<PAGE>
 
                                    [LOGO]



To Our Stockholders:

          In 1997, TCI implemented a plan to set the foundation for enhanced
profitability and competitiveness.  The plan set as goals:

               --   Regaining lost sales momentum and market share

               --   Identifying and reducing costs while enhancing quality

               --   Developing resources to grow its business while developing a
                    proactive plan to deal with its previously disclosed pipe
                    replacement program

               --   Enhancing its expertise on the logistics/operations front.

ACHIEVEMENTS

          After two years of sales decline, TCI regained its sales momentum and
increased its market share.  The Company's net sales increased to $45.6 million
in 1997 from $37.7 million in 1996.  The two major contributors to this sales
increase were our redirected sales efforts and a buoyant North American industry
climate.

          We started in early 1997 to refocus our sales force on the end users
of our products while increasing the coverage of our distribution system.  We
also increased our direct sales force and completed our warehouse expansion
program to allow more direct access to our products by our customers, as well as
to make us more competitive in freight costs.

          As part of our overall cost reduction and enhanced quality programs,
we installed a pipe manufacturing line in Oaks, Pennsylvania.  This line
obviates the need to purchase primary pipe at excessive prices from our prior
sole supplier and should, over time, result in significant cost savings.
Although we began manufacturing, with full Underwriters' Laboratories approval
in October, 1997, we will realize the cost efficiencies as we start selling our
manufactured products in early 1998.  This new line should enable us not only to
achieve substantial savings, but also to control our quality and substantially
improve our product development capability.  To this end, we have installed and
staffed a quality control laboratory in our facilities in Oaks.  We also
targeted other major cost reduction opportunities from which we should benefit
during 1998.

                                       1
<PAGE>
 
          To increase our long term revenue base and to respond to customer
needs, we initiated a custom part service business at American Containment in
Bakersfield, California.  This unit will focus solely on this business and
become the field technical arm of TCI, as well.  This will be a natural
complement to our parts business and should enhance our field level expertise
and resources for our customers.

          To focus even more on cost reduction and efficiency, we have separated
administration from operations and hired a dedicated, established senior
logistics and operations officer.

          In 1997 we also established a proactive program to deal with the
deteriorating piping supplied to us by Dayco prior to 1994 and recorded an $18.6
million charge to income primarily to increase our warranty reserve to cover
expected future costs of replacing this pipe.

          Finally, following the negotiations breakdown with Dayco on the pipe
warranty issue in early fall, we initiated litigation against Dayco to recover
the damages we sustained as a result of Dayco's deteriorating pipe.

THE RESULTS

          While we continued to establish the foundation for future
profitability and push sales to record levels, increases in costs at our Oaks
facility in the first six months and efficiency issues related to our large
volume increases at our Bakersfield facility, taken together with the special
charge discussed above, reduced our profitability substantially, resulting in a
net loss of $12.4 million in 1997.

OUTLOOK

          In 1997, TCI has laid the foundation for enhanced profitability with a
plan for increased sales, efficiencies and identifying cost reduction.  This
foundation, coupled with an anticipated healthy industry, should result in a
much better year for TCI in 1998.

                                       2
<PAGE>
 
BOARD OF DIRECTORS

          Chuck Frey, a friend, mainstay in our industry, and long-time
director, will be retiring from our Board as of our annual meeting.  We wish to
thank him for his dedicated efforts over the last seven years in shaping this
company and wish him well.

                                    Very truly yours,


                                /s/ Pierre Desjardins
                                    Pierre Desjardins
                                    Chairman, President and Chief Executive
                                    Officer

                                       3
<PAGE>
 
                            SELECTED FINANCIAL DATA
 
The following table sets forth certain consolidated summary
financial data of the Company for the periods presented.

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                     1993      1994      1995      1996       1997
                                                                  -------   -------   -------   -------   --------
                                                                        (In thousands, except per share data)
<S>                                                              <C>        <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
 Net Sales......................................................  $31,500   $40,355   $39,069   $37,730   $ 45,649
 Cost of sales (excluding warranty
  expense)......................................................   17,154    22,174    23,058    24,288     30,698
                                                                  -------   -------   -------   -------   --------
                                                                   14,346    18,181    16,011    13,442     14,951
 Warranty expense...............................................      473       605     8,073       747     18,596
                                                                  -------   -------   -------   -------   --------
 Gross profit (loss)............................................   13,873    17,576     7,938    12,695     (3,645)
 Selling, general and administrative............................    7,650     9,350    10,262    10,665     12,307
 Amortization of patents, licenses and
  goodwill(1)(2)................................................      314       356       483       508        521
 Loss on write-off of patent(2).................................       --     1,847        --        --        565
 Other operating expense........................................       --        --        --        --      1,800
                                                                  -------   -------   -------   -------   --------
 Income (loss) from operations..................................    5,909     6,023    (2,807)    1,522    (18,838)
  Interest expense..............................................    1,222       286       146       362        627
 Other expense(3)...............................................       --        --       407        --         --
                                                                  -------   -------   -------   -------   --------
 Income before income taxes.....................................    4,687     5,737    (3,360)    1,160    (19,465)
 Income tax expense (benefit)...................................    2,036     2,391    (1,112)      762     (7,109)
                                                                  -------   -------   -------   -------   --------
 Net income (loss)(8)...........................................  $ 2,651   $ 3,346   $(2,248)  $   398   $(12,356)
                                                                  =======   =======   =======   =======   ========
 Earnings (loss) per common share(4)
  -basic........................................................     $.78     $(.48)     $.09    $(2.66)
                                                                  =======   =======   =======   =======
 Earnings (loss) per common share -
  assuming dilution.............................................               $.78     $(.48)     $.08     $(2.66)
                                                                            =======   =======   =======   ========

                                                                                     December 31,
                                                                  ------------------------------------------------
                                                                     1993      1994      1995      1996       1997
                                                                  -------   -------   -------   -------   --------
                                                                                   (In thousands)
<S>                                                               <C>       <C>       <C>       <C>       <C>
BALANCE SHEET DATA:
 Working capital (deficit)......................................     (993)  $ 7,776   $ 8,224   $ 8,261      1,128
 Goodwill, patents, patent rights and
  licenses, net(1)(2)...........................................    7,863    10,449    10,317    10,700      9,672
 Deferred Income Taxes..........................................      234       771     3,228     1,701      7,420
 Total Assets...................................................   19,132    26,901    30,702    34,965     40,047
 Line of credit borrowings(5)(7)................................    1,606       983       251     3,677      3,197
 Debt(6)(8).....................................................    5,800        --       654     2,664      3,049
 Subordinated debt to related party(6)..........................    2,000        --        --        --         --
 Stockholders' equity(6)........................................    4,573    20,804    18,616    19,016      6,440

</TABLE>
____________________

(1)  In connection with the initial public offering by the Company of 1,346,600
     shares of its common stock (the "Offering"), the Company acquired the Tank
     Jacket patent from Groupe Treco Ltee ("Treco"), a majority stockholder of
     the Company, in consideration for the issuance by the

                                       4
<PAGE>
 
     Company to Treco of 45,000 shares of the Company's common stock.  The Tank
     Jacket patent was valued at $427,500.  See Note 11 of Notes to Consolidated
     Financial Statements appearing elsewhere herein.

(2)  On December 16, 1994, the Company and Mr. Keith Osborne entered into a
     settlement agreement pursuant to which the parties settled an interference
     proceeding (the "Interference Proceeding") commenced by Mr. Osborne against
     the Company.  In connection with the settlement of the Interference
     Proceeding, the Company wrote-off the remaining unamortized portion of the
     Company's patent pertaining to the retractability feature of Enviroflex and
     capitalized amounts paid to acquire a license and related costs.  See Note
     2 of Notes to Consolidated Financial Statements appearing elsewhere herein.
     See also "Item 3. Legal Proceedings."

(3)  During 1995, the Company incurred non-recurring transaction expenses,
     consisting primarily of legal fees and special committee and board fees of
     $407,000, related to negotiations with a third party and certain members of
     management with respect to their proposed acquisition of the Company.  In
     August 1995, the Company announced that the acquisition negotiations had
     been terminated and charged all costs associated therewith to other
     expense.

(4)  Based on 4.3 million weighted average shares outstanding during 1994 and
     4.6 million during 1995, 1996 and 1997.

(5)  The proceeds from the Offering were used, in part, to repay, in full, the
     bank debt and the subordinated debt to a related party and for the
     temporary repayment of the Company's working capital line of credit.

(6)  On March 4, 1994, the Company completed the Offering and received net
     proceeds of approximately $11.0 million.

(7)  Increases in the line of credit and debt in 1996 were due to increased
     working capital requirements for, among other things, warranty charges
     related to the Enviroflex pipe, as well as two term loans for expansion and
     the acquisition of American Containment, Inc.

(8)  The net loss resulting principally from the $20.4 million of warranty and
     other expense in 1997 creates a deferred tax benefit of approximately $7.4
     million.  This future tax benefit is reflected under "Deferred Income
     Taxes" (both current and long lived) on the Company's balance sheet which
     will be deductible in future years.

(9)  The other expense in 1997 of $1.8 million was associated with the legal
     settlement regarding licensing of certain patented technology.

                                       5
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion and analysis of financial condition and
results of operations of the Company should be read in conjunction with the
consolidated financial statements of the Company, including the related notes
thereto, appearing elsewhere herein.

