<PAGE>

                          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        February 28, 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   0-72  
                                        -------

                    York Research Corporation                    
     -----------------------------------------------------------------
             (Exact name of registrant as specified)

             Delaware                                06-0608633     
    (State or other jurisdiction of                (I.R.S. Employer
    of incorporation or organization)             Identification No.)

         280 Park Avenue, Suite 2700 West,  New York, New York   10017    
    --------------------------------------------------------------------
    (Address of principal executive offices)                    (Zip Code)

Registrant's telephone number, including area code (212) 557-6200   
                                                   --------------
Securities registered pursuant to Section 12(b) of the Act:

                                       Name of each exchange
    Title of each class                 on which registered 
   --------------------                -----------------------
          None                                                 

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

         Common stock, par value $.01 per share               
         --------------------------------------
                     (Title of class)

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

    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. [   ] 

    The aggregate market value of the voting stock held by non-affiliates of 
the Registrant as of May 12, 1997 was as follows:

                Common Stock, $.01 par value - $95,282,690

(Based on a closing price of $8.0625 for the common stock on such date).

    The number of shares outstanding of the Registrant's classes of common 
stock, as of May 12, 1997:

                Common Stock, $.01 par value 14,306,628 shares

              Documents incorporated by reference:     None


<PAGE>
                                     PART I
 
                                ITEM 1 BUSINESS
 
    A. General
 
    York Research Corporation ("York" or the "Company") is a developer, owner 
and marketer of energy related projects and products. York, through its 
subsidiaries, partnerships, joint ventures and affiliates, currently 
participates in two broad areas of the energy business--power project 
development and services, including cogeneration and wind energy, and the 
marketing of energy and natural gas for sale in the wholesale power markets 
and the wholesale and retail natural gas markets. The Company believes that 
continuing deregulation of world energy markets, privatization of electric 
power generation and distribution systems, and increasingly open markets are 
creating a demographic opportunity that York is well positioned to exploit. 
The Company believes that its several areas of expertise will converge to 
create potential for growth as the twenty-first century approaches.
 
    The Company has developed three power projects in New York City. A 7
megawatt ("MW") engine powered facility in Coney Island, Brooklyn, was completed
in 1989, and was subsequently replaced by a 28 MW combined cycle gas turbine
facility at the same site, known as the Warbasse Project. The third project is
the 286 MW facility owned by the Brooklyn Navy Yard Cogeneration Partners, L.P.
("BNY Facility"). Both projects have Consolidated Edison Company of New York,
Inc. ("Con Edison") and various host entities as the main customers.
 
    As a result of these projects and various others under development, the
Company is capable of developing a gamut of projects from very small to very
large, using both fossil fuels and wind power as energy sources, serving utility
grids, merchant sales, and self-contained residential complexes or industrial
users.
 
    The wholesale power business in the United States was previously limited to
inter-utility and power pool purchases and sales. More recently, due to federal
deregulation, power may be purchased, transmitted over existing utility systems,
and then sold in the wholesale markets. When fully deregulated, the retail
energy market would approximate $200 billion per year.
 
    Through its subsidiary, York Windpower Corporation ("York Windpower") (see
Item 1.E), the Company is proceeding to develop selected very large wind power
projects, and a series of mid-size projects. In some areas, the indigenous wind
regimes provide a competitive source of power to meet expanding needs. In
others, although there is a current surplus of energy, there is a long-term
need. One of the current driving forces behind the large projects is economic
development, combined with future capacity needs and the natural desire to
replace fossil fuels with environmentally clean renewable energies.
 
    York will meet these needs by combining the Company's prowess in project
development, energy services and marketing with European technologically
advanced wind turbine products. As a consequence of York's relationship with
European manufacturers, the Company may offer selected countries the opportunity
to create new jobs by locating 


<PAGE>

production facilities for these technologically advanced products in their 
areas, while acquiring for York large scale long-term power contracts. This 
arrangement assures the manufacturer of an economic production level, while 
providing to the Company the advantages of domestic content, product 
availability and competitive costs.
 
    Management believes that these areas of current concentration will allow the
Company to capitalize on its strengths and experience while positioning it for
the future. During the past several years, the Company has invested a
significant portion of its revenues and capital resources in developing and
nurturing new markets and projects. These efforts and expenditures, which need
to continue at some level in the near term, have not yet begun to generate
revenues, but management believes their potential warrants the efforts.

    All note references are to Notes to Consolidated Financial Statements.
 






                                       -2-
<PAGE>

B. Cogeneration
 
   1. THE WARBASSE PROJECT
 
    Between 1987 and 1989, York constructed and operated a 7 MW engine powered
cogeneration project that supplied all of the utility services including
electricity, heat, hot water and air conditioning to Amalgamated Warbasse
Houses, Inc. ("AWH"), a 10,000 resident middle income housing complex in
Brooklyn, New York. During 1989, York, as agent for the project owner,
Warbasse-Cogeneration Technologies Partnership L.P. ("WCTP") (see Item 1.E),
negotiated a 21 MW Power Sale Agreement between Con Edison and WCTP based upon
expansion of the project. The Power Sale Agreement required WCTP to replace and
expand its facility, converting it from an engine facility to a larger gas
turbine facility, interconnect with the utility system and achieve commercial
operation by the end of 1991, and to achieve full rated capacity no later than
December 31, 1994, all of which was accomplished ahead of schedule. This
Agreement was approved by the Public Service Commission ("PSC") in October 1989
and includes capacity, energy and operation and maintenance payments continuing
through the year 2011, with payments indexed to prevailing fuel price levels and
inflation. The Warbasse facility is on land leased from AWH, its thermal host.
 
    The Company and WCTP executed an Agreement to Provide for Construction of
Additional Capacity in 1990, pursuant to which the Company constructed the
expansion of the facility to service the Con Edison contract. The Company and
WCTP also executed an Operations and Maintenance ("O&M") Agreement in 1989
pursuant to which the Company agreed to operate the facility for its life (see
Note 5).
 
    In September 1994, pursuant to the O&M Agreement, the Company resumed full
operation of the Warbasse facility, and since that date has supplied all of the
thermal and electric needs of AWH on a continuous basis, and the full capacity
requirements of its electric power contract with Con Edison, as dispatched. See
Item 13 and Note 5 for information regarding receivables due to the Company from
WCTP and the operations of the Warbasse facility.
 
                                       -3-
<PAGE>


    2. BROOKLYN NAVY YARD PROJECT
 
    Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP"), is owned and
controlled equally by a subsidiary of Edison Mission Energy ("Mission"), which
is a wholly owned subsidiary of SCE Corp., and B-41 Associates L.P. ("B-41LP").
BNYLP was formed to develop, construct, finance, own and operate the 286
megawatt natural gas fired combined cycle BNY Facility, which began operations
on November 1, 1996.
 
    The Company and Mission previously estimated the total capital costs of the
Brooklyn Navy Yard ("BNY") Facility, when fully completed, to be approximately
$420,000,000. Due to an expansion of the construction scope and the resulting
delays, this estimate has been exceeded, including capitalized interest during
construction. On December 22, 1995, the New York City Industrial Development
Agency (the "IDA") issued $253,925,700 of Industrial Development Revenue Bonds
for the purpose of financing certain costs incurred through that date in
constructing and developing the BNY Facility. These bonds are recourse to a
letter of credit ("LOC") in like amounts arranged by Mission, which LOC is in
turn supported by a Mission guarantee. BNYLP has agreed to reimburse Mission if
the guarantee is called, out of future cash flow as and if available. The
proceeds of this bond sale were used to reimburse Mission for a portion of its
construction loans made to date and to reimburse the Company for engineering and
other costs that had been expensed in prior periods and for services that have
been performed by the Company.
 
    In March 1996, the project delivered initial test quantities of power to Con
Edison, equivalent to existing contract capacity. Construction was substantially
completed and the facility commenced operations in accordance with its contract
on November 1, 1996. Mission has funded all construction costs incurred to
date in excess of those funded by the IDA bonds mentioned above, and may need to
provide additional guarantees to secure non-recourse project financing. The
Company has no obligation to fund the project or provide guarantees and all
obligations incurred by BNYLP to date are non-recourse to the Company.
 
    Pursuant to the provisions of the partnership agreement, Mission retains the
right, because it has spent in excess of $13,258,043 in development costs, to
take all the votes on the Management Committee that control the day to day
operations of BNYLP. Mission has informed B-41LP that they have incurred gross
costs in excess of $454,000,000 through February 28, 1997 for this project. If
Mission decides to exercise its right to cast all votes on the BNYLP Management
Committee, B-41LP still remains a 50% general and limited partner in the Navy
Yard project and retains all its other rights, and Mission retains all its
funding and other obligations to the Project and B-41LP.
 


                                       -4-
<PAGE>

    Like other large projects of this nature, the BNY cogeneration project is
subject to various risks. There can be no assurance that the facility, although
completed, will operate at sufficient levels to cover all operation and
maintenance expenses and debt service. The Company has no liability for any such
shortfalls.
 
C. Marketing of Electric Power and Natural Gas
 
    During Fiscal 1997, the Company purchased 85% of the outstanding shares of
North American Energy Conservation Inc. ("NAEC")(see Note 15), which has been
arranging wholesale electric power transactions since the beginning of 1994.
These activities depend upon open access to the utility-owned transmission grid
through which power flows between regions. On April 24, 1996 the Federal Energy
Regulatory Commission ("FERC") exercised its authority over the transmission
grid by setting comprehensive rules for open and comparable access to the entire
grid for all parties. These rules will apply to NAEC and to York cogeneration
and power projects. The newly deregulated United States market consumes 2.8
trillion kilowatt hours of electric energy each year for which the retail cost
is nearly $200 billion. The $70 billion wholesale market is now open. During the
next several years the retail power market is also expected to be substantially
deregulated.
 
    In 1996 NAEC expanded its business into the marketing of natural gas to the
wholesale and retail markets and opened a regional office in Syracuse, New York.
 
    The Company believes that emerging opportunities in the wholesale and retail
markets and broader geographic activity will lead to services and products not
currently available, and that the project development and operating expertise of
the Company will be combined with the marketing of energy commodities on a value
added basis.
 
    While the Company believes that its creative capability, its several
relationships, and its level of performance to date can lead to long-term
success, there can be no assurance as to future results or as to how competitive
these businesses will become.
 
    To date, activities have been substantially limited to Eastern Canada, New
England, and the Middle Atlantic states. The Company believes that its marketing
concepts can be applied over a much broader area and a greater breadth of
product offerings.
 
D. Wind Energy and Economic Development
 
    Consistent with its strategy of developing environmentally beneficial power
projects for long-term operation, and for marketing power in future competitive
markets, the Company has been actively pursuing a variety of renewable energy
projects, particularly those that utilize wind energy in strategic locations.
York Windpower currently plans to develop selected very large wind projects and
a series of mid-sized ones.
 
                                       -5-
<PAGE>

    The current driving force behind these wind projects will be a combination
of short and long-term energy needs, economic development in the regions, and
the environmentally friendly nature of wind energy.
 
E. Subsidiaries, Partnerships and Joint Ventures
 
    The Company conducts a substantial portion of its business through
subsidiaries, partnerships and joint ventures, in some of which affiliates of
the Company have an interest.
 
    York owns 100% of the outstanding shares of B-41 Management Corp. ("B41MC"),
Cogeneration Technologies, Inc. ("Cogen"), and York Internet Power Services,
Inc., all of which are Delaware Corporations; 85% of the outstanding shares of
NAEC, a Delaware Corporation; and 100% of the outstanding shares of York
Research Canada, Inc. ("York Canada"), an entity incorporated under the laws of
Canada. York Canada owns 100% of the outstanding shares of York Windpower Corp.,
an entity incorporated under the laws of Canada.
 
    York and its subsidiaries own 74.7% of B-41LP, the 50% partner in BNYLP, as
a result of the following:
 
    B-41MC holds a 5% general partnership interest in B-41LP.
 
    Cogen holds a 22% limited partnership in B-41LP resulting from 
    assignment of a 40 MW Power Contract to B-41LP.
 
    York holds a 90% limited partnership interest in York Cogen Partners 
    L.P. ("YCP"), which in turn holds a 53% limited partnership interest in 
    B-41LP resulting from assignment of a 90 MW power contract to B-41LP.

    RV Associates L.P. ("RVA"), an entity controlled by the chairman of 
    the Company, holds a 5% general partnership interest and a 15% limited 
    partnership interest in B-41LP, resulting from assignment of a 40 MW 
    contract to B-41LP, assumption of certain partnership liabilities and 
    acceptance of a reduced share of development fees and reimbursements.
 
    A portion of B-41LP's partnership interest in BNYLP has been pledged 
    as collateral to unaffiliated third parties to secure certain 
    obligations of B-41LP.
 
    WCTP is a limited partnership whose 25% general partner is RRR'S Ventures
Ltd. ("RRR'S"). The Chairman of the Company is president and a major shareholder
in RRR'S. Entities unaffiliated with the Company or RRR'S own an aggregate of
75% limited partnership interest in WCTP. RRR'S also holds a 10% general
partnership interest in YCP (see Item 13).
 
    North American Energy Conservation, Inc. is 15% owned by the Chairman of the
Company.
 
                                       -6-
<PAGE>

F. Backlog
 
    The Company does not currently calculate backlog because the revenue streams
are dependent upon a number of variable factors such as inflation, fuel prices,
electric utility rates and utilizations, and natural gas prices and supply.
 
G. Patents and Trademarks
 
    The Company and its subsidiaries have no patents or trademarks that can be
considered material to the Company's or its subsidiaries' businesses.
 
H. Research and Development
 
    Since research and development costs are not significant, the Company does
not account separately for these costs.
 
I. Raw Materials and Suppliers
 
    The Company and its subsidiaries are not dependent on any single source of
supplies or services for their activities.
 
J. Marketing
 
    York markets its projects and products through a dedicated sales staff,
supplemented by technical support personnel and management personnel from the
Company, and by representatives internationally.
 
K. Employees
 
    As of April 30, 1997, the Company and its subsidiaries employed 44 people on
a full-time basis. Most of the Company's executives are technically trained and
actively engaged in the project development and sales areas.
 
L. Competition
 
    There are many companies with access to greater financial resources that are
active in various aspects of the Company's energy business. These companies will
continue to compete in the energy marketplace. The Company cannot assess the
effect of competition in the future.
 
M. Customers
 
    During Fiscal 1997, all of the services revenues were derived from WCTP and
BNYLP. Energy sales were derived from numerous retail customers and utilities.
Two utilities accounted for approximately 20% and 15% respectively, of the total
revenues, however, due to the relatively short-term nature of the contracts with
these customers, the loss of one of these customers would have no material
adverse effect on the Company.
 
                                       -7-
<PAGE>

N. Environmental Matters
 
    The Company believes that the various technologies it employs, which provide
for increased efficiency, compared to conventional power generation facilities,
are not environmentally sensitive. The construction of power generation
facilities requires typical environmental impact statements and permitting
procedures which may result in delays. The Company believes that it is in
compliance with federal, state and local laws involving the protection of the
environment. The Company does not believe that continued compliance will require
any material capital expenditures. The Company's facilities are designed to
comply with all applicable environmental laws.
 
