LIBERTY TECHNOLOGIES INC, 10-K/A, 1997-10-01

LIBERTY TECHNOLOGIES INC
10-K/A, 1997-10-01
MEASURING & CONTROLLING DEVICES, NEC

Previous: LIBERTY TECHNOLOGIES INC, 10-Q/A, 1997-10-01

Next: GREENWICH STREET MUNICIPAL FUND INC, 497, 1997-10-01

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A Amendment No. 3

(Mark One)

[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] for the fiscal year ended December 31, 1996

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

Commission file number 1-11729

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

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

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

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

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

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

As of April 7, 1997, the aggregate market value of voting stock held by
non-affiliates of the registrant based on the last sales price as reported by
the NASDAQ National Market was $14,997,348 (4,999,116 shares outstanding at a
closing price of $3.00 per share).

As of April 7, 1997, the registrant had 4,999,116 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

The registrant's Proxy Statement for the Annual Meeting of Shareholders on
June 10, 1997 is incorporated by reference in Part III of this Form 10-K to the
extent stated herein.

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

Page 1 of 451 Pages
Exhibit Index at Page 52

<PAGE>

INDEX TO FORM 10-K
LIBERTY TECHNOLOGIES, INC.

Page
References

PART I

ITEM 1. BUSINESS ...................................................... 3

ITEM 2. PROPERTIES..................................................... 18

ITEM 3. LEGAL PROCEEDINGS.............................................. 18

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 18

PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS............................................ 19

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................... 20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................... 21

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 27

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................ 27

PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 28

ITEM 11. EXECUTIVE COMPENSATION......................................... 29

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 29

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 29

PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K............................................ 30

<PAGE>

PART I

ITEM 1. BUSINESS

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

Liberty has four key business segments to support its mission: (1)
performance and condition monitoring products, (2) Liberty Technical Services,
(3) RADView(TM) imaging systems and (4) international business development.

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

Liberty Technical Services provides comprehensive nondestructive and
dynamic testing services for customers in the power, chemical, paper, petroleum
and construction industries. Dynamic testing services are provided for many
plant components, including valves, compressors, turbines, engines, motors and
motor-driven equipment. Nondestructive evaluation services include special
applications of visual inspection, ultrasonic, radiographic, dye penetrant, eddy
current, and magnetic particle technologies. Special services include process
safety management support, plant inspection, computerized reporting, and
training in nondestructive testing.

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

In December 1995, the Company formed a joint venture company, Liberty
Maintenance Predictive, S.A.S. ("Liberty M.P."), with French-owned Electricite
de France ("EdF"), the largest utility in the world. Liberty M.P. provides
predictive maintenance products and related services critical to the safe,
reliable operation of electric power and industrial plants in the European
Union. In 1996, Liberty developed several business alliances for Europe,
Scandinavia, the United Kingdom, and the Far East. Liberty intends to continue
to establish business alliances, joint ventures and partnerships in various
locations around the world where appropriate to meet its business objectives.

<PAGE>

Market Overview

The Company believes that increased demands for improved productivity,
reliability, safety and environmental compliance in various process industries
will continue to lead to a growing market for diagnostic products and services
specifically designed for predictive maintenance. The Company also believes that
the international nuclear power and process markets will develop using the
Company's diagnostic products.

Increasing regulatory requirements, operation and maintenance costs, and
global competition have led to intensified efforts by companies to improve the
productivity, reliability and safety of their production facilities. Unplanned
production shutdowns can have particularly severe economic consequences in
process industries, which are characterized by continuous facility operation. In
addition, concern about environmental damage and worker health is increasing
attention to the safety of industrial plants where dangerous accidents can occur
if critical or safety-related equipment fails to perform according to design.

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

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

The demands for productivity, reliability, and compliance have expanded the
market for non-destructive testing evaluation equipment and services (NDE). In
turn, the NDE industry is demanding more advanced and efficient equipment. One
emerging trend is the replacement of film-based radiography with filmless
radiography. Filmless radiography utilizes non-hazardous, reusable phosphor
screens to more efficiently capture and store images in a digital format which
allows images to be transmitted for viewing around the world while eliminating
hazardous waste disposal issues. The trend towards filmless radiography is
expected to accelerate as industries continue to move to paperless documentation
systems. Target areas where radiography is practiced are the aerospace, power,
process, defense, automotive, electrical and electronics, forging and casting
industries.

<PAGE>

The trend towards outsourcing in many industries creates demand for
subcontracting much of the NDE work to service companies. These service
companies, such as Liberty Technical Services, have the specialized knowledge
and access to labor which enables them to efficiently perform this work.
Inspections of fixed assets in process plants are performed on a routine basis
to prevent equipment failure and to ensure compliance with safety and
environmental regulations.

Strategy

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

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

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

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

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

<PAGE>

Acquisitions

As part of the Company's strategic direction to extend its marketing reach
to industries worldwide, the Company has made, and will continue to seek, when
consistent with its business objectives, acquisitions that will position the
Company for sustainable, long-term growth. The acquisitions outlined below have
enlarged the Company's product and service portfolio and significantly improved
access to various industries for its full range of products and services.

In August 1994, the Company acquired Beta Monitors & Controls Ltd. (Beta),
a Canadian-based company, whose proprietary systems analyze the mechanical
condition, performance, and vibration characteristics of engines, compressors,
motors, turbines, and industrial processes. Beta's systems include sensors and
probes, signal processors and proprietary software that capture and log data for
trending and analysis. The Company's acquisition of Beta created marketing
opportunities in the hydrocarbon and other process industries where Beta has
long-standing customer relationships.

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

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

A description of the consideration paid by the Company in connection with
the above acquisitions is provided under the Notes to Consolidated Financial
Statements portion of this Form 10-K document. Refer to Note 2. Acquisitions,
page F-11.

Strategic Alliances

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

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

Sentinel/Amersham. In June 1996, Liberty entered into a non-exclusive
agreement with Sentinel, the non-destructive test equipment business of Amersham
International, to represent RADView digital and filmless radiography in the
United Kingdom, German, and Benelux markets. Sentinel/Amersham receives a
commission on net sales of RADView products which it sells.

Groner Offshore I&M AS; Groner STK, Carl Bro. In May, 1996 Liberty signed
an agreement with these three leading inspection and condition monitoring
companies to offer the complete range of Liberty's diagnostic products and
services to the Scandinavian market. Liberty pays a commission on net sales of
Liberty products to the Scandinavian market. Liberty receives a royalty on any
services sold that utilize Liberty products.

<PAGE>

Electricite de France. In December 1995, Liberty and EdF formed a joint
venture company, Liberty M.P. to expand the Company's presence in the European
power and process markets. Liberty M.P., with headquarters near Paris, France,
provides predictive maintenance products and related services critical to the
safe, reliable operation of electric power and industrial plants in the European
Union. Liberty M.P. utilizes technologies developed by both Liberty Technologies
and EdF. EdF is the largest utility in the world. In 1993 Liberty and EdF signed
a joint development agreement with respect to the commercialization of the
Company's STARS(R) Acoustic Blade Monitor, for monitoring blades in large,
low-pressure turbines. Through December 31, 1996, the Company had invested
$116,000 for a 51% ownership interest in Liberty M.P. For the year ended
December 31, 1996, Liberty M.P. had revenues of $2,423,000 and a net loss of
$101,940. There were no material operating activities through December 31, 1995.

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

Asea Brown Boveri. In June 1994, the Company entered into a five-year
exclusive license agreement with Asea Brown Boveri (ABB) Combustion Engineering
Nuclear Operations which allows the Company to provide ABB's AirCEt(TM) Air
Operated Valve diagnostic system and AirCEt related services to power and
process customers worldwide. Concurrently, the Company granted ABB a
non-exclusive license to provide Liberty's Valve Operation Test and Evaluation
System (VOTES(R)) products and services in Russia and the Ukraine. Both
companies pay a commission or receive a royalty on respective sales of their
company's products or services.

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

Framatome Technologies, Inc. Since August 1988, Framatome Technologies,
Inc. (formerly Babcock and Wilcox Nuclear Services, a subsidiary of Framatome
S.A.) has been granted the right to provide training and field service support
for VOTES in the United States and Canadian nuclear power industries. Liberty
receives a royalty on services provided by Framatome Technologies, Inc.

Products and Services Currently Offered

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

<PAGE>

engines, compressors, motors, and motor-driven equipment. The Company's computed
radiography products and services improve upon cost and safety as compared to
conventional radiography.

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

<TABLE>
<CAPTION>
Products Initially Sold Applications
-------- -------------- ------------
<S> <C> <C>
AirCEt(TM) 1994 Data acquisition system for air operated valves
BETA-LINK(TM) 1995 Gathers and transmits data using radio telemetry
simplifying data collection
BETA-TRAP(TM) 1982 Evaluates peak firing pressures and consistency
among combustion engine cylinders
DATA-TRAP(R) 1983 Vibration-based condition monitoring and analysis
for all classes of rotating equipment
DIESEL-TRAP(TM) 1994 Analysis and condition monitoring for diesel engines
FOUDRE 1996 Acoustic valve leak detection instrument
M-HEALTH(TM) 1988 Plant-wide machinery data collection and analysis
system for condition monitoring and predictive
maintenance
Motor Nalysis Software 1996 Database management and analysis software for motor
instruments
Motor Performance Analyzer 1996 Instrument automatically detects early stage
problems in electric motors
Motor Power Monitor(R) 1993 Detects early-stage problems in motors and
motor-driven equipment
Packing 'nForcer(R) 1993 Measurement of valve stem packing force
PERFORM(TM) 1995 Compressor operating efficiency optimization system
PRISM(TM)dms 1994 Comprehensive mechanical integrity support software
system
Quarter Turn(TM) 1993 Quarter turn valve diagnostic system

QuickCheck II(R) 1995 Check valve testing system

RADView(TM) Film Digitizer and Workstation 1995 Converts existing radiographic film records to a
digital format and offers improved records
management and image analysis
RADView(TM) Filmless Radiography 1996 Industrial Radiography system uses reusable phosphor
screens instead of radiographic films
RECIP-TRAP(R) 1985 Analyzes performance and health of reciprocating
compressors and engines
RECIP-TRAP 9240 1997 Multi-channel real time analyzer for engines and
compressors
RECIP-TRAP/Online(TM) 1995 Monitors reciprocating machinery on line, multiple
machines, networks data
Rt Win 1996 Microsoft Windows based analysis software for
Recip-Trap and Recip-Trap 9240
Valve Vision 1996 Control valve testing instrument
VOTES(R) 100E 1996 Compact version of Votes for motor operated

VOTES(R) For Windows 1995 Advanced valve analysis software product
VOTES (R) Systems, Sensors and 1998 Motor operated valve diagnostic testing
Accessories
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C>
valve diagnostics

VOTES(R) for Windows 1995 Advanced valve analysis software product
VOTES(R) Systems, Sensors and Accessories 1988 Motor operated valve diagnostic testing

Services
--------

Customer Service and Applications 1979(1) Sales, service and calibration of the Company's
Engineering products plus customer training and other technical
services.
Liberty Technical Services 1968(2) Nondestructive Testing Services include visual
inspection, ultrasonic, radiographic, dye penetrant,
magnetic particle technologies and special services.
Liberty Technical Services 1993 Dynamic testing includes diagnostics of critical
plant equipment in power and process facilities
</TABLE>

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

(2) Nondestructive Testing Services provided originally by INDT, acquired by
Liberty in March 1994.

Products

AirCEt(TM). The AirCEt system provides the ability to track, quantify and
evaluate up to sixteen air operated valve functional inputs measured over real
time. AirCEt is non-intrusive and can be used with any type air operated or
hydraulically operated valve. The system enables set-up, bench marking and
troubleshooting. This product is sold under an exclusive world-wide license from
Asea Brown Boveri (ABB).