1997 Adjustment to Warranty Reserve
-----------------------------------

          In 1997 the Company sustained a significant net loss.  This loss was
principally due to a $20.4 million charge to earnings in the third quarter
primarily to increase the Company's warranty reserve.  This increase is intended
to cover the future cost of inspecting and replacing pipe with deteriorating
cover material on the retractable inner pipe portion of the Company's double-
wall, underground fuel dispensing and containment systems installed between 1990
and 1994.  As previously reported, the deterioration results from a
microbiological fungus which, under certain conditions, affects the outer layer
of the system's primary (inner) retractable pipe.  The Company purchased the
retractable pipe on a sole source basis from Dayco-Products, Inc. ("Dayco"), a
subsidiary of Mark IV Industries, which designed and manufactured the pipe.  The
outer cover of the retractable pipe was reengineered in 1994 to eliminate this
problem.  This fungus does not affect the system's (outer) secondary containment
pipe or the other portions of the Enviroflex systems.

          During the third quarter, the Company completed its review of the pipe
problem which was initiated in 1996 by surveying most of the identified sites.
The Company concluded in its review that the problem had accelerated in some
areas and that the majority of the pipe would have to be replaced over a period
of time.  Also, the Company concluded from its negotiations with Dayco that
substantial financial assistance would not be forthcoming from Dayco in
connection with the repair and replacement of the deteriorating pipe and, as a
result, the Company initiated legal proceedings against Dayco.  See Note 11 to
"Notes to Financial Statements."  As part of its review, the Company identified
the number of sites likely to be affected and the cost to replace pipe at these
sites.  To date, the Company has completed replacement of the pipe at over 1,000
sites and estimates that there are approximately 3,000 additional sites where
pipe susceptible to deterioration was installed.

          Approximately $18.6 million of the $20.4 million charge primarily
represented management's assessment of the cost of inspecting and replacing pipe
at the remaining 3,000 sites over a two to three year period, assuming no
financial assistance from Dayco.  Although Dayco had previously agreed to credit
certain overcharges and had made an accommodation to provide replacement pipe
through the end of 1997, Dayco has not contributed

                                       6
<PAGE>
 
significantly to any other costs for replacement of pipe to date and has not
committed to cover any future expense.  The Company has commenced litigation
against Dayco in an effort to require Dayco to assume responsibility for its
pipe.  See "Note 11" to "Notes to Financial Statements."  In an effort to
eliminate its reliance on Dayco, provide better quality and reliability and
reduce costs, the Company has commenced manufacturing of a new primary pipe at
its Oaks, Pennsylvania facility.  The remainder of the charge is due to a write
down in inventory and costs incurred in connection with licensing patented
technology.

RESULTS OF OPERATIONS - 1995-1997

          The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:

                                            YEAR ENDED DECEMBER 31,
                                          ---------------------------
                                            1995     1996      1997
                                          --------  -------  --------

Net sales...............................    100.0%   100.0%    100.0%
Cost of sales (excluding warranties)....     59.0     64.4      67.2
                                            -----    -----    ------
                                             41.0     35.6      32.8
Warranty expense........................     20.7      2.0      40.7
                                            -----    -----    ------
Gross profit............................     20.3     33.6      (7.9)
 
Selling, general and administrative.....     26.3     28.3      27.0
Amortization of patents, licenses and
  goodwill..............................      1.2      1.3       1.1
Loss on write-off of patent.............       --       --       1.2
Other operating expense.................       --       --       3.9
                                            -----    -----    ------
Operating income (loss).................     (7.2)     4.0     (41.1)
Interest expense........................      0.4      0.9       1.4
Other expense...........................      1.0       --        --
                                            -----    -----    ------
Income (loss) before income taxes.......     (8.6)     3.1     (42.5)
Income tax expense (benefit)............     (2.8)     2.0     (15.6)
                                            -----    -----    ------
Net income (loss).......................    (5.8)%     1.1%   (26.9)%
                                            =====    =====    ======

                                       7
<PAGE>
 
          Net Sales

          The Company's net sales were $45.65 million in 1997, compared to
$37.73 million in 1996, and $39.07 million in 1995.

          Net sales increased $7.92 million, or 21.0%, in 1997 as compared to
1996. The increase was primarily attributable to strong sales of underground
flexible piping systems in the United States due to the Company's redirected
sales effort, the buoyancy of the North American market, as well as an increase
in sales at American Containment, Inc.

          Net sales decreased $1.34 million or 3.4% in 1996 as compared to 1995.
The decrease was primarily attributable to a decrease in sales of Enviroflex
piping systems in North America and the United Kingdom, increased competition
worldwide in the flexible pipe market, as well as an increase in discounting to
customers.

          Gross Profit

          Components of the Company's cost of sales include product
manufacturing costs including amounts paid to various third party manufacturers,
costs associated with operating the Company's warehouses, depreciation of molds,
tools and equipment, warranty expense and limited assembly costs. The Company's
gross loss was ($3.65) million in 1997, compared to gross profit of $12.69
million in 1996 and $7.94 million in 1994.

          The Company's gross profit for the year ended 1997 decreased $16.34
million or 128.7%, compared to 1996.  The decrease resulted primarily from an
$18.6 million charge to earnings to increase the Company's warranty reserve
referred to above.

          Gross profit before the charge increased $1.51 million, or 11.2%,
compared to 1996.  The increase in gross profit before the charge resulted
primarily from increased sales.

          Gross profit increased $4.75 million or 59.8% in 1996 as compared to
1995. The increase resulted primarily from a decrease in warranty charge from
$8.10 million warranty in 1995 to $747,000 in 1996.  This increase was partially
offset by an increase in discounting to customers, an increase in the cost of
certain purchased materials, and an increase in freight costs and manufacturing
overhead.

          Operating Expense

          Selling, general and administrative expenses consist primarily of
salaries and related employee benefits, payroll taxes, commissions, royalties,
legal expenses and other general, administrative and overhead costs.  Selling,
general and administrative expenses were $12.31 million in 1997, compared to

                                       8
<PAGE>
 
$10.66 million in 1996.  Selling, general, and administrative expenses in 1997
increased $1.64 million or 15.4%, compared to 1996.  The increase was due to
administrative costs associated with the acquisition of American Containment,
Inc., acquired in July, 1996, as well as increased litigation expenses.

          Selling, general and administrative expenses increased $403,000, or
3.9%, in 1996, as compared to 1995, which was primarily attributable to an
increase in selling and administrative expenses related to the acquisition of
American Containment, Inc. and additional corporate personnel.

          The change in selling, general and administrative expenses as a
percentage of net sales to 27.0% in 1997, from 28.3% in 1996 and 26.3% in 1995,
resulted primarily from selling, general and administrative expenses being
spread over a larger volume of sales in 1997 and, in 1996, from increased
selling, general and administrative expenses as a result of the acquisition of
American Containment, Inc.

          Research and development expenses are included in the general expense
category and were approximately $527,000, $786,000 and $760,000, in 1997, 1996
and 1995, respectively.

          Amortization of Intangibles

          Amortization of intangibles consists of the amortization of goodwill
over a period of 40 years and the amortization of various patents and licenses
that are amortized on a straight-line basis over the estimated lives of the
patents and licenses (which range from 13 to 17 years) at the acquisition date
or subsequent issuance date.

          Interest Expense

          Interest expense was $627,000, $362,000 and $146,000 in 1997, 1996 and
1995, respectively.  The increase of $265,000 from 1996 to 1997 was due to
increased borrowings under the Company's line of credit sufficient to permit the
purchase and installation of a new manufacturing line for primary pipe at the
Company's Oaks, Pennsylvania facility, as well as from increased cash used for
warranty work.

          The increase in interest expense of $216,000 in 1996 compared to 1995
was due to an increase in debt used to acquire American Containment, Inc. and an
increase in the Company's line of credit activity for, among others, warranty
charges related to the Enviroflex pipe.

          Other

          The Company incurred non-recurring transaction expenses, consisting
primarily of legal fees, special committee and board fees and related expenses
relating to offers made by Danaher

                                       9
<PAGE>
 
Corporation, certain members of management and others to acquire the outstanding
common stock of the Company during 1995.

          Income Taxes

          Income tax expense (benefit) was ($7.11 million), $762,000 and ($1.11
million) in 1997, 1996 and 1995, respectively.  The fluctuation in income tax
expense (benefit) during the three-year period was primarily due to changes in
the Company's income before income taxes.  The Company recorded deferred income
tax assets of approximately $7.42 million and $1.70 million in 1997 and 1996,
respectively, resulting from future tax benefits related to future deductibility
of warranty expense referred to above.  See Note 10 of Notes to Consolidated
Financial Statements appearing elsewhere herein for additional information
concerning variations in the customary relationship between income before income
tax expense (benefit) and income tax expense (benefit).

          Net Income

          The Company's net loss was ($12.36) million in 1997, as compared to
net income of $398,000 in 1996, and a net loss of ($2.25) million in 1995.  The
decrease in net income in 1997 compared to 1996 was due primarily to a $20.4
million charge to earnings to increase the Company's warranty reserve, as well
as charges associated with licensing of certain patented technology.

          The increase in net income in 1996, as compared to 1995, resulted from
an additional warranty charge of $7.50 million in 1995, and non-recurring
transaction expense.  This was partially offset by a decrease in gross margin
due to, among other things, increased customer discounts and costs of certain
purchased materials.

          Seasonality and Economic Conditions

          The Company's sales are affected by the timing of planned construction
of new service stations and the retrofitting of existing service stations by end
users, both of which are influenced by inclement weather and general economic
conditions. Accordingly, the Company's net sales and operating results for the
quarter ended March 31 are generally adversely affected.

          Inflation

          Management does not believe that inflation has had a material impact
upon results of operations during the years ended December 31, 1997, 1996 or
1995.

                                       10
<PAGE>
 
          Recent Accounting Pronouncements.