O. Regulation
 
    A subsidiary of the Company operates the Warbasse cogeneration facility in
New York that is a qualifying cogeneration facility ("QF") pursuant to the
Public Utility Regulatory Policies Act of 1978 ("PURPA"). The Company has also
been involved in the development of the BNY cogeneration project in New York, a
project that has filed for and obtained QF status.
 
    Projects that meet the QF criteria stated in the federal rules generally are
exempt from federal, state and local regulation that applies to generating
facilities which are not QFs. However, the New York State Public Service
Commission ("NYPSC") has determined that it has the authority to regulate sales
of electricity by QFs to retail customers, though the regulatory regime is less
burdensome than that applied to traditional utilities. The NYPSC has not made
any determination as to whether this policy would apply to the Projects.
 
    One of the criteria for QF status is that a total of no more than 50 
percent of the equity interests may be owned by one or more companies that 
are electric utility holding companies under the Public Utility Holding 
Company Act of 1935 ("PUHCA"). Under PUHCA, an entity which owns 10 percent 
or more of the voting securities of, or otherwise controls, an electric 
utility company, is an electric utility holding company. An electric utility 
company is defined in PUHCA to mean a company that owns or operates physical 
facilities for the generation, transmission or distribution of electricity 
for sale. QFs are expressly exempt from this definition, and the Company 
therefore is not a public utility holding company by virtue of its interests 
in QFs.
 
   Power Brokering
 
    A power broker is not considered to be a public utility under the Federal
Power Act ("FPA") and is not subject to regulation by the Federal Energy
Regulatory Commission ("FERC"), which administers the FPA. A power broker
arranges transactions for a buyer and seller and receives a fee for its
services. To date, no company that is a power broker has been found by the SEC
to be an electric utility company under PUHCA. Accordingly, the Company believes
that its activities as 


                                       -8-
<PAGE>


a broker of electricity also would not result in its becoming an electric 
utility company or an electric utility holding company under PUHCA, and would 
not affect the QF status of the Projects.
 
    Power Marketing
 
    NAEC is considered to be a public utility under the FPA and its transactions
are regulated under the FPA. A power marketer takes title to electricity and
resells it at wholesale in interstate commerce. To date, no company that is a
power marketer has been found by the SEC to be an electric utility company under
PUHCA, but there can be no assurance as to the future. The Company believes that
NAEC's activities as a power marketer would not result in the Company becoming
an electric utility company or an electric utility holding company under PUHCA
and would not affect the QF status of the Projects.
 
                                       -9-
<PAGE>

ITEM 2                        PROPERTIES
 
    The Company leases its facilities.  The Company considers its facilities to
be suitable and adequate for the purposes for which they are used.
 
                                                  Square
Entity/Location                                   Footage       Use
----------------                                -----------  ---------

York Research Corporation                          (1)        Office
  280 Park Avenue
  New York, New York

Subsidiaries

Cogeneration Technologies, Inc.                    (1)        Office
  280 Park Avenue
  New York, New York

York Research Canada, Inc.                         (2)        Office
  1000 De La Gauchetiere
      Street West
  Montreal, Quebec, Canada

York Windpower Corp.                               (2)        Office
  1000 De La Gauchetiere
      Street West
  Montreal, Quebec, Canada

North American Energy Conservation, Inc.           (3)        Office
  100 Clinton Square, Suite 400
  126 North Salina Street                       
  Syracuse, New York                             


(1) Total square footage shared by York and Cogen at this location is currently
    12,300.
 
(2) Total square footage shared by York Canada and York Windpower Corp. at this
    location is currently 1,650.
 
(3) Total square footage leased by NAEC at this location is approximately
    12,850, less approximately 3,800 square feet sublet to two tenants.
 
ITEM 3                    LEGAL PROCEEDINGS
 
    There is no material litigation directly affecting the Company. See Note 4
as to certain litigation involving BNYLP.
 
ITEM 4        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
   None
 
                                    -10-

<PAGE>


                                    PART II
 
ITEM 5          MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED
                            SECURITY HOLDER MATTERS
 
    The Company's common stock is traded in the over-the-counter market under
the symbol "YORK". The following table shows the range of high and low closing
sales prices for the common stock on the NASDAQ National Market System.
 
                                        HIGH        LOW

    Fiscal Year 1997
        First Quarter                    9-7/8      5-7/8
        Second Quarter                  10-5/16     8-5/8
        Third Quarter                   11-5/8      9-3/8
        Fourth Quarter                  10-1/2      8-7/8

   Fiscal Year 1996
        First Quarter                    6-3/4      4-7/8
        Second Quarter                   6-1/4      4-3/4
        Third Quarter                    7-3/4      5
        Fourth Quarter                   7-1/2      5-1/8


    On May 13, 1997, the Company had 534 holders of record of its common stock.
The Company has not declared any common stock or cash dividends during the last
five years and has no present intention to declare cash dividends.
 



                                       -11-

<PAGE>

ITEM 6                  SELECTED FINANCIAL DATA
            (in thousands of dollars, except per share data)
 
<TABLE>
<CAPTION>
                                                                              For the Year Ended
                                                             -----------------------------------------------------
<S>                                                          <C>        <C>        <C>        <C>        <C>
                                                              2/28/97    2/28/96    2/28/95    2/28/94    2/28/93
                                                             ---------  ---------  ---------  ---------  ---------
Total revenues                                               $  46,327  $  14,392  $   7,524  $   6,494  $   5,698
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------

Net income (loss) from continuing operations                 $   7,823  $   4,400  $     222  ($    416) ($  1,892)
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------

Net income (loss) per common share from continuing
  operations                                                 $    0.51  $    0.35  $    0.02  ($   0.03) ($   0.17)
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------



Total assets                                                 $  84,829  $  60,002  $  50,685  $  29,467  $  30,410
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------

Limited recourse long-term liabilities (1)                   $  19,982  $  20,232  $  20,482  $       0  $       0
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------

Other long-term liabilities                                  $     885  $     685  $     638  $   1,155  $   1,498
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------

Deferred revenue and other credits                           $   3,460  $   3,460  $   3,478  $   4,097  $   4,776
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------

Stockholders' equity                                         $  46,990  $  32,827  $  21,886  $  18,742  $  11,646
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------



Cash dividends declared per common share                     $       0  $       0  $       0  $       0  $       0
                                                             ---------  ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------  ---------
</TABLE>
 
(1) Recourse to certain of B-41LP's cash flow and not recourse to the Company.
    This limited recourse obligation was settled subsequent to February 28, 1997
    (see Note 5 and the Pro forma Balance Sheet).
 


                               -12-


<PAGE>
             MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
ITEM 7              CONDITION AND RESULTS OF OPERATIONS
 
Liquidity and Capital Resources
 
    Brooklyn Navy Yard Project
 
    Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP"), a joint venture,
was formed on October 19, 1992. BNYLP is owned and controlled equally by a
subsidiary of Edison Mission Energy ("Mission"), which is a wholly owned
subsidiary of SCE Corp., and a limited partnership, B-41 Associates, L.P.("B-41
LP"), in which the Company is the majority partner (see Note 4).
 
    The Company and Mission previously estimated the total capital costs of the
Brooklyn Navy Yard ("BNY") Facility, when fully completed, to be approximately
$420,000,000. Due to an expansion of the construction scope and the resulting
delays, this estimate has been exceeded, including capitalized interest during
construction. On December 22, 1995, the New York City Industrial Development
Agency (the "IDA") issued $253,925,700 of Industrial Development Revenue Bonds
for the purpose of financing certain costs incurred through that date in
constructing and developing the BNY Facility. These bonds are recourse to a
letter of credit ("LOC") in like amounts arranged by Mission, which LOC is in
turn supported by a Mission guarantee. BNYLP has agreed to reimburse Mission if
the guarantee is called, out of future cash flow as and if available. The
proceeds of this bond sale were used to reimburse Mission for a portion of its
construction loans made to date and to reimburse the Company for engineering and
other costs that had been expensed in prior periods and for services that have
been performed by the Company.
 
    In March 1996, the project delivered initial test quantities of power to Con
Edison, equivalent to existing contract capacity. Construction was substantially
completed and the facility commenced operations in accordance with its contract
on November 1, 1996. Mission has funded all construction costs incurred to
date in excess of those funded by the IDA bonds mentioned above, and may need to
provide additional guarantees to secure non-recourse project financing. The
Company has no obligation to fund the project or provide guarantees and all
obligations incurred by BNYLP to date are non-recourse to the Company.
 
    Pursuant to the provisions of the partnership agreement, Mission retains the
right, because it has spent in excess of $13,258,043 in development costs, to
take all the votes on the Management Committee that control the day to day
operations of BNYLP. Mission has informed B-41LP that they incurred gross costs
in excess of $454,000,000 through February 28, 1997 for this project. If Mission
decides to exercise its right to cast all votes on the BNYLP Management
Committee, B-41LP still remains a 50% general and limited partner in the Navy
Yard project and retains all its' other rights, and Mission retains all its
funding and other obligations to the Project and B-41LP.
 
    Like other large projects of this nature, the BNY cogeneration project is
subject to various risks. There can be no assurance that the facility, although
completed, will operate at sufficient levels to cover all operation and
maintenance expenses and debt service. The Company has no liability for any such
shortfalls.


                               -13-


<PAGE>


    Warbasse Project
 
    In September 1994, the Company resumed full operations of the Warbasse
facility, and since that date has supplied, on a continuous basis, all the
electric and thermal energy needs of the host, Amalgamated Warbasse Houses,
Inc., and is supplying up to the full capacity requirements of its electric
power contract with Consolidated Edison Company of New York, Inc, when
dispatched.
 
    The Company has completed the Warbasse project, and transferred the facility
to Warbasse-Cogeneration Technologies Partnership L.P. on August 1, 1996. The
Company expects to spend up to $1,000,000 during the next year, on certain
remaining items for increased efficiency and operational control, which were
accrued at the time of transfer.
 
    In March 1997, B-41LP settled all its obligations to Sanwa Business Credit
Corp. ("SBCC") for a cash payment of $2,750,000. SBCC, in exchange for this cash
payment gave up all its interest in the future cash flow from the Brooklyn Navy
Yard Project and has no continuing interest in any of the Company's projects or
assets (see Note 5 and the Pro forma Balance Sheet).
 
    General
 
    During the year ended February 28, 1997, cash balances increased by
approximately $6.0 million. Net income from operations generated approximately
$7.8 million and increases in accounts payable, accrued expenses and other
long-term liabilities generated approximately $5.2 million. These sources of
cash were offset by an increase in receivables of approximately $11.0 million
predominantly due to the acquisition of NAEC, which principally accounts for
cash generated by operating activities of approximately $2.1 million. During
Fiscal 1996, the Company had net income of approximately $4.4 million offset by
approximately $3.0 million spent on construction of the Warbasse project, and an
increase in receivables of approximately $1.7 million, resulting in cash used in
operating activities of approximately $509,000. During Fiscal 1995, the Company
had net income of approximately $222,000, and spent approximately $1,846,000 on
construction, with virtually no change in service receivables, resulting in cash
used in operating activities of approximately $2.3 million.
 
    Approximately $3.9 million was generated by financing activities during 
Fiscal 1997, mainly due to proceeds from the exercise of stock options and 
warrants of approximately $3.7 million and the repayment by the York Research 
Corporation Employee Stock Ownership Trust ("ESOP") of $450,000. Cash 
generated by financing activities in Fiscal 1996 was approximately 
$4,416,000, due to the repayment by the ESOP of $3,079,000 of the demand 
purchase money loans due to the Company, and $1,455,000 due to proceeds from 
the exercise of stock warrants and options. In Fiscal 1995, the ESOP repaid 
$2,153,000, and there were no material exercises of warrants or options.

 
                                     -14-

<PAGE>

 
    The ESOP purchased from the Company a total of 3,793,500 shares of the
Company's Common Stock between 1988 and February 28, 1996 in exchange for demand
purchase money loans, totaling approximately $14,462,000 (see Note 11). During
Fiscal 1995, the ESOP trustee sold 380,000 shares of the Company's common stock
at a profit to the ESOP, and repaid $2,153,000 of the demand purchase loans. The
ESOP also repaid approximately $370,000 of third party loans during Fiscal 1995,
leaving a balance owed to third parties of approximately $561,000. During Fiscal
1996, the ESOP trustee sold 606,000 shares of the Company's common stock at a
profit to the ESOP, and repaid $3,079,000 of the demand purchase money loan.
During Fiscal 1997, the ESOP trustee sold 50,000 shares of the Company's common
stock, and repaid $450,000 of the demand purchase money loan.
 
    See Note 3 for disclosure of the impact of the issuance of Statement of
Financial Accounting Standards No. 128, Earnings Per Share.
 
    Because of the nature of the Company's business, there can be no assurance
that service and other revenues will continue at the same level from year to
year. This Annual Report on Form 10-K contains a number of forward-looking
statements, all of which are based on current expectations. Actual results may
vary materially.
 
Results of Operations
 
1997 Compared to 1996
 
    Total revenues in Fiscal 1997 soared by approximately $31,936,000 over
Fiscal 1996, due predominantly to the acquisition of NAEC on November 1, 1996
(see Note 15), which accounted for the increase in energy sales of approximately
$26,571,000. Service revenues increased by approximately $9,307,000, due mainly
to an increase of $11,000,000 as a result of a services agreement between WCTP
and RVA, and the Company (see Note 14), and an increase of approximately
$748,000 in service revenues to WCTP due to higher fuel costs, and an increase
in purchases of supplies, spare parts, etc. These increases were offset by a
decrease in engineering services of approximately $2,442,000, due mainly to
$2,500,000 of reimbursements in Fiscal 1997 by BNYLP for certain engineering
costs a portion of which was expensed in prior periods versus $5,000,000 of
similar reimbursements in Fiscal 1996. Development and other fees decreased
approximately $3,942,000 due to none being earned in Fiscal 1997.
 
    Cost of services, which include fuel and other operations and maintenance
costs, increased approximately $763,000 during Fiscal 1997, commensurate with
service revenues from WCTP.
 
    Cost of energy increased approximately $25,000,000 as a result of the
commencement of energy sales due to the acquisition of NAEC. The gross margin
from energy sales is subject to various market fluctuations and may vary from
year to year.
 
    Selling, general and administrative expenses increased approximately
$1,840,000. The operations of NAEC since acquisition, including payroll and
employee benefits, rent and office expenses, consulting fees, etc., accounted
for approximately $1,135,000 of the total increase in selling, 


                                     -15-

<PAGE>


general and administrative expenses. The remaining increase is explained by 
an additional $470,000 spent on payroll and employee benefits in Fiscal 1997, 
due to salary increases and bonuses, and increased consulting fees of 
approximately $360,000 for the development of potential new markets.
 
    Interest and other income increased approximately $1,775,000. This was 
mainly due to interest of approximately $1,285,000 recorded by CTI due on the 
note receivable from WCTP which commenced in August, 1996 (see Note 5). 
Additional receipts of approximately $168,000 from AWH, recognized as other 
income, in payment of certain amounts due to CTI which were deferred in prior 
years, accounted for another portion of the increase in interest and other 
income. The commencement in December 1996 of general partner fees received by 
B-41LP from BNYLP accounted for an increase in other income of approximately 
$299,000. 