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

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

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

<PAGE>

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

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

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

MotorNalysis(TM). MotorNalysis supports the Motor Performance Analyzer
(MPA) and Motor Performance Tracker (scheduled for release in 1997) products. It
provides tools for waveform analysis and motor comparisons. Features include
data management capabilities and communications features to enable remote
monitoring.

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

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

Packing 'nForcer(R). Packing 'nForcer is a portable diagnostic system using
Liberty's patented C-clamp sensor technology that measures packing friction
force on all types of rising stem valves. Ensuring that packing friction force
is in the proper range is the only way to verify that packing bolts are
sufficiently tightened to prevent leaks, yet not overly tightened to impair
operability or damage the packing. The C-clamp, which temporarily and quickly
attaches to the valve stem, has significant competitive advantages over
installing labor intensive semi-permanent stem sensors. The Company believes
that currently, there is no competing product on the market that can directly
measure packing friction forces. This is particularly important in the
industries where fugitive emissions are a major environmental issue.

PERFORM(TM). PERFORM generates parameters and loading curves that
accurately represent the performance capabilities of compressors. Analysis of
test results produce empirical equations for horsepower and flow capacity. This
enables calculations of actual performance over the entire operating range of
the unit. The equations are used in control systems, for system models, and to
predict operation

<PAGE>

with mechanical changes such as cylinder boring. Accurate performance curves
permit effective use of the available horsepower on each unit and provide a
simple method to compare different operating characteristics between units.

PRISM(TM)dms. The "Process Related Integrity Systems Management" program is
a facility-wide equipment management system which helps all types of plants meet
OSHA 1910 process safety management requirements. The PRISMdms software
streamlines maintenance practices and provides necessary OSHA documentation.

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

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

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

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

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

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

RT Win. The RT Win Windows-based software is a companion product to the
Recip-Trap and Diesel-Trap. The SQL software enables customers to monitor to
monitor the performance and condition

<PAGE>

of reciprocating machinery across multiple plant locations.

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

VOTES(R) Systems, Sensors and Accessories. Liberty's Valve Operation Test
and Evaluation System (VOTES) is the predominant system in the worldwide nuclear
power industry for testing motor-operated valves. VOTES is a fully integrated
diagnostic system that provides a comprehensive profile of a plant's motor
operated valves, including the condition of the valve's motor, gearing, control,
settings, stem, packing, bearings and other components. VOTES contributes to a
plant's predictive maintenance program by helping to optimize valve operability,
reduce maintenance costs and reduce personnel exposure to hazardous
environments. VOTES for Windows analysis software evaluates tests acquired with
the VOTES system using a Microsoft Windows(TM) platform offering many advanced
diagnostic and data management tools.

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

Services

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

Liberty Technical Services. Testing services are provided for many plant
components including valves, pumps, fans, compressors, turbines, engines, motors
and motor-driven equipment. Nondestructive evaluation services include visual
inspection, ultrasonic, radiographic, dye penetrant, and magnetic particle
technologies. Special services include process safety management, plant
inspection, computerized reporting and training in nondestructive testing.

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

<PAGE>

Products Under Development

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

Easy Torque-Thrust Sensor (ETT) - The Easy Torque Thrust Sensor takes the
art out of strain gauging. ETT is quick and simple to install and is adaptable
for various stem diameters.

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

Motor Power Monitor (MPM) DC Capabilities - Additional capabilities of
measuring DC currents and voltages will be added to the current MPM system. This
application is needed in boiling water reactors (BWRs) in which many of the
motor operated valves are DC controlled.

PRISM(TM)dms Version 3.0 - This version of the software which supports the
mechanical integrity compliance program offered by Liberty Technical Services
will incorporate features suggested by our clients. New features of this version
include internal code calculations for evaluating system components, along with
"smart graphics" which allow the user a visual method of information retrieval.

RADView(TM) Filmless Radiography - The U.S. Air Force awarded Liberty a
$1.2 million contract to utilize Liberty's experience in industrial filmless
radiography, signal processing, and other areas of expertise, to develop and
produce an enhanced version of RADView to meet Air Force requirements. This
effort will result in improved resolution, larger image formats, and
implementation of systems at several air bases.

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

Advanced Research Projects

In the last five years, Liberty invested an average of 16% of revenues on
research and development, a portion of which is devoted to advanced research
projects. The Company is investing in knowledge-based diagnostic systems, unique
sensors, wavelet transform, algorithm development, data compression, information
displays, wireless communications and phosphor imaging technology. As a market
leader in certain sensor technologies, the Company intends to maintain its
leadership position by continuing development in this area. This research is
addressing probe limitations related to environmental conditions and adding
intelligent capabilities to the sensors.

<PAGE>

Engineering and Product Development

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

Expenditures for engineering and product development in fiscal 1996, 1995
and 1994 were approximately $4.7 million, $4.6 million (of which $1.7 million
was capitalized software development costs) and $4.8 million (of which $1.7
million was capitalized software development costs), or approximately 13%, 12%
and 17% of total revenues, respectively. No software development costs were
capitalized in 1996. The decline in engineering and product development costs as
a percentage of total revenues from 1994 to 1995 reflected the increase in
service revenues. Of such amounts, approximately $4.6 million, $4.5 million and
$4.7 million, respectively, were funded by the Company from internally generated
sources and approximately $0.2million, $0.1 million and $0.1 million,
respectively, were funded by customers of the Company or third parties.

The dollars spent for engineering and product development expenditures
primarily reflects the Company's focus on development of new products and
extension of existing product applications. In this regard, although engineering
and product development expenditures were relatively flat from 1994 to 1995 to
1996, expenditures on condition monitoring decreased from $4.7 million to $3.8
million to $3.5 million, respectively. During this same period, expenditures on
RADView increased from $0.1 million to $0.8 million to $1.2 million,
respectively. Investments in 1997 and beyond will vary depending on product
development plans.

Sales and Marketing

The Company sells its systems and services through a direct sales force
located in the United States, Canada, and Europe. The Company's principal office
is in Conshohocken, Pennsylvania. Other offices including sales and service are
located in Calgary, Alberta; Florence, WI; Savannah, GA; Houston, TX;
Jacksonville, FL; Kingsport, TN; Mobile, AL; North Augusta, SC; North
Charleston, SC; Olathe, KS; Richmond, VA; Shreveport, LA; and Cheshire, England.
LMP is located outside Paris, France. In addition, the Company has entered into
third party distribution agreements with distributors in various locations
around the world to expand its international sales.

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

<PAGE>

Customers

Current customers for the Company's products are companies in the domestic
and international power and process industries. In 1996, the Company's foreign
operations and export sales approximated $4.6 million or 13% of total revenues.
In 1995 and 1994, foreign operations and export sales accounted for less than
10% of total revenues. In 1996, 1995 and 1994, no customer accounted for 10% or
more of total revenues. Because of the Company's typical pattern of revenues,
its growth and the increase in its customer base, the Company does not believe
that the loss of any particular customer would have a material adverse effect on
the Company's business. However, due to the variability in the size and timing
of orders for both products and services from the Company's customers, the
Company's operating results may vary significantly from quarter to quarter.

Backlog

The Company typically fills orders for commercial products within 30 to 45
days, although certain product orders require more time to complete, depending
on customer schedules for planned facility maintenance and product availability.
Customers usually purchase products on an as-needed basis, and thus, the Company
generally has less than two months' revenues in product backlog. Due to the
variable nature of service contracts, the Company generally carries about three
month's revenues in service backlog. The Company does not believe that backlog
is a meaningful indicator of future revenues.

Patents and Intellectual Property

The Company relies primarily on a combination of patent, copyright,
trademark and trade secret laws, employee and third-party nondisclosure
agreements and other intellectual property protection methods to protect its
products and proprietary technologies. The Company believes that their patents
and intellectual property provide Liberty with a competitive advantage. The loss
of any single item, however, would not have a significant impact on the Company.
The Company currently owns 24 U.S. patents (one expires in 1998, 23 expire
between 2007 and 2015) and 27 foreign patents (expire between 2008 and 2012) and
in addition has assigned four U.S. and one foreign patent to EPRI in return for
exclusive worldwide marketing and licensing rights for STARS ABM. The RADView
technology is protected by 38 U.S. patents (expire between 2006 and 2009) under
license from Quantex Corporation. In addition, the Company currently has eight
U.S. and 23 foreign patent applications pending. The Company's software is
protected under copyright laws.

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

Manufacturing and Quality Assurance

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

The Company's manufacturing operation consists primarily of final assembly
and testing of materials, electronic components and subsystems produced by the
Company or purchased from suppliers. Sensors,

<PAGE>

calibrators and RADView phosphor screens are manufactured from basic components
and raw materials. The Company has established comprehensive quality assurance
programs in all areas, including procurement, manufacturing, engineering, design
and development of both hardware and software. Raw materials, parts,
subassemblies and fully configured finished products undergo rigorous functional
and quality assurance testing. Because of the critical safety-related
applications in which the Company's products are used, customers and industry
sponsored monitoring groups regularly inspect and audit the Company's operations
as part of the vendor certification programs required by federal law and by
individual customers' quality assurance programs.

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

Competition

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

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

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

Employees

As of December 31, 1996, the Company employed approximately 379 persons of
whom 28 were engaged in sales and marketing, 46 in engineering and product
development, 25 in manufacturing and quality assurance, 234 in technical service
and support and 46 in finance and administration. None of the Company's
employees are subject to a collective bargaining agreement. The Company believes
that its employee relations are good.

<PAGE>

ITEM 2. PROPERTIES

Liberty leases approximately 40,000 square feet for its principal
administrative, marketing, manufacturing and product development and support
facility in Conshohocken, Pennsylvania, under an agreement which expires in
December 2000. The Company also leases a 20,000 square foot facility in Houston,
Texas for sales, product support, and service under an agreement which expires
in February 2001. In addition, approximately 6,600 square feet is leased for
product development and sales functions in Calgary, Alberta under an agreement
which expires in May 2001. Other locations for sales and service operations are
leased in St. Joseph, Michigan; Florence, Wisconsin; Olathe, Kansas; Richmond,
Virginia; Savannah, Georgia; Jacksonville, Florida; and Mobile, Alabama. under
agreements expiring at various times through 1999. Liberty M.P. leases office
space near Paris, France.

Owned facilities include the 14,286 square foot headquarters for Liberty
Technical Services in North Charleston, South Carolina located on 1.7 acres.
Also owned are service operations offices in North Augusta, South Carolina
located on 1.5 acres and Shreveport, Louisiana located on 1.4 acres. The Company
believes that its facilities are adequate for the foreseeable future and that
suitable additional or alternative space will be available on commercially
reasonable terms when needed in the future.

ITEM 3. LEGAL PROCEEDINGS

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

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

No matters were submitted to a vote of the Company's shareholders during
its fourth quarter of 1996.

<PAGE>

PART II

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

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

High Low
1995
----
First Quarter 5 3/4 3 1/2
Second Quarter 6 1/2 5
Third Quarter 6 3/4 4 1/2
Fourth Quarter 5 1/2 3 3/4
1996
----
First Quarter 6 1/8 4 3/8
Second Quarter 8 5/8 5 1/2
Third Quarter 6 1/4 3 3/16
Fourth Quarter 4 1/4 2 1/2

On April 7, 1997, the closing sale price for the Company's Common Stock was
$3.00 per share. As of that date, there were 203 record holders of the Common
Stock, and the Company estimates that there were approximately 1,500 beneficial
holders of the Common Stock.

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

The Company did not sell any equity securities during the year ended
December 31, 1996 that were not registered under the Securities Act.