          On December 15, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share".  SFAS
128 eliminates the primary and fully diluted earnings per share and requires the
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings.  Basic earnings
per share excludes the dilution and is computed by dividing income available to
common shareholders by the weighted average number of shares outstanding during
the period.  Dilutive earnings per share takes into account the potential
dilution that could occur if securities and other contracts to issue common
stock were exercised and converted into common stock.  Prior periods income
(loss) per share calculations have been restated to reflect the adoption of SFAS
No. 128.

          In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards to provide prominent disclosure of
comprehensive income items.  Comprehensive income is the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources.  SFAS No. 130 is effective for all periods
beginning after December 15, 1997.  Subsequent to the effective date, all prior-
period amounts are required to be restated to conform to the provisions of SFAS
No. 130.  The adoption of SFAS 130 is not expected to have a material impact on
the Corporation's financial position or results of operations.

          In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information.  SFAS 131 requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders.  It also
requires that public business enterprises report certain information about their
products and services, the geographic areas in which they operate, and their
major customers.  SFAS No. 131 is effective for all periods beginning after
December 15, 1997.  The adoption of SFAS 131 is not expected to have any impact
on the Corporation's financial position or results of operations.

          Year 2000 Disclosure

          Management has initiated an enterprise-wide program to prepare the
Company's computer systems and applications for the year 2000.  The Company
expects to incur internal staff costs as well as consulting and other expenses
related to infrastructure and facilities enhancements necessary to prepare the
systems for the year 2000.  Testing and conversion of system applications is
expected to cost approximately $250,000.

                                       11
<PAGE>
 
          Financial Condition; Liquidity and Capital Resources

          The Company had working capital of $1.13 million at December 31, 1997,
compared to $8.26 million in 1996 and $8.22 million at December 31, 1995.

          The Company satisfies its working capital needs primarily through
funds generated by operations and by borrowings under a $6 million unsecured
line of credit facility with a commercial bank. Amounts borrowed under this line
of credit bear interest at the bank's national commercial rate (8.5% at December
31, 1997).  At December 31, 1997, the Company owed $3.20 million under the line
of credit.  In addition, the Company has a $1.06 million secured credit facility
with the commercial bank for expansion purposes.  At December 31, 1997, the
Company has borrowed $808,000 under this facility.

          In 1996, the Company executed a term loan with a bank for $1.0 million
which was used for the acquisition of American Containment, Inc.  The term loan
bears interest at the bank's national commercial rate plus .125% (8.625% at
December 31, 1997.) and is secured by the assets of American Containment, Inc.
At December 31, 1997, $733,000 was outstanding under the term loan.  The loan
requires the payment of equal monthly installments of principal in the amount of
$16,667 plus interest on the unpaid principal balance.

          In 1996, the Company signed a note payable to a third party of
$500,000.  The note payable bears an interest rate of 8% compounded annually.
At December 31, 1997, a balance of $187,500 was outstanding under the note
payable.  The note requires the payment of equal quarterly installments of
$62,500 plus interest on the unpaid principal balance.

          In 1995, the Company executed a term loan with a bank for $1.60
million which is required to be used exclusively for the purchase of equipment.
The term loan bears interest at the bank's national commercial rate plus .125%
(8.625% at December 31, 1997) and is secured by all equipment financed
thereunder.  At December 31, 1997 and 1996, $1.20 million and $1.29 million,
respectively, were outstanding under the term loan.  The loan requires the
payment of equal monthly installments of principal in the amount of $26,667 plus
interest on the unpaid principal balance.

          In February, 1998, the Bank committed, subject, among other things, to
negotiation of definitive loan documentation, to extend a new $10 million credit
facility to the Company.  The loan would be secured by essentially all of the
Company's assets.  Under the facility the Company would be entitled to borrow,
repay and reborrow an amount equal to the sum of 80% of "eligible receivables"
(to be defined in the definitive loan documents) and 25%-35% of the value of
"eligible inventory" (to be defined in the definitive loan documentation), not
to exceed $10 million.

                                       12
<PAGE>
 
The loan would bear interest at the lender's prime rate plus 1/2%.  The facility
would be subject to a number of covenants which have yet to be negotiated, plus
other usual terms and conditions.

          The Company invested $2.20 million, $1.91 million and $2.12 million in
capital equipment and leasehold improvements in 1997, 1996 and 1995,
respectively.  The purchase of product molds and tooling constituted $501,000,
$737,000 and $992,000 of these capital expenditures in 1997, 1996, and 1995,
respectively.  Total capital expenditures during 1998 are expected to be
approximately $1.17 million.  Also, the Company is evaluating an additional
expansion of its manufacturing line which would cost about $1.2 million.  The
Company intends to use its cash flow from operations and, to the extent
necessary, its working capital line of credit and term loans to fund its 1998
capital expenditures.

          Because the Company does not discharge a significant amount of
material into the environment, the Company does not anticipate that it will
incur any material costs or expenses in complying with federal, state and local
environmental laws or otherwise relating to the protection of the environment.
The Company does not anticipate that it will incur material costs and expenses
for research and development necessary to modify its existing product lines to
comply with changes in such laws and could, under certain circumstances, become
liable with respect to the discharge of materials into the environment that
results from a defect in a product.

          The Company believes that its presently available funds, together with
cash flow expected to be generated from operations and amounts available under
its commitments from its commercial bank, will be adequate to satisfy its
anticipated working capital requirements for the foreseeable future.

          On March 17, 1998, the Company's principal shareholder purchased from
the Company 400 shares of authorized perpetual preferred stock at $10,000, cash,
per share, or $4 million in the aggregate.  (See note 14 to "Notes to Financial
Statements").

                                       13
<PAGE>
     
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To the Board of Directors and Shareholders,
Total Containment, Inc.

We have audited the consolidated balance sheet of Total Containment, Inc. (a
Pennsylvania Corporation) and Subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year ended December 31, 1997.  These financial statements are
the responsibility of the Corporation's management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.  We also audited the adjustments to shares and earnings per share data
for 1996 and 1995 due to the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" as discussed in Note 8.  In our opinion
such adjustments are appropriate and have been properly applied.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform our 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 consolidated 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 our audit provides a reasonable basis for our opinion.

In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Total Containment, Inc. and Subsidiaries at December 31, 1997, and the
consolidated results of their operations and their consolidated cash flows for
the year ended December 31, 1997, in conformity with generally accepted
accounting principles.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania
February 12, 1998 (except for Note 14 as to which the date is March 17, 1998)
     
                                       14
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Stockholders
and Board of Directors of
Total Containment, Inc.


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Total Containment, Inc. and its subsidiaries at December 31, 1996, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.  These financial statements are the responsibility of the
Company's management, our responsibility is to express an opinion on these
financial statements based on our audits.  We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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 the examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for the opinion expressed above.  We have not audited the
consolidated financial statements of Total Containment, Inc. for any period
subsequent to December 31, 1996.


Price Waterhouse LLP


Philadelphia, Pennsylvania
March 7, 1997

                                       15
<PAGE>
 
                            TOTAL CONTAINMENT, INC.

                          CONSOLIDATED BALANCE SHEETS

                                  DECEMBER 31,


<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                        ------------------------
                                                           1996          1997
                                                        -----------  -----------
<S>                                                     <C>          <C>
                 ASSETS
Current assets:
  Cash and cash equivalents...........................  $   616,015  $   612,119
  Accounts receivable, net of allowance for
    doubtful accounts of $50,000 and $200,000
    for 1996 and 1997, respectively...................    7,452,901    7,887,074
  Inventories.........................................    7,248,293    7,305,643
  Deferred income taxes...............................      576,983    3,114,165
  Prepaid royalties...................................      438,000           --
  Other current assets................................    2,662,049    2,276,818
                                                        -----------  -----------
     Total current assets ............................   18,994,241   21,195,819
 
  Molds and tooling costs, net........................    1,362,112      986,612
  Property and equipment, net.........................    2,511,301    3,870,524
  Prepaid royalties...................................      207,747           --
  Patents, patent rights and licenses, net............    5,155,124    4,292,630
  Goodwill, net.......................................    5,544,521    5,379,359
  Deferred income taxes...............................    1,123,638    4,305,894
  Other assets........................................       66,585       15,956
                                                        -----------  -----------
                                                        $34,965,269  $40,046,794
                                                        ===========  ===========
 
      LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
  Line of credit borrowings ..........................  $ 3,677,000  $ 3,197,000
  Current portion of long-term debt...................      770,012      743,512
  Accounts payable, trade and accrued expenses .......    5,125,582    6,019,265
  Other payable.......................................           --    4,020,481
  Warranty reserve - current..........................    1,160,604    6,087,565
                                                        -----------  -----------
     Total current liabilities .......................   10,733,198   20,067,823
 
Long-term debt........................................    1,894,082    2,305,282
Non-current warranty..................................    3,322,410   11,233,833
                                                        -----------  -----------
     Total liabilities ...............................   15,949,690   33,606,938
                                                        -----------  -----------
Commitments and contingencies.........................           --           --
Stockholders' equity:
  Preferred stock - $.01 par value; authorized
    1,000 shares; none issued and outstanding.........           --           --
  Common stock - $.01 par value; authorized
    20,000,000 shares; 4,641,600 shares issued
    and outstanding...................................       46,416       46,416
  Capital in excess of par value .....................   13,728,778   13,728,778
  Retained earnings...................................    5,216,846   (7,139,358)
  Equity adjustment from foreign currency
    translation.......................................       23,539     (195,980)
                                                        -----------  -----------
    Total stockholders' equity .......................   19,015,579    6,439,856
                                                        -----------  -----------
                                                        $34,965,269  $40,046,794
                                                        ===========  ===========
</TABLE>
                 The accompanying notes are an integral part of
                          these financial statements.