1996 Compared to 1995
 
    Total revenues increased approximately $6,868,000 when comparing the years
ended February 28, 1996 to February 28, 1995. This was mainly due to a
reimbursement by BNYLP of $5,000,000 for certain engineering services and other
costs that had been expensed in prior periods. Services revenues increased
approximately $2,290,000 when comparing year to year, since the Warbasse project
resumed operations in September 1994, thereby reflecting only six months of
revenue in Fiscal 1995 versus a full year in Fiscal 1996. Development fees paid
by Mission to B-41LP to compensate B-41LP for certain services rendered
increased $2,000,000 and power brokerage fees increased $425,000. These
increases were offset by decreases of $2,500,000 and $533,000 due to the
conclusion of certain monthly development fees from BNYLP in December 1994 and
June 1995, respectively.
 
    Cost of services increased approximately $2,490,000 when comparing Fiscal
1996 to Fiscal 1995. This was principally due to an increase in cost of services
to WCTP, which include fuel and other operations and maintenance costs, of
approximately $1,728,000, commensurate with service revenues to WCTP and an
increase in related overhead expenses allocated from selling, general and
administrative expenses.
 
    Selling, general and administrative expenses increased approximately
$300,000 when comparing Fiscal 1996 to Fiscal 1995. An increase of approximately
$478,000 is attributable to payroll and related expenses, as a result of salary
increases, additional personnel, and continually increasing health insurance
costs. An increase of approximately $407,000 was related to expenditures for
development of new projects, and an increase of $181,000 in Fiscal 1996 related
to public company and corporate communications expenses. Selling, general and
administrative expenses decreased approximately $778,000, as a result of an
increase in overhead expenses allocated to cost of services.
 
    Interest and other income increased approximately $876,000 from year to
year. Of this increase, approximately $1,083,000 was due to interest received
from WCTP related to the long-term note receivable acquired by B-41LP in
September 1994, thereby reflecting only six months of interest income in Fiscal
1995 versus a full year in Fiscal 1996. The realization of a deferred gain of
approximately $244,000 in Fiscal 1995 resulted in a decrease when comparing year
to year.
 

                                     -16-

<PAGE>

    Income allocated to minority interest increased $500,000 when comparing year
to year. This was the minority portion of the income of B-41LP.
 
ITEM 8          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
    See Index to Consolidated Financial Statements on Page 27.
 
ITEM 9          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURES
 
     None
 
















                                     -17-

<PAGE>

                                    PART III
 
ITEM 10                DIRECTORS AND EXECUTIVE OFFICERS
 
    The executive officers and directors of the Company are:
 
    Robert M. Beningson             Chairman of the Board, President and Chief
                                    Executive Officer

    Michael Trachtenberg            Executive Vice President, Chief Financial 
                                    and Accounting Officer and Secretary

    Robert C. Paladino              Executive Vice President

    H. Clifton Whiteman             Director

    Stanley Weinstein               Director
 
    Mr. Robert M. Beningson, 68, was elected a director of the Company in
October 1981. In February 1982, Mr. Beningson was elected Chairman of the Board,
President and Chief Executive Officer of the Company. Mr. Beningson is Chief
Executive Officer and Chairman of the Board of each of the Company's
subsidiaries. Previously, Mr. Beningson was Chairman of the Board of Directors
of the Company between 1968 and 1979.
 
    Mr. Michael Trachtenberg, 48, a Certified Public Accountant, joined the
Company in January 1987 and was elected Vice President, Chief Financial Officer
and Secretary in March 1987. From November 1985, until joining the Company, Mr.
Trachtenberg was a financial consultant in private practice. Prior thereto, Mr.
Trachtenberg was Vice President-Finance and Chief Financial Officer of S&S
Corrugated Paper Machinery Co., Inc. From 1980 to 1984 Mr. Trachtenberg held
various positions with Carter Day Industries, Inc., an agricultural equipment
manufacturer and energy and environmental systems company, culminating in his
appointments as Vice President, Treasurer and Chief Financial Officer.
 
    Mr. Robert C. Paladino, 46, joined the Company in January 1987 and was
elected Executive Vice President in April 1990. From October 1980 until joining
the Company, Mr. Paladino was Senior Vice President and General Counsel of NPS
Technologies Group, Inc., an engineering and construction company serving the
electric utility industry. From 1974 to 1980, Mr. Paladino held various
positions with the Edison Electric Institute, the national organization for the
investor-owned electric utility industry, culminating in his appointment as
Director of Fossil Fuels and Assistant to the President.
 
    Mr. H. Clifton Whiteman, 71, was elected to the Board of Directors in July
1991. From March 1982 through March 1989, Mr. Whiteman served as Executive Vice
President of The Bank of Tokyo Trust Company. Following his retirement in April
1989, he was a consultant to The Bank of Tokyo Group in New York City until
April 1992. Mr. Whiteman serves on the Board of Directors of CB Bancshares, Inc.
 



                              -18-

<PAGE>

    Mr. Stanley Weinstein, 71, was elected to fill a vacancy on the Board of
Directors in May, 1995. Until 1991, Mr. Weinstein was a partner at Deloitte and
Touche, certified public accountants, and since such date, has been an
independent consultant.
 
    None of the directors or executive officers of the Company are related to
each other.
 
ITEM 11                      EXECUTIVE COMPENSATION
 
                           SUMMARY COMPENSATION TABLE
 
    The following table sets forth the compensation received by the Company's
Chief Executive Officer and the remaining most highly paid executive officers
for the three fiscal years ended February 28, 1997.

<TABLE>
<CAPTION>
                                                                Annual Compensation
                                                           ------------------------------
                                                                                Other
                                                           Salary    Bonus   Compensation
Name & Principal Position                            Year    ($)      ($)      ($) (2)
---------------------------------------------------  ----  -------  -------  ------------
<S>                                                  <C>   <C>      <C>      <C>
ROBERT M. BENINGSON                                  1997  480,681        0          0
  Chairman, President &                              1996  400,681        0          0
  Chief Executive Officer                            1995  371,082        0          0

MICHAEL TRACHTENBERG                                 1997  199,231  100,000          0
  Executive Vice President &                         1996  190,000        0          0
  Chief Financial and Accounting                     1995  190,000        0          0
  Officer

ROBERT C. PALADINO                                   1997  193,846  100,000          0
  Executive Vice President                           1996  179,538        0     15,000
                                                     1995  164,924        0          0
 
<CAPTION>
                                                        Long-Term Compensation
                                                     -----------------------------
 
                                                           Awards          Payouts
                                                     ------------------   ---------
                                                      Restr                          All Other
                                                      Stock    Options/    LTIP       Compen-
                                                     Awards     SAR's     Payouts     sation
Name & Principal Position                              ($)     (#) (1)      ($)       ($) (3)
---------------------------------------------------  -------   --------   --------   ---------
<S>                                                  <C>       <C>        <C>        <C>
ROBERT M. BENINGSON                                     0            0        0       18,875
  Chairman, President &                                 0            0        0       12,109
  Chief Executive Officer                               0      375,000        0       19,737

MICHAEL TRACHTENBERG                                    0            0        0       23,418
  Executive Vice President &                            0            0        0       14,699
  Chief Financial and Accounting                        0      100,000        0       18,863
  Officer

ROBERT C. PALADINO                                      0            0        0       23,418
  Executive Vice President                              0            0        0       14,699
                                                        0       50,000        0       16,180
</TABLE>
 
(1) The Company does not grant SAR's. In fiscal 1995, all grants were
    qualified stock options. 

(2) Forgiveness of indebtedness. 

(3) Represents the value of the Company's contribution to the ESOP allocable 
    to executives' accounts for such year.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
    The following table sets forth information on option grants in Fiscal 1997
to the named executive officers.
 
<TABLE>
<CAPTION>
                                                            Individual Grants
                                                      ------------------------------
<S>                                                   <C>            <C>              <C>          <C>            <C>
                                                                       % of Total
                                                                         Options                                    Alternative
                                                         Options       Granted to      Exercise                     Grant Date
                                                         Granted      Employees in       Price      Expiration     Present Value
Name                                                       (#)         Fiscal Year     ($/share)       Date             ($)
----------------------------------------------------  -------------  ---------------  -----------  -------------  ---------------
ROBERT M. BENINGSON                                        0             N/A            N/A           N/A             N/A

MICHAEL TRACHTENBERG                                       0             N/A            N/A           N/A             N/A

ROBERT C. PALADINO                                         0             N/A            N/A           N/A             N/A
</TABLE>
 

                                     -19-
<PAGE>

                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR END OPTION VALUE
 
    The following table sets forth information on option exercises in Fiscal
1997 by the named executive officers and the value of such officers unexercised
options at February 28, 1997.
 
<TABLE>
<CAPTION>
                                                  Shares                                                   Value of Unexercised
                                                 Acquired                     Unexercised Options          In-the-Money Options
                                                    on          Value        at Fiscal Year end (#)     at Fiscal Year End ($) (1)
                                                 Exercise     Realized    ----------------------------  --------------------------
          Name                                      (#)        ($) (1)    Exercisable   Unexercisable   Exercisable  Unexercisable
   -------------------                          -----------  -----------  -----------  ---------------  -----------  -------------
<S>                                             <C>          <C>          <C>          <C>              <C>          <C>
ROBERT M. BENINGSON                                      0            0    2,325,000              0      8,630,500             0

MICHAEL TRACHTENBERG                                35,000      196,875      193,000         72,000        802,175       352,950

ROBERT C. PALADINO                                   5,000       32,000      156,000         40,000        632,275       192,475
</TABLE>
 
(1) Value calculated is the difference between closing price on the date of
    exercise or year end, respectively, and the exercise price.
 
                               PENSION PLAN TABLE
 
<TABLE>
<CAPTION>
                                       Years of Service (2)
                 ----------------------------------------------------------------
Remuneration(1)     10         15         20         25         30         35+
---------------  ---------  ---------  ---------  ---------  ---------  ---------
<S>              <C>        <C>        <C>        <C>        <C>        <C>
      50,000         3,200      4,125      5,200      6,250      7,500      8,750

     100,000         8,200     11,625     15,200     18,250     21,675     24,175

     150,000        13,200     19,125     25,200     30,750     36,675     40,425

     200,000        18,200     26,625     35,200     43,250     51,675     56,675

     250,000        23,200     34,125     45,200     55,750     66,675     72,925

</TABLE>

(1) Based on highest five year average and includes annual salary and cash
    bonus, if any. 

(2) The years of credited service for individuals listed in the Summary 
    Compensation Table are 41 for Robert M. Beningson, 10 for Robert C.
    Paladino, and 14 for Michael Trachtenberg.
 
    IRS regulations limit the amount of compensation credited for Pension Plan
purposes to $150,000 per year, subject to cost of living increases.
 
           SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
    Mr. Paladino filed a Form 4 one month late, which reported the exercise of
options and the gift of those shares to a charity.
 
COMPENSATION OF DIRECTORS
 
    Directors receive no fees for attending Board or Committee meetings.
However, both Mr. Whiteman and Mr. Weinstein serve as consultants to York, and
give advice, consultation and reports to York on such matters as are requested
by Executive Officers or the Board of Directors. In both Fiscal 1997 and Fiscal
1996, Mr. Whiteman received $24,000. Mr. Weinstein received $24,000 in Fiscal
1997, and $18,000 in Fiscal 1996.
 
    The Company has not entered into any employment contracts with any of the
herein named Officers or Directors.
 


                                   -20-

<PAGE>

                            SECURITY OWNERSHIP OF 
ITEM 12            CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
a. Security Ownership of Certain Beneficial Owners
 
    The following table sets forth the information indicated as of February 28,
1997, as to all persons known by the Board of Directors to be the beneficial
owners of more than five percent of the Corporation's Common Stock.
 
    Name and Address                     Amount and Nature of   Percent of
    of Beneficial Owner                  Beneficial Ownership    Class (1)
    -----------------------------------  --------------------  -------------

    Robert M. Beningson
    280 Park Avenue
    New York, NY 10017                        3,491,000(1)(2)        21.2%

    H. Clifton Whiteman
    280 Park Avenue
    New York, NY 10017                        1,235,420(1)(4)         8.6%

    York Research Corp.
    Employee Stock Ownership Plan
    280 Park Avenue
    New York, NY 10017                        1,120,220(1)           7.9%

 
See note references below. 

b. Security Ownership of Management
 
    The following table sets forth the information indicated as of February 28,
1997 with respect to common stock of the Company beneficially owned by directors
and officers of the Company and by directors and officers as a group:
 
<TABLE>
<CAPTION>

    Name of                             Amount and Nature of   Percent of
    Beneficial Owner                    Beneficial Ownership    Class (1)
    ----------------------------------  --------------------  -------------
    <S>                                 <C>                   <C>
    Robert M. Beningson                        3,491,000(1)(2)        21.2%

    Michael Trachtenberg                         286,200(1)(3)         2.0%

    Robert C. Paladino                           202,000(1)(5)         1.4%

    H. Clifton Whiteman                        1,235,420(1)(4)         8.6%

    Stanley Weinstein                             20,000(1)(6)          (6)

    Directors and Officers 
    as a group (5) persons                     5,234,620(1)          30.8%
</TABLE>
 

                                      -21-

<PAGE>
 
(1) The Percent of Class is based upon 14,256,304 issued and outstanding shares
    of common stock at February 28, 1997 plus the shares that underlie
    unexercised warrants or options held by the individuals.
 
(2) Includes 824,000 shares owned directly, plus warrants to purchase 1,650,000
    shares of common stock, options to purchase 575,000 shares of common stock
    and 442,000 shares owned by RRR'S Ventures, Ltd., a corporation controlled
    by Mr. Beningson.
 
(3) Includes 21,200 shares owned directly by Mr. Trachtenberg and options to
    purchase 265,000 shares of common stock.
 
(4) Includes 75,200 shares owned directly by Mr. Whiteman, warrants to purchase
    40,000 shares of common stock, and 1,120,220 shares held by the ESOP of
    which Mr. Whiteman is the trustee.
 
(5) Includes 6,000 shares owned directly by Mr. Paladino and options to purchase
    196,000 shares of common stock.
 
(6) Includes warrants to purchase 20,000 shares of common stock; less than 1%
    ownership.
 
ITEM 13           CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    Mr. Beningson is President and a major shareholder of RRR'S Ventures, Ltd.,
a corporation in which the Chief Financial Officer of the Company is also a
minor shareholder, which is 25% general partner to WCTP, limited partner in RV
Associates L.P. ("RVA") (which in turn is a minority partner in B-41LP), and 10%
general partner in York Cogen Partners L.P. ("YCP"), a limited partner in B-41LP
(see Note 4). Mr. Beningson is also a 15% shareholder in NAEC.
 
    At February 28, 1997, WCTP was indebted to the Company for approximately
$2,006,000 related to operations and maintenance services, of which $1,583,625
was paid subsequent to year end, for approximately $2,500,000 for loans to WCTP
and for professional services paid for on behalf of WCTP, and for approximately
$28,810,000 related to the transfer of the Warbasse Facility, and indebted to
YCP for $28,522,000 (see Note 5).
 
