share is calculated by
dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding for the period, adjusted for the dilutive effect of common stock
equivalents, consisting of dilutive common

                                      F-9
<PAGE>

stock options using the treasury stock method. For all period presented, common
stock options are not included in the computation as they would be
anti-dilutive.

Foreign Currency Translation
----------------------------

The Company's foreign subsidiaries translate their balance sheet and income
statement accounts from their local currency to U.S. dollars, using the year end
and weighted average exchange rates, respectively. Translation adjustments
resulting from this process are recorded directly in shareholders' equity.

Supplemental Cash Flows Disclosure
----------------------------------

For the years ended December 31, 1997, 1996 and 1995, the Company paid interest
of $541,000, $270,000 and $129,000, respectively, and income taxes of $763,000,
$103,000 and $75,000, respectively. Cash received for income tax refunds totaled
$242,000, $432,000 and $305,000, respectively, for the same periods.

New Accounting Pronouncement
----------------------------

In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information". This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management is currently
evaluating the need to make additional disclosures under SFAS No. 131. However,
this statement will not have any effect on the Company's reported financial
position or results of operations.

2. ACQUISITIONS:
   ------------

On August 12, 1994, the Company acquired 100% of the capital stock of Beta
Monitors and Controls Ltd., a Canadian company (Beta), for Canadian $5,500,000,
equivalent to U.S. $4,022,000. The transaction was accounted for using the
purchase method of accounting. The excess of cash paid over the estimated fair
value of the net assets acquired of $2,490,000 was recorded as goodwill. During
1997, the Company determined that events and circumstances, primarily continued
operating losses after the acquisition date and substantial investment in
research and development for new products to enhance the product portfolio
acquired, indicated that the recoverability of the carrying amount of the
goodwill had been impaired. The Company has determined that future cash flows
from the products acquired will not be sufficient to realize the carrying amount
of the goodwill at December 31, 1997. Accordingly, for the year ended December
31, 1997, the Company recorded a charge of $1,966,000 for the write-off of
goodwill related to this acquisition.

On March 28, 1994, the Company acquired 100% of the capital stock of Industrial
NDT Company, Inc. (INDT) in exchange for $2,000,000 in cash and 317,460 shares
of common stock of the Company (valued at $1,754,000), and a contingent payment
of up to $500,000 (paid in February 1995). The transaction was accounted for
using the purchase method of accounting. The excess of the purchase price over
the estimated fair value of the net assets acquired of $3,110,000 was recorded
as goodwill and was being amortized on a straight-line basis over 20 years. In
October 1997, the Company sold substantially all of the assets of INDT (see
Note 3).

                                      F-10
<PAGE>


3. SALE OF NDE BUSINESS:
   ---------------------

On October 30, 1997, the Company completed the sale of substantially all of the
assets of its nondestructive testing and evaluation services business (the "NDE
Business"), a division of INDT, to a subsidiary of General Electric Company
("GE") for $13,500,000 and the assumption of certain associated liabilities
totaling approximately $1,340,000. In January 1998, the Company paid GE $399,000
related to a final working capital adjustment. At December 31, 1997, $1,385,000
of the proceeds from the sale are held in escrow to secure certain
indemnification obligations of the Company to the buyer. The escrow is due to be
received in October 1998. The Company used a portion of the proceeds from the
sale to repay its line of credit and intends to use the remaining proceeds to
invest in the existing product business and for other corporate purposes.

For all periods presented in the accompanying financial statements, the results
of operations of the NDE Business are reported as discontinued operations. The
net assets of the NDE Business are reported as net assets of discontinued
operations at December 31, 1996. During the year ended December 31, 1997, the
Company recorded a gain of $2,641,000 on the sale of the NDE Business, net of
taxes totaling $3,670,000. The goodwill of $2,574,000 associated with the NDE
Business is not deductible for tax purposes in calculating the gain on the sale.
For the years ended December 31, 1997, 1996 and 1995, the NDE Business generated
service revenues of $12,683,000, $18,035,000 and $11,277,000, respectively.

4. NON-RECURRING CHARGES:
   ---------------------

In 1997 the Company recorded a charge of $1,966,000 for the write-off of
goodwill related to the acquisition of Beta (see Note 2). Additionally, the
Company recorded a charge of $313,000, primarily related to the write down of
organizational costs, technology licenses and patents.