                                       16
<PAGE>
 
                            TOTAL CONTAINMENT, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                            YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
 
YEAR ENDED DECEMBER 31,
                                                1995          1996          1997
                                         -----------   -----------   -----------
<S>                                        <C>         <C>           <C>
Net sales..............................  $39,068,990   $37,730,009   $ 45,648,699
Cost of sales (excluding warranty
 expense)..............................   23,058,278    24,288,535     30,697,518
                                         -----------   -----------   ------------
                                          16,010,712    13,441,474     14,951,181
Warranty expense.......................    8,073,005       746,792     18,596,329
                                         -----------   -----------   ------------
Gross profit (loss)....................    7,937,707    12,694,682     (3,645,148)
 
Selling, general and administrative....   10,261,950    10,664,161     12,307,515
Amortization of patents, licenses and
 goodwill..............................      482,803       508,309        521,077
Loss on write-off of patent............           --            --        564,684
Other operating expense................           --            --      1,800,000
                                         -----------   -----------   ------------
Income (loss) from operations..........   (2,807,046)    1,522,212    (18,838,424)
 Interest expense......................     (145,979)     (362,437)      (626,575)
 Other expense.........................     (407,133)           --             --
                                         -----------   -----------   ------------
Income (loss) before income taxes......   (3,360,158)    1,159,775    (19,464,999)
Income tax expense (benefit)...........   (1,112,121)      761,565     (7,108,795)
                                         -----------   -----------   ------------
Net income (loss)......................  $(2,248,037)  $   398,210   $(12,356,204)
                                         ===========   ===========   ============
Per share data:
 Earnings (loss) per common share -
  basic................................        $(.48)         $.09         $(2.66)
                                         ===========   ===========   ============
 Earnings (loss) per common share
  assuming dilution....................         (.48)         $.08         $(2.66)
                                         ===========   ===========   ============
Weighted average shares used in com-
  putation of earnings (loss) per
  common share.........................    4,641,600     4,641,600      4,641,600
                                         ===========   ===========   ============
</TABLE>

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

                                       17
<PAGE>
 
                            TOTAL CONTAINMENT, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997


<TABLE>
<CAPTION>
                                                                EQUITY
                                                                ADJUSTMENT
                                                  CAPITAL       FROM FOREIGN
                                      COMMON      IN EXCESS     RETAINED      CURRENCY
                                      STOCK       OF PAR VALUE  EARNINGS      TRANSLATION   TOTAL
                                      ----------  ------------  -----------   -----------   -----------
<S>                                   <C>         <C>           <C>           <C>           <C>
January 1, 1995.....................     $46,416   $13,728,778  $ 7,066,673   $   (37,537)  $20,804,330
Net loss............................                             (2,248,037)   (2,248,037)
Equity adjustment from foreign
 currency translation...............                                               59,212        59,212
                                      ----------  ------------  -----------   -----------   -----------
December 31, 1995...................      46,416    13,728,778    4,818,636        21,675    18,615,505
Net Income..........................                                398,210                     398,210
Equity adjustment from foreign
 currency translation...............                                                1,864         1,864
                                      ----------  ------------  -----------   -----------   -----------
December 31, 1996...................      46,416    13,728,778    5,216,846        23,539    19,015,579
Net loss............................                            (12,356,204)                (12,356,204)
Equity adjustment from foreign
 currency translation...............                                             (219,519)     (219,519)
                                      ----------  ------------  -----------   -----------   -----------
December 31, 1997...................     $46,416   $13,728,778  $(7,139,358)  $  (195,980)  $ 6,439,856
                                      ==========   ===========  ===========   ===========   ===========

</TABLE>

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

                                       18
<PAGE>
 
                            TOTAL CONTAINMENT, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
 
YEAR ENDED DECEMBER 31,
                                                 1995          1996           1997
                                          -----------   -----------   ------------
<S>                                       <C>           <C>           <C>
Cash flows from operation activities:
 Net income (loss)......................  $(2,248,037)  $   398,210   $(12,356,204)
 
 Adjustments to reconcile net income
  (loss) to net cash provided by
  operating activities:
  Depreciation and amortization.........    1,472,333     1,566,294      1,744,418
  Loss on write-off of patent...........           --            --        564,684
  Change in assets and liabilities:
   Accounts receivable..................    1,042,693      (813,202)      (561,500)
   Inventories..........................   (1,123,495)   (1,219,947)      (158,721)
   Other assets.........................       (5,675)   (1,494,063)     1,081,230
   Deferred taxes.......................   (2,495,144)    1,516,445     (5,719,438)
   Accounts payable, trade and
    accrued expenses....................       27,243     2,043,716        987,414
   Other payable........................           --            --      4,020,481
   Income taxes payable.................     (442,296)           --             --
   Warranty reserve.....................    6,464,653    (3,788,542)    12,855,711
                                          -----------   -----------   ------------
    Net cash provided by (used for)
     operating activities...............    2,692,275    (1,791,089)     2,458,075
                                          ===========   ===========   ============
 
Cash flows from investing activities:
 Purchase of molds and tooling..........     (991,990)     (736,761)      (500,688)
 Purchase of property and equipment.....   (1,123,726)   (1,176,778)    (1,699,212)
 Patent costs and license fees..........     (350,634)     (484,039)       (67,744)
 Purchase of net assets of ACI..........           --    (1,000,000)            --
                                          -----------   -----------   ------------
    Net cash used for investing
     activities.........................   (2,466,350)   (3,397,578)    (2,267,644)
                                          ===========   ===========   ============
 
Cash flows from financing activities:
 Borrowings on long-term debt...........      654,214     2,219,050      1,154,712
 Payments on long-term debt.............           --      (209,170)      (770,012)
 Net borrowings (payments) under line
  of credit.............................     (733,873)    3,426,000       (480,000)
                                          -----------   -----------   ------------
  Net cash provided by (used for)
   financing activities.................      (79,659)    5,435,880        (95,300)
                                          -----------   -----------   ------------
Effect of foreign currency exchange
 rate...................................        9,246         1,864        (99,027)
                                          -----------   -----------   ------------
Net increase (decrease).................      155,512       249,077         (3,896)
Cash and cash equivalents at beginning
 of year................................      181,006       336,518        616,015
                                          -----------   -----------   ------------
Cash and cash equivalents from ACI
 acquisition............................           --        30,420

Cash and cash equivalents at end of
 year...................................  $   336,518   $   616,015   $    612,119
                                          ===========   ===========   ============
Supplemental cash flow information:
 Interest paid..........................  $   147,888   $   391,561        626,575
 Income taxes paid......................    1,959,971        75,604             --
 
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                       19
<PAGE>
 
                            TOTAL CONTAINMENT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   DESCRIPTION OF BUSINESS

     Total Containment, Inc. (the Company) is a leading manufacturer and
distributor of underground systems and products for the conveyance and
containment of petroleum and alcohol based motor vehicle fuels from underground
storage tanks to aboveground fuel dispensers.  The principal end users of the
Company's products are service stations, convenience stores and other retail
sellers of gasoline, gasohol and other motor vehicle fuels, government bodies,
utilities, and other fleet vehicle operators.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of consolidation.  The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, TCI Environment
NV/SA (TCI-NV), Rene Morin, Inc. and American Containment, Inc. (acquired in
1996).  All significant intercompany balances and transactions have been
eliminated in consolidation.

     On July 11, 1996, the Company purchased all of the assets and certain
liabilities of American Containment, Inc., a manufacturer and installer of
fiberglass tank and dispenser sumps.  This transaction was accounted for under
the purchase method of accounting.  The results of operations of American
Containment, Inc. are reflected in the Company's consolidated statement of
operations from July 11, 1996 to December 31, 1996.  Goodwill associated with
this purchase will be amortized over approximately forty years.  1996 pro forma
(unaudited) revenues, net income, and earnings per share would be approximately
$39,530,000, $517,470, and $.11, respectively, if the operating results of
American Containment, Inc. were included in the operations of the Company for
the entire year.  The pro forma results in 1995 would not have been materially
different had American Containment, Inc. been included in the financial results
of the Company.

     Foreign currency translation.  TCI-NV uses the Belgian Franc as its
functional currency.  Translation adjustments are reported separately and
accumulated as a separate component of stockholders' equity.

     Concentration of credit risks.  The Company's trade receivables result
primarily from the sale of product to distributors who sell to automobile
service stations and convenience store markets including several large chains.
The

                                       20
<PAGE>
 
Company traditionally relies on a limited number of suppliers on an exclusive
basis.

     Inventories.  Inventories are stated at the lower of cost or market, cost
being determined on a first-in, first-out (FIFO) basis.

     Property and equipment.  Property and equipment are valued at cost.
Depreciation is computed on a straight-line basis over the useful lives of the
assets.

     Patents, patent rights and licenses.  The Company capitalizes costs of
acquired patents, and other costs related to obtaining and maintaining patents.
Patents, patent rights and licenses are being amortized on a straight-line basis
over the estimated lives of the patents and licenses which range from 13 to 17
years.  Amortization expense aggregated $326,757, $347,381 and $365,554 for
1995, 1996 and 1997, respectively.  A patent was written off in the third
quarter of 1997 for a product line that was discontinued with a value of
$564,684.  Accumulated amortization was $1,276,350 and $1,641,904 at December
31, 1996  and 1997, respectively.

     Goodwill.  Goodwill represents the excess of the purchase price over the
fair value of the net tangible and identified intangible assets, and is being
amortized over forty years.  Goodwill amortization approximated $155,843,
$160,928 and $166,009 for 1995, 1996 and 1997, respectively.  Accumulated
goodwill amortization was $1,102,108 and $1,268,117 at December 31, 1996 and
1997, respectively.