    In Fiscal 1993, RVA received a distribution of $2,000,000 from B-41LP which
is expected to be charged against capital, concurrent with future allocations of
income.
 
    At February 28, 1997, Mr. Beningson was indebted to the Company for
$6,971,500 related to the exercise of warrants and purchase of common shares in
prior years. Mr. Trachtenberg is indebted to the Company for $214,860 related to
the exercise of options. Mr. Paladino is indebted to the Company for $130,000
related to the exercise of options and an advance. All these amounts are
non-interest bearing and are payable on demand. Mr. Whiteman is indebted to the
Company for $125,000 related to demand loans, the principal of which bears
interest at prime.
 
    At February 28, 1997 and 1996, approximately $62,000 and $75,000,
respectively, was due to the Company from RRR'S as a result of general partners'
and administrative fees due to RRR'S by YCP, offset by, the cumulative effect of
expenses paid by the Company on behalf of RRR'S.
 



                                -22-

<PAGE>
 
    In March 1997, B-41LP settled all its obligations to SBCC for a cash payment
of $2,750,000. SBCC, in exchange for this cash payment gave up all its interest
in the future cash flow from the Brooklyn Navy Yard Project and has no
continuing interest in any of the Company's projects or assets. In settling this
obligation, B-41LP caused RVA and its partners to lose tax benefits that they
would have been able to utilize. Therefore, the Company will compensate RVA for
its lost tax benefits in the total amount of $4 million. The form of this
non-cash transaction with RVA and its partners will be the exercise of 500,000
pre-existing warrants at $6 per share for a total of $3,000,000, and the
transfer of $1,000,000 of the Company's note receivable from the Chairman to a
nonconsolidated affiliate. This extinguishment of the SBCC liability will result
in an extraordinary gain of approximately $5.4 million net of taxes, which will
be reflected in the first quarter of Fiscal 1998.
 
    As of November 1, 1996, the Company acquired 85% of the shares of NAEC for
$1 from NAEC. Prior to the acquisition, all of the stock was owned by the
Company's chairman. The acquisition has been accounted for as a purchase. In
Fiscal 1997, prior to the acquisition, the Company recognized approximately
$924,000 as reimbursement of cost.
 
    In the year ended February 28, 1997, the Company recorded $11,000,000 of
fees for services rendered through February 28, 1997 to WCTP and RV Associates
L.P. ("RVA"), two partnerships of which a company controlled by the Company's
chairman is the general partner. This amount was included in service revenues.
These fees were recorded pursuant to a services agreement between WCTP, RVA, CTI
and York. The services include ongoing negotiations of consolidation agreements
with Con Edison and Edison Mission Energy, aiding in resolving various contract
issues concerning WCTP's and RVA's power purchase agreements with Con Edison,
and various issues related to the progress of the Brooklyn Navy Yard Project.
Included in other receivables at February 28, 1997 was the fourth quarter
installment of $3,500,000 of fees for services, which was received on May 14,
1997.
 
    The Company recognizes that potential conflicts of interest may arise by
reason of the fact that Mr. Beningson controls RRR'S Ventures, Ltd. and RVA, and
is President and Chief Executive Officer of the Company. Mr. Beningson has
advised the Company that in all transactions between or affecting any affiliated
entity and the Company he will act in the best interests of the shareholders of
the Company, as determined by the Board of Directors of the Company, excluding
himself.
 
                                -23-

<PAGE>
                                    PART IV
 
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
    (1)(1) and (a)(2): See Index to Consolidated Financial Statements at Page 

27. (a)(3) Exhibits:
 
<TABLE>
<C>        <S>
      3(a) Certificate of Incorporation of the Company, as amended. (1)
 
      3(a) (I) Certificate of Amendment to the Company's Certificate of Incorporation as filed
           with the Secretary of State of the State of Delaware on May 16, 1988.
 
      3(b) Bylaws of the Company. (1)
 
      4(a) Form of Certificate evidencing Common Stock, $.01 par value per share, of the
           Company. (2)
 
     10(o) Agreement for Construction of Additional Capacity, dated May 7, 1990, between
           Warbasse-Cogeneration Technologies Partnership, L.P. and York Research Corporation.
           (3)
 
     10(q) Lease and Energy Sale Agreement, dated December 18, 1989 between the Brooklyn Navy
           Yard Development Corporation and Cogeneration Technologies, Inc., a wholly owned
           subsidiary of the Company. (4)
 
     10(r) Limited Partnership Agreement by and between Mission Energy New York, Inc. and B-41
           Associates, L.P., dated October 19, 1992, with Exhibits thereto. (5)
 
     10(s) Stipulation of Settlement among counsel to plaintiffs in litigation entitled In Re
           York Research Corporation Securities Litigation, United States District Court,
           Southern District of New York, Master File No. 91 Civ. 5040 (LJF), and counsel for
           all defendants therein, dated January 15, 1993, with Exhibits thereto. (5)
 
     10(t) Final Judgment of Dismissal with Prejudice, In Re York Research Corporation
           Securities Litigation, United States District Court, Southern District of New York,
           Master File No. 91 Civ. 5040 (LJF). (5)
 
     10(u) Amended and Restated Agreement of Limited Partnership of B-41 Associates L.P., dated
           December 26, 1992. (5)
 
    10(bb) Promissory Note, dated November 17, 1994, made by Warbasse-Cogeneration Technologies
           Partnership L.P. payable to the order of Cogeneration Technologies, Inc. (8)
 

                                -24-

<PAGE>

    10(cc) Security Agreement, dated as of November 17, 1994, made by Warbasse-Cogeneration
           Technologies Partnership L.P. to Cogeneration Technologies, Inc. (8)
 
    10(dd) Assignment and Security Agreement, dated as of November 17, 1994, made by Warbasse-
           Cogeneration Technologies Partnership L.P. to Cogeneration Technologies, Inc. (8)
 
    10(ee) Intercreditor Agreement, dated as of November 17, 1994, by and among Tomen Power
           Corporation, B-41 Associates, L.P., Cogeneration Technologies, Inc. and Warbasse-
           Cogeneration Technologies Partnership L.P. (8)
 
    10(ff) Restructuring Fee Agreement, dated as of November 17, 1994, by and among Warbasse-
           Cogeneration Technologies Partnership L.P., B-41 Associates, L.P. and Cogeneration
           Technologies, Inc. (8)
 
    10(gg) Subordinated Promissory Note, dated as of November 17, 1994, made by Warbasse-
           Cogeneration Technologies Partnership L.P. payable to the order of B-41 Associates,
           L.P. in the principal amount of $3,000,000. (8)

    10(hh) Subordinated Promissory Note, dated as of November 17, 1994, made by Warbasse-
           Cogeneration Technologies Partnership L.P. payable to the order of Cogeneration
           Technologies, Inc. in the principal amount of $3,000,000. (8)
 
    10(ii) Agreement of Limited Partnership of York Cogen Partners, L.P.
 
    10(jj) Renegotiation and Payment Agreement dated February 28, 1997 by and between Sanwa
           Business Credit Corporation and B-41 Associates, L.P.
 
    21     Subsidiaries of the Company
 
    23     Consent of Independent Certified Public Accountants.
</TABLE>
 
(b) Consolidated Financial Statements
 
    See Index to Consolidated Financial Statements at Page 27.
 
    All other exhibits and financial statement schedules have been 
    omitted because they have been previously filed or incorporated by 
    reference, in the Company's Form 10K for the fiscal year ended September 
    30, 1990, are inapplicable, or the required information is included 
    elsewhere in the Consolidated Financial Statements or the notes thereto.
 
(c) Reports on Form 8-K
 
    The following reports on Form 8-K were filed during the year ended February
28, 1997:
 
       On November 20, 1996, the Company filed a report on Form 
       8-K with regard to the acquisition of 85% of the outstanding 
       shares of North American Energy Conservation, Inc.
 

                                 -25-

<PAGE>

 
(1) Previously filed as an Exhibit, under the corresponding exhibit number, to
    the Company's Form 10K for the fiscal year ended September 30, 1982,
    Commission file number 0-72, and incorporated herein by reference.
 
(2) Previously filed as an Exhibit, under the corresponding exhibit number with
    Registration Statement No. 33-13899 on April 30, 1987 and incorporated
    herein by reference.
 
(3) Previously filed as an Exhibit with the Company's Form 10-Q for the quarter
    ended June 30, 1990 and incorporated herein by reference.
 
(4) Previously filed as an Exhibit with the Company's Form 10K for the year
    ended September 30, 1990 and incorporated herein by reference.
 
(5) Previously filed as an Exhibit with the Company's Form 10K for the year
    ended February 28, 1993 and incorporated herein by reference.
 
(6) Previously filed as an Exhibit with the Company's Form 10K for the year
    ended February 28, 1994 and incorporated herein by reference.
 
(7) Previously filed as an Exhibit with the Company's Form 10-Q for the quarter
    ended August 31, 1994 and incorporated herein by reference.
 
(8) Previously filed as an Exhibit with the Company's Form 10-Q for the quarter
    ended November 30, 1994 and incorporated herein by reference.
 
                                       -26-
<PAGE>

                    (YORK)RESEARCH CORPORATION AND SUBSIDIARIES 
                     INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                                          PAGE(S)
                                                                                                         
<S>                                                                                                      <C>
York Research Corporation and Consolidated Subsidiaries:

    Report of Independent Certified Public Accountants                                                      28

    Consolidated Financial Statements:
      Consolidated Balance Sheets--February 28, 1997 and 1996                                               29

      Consolidated Statements of Operations for the Years Ended February 28, 1997, February 28, 1996
       and February 28, 1995                                                                                30

      Consolidated Statement of Stockholders' Equity for the Years Ended February 28, 1997, February
       28, 1996 and February 28, 1995                                                                       31

      Consolidated Statements of Cash Flows for the Years Ended February 28, 1997, February 28, 1996
       and February 28, 1995                                                                                32

    Notes to Consolidated Financial Statements                                                              33
                                                                                                          through
                                                                                                            57
</TABLE>
 




                               -27-

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
The Board of Directors and Stockholders 
York Research Corporation:
 
    We have audited the accompanying consolidated balance sheets of York
Research Corporation and Subsidiaries as of February 28, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended February 28, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
York Research Corporation and Subsidiaries at February 28, 1997 and 1996, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended February 28, 1997, in conformity
with generally accepted accounting principles.
 
    As of February 28, 1997, a substantial portion of the Company's assets are
related to the Warbasse Project (See Notes 5 and 6).
 
                                          Grant Thornton LLP
 
New York, New York 
May 16, 1997
 
                                       -28-
<PAGE>
                   YORK RESEARCH CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                       PRO FORMA
                                                                      FEBRUARY 28,
                                                     FEBRUARY 28,   1997 (SEE NOTE 5)  FEBRUARY 28,
                                                         1997         (UNAUDITED)         1996
                                                     -------------  ----------------  -------------
<S>                                                  <C>            <C>               <C> 
ASSETS
Current Assets:
  Cash and cash equivalents........................  $  11,513,026   $    8,763,026   $   5,530,190
  Accounts receivable..............................      7,900,114        7,900,114           --
  Other receivables--related parties...............      8,298,806        8,298,806       2,434,498
  Inventory........................................      1,312,086        1,312,086           --
  Deferred tax asset...............................        661,000          661,000         684,000
  Other current assets (including advances to
    employees of $146,300, $146,300 and $32,775,
    respectively)..................................        311,356          311,356         204,728
                                                      -------------  ----------------  ------------  
    Total current assets...........................     29,996,388       27,246,388       8,853,416
Property, plant and equipment, net.................        602,428          602,428         353,755
Construction in progress--WCTP.....................          --               --         24,726,114
Long-term note receivable--WCTP....................     49,490,535       49,490,535      20,682,000
Other long-term receivables--WCTP..................          --               --          1,529,978
Advances to minority partner.......................      2,000,000        2,000,000       2,000,000
Payment in lieu of performance bond-- WCTP.........          --               --            500,000
Other assets (including advances to employees and a
  director of $608,267, $608,267 and $627,267,
  respectively)....................................      2,402,082        2,402,082         979,094
Excess of investment over net assets acquired,
  net..............................................        337,940          337,940         377,312
                                                     -------------  ----------------  -------------  
    Total assets...................................  $  84,829,373   $   82,079,373   $  60,001,669
                                                     -------------  ----------------  -------------  
                                                     -------------  ----------------  -------------  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable.................................  $  10,765,462   $   10,765,462   $   1,209,978
  Accrued expenses.................................      1,659,085        1,659,085       1,443,149
  Accrued income taxes.............................        765,498          765,498         144,342
                                                     -------------  ----------------  -------------  
    Total current liabilities......................     13,190,045       13,190,045       2,797,469
Due to SBCC........................................     19,982,000            --         20,232,000
Other long-term liabilities........................        884,949          884,949         684,833
Deferred revenue and other credits.................      3,460,000        7,907,937       3,460,000
                                                     -------------  ----------------  -------------  
    Total liabilities..............................     37,516,994       21,982,931      27,174,302
Minority interest in partnership...................        321,942        3,669,638           --
Commitments and contingencies......................          --               --              --
Stockholders' equity
  Common stock, Class A, $.01 par value; authorized
    10,000,000 shares; none issued.................          --               --              --
  Common stock, $.01 par value; authorized 50,000,000
    shares; issued and outstanding
    14,256,304 and 13,329,778 shares in 1997 and
    1996, respectively.............................        142,563          147,563         133,298
  Additional paid-in capital.......................     60,350,127       63,345,127      54,230,850
  Accumulated earnings (deficit)...................     (4,083,050)       1,353,317     (11,905,661)
                                                     -------------  ----------------  -------------  
                                                        56,409,640       64,846,007      42,458,487
Less:
Treasury stock, at cost (47,124 shares)............       (706,401)        (706,401)       (706,401)
Notes receivable--sale of common stock.............     (7,960,313)      (6,960,313)     (7,539,787)
Deferred compensation--ESOP........................       (752,489)        (752,489)     (1,384,932)
                                                     -------------  ----------------  -------------  
    Total stockholders' equity.....................     46,990,437       56,426,804      32,827,367
                                                     -------------  ----------------  -------------  
    Total liabilities and stockholders' equity.....  $  84,829,373   $   82,079,373   $  60,001,669
                                                     -------------  ----------------  -------------  
                                                     -------------  ----------------  -------------  
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       -29-

<PAGE>
                   YORK RESEARCH CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                        FOR THE YEARS ENDED FEBRUARY 28,