In 1995 the Company reorganized its two product operations into one unit and its
two service operations into a second unit. This reorganization resulted in a
restructuring charge of $758,000 for the year ended December 31, 1995.
Additionally, in 1995 the Company wrote-off capitalized software costs totaling
$3,670,000 (see Note 1).

5. PROPERTY AND EQUIPMENT:
   ----------------------
                                                         December 31,
                                               -------------------------------
                                                   1997              1996
                                               ------------     --------------

          Machinery and equipment              $   4,440,000    $    4,319,000
          Furniture and fixtures                     227,000           354,000
          Leasehold improvements                     220,000           180,000
                                               -------------    --------------

                                                   4,887,000         4,853,000
          Less- Accumulated depreciation and
            amortization                          (2,733,000)       (2,196,000)
                                               --------------   --------------

                                               $   2,154,000    $    2,657,000
                                               =============    ==============



                                      F-11
<PAGE>

6. LINES OF CREDIT:
   ---------------

During 1997 and 1996, the Company had a $7.5 million line of credit facility
with a commercial bank (the "Bank"). The line, which was initially unsecured,
was to expire in two intervals; $2.5 million on March 1, 1997 and $5 million on
May 1, 1997. On February 27, 1997, the Bank extended the entire $7.5 million
facility to May 1, 1997, but required that the line be secured by the Company's
accounts receivable and inventories. In April 1997, the Bank extended the credit
facility through March 1998. Prior to the sale of the NDE Business (see Note 3)
the Company was in violation of certain loan covenants with the Bank.
Additionally, the Company's outstanding principal balance under the credit
facility exceeded the line's borrowing base at various times during 1997. These
events constituted events of default under the Company's loan agreement with the
Bank. The line was fully repaid with a portion of the proceeds from the sale of
the NDE Business (see Note 3), however the Bank subsequently exercised its right
not to make future advances under the credit facility. The line bore interest at
the Eurodollar rate plus 1.25% to 1.5% or the bank's prime rate plus .5% to
1.0%. Interest expense on the line was $265,000 and $56,000 for the years ended
December 31, 1997 and 1996, respectively, at a weighted average interest rate of
6.87% and 6.75%, respectively.

7. LONG-TERM DEBT:
   --------------
<TABLE>
<CAPTION>
                                                                        December 31,
                                                              ---------------------------------
                                                                     1997             1996
                                                              ---------------  ----------------
<S>                                                          <C>               <C>
          Annuity payable to former shareholder of INDT       $       190,000  $        207,000
          Other                                                        92,000            56,000
                                                              ---------------  ----------------
                                                                      282,000           263,000
          Less- Current portion                                       (37,000)          (46,000)
                                                              ---------------  ----------------
                                                              $       245,000  $        217,000
                                                              ===============  ================
</TABLE>

Long-term debt maturities as of December 31, 1997 are as follows:

          1998                                            $         49,000
          1999                                                      34,000
          2000                                                      33,000
          2001                                                      33,000
          2002                                                      33,000
          Thereafter                                               100,000
                                                          ----------------
                                                          $        282,000
                                                          ================
8. LEASE COMMITMENTS:
   -----------------

The Company leases office space under non-cancelable operating leases that
expire on various dates through 2002. Rent expense was $654,000, $771,000, and
$687,000 for the years ended December 31, 1997, 1996, and 1995, respectively.

                                      F-12
<PAGE>

Future minimum payments under the leases as of December 31, 1997, are as
follows:

          1998                                            $        667,000
          1999                                                     686,000
          2000                                                     622,000
          2001                                                     113,000
          2002                                                     109,000
                                                          ----------------
                                                          $      2,197,000
                                                          ================
9. SHAREHOLDER RIGHTS PLAN:
   -----------------------

In May 1996, the Company adopted a Shareholder Rights Plan ("the Rights Plan")
which was amended in October 1997. The purpose of the rights plan is to insure
that any acquisition of the Company would be on terms that are fair to and in
the best interest of all shareholders. Under the Rights Plan, holders of common
stock are entitled to receive one right for each share of common stock held.
Separate rights certificates would be issued and become exercisable in the event
that an acquiring party accumulates 15% or more of the Company's common stock or
announces an offer to acquire 15% or more of the outstanding Company common
stock.