     The Company evaluates the carrying value of long-lived assets, including
goodwill, whenever changes in circumstances indicate the carrying amount of such
assets may not be recoverable.  In performing such review for recoverability,
the Company compares the expected future cash flows to the carrying value of
long-lived assets and identifiable intangibles.  If the anticipated undiscounted
future cash flows are less than the carrying amount of such assets, the Company
recognizes an impairment loss for the difference between the carrying amount of
the assets and their estimated fair value.

     Warranty reserve.  The Company's Tank Jacket and Pipe Jacket product lines
carry a warranty of one year for workmanship and materials.  The Enviroflex
product line carries a ten year warranty for workmanship and materials.  The
Tank Jacket product line also carries a thirty year warranty for corrosion from
certain specified materials.  The Company's warranties are limited to
replacement of defective material; they do not cover by their terms costs
associated with leaks or spillage of tank or pipe contents.  Management has
accrued a reserve for anticipated warranty and other products liability claims
and associated legal fees based upon its industry knowledge and actual claims
experience.

                                       21
<PAGE>
 
     As the result of a review of piping problems initiated in 1996, the
Company, during the third quarter of 1997, increased its warranty reserve by
approximately $18.6 million primarily to cover the Company's estimate of the
cost, anticipated to be incurred over a two to three year period, of inspecting
and replacing pipe with deteriorating cover material on the retractable inner
pipe portion of the Company's double-wall underground fuel dispensing and
containment systems installed between 1990 and 1994 at over 3,000 sites.  The
deterioration results from a microbiological fungus which, under certain
conditions, affects the outer layers of the system's primary (inner) retractable
pipe.  The Company has instituted litigation against the supplier of the pipe to
recover the cost the Company has and will sustain to replace such pipe, as well
as other damages (See Note 11).

     During 1995, the Company increased its warranty reserve through a charge to
expense of approximately $7.5 million to cover its then expected estimate of
warranty claims associated with the pipe discussed above.

     Income taxes.  The Company uses the liability method of accounting for
income taxes.  Under this method, deferred tax liabilities and assets are
recorded for the expected future tax consequences of temporary differences
between the carrying amounts for financial statement purposes and the tax bases
of assets and liabilities.  Income tax expense (benefit) for the years ended
December 31, 1995, 1996 and 1997 were ($1,112,121), $761,565 and benefit of
$(7,108,795), respectively.  The variance from 1997 to 1996 and 1996 to 1995 was
due to the change in the Company's income before income taxes.  The income tax
benefit derived principally from the future deductibility of warranty expense
recognized for financial statement purposes in 1997 has been established as a
deferred tax asset in the amount of $7,420,059 and is segmented into current and
long term based upon projections as to the tax period in which the Company will
receive these benefits.  The valuation allowance relating to the state net
operating loss carryforward component of deferred tax asset was $159,687 at
December 31, 1996 and $275,465 at December 31, 1997.

     The Company's foreign subsidiary has undistributed retained earnings of
$1,138,192 and $1,232,186 at December 31, 1996 and 1997, respectively.  Because
a substantial portion of these earnings has been reinvested in working capital
and the remainder is not expected to be remitted to the Company, U.S. income and
foreign withholding taxes have not been provided on these unremitted earnings.


     Other expenses.  The other expense in 1997 of $1.8 million was associated
with the legal settlement regarding licensing of certain patented technology.

                                       22
<PAGE>
 
     During 1995, the Company incurred non-recurring transaction expenses,
consisting primarily of legal fees and special committee and board fees and
expenses, of $407,000 related to negotiations with a third party and certain
members of management in connection with attempts to acquire the Company.  In
August, 1995, the Company announced the acquisition negotiations had been
terminated and expensed all costs associated with those failed acquisition
attempts.

     Revenue recognition.  Sales are recorded upon shipment. Expenses for
estimated product returns and warranty costs are accrued in the period of sale
recognition.

     Earnings (loss) per share.  On December 15, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share".  SFAS 128 eliminates the primary and fully diluted
earnings per share and requires the presentation of basic and diluted earnings
per share in conjunction with the disclosure of the methodology used in
computing such earnings.  Basic earnings per share excludes the dilution and is
computed by dividing income available to common shareholders by the weighted
average number of shares outstanding during the period.  Dilutive earnings per
share takes into account the potential dilution that could occur if securities
and other contracts to issue common stock were exercised and converted into
common stock.  Prior periods income (loss) per share calculations have been
restated to reflect the adoption of SFAS No. 128.

     Advertising Cost.  The Company expenses advertising costs as incurred.

     Research and Development.  Research and Development cost, which are
expensed by the Company as incurred were $760,000, $786,000 and $527,000 in
1995, 1996, and 1997, respectively.

     New Accounting Pronouncements.  In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards to provide
prominent disclosure of comprehensive income items.  Comprehensive income is the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources.  SFAS No. 130 is
effective for all periods beginning after December 15, 1997.  Subsequent to the
effective date, all prior-period amounts are required to be restated to conform
to the provisions of SFAS No. 130.  The adoption of SFAS 130 is not expected to
have a material impact on the Corporation's financial position or results of
operations.

     In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information.  SFAS 131 requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial

                                       23
<PAGE>
 
statements of interim periods issued to shareholders.  It also requires that
public business enterprises report certain information about their products and
services, the geographic areas in which they operate, and their major customers.
SFAS No. 131 is effective for all periods beginning after December 15, 1997.
The adoption of SFAS 131 will have no impact on the Corporation's financial
position or results of operations.

     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.
Significant estimates made by management that are subject to change include the
warranty reserve and deferred tax assets.

3.   INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION> 
                                                                      December 31,
                                                               -------------------------
                                                                  1996          1997
                                                                  ----          ----
<S>                                                 <C>                       <C>
Raw materials.....................................              $   502,954   $   516,042
Finished goods....................................                6,745,339     6,789,601
                                                                -----------   -----------
                                                                $ 7,248,293   $ 7,305,643
                                                                ===========   ===========
 
4.                                                  MOLDS AND TOOLING COSTS
 
  Molds and tooling costs include the following:
 
                                            Useful
                                            Lives                     December 31,
                                            -------             -------------------------
                                                                       1996          1997
                                                                -----------   -----------
 
Molds and tooling costs ..................  3 years             $ 3,928,475   $ 4,418,081
Less - accumulated
 amortization.....................................               (2,566,363)   (3,431,469)
                                                                -----------   -----------
                                                                $ 1,362,112   $   986,612
                                                                ===========   ===========
</TABLE>

     Amortization expense of molds and tooling costs was $781,300, $772,536 and
$865,106 for the years ended December 31, 1995, 1996 and 1997, respectively.
 
5.    PROPERTY AND EQUIPMENT

     Property and equipment include the following:
 

                                       24
<PAGE>
 
                           Useful                   
                           Lives               December 31,
                           -------      -------------------------
                                            1996          1997
                                        ------------  ------------
Furniture, fixtures and
  office equipment ......  3-5 years    $   542,459   $   568,397
Equipment ............... 5-10 years      2,510,165     3,781,410
Leasehold improvements .. lease term        472,764       674,874
                                        -----------   -----------
                                          3,525,388     5,024,681
Less - Accumulated depreciation.......   (1,014,087)   (1,154,157)
                                        -----------   -----------
                                        $ 2,511,301   $ 3,870,524
                                        ===========   ===========

     Depreciation expense on property and equipment was $243,998, $285,447 and
$322,640 for the years ended December 31, 1995, 1996 and 1997, respectively.
Fully depreciated assets of $196,284 were removed from both the fixed asset and
accumulated depreciation account in 1997.

6.   LONG-TERM DEBT

     Term Loans.  In 1995, the Company executed a term loan agreement with a
bank for $1,600,000 which was used exclusively for the purchase of equipment.
The term loan bears interest at the bank's national commercial rate plus .125%
(8.625% at December 31, 1997) and is secured by all equipment financed
thereunder.  At December 31, 1996 and 1997, $1,293,264 and $1,200,000
respectively were outstanding under the term loan.  The loan requires the
payment of equal monthly installments of principal in the amount of $26,667 plus
interest on the unpaid principal balance.

     In 1996, the Company executed a term loan with a bank for $1,000,000 which
was used for the acquisition of American Containment, Inc.  The term loan bears
interest at the bank's national commercial rate plus .125% (8.625% at December
31, 1997.) and is secured by the assets of American Containment, Inc.  At
December 31, 1996 and 1997, $933,329 and $733,317 was outstanding under the term
loan.  The loan requires the payment of equal monthly installments of principal
in the amount of $16,667 plus interest on the unpaid principal balance.

     In 1996, the Company signed a note payable to a third party of $500,000.
The note payable bears an interest rate of 8% compounded annually.  At December
31, 1997, the balance of $187,500 was outstanding under this note payable.  The
note requires the payment of equal quarterly installments of $62,500 plus
interest on the unpaid principal balance.

     In 1997, the Company borrowed under a term loan credit availability to
acquire equipment related to a new pipe manufacturing line.  The term loan bears
interest at the bank's national commercial rate plus .125% (8.625% at December
31, 1997) and is secured by all equipment financed thereunder.  At

                                       25
<PAGE>
 
December 31, 1997, a balance of $807,977 was outstanding under the term loan.

     In 1996, Rene Morin, Inc. borrowed under a term loan for manufacturing
equipment.  The term loan bears interest at 9.5%.  At December 31, 1997, a
balance of $120,000 was outstanding.