<TABLE>
<CAPTION>
                                                                           1997           1996           1995
                                                                       -------------  -------------  ------------
<S>                                                                    <C>            <C>            <C>
Revenues:
  Services...........................................................  $  19,756,615  $  10,450,061  $  2,974,156
  Energy sales.......................................................     26,570,707       --             --
  Development and other fees.........................................       --            3,941,688     4,550,064
                                                                       -------------  -------------  ------------
    Total revenues...................................................     46,327,322     14,391,749     7,524,220
                                                                       -------------  -------------  ------------
Costs and expenses:
  Cost of services...................................................      6,216,115      5,452,869     2,966,075
  Cost of energy.....................................................     25,112,691       --             --
  Selling, general and administrative................................      7,859,239      6,019,547     5,720,640
  Interest and other (income) expense................................     (4,205,276)    (2,430,295)   (1,554,539)
  Minority interest in partnership...................................        321,942        500,000       --
                                                                       -------------  -------------  ------------
    Total costs and expenses.........................................     35,304,711      9,542,121     7,132,176
                                                                       -------------  -------------  ------------
Income before income taxes...........................................     11,022,611      4,849,628       392,044
Provision for income taxes...........................................      3,200,000        450,000       170,000
                                                                       -------------  -------------  ------------
Net income...........................................................  $   7,822,611  $   4,399,628  $    222,044
                                                                       -------------  -------------  ------------
                                                                       -------------  -------------  ------------
Net income per common share--primary:................................  $        0.51  $        0.35  $       0.02
                                                                       -------------  -------------  ------------
                                                                       -------------  -------------  ------------
Net income per common share--fully diluted:..........................  $        0.51  $        0.35  $       0.02
                                                                       -------------  -------------  ------------
                                                                       -------------  -------------  ------------
Weighted average number of common shares and common share
  equivalents:.......................................................     15,487,779     15,512,011    10,981,173
                                                                       -------------  -------------  ------------
                                                                       -------------  -------------  ------------
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       -30-

<PAGE>
                   YORK RESEARCH CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED FEBRUARY 28, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                               COMMON STOCK
                            -------------------   ADDITIONAL
                            SHARES                 PAID-IN     ACCUMULATED     TREASURY     NOTES        DEFERRED
                            ISSUED      AMOUNT     CAPITAL      (DEFICIT)       STOCK     RECEIVABLE   COMPENSATION
                         ------------  --------  -----------  -------------  -----------  -----------  ------------
<S>                      <C>          <C>        <C>          <C>             <C>         <C>           <C>
Balance, February 28,
  1994................    12,480,594   $124,806  $49,252,945   $(16,527,333)  $(706,401)  $(7,292,406)   $(6,109,390) 
Issuance of common
  stock for services..        80,000        800      174,200       --           --            --            --
Exercise of options...        50,000        500      164,400       --           --           (162,000)      --
Cash receipts.........       --          --         --             --           --             60,998      2,153,000
ESOP third party
  loans...............       --          --         --             --           --            --             156,029
Deferred compensation
  accrual.............       --          --           28,450       --           --            --             344,870
Net income............       --          --         --              222,044     --            --            --
                          ----------   --------  -----------  -------------  ----------  -------------  ------------
Balance, February 28,
  1995................    12,610,594    126,106   49,619,995    (16,305,289)   (706,401)   (7,393,408)    (3,455,491)
Exercise of options...       222,957      2,230      776,045       --           --           (296,379)      --
Exercise of
  warrants............       207,727      2,077      970,843       --           --            --            --
Cash receipts.........       --          --         --             --           --            150,000      3,079,000
Deferred compensation
  accrual.............       --          --          263,958       --           --            --             148,778
Issuance of shares to
  ESOP................       288,500      2,885    1,089,334       --           --            --          (1,092,219)
Tax effect of options
  and warrants........       --          --        1,013,000       --           --            --            --
ESOP third party
  loans...............       --          --         --             --           --            --             (65,000)
Issuance of
  warrants............       --          --          497,675       --           --            --            --
Net income............       --          --         --            4,399,628     --            --            --
                          ----------   --------  -----------  -------------  ----------  -------------  ------------
Balance, February 28,
  1996................    13,329,778    133,298   54,230,850    (11,905,661)   (706,401)   (7,539,787)    (1,384,932)
Exercise of options...       333,800      3,338    1,015,350       --           --           (420,526)      --
Exercise of
  warrants............       589,726      5,897    2,743,124       --           --            --            --
Donation of stock.....         3,000         30       30,345       --           --            --            --
Cash receipts.........       --          --         --             --           --            --             450,000
Deferred compensation
  accrual.............       --          --          342,458       --           --            --             182,443
Tax effect of options
  and warrants........       --          --        1,988,000       --           --            --            --
Net income............       --          --         --            7,822,611     --            --            --
                          ----------   --------  -----------  -------------  ----------  -------------  ------------
Balance, February 28,
  1997................    14,256,304   $142,563  $60,350,127    $(4,083,050)  $(706,401)  $(7,960,313)     $(752,489)
                          ----------   --------  -----------  -------------  ----------  -------------  ------------
                          ----------   --------  -----------  -------------  ----------  -------------  ------------
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       -31-
<PAGE>
                   YORK RESEARCH CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED FEBRUARY 28,

<TABLE>
<CAPTION>
                                                                             1997          1996         1995
                                                                          ----------    ----------   ----------
<S>                                                                      <C>            <C>           <C>
OPERATING ACTIVITIES:
Net income from operations.............................................  $  7,822,611  $ 4,399,628  $   222,044
Adjustments to reconcile net income from operations to net cash
  generated by (used in) operating activities:
  Depreciation and amortization........................................       160,754      167,185      146,857
  Deferred income taxes................................................        23,000     (684,000)     --
  Non-cash charges.....................................................       397,391       25,000      --
  Common shares issued for services and donation.......................        30,375      --           175,000
  Amortization of deferred credits.....................................      --           (392,633)  (1,152,128)
  Gain on sale and disposition of machinery and equipment..............      --            --             2,855
  ESOP contribution....................................................       524,901      412,736      373,320
  Tax benefit of stock options and warrants............................     1,988,000    1,013,000      --
  Changes in operating assets and liabilities:
    (Increase) decrease in receivables.................................   (10,988,635)  (1,687,043)      15,882
    Increase in construction in progress...............................      --         (2,984,374)  (1,845,797)
    Net (increase) decrease in notes receivable, inventory, other 
      current assets, and other assets.................................    (3,235,578)    (246,483)     415,038
    Net decrease in due to bank and equipment vendor...................      --            --          (571,664)
    Net increase (decrease) in accounts payable, accrued expenses and
      long-term liabilities............................................     5,156,465     (413,744)    (221,683)
    Increase in accrued taxes..........................................       246,166     (118,151)     104,921
                                                                         ------------  -----------  -----------
  NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES.................     2,125,450     (508,879)  (2,335,355)
                                                                         ------------  -----------  -----------
INVESTING ACTIVITIES:
  Purchase of machinery and equipment..................................      (158,995)    (144,697)    (220,304)
  Purchase of NAEC, net of cash acquired...............................       128,495      --           --
                                                                         ------------  -----------  -----------
  NET CASH USED IN INVESTING ACTIVITIES................................       (30,500)    (144,697)    (220,304)
                                                                         ------------  -----------  -----------
FINANCING ACTIVITIES:
  Amounts received from ESOP...........................................       450,000    3,079,000    2,153,000
  Proceeds from notes receivable.......................................      --            150,000      --
  Payments on capital leases...........................................       (31,687)     (17,545)     (20,415)
  Payment of due to SBCC...............................................      (250,000)    (250,000)    (200,000)
  Proceeds from exercise of stock options and warrants.................     3,719,573    1,454,816          500
                                                                         ------------  -----------  -----------
  NET CASH GENERATED BY FINANCING ACTIVITIES...........................     3,887,886    4,416,271    1,933,085
                                                                         ------------  -----------  -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................     5,982,836    3,762,695     (622,574)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.........................     5,530,190    1,767,495    2,390,069
                                                                         ------------  -----------  -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR...............................  $ 11,513,026  $ 5,530,190  $ 1,767,495
                                                                         ------------  -----------  -----------
                                                                         ------------  -----------  -----------
</TABLE>

Non-cash investing and financing activities:

    During Fiscal 1997, $28,808,535 was converted from construction in 
process, other long-term receivables-WCTP and payment in lieu of performance 
bond-WCTP to notes receivable-WCTP.

    During Fiscal 1997, the Company acquired 85% of the common stock of NAEC 
for $1. The fair value of assets acquired was $4,587,849, and liabilities 
assumed were $4,960,240.

    During Fiscal 1997, a capital lease obligation of $211,060 was incurred 
when the Company entered into leases for new equipment.

    During Fiscal 1996, the Company issued 288,500 shares of common stock to 
the ESOP, in exchange for a note receivable for $1,092,219.

     During Fiscal 1997, 1996 and 1995, the Company received $420,526, 
$296,379 and $162,000 of notes receivable--sale of common stock, 
respectively, for options exercised. 

     The accompanying notes are an integral part of these financial statements.

                                      -32-
<PAGE>
                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

1.   NATURE OF BUSINESS
     ------------------

     York Research Corporation ("York" or the "Company") is a developer, owner
and marketer of energy related projects and products and through its
subsidiaries, partnerships, joint ventures and affiliates, currently
participates in two broad areas of the energy business--power project
development and services, including cogeneration and wind energy, and the
marketing of energy and natural gas in the wholesale power markets and the
wholesale and retail natural gas markets.
 
    The principal markets for the Company's products and services currently are
the United States and Eastern Canada. Revenues are principally derived from
entities that supply, broker or market energy to utilities, residential
complexes, and industrial concerns.
 
2.   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 the
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.
 
3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------

     PRINCIPLES OF CONSOLIDATION
     ---------------------------

     The consolidated financial statements of York and subsidiaries and all
majority owned partnerships include the accounts of Cogeneration Technologies,
Inc. ("Cogen"), B-41 Associates L.P. ("B-41LP"), B-41 Management Corporation
("B-41MC"), York Cogen Partners L.P. ("YCP"), York Internet Power Services,
Inc., North American Energy Conservation, Inc. ("NAEC"), York Research Canada,
Inc. ("York Canada") and York Windpower Corp., which is 100% owned by York
Canada. All material intercompany profits and transactions have been eliminated
in consolidation.
 
CASH AND CASH EQUIVALENTS
-------------------------

     The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
 
                                     -33-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

     REVENUE RECOGNITION
     -------------------

     The Company recognizes service revenues and energy sales in the period in
which the work is performed or the commodity is delivered. Development fees
received were either amortized over the related development period, or
recognized as received, based on their nature.
 
     LONG-TERM CONTRACT AND CONSTRUCTION IN PROGRESS
     -----------------------------------------------

     Due to the uncertainties that had surrounded the Warbasse Project (see Note
5), the Company accounted for the Warbasse Project construction contract using
the completed contract method. Construction in progress included equipment,
building structure and installation subcontract costs, and construction period
interest.
 
     PROPERTY, PLANT AND EQUIPMENT
     -----------------------------

     Property, plant and equipment are stated at cost and are being depreciated
or amortized on the straight-line method over their estimated useful lives as
follows:
 
             Machinery and equipment..................  5-10 years
             Furniture and fixtures...................  5-10 years
             Motor vehicles...........................  3 years
             Leasehold improvements...................  5-8 years

     INCOME TAXES
     ------------

     The Company utilizes the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109,
deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities including
net operating loss carryforwards, using the enacted marginal tax rate. Deferred
income tax expense or benefits are based on the changes in the asset or
liability from period to period. Deferred tax assets are recognized to the
extent realization of such benefits are more likely than not.
 
     EXCESS OF INVESTMENT OVER NET ASSETS ACQUIRED, NET
     --------------------------------------------------

     The Company's acquisition of Cogen in 1985 resulted in an $828,000 excess 
of investment over net assets acquired, which is being amortized on a 
straight-line basis over 20 years. Accumulated amortization at February 28, 
1997 and 1996 is $490,000 and $451,000, respectively. At each balance sheet 
date, the Company evaluates the 

                                    -34-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

realizability of goodwill based upon expectations of nondiscounted cash flows 
and operating income for each subsidiary having a material goodwill balance. 
Based upon its most recent analysis, the Company believes that no material 
impairment of goodwill exists at February 28, 1997.
 
     LONG-TERM NOTE RECEIVABLES-WCTP
     -------------------------------

     The realizability of the long-term note receivable-WCTP is evaluated by the
Company by review of the present value of the currently expected future cash
flow from the Warbasse facility.
 
     PER SHARE DATA
     --------------
     Per share data is based on the weighted average number of common shares and
common share equivalents (warrants and options) outstanding during the year,
calculated using the modified treasury stock method in 1997 and 1996, and the
treasury stock method in 1995.
 
<TABLE>
<CAPTION>
                                                                             FISCAL        FISCAL        FISCAL
                                                                              1997          1996          1995
                                                                          ------------  ------------  ------------
<S>                                                                       <C>           <C>           <C>
Weighted average number of shares outstanding...........................    13,705,557    12,888,772    12,465,744
Average of unreleased ESOP shares (a)...................................      (923,006)   (1,219,279)   (1,604,666)
Dilution (warrants and options) (b).....................................     2,705,228     3,842,518       120,095
                                                                          ------------   -----------   -----------
Weighted average number of common share and common share equivalents....    15,487,779    15,512,011    10,981,173
                                                                          ------------   -----------   -----------
                                                                          ------------   -----------   -----------
</TABLE>
 

(a)  Amount reflects average unreleased ESOP shares (see Note 11) for the 
     periods presented. As of 2/28/97, the balance of unreleased ESOP shares 
     was 867,995.
 
(b)  Amount reflects average dilution for the periods presented. Fiscal 1997 and
     1996 include an average of 175,000 and 1,199,300 options and warrants,
     respectively, exercisable at prices above market; Fiscal 1995 includes only
     options and warrants below market.
 
     FAIR VALUE OF FINANCIAL INSTRUMENTS
     -----------------------------------

     The carrying amounts of cash and cash equivalents, accounts and other 
receivables, accrued expenses and accounts payable approximate fair value, 
principally because of the short maturity of these items. For the fair value 
of Due to SBCC, see Note 5. For long-term receivables-WCTP (see Note 5 for 
terms) and advances to minority partner (see Note 14 for terms), there are no 
quoted market prices, and a reasonable estimate of fair value could not be 
made without incurring excessive costs.
 
                                    -35-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

     INVENTORY
     ---------

     Inventory consists of natural gas held in storage. The Company accounts for
its natural gas inventory using lower of cost or market, cost being determined
using the average cost method.
 
     RECLASSIFICATIONS
     -----------------
 
     Certain amounts in the 1996 consolidated financial statements were
reclassified to conform to the 1997 presentation.
 
     IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
     ------------------------------------------

     In February 1997, the Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share, which
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. Basic earnings per share
excludes dilution and is computed by dividing income available to common 
shareholders by the weighted-average common shares outstanding for the period. 
Diluted earnings per share reflects the weighted average common shares
outstanding plus the potential dilutive effect of securities or contracts which
are convertible to common shares, such as options, warrants, and convertible
preferred stock. The pro forma effect of adopting the new standard would be
basic earnings per share of $.61, $.38 and $.02, and diluted earnings per share
of $.52, $.35 and $.02 for the years ended February 28, 1997, 1996 and 1995,
respectively.
 
4.   BROOKLYN NAVY YARD
     ------------------

     A joint venture, Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP")
was formed as of October 19, 1992. BNYLP is owned and controlled equally by a
subsidiary of Edison Mission Energy ("Mission"), which is a wholly-owned
subsidiary of SCE Corp., and B-41LP. BNYLP was formed to develop, construct,
finance, own and operate the 286 megawatt ("MW") natural-gas-fired,
combined-cycle Brooklyn Navy Yard ("BNY") cogeneration facility with
Consolidated Edison Company of New York, Inc. ("Con Edison") and various host
entities as the principal customers.