<PAGE>

Item 6. Selected Consolidated Financial Data

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

<TABLE>
<CAPTION>
Statement of Operations Data: Year Ended December 31
(In thousands, except per share data)
1996 1995 1994(1) 1993(1) 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues
Product $ 12,456 $ 12,474 $ 9,049 $ 12,397 $ 12,685
Service 23,125 26,645 18,682 6,161 1,037
-------- -------- -------- -------- --------
35,581 39,119 27,731 18,558 13,722
-------- -------- -------- -------- --------
Cost of revenues
Product 4,243 5,364 3,335 3,380 3,890
Service 15,255 17,266 12,247 3,862 311
-------- -------- -------- -------- --------
19,498 22,630 15,582 7,242 4,201
-------- -------- -------- -------- --------
Gross profit
Product 8,213 7,110 5,714 9,017 8,795
Service 7,870 9,379 6,435 2,299 726
-------- -------- -------- -------- --------
16,083 16,489 12,149 11,316 9,521
-------- -------- -------- -------- --------

Operating expenses
Engineering and product development 4,656 2,868 3,122 3,393 3,649
Selling, general and administrative 13,736 12,883 9,233 4,577 3,347
Non-recurring charge -- 4,428(2) -- -- 509
-------- -------- -------- -------- --------
18,392 20,179 12,355 7,970 7,505
-------- -------- -------- -------- --------
Operating income (loss) (2,309) (3,690) (206) 3,346 2,016
Interest income (expense), net (226) (61) 139 169 9
Other -- -- (41) -- --
-------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary item, change in
accounting principle and
minority interest (2,535) (3,751) (108) 3,515 2,025
Income taxes (benefit) 87 (1,109) (4) 1,106 811
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item, change in accounting
principle and minority interest (2,622) (2,642) (104) 2,409 1,214
Minority interest in loss of joint venture (50) -- -- -- --
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item and change in accounting
principle (2,572) (2,642) (104) 2,409 1,214
Extraordinary item and accounting change -- -- -- 100 34
-------- -------- -------- -------- --------
Net income (loss) $ (2,572) $ (2,642) $ (104) $ 2,509 $ 1,248
======== ======== ======== ======== ========
Net income (loss) per share(3):
Before extraordinary item and
accounting change $ (.52) $ (.53) $ (.02) $ 0.52 $ 0.34
Extraordinary item/accounting change -- -- -- 0.02 0.01
-------- -------- -------- -------- --------
$ (.52) $ (.53) $ (.02) $ 0.54 $ 0.35
======== ======== ======== ======== ========
Shares used in computing net income (loss)
per share 4,970 4,943 4,859 4,637 3,588
======== ======== ======== ======== ========
Balance Sheet Data:
Cash and investments $ 324 $ 356 $ 1,083 $ 9,175 $ 1,973
Working capital 2,828 5,773 6,967 15,226 3,046
Total assets 25,017 23,803 24,403 19,875 7,160
Long-term debt 217 259 315 188 327
Total debt 6,008 2,551 566 371 575
Redeemable convertible preferred stock -- -- -- -- 4,321
Shareholders' equity (deficit) 13,973 16,410 18,954 17,502 (153)
</TABLE>

(1) See Note 2 to the Notes to the consolidated financial statements for
information on acquisitions in 1994 and 1993.

(2) In 1995, the Company recorded non-recurring charges related to the
write-off of capitalized software development costs and a corporate
restructuring. See Notes 1 and 3 to Notes to the consolidated financial
statements.

(3) In 1996, 1995 and 1994, net loss per share was computed on the basis
described in Note 1 of Notes to Consolidated Financial Statements. For all
prior periods, net income per share was calculated by dividing net income
by the weighted average number of shares outstanding for the respective
periods, adjusted for the dilutive effect of common stock equivalents.

<PAGE>

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

Results of Operations

1996 Compared to 1995

Total Revenues. Total revenues decreased from $39.1 million in 1995 to
$35.6 million in 1996, or 9%. Service revenues decreased from $26.6 million in
1995 to $23.1 million in 1996, or 13%, primarily as a result of lower nuclear
service revenues as customers continued to reduce their maintenance outages. The
decline was offset by a 7% increase in industrial service revenues. Royalties
and license fees remained relatively flat while outside funding sources
increased approximately $100,000.

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

Cost of Revenues. Cost of revenues decreased from $22.6 in 1995 to $19.5 in
1996, or 14%. As a percentage of total revenues, cost of revenues decreased from
58% in 1995 to 55% in 1996.

Cost of service revenues increased from 65% in 1995 to 66% in 1996. Cost of
product revenues decreased from 43% in 1995 to 34% in 1996, primarily as a
result of the elimination of the amortization of capitalized software from costs
of sales in 1996 and the consolidation of manufacturing operations in the
beginning of 1996.

In accordance with SFAS No. 86, the Company capitalized software
development costs through 1995. Amortization related to these costs was $0.7
million in 1995. The Company wrote-off the balance of capitalized software
development costs at the end of 1995 and has no such amortization in 1996.

Gross Profit. Gross profit decreased from $16.5 million in 1995 to $16.1
million in 1996, or 2%. As a percentage of total revenues, gross profit
increased from 42% in 1995 to 45% in 1996. The Company expects that the gross
profit percentage will vary from period to period depending primarily on the mix
of products and services sold.

Engineering and Product Development Expenses. Engineering and product
development expenses increased from $2.9 million in 1995 to $4.7 million in
1996, or 62%, primarily as a result of software development costs which did not
meet the criteria for capitalization. During 1995 the Company capitalized
software development expenditures of $1.7 million. As discussed above, at the
end of 1995 the Company wrote off the balance of capitalized software and has
not capitalized any additional software development costs in 1996.

Excluding the impact of software development costs capitalized during 1995,
total engineering and product development costs including capitalized software
development expenditures remained relatively flat, increasing from $4.6 million
to $4.7 million, or 2%, from 1995 to 1996. As a percentage of total revenues,
engineering and product development expenses, including capitalized
expenditures, increased from 12% in 1995 to 13% in 1996, reflecting the lower
revenues in 1996.

<PAGE>

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $12.9 million in 1995 to $13.7 million in
1996, or 6%, and increased as a percentage of total revenues from 33% in 1995 to
39% in 1996. The increase in expenditures resulted primarily from the addition
of $0.7 million in Liberty M.P. operating expenses, which became operational at
the beginning of 1996. The increase as a percentage of revenues is a result of
the decrease in revenues.

Non-recurring Charges. The Company incurred restructuring charges of $.8
million during 1995 as a result of the consolidation of its two product
divisions, including manufacturing, into a single products business unit, and
its two service subsidiaries into a single service division as of December 31,
1995. There were no such charges in 1996.

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

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

Income Taxes (Benefit). The Company had an income tax benefit of $1.1
million for 1995 and expense of $0.1 million for 1996. The net tax benefit in
1995 is a result of the federal income tax benefit from the consolidated losses
being greater than the state income tax expense which resulted from taxable
income from certain of the Company's subsidiaries. The net tax expense in 1996
represents state income taxes and foreign taxes from certain of the Company's
subsidiaries. The federal income tax benefit for 1996 ($0.9 million) was offset
by a valuation allowance of the same amount.

The Company's effective tax benefit of 29% for 1995 and tax expense of 3%
for 1996 are not representative of the expected income tax rates to be incurred
in future years because of the effect of losses incurred during 1996 and 1995
and because of the valuation allowance recorded in 1996. See Note 11 of Notes to
Consolidated Financial Statements.

Net Loss. Net loss for both 1995 and 1996 was $2.6 million, or $0.53 and
$0.52 loss per share in 1995 and 1996, respectively. The net loss in 1995
reflects the effect of the non-recurring charges, as discussed above. The net
loss in 1996 reflects lower gross profit and operating income and the valuation
allowance of $0.9 million recorded on the deferred tax asset. The number of
shares used in calculating earnings per share increased to 4,970,000 in 1996
from 4,943,000 in 1995 due to the issuance of shares in connection with the
exercise of stock options under the Company's 1988 and 1992 Stock Option Plans
and the sale of stock through the Company's Employee Stock Purchase Plan.

1995 Compared to 1994

Total Revenues. Total revenues increased from $27.7 million in 1994 to
$39.1 million in 1995, or 41%. Service revenues increased from $18.7 million in
1994 to $26.6 million in 1995, or 42%, primarily as a result of the Company's
acquisition of INDT in March 1994 and internal growth. Liberty nuclear service
revenues, royalties and license fees remained relatively flat.

<PAGE>

Product revenues increased from $9.0 million in 1994 to $12.5 million in
1995, or 39%, as a result of the full year impact of the acquisition of Beta
Monitors and Controls, Ltd. on August 12, 1994, which had $1.8 million of
revenue during the remainder of 1994 and $6.1 million for the full year 1995. In
addition, international nuclear sales increased from $.2 million in 1994 to $1.5
million in 1995, largely attributable to sales to Electricite de France. These
gains were offset by $1.7 million lower domestic nuclear sales.

Cost of Revenues. Cost of revenues increased from $15.6 million in 1994 to
$22.6 million in 1995, or 45%. As a percentage of total revenues, cost of
revenues increased from 56% in 1994 to 58% in 1995 due to the significant
increase in the volume of service revenues, which have a lower margin. Cost of
product revenues increased as a percentage of product sales from 37% in 1994 to
43% in 1995 as a result of product mix.

Gross Profit. Gross profit increased from $12.1 million in 1994 to $16.5
million in 1995, or 36%. As a percentage of total revenues, gross profit
decreased from 44% in 1994 to 42% in 1995. The Company expects that the gross
profit percentage will vary from year to year depending primarily on the mix of
products and services sold.

Engineering and Product Development Expenses. Engineering and product
development expenses decreased from $3.1 million in 1994 to $2.9 million in
1995, or 6%. The Company capitalized software development expenditures of $1.7
million during 1994 and 1995. Amortization of capitalized software development
costs totaled $.2 million in 1994 and $.8 million in 1995. These expenditures
were capitalized in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86. Total engineering and product development costs, including
capitalized software development expenditures, remained relatively flat,
declining from $4.8 million to $4.6 million, or 4%, from 1994 to 1995. As a
percentage of total revenues, engineering and product development expenses,
including capitalized expenditures, decreased from 17% in 1994 to 12% in 1995,
reflecting the increase in service revenues as a percentage of total revenues.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $9.2 million in 1994 to $12.9 million in
1995 and remained unchanged as a percentage of total revenues at approximately
33%. The increase in expenditures is due primarily to the acquisitions of INDT
and Beta.

Interest Income (Expense), net. Net interest expense for 1995 was $(.1)
million, compared to net interest income of $.1 million in 1994. This change is
as a result of the sale of short-term investments in 1994 to acquire INDT, Beta,
and various technology licenses and of increased short-term bank financing
during 1995 to fund working capital.

<PAGE>

Income Tax Benefit. The Company had an income tax benefit of $1.1 million
for 1995 compared to a nominal benefit for 1994. These net tax benefits are a
result of the federal income tax benefit from the consolidated losses being
greater than the state income tax expense which resulted from taxable income
from certain of the Company's subsidiaries. The Company's effective tax benefit
of 29% for 1995 and 3% for 1994 are not representative of the expected income
tax rates to be incurred in future years because of the effect of losses
incurred during 1994 and 1995. See Note 10 of Notes to Consolidated Financial
Statements.

Net Income (Loss). Net loss increased from a loss of $.1 million, or $.02
loss per share, in 1994 to a loss of $2.6 million, or $.53 loss per share, in
1995. The increase in the net loss in 1995 resulted from the $.8 million
restructuring charge and the $3.7 million write-off of capitalized software, and
was partially offset by improved operating results before such charges and a
larger income tax benefit. The number of shares used in calculating earnings per
share increased to 4,943,000 in 1995 from 4,859,000 in 1994 due to the issuance
of shares in connection with the purchase of INDT in March 1994, the exercise of
stock options under the Company's 1988 and 1992 Stock Option Plans and the sale
of stock through the Company's Employee Stock Purchase Plan.

Liquidity and Capital Resources

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

1996 Compared to 1995

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

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

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

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

<PAGE>

1995 Compared to 1994

The Company had cash of $0.4 million and $1.1 million at December 31, 1995
and 1994, respectively.