     Aggregate maturities of the borrowings is as follows:

          1998 ........................................   743,512
          1999 ........................................   556,012
          2000 ........................................   556,012
          2001 ........................................   385,281
          2002 ........................................         0
          Thereafter ..................................   807,977
                                                        ---------

                                                        3,048,794
                                                        =========

7.   LINE OF CREDIT

     The Company has a line of credit agreement with a bank which provides for
borrowings up to an aggregate limit of $6,000,000.  Advances under the line of
credit bear interest at the bank's national commercial rate (8.5% at December
31, 1997) and are unsecured.  At December 31, 1997, $3,197,000 was outstanding
under the line of credit.

     Interest expense on borrowings under the line of credit was  $144,000,
$195,337 and $353,796 in 1995, 1996 and 1997, respectively.

8.   EARNINGS (LOSS) PER SHARE

     The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted EPS
computations.

<TABLE>
<CAPTION>
                                              FOR THE YEAR ENDED DECEMBER 31, 1997
                                            ----------------------------------------
                                               INCOME         SHARES      PER-SHARE
                                             (NUMERATOR)   (DENOMINATOR)    AMOUNT
                                            -------------  -------------  ----------
<S>                                         <C>            <C>            <C>
(Loss) before accounting change          ($12,356,204)
                                         =============
BASIC EPS
Income available to common stockholders  ($12,356,204)        4,641,600      ($2.66)
                                                                             =======
EFFECT OF DILUTIVE SECURITIES
Options                                               --         15,147          --
                                            ------------   ------------   ---------
 DILUTED EPS
Income available to common stockholders
plus assumed conversions                    ($12,356,204)     4,656,747      ($2.66)
                                            ============   ============   =========
</TABLE>

     Options to purchase 480,000 shares of common stock at a range of $2.75 to
$9.50 a share were outstanding during the year.

                                       26
<PAGE>
 
They were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common shares.
The options, which expire from January 16, 1999 to August 7, 2002, were still
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
                                            FOR THE YEAR ENDED DECEMBER 31, 1996
                                           --------------------------------------
                                              INCOME        SHARES      PER-SHARE
                                           (NUMERATOR)   (DENOMINATOR)   AMOUNT
                                           ------------  -------------  ---------
<S>                                        <C>           <C>            <C>
Income before accounting change               $398,210
                                           ===========
 
BASIC EPS
Income available to common stockholders       $398,210      4,641,600       $0.09
                                                                        =========
 
EFFECT OF DILUTIVE SECURITIES
Options                                             --         67,538          --
                                           -----------   ------------   ---------
 
DILUTED EPS
Income available to common stockholders
plus assumed conversions                      $398,210      4,709,138       $0.08
                                           ===========   ============   =========
</TABLE>

     Options to purchase 180,000 shares of common stock at a range of $3.50 to
$9.50 a share were outstanding during the year.  They were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares.  The options, which expire from
January 16, 1999 to July 10, 2001, were still outstanding at December 31, 1997.
<TABLE>
<CAPTION>
                                              FOR THE YEAR ENDED DECEMBER 31, 1995
                                            ----------------------------------------
                                               INCOME         SHARES      PER-SHARE
                                             (NUMERATOR)   (DENOMINATOR)    AMOUNT
                                            -------------  -------------  ----------
<S>                                         <C>            <C>            <C>
(Loss) before accounting change             ($ 2,248,037)
                                            ------------   ------------   ---------
BASIC EPS
(Loss) available to common stockholders     ($ 2,248,037)     4,641,600      ($0.48)
                                                                              =====
EFFECT OF DILUTIVE SECURITIES
Options                                               --             --          --
                                            ------------   ------------   ---------
 
DILUTED EPS
(Loss) available to common stockholders
plus assumed conversions                    ($ 2,248,037)     4,641,600      ($0.48)
                                            ============   ============   =========
</TABLE>

     Options to purchase 205,000 shares of common stock at $9.50 a share were
outstanding during the year.  They were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.  130,000 options, which expire on January 16,
1999, were still outstanding at December 31, 1997.

                                       27
<PAGE>
 
9.   STOCK OPTION PLAN

     At December 31, 1997, the Company had two stock option plans.  The Company
applies APB Opinion 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its plans.  Accordingly, no compensation costs
have been recognized for either plan.

     On January 16, 1994, the Stockholders of the Company approved a Stock
Compensation Plan (the "Plan").  The Plan authorizes the issuance of up to
400,000 shares of the common stock to key employees of the Company and its
subsidiaries.  The number of shares authorized for issuance under the Plan, and
the outstanding awards granted under the Plan, are subject to adjustment in the
event of stock dividends, stock splits and similar transactions.  Awards may be
granted in the form of nonqualified stock options, incentive stock options,
stock appreciation rights, performance units and restricted stock.  The options
granted under the Plan are restricted and unvested at the date of grant.  Stock
options are issued at prices equal to the market price at the date of grant.
The stock options have a vesting period of five years from the date of issuance.

     On February 27, 1997, the Board of Directors of the Company approved and
adopted the 1997 Stock Compensation Plan, subject to stockholder approval
obtained on April 11, 1997.  The 1997 Plan authorizes the issuance of up to an
additional 400,000 shares of Common Stock to employees of the Company and its
subsidiaries.  The 1997 plan is substantially identical to the 1994 plan.
Options to acquire 440,000 shares were outstanding under the 1997 plan at
December 31, 1997.

     On August 28, 1996, the Company granted to its current Chief Executive
Officer, in connection with his employment, incentive stock options of the
Company to purchase 225,000 shares.  The options have a term of five years from
the date of grant.  The stock options have a vesting period of three years from
the date of issuance, beginning one year from the date of grant.  The options
granted to the Chief Executive Officer were not issued under the 1994 Plan.  In
August, 1997, following the approval of an additional 400,000 option allotment
under the 1997 Plan, the 1996 options granted to the Chief Executive Officer
which were not issued under the Plans were subsequently incorporated into the
1997 Plan without any change in terms.

     Had compensation cost for the plan year been determined based on the fair
value of options at the grant dates consistent with the method of SFAS 123,
"Accounting for Stock-Based Compensation", the Company's net income and diluted
earnings per share would have been reduced to the pro forma amounts indicated
below.

                                       28
<PAGE>
 
<TABLE>
<CAPTION> 
                                             1997       1996         1995
                                     ------------   --------  -----------
<S>                                 <C>             <C>       <C>
Net Income (loss) ... as reported    $(12,356,204)  $398,210  $(2,248,037)
                      pro forma      $(12,584,174)  $139,880  $(2,358,327)
 
Basic earnings (loss)
  per share ......... as reported    $      (2.66)  $    .09  $      (.48)
                      pro forma      $      (2.71)  $    .03  $      (.51)
 
Diluted earnings (loss)
  per share ......... as reported    $      (2.66)  $    .08  $      (.48)
                      pro forma      $      (2.71)  $    .03  $      (.51)

</TABLE>

     These pro forma amounts may not be representative of future disclosure
because they do not take into effect the pro forma compensation expense related
to grants before 1995.

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997 and 1996 respectively; no dividend yield for
all years; expected volatility of 32.00% and 61.63%; risk-free interest rate of
6.11%, and 6.79%; and expected lives of 10 years for all years for options under
the Plan, and five years for options granted to the Chief Executive Officer.

     A summary of the status of the Company's option plans as of December 31,
1997, and changes for the three years then ended was as follows:

<TABLE>
<CAPTION>
                              1997                1996               1995
                       ------------------  ------------------  -------------------
                                Weighted            Weighted             Weighted
                                Average             Average              Average
                       Number   Exercise   Number   Exercise   Number    Exercise
                       of       Price Per  of       Price Per  of        Price Per
                       Shares   Share      Shares   Share      Shares    Share
                       -------  ---------  -------  ---------  --------  ---------
<S>                   <C>       <C>        <C>      <C>        <C>      <C>
Outstanding at
  beginning of year    595,000      $4.20  205,000      $9.50   205,000      $9.50

Options granted         70,000       2.70  480,000      $2.77        -          -

Options exercised           -          -        -          -         -          -

Options forfeited           -          -    90,000      $8.33        -          -
                       -------  ---------  -------  ---------  --------  ---------
Outstanding at
 end of year           665,000      $4.10  595,000      $4.24   205,000      $9.50
                       =======  =========  =======  =========  ========  =========
Options exercisable
 at year end           201,000      $5.41   52,000      $9.50    41,000      $9.50  
                       -------  ---------  -------  ---------  --------  ---------
Weighted average
 fair value of
 options granted
 during the year                    $1.53               $2.54                $2.69

</TABLE>

                                       29
<PAGE>
 
     The following information applies to options outstanding at December 31,
1997:
<TABLE>
<CAPTION>
 
<S>                                <C>
Number outstanding..............................            665,000
Range of exercise prices........................     $2.50 to $9.50
Weighted average exercise price.................              $4.10
Weighted average remaining contractual life ....   2 years 6 months
</TABLE>

     The following table summarizes information about non-qualified stock
options at December 31, 1997:

<TABLE>
<CAPTION>
                                   Options Outstanding                         Options Exercisable
                    ------------------------------------------------      -----------------------------
                       Number           Weighted                            Number
                    Outstanding          Average           Weighted       Exercisable        Weighted
Range of                 at             Remaining           Average           at              Average
Exercise            December 31,       Contractual         Exercise       December 31,       Exercise
 Prices                 1997              Life              Price             1997             Price
--------            ------------      -------------      -----------      ------------      -----------
<S>                 <C>                  <C>           <C>            <C>
$2.50 to
$3.75               535,000           2 yr. 10 ms.             $2.79           123,000            $2.82
 
$9.50 to
$14.25              130,000           1 yr.                    $9.50            78,000            $9.50
</TABLE>

10.   INCOME TAXES
 
           The provision for income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                          Year ended December 31,
                                     1995          1996          1997
                                 -----------   ------------   -----------
<S>                               <C>           <C>           <C>
Currently payable:
  Federal...................     $   869,015    $(1,043,920)  $(1,390,866)
  State.....................         232,759              -    (  178,732)
  Foreign...................         281,249        289,040       180,241
Deferred....................      (2,495,144)     1,516,445    (5,719,438)
                                 -----------   ------------   -----------
                                 $(1,112,121)   $   761,565   $(7,108,795)
                                 ===========   ============   ===========
</TABLE>

     The Company's income, as reported in the statement of operations, differs
from taxable income as reported in its tax return principally due to the use of
accelerated depreciation for income tax purposes, and the accrual of warranty
expenses and other accruals for financial reporting purposes which are
deductible for income tax purposes when paid.