                                    -36-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

     B-41LP was formed to more effectively develop and manage the original
partners' investments in the BNY facility. The profit sharing and ownership
percentages in the B-41LP partnership agreement, as amended, are as follows:
 
     1.  RV Associates L.P. ("RVA"), whose limited partner, RRR'S Ventures
         Ltd., and general partner are controlled by the Chairman of the 
         Company, is a 5% general partner. B-41MC, a wholly-owned subsidiary 
         of York, is also a 5% general partner.
 
     2.  RVA is also a 15% limited partner. RVA contributed a power purchase
         agreement totaling 40 MW.
 
     3.  Cogen, a wholly-owned subsidiary of York, is a 22% limited partner.
         Cogen contributed a power purchase agreement totaling 40 MW.
 
     4.  YCP is a 53% limited partner. RRR'S Ventures Ltd. is the 10% general
         partner of YCP, and York is the 90% limited partner in YCP. YCP 
         contributed a power purchase agreement totaling 90 MW.
 
     For tax purposes, depreciation, operating losses and capital transactions
are subject to other sharing percentages.
 
     The BNYLP partnership agreement contains provisions, among other things,
with respect to funding obligations of Mission, security for loans and
guarantees by Mission, the allocation of cash flow and tax depreciation under
various circumstances, profits and losses both before and after Mission's
advances have been repaid, management of the Partnership, and dispute resolution
(including provisions for a buy out of either Mission's or B-41LP's general
partnership interest). B-41LP and Mission are in the process of amending the
Partnership agreement to reflect certain changes pertaining to funding
obligations, management, and operations.
 
     Upon formation of BNYLP, all of the project-related assets, contract 
rights, leases or other intangible assets that had been accumulated by the 
Company and B-41LP during the pre-joint venture development period, as well as 
all related liabilities, were transferred to BNYLP. Although BNYLP accounts for
B-41LP's contribution at an agreed upon value of $7,000,000, B-41LP recorded 
its investment in BNYLP at the historical carrying value of the assets 

                                    -37-

<PAGE>
                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

contributed of zero. B-41LP accounts for its investment in BNYLP under the 
equity method.
 
     For the years ended February 28, 1997 and 1996, BNYLP's only activity was
the construction, testing and initial operation of the BNY facility. As capacity
payments from Con Edison did not start until March 1997, BNYLP did not recognize
any revenues, expenses, or operating profits or losses. The summarized financial
information of BNYLP at February 28, 1997 and 1996 is as follows:
 
                                             (UNAUDITED)     (UNAUDITED)
                                                 1997            1996
                                           --------------   --------------
Current assets...........................   $ 23,797,000     $ 15,138,000
Noncurrent assets........................   $454,747,000     $351,980,000
Current liabilities......................   $204,234,000     $ 93,277,000
Noncurrent liabilities...................   $253,926,000     $253,926,000
Net assets...............................   $ 20,384,000     $ 19,915,000

     The Company and Mission previously estimated the total capital costs of the
BNY Facility, when fully completed, to be approximately $420,000,000. On
December 22, 1995, the New York City Industrial Development Agency (the "IDA")
issued $253,925,700 of Industrial Development Revenue Bonds for the purpose of
financing certain costs incurred through that date in constructing and
developing the BNY Facility. These bonds are recourse to a letter of credit
("LOC") in like amounts arranged by Mission, which LOC is in turn supported by a
Mission guarantee. BNYLP has agreed to reimburse Mission if the guarantee is
called, out of future cash flow as and if available. The proceeds of this bond
sale were being used to reimburse Mission for a portion of its construction
loans made to date and to reimburse the Company for engineering and other costs
that had been expensed in prior periods and for services that have been
performed by the Company.
 
    In March 1996, the project delivered initial test quantities of power to Con
Edison, equivalent to existing contract capacity. Construction was substantially
completed and the facility commenced operations in accordance with its contract
on November 1, 1996. Mission has funded all construction costs incurred to date
in excess of those funded by the IDA bonds mentioned above, and may need to
provide additional guarantees to secure project financing. The Company has no
obligation to fund the project or provide guarantees and all obligations
incurred by BNYLP to date are non-recourse to the Company.

                                    -38-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

     In consideration for certain development services for the BNY facility
performed by the Company, RVA has assumed the obligation for certain credit
facilities totaling $9,750,000 which are repayable only from amounts received
from third party BNYLP financings or BNY facility operations.
 
     As of February 28, 1997, the Company and B-41LP have received a total of
$21,541,000 for development fees, a nonrefundable commission from a vendor in
connection with the procurement of certain BNYLP equipment, and for
reimbursement of development costs net of related liabilities assumed by BNYLP.
In Fiscal 1997, 1996 and 1995, the Company recognized development fee revenue of
$0, $3,267,000 and $4,300,000, respectively. At February 28, 1997 and 1996,
revenues of $3,460,000 have been deferred, which is one half of the
nonrefundable commission, to be recognized over the estimated useful life of the
related equipment.
 
     In accordance with the joint venture agreement, the Company provides
engineering services for BNYLP. During Fiscal 1997, 1996 and 1995, the Company
recognized revenue from engineering services of approximately $838,000, 
$780,000 and $593,000, respectively, which are reflected in service revenues 
and cost of services. During Fiscal 1997 and 1996, the Company also recognized 
reimbursements of $2,500,000 and $5,000,000, respectively, for certain 
engineering and other costs a portion of which had been expensed in prior 
periods. At February 28, 1997 and 1996, the Company had receivables from BNYLP 
of approximately $280,000 and $138,000, respectively. These amounts are 
included in other receivables and were fully collected subsequent to the 
respective year ends.
 
     Commencing December 1, 1996, BNYLP paid general partner fees to B-41LP 
equal to 2.5% of gross monthly revenues of the Brooklyn Navy Yard project. 
B-41LP in turn pays a general partner fee of 1.25% of gross monthly revenues to
each of B-41MC and RVA. In the year ended February 28, 1997, B-41MC recognized 
general partner fees of $298,690, with a receivable of $166,598 at February 28,
1997, which was paid in April 1997.
 
     Pursuant to the provisions of the partnership agreement, Mission retains 
the right, because it has spent in excess of $13,258,043 in development costs, 
to take all the votes on the Management Committee that controls the day to day
operations of BNYLP. Mission has informed B-41LP that they had incurred gross
costs in excess of $454,000,000 for this project as of February 28, 1997. If
Mission decides to exercise its right to cast all votes on the BNYLP 

                                    -39-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

Management Committee, B-41LP still remains a 50% general and limited partner 
in the Navy Yard project and retains all its other rights, and Mission retains 
all its funding and other obligations to the Project and B-41LP.
 
     In February 1997, the general contractor of the Brooklyn Navy Yard facility
brought an action in California against BNYLP seeking damages of $137 million
for amounts owed under the turnkey contract and denying liability under various
claims. BNYLP responded to the complaint, denying all the allegations contained
therein and commenced an action in New York against the general contractor
denying any liability under the turnkey contract and seeking in excess of $13
million of counter claims. In addition, BNYLP has been named as one of the
defendants in another action relating to the construction activity of the
Brooklyn Navy Yard facility. Although it is a general partner of BNYLP, B-41LP
was not served in these complaints and is not a party to any of the actions.
 
     Like other large projects of this nature, the BNY cogeneration facility is
subject to various risks. There can be no assurance that the facility, although
completed, will operate at sufficient levels to cover all operation and
maintenance expenses and debt service. The Company has no liability for any such
shortfalls.
 
5.   WARBASSE PROJECT
     ----------------

     In May 1990, an agreement was entered into between Warbasse-Cogeneration
Technologies Partnership L.P. ("WCTP") (see Note 14) and the Company whereby the
Company agreed to construct the expansion of the Warbasse facility converting it
from the engine facility previously constructed for WCTP by the Company, to a
larger gas turbine facility (the "Warbasse Project") to enable it to service Con
Edison pursuant to the existing contract between WCTP and Con Edison.
 
     The Company also contracted with WCTP to provide operations and maintenance
services for the Warbasse Project at its direct cost. The services agreement
includes providing fuel, operating, manning and maintaining the facility. The
Company operates the Warbasse Facility, supplying on a continuous basis all the
thermal and electric energy needs of the host, Amalgamated Warbasse Houses,
Inc., and supplying up to the full capacity requirements of its electric power
contract with Con Edison, when dispatched. During Fiscal 1997, 1996 and 1995, 
the Company recognized approximately $5,400,000, $4,700,000 and $2,400,000, 
respectively, for operations and maintenance services revenues, which has been 
reflected in service revenues. Cost of 

                                     -40-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

services for the same periods was approximately $5,400,0000, $4,700,000 and 
$2,400,000, respectively.
 
     On July 27, 1994, B-41LP purchased from Sanwa Business Credit Corp. 
("SBCC") the note obligation of WCTP to SBCC together with all related 
collateral and ancillary rights owned by SBCC. In payment, SBCC would have 
received a share of the cash flow, if any, from the BNY project. The note 
obligation of WCTP to B-41LP (the "B-41LP Note") has been recorded as a 
Long-term note receivable--WCTP and has a face value of $28,522,000, which 
includes accrued interest of $6,022,000 from April 1, 1991 through July 27, 
1994. This obligation is payable to B-41LP from a portion of the net operating 
cash flow of the Warbasse project. On December 1, 1996, this note obligation of
WCTP (herein after referred to as the YCP Note) was assigned to YCP by B-41LP. 
The YCP Partnership Agreement was amended to provide that the amounts received 
by YCP in respect of the note obligation shall be distributed 74.7% to York 
and 25.3% to RRR'S, its minority partner, which are the same distribution 
percentages as were held by York and affiliates of RRR'S in B-41LP.
 
     The YCP Note has been reflected in the consolidated balance sheet at an
amount equal to the initial obligation to SBCC. The $7,840,000 difference
between the face amount of the note and the amount reflected will be adjusted to
income over time as principal payments of the long-term note receivable are made
by WCTP.
 
     The obligation of B-41LP to SBCC has been recorded as Due to SBCC of
$20,682,000, which was the net present value of the maximum annual amount
payable to SBCC, over 30 years discounted at 7%. Other than $700,000 paid
through February 28, 1997, the amount to be paid to Sanwa would have been a
function of B-41LP's share of the actual cash flow generated from the BNY
project, with no guaranteed minimum amount. B-41LP's obligation to SBCC was
recourse only to and secured only by B-41LP's cash flow, if any, from the BNY
project.
 
     In March 1997, B-41LP settled all its obligations to SBCC for a cash 
payment of $2,750,000. SBCC, in exchange for this cash payment gave up all its 
interest in the future cash flow from the Brooklyn Navy Yard Project and has no
continuing interest in any of the Company's projects or assets. In settling this
obligation, B-41LP caused RVA and its partners to lose tax benefits that they
would have been able to utilize. Therefore, the Company will compensate RVA for
its lost tax benefits in the total amount of $4 million. The form of this
non-cash transaction with RVA and its partners will be the exercise of 500,000
pre-existing warrants at $6 per share for a total 

                                    -41-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

of $3,000,000, and the transfer of $1,000,000 of the Company's note receivable 
from the Chairman to a nonconsolidated affiliate. This extinguishment of the 
SBCC liability will result in an extraordinary gain of approximately 
$5.4 million net of taxes, which will be reflected in the first quarter of 
Fiscal 1998. The accompanying pro forma balance sheet reflects these 
transactions as if they occurred on February 28, 1997.
 
     On November 17, 1994, the YCP Note due from WCTP was restructured along 
with other long-term debt of WCTP. Such other long-term debt of WCTP includes a
note payable to Tomen Power Corporation ("Tomen") and includes a note payable 
to Cogen. The three notes will share in the net operating cash flow of WCTP, as
defined, pro rata in proportion to the principal balances of the notes, and
would share PARI PASSU in the collateral of WCTP in the event of a default.
Management expects that all three notes will be paid from the operations of
WCTP, and each note carries an interest rate of LIBOR plus 2%. In addition,
YCP and Cogen will receive a restructuring fee of $3,000,000 each, to be paid
the year after the three notes are fully paid.
 
     The Company completed construction of the project, and on August 1, 1996,
the Warbasse Facility was transferred by Cogen to WCTP, in exchange for a Note
Receivable of $28,808,535. The Note Receivable represents the total construction
cost of the facility plus (1) the unpaid balance of approximately $1,530,000 in
Other long-term receivables-WCTP at February 28, 1996, which relates to
operation and maintenance services performed for WCTP in prior periods, (2) a
$500,000 payment made to WCTP in lieu of a performance bond and (3) an accrual
for the remaining construction tasks which generally relate to improving
efficiency and operational control. Therefore, the caption Long-term note
receivable-WCTP on the balance sheet consists of:
 
          YCP Note............................  $20,682,000
          CTI Note............................   28,808,535
                                                 ----------
                                                $49,490,535
                                                 ----------
                                                 ----------

     Interest income on these notes amounted to approximately $3,490,000, 
$2,360,000 and $1,277,000 for Fiscal 1997, 1996 and 1995, respectively.


                                     -42-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

6.   OTHER RECEIVABLES--RELATED PARTIES
     ----------------------------------
 
     Other receivables--related parties at February 28, 1997 and 1996 consist 
of the following:
 
                                                       1997          1996
                                                   ------------  ------------

Service and other receivables--WCTP..............  $  8,019,190  $  1,696,583
Engineering service and general 
  partner fee receivables-- BNYLP................       279,616       137,915
Other receivables--NAEC..........................            --       600,000
                                                   ------------  ------------
                                                   $  8,298,806  $  2,434,498
                                                   ------------  ------------
                                                   ------------  ------------

     Of the total other receivables--related parties at February 28, 1997,
$5,083,625 was received subsequent to year end.
 
7.   PROPERTY, PLANT AND EQUIPMENT
     -----------------------------

     Property, plant and equipment at February 28, 1997 and 1996 consist of the
following:
 
                                                      1997        1996
                                                   ----------  ----------
      Machinery and equipment....................  $  925,099  $  650,738
      Furniture and fixtures.....................     249,980     248,797
      Motor vehicles.............................     315,448     221,937
      Leasehold improvements.....................      36,064      35,064
                                                   ----------  ----------
                                                    1,526,591   1,156,536
      Less: accumulated depreciation.............    (924,163)   (802,781)
                                                   ----------  ----------
                                                   $  602,428  $  353,755
                                                   ----------  ----------
                                                   ----------  ----------

8.   CONSTRUCTION IN PROGRESS
     ------------------------

     Construction in Progress ("CIP") as of February 28, 1996 included all of 
the personal property procured, to which the Company had title, for expansion 
of the Warbasse Project. Also included in CIP was $1,012,000 of interest and
professional fees capitalized through February 28, 1996. On August 1, 1996, the
Warbasse facility was transferred by Cogen to WCTP (see Note 5).