Each right will entitle a holder, except a 15% or more holder, to buy one
one-thousandth share of Series A Preferred Stock at an exercise price of $48 per
unit. Each one one-thousandth share of such Preferred stock is essentially
equivalent to one share of the Company's common stock. However, if an acquiring
party accumulates 15% or more of the Company common stock or certain other
events occur, each right entitles the holder (other than a 15% holder) to
purchase for $48 either $96 worth of the Company's common stock or $96 worth of
the 15% holder's common stock.

The rights expire in May 2006 and may be redeemed by the Company at a price of
$.001 per right at any time up to ten days after they become exercisable or in
connection with a transaction approved by the Board of Directors.

10. STOCK INCENTIVE PLANS:
    ---------------------

Stock Option Plans
------------------

The Company has two stock option plans, the 1992 Stock Option Plan and the 1988
Stock Option Plan, which provide for the granting of options to purchase an
aggregate of 1,800,000 shares of Common Stock to eligible employees and others.
The 1992 Stock Option Plan provides for the grant of options to purchase up to
1,300,000 shares. No additional options will be granted under the 1988 Stock
Option Plan, which provided for the grant of options to purchase up to 500,000
shares.

The terms and conditions of each option award are determined by a committee of
the Board of Directors. Stock options are granted at exercise prices which are
not less than the fair market value of the Company's common stock on the grant
date and are generally exercisable over a period not to exceed ten years from
the date of the grant.

                                      F-13
<PAGE>

Information with respect to the options under both plans and certain prior
options is as follows:

<TABLE>
<CAPTION>

                                                                                   Aggregate       Option Price
                                                                 Shares              Price           Per Share
                                                                 ------            ---------       ------------
<S>                                                             <C>                <C>           <C>        <C>
Outstanding, December 31, 1994                                  1,052,875          $  5,291,000  $   1.65 - 9.50

    Granted                                                        81,000               403,000      4.25 - 6.25
    Exercised                                                      (9,250)              (16,000)     1.65 - 4.00
    Canceled                                                      (54,875)             (260,000)     3.75 - 9.00
                                                              -----------       --------------
Outstanding, December 31, 1995                                  1,069,750             5,418,000  $   1.65 - 9.50

    Granted                                                       212,000             1,208,000      3.00 - 4.88
    Exercised                                                     (15,625)              (67,000)     1.65 - 5.25
    Canceled                                                     (243,625)           (1,920,000)     4.00 - 9.75
                                                              -----------       ---------------
Outstanding, December 31, 1996                                  1,022,500             4,639,000  $   1.65 - 9.75

    Granted                                                       139,500               396,000      2.38 - 3.88
    Exercised                                                      (9,000)              (15,000)     1.65 - 1.65
    Canceled                                                     (105,000)             (620,000)     2.88 - 9.75
                                                              -----------       ---------------
Outstanding, December 31, 1997                                  1,048,000         $   4,400,000  $   1.65 - 9.75
                                                              ===========       ===============
</TABLE>

At December 31, 1997, 537,000 options were available for future grants. The
options generally vest over a four year period, except for non-employee director
grants which vest immediately.

Information with respect to options outstanding under the two stock options
plans at December 31, 1997 is as follows:

<TABLE>
<CAPTION>
                                             Options Outstanding                      Options Exercisable
                              -------------------------------------------------  -----------------------------
                                             Weighted-Average                                 Weighted-Average
                                  Number         Remaining      Weighted-Average    Number       Exercise
      Periods Granted          Outstanding   Contractual Life   Exercise Price   Outstanding        Price
      ---------------          -----------   ----------------   ---------------- -----------  ----------------
<S>                              <C>          <C>                 <C>                <C>          <C>
Prior to January 1, 1995         672,250      4.7 years           $ 4.09             615,290      $ 3.93
During 1995                       57,000      7.4 years             5.08              33,250        5.03
During 1996                      183,250      8.0 years             5.34              51,997        5.09
During 1997                      135,500      9.4 years             2.83               7,500        3.17
                               ---------      ---------           ------             -------      ------
                               1,048,000      6.0 years           $ 4.20             708,037      $ 4.06
                               =========      =========           ======             =======      ======
</TABLE>

Employee Stock Purchase Plan
----------------------------

Under the terms of the Company's 1993 Employee Stock Purchase Plan, eligible
employees may purchase shares of the Company's common stock through payroll
deductions. The number of shares available for purchase by each individual is
limited, based on compensation levels. The purchase price is equal to 85% of the
lower of the average of the highest and the lowest price of the stock on the
first and on the last day of the preceding quarter.