     Deferred income tax expense (benefit) consists of the following:

                                       30
<PAGE>
 
<TABLE>
<CAPTION> 
                                                                          Year ended December 31,
                                                                   --------------------------------------
                                                                          1995         1996          1997
                                                                   -----------   ----------   -----------
<S>                                                              <C>             <C>          <C>
Depreciation....................................................   $   (10,103)  $    4,209   $    31,633
Allowance for doubtful                                          
  accounts......................................................                                  (58,500)
Warranty reserve................................................    (2,492,392)   1,522,413    (5,021,502)
Other reserves..................................................             -            -      (672,011)
Other...........................................................         7,351      (10,177)  $       942
                                                                   -----------   ----------   -----------
                                                                   $(2,495,144)  $1,516,445   $(5,719,438)
                                                                   ===========   ==========   ===========
</TABLE>

   A reconciliation of income taxes with the amounts which
   would result from applying the U.S. statutory rate follows:

<TABLE>
<CAPTION> 
                                                                          Year ended December 31,
                                                                   --------------------------------------
                                                                          1995         1996          1997
                                                                   -----------   ----------   -----------
<S>                                                              <C>             <C>          <C>
Tax expense (benefit) at U.S.
  statutory rate................................................  $(1,142,454)  $  394,324   $(6,618,099)
State income taxes, net of                                        
  federal benefit...............................................     (155,239)           -      (910,592)
Excess foreign tax on foreign                                     
  subsidiary income.............................................       38,000       36,363        35,028
Amortization of certain                                           
  intangible assets.............................................      148,100      172,825       261,794
Increase in valuation allowance.                                            -      159,687       115,778
Other...........................................................         (528)      (1,634)        7,296
                                                                  -----------   ----------   -----------
                                                                  $(1,112,121)  $  761,565   $(7,108,795)
                                                                  ===========   ==========   ===========
</TABLE>
 
   Significant components of the deferred tax balances at
   December 31, 1996 and 1997 are:
 
<TABLE>
<CAPTION>
                                                                             December 31, 1996          December 31, 1997
                                                                          -----------------------   ------------------------
                                                                           Current     Noncurrent     Current     Noncurrent
                                                                           deferred     deferred     deferred      deferred
                                                                          ---------   -----------   ----------   -----------
<S>                    <C>                                                            <C>           <C>          <C>
Warranty reserve................................................          $ 496,260   $ 1,167,306   $2,303,873   $ 4,381,195
Accrued vacation................................................             43,598             -       43,325             -
Other reserves..................................................                  -             -      672,010             -
Allowance for doubtful
  accounts......................................................             19,500             -       78,000             -
Depreciation....................................................                  -       (43,668)           -       (75,301)
Net operating loss
  carry forward.................................................            159,687             -      275,465             -
Other...........................................................             17,625             -       16,957             -
                                                                          ---------   -----------   ----------   -----------
                                                                          $ 736,670   $ 1,123,638   $3,389,630   $ 4,305,894
Valuation
  Allowance.....................................................           (159,687)            -     (275,465)            -
                                                                          ---------   -----------   ----------   -----------
                                                                          $ 576,983   $ 1,123,638   $3,114,165   $ 4,305,894
                                                                          =========   ===========   ==========   ===========
</TABLE>

     Realization of deferred tax assets associated with the state net operating
loss (NOL) carryforwards is dependent upon generating sufficient taxable income
prior to their expiration. The Company believes that there is a risk that
certain of these NOL carryforwards may expire unused and, accordingly, has

                                       31
<PAGE>
 
established a valuation allowance of $275,465 against them. The valuation
allowance at December 31, 1997 relates to state net operating loss carryforwards
expiring through the year 2000.  Although realization is not assured for the
remaining deferred tax assets, the Company believes it is more likely than not
that they will be realized through future taxable earnings.

11.   PATENTS AND TRADEMARKS, LITIGATION AND CONTINGENCIES

     In January, 1998 the Company settled and terminated litigation with two
competitors who claimed that they possessed licenses to manufacture and sell
underground systems with retractability and other features covered by patents
licensed to the Company.  The purported licensees acknowledged that whatever
license rights they had were terminated and the Company paid approximately $1.64
million to them, excluding various other expenses associated with this
litigation of approximately $.16 million.

     During 1997 the Company was a party in litigation involving the owner of
the patents referred to above and a third party to whom the owner of such patent
proposed to transfer his business, including patent rights with respect to the
retractability feature, among others, of the underground containment systems
sold by the Company.

     In April, 1997 a court held that the owner of the patent was entitled to
transfer his business, including his patent rights.    The Company did not
appeal the Court's decision.

     During 1997, the Company initiated a legal action against Dayco Products,
Inc., a subsidiary of Mark IV Industries, in the United States District Court
for the Eastern District of Pennsylvania seeking, among other things, a judicial
determination that Dayco breached the provisions of two Supply Agreements,
entered into in 1990 and 1993 for the sale of primary pipe.  The Complaint
alleges that Dayco supplied pipe that was defective because it was susceptible
to microbial fungus.

     In its suit, the Company requests that the Court award damages, to cover,
among other things, the cost of inspecting and replacing defective pipe and
related costs in an amount to be determined at trial and for further appropriate
relief.  The Company, in consultation with its legal counsel, believes that it
is more likely than not that the Company will prevail with respect to its
material claims.  (See "Significant Accounting Policies - Warranty Reserve.")

     A legal action was filed in the Fifth Circuit Court of the State of Hawaii
on September 16, 1997 by JJR Inc., James Jasper Enterprises, Inc., and others
with interests in a retail shopping center on the Island of Kauai, Hawaii,
against the Company, Dayco, and Senter Petroleum, Inc. for damages allegedly
resulting from the failure of the Company's Enviroflex piping system on or

                                       32
<PAGE>
 
about August 12, 1996 at The Little Gas Shack (the "Shack"), a retail gasoline
service facility supplied by Senter adjacent to the shopping center.  The
Complaint alleges that more than 1,800 gallons of gasoline were released onto
the property occupied by the Shack and the adjacent businesses and into a nearby
stream and the harbor where the shopping center was located.  Although the
amount sought by the plaintiffs is not specified in the Complaint, the attorney
retained by the Company's insurance carrier has ascertained that the plaintiffs
are seeking approximately $23 million in damages.  The Company has and maintains
insurance with policy limits at the time of this claim of $3 million which may
respond to this claim, however, the amount claimed exceeds the liability limits.
Under the Dayco Supply Agreement, Dayco is required to indemnify and hold the
Company harmless from all claims and suits by third parties based upon the
manufacture of Enviroflex primary pipe or the performance by Dayco of its
obligations under the Agreement.  Dayco, has not, as yet, agreed to honor this
obligation.  The Company has commenced litigation to enforce its rights against
Dayco.  Based upon the Company's investigation to date, the Company believes
that the Enviroflex secondary containment system functioned properly to contain
the overflow and was not responsible for the release, and that any loss was
caused by the failure of equipment manufactured and supplied by third parties.
The Company believes that plaintiff's claims are grossly excessive and intends
to vigorously defend its position.  The Company believes that it has no material
uninsured liability in connection with this matter and that if it does, it is
covered by Dayco's indemnity.

     Other Litigation.  The Company is also involved in various other legal
actions incidental to the conduct of its business. Management is contesting
these cases vigorously and believes it has meritorious defenses in each matter.
Management does not believe the ultimate outcome of these various legal actions
will have a material effect on the Company's financial condition, results of
operations or working capital requirements.

12.  COMMITMENTS

     Dayco Agreement.  On January 1, 1993, Dayco and the Company entered into a
five year supply agreement (the "Dayco Agreement") pursuant to which Dayco
agreed to sell Enviroflex primary pipe exclusively to the Company for use in
flexible double-wall underground piping systems and the Company agreed to
purchase such pipe exclusively from Dayco.  Under the Dayco Agreement, the
Company has minimum purchase requirements per calendar year.  The Company
exceeded the minimum purchase requirements in each calendar year the Dayco
Agreement has been in effect.  During 1997, the Company terminated this
agreement (see Note 11).  Dayco has asserted that it is entitled to payment of
$4,038,000 for goods, services, and freight contracted for by the Company under
the Dayco Agreement.  The Company has declined to pay this for the reason, among
other things, that management estimates that

                                       33
<PAGE>
 
amounts owed to the Company by Dayco exceed the amount to which Dayco claims it
is entitled.

     The Company has employment agreements with certain key executives that
provide severance pay benefits if there is a change in control of the Company.
The agreements will continue in effect on a year-to-year basis until terminated
or not renewed by the Company or key executives.  Upon a change in control, the
Company shall continue to pay the key executives' salaries per the agreements
and certain benefits for the agreed upon time periods.  The maximum contingent
liability under the agreements at December 31, 1997 was $1,073,000.

     Lease Commitments.  The Company leases its facilities, certain office
equipment and vehicles under noncancelable operating leases.  Total rental
expense under these leases for the years ended December 31, 1995, 1996 and 1997
was approximately $265,000, $235,000 and $867,000, respectively.