                                     -43-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

9.   ACCRUED EXPENSES
     ----------------

     Accrued expenses at February 28, 1997 and 1996 include:
 
                                                     1997          1996
                                                 ------------  ------------

     Professional fees.........................   $  537,000    $  643,000
     Taxes other than income...................      445,000            --
     Construction and 
      cogeneration services....................           --       332,000
     Accrued pension cost......................      398,000       255,000
     Other.....................................      279,000       213,000
                                                 -----------   -----------
     Total accrued expenses....................   $1,659,000    $1,443,000
                                                 -----------   -----------
                                                 -----------   -----------

10.  STOCKHOLDERS' EQUITY
     --------------------

     Common Stock -- The Company has authorized 50,000,000 shares of common 
stock. In addition, the Company has authorized 10,000,000 shares of Class A 
common stock, none of which have been issued. Each Class A common share has
one/hundredth of a vote as compared with the regular common stock and is
entitled to a $.20 dividend priority before any dividends are payable on the
full voting common stock.
 
     The Company, from time to time, issues shares of unregistered common stock
for payment of certain nonemployee services. The shares are valued at 70% of the
market value of registered common stock on the date of issue, which management
believes approximates the fair market value of services rendered. This
consideration has been included in selling, general and administrative expenses
in the appropriate period. There were no shares issued for payment of
nonemployee services in Fiscal 1997 or 1996. In Fiscal 1995, 80,000 shares were
issued with a value of $175,000 for payment of nonemployee services.
 
     Incentive Stock Option ("ISO") Plan -- In 1982, the Company authorized
1,400,000 qualified stock options, which have all been granted. The 1982 Plan
expired on April 26, 1992. In September 1993, the Company adopted the 1993 ISO
Plan, authorizing a total of 3,000,000 qualified and nonqualified stock options,
of which 1,619,000 qualified stock options were granted to employees, and 56,000
nonqualified stock options were granted to two consultants to the Company.
 
    Options granted under both plans may not be granted at a price less than the
fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). Options granted under the Stock Option Plans will expire not more
than ten years from the date of grant.
 
                                    -44-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

     In Fiscal 1997, the Company granted 150,000 options to employees of the
Company. The exercise price of the options is equal to the fair market value of
the common stock at the date of the grant. These options vest over a three year
period.
 
     The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, Accounting for Stock Based Compensation (FAS 123).
It applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock based compensation plans. If the Company had
elected to recognize compensation expense based upon the fair value at the grant
date for awards under these plans consistent with the methodology prescribed by
FAS 123, the Company's net income and income per share would be decreased to the
pro forma amounts indicated below for the year ended February 28, 1997:
 
     Net Income
      As reported.................  $7,822,611
      Pro forma...................  $7,698,490

     Income per common share
      As reported..................  $     .51
      Pro forma....................  $     .50

 
No options were granted in Fiscal 1996.
 
     These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before March 1, 1995. The fair value of these options was estimated
at the date of grant using Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended February 28, 1997:
 
     Volatility............................  79%
     Risk free rate........................  6.98%
     Expected life.........................  10 years
     Forfeiture rate.......................  33%

 
     The weighted average fair value of options granted during Fiscal 1997, for
which the exercise price equals the market price on the grant date, was $7.64,
and the weighted average exercise price was $8.96.
 
                                    -45-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

     Stock option activity during Fiscal 1997, 1996 and 1995 is summarized 
below:
 
                                                           WEIGHTED-AVERAGE
                                                OPTIONS     EXERCISE PRICE
                                              ----------  -----------------

Balance, February 28, 1994..................   1,127,900      $    5.55
Granted.....................................   1,139,000           3.14
Exercised...................................     (50,000)          3.24
                                              ----------         
Balance, February 28, 1995..................   2,216,900           4.37
Exercised...................................    (222,957)          4.24
Canceled....................................     (23,543)          4.23
                                              ----------          
Balance, February 28, 1996..................   1,970,400           4.36
Granted.....................................     150,000           8.96
Exercised...................................    (333,800)          3.79
Canceled....................................     (40,773)          4.17
                                              ----------          
Balance, February 28, 1997..................   1,745,827      $    4.90
                                              ----------
                                              ----------

     At February 28, 1997, 1996 and 1995, 1,361,313, 1,496,252 and 282,034,
options, respectively, were exercisable.
 
     The following table summarizes information concerning currently outstanding
and exercisable stock options:
 
<TABLE>
<CAPTION>
                              WEIGHTED-AVERAGE     WEIGHTED-                WEIGHTED-
   RANGE OF                       REMAINING         AVERAGE                  AVERAGE
   EXERCISE       NUMBER      CONTRACTUAL LIFE     EXERCISE      NUMBER     EXERCISE
    PRICES      OUTSTANDING        (YEARS)           PRICE     EXERCISABLE    PRICE
--------------  -----------  -------------------  -----------  ----------  -----------
<S>             <C>          <C>                  <C>          <C>         <C>
$3.00-$4.50        750,544             7.39        $    3.20      605,944   $    3.22
$4.51-$6.00        730,983             5.82        $    5.33      616,067   $    5.35
$8.00-$10.00       264,300             7.02        $    8.54      139,302   $    8.17
                 ---------                                      ---------
                 1,745,827                                      1,361,313
                 ---------                                      ---------
                 ---------                                      ---------
</TABLE>
 
     Warrants--all warrants are exercisable upon grant, although the underlying
shares may not necessarily be registered, and the warrants expire after ten
years. The exercise prices of the warrants are the NASDAQ closing prices of the
Company's common stock at the dates of grant.
 
     In February and March 1988, the Company's Chairman exercised warrants to
purchase 850,000 shares of common stock in exchange for cash and a noninterest
bearing note totaling $3,531,250. In September 1989, the Company's Chairman
exercised warrants to purchase 625,000 shares of common stock in exchange for
cash and a noninterest bearing note payable on demand totaling $3,706,250. In
Fiscal 1992, the Company's Chairman repaid $600,000. These notes, which total
$6,971,500 at February 28, 1997 and 1996 are included in Notes receivable--sale
of common stock (see Note 5). In June, 1996, the Company's Chairman gifted
100,000 warrants to various third parties.

                                     -46-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

     The following table presents Mr. Beningson's total number of warrants
outstanding as of February 28, 1997 (see Note 5):
 
          Date of    # Warrants    Price per
           Grant        Held         Share
        -----------  -----------  -----------
           4/90        375,000    $    6.00   (reset from $11.00 on 
                                             7/16/93)
           1/91        475,000    $    6.00   (reset from $8.00 on 7/16/93)
           7/93        800,000    $    6.00
                     ---------
                     1,650,000
                     ---------
                     ---------

 
     In July 1993, warrants were granted to purchase 40,000 shares of the
Company's common stock at a purchase price of $6.00 to H. Clifton Whiteman, a
director of the Company. In July 1995, Stanley Weinstein, a director of the
Company, was granted warrants to purchase 20,000 shares of the Company's common
stock at $5.44 per share through 2005.
 
     In Fiscal 1997, a former director of the Company exercised warrants to
purchase a total of 300,000 shares of the Company's common stock in exchange for
$1,387,500. In Fiscal 1996, this former director exercised warrants to purchase
a total of 200,000 shares in exchange for $925,000. At February 28, 1997, this 
former Director holds warrants to purchase 700,000 shares of common stock which
expire in 2002 and specify a purchase price of $4.63.
 
     In July 1993, warrants were granted to purchase 75,000 shares of the
Company's common stock at a purchase price of $6.00 per share to three entities
that have performed various consulting services for the Company. In September
1995, December 1995 and March 1996, warrants were granted to purchase 30,000,
32,500 and 20,000 shares, respectively, of the Company's common stock, to
consultants that have performed various services for the Company. During Fiscal
1997, 10,000 warrants were exercised for $51,250, and 25,000 warrants were
exercised for $137,500.
 
     In the aggregate, at February 28, 1997, warrants to purchase 3,126,211
shares of the Company's common stock at prices ranging from $4.50 to $11.00 were
outstanding, expiring through 2005.
 
11.  EMPLOYEE BENEFIT PLANS
     ----------------------

     EMPLOYEE SAVINGS PLAN
     ---------------------

     During 1988, the Company adopted the York Research Corporation 401(k) Plan
("401(k) Plan"). The 401(k) Plan allows employees of the Company to defer a
portion of their earnings on a pre-tax basis through contributions to the 401(k)
Plan. The Company may at its discretion make a contribution to the 401(k) Plan.
To date the Company has elected not to contribute to the 401(k) Plan.
 
     DEFINED BENEFIT PLAN
     --------------------

     The Company has a defined benefit pension plan covering substantially all
employees not covered by a collective bargaining agreement. The benefits are
based on years of service and the highest consecutive five years of the
employees' compensation. The Company's funding policy is to contribute annually
the amount 

                                     -47-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

necessary to satisfy the Internal Revenue Service's funding standards. 
Contributions are intended to provide, not only for benefits attributed to 
service to date, but also for those expected to be earned in the future.
 
     Pension cost for the years ended February 28, 1997, 1996 and 1995 include
the following components:
 
                                              1997       1996       1995
                                           ---------  ---------  ---------
Service cost -
 benefits earned during 
 the current period......................  $  30,756  $  28,568  $  23,285
Interest cost on projected 
 benefit obligation......................    104,757     87,520     80,214
Actual return on plan assets.............    (39,633)   (36,716)   (28,727)
Net amortization and deferral............     (4,263)     4,178     (1,687)
                                           ---------  ---------  ---------
  Net pension cost.......................  $  91,617  $  83,550  $  73,085
                                           ---------  ---------  ---------
                                           ---------  ---------  ---------
 
     For all periods presented, the weighted average discount rate was 8.5% and
rate of increase in future compensation levels was 3% used in determining the
actuarial present value of the projected benefit obligation. The expected
long-term rate of return on plan assets is 8.5%.
 
     The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet as of February 28, 1997 and 1996:
 
                                                    1997          1996
                                                ------------  ------------
Actuarial present value of 
 benefit obligations:
    Vested benefit obligation.................  $  1,195,570  $  1,057,085
                                                ------------  ------------
                                                ------------  ------------
    Accumulated benefit obligation............  $  1,216,018  $  1,088,755
                                                ------------  ------------
                                                ------------  ------------
Projected benefit obligation..................  $  1,292,437  $  1,145,738
Plan assets at fair value.....................       860,810       759,630
                                                ------------  ------------
Unfunded obligation...........................       431,627       386,108
Unamortized net transition obligation.........      (111,949)     (126,458)
Unrecognized net (gain) loss..................        78,357        (4,408)
Adjustment required to recognize 
 minimum liability............................            --        74,000
                                                ------------  ------------
Accrued pension cost..........................  $    398,035  $    329,242
                                                ------------  ------------
                                                ------------  ------------


                                     -48-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

     EMPLOYEE STOCK OWNERSHIP PLAN
     -----------------------------

     During 1988, the Company adopted an Employee Stock Ownership Plan ("ESOP")
that covers substantially all employees. Effective March 1, 1994, the Company
adopted the provisions of Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans" ("SOP 93-6"). The following table presents the
number of shares of common stock, which were unregistered at the time and
subsequently registered, the ESOP purchased from the Company, at prices which
represented 70% of the NASDAQ closing prices at the date of purchase:
 
            PURCHASED IN       # SHARES     PURCHASE
             FISCAL YEAR       PURCHASED      PRICE
           ---------------    -----------  -----------

            1996                288,500    $ 1,092,219
            1995                   --            --
            1994                   --            --
            1993 and prior    3,500,000     13,370,000
                              ---------    -----------
                              3,788,500    $14,462,219
                              ---------    -----------
                              ---------    -----------

     Management believes the valuation represented the fair market value of the
unregistered shares on those dates.
 
     The Company contributed approximately $525,000, $413,000 and $373,000 to 
the ESOP during Fiscal 1997, 1996 and 1995, respectively. The Company makes 
annual contributions to the ESOP as determined by the Board of Directors and 
subject to certain limitations dictated by tax regulations.
 
     To purchase the shares from the Company, the ESOP borrowed funds from the
Company. Repayment of these loans has been and is expected from employer
contributions, borrowing by the ESOP from third parties, and by sale of
unreleased ESOP shares to third parties. The Company has recorded all amounts
loaned to the ESOP as deferred compensation, a contra-equity account, and has
included the third party loans to the ESOP in other long-term liabilities. 
Certain of the unreleased ESOP shares are used as collateral for a third party 
loan to the ESOP.
 
     During the quarter ended August 31, 1993, the ESOP borrowed $1,150,000 from
third parties. These funds, along with an additional $12,987,000 generated
through February 28, 1997 by the sale of the Company's stock owned by the ESOP,
were used to repay the demand purchase money loans due to the Company. The
$1,150,000 initially borrowed by the ESOP was included in other long-term
liabilities and as deferred compensation, a contra-equity account, and had a
balance of approximately $626,000 and $561,000 at February 28, 1997 and 1996 as
a result of repayments by the ESOP. The ESOP incurred interest expense of
approximately $72,500 and $65,000, respectively related to these loans during
Fiscal 1997 and 1996.
 
     ESOP shares are released and allocated to participant accounts based upon
Company contributions and certain payments made to reduce ESOP debt to the
Company. The Company reports compensation expense as shares are committed to be
released equal to the current market price of the shares, and the shares then
become outstanding for earnings-per-share ("EPS") computations.

                                     -49-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

     A summary of the ESOP shares as of February 28, 1997 and 1996 is as 
follows:
 
                                                      1997          1996
                                                  ------------  ------------
     Allocated shares..........................       551,649       481,619
     Shares released for allocation............        56,353        70,030
     Unreleased shares.........................       867,995     1,000,348
                                                  ------------  ------------
                                                    1,475,997     1,551,997
                                                  ------------  ------------
                                                  ------------  ------------
      Fair value of unreleased shares 
        at February 28, 1997 and 1996..........   $ 8,028,954   $ 6,377,219
                                                  ------------  ------------
                                                  ------------  ------------

12.  INCOME TAXES
     ------------
     The provision (benefit) for income taxes for each of the three years ended
February 28, 1997 are as follows:
 
                                              1997         1996        1995
                                          ------------  ----------  ----------

Current:
 Federal................................  $    602,000  $   75,000  $   11,000
 State and local........................       587,000      46,000     159,000
                                          ------------  ----------  ----------
                                             1,189,000     121,000     170,000
                                          ------------  ----------  ----------
Deferred:
 Federal................................       (89,000)   (399,000)     --
 State and local........................       112,000    (285,000)     --
                                          ------------  ----------  ----------
                                                23,000    (684,000)          0
                                          ------------  ----------  ----------
 Tax benefits allocated directly to 
paid-in capital:
 Federal................................     1,577,000     275,000      --
 State and local........................       411,000     738,000      --
                                          ------------  ----------  ----------
                                             1,988,000   1,013,000           0
                                          ------------  ----------  ----------
Provision...............................  $  3,200,000  $  450,000  $  170,000
                                          ------------  ----------  ----------
                                          ------------  ----------  ----------

 
     During the year ended February 28, 1997, income tax expense was reduced by
approximately $1,811,000 resulting from the benefit of utilizing net operating
loss carryforwards.
 