Net cash provided by operations was $.9 million in 1995 compared to $2.9
million in 1994. The decrease is due primarily to higher accounts receivable
resulting from strong fourth quarter sales, offset by an increase in accounts
payable and accrued expenses. This decrease was further offset by an increase in
non-cash operating charges, primarily the writeoff of capitalized software.

Net cash used by investing activities in 1995 was $3.7 million compared to
$1.7 million in 1994. The 1994 activity included the liquidation of short-term
investments used to pay for the acquisitions of INDT and Beta, and by a payment
for the licensing of phosphor radiography technology. Investment in fixed assets
and capitalized software remained flat from 1994 to 1995.

Net cash provided by financing activities in 1995 was $2.1 million compared
to net cash used by financing activities of $1.5 million in 1994. The cash
provided in 1995 was due primarily to the additional borrowings against the
Company's bank line of credit, contrasted with the use of cash in 1994 for the
repayment of certain debt assumed in connection with the acquisition of INDT
($1.1 million) and the purchase of treasury stock.

Liquidity

During 1996 the Company increased its maximum availability on its revolving
credit facility with a commercial bank from $5,000,000 to $7,500,000. The
balance outstanding was $5.7 million and $2.2 million at December 31, 1996 and
1995, respectively, and the balance of the facility was available. The line is
collateralized by substantially all of the Company's accounts receivable and
inventory. The credit facility may be used for working capital or acquisitions.
Borrowings under this facility bear interest at a rate equal to the lower of the
bank's prime rate less 0.5% or the Eurodollar rate plus 1.25%. The average
interest rate was 6.87% and 6.75% at December 31, 1996 and 1995, respectively.
The line requires that the Company maintain compliance with certain financial
covenants. The Company was not in compliance with certain of these covenants at
December 31, 1996. The bank had waived non-compliance through May 1, 1997.

The Company has amended the credit facility effective April 3, 1997. The
amended facility provides availability of $9,000,000 through June 30, 1997;
$7,500,000 through September 30, 1997; $6,500,000 through December 31, 1997; and
$5,500,000 through March 31, 1998. After June 30, 1997, borrowings under the
line are limited to 85% of eligible receivables and 25% of eligible inventory,
as defined. Beginning after October 1, 1997, the borrowing base will be limited
solely to 85% of eligible receivables, as defined. The interest rate on the
facility varies from the Eurodollar rate plus 1.50% to the bank's prime rate
plus 1.00% and is payable at the maturity of each draw against the facility. The
line of credit expires on March 31, 1998.

The Company's primary source of financing in 1996 and 1997 has been
borrowings under its line of credit. Since the original filing of this report,
the Company has failed to perform certain covenants contained in its line of
credit, resulting in it being in default thereunder, an event which was reported
in the original filing of its Form 10-Q for the quarter ended June 30, 1997. To
date, the Company has been permitted by its lenders to continue to borrow moneys
from time to time under the credit facility, up to the maximum $7,500,000,
notwithstanding the existing default. However, no assurance can be given that
the lenders will continue to permit such additional borrowings in the future or
will not accelerate all outstanding amounts under the line of credit. As a
result of such default, Arthur Andersen LLP, the Company's independent auditors,
modified its report to the consolidated financial statements of the Company and
its subsidiaries for the year ended December 31, 1996, which revised report is
filed with Form 10-K/A.

The modified opinion of Arthur Andersen, LLP indicates that the Company (i)
incurred losses during the last three fiscal years and has continued to incur
losses in 1997 (ii) continues to experience limitations on its ability to borrow
and (iii) is in violation of certain loan covenants that give the lenders the
right to accelerate the due date of the loan. These factors create a substantial
doubt about the Company's ability to continue as a going concern and an
uncertainty as to the recoverability and classification of recorded asset
amounts and the amounts and classification of liabilities.

On July 25, 1997, the Company entered into an agreement with General
Electric Company (GE) to sell substantially all of the assets of the Company's
nondestructive testing and evaluation services business (the NDE Business) for
$13.6 million in cash, subject to downward adjustment based upon the closing
balance sheet. An amount equal to 10% of the purchase price must be held in an
escrow account for a period of one year from the closing date. The Company
intends to use the proceeds from the sale of the NDE Business to repay its bank
debt, to invest in the products business and for other corporate purposes. The
sale of the NDE Business is subject to the approval of the Company's
shareholders, among other things. There can be no assurance that the Company
will consummate the sale of the NDE Business. If the sale of the NDE Business is
not completed, the Company would need to pursue alternative financing such as a
private placement. Management is unable to estimate the amount and timing of
funding required, if any, from these alternative sources.

The Company believes that its current cash and short-term investment
resources, cash provided by the anticipated sale of the NDE Business and
availability under its current and anticipated line of credit, will be
sufficient to fund the Company's operations, debt and lease obligations, and
expected capital expenditures for the next twenty-four months and to the best
belief of management on a longer term basis. Additional financing may be
required for the Company to consummate any material business acquisitions.

<PAGE>

Inflation

Inflation has not had a significant impact on the Company.

Special Note Regarding Forward Looking Statements

Statements in this annual report on Form 10-K, including those concerning
the Company's expectations of future sales; gross profit; net income;
engineering and product development expenditures; selling, general and
administrative expenses; product introductions and cash requirements include
certain forward-looking statements. As such, actual results may vary materially
from such expectations.

In evaluating such statements, prospective and current investors should
specifically consider the various factors which could cause actual results to
differ from those indicated by such forward-looking statements including,
without limitation, the timely development, production and acceptance of new
products; changes in product/service revenue mix; continued acceptance in the
marketplace, competition and buying patterns of customers; and absence of
significant order backlog.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item is set forth on pages F-1 through
F-19 hereto and is incorporated by reference herein.

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

None.

<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

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

R. Nim Evatt 55 President; Chief Executive Officer and
Chairman of the Board

Daniel G. Clare 38 Vice President, Finance; Chief
Financial Officer; Treasurer

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

Mr. Clare joined the Company as Vice President, Finance, Chief Financial
Officer and Treasurer in March 1995. Previously, Mr. Clare held various
financial management positions in Martin Marietta/General Electric (GE)
Aerospace. Previously he held positions throughout GE, including the Plastics
Group, GE Capital Corporation, the Corporate Audit Staff and the Power Delivery
Division.
26

<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by the Company to
its officers for the years ended December 31, 1996, 1995 and 1994:

Summary Compensation Table

<TABLE>
<CAPTION>
Annual Compensation(1) Long-Term Compensation
---------------------- ----------------------

Name and Other Annual All other
Principal Salary Bonus Compensation(1) Options/ Compensation(2)
Position Year ($) ($) ($) SARs (#) ($)
- -------- ---- ------- ------- --------------- ---------- ---------------

<S> <C> <C> <C> <C> <C> <C>
R. Nim Evatt 1996 194,500 - - 25,000 2,375
Chief Executive 1995 180,153 - - 55,000 2,310
Officer; President 1994 164,988 - - - 2,310

Daniel G. Clare 1996 131,176 - - 15,000 1,767
Chief Financial Officer; 1995 90,600 - - 25,000 486
Vice President
</TABLE>
- -------------

(1) Would include perquisites and other personal benefits paid for by the
Company, such as automobile payments, long-term disability and life
insurance premiums and relocation expenses. The value of such personal
benefits for each of the named executive officers was less than the
minimum required to be reported, the lesser of $50,000 or 10% of annual
salary and bonus.

(2) Represents allocations to accounts of executive officers under the
Company's Retirement Savings Plan, which is intended to qualify under
Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended (the "401(k) Plan"). Employees of the Company who have
completed at least one-half year of service with the Company are
eligible to make contributions to the 401(k) Plan on a pre-tax basis in
accordance with certain limitations set forth in the 401(k) Plan or
defined in the Code. The Company matches 25% of each employee's pre-tax
contributions, up to a maximum matching contribution of 1.5% of such
participant's annual compensation. The pre-tax contributions by
participants and the earnings thereon are at all times fully vested.
The Company's contribution vests to the employee at a rate of 50% for
each year of service with the Company. A participant's vested benefit
under the 401(k) Plan may be distributed to the participant upon his
retirement, death, disability or termination of employment or upon
reaching age 59 1/2.

The following table presents information concerning stock options granted
to the named executive officers in 1996:

Option/SAR Grants in 1996

<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Individual Grants Rates of Stock
Appreciation for Option
Term
- --------------------------------------------------------------------------------- ---------------------------

Number of % of Total
Securities Options/
Underlying SARs Granted Exercise or
Options/SARs to Employees Base Price Expiration
Name Granted (#) in Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- ------------- -------------- ------------ ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
R. Nim Evatt 25,000 (1) 11.9% $4.875 2/01/06 $76,775 $193,775

Daniel G. Clare 10,000 (2) 4.8% $3.250 9/25/06 $20,475 $ 51,680

5,000 (1) 2.4% $4.875 2/01/06 $15,355 $ 38,755
</TABLE>
- -------------

(1) Options under this grant vest on the earlier of five years from the
date of grant, or annually over four years in increments of 25% of
total shares granted if the stock price of the Company has reached
$9.75 by February, 1997; $9.75 by February, 1998; $13.75 by February,
1999; and $19.25 by February, 2000. If the stock price does not reach
$9.75 by February, 1997, but does reach $9.75 by February, 1998, 50% of
the grant would vest immediately. These options expire February, 2007.

(2) Options under this grant vest over four years on the annual anniversary
of the option grant date in increments of 25% of total shares granted.
These options expire September, 2007.

The following table presents information concerning the exercise of
stock options by any of the named executive officers during 1996 and stock
option values for unexercised stock options held by each of the named executive
officers as of the end of 1996:

Aggregated Option Exercises in 1996
and Year End Option Values

<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options/SARs at
Options at Year End Year End
------------------------- -------------------------------

Number of Shares
Acquired on
Name Exercise Value Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ---------------- ----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
R. Nim Evatt -- -- 248,500 46,500 $269,500 $0
Daniel G. Clare -- -- 6,250 33,750 $0 $0

</TABLE>
- -------------

(1) Represents the product of the number of shares acquired on exercise,
multiplied by the difference between (i) the per share fair market
value of the Common Stock on the date of exercise and (ii) the exercise
price per share.

Employment Agreements

The Company has an employment agreement with Mr. Evatt dated April 1,
1991. Mr. Evatt is employed at will under his agreement and, if terminated
without cause, is entitled to one-half of his then current base salary for a
period of two years from the time notice is given, reduced by any period during
which the agreement's noncompetition provision, which runs for two years after
employment terminates, is violated. The Company entered into an employment
agreement with Mr. Leon, dated December 28, 1995, which provides for, in effect,
a phased-in retirement for the former executive officer with a gradual reduction
of time commitments and responsibilities, as well as compensation, over the term
of the agreement. Mr. Leon's agreement has a three year term from January 1,
1996 through December 31, 1998 and includes covenants not to compete during the
term.

Board of Directors

With regard to compensation for the Board of Directors, employee directors
are not compensated for their services as members of the Board. Compensation of
outside directors is determined by action of the Compensation and Benefits
Committee or the whole Board after receiving the recommendations of the Chief
Executive Officer. Currently, non-employee directors are paid $1,250 per meeting
attended. Each non-employee director has been granted an option to purchase
10,000 shares of Common Stock on the later to occur of October 1, 1993 and the
date that such director is first elected to the Board. In addition, each
non-employee director is entitled to receive an annual grant of a stock option
under the Company's 1992 Stock Option Plan to purchase 2,500 shares of Common
Stock, such option to be granted, priced and fully vested on the date that is
the anniversary of the commencement of such director's service. The exercise
price of option grants is set at the NASDAQ closing price on the day prior to
the date of grant.