Fair Value of Stock Based Compensation
--------------------------------------

The Company applies Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees," and the related interpretations in accounting for
its stock option plans and Employee Stock Purchase Plan. Had compensation cost
for the Company's stock plans been

                                      F-14

<PAGE>

determined based upon the fair value of the options and employee stock purchases
at the date of grant, as prescribed under SFAS No. 123 "Accounting for
Stock-Based Compensation", the Company's net loss and basic and diluted net loss
per share would have been as follows:
<TABLE>
<CAPTION>

                                                                            Year Ended December 31,
                                                            -------------------------------------------------
                                                                  1997             1996               1995
                                                            ---------------    ---------------    -----------
<S>                                                         <C>                <C>                <C>
       Net loss as reported                                 $    (897,000)     $ (2,572,000)      $ (2,642,000)
       Pro forma net loss                                   $  (1,114,000)     $ (2,727,000)      $ (2,723,000)
       Basic and diluted net loss per share as reported     $        (.18)     $       (.52)      $       (.53)

       Pro forma basic and diluted net loss per share       $        (.22)     $       (.55)      $       (.55)
</TABLE>

The weighted average fair value of stock options grants was $1.82, $2.56 and
$3.39 for the years ended December 31, 1997, 1996 and 1995, respectively. The
fair value of each grant is estimated on the date of grant using the
Black-Sholes option pricing model using the following weighted average
assumptions:
<TABLE>
<CAPTION>

                                                               Year Ended December 31,
                                                ------------------------------------------------
                                                       1997              1996            1995
                                                ---------------   ---------------    -----------
<S>                                                  <C>                <C>                <C>
          Risk free interest rate                    6.64%              6.01%              6.48%
          Expected dividend yield                     --                 --                 --
          Expected life                            5.4 years          6.0 years          6.0 years
          Expected volatility                        85.1%               60%                60%
</TABLE>

Because the SFAS No. 123 method of accounting is not required to be applied to
options granted prior to January 1, 1995, the resulting pro-forma compensation
cost may not be representative of that to be expected in future years.

11. INCOME TAX PROVISION (BENEFIT):
    ------------------------------

The components of loss before income tax provision (benefit) were as follows:
<TABLE>
<CAPTION>


                                                                                 Year Ended December 31,
                                                              ----------------------------------------------------
                                                                    1997              1996              1995
                                                              ---------------   ---------------    ---------------
<S>                                                           <C>               <C>                 <C>
Income (loss) from continuing operations before income taxes:
    Domestic                                                  $  (3,948,000)    $    (4,475,000)     $  (5,022,000)
    Foreign                                                      (2,123,000)            (61,000)          (454,000)
                                                              --------------    ----------------   ---------------
                                                              $  (6,071,000)    $    (4,536,000)     $  (5,476,000)
                                                              ==============    ================   ===============
</TABLE>

                                      F-15
<PAGE>

The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>

                                                                          Year Ended December 31,
                                                              ------------------------------------------------------
                                                                    1997              1996               1995
                                                              ---------------   ---------------    -----------------
<S>                                                         <C>                  <C>                 <C>
Current provision (benefit):
    Federal                                                   $    1,534,000     $    (366,000)    $      (294,000)
    State                                                            566,000            57,000              64,000
    Foreign                                                           18,000           112,000              52,000
                                                              ---------------   --------------     ---------------
                                                                   2,118,000          (197,000)           (178,000)
                                                              --------------    --------------     ---------------

Deferred provision (benefit):
    Federal                                                         (104,000)         (523,000)           (708,000)
    State                                                            (19,000)               --               5,000
    Foreign                                                          (18,000)          (82,000)           (228,000)
                                                              --------------    --------------     ---------------
                                                                    (141,000)         (605,000)           (931,000)
                                                              --------------    --------------     ---------------