     Through the fiscal year ended September 30, 1994, the Company filed its tax
returns based on a September year-end. On July 18, 1995, the Internal Revenue
Service granted the Company permission to file its tax returns on a February
year-end, effective February 28, 1995. At February 28, 1997, the Company had the
following net operating loss carryforwards for federal income tax purposes:
 
             YEAR OF EXPIRATION                              AMOUNT
             ------------------                           ------------
             September 30, 2007.........................  $  1,208,000
             September 30, 2009.........................       155,000
                                                          ------------
                                                          $  1,363,000
                                                          ------------
                                                          ------------

     During the year ended February 28, 1997, the Company utilized all of its
alternative minimum tax net operating loss carryforwards. The difference between

                                     -50-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

these loss carryforward amounts is attributable to adjustments required in the
alternative minimum tax computation.
 
     Internal Revenue Code Section 382 places a limitation on the utilization of
carryforwards when an ownership change, as defined in the tax law, occurs.
Generally, an ownership change occurs when there is a greater than 50 percent
change in ownership. If such a change should occur, the actual utilization of
carryforwards, for tax purposes, would be limited annually to a percentage,
approximately 5.5%, of the fair market value of the Company at the time of such
change.
 
     The reconciliation between the effective tax rate and the statutory federal
income tax rate is as follows:
 
<TABLE>
<CAPTION>
                                                     YEAR          YEAR          YEAR
                                                    ENDED         ENDED         ENDED
                                                 FEBRUARY 28,  FEBRUARY 28,  FEBRUARY 28,
                                                     1997          1996          1995
                                                 ------------  ------------  ------------
<S>                                              <C>           <C>           <C>
Amount computed using the 
 statutory rate................................  $  3,748,000  $  1,646,000   $  147,000

Increase (reduction) in taxes 
 resulting from: 
 Increase (utilization) of
 federal loss carryforwards....................    (1,248,000)   (1,391,000)     (78,000)

Reduction in valuation allowance 
 for loss carryforwards........................      (434,000)     (684,000)      --

Imputed interest income on 
 loans.........................................       153,000       171,000      148,000

Nondeductible expenses.........................       207,000       194,000       42,000

Foreign losses.................................         6,000       325,000      291,000

Litigation settlement..........................       (45,000)      169,000     (194,000)

Valuation allowances on other 
 temporary differences.........................      (522,000)     (383,000)    (303,000)

State and local taxes, net 
 of federal tax benefit 
 and state loss carryforwards..................       733,000       329,000      105,000

Alternative minimum tax........................       602,000        75,000       11,000

Other..........................................       --             (1,000)       1,000
                                                 ------------  ------------  ------------
                                                 $  3,200,000  $    450,000   $  170,000
                                                 ------------  ------------  ------------
                                                 ------------  ------------  ------------
</TABLE>
 

                                     -51-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

     The components of the deferred tax asset and deferred tax liability as of
February 28, 1997 and 1996 were as follows:
 
                                                        1997         1996
                                                   ------------  -----------
Deferred tax asset
------------------
     Loss carryforwards..........................  $  1,624,000  $ 4,119,000
     Credit carryovers...........................       675,000      289,000
     Accrued expenses............................        26,000       96,000
     Other.......................................            --       13,000
                                                   ------------  -----------
                                                      2,325,000    4,517,000
     Less: Valuation allowance...................    (1,337,000)  (3,833,000)
                                                   ------------  -----------
     Total deferred tax asset....................       988,000      684,000
                                                   ------------  -----------

Deferred tax liability
----------------------
     Partnership items...........................       338,000        --
     Other.......................................       (11,000)       --
                                                   ------------  -----------
     Total deferred tax 
       liability.................................       327,000        --
                                                   ------------  -----------
Net deferred tax asset..........................   $    661,000  $   684,000
                                                   ------------  -----------
                                                   ------------  -----------

     During the year ended February 28, 1997, the reduction in the valuation
allowance of $2,496,000 was the result of current utilization of net operating
losses of $1,811,000, current utilization of other deferred tax assets and 
other adjustments of approximately $381,000, and the recognition of the 
additional deferred tax asset of $304,000, based on the Company's expectation 
of future taxable income.
 
     The deferred tax asset relating to net operating loss carryforwards of
$1,624,000 include tax benefits of $287,000 relating to stock options and
warrants that was allocated directly to paid-in capital.
 
    The Company paid income taxes for:
            Year ended February 28, 1997..............  $ 608,000
            Year ended February 28, 1996..............  $ 298,000
            Year ended February 28, 1995..............  $ 110,000
 
                                     -52-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

13.  LEASE OBLIGATIONS
     -----------------

     Future minimum annual rental payments for real property, required under
leases and having terms of more than one year at February 28, 1997, are as
follows:
 
                                                        Operating
                                                          Leases
                                                      -------------
                      1998                            $    617,000
                      1999                                 663,000
                      2000                                 616,000
                      2001                                 622,000
                      2002                                 622,000
                      Thereafter                           982,000
                                                      -------------
Total minimum lease payments                          $  4,122,000
                                                      -------------
                                                      -------------


     In July 1990, in connection with a lease for office space, the Company
received from the prior tenant a rent subsidy equal to the difference between
the market rate for the premises and the rental provided for in the lease. This
subsidy, which totaled $625,000, was paid to the Company in April 1991 and was
being amortized over the life of the lease as a monthly reduction to rent
expense. At February 28, 1995, the unamortized balance was $126,000. In May
1995, the lease was restructured and the remaining unamortized balance of
$72,000 was recognized. The restructuring of the lease extended the life to 2003
at a reduced expense, and added another 2,500 square feet of office space.
 
     Total rent expense for operating leases was approximately $505,000 in 
Fiscal 1997, $623,000 in Fiscal 1996 and $419,000 in Fiscal 1995.
 
     The Company leases equipment under leases that have been classified as
capital leases for financial statement purposes. As of February 28, 1997,
included in property, plant and equipment are the following assets held under
capital leases:
 
        Machinery and equipment...........................  $ 224,747
        Accumulated depreciation..........................    (14,916)
                                                            ---------
                                                            $ 209,831
                                                            ---------
                                                            ---------

                                     -53-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

     Future minimum lease payments for assets under capital leases at 
February 28, 1997 are as follows:

                1998                             $  56,788
                1999                                56,788
                2000                                56,788
                2001                                56,788
                2002                                37,819
                                                 ---------
                                                   264,971
                Less: Amount representing 
                       Interest                     53,910
                                                 ---------
                Present value and net 
                 minimum lease payments          $ 211,061
                                                 ---------
                                                 ---------
 
     The above amount totaling $211,061 has been included on the balance sheet 
as other long-term liabilities.
 
14.  RELATED PARTY TRANSACTIONS
     --------------------------

     In Fiscal 1993, the Company loaned Mr. Whiteman $100,000, which is
outstanding at February 28, 1997 and is payable on demand, and earns interest at
prime. At February 28, 1997, the total outstanding balance was approximately
$125,000. In each of Fiscal 1997, 1996 and 1995, the Company paid Mr. Whiteman
$24,000 for consulting services. In Fiscal 1995, the Company issued 40,000
shares of common stock, valued at $87,500, 70% of the fair market value on the
date of issue, to Mr. Whiteman for consulting services.
 
     In Fiscal 1997 and 1996, the Company paid Mr. Weinstein $24,000 and 
$18,000, respectively, for consulting services, and in Fiscal 1996 granted 
warrants to purchase 20,000 shares of the Company's common stock at $5.44 per 
share.
 
     Mr. Beningson is President and a major stockholder of RRR'S, which is a 25%
general partner of WCTP, limited partner of RVA, and a 10% general partner of
YCP. In Fiscal 1997, RVA was allocated $321,942 of the interest income on the
YCP Note (see Note 5). In Fiscal 1996, RVA received $500,000 which was the
minority portion of the income of B-41LP. In Fiscal 1993, RVA received a
distribution of $2,000,000 from B-41LP, which is expected to be charged against
capital, concurrent with future allocations of income.
 
     As discussed in Note 5, WCTP contracted with the Company to procure,
construct, design and place in operation a cogeneration facility. The Company's
Chairman and Chief Financial Officer are shareholders of the general partner of
WCTP. The general partner of WCTP receives a general partners fee of 1% of WCTP
revenues and an administrative services payment of 4% of WCTP 

                                     -54-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

revenues. The limited partners are not related parties to the Company. The 
general partner may have the potential for substantial future distributions 
from WCTP.
 
     In the year ended February 28, 1997, the Company recorded $11,000,000 of
fees for services rendered through February 28, 1997 to WCTP and RV Associates
L.P. ("RVA"), two partnerships of which a company controlled by the Company's
chairman is the general partner. This amount was included in service revenues.
These fees were recorded pursuant to a services agreement between WCTP, RVA, CTI
and York. The services include ongoing negotiations of consolidation agreements
with Con Edison and Edison Mission Energy, aiding in resolving various contract
issues concerning WCTP's and RVA's power purchase agreements with Con Edison,
and various issues related to the progress of the Brooklyn Navy Yard Project.
Included in other receivables at February 28, 1997 was the fourth quarter fee of
$3,500,000 for services, which was received on May 14, 1997.
 
     Mr. Beningson is president and was previously the sole shareholder of NAEC.
The Company had an agreement with NAEC which provided for the Company to be
reimbursed for all costs associated with its activities related to NAEC and the
Company received a fee mutually agreed upon based on level of activity. At
February 28, 1996, NAEC was indebted to the Company for approximately $600,000
related to various costs. This was fully paid in April 1996. In Fiscal 1997,
prior to acquisition of 85% of the shares of NAEC (see Note 15), the Company
recognized approximately $924,000 as reimbursement of costs, and no power
brokerage fees. In Fiscal 1996 and 1995, the Company recognized $1,200,000 each
year as reimbursement of costs, and power brokerage fees of $675,000 and
$250,000, respectively.
 
15.  ACQUISITION OF NAEC
     -------------------

     As of November 1, 1996, the Company acquired 85% of the shares of NAEC for
$1 from NAEC. Prior to the acquisition, all of the stock was owned by the
Company's chairman. The acquisition has been accounted for as a purchase and the
operations of NAEC have been reflected as of the acquisition date.
 
     The following table reflects unaudited pro forma combined results of
operations for the Company and NAEC on the basis that the acquisition had taken
place at the beginning of the fiscal year:
 
                                                 FOR THE YEAR ENDED
                                                    FEBRUARY 28,
                                            ----------------------------
                                                 1997           1996
                                            -------------  -------------
Revenues..................................  $  70,048,380  $  32,006,011
                                            -------------  -------------
Net Income................................  $   7,388,152  $   2,717,124
                                            -------------  -------------
Net Income per Common Share...............  $        0.49  $        0.18
                                            -------------  -------------
Shares Used in Computation................     15,487,779     15,512,011
                                            -------------  -------------


                                     -55-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

     In managements' opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred had
the acquisition been consummated at the beginning of the periods presented or of
future operations of the combined companies under the ownership and management
of the Company.
 
16.  SIGNIFICANT CUSTOMERS AND CONTRACTS
     -----------------------------------

     Energy sales were derived from numerous retail customers and utilities. Two
utilities accounted for approximately 20% and 15%, respectively, of the total
revenues in Fiscal 1997.
 
     As part of its marketing operations, the Company routinely enters into
commitments for the purchase of electric and gas energy. The Company obtains
similar commitments from its customers. To minimize risk, the Company uses
futures contracts in the natural gas markets.
 
17.  SETTLEMENT OF CLASS ACTION LITIGATION
     -------------------------------------

     The Company, while denying any liability, and in the opinion of management,
in order to avoid a protracted and costly litigation, settled in May 1993 a
class action lawsuit which shareholders brought against the Company and certain
directors and officers of York. Pursuant to the terms of the settlement, in
March 1995 the Company issued to the members of the class warrants to purchase
600,000 shares of its common stock at $8.00 ("Class A Warrants") per share and
warrants to purchase 180,000 shares of its common stock at $6.15 ("Class B
Warrants") per share (collectively the "Warrants"). The Class A Warrants expired
on November 1, 1995. When the Class A Warrants expired, the holders of such
warrants became entitled to and did surrender them for $6.9 million drawn under
a letter of credit which had been posted on February 16, 1995 by Edison Mission
Energy. The Class B Warrants remain outstanding except that at February 28,
1997, 14,918 Class B Warrants had been exercised. Under the terms of the
settlement other principal provisions of the Warrants include the following:
 
(i)  The Company has the right to redeem the Class B Warrants in whole or in
part for $11.50 per Warrant.
 
(ii) The Company has the right to reduce the Class B Warrant exercise price
in its discretion (the "adjusted exercise price").
 
(iii) Unless the Class B Warrants have previously been redeemed or
accelerated the warrants may be exchanged by the holders thereof on the
Expiration Date, which has been extended, for $11.50 in cash per warrant (the
"Surrender Price").
 
iv)  All unexpired Class B Warrants may no longer be exchanged for the
Surrender Price if the closing price of the Company's stock on NASDAQ shall have
equaled or exceeded the exercise price or adjusted exercise price of the
Warrants plus $11.50 on at least seventy-five of ninety consecutive trading days
at any time prior to the Expiration Date.
 
                                     -56-

<PAGE>

                  YORK RESEARCH CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  -------------------------------------------

(v)  The Surrender Price of the Class B Warrants was collateralized by a 35%
limited partnership interest in Brooklyn Navy Yard Cogeneration Partners, L.P.
("BNYLP") held by B-41 Associates, L.P. This limited partnership interest will
be released when it is replaced by a letter of credit or if the event described
in (iv) above occurs. When the new warrants referred to in (vi) below were
issued, the collateral was reduced to a 17 1/2% limited partnership interest.
 
(vi) On March 18, 1996, the Company agreed with counsel for the Class Action
litigants to issue up to 180,000 new Warrants to holders of Class B Warrants as
consideration for an extension until December 31, 1996 of the obligation of
B-41LP to provide a letter of credit (in an amount up to $1,984,000) to secure
the Surrender Price of the remaining Class B Warrants. Court approval of the
agreement was given on June 4, 1996. Thereafter, 179,500 new Class C Warrants
were issued, the shares issuable upon exercise thereof having been registered.
The new Class C Warrants expire between September 27, 1998 and October 4, 1998,
are exercisable at $6.50 per share and do not have any provisions for surrender
or collateral. Because B-41LP did not provide the letter of credit by 
December 31, 1996, the Class B Warrant expiration date extends day for day and 
a further extension is presently under negotiation.

                                     -57-
<PAGE>

                            SIGNATURES



     Pursuant to the requirements of Section 13 or 15(d) of the Securities 
and Exchange Act of 1934, the Registrant has duly caused this report to be 
signed on its behalf by the undersigned, thereunto duly authorized.

YORK RESEARCH CORPORATION
-------------------------
     (Registrant)



/s/ Robert M. Beningson                 /s/ Michael Trachtenberg          
-----------------------------------     --------------------------
Robert M. Beningson                     Michael Trachtenberg
President, Chief Executive Officer      Executive Vice President;
Chairman of the Board                   Chief Financial and Accounting
May 21, 1997                            Officer; Secretary
                                        May 21, 1997



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

/s/ Robert M. Beningson     
------------------------
Robert M. Beningson
Director
May 21, 1997


/s/ H. Clifton Whiteman     
------------------------
H. Clifton Whiteman
Director
May 21, 1997


/s/ Stanley Weinstein       
------------------------
Stanley Weinstein
Director
May 21, 1997

                                      -58-