COMPENSATION AND BENEFITS COMMITTEE REPORT
ON EXECUTIVE COMPENSATION

The Compensation and Benefits Committee of the Board of Directors (the
"Committee") is charged with reviewing and approving the Company's compensation
objectives, practices and policies for all employees, setting the specific
compensation for the Chief Executive Officer and other executive officers of the
Company and making determinations with respect to the granting of stock options
under the Company's 1992 Stock Option Plan, including the relevant terms
thereof. The current members of the Committee are Messrs. Evatt, Defieux, Hinds
and Rosener, except with respect to the grant of stock options to executive
officers, in which case the members are Messrs. Defieux and Hinds alone. Mr.
Evatt is the Company's President, Chief Executive Officer and Chairman of the
Board, and Messrs. Defieux, Hinds and Rosener are non-employee directors of the
Company.

For the fiscal year ended December 31, 1996, the Committee continued to
implement compensation policies, plans and programs that were developed during
1995 which align the financial interests of the Company's senior management, in
their management capacities, with those of its shareholders. The Committee
believes that (1) executive compensation should be meaningfully related to the
performance of the Company and the value created for shareholders; (2)
compensation programs should support both short and long-term goals and
objectives of the Company; (3) compensation programs should reward individuals
for outstanding contributions to the Company's success; and (4) short and
long-term compensation policies play a significant role in attracting and
retaining well qualified executives.

In setting annual compensation for executive officers, the Committee
reviews a number of criteria relating to the performance of the Company
generally and of each executive officer specifically (other than the Chief
Executive Officer) during the prior fiscal year and evaluates its expectation as
to each such individual's future contributions to the Company. With respect to
the Chief Executive Officer, such review is conducted by the three non-employee
directors of the Company who serve on the Committee.

The salaries of the executive officers for 1996 were based on an
evaluation of individual job performance and the performance of the Company as a
whole. In making its decision on salary levels, the Committee did not use any
predetermined formula or assign any particular weight to any individual
criteria. The Committee also has discretion to pay bonus compensation, although
there is no formalized incentive payment plan or program and no annual bonuses
were paid to executive officers for 1996.

The Committee believes that it is essential for executives, as well as
other employees, of the Company, to own significant amounts of Common Stock,
through the granting of stock options which generally vest over a four year
period, thereby better aligning the long-term interest of executives with that
of the Company's shareholders. The Compensation and Benefits Committee believes
that stock options provide incentive to executives by giving them a strong
economic interest in maximizing stock price appreciation and enhancing their
performance in attaining long-term Company objectives. In January of 1996, the
Committee modified the typical vesting provision of the Company's standard form
of employee stock option agreement to include target price levels that the
Company's Common Stock would have to reach for each year of a stock option's
vesting period for such option to become exercisable immediately with respect to
that portion of the option which vested over the year; otherwise, the options
would not vest for five years. The Committee believes that such modification
will further align the long-term interest of the Company's executives and other
employees to that of the Company's shareholders. The Company also uses initial
option grants to induce qualified senior management candidates to accept offers
of employment.

Beginning in 1994, Section 162(m) of the Internal Revenue Code of 1986,
as amended (the "Code"), limits the deductibility of compensation in excess of
$1 million paid to the Company's Chief Executive Officer and to any of the other
four highest-paid executive officers unless such compensation qualifies as
"performance-based," as defined in Section 162(m) and the regulations
thereunder. The Company is assessing, and generally will seek to implement steps
to eliminate or minimize, the impact of this provision on its compensation plans
and policies and to assure future deductibility of senior executive
compensation, to the extent that so qualifying does not compromise the
Committee's flexibility in designing effective, competitive compensation plans
and is not inconsistent with the Company's fundamental compensation policies.
The effect of Section 162(m) did not limit the deductibility of any compensation
paid to any of the "covered employees" of the Company between 1994 to 1996.

R. Nim Evatt
Richard J. Defieux
John A. Hinds
James D. Rosener

The above Report shall not be deemed incorporated by reference by any
general statement incorporating by reference this Proxy Statement into any
filing under the Securities Act of 1933 (the "Securities Act") or the Exchange
Act and shall not otherwise be deemed filed under such Acts.

Compensation and Benefits Committee Interlocks
and Insider Participation

The Compensation and Benefits Committee of the Board of Directors
currently consists of R. Nim Evatt, Richard J. Defieux, John A. Hinds and James
D. Rosener. Mr. Evatt is the Chairman of the Board, Chief Executive Officer and
President of the Company. Mr. Defieux is an affiliate of one of the two venture
capital funds that together were controlling shareholders of the Company prior
to its initial public offering, each of which had a right to designate one board
member at such time, which right terminated upon the closing of the initial
public offering. See also "Certain Transactions."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is presented under the caption
"Security Ownership of Certain Beneficial Owners and Management" of the
Company's definitive Proxy Statement to be filed with the Commission not later
than April 29, 1997 and is hereby incorporated by reference herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is presented under the caption "Certain
Transactions" of the Company's definitive Proxy Statement to be filed with the
Commission not later than April 29, 1997 and is hereby incorporated by reference
herein.

<PAGE>

PART IV

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

(a) Financial Statements and Financial Statement Schedules.

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

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

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

(b) Reports on Form 8-K. One Form 8-K was filed by the Registrant during
the fourth quarter of 1996.

<PAGE>

LIBERTY TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

Page
----

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2

CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1996 AND 1995 F-3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 1996, 1995 AND 1994 F-4

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 1996, 1995 AND 1994 F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7

CONSOLIDATED FINANCIAL STATEMENT SCHEDULE:

II. VALUATION AND QUALIFYING ACCOUNTS F-21

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Liberty Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Liberty
Technologies, Inc. (a Pennsylvania corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements and schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Liberty Technologies, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

As discussed in Note 1, subsequent to February 5, 1997, the date of our original
report (except for the matter discussed in Notes 1 and 6 as to which the date is
April 4, 1997), the Company (i) has continued to incur losses in 1997 (ii)
continues to experience limitations on its ability to borrow and (iii) is in
violation of certain loan covenants that gives the lenders the right to
accelerate the due date of the loan. These factors, as described in Note 1,
create a substantial doubt about the Company's ability to continue as a going
concern and an uncertainty as to the recoverability and classification of
recorded asset amounts and the amounts and classification of liabilities.
Management's plans in regard to these matters are also described in Note 1. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

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

ARTHUR ANDERSEN LLP

Philadelphia, Pa.
September 17, 1997

F-2
<PAGE>

<TABLE>

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

<CAPTION>
December 31,
--------------------
ASSETS 1996 1995
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 324 $ 356
Accounts receivable, net of allowance for doubtful
accounts of $182 and $111 ............................. 8,499 9,050
Inventories ............................................ 3,742 2,075
Deferred income taxes .................................. 385 730
Prepaid income taxes ................................... 230 319
Prepaid expenses and other ............................. 414 377
-------- --------
Total current assets ......................... 13,594 12,907
Property and equipment, net ................................ 4,612 3,890
Goodwill, net .............................................. 4,961 5,325
Deferred income taxes, net ................................. 367 281
Other assets ............................................... 1,483 1,400
-------- --------
$ 25,017 $ 23,803
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------

Current liabilities:
Line of credit ......................................... $ 5,725 $ 2,200
Current maturities of long-term debt ................... 66 92
Book overdraft ......................................... 472 --
Accounts payable ....................................... 2,728 2,277
Accrued compensation and benefits ...................... 1,250 1,361
Unearned revenue ....................................... 12 340
Income taxes payable ................................... 137 196
Other accrued expenses ................................. 376 668
-------- --------

Total current liabilities .................... 10,766 7,134
-------- --------

Long-term debt ............................................. 217 259
-------- --------
Due to minority shareholder 61 --
-------- --------

Commitments (Note 8)

Shareholders' equity:
Series A Preferred stock, $.001 par value, 10,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 10,000,000 shares
authorized, 5,018,987 and 5,003,362 shares issued,
and 4,989,915 and 4,957,151 outstanding ............. 50 50
Additional paid-in capital ............................. 17,242 17,195
Accumulated deficit .................................... (3,178) (606)
Treasury stock at cost ................................. (149) (237)
Cumulative translation adjustment ...................... 8 8
-------- --------
Total shareholders' equity ................... 13,973 16,410
-------- --------

$ 25,017 $ 23,803
======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE>

LIBERTY TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product ................................................... $ 12,456 $ 12,474 $ 9,049
Service ................................................... 23,125 26,645 18,682
-------- -------- --------

35,581 39,119 27,731
-------- -------- --------

Cost of revenues:
Product ................................................... 4,243 5,364 3,335
Service ................................................... 15,255 17,266 12,247
-------- -------- --------

19,498 22,630 15,582
-------- -------- --------

Gross profit ................................... 16,083 16,489 12,149
-------- -------- --------

Operating expenses:
Engineering and product development ....................... 4,656 2,868 3,122
Selling, general and administrative ....................... 13,736 12,883 9,233
Non-recurring charges (Note 3) ............................ -- 4,428 --
-------- -------- --------

18,392 20,179 12,355
-------- -------- --------

Operating loss ................................. (2,309) (3,690) (206)

Interest income (expense), net ............................... (226) (61) 139

Other ........................................................ -- -- (41)
-------- -------- --------

Loss before income taxes and minority interest.. (2,535) (3,751) (108)

Income taxes (benefit) ....................................... 87 (1,109) (4)
-------- -------- --------

Loss before minority interest .................. (2,622) (2,642) (104)

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

Net loss ..................................................... $ (2,572) $ (2,642) $ (104)
======== ======== ========

Net loss per share ........................................... $ (.52) $ (.53) $ (.02)
======== ======== ========

Shares used in computing net loss per share .................. 4,970 4,943 4,859
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE>

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

<CAPTION>
Common Stock Treasury Stock Total
------------------ Additional Retained ------------------ Cumulative Share-
Number Paid-in Earnings Number Translation holders'
of Shares Amount Capital (Deficit) of Shares Amount Adjustment Equity
--------- ------ -------- ------- --------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 ...................... 4,614,638 $ 46 15,315 $ 2,140 -- $ -- $ -- $17,501
Shares issued in connection with acquisition of
Industrial NDT Company, Inc. (Note 2) ....... 317,460 3 1,751 -- -- -- -- 1,754
Exercise of stock options ..................... 57,100 1 131 -- -- -- -- 132
Purchase of treasury stock .................... -- -- -- -- 75,000 (406) -- (406)
Shares issued for employee stock purchase plan 4,914 -- 15 -- (9,422) 62 -- 77
Net loss ...................................... -- -- -- (104) -- -- -- (104)
--------- ------ -------- ------- ------ ------ ------ -------
Balance, December 31, 1994 ...................... 4,994,112 50 17,212 2,036 65,578 (344) -- 18,954
Exercise of stock options ..................... 9,250 -- 16 -- -- -- -- 16
Shares issued for employee stock purchase plan -- -- (33) -- (19,367) 107 -- 74
Currency translation adjustment ............... -- -- -- -- -- -- 8 8
Net loss ...................................... -- -- -- (2,642) -- -- -- (2,642)
--------- ------ -------- ------- ------ ------ ------ -------
Balance, December 31, 1995 ...................... 5,003,362 50 17,195 (606) 46,211 (237) 8 16,410
Exercise of stock options ..................... 15,625 -- 67 -- -- -- -- 67
Shares issued for employee stock purchase plan -- -- (20) -- (17,139) 88 -- 68
Net loss ...................................... -- -- -- (2,572) -- -- -- (2,572)
--------- ------ -------- ------- ------ ------ ------ -------
Balance, December 31, 1996 ...................... 5,018,987 $ 50 $ 17,242 $(3,178) 29,072 $ (149) $ 8 $13,973
========= ====== ======== ======= ====== ====== ====== =======

</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE>

LIBERTY TECHNOLOGIES INC. AND SUBSIDIARIES
- -----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $(2,572) $(2,642) $ (104)

Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................. 1,924 2,518 1,577
Deferred income taxes ......................................... 284 (931) 377
Minority interest in loss of joint venture .................... (50) -- --
Write-off capitalized software ................................ -- 3,670 --
Change in assets and liabilities, net of effect from
acquisitions-
(Increase) decrease in:
Accounts receivable ............................... 551 (2,865) 2,042
Inventories ....................................... (1,975) (406) (41)
Prepaid income taxes .............................. 67 (24) (292)
Prepaid expenses and other ........................ (31) (19) 85
Other assets ...................................... 63 (10) (105)
Increase (decrease) in:
Accounts payable .................................. 451 738 (417)
Accrued expenses and compensation ................. (403) 706 (437)
Income taxes payable .............................. 46 190 --
Unearned revenue .................................. (328) (58) 220
------- ------- -------
Net cash provided by (used in) operating
activities ....................................... (1,973) 867 2,905
------- ------- -------

Cash flows from investing activities:
Purchases of property and equipment ............................... (1,844) (1,526) (1,397)
Sale of short-term investments .................................... -- -- 7,757
Purchases of technology licenses .................................. (100) -- (688)
Capitalization of software development costs ...................... -- (1,745) (1,674)
Payment for purchase of acquisitions, net of cash acquired
and common stock issued ......................................... -- (500) (5,674)
Other ............................................................. (224) 118 (63)
------- ------- -------
Net cash used in investing activities ............... (2,168) (3,653) (1,739)
------- ------- -------

Cash flows from financing activities:
Payments of long-term debt (INDT acquisition) ..................... -- -- (1,112)
Payments of long-term debt (other) ................................ (134) (240) (192)
Net borrowings under line of credit ............................... 3,525 2,200 --
Increase in book overdraft ........................................ 472 -- --
Proceeds from exercise of stock options and warrants .............. 67 16 132
Proceeds from Employee Stock Purchase Plan ........................ 68 75 77
Treasury stock purchases .......................................... -- -- (406)
Investment from minority shareholder in joint venture ............. 111 -- --
------- ------- -------
Net cash provided by (used in) financing
activities ........................................ 4,109 2,051 (1,501)
------- ------- -------
Effect of foreign exchange rate changes on cash ...................... -- 8 --
------- ------- -------
Net decrease in cash and cash equivalents ............................ (32) (727) (335)

Cash and cash equivalents, beginning of year ......................... 356 1,083 1,418
------- ------- -------
Cash and cash equivalents, end of year ............................... $ 324 $ 356 $ 1,083
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Background

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

Going Concern

As indicated in the accompanying financial statements, the Company has incurred
losses during the last three years. Additionally, for the six months ended June
30, 1997 the Company incurred a net loss of $20,000. During 1996 and 1997, the
Company's primary source of financing has been borrowings under its line of
credit. During 1997, the Company has experienced and continues to experience
limitations on its ability to borrow. Additionally, in 1997, the Company was in
violation of certain loan covenants that gives the lenders the right to
accelerate the due date of the loan. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.

In April 1997, the Company's line of credit facility was amended to extend the
line through March 1998 (see Note 6). As of September 17, 1997, the Company is
in violation of certain loan covenants under the loan agreement with its bank.
Additionally, since June 30, 1997, the Company's outstanding principal balance
under the credit facility has exceeded the line's borrowing base. These events
constitute events of default under the Company's loan agreement with its bank.
The bank has reserved the right not to make any further advances under the
facility in excess of the borrowing base and any future advances are at the
discretion of the bank. The Company's maximum borrowing availability,
notwithstanding the borrowing base limitations, decreases to $6,500,000 at
September 30, 1997 from $7,500,000 at June 30, 1997. At August 31, 1997,
approximately $6,900,000 was outstanding under the line. These events of default
may have a material adverse effect on the Company.

On July 25, 1997, the Company entered into an agreement to sell substantially
all of the assets of its nondestructive testing and evaluation services business
(the NDE Business) to a subsidiary of General Electric Company (GE) for
$13,600,000 (subject to a dollar-for-dollar reduction based on the amount of
working capital and the amount of fixed assets of the NDE Business on the
closing date) and the assumption of certain associated liabilities not to exceed
$1,390,000. Approximately 10% of the cash portion of the purchase price will be
held in escrow to secure certain indemnification obligations of the Company to
the buyer. Consummation of the transaction is subject to, among other things,
the approval of the Company's shareholders. If approved and the other conditions
are satisfied it is currently expected that the transaction will close by
October 31, 1997. The Company intends to use the proceeds from the sale of the
NDE Business to repay its bank debt, to invest in the existing product business
and for other corporate purposes.

These can be no assurance that the Company will consummate the sale of the NDE
Business. If the sale of the NDE Business is not completed, the Company would
need to pursue alternative financing such as a private placement. Management is
unable to estimate the amount and timing of funding required, if any, from these
alternative sources.

These financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

Principles of Consolidation

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

Use of Estimates

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

Inventories

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

F-7
<PAGE>

Software Development Costs

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

For the years ended December 31, 1995 and 1994, the Company capitalized
$1,745,000 and $1,674,000, respectively, of software development costs relating
to new product lines. The Company also purchased $450,000 of capitalized
software with the acquisition of Beta Monitors and Controls Ltd. in 1994. For
the years ended December 31, 1995 and 1994, the Company recorded amortization of
$733,000 and $185,000, respectively. As of December 31, 1995 the Company wrote
off capitalized software costs of $3,670,000. This write-off of the software
development costs was due to the rapidly changing technology environment in
which the Company operates and its impact on product life cycles. Software
development costs were not capitalized in 1996.

Property and Equipment

Property and equipment are recorded at cost. Additions or improvements are
capitalized, while repairs and maintenance are charged to expense. Depreciation
is computed on straight-line methods for financial reporting purposes and on
accelerated methods for income tax purposes. Buildings and improvements are
depreciated over 25 years and 15 years, respectively, while machinery and
equipment and furniture and fixtures are depreciated over their estimated useful
lives of 3 to 7 years.

Leasehold improvements and capitalized leases are amortized over the shorter of
the useful life of the related asset or the lease term. Upon retirement or
disposition, the applicable property amounts are relieved from the accounts, and
any gain or loss is recorded in the statement of income.

Revenue Recognition

Product revenues are recognized when products are shipped and service revenues
are recognized as earned when the related services are performed. Included in
service revenues are royalties, license fees and research funding of $231,000,
$132,000 and $122,000 in 1996, 1995 and 1994, respectively.

F-8
<PAGE>

Major Customers and Concentration of Credit Risk

The Company sells its products and services primarily to the domestic and
international power and process industries. Financial instruments that
potentially subject the Company to credit risk consist primarily of trade
accounts receivable. For the years ended December 31, 1996, 1995 and 1994, no
customer accounted for more than 10% of total revenues. For the year ended
December 31, 1996, the Company's foreign operations and export sales
approximated $4.6 million or 13% of total revenues. For the years ended December
31, 1995 and 1994, foreign operations and export sales accounted for less than
10% of total revenues. There is no single geographic area of significant
concentration.

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses, and debt
instruments. The values of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses are considered to be representative of
their respective fair values. Based on the terms of the Company's debt
instruments that are outstanding as of December 31, 1996, the carrying values
are considered to approximate their respective fair values. See Notes 6 and 7
for the terms and carrying values of the Company's various debt instruments.

Warranty Provision

A provision for expected future product warranty claims is estimated by
management based on the Company's prior claim experience.

Income Taxes

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

Engineering and Product Development

Engineering and product development costs, which are not capitalized software,
are charged to expense in the period incurred.

Cash and Cash Equivalents

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

F-9
<PAGE>

Statements of Cash Flows Information

For the years ended December 31, 1996, 1995 and 1994, the Company paid interest
of $270,000, $129,000, and $44,000, respectively, and income taxes of $103,000,
$75,000 and $280,000, respectively. The following table displays non-cash assets
that were recorded as a result of the acquisitions discussed in Note 2.

1994
-----------
NON-CASH ASSETS:
Accounts receivable $ 2,828,000
Inventory 509,000
Prepaid expenses 441,000
Property and equipment 1,857,000
Non-compete agreement --
Goodwill 5,600,000
Other assets 808,000
-----------
Net non-cash assets acquired 12,043,000
Assumed liabilities (4,615,000)(a)
-----------
Total consideration 7,428,000
Note payable to seller under non-compete agreement (Note 7) --
Common stock issued to sellers (1,754,000)
-----------
Net cash paid $ 5,674,000
===========

(a) $1,112,000 of assumed debt was repaid to third parties subsequent to the
closing of the INDT acquisition.

Net Loss Per Share

Net loss per share is calculated by dividing net loss by the weighted average
number of common shares outstanding for the respective periods.

Foreign Currency Translation

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

Reclassifications

Certain reclassifications have been made to the 1995 financial statements to
conform to current presentations.

Goodwill

The excess of the purchase prices of acquisitions over the fair market value of
the acquired net assets is recorded as goodwill and amortized on a straight-line
basis over 10 or 20 years. As of December 31, 1996 and 1995, goodwill is net of
accumulated amortization of $850,000 and $486,000, respectively. The Company
continually evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life may warrant revision or that the
remaining balance of goodwill may not be recoverable. When factors indicate that
goodwill should be evaluated for possible impairment, the Company uses an

F-10
<PAGE>

estimate of the related undiscounted future cash flows over the remaining life
of the goodwill in measuring whether the goodwill is recoverable.

New Accounting Pronouncements

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long
Lived Assets to be Disposed of" ("SFAS No. 121"). SFAS No. 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill. The Company adopted SFAS No. 121
effective January 1, 1996. The adoption did not have an effect on the Company's
financial statements.

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 established financial accounting
and reporting standards for stock based compensation plans. The Company has
adopted the disclosure requirements of SFAS No. 123 (see Note 10).

2. ACQUISITIONS:

On August 12, 1994, the Company acquired 100% of the capital stock of Beta
Monitors and Controls Ltd., a Canadian company (Beta), for Canadian $5,500,000,
equivalent to U.S. $4,022,000. The Company also entered into a four year
employment agreement with Beta's former president, who retired at the end of
1996, which required a base level of compensation and an annual bonus based on
the performance of the business. The transaction was accounted for using the
purchase method of accounting, whereby the purchase price is allocated to the
assets and liabilities of Beta based on their fair market value at the
acquisition date. Such allocation has been based on estimates that may be
revised at a later date. The excess of cash paid over the estimated fair value
of the net assets acquired was approximately $2,490,000 which was recorded as
goodwill and is being amortized on a straight-line basis over 20 years.

On March 28, 1994, the Company acquired 100% of the capital stock of Industrial
NDT Company, Inc. (INDT) in exchange for $2,000,000 in cash and 317,460 shares
of common stock of the Company (valued at $1,754,000), and a contingent payment
of up to $500,000 (paid in February 1995). The acquisition has been accounted
for using the purchase method, whereby the purchase price is allocated to the
assets and liabilities of INDT based on their fair market value at the
acquisition date. Such allocation has been based on estimates that may be
revised at a later date. The purchase price, including transaction costs and the
$500,000 contingent payment paid in February 1995, exceeded the fair market
value of the net assets acquired by $3,110,000 which was recorded as goodwill
and is being amortized on a straight-line basis over 20 years.

In 1993, the Company acquired substantially all of the net assets of Boggs
Technical Services, Inc. (MOV Services) and entered into a ten-year non-compete
agreement with the owner of MOV Services. The acquisition was accounted for
using the purchase method of

F-11
<PAGE>

accounting. The related goodwill and non-compete agreement are being amortized
over ten years.

The following unaudited pro forma information is presented for the acquisitions
of Beta and INDT as if the acquisitions had occurred on January 1, 1994.

The unaudited pro forma information does not purport to be indicative of the
results that would have been attained if the operations had actually been
combined during the periods presented, and is not necessarily indicative of
operating results to be expected in the future.