Increase (decrease) in valuation allowance                          (889,000)          889,000                  --
                                                              --------------    --------------     ---------------

                                                               $   1,088,000      $     87,000     $    (1,109,000)
                                                              ==============    ===============    ===============
</TABLE>
<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                              ---------------------------------------------------
                                                                    1997              1996               1995
                                                              ---------------   ---------------    --------------
<S>                                                           <C>                <C>               <C>
Continuing operations                                         $   (2,311,000)    $       30,000    $  (1,263,000)
Discontinued operations:
    Income from discontinued operations                              167,000             57,000          154,000
    Gain on sale of discontinued operations                        3,232,000                 --               --
                                                              --------------    ---------------    --------------
                                                              $    1,088,000     $       87,000     $ (1,109,000)
                                                              ==============    ===============    ==============
</TABLE>

The reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate from continuing operations is as follows:
<TABLE>
<CAPTION>

                                                                          Year Ended December 31,
                                                              --------------------------------------------------
                                                                    1997             1996              1995
                                                              ---------------  ---------------   ---------------
<S>                                                                <C>              <C>               <C>
Statutory tax provision (benefit)                                  (34.0)%          (34.0)%           (34.0)%
State income taxes, net of federal tax benefit                       --                --               --
Foreign taxes                                                        --               0.7               0.6
Tax credits utilized                                                (1.6)            (1.1)              --
Increase (decrease) in valuation allowance                         (14.6)            35.1               --
Write off of non-deductible goodwill                                11.0               --               --
Other, net                                                           1.1               --              10.3
                                                              -----------      ----------        ----------
                                                                   (38.1)%            0.7%            (23.1)%
                                                              ===========      ==========        ==========
</TABLE>
                                      F-16
<PAGE>
The tax effect of temporary differences that give rise to deferred income taxes
are as follows:
<TABLE>
<CAPTION>
                                                            December 31,
                                                   ---------------------------------
                                                         1997              1996
                                                   ---------------   ---------------
<S>                                               <C>                 <C>
Gross deferred tax asset:
   Accruals and reserves currently not deductible    $     340,000     $     385,000
   Net operating loss carryforwards                             --         1,114,000
   Tax credit carryforwards                                362,000           305,000
   Intangible asset amortization                            33,000                --
   Valuation allowance                                          --         ( 889,000)
                                                   ---------------     -------------

                                                     $     735,000     $     915,000
                                                   ===============     =============
Gross deferred tax liability:
   Depreciation                                      $    (149,000)    $    (203,000)
   Other                                                        --           (33,000)
                                                   ---------------   ---------------

                                                     $    (149,000)    $    (236,000)
                                                   ===============   ================
</TABLE>

During 1996, management evaluated the realizability of the deferred tax asset
under the guidelines set forth in SFAS No. 109 and recorded a valuation
allowance of $889,000. As a result of the gain on the sale of the NDE Business
(see Note 3), the Company utilized net operating losses and tax credit
carryforwards for which the valuation allowance had been recorded. Accordingly,
the Company recorded an income tax benefit of $889,000 for the year ended
December 31, 1997 related to the reversal of the valuation allowance.
Realization of the remaining net deferred tax asset is depended on generating
sufficient future taxable income. Although realization is not assured,
management's belief is that it is more likely than not that all of the net
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced. At December 31, 1997, approximately $1.5
million of taxable income is needed to realize the net deferred tax asset.

12. SAVINGS PLAN:
    ------------
The Company has established a Retirement Savings Plan that is intended to
qualify under Sections 401(a) and 401(k) of the Internal Revenue Code and covers
substantially all employees. The Company currently matches 25% of eligible
employees' contributions up to a maximum of 1.5% of each employee's
compensation. The expense under this plan was approximately $89,000, $77,000 and
$42,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

13. JOINT VENTURE:
    --------------
In December 1995 the Company formed a joint venture with Electricite de France
for the sale of products and services within the European Union. The Company
invested $225,000 for a 51% ownership interest in Liberty M.P. Liberty M.P. had
revenues of $1,908,000 and $2,423,000 and a net loss of $267,000 and $98,000 for
the years ended December 31, 1997 and 1996, respectively. Liberty M.P. had no
material operating activities through December 31, 1995.


                                      F-17


<PAGE>
                                                                    Schedule II



                   LIBERTY TECHNOLOGIES, INC. AND SUBSIDIARIES

                 CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>

                                                      Additions
                                         Balance at    Charged                         Balance at
                                         Beginning   to Costs and                       End of
           Classifications               of Period     Expenses        Deductions       Period
           ---------------               ---------   ------------      -----------    -----------
<S>                                     <C>           <C>               <C>            <C>
For the Year Ended,
    December 31, 1997
       Allowance for doubtful accounts  $    61,000   $      65,000    $     15,000   $    111,000
                                        ===========   =============    ============   ============

For the Year Ended,
    December 31, 1996
       Allowance for doubtful accounts  $    56,000   $      36,000    $     31,000   $     61,000
                                        ===========   =============    ============   ============

For the Year Ended,
    December 31, 1995
       Allowance for doubtful accounts  $    52,000   $      93,000    $     89,000   $     56,000
                                        ===========   =============    ============   ============
</TABLE>


                                      F-18
<PAGE>

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Exhibit                                                                                               Numbered
   No.                                  Description                                                     Page
 -------                                -----------                                                  -------------
<S>       <C>
2.1      Agreement and Plan of Merger dated as of March 11, 1994 among the Company,
         Liberty Acquisition Corp., Industrial NDT Company, Inc., John D. Ridgeway, Jr.
         and Sandra R. Miles. The Exhibits and Schedules to the Agreement and Plan of
         Merger other than the Disclosure Memorandum (not including attachments thereto),
         the Registration Rights and Stock Restriction Agreement and the Employment
         Agreements are not being filed with this Annual Report on Form 10-K. (2) ............................
2.2      Registration Rights and Stock Restriction Agreement between the Company
         and the shareholders of INDT dated as of March 28, 1994(2)...........................................
2.3      Stock Purchase Agreement dated as of August 9, 1994 by and among Liberty Technologies,
         Inc., 3039111 Canada, Ltd., and the shareholders of Beta Monitors & Controls, Ltd.
         (which are listed on Schedule A attached to the Stock Purchase  Agreement.) (3) .....................
2.6      Asset Purchase Agreement among General Electric Company, GE Inspection
         Services, Inc., Liberty Technologies, Inc., LTH Delaware, Inc. and Liberty
         Technical Services, Inc. dated July 25, 1997(3)......................................................
3.1      Restated Certificate of Incorporation of the Company(1)..............................................
3.2      By-Laws of the Company, Effective November 10, 1992(1)...............................................
4.1      Specimen Stock Certificate (1).......................................................................
4.2      Amended and Restated Rights Agreement between Liberty Technologies, Inc.
         and StockTrans, Inc. dated October 6, 1997, including Form of Series A Rights
         Certificate (as amended) (Exhibit A), Form of Designation (Exhibit B), and
         Form of Summary of Rights (as amended) (Exhibit C)(9)...............................................