For the Year Ended
December 31, 1994
-----------------------

Total revenues $33,723,000
Net income $ 241,000
Shares used in computing earnings per share 4,938,000

Net income per share $ .05

3. NON-RECURRING CHARGES:

In 1995 the Company reorganized its two product operations into one unit and its
two service operations into a second unit. This reorganization resulted in a
restructuring charge of $758,000 for the year ended December 31, 1995.

Also in 1995 the Company wrote-off capitalized software costs totaling
$3,670,000 (see Note 1).

4. INVENTORIES:

December 31,
------------------------------------
1996 1995
---------------- ----------------

Raw materials & work in process $ 3,171,000 $ 1,687,000
Finished goods 571,000 388,000
---------------- ----------------

$ 3,742,000 $ 2,075,000
================ ================

F-12
<PAGE>

5. PROPERTY AND EQUIPMENT:
December 31,
------------------------------------
1996 1995
---------------- ----------------

Land $ 163,000 $ 163,000
Machinery and equipment 7,220,000 5,761,000
Furniture and fixtures 990,000 1,117,000
Buildings and improvements 615,000 604,000
Leasehold improvements 235,000 143,000
---------------- ----------------

9,223,000 7,788,000
Less- Accumulated depreciation and
amortization (4,611,000) (3,898,000)
---------------- ----------------

$ 4,612,000 $ 3,890,000
================ ================

6. LINE OF CREDIT:

The Company had a $7,500,000 credit facility with a commercial bank, with
interest at the lower of the Eurodollar rate plus 1.25% or the bank's prime rate
less one-half percent. The rate at December 31, 1996 was 6.36%. The line
requires an annual fee of one quarter percent on the unused portion and requires
that the Company maintain certain financial covenants. The Company was not in
compliance with certain of these covenants at December 31, 1996. The bank has
waived non compliance with these covenants through May 1, 1997. The line is
collateralized by substantially all of the Company's accounts receivable and
inventory. The maximum additional availability as of December 31, 1996 was
$1,775,000. Interest of $265,000 and $56,000 was charged to expense for the
years ended December 31, 1996 and 1995, respectively, at a weighted average
interest rate of 6.87% and 6.75%, respectively.

The Company amended the credit facility effective April 3, 1997. The amended
facility provides maximum availability of $9,000,000 through June 30, 1997;
$7,500,000 through September 30, 1997; $6,500,000 through December 31, 1997; and
$5,500,000 through March 31, 1998. After June 30, 1997, borrowings under the
line are limited to 85% of eligible receivables and 25% of eligible inventory,
as defined. Beginning after October 1, 1997, the borrowing base will be limited
solely to 85% of eligible receivables, as defined. The interest rate on the
facility varies from the Eurodollar rate plus 1.50% to the bank's prime rate
plus 1.00% and is payable at the maturity of each draw against the facility. The
line of credit expires on March 31, 1998.

Liberty M.P. has a credit facility with a commercial bank which provides for
maximum availability of approximately $342,000, with interest at the bank's
weighted middle rate plus 1.8%. There were no borrowings for the year ended
December 31, 1996.

F-13
<PAGE>

7. LONG-TERM DEBT:

December 31,
------------------------
1996 1995
--------- ---------
Annuity payable to former shareholder
of INDT, monthly payments of $3,000,
net of unamortized discount of $81,000
and $99,000 at December 31, 1996 and
1995, respectively $ 207,000 $ 223,000
Note payable in connection with
covenant not-to-compete, net of
unamortized discount of $1,000 at
December 31, 1995 (see Note 2) -- 49,000
Other 76,000 79,000
--------- ---------
283,000 351,000
Less- Current portion (66,000) (92,000)
--------- ---------

$ 217,000 $ 259,000
========= =========

Long-term debt maturities as of December 31, 1996 are as follows:

1997 $ 83,000
1998 52,000
1999 37,000
2000 36,000
2001 33,000
Thereafter 123,000
------------
364,000
Less- Unamortized discount (81,000)
------------
$ 283,000
============

8. LEASE COMMITMENTS:

The Company leases office space under non-cancelable operating leases that
expire on various dates through 2001. Rent expense was $771,000, $687,000, and
$709,000 for the years ended December 31, 1996, 1995 and 1994, respectively.

Future minimum payments under the leases as of December 31, 1996, are as
follows:

1997 $ 677,000
1998 673,000
1999 688,000
2000 649,000
2001 87,000
------------

$ 2,774,000
============

F-14
<PAGE>

9. SHAREHOLDER RIGHTS PLAN:

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

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

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

10. STOCK INCENTIVE PLANS:

Stock Option Plans

The Company has two stock option plans, the 1992 Stock Option Plan and the 1988
Stock Option Plan, which provide for the granting of options to purchase an
aggregate of 1,800,000 shares of Common Stock to eligible employees and others.
The 1992 Stock Option Plan provides for the grant of options to purchase up to
1,300,000 shares. There were 578,000 options available for future grant as of
December 31, 1996 under this Plan. No additional options will be granted under
the 1988 Stock Option Plan, which provided for the grant of options to purchase
up to 500,000 shares.

Options granted may be at fair market value of the stock or at a price
determined by a committee of the Board. The stock options generally vest over a
four-year period, except for non-employee director grants which vest
immediately, and are exercisable over a period determined by the committee but
not longer than ten years.

F-15
<PAGE>

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

<TABLE>
<CAPTION>
Aggregate Option Price
Shares Price Per Share
--------- ------------- ---------------
<S> <C> <C> <C>
Outstanding, December 31, 1993 727,100 $ 2,972,000 $ 1.65 - 9.50

Granted 459,500 2,842,000 3.75 - 9.25
Exercised (57,100) (132,000) 1.65 - 6.00
Canceled (76,625) (391,000) 1.65 - 8.75
--------- -------------

Outstanding, December 31, 1994 1,052,875 5,291,000 $ 1.65 - 9.50

Granted 81,000 403,000 4.25 - 6.25
Exercised (9,250) (16,000) 1.65 - 4.00
Canceled (54,875) (260,000) 3.75 - 9.00
--------- -------------

Outstanding, December 31, 1995 1,069,750 5,418,000 $ 1.65 - 9.50

Granted 212,000 1,208,000 3.00 - 4.88
Exercised (15,625) (67,000) 1.65 - 5.25
Canceled (243,625) (1,920,000) 4.00 - 9.75
--------- -------------

Outstanding, December 31, 1996 1,022,500 $ 4,639,000 $ 1.65 - 9.75
========= =============
</TABLE>

At December 31, 1996, options totaling 657,269 were vested at exercise prices
ranging from $1.65 to $9.75 per share. The aggregate exercise price of these
options was $2,539,000 as of December 31, 1996.

Employee Stock Purchase Plan

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

Fair Value of Stock Based Compensation

The Company applies Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees," and the related interpretations in accounting for
its stock option plans. The disclosure requirements of SFAS No. 123 were adopted
by the Company in 1996. Had compensation cost for the Company's common stock
option plans been determined based upon the fair value of the options at the
date of grant, as prescribed under SFAS No. 123, the Company's net loss would
have been increased to the following pro forma amounts:

F-16
<PAGE>

Year Ended December 31,
-----------------------------
1996 1995
------------ ------------
Net loss as reported $ (2,572,000) $ (2,642,000)
Pro forma net loss $ (2,727,000) $ (2,723,000)

Net loss per share as reported $ (.52) $ (.53)
Pro forma net loss per share $ (.55) $ (.55)

Because the SFAS No. 123 method of accounting is not required to be applied to
options granted prior to January 1, 1995, the resulting pro-forma compensation
cost may not be representative of that to be expected in future years. The
weighted average fair value of options granted was $2.56 and $3.39 for the years
ended December 31, 1996 and 1995, respectively.

Information with respect to the options outstanding under the two stock options
plans at December 31, 1996 is as follows:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Outstanding Contractual Exercise Outstanding Exercise
Periods Granted at 12/31/96 Life Price at 12/31/96 Price
--------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
Prior to January 1, 1995 757,990 5.7 years $ 4.22 627,144 $ 3.83
During 1995 62,006 8.4 years $ 5.12 22,625 $ 4.99
During 1996 202,504 9.4 years $ 5.56 7,500 $ 3.21
------------ --------- ------ ---------- ------
1,022,500 6.6 years $ 4.54 657,269 $ 3.86
============ ========= ====== ========== ======
</TABLE>

The fair value of each grant is estimated on the date of grant using the
Black-Sholes option pricing model with the following assumptions used for grants
in 1996 and 1995: no expected dividend yield; volatility - 60%; risk free
interest rate of 5.4% to 7.9% based on the rate in effect on the date of grant;
and an expected life of 6.0 years.

F-17

<PAGE>

11. INCOME TAXES (BENEFIT):

The components of loss before income taxes (benefit) were as follows:

Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------

Income (loss) before income taxes:
Domestic $(2,474,000) $(3,288,000) $ (220,000)
Foreign (61,000) (454,000) 112,000
----------- ----------- -----------
$(2,535,000) $(3,742,000) $ (108,000)
----------- ----------- -----------

The components of income taxes (benefit) were as follows:

Year Ended December 31,
-----------------------------------------

Current provision (benefit):
Federal $ (366,000) $ (294,000) $ (438,000)
State 57,000 64,000 53,000
Foreign 112,000 52,000 4,000
----------- ----------- -----------

(197,000) (178,000) (381,000)
----------- ----------- -----------

Deferred provision (benefit):
Federal (523,000) (708,000) 379,000
State -- 5,000 (2,000)
Foreign (82,000) (228,000) --
----------- ----------- -----------

(605,000) (931,000) 377,000
----------- ----------- -----------

Increase in valuation allowance 889,000 -- --
----------- ----------- -----------

$ 87,000 $(1,109,000) $ (4,000)
=========== =========== ===========

The reconciliation of the statutory federal rate to the Company's effective
income tax rate is as follows:

Year Ended December 31,
----------------------------
1996 1995 1994
------ ------ ------

Statutory tax provision (benefit) (34.0)% (34.0)% (34.0)%
State income taxes, net of federal tax benefit 1.5 1.2 31.4
Foreign taxes 2.0 0.6 33.8
Tax credits utilized (3.8) -- --
Net operating losses for which no tax benefit is
currently available 35.1 -- --
Other, net 2.6 2.6 (34.6)
------ ------ ------
3.4% (29.6)% (3.4)%
====== ====== ======

F-18

<PAGE>

The tax effect of temporary differences that give rise to deferred income taxes
are as follows:

December 31,
--------------------------
1996 1995
----------- -----------
Gross deferred tax asset:
Accruals and reserves currently not deductible $ 385,000 $ 250,000
Net operating loss carryforwards 1,114,000 480,000
Tax credit carryforwards 305,000 278,000
Intangible asset amortization -- 60,000
Other 53,000 57,000
Valuation allowance (889,000) --
----------- -----------

$ 968,000 $ 1,125,000
=========== ===========

Gross deferred tax liability:
Depreciation $ (203,000) $ (4,000)
Other (13,000) (108,000)
----------- -----------

$ (216,000) $ (112,000)
=========== ===========

As December 31, 1996, the Company had net operating loss carryforwards and tax
credit carryforwards for federal income tax purposes of approximately $2,131,000
and $511,000, respectively. The net operating loss carryforwards and tax credit
carryforwards will begin to expire in 2009 and 2007, respectively.

During 1996, management evaluated the realizability of the deferred tax asset
under the guidelines set forth in SFAS No. 109 and recorded a valuation
allowance. Realization of the remaining carryforwards and timing differences are
dependent on generating sufficient taxable income prior to expiration of the
carryforwards. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced. Any future benefits recognized from
the reduction of the valuation allowance will result in a reduction of income
tax expense.

12. SAVINGS PLAN:

The Company has established a Retirement Savings Plan that is intended to
qualify under Sections 401(a) and 401(k) of the Internal Revenue Code and covers
substantially all employees. The Company currently matches 25% of eligible
employees' contributions up to a maximum of 1.5% of each employee's
compensation. The expense under this plan was approximately $136,000, $88,000
and $51,000 for the years ended December 31, 1996, 1995 and 1994, respectively.

F-19

<PAGE>

13. JOINT VENTURE:

In December 1995 the Company formed a joint venture with Electricite de France
for the sale of products and services within the European Union. The Company
invested $116,000 for a 51% ownership interest in Liberty M.P., SAS. Liberty
M.P. had revenues of $2,423,000 and a net loss of $101,940 for the year ended
December 31, 1996. Liberty M.P. had no material operating activities through
December 31, 1995.

F-20

<PAGE>

Schedule II

LIBERTY TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Additions
Balance at Charged to Balance at
Beginning Costs and Other End of
Classifications of Period Expenses Deductions Increases (A) Period
--------------- --------- -------- ---------- ------------- ------
<S> <C> <C> <C> <C> <C>
For the Year Ended,
December 31, 1996
Allowance for doubtful
accounts $ 111,000 $ 81,000 $ 10,000 $ -- $ 182,000
=========== ============= ============ ============ ============

For the Year Ended,
December 31, 1995
Allowance for doubtful
accounts $ 136,000 $ 169,000 $ 194,000 $ -- $ 111,000
=========== ============= ============ ============ ============

For the Year Ended,
December 31, 1994
Allowance for doubtful
accounts $ 83,000 $ 31,000 $ 81,000 $ 103,000 $ 136,000
=========== ============= ============ ============ ============
</TABLE>

(A) Balances as of acquisition dates of INDT and Beta (see Note 2 of Notes to
Consolidated Financial Statements)

F-21

<PAGE>

INDEX TO EXHIBITS

Exhibit Sequentially
No. Numbered
Description Page
----------- ----

2.1 Agreement and Plan of Merger dated as of March 11,
1994 among the Company, Liberty Acquisition
Corp., Industrial NDT Company, Inc., John D. Ridgeway,
Jr. and Sandra R. Miles. The Exhibits and Schedules
to the Agreement and Plan of Merger other than the
Disclosure Memorandum (not including attachments
thereto), the Registration Rights and Stock Restriction
Agreement and the Employment Agreements are not being
filed with this Annual Report on Form 10-K.**...............
2.2 Registration Rights and Stock Restriction Agreement
between the Company and the shareholders of INDT dated
as of March 28, 1994**......................................
2.4 Stock Purchase Agreement dated as of August 9, 1994 by
and among Liberty Technologies, Inc., 3039111 Canada,
Ltd., and the shareholders of Beta Monitors & Controls,
Ltd. ( which are listed on Schedule A attached to the
Stock Purchase Agreement.)***...............................
3.1 Restated Certificate of Incorporation of the Company*.......
3.2 By-Laws of the Company, Effective November 10, 1992*........
4.1 Specimen Stock Certificate*.................................
10.1 1992 Stock Option Plan and related Form of Stock Option
Agreement*..................................................
10.2 1988 Stock Option Plan*.....................................
10.3 Employee Stock Purchase Plan*...............................
10.4 Retirement Savings Plan*....................................

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

** Filed as an exhibit to the Company's Report on Form 8-K
dated April 8, 1994.

*** Filed as an exhibit to the Company's Report on Form 8-K
dated August 24, 1994.

**** Filed as an exhibit to the Company's Report on Form
10-K for the year ended December 31, 1993.

***** Filed as an exhibit to the Company's Report on Form
10-K for the year ended December 31, 1994.

****** Filed as an exhibit to the Company's Report on Form
10-K for the year ended December 31, 1995.

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

<PAGE>

10.5 Agreements between the Company and each of R. Nim Evatt
and Anthony L. Moffa*.......................................
10.6 Lease between the Company and Lee Park Investors, L.P. with
respect to the Company's principal executive offices*.......
10.7 Asset Purchase Agreement between the Company, Boggs
Technical Services, Inc. and Marcus Boggs*..................
10.9 Form of Employee Innovation and Non-Disclosure
Agreement*..................................................
10.11 Agreement between the Company and B&W Nuclear
Services dated August 5, 1988*..............................
10.13 Settlement Termination of Product Licensing
Agreement*..................................................
10.14 Restrictive Covenant Agreement between the Company
and Marcus Boggs*...........................................
10.16 Credit Agreement between the Company and First
Fidelity Bank, N.A. as amended dated December
30, 1995*******.............................................
10.17 Joint Development Agreement between the Company
and EdF****.................................................
10.19 Joint Venture Agreement between the Company and CHARTH,
an affiliate of EdF, dated November 22, 1994*****...........
10.20 Amended Joint Venture Agreement between the Company and
CHARTH, an affiliate of EdF dated December 1995******.......
10.21 Teaming Agreement Between Framatome and Liberty
Technologies, Inc. for Spain dated March 1, 1995******......
10.22 Technology Transfer and License Agreement between the
Company and Quantex Corporation dated June 14,
1994******..................................................
10.23 Teaming Agreement Between Framatome, Liberty M.P., S.A.S.
and Liberty Technologies, Inc. for France dated January
1, 1996******...............................................
10.24 Shareholders' Rights Plan*******............................
10.25 Credit Agreement between the Company and First Union
Bank, N.A. as amended dated October 11, 1996................ 57
10.26 Credit Agreement between the Company and First Union
Bank, N.A. as amended dated February 27, 1997............... 72
10.27 Credit Agreement between the Company and First Union
Bank, N.A. as amended dated April 1, 1997................... 160

10.28 Agreement between the Company and Robert L. Leon............ 453
11.1 Earnings per share calculation.............................. 450
21.1 Subsidiaries................................................ 451
23.1 Consent of Arthur Andersen LLP.............................. 452

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Conshohocken, Commonwealth of Pennsylvania, on the 14th day of April, 1997.

LIBERTY TECHNOLOGIES, INC.

By:/s/ R. Nim Evatt
-----------------------------------
President, Chief Executive Officer and
Chairman of the Board

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

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ R. Nim Evatt President, Chief Executive Officer and Chairman of 9/18/97
- -------------------------- the Board (principal executive officer)
R. Nim Evatt

/s/ Daniel G. Clare Vice President - Finance (principal financial and 9/18/97
- -------------------------- accounting officer)
Daniel G. Clare

/s/ Robert L. Leon Director 9/18/97
- --------------------------
Robert L. Leon

/s/ James D. Rosener Director 9/18/97
- --------------------------
James D. Rosener

/s/ Richard J. Defieux Director 9/18/97
- --------------------------
Richard J. Defieux

/s/ John A. Hinds Director 9/18/97
- --------------------------
John A. Hinds
</TABLE>
52

<PAGE>

EXHIBIT 10.28

LIBERTY
[LOGO] -------
TECHNOLOGIES, INC. December 28, 1995

Mr. Robert L. Leon
1401 Comly Court
Maple Glen, PA 19002

Dear Bob:

This will confirm the terms and conditions upon which you will be employed
by Liberty Technologies, Inc. ("Liberty" or the "Company") beginning January 1,
1996 and certain other matters regarding your relationship with Liberty.

1. Termination of Prior Agreements. Except as set forth specifically in
this Agreement, all agreements, understandings, course of dealings, practices,
and policies between you on the one hand, and Liberty and its subsidiaries and
affiliates on the other hand, are hereby terminated.

2. Term. This Agreement shall commence on January 1, 1996 and shall
continue through and including December 31, 1998, whereupon your employment
thereunder shall terminate. From the date hereof through and including December
31, 1995, you shall remain employed by the Company at your current salary and
shall be entitled to the benefits currently made available to employees of the
Company.

3. Duties.
a. You shall be available to the Company at the Company's request,
without limitation under the condition of reasonable notice, to perform
enginnering related services, including product development and planning, patent
development and other engineering type services; and also marketing and travel
related services, including attendance at industry meetings, and marketing
related meetings, and all associated travel. You will be required in year one to
be available for a minimum of eighty-five (85) days of such services in any
combination; in year two to be available for a minimum of sixty-two (62) days of
such service in any combination; and in year three to be available for a
minimum of thirty-eight (38) days of such services in any combination.
Reimbursement for ordinary and necessary business expenses incurred in
conjunction with these services will be made in accordance with Company policy.

b. You shall devote your business attention to the performance of
the services to be provided thereunder. During the term of this contract, you
shall not engage in any business activity, or become financially interested in
(defined for this purpose, as directly or indirectly owning or controlling, in
fact, more than ten percent (10%) of the equity of such entity) in any business
entity that is competitive with the business of the Company on the date of this
agreement.

c. All Intellectual Property, products and patents developed during
the period of this agreement which are consistent with the then business of
the Company shall become the property of the Company.

<PAGE>

Mr. Robert L. Leon
December 28, 1995
Page 2

4. Compensation.
a. During the term of this Agreement, so long as you remain
available to perform reasonable services requested by the Company, you shall
received an annual salary of one hundred and two thousand dollars ($102,000.00)
in the first year; seventy-four thousand four hundred dollars ($74,400.00) in
year two; and forty-five thousand six hundred dollars ($45,600.00) in year
three. All annual compensation will be paid bi-weekly under the normal Company
pay cycle.

b. Service days of either type, whether engineering related or
marketing and travel, worked in excess of eighty-five (85) in year one, in
excess of sixty-two (62) in year two, and in excess of thirty-eight (38) in year
three will be compensated at a rate of $800.00/day. All such additional
compensation shall be paid in the pay period associated with their occurrance.

c. For such term, you shall be entitled to participate in the
Company medical, dental, flexible benefit, and life insurance programs (however,
your life insurance coverage will be limited to $65,000) and to participate in
the Company sponsored retirement savings plan (401K).

d. Because you are to be employed on a less than full-time basis,
you will not be entitled to any vacation or holidays.

e. In the event you become disabled, as defined by the group
disability policy maintained by Liberty for its eligible employees at the time
you become disabled, and are unable to perform the services outlined in
Paragraph 3, your compensation and participation in the Company Benefits
Programs will continue until the expiration date of this contract.

f. In the event of your death during the term of this agreement,
your compensation and participation in the Company Benefit Program will cease at
the end of the month of death; however, medical and dental benefits which would
be available to your spouse under the Consolidated Omnibus budget Reconciliation
Act of 1985 (COBRA) will be paid for by the Company until December 31, 1998.

g. You will receive 6,000 Incentive Stock Options at the initiation
of this contract. These options will be immediately vested as of January 2,
1996, and be priced at the closing of the market on that date.

h. Your existing vested stock options will be maintained for the
full term of the aagreement under the provisions of the Company 1992 Stock
Option Plan. Your existing stock options that are not vested as of December 31,
1995 will be allowed to vest as initially scheduled during the term of the
agreement and will be maintained for the remaining full term of the agreement.

<PAGE>

Mr. Robert L. Leon
December 28, 1995
Page 3

5. Trading Policy. During the term of the agreement, or for one year after
you are no longer a member of the Board of directors, whichever is less, you
agree to be bound as an "Insider" under the terms of the Company's Insider
Trading Policy, a copy of which has been delivered to you.

The obligations of the Company under this agreement shall survive any
changes in management or control of the Company. During the period of this
agreement if Libery Technologies, Inc. policy prevents you from working the
annual minimum number of days as described in Paragraph 3a, you will still be
compensated under the terms and conditions of this agreement.

Please indicate your agreement and intention to be legally bound hereby
with the foregoing by signing and returning a copy of this signed letter to me.

Sincerely,
LIBERTY TECHNOLOGIES, INC.

/s/ R. Nim Evatt
-------------------------------------
R. Nim Evatt
President

ACCEPTED AND AGREED:

/s/ Robert L. Leon
Robert L. Leon ------------------------
12/28/95