<PAGE>

10.1     1992 Stock Option Plan and related Form of Stock Option Agreement(1).................................
10.2     1988 Stock Option Plan(1)............................................................................
10.3     Employee Stock Purchase Plan(1)......................................................................
10.4     Retirement Savings Plan(1)...........................................................................
10.5     Agreements between the Company and each of R. Nim Evatt and Anthony L. Moffa(1)......................
10.6     Lease between the Company and Lee Park Investors, L.P. with respect to the
         Company's principal executive offices(1).............................................................
10.7     Asset Purchase Agreement between the Company, Boggs Technical Services, Inc.
         and Marcus Boggs(1)..................................................................................
10.9     Form of Employee Innovation and Non-Disclosure Agreement(1)..........................................
10.11    Agreement between the Company and B&W Nuclear Services dated August 5, 1988(1).......................
10.13    Settlement Termination of Product Licensing Agreement(1).............................................
10.14    Restrictive Covenant Agreement between the Company and Marcus Boggs(1)...............................
10.16    Credit Agreement between the Company and First Fidelity Bank, N.A. as
         amended dated December 30, 1995(6)...................................................................
10.17    Joint Development Agreement between the Company and EdF(4)...........................................
10.19    Joint Venture Agreement between the Company and CHARTH, an affiliate of EdF,
         dated  November 22, 1994(5) .........................................................................
10.20    Amended Joint Venture Agreement between the Company and CHARTH, an
         affiliate of EdF, dated December 1995(6) ............................................................
10.21    Teaming Agreement Between Framatome and Liberty Technologies, Inc. for Spain
         dated March 1, 1995(6) ..............................................................................
10.22    Technology Transfer and License Agreement between the Company and Quantex
         Corporation dated June 14, 1994(6) ..................................................................
10.23    Teaming Agreement Between Framatome, Liberty M.P., S.A.S. and Liberty
         Technologies, Inc. for France dated January 1, 1996(6) ..............................................
10.24    Credit Agreement between the Company and First Union Bank, N.A.
         as amended dated October 11, 1996(8).................................................................
10.25    Credit Agreement between the Company and First Union Bank, N.A.
         as amended dated February 27, 1997(8)................................................................
10.26    Credit Agreement between the Company and First Union Bank, N.A.
         as amended dated April 1, 1997(8)....................................................................
10.27    Stock Purchase Agreement among Liberty Technologies, Inc., Edison Venture
         Fund, L.P. and certain Purchasers listed therein dated August 29, 1997(10)...........................
10.28    Letter Agreement among Liberty Technologies, Inc. and L. Mark Newman,
         Larry D. Hornbeck, Don V. Ingram, Stephen F. Smith, Stephen A. Wells and
         Energy Consolidation, Inc. dated August 18, 1997.(10)................................................
10.29    Agreement between the Company and Robert L. Leon(8)..................................................
21.1     Subsidiaries          ............................................................................... 48
23.1     Consent of Arthur Andersen LLP....................................................................... 49
</TABLE>
------------------

1     Filed as an exhibit to the Company's Form S-1 Registration Statement,
      No. 33-58600, and incorporated herein by this reference.

2     Filed as an exhibit to the Company's Report on Form 8-K dated April 8,
      1994, and incorporated herein by this reference.

3     Filed as exhibit to the Company's Report on Form 8-K dated August 24,
      1994, and incorporated herein by this reference.

4     Filed as an exhibit to the Company's Report on Form 10-K for the year
      ended December 31, 1993, and incorporated herein by this reference.

5     Filed as an exhibit to the Company's Report on Form 10-K for the year
      ended December 31, 1994, and incorporated herein by this reference.

6     Filed as an exhibit to the Company's Report on Form 10-K for the year
      ended December 31, 1995, and incorporated herein by this reference.

7     Filed as an exhibit to the Company's Report on Form 8-K dated May 15,
      1996.

8     Filed as an exhibit to the Company's Report on Form 10-K for the year
      ended December 31, 1996, and incorporated herein by this reference.

9     Filed as an exhibit to the Company's Report on Form 8-K dated
      October 6, 1997.

10    Filed as an exhibit to the Company's Report on Form S3 dated October 10,
      1997.



<PAGE>

                                   SIGNATURES


           Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Conshohocken, Commonwealth of Pennsylvania, on March 27, 1998.

                                        LIBERTY TECHNOLOGIES, INC.


                                        By:_____________________
                                        President, Chief Executive Officer and
                                        Chairman of the Board

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

               Signature                                      Title                                      Date
               ---------                                      -----                                      ----
<S>                                    <C>                                                              <C>
                                       President, Chief Executive Officer and Chairman of               3/27/98
-----------------------------          the Board (principal executive officer)
     R. Nim Evatt

                                       Vice President - Finance (principal financial and                3/27/98
-----------------------------          accounting officer)
     Daniel G. Clare

                                                                                                        3/27/98
-----------------------------          Director
     Rolland K. Bullard, II

                                                                                                        3/27/98
-----------------------------          Director
     Richard J. Defieux

                                                                                                        3/27/98
-----------------------------          Director
     Robert L. Leon

                                                                                                        3/27/98
-----------------------------          Director
     L. Mark Newman

                                                                                                        3/27/98
-----------------------------          Director
     James D. Rosener

                                                                                                        3/27/98
-----------------------------          Director
     Stephen A. Wells

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