     Future minimum lease payments under noncancelable operating leases at
December 31, 1997 are as follows:

 Year ended
December 31,
------------

    1998............................................  1,069,564
    1999............................................    582,049
    2000............................................    525,029
    2001............................................    373,711
    2002............................................    126,220
                                                     ----------
                                                      $2,673,973
                                                      ==========

13.  FOREIGN OPERATIONS AND EXPORT SALES

     Summarized financial data with respect to the operations of TCI-NV at
December 31, 1996 and 1997 and for the years then ended follows:

                                                    1996         1997
                                                 -----------  ----------- 
Total assets...................................  $ 1,989,000  $ 2,144,000
Total liabilities..............................      786,000      912,000
                                                 -----------  -----------
Net assets.....................................  $ 1,203,000  $ 1,232,000
                                                 ===========  ===========
Net sales......................................  $ 3,761,000  $ 3,536,000
                                                 ===========  ===========
Net income.....................................  $   335,000  $   248,257
                                                 ===========  ===========
 
   The Company's net sales by geographic region are as follows:
 
    Year Ended December 31,
-----------------------------------------------------------------
                                               1995         1996         1997
                                        -----------  -----------  -----------
Net Sales:           
 United States........................  $26,762,000  $25,001,000  $33,128,000
 Canada...............................    1,811,000    1,566,000    1,463,000
 Mexico, Central and
 

                                       34
<PAGE>
 
  South America.......................    4,957,000    6,028,000    6,412,000
 Europe and the Middle                
  East................................    4,431,000    3,761,000    3,536,000
 Southeast Asia,                      
  Australia and New                   
  Zealand.............................    1,108,000    1,374,000    1,110,000
                                        -----------  -----------  -----------
Total.................................  $39,069,000  $37,730,000  $45,649,000
                                        ===========  ===========  ===========


14.  SUBSEQUENT EVENT

     On March 17, 1998, the Company's principal shareholder purchased from the
Company 400 shares of authorized perpetual Class A Floating Rate Preferred Stock
of the Company at $10,000, cash, per share (the "Preferred Stock") or $4 million
in the aggregate.  The perpetual Preferred Stock is entitled to receive, as and
if declared by the Company's Board, dividends at a floating rate equal to the
rate payable by the Company on its line of credit with its commercial bank.
Dividends are paid quarterly in arrears, and if not declared or paid would
cumulate at the line of credit rate, plus 50 basis points.  The preferred stock:
(i) does not possess voting rights, (ii) is not convertible into common stock,
and (iii) is not redeemable at the option of the holder.  The Preferred Stock is
redeemable at the option of the Company, but only (i) if and to the extent the
Company's net tangible assets at the end of any fiscal quarter and after such
dividend exceeds $4.5 million, or (ii) if at least a majority of the independent
and disinterested members of the audit committee of the Company's Board of
Directors approve such redemption.  The preceding provision relating to
redemption constitutes a covenant between the Company, the Company's principal
shareholder and its remaining shareholders and may not be changed without the
approval of at least a majority of the independent and disinterested members of
the audit committee of the Company's Board of Directors.

     If this transaction was enacted as of December 31, 1997, the balance sheet
would have changed as follows:


                           Historical      Pro Forma       Pro Forma
                        December 31, 1997  Adjustment  December 31, 1997
                        -----------------  ----------  -----------------
Current Assets........        $21,195,819  $4,000,000        $25,195,819
Other Assets..........        $18,850,975          --        $18,850,975
                              -----------  ----------        -----------
Total Assets..........        $40,046,794  $4,000,000        $44,046,794
                              ===========  ==========        ===========
 
Current Liabilities           $20,067,823  $       --        $20,067,823
Other.................        $13,539,115          --        $13,539,115
                              -----------  ----------        -----------
Total Liabilities .           $33,606,938                    $33,606,938
 
Stockholder Equity .          $ 6,439,856  $4,000,000        $10,439,856
                              -----------  ----------        -----------
 
Total Liabilities &
  Equity..............        $40,046,794  $4,000,000        $44,046,794
                              ===========  ==========        ===========
 

                                       35
<PAGE>
 
                                  FORM 10-K/A
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

(Mark One)

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the Fiscal Year Ended December 31, 1997,

                                       OR

[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 [no fee required] for the Transition Period from
     ___________ to ___________.

                        Commission file number 0-23454.

                            TOTAL CONTAINMENT, INC.
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)


                         Pennsylvania                   23-2394872
               -------------------------------     -------------------
              (State or other jurisdiction of       (I.R.S. Employer
               incorporation or organization)      Identification No.)

       422 Business Center, A130 North Drive,
              P.O. Box 939, Oaks, Pennsylvania          19546
          ----------------------------------------   ----------
      (Address of principal executive offices)       (Zip Code)

Registrant's telephone number, including area code: (610)666-7777
                                                    -------------

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

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

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

             Common Stock (par value $.01 per share)
             ---------------------------------------
                         (Title of Class)

     Indicate by check mark whether 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 for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [ X ]   No [  ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by

                                       36
<PAGE>
 
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

     Based on the closing sale price of the Registrant's Common Stock as quoted
on the Nasdaq Stock Market, the aggregate market value of the shares of Common
Stock held by nonaffiliates as of February 27, 1998, was $4,380,364.80.

     As of February 27, 1998 the Registrant had 4,641,600 shares of Common Stock
outstanding.

     Documents incorporated by reference.  Portions of the 1997 Annual Report to
Stockholders of the Registrant are incorporated by reference into Part II of
this Report and portions of the Proxy Statement of the Registrant relating to
the Registrant's Annual Meeting to be held on April 17, 1998 are incorporated by
reference into Part III of this Report.

     Except for historical information, this report may be deemed to contain
"forward-looking" statements.  The Company desires to avail itself of the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") and is including this cautionary statement for the express purpose of
availing itself of the protection afforded by the Act.

     Examples of forward-looking statements include, but are not limited to (a)
projections of revenues, cost of raw materials, income or loss, earnings or loss
per share, capital expenditures, growth prospects, dividends, the effect of
currency translations, capital structure and other financial items, (b)
statements of plans of and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulating
authorities, (c) statements of future economic performance and (d) statements of
assumptions, such as the prevailing weather conditions in the Company's market
areas, underlying other statements and statements about the Company or its
business.

                                       37
<PAGE>
 
                            TOTAL CONTAINMENT, INC.

                               TABLE OF CONTENTS

                                     PART I


ITEM 1.     BUSINESS....................................................  1
                                                              
ITEM 2.     PROPERTIES..................................................  4
                                                              
ITEM 3.     LEGAL PROCEEDINGS...........................................  4
                                                              
ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY       
            HOLDERS.....................................................  5
                                                              
ITEM 4A.    EXECUTIVE OFFICERS OF THE REGISTRANT........................  5

                                    PART II
 
ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 
            STOCKHOLDER MATTERS.........................................  6
 
ITEM 6.     SELECTED FINANCIAL DATA.....................................  7
 
ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS.........................  7
 
ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................  7
 
ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE.........................  7

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE
          REGISTRANT.................................................    7

ITEM 11.  EXECUTIVE COMPENSATION.....................................    7

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT.............................................    7

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............    7

                                    PART IV

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

                                       38
<PAGE>
 
                                     PART I

ITEM 1.   BUSINESS

     Total Containment, Inc. (the "Company") was incorporated in the State of
Pennsylvania.  The Company is a leading manufacturer and distributor of
underground systems and products for the conveyance and containment of petroleum
and alcohol based motor vehicle fuels from underground storage tanks to
aboveground fuel dispensers. The Company's systems and products are used in
connection with the installation of new and the retrofitting of existing
underground fuel containment and distribution systems ("Fuel Containment
Systems") worldwide.  The principal end users of the Company's products are
major oil companies and convenience stores. End users also include government
bodies, utilities and other fleet vehicle operators.

     During the third quarter of 1996, the Company acquired American
Containment, Inc. ("ACI").  ACI is principally engaged in the manufacture and
installation of fiberglass tank and dispenser sumps used in underground piping
systems.  The Company acquired ACI to have a supply of quality fiberglass
components in addition to an increased presence in the Western United States.
The Company intends to transfer this business from ACI to the Company.  During
1997, the Company caused ACI to redirect its focus solely on the custom part
service business, as well as on becoming the field technical arm of the Company.
The Company believes that this action will complement the Company's parts
business, enhance its field level expertise and provide an additional resource
to its customers.

PRINCIPAL PRODUCTS

     The principal products of the Company and their primary features are
summarized in the following table:

Enviroflex   A flexible double-wall     - Double-wall construc-
              pipe for the conveyance     tion provides primary
              and secondary contain-      pipe protection and
              ment of motor vehicle       secondary containment
              fuels from underground
              storage tanks to          - Flexible
              product dispensers
                                        - No joints

                                        - UL-approved for gaso-
                                           line and gasohol

                                        - Primary pipe can be
                                          retracted for repair or 
                                          replacement

                                        - Ease of installation

                                       39
<PAGE>
 
                                        - Thermoplastic
                                          construction

                                        - Certain features
                                          protected by patent
 
Sump/risers  Liquid-resistent access    - Secondary containment
             chambers made from
             fiberglass or polyethy-    - Mounted on all types of
             lene for submersible         underground storage
             pumps and other fit-         tanks
             tings attached to
             underground storage        - Provides easy above-
             tanks                        ground access to pumps
                                          and fittings
 
                                        - Sumps and risers can be
                                          stacked and trimmed to
                                          achieve required burial
                                          depth
 
Dispenser    Liquid-resistant            - Secondary containment
sumps        secondary containment
             chambers made from          - UL-approved mounting
             fiberglass or poly-           frames, brackets and
             ethylene for above            stabilizer bars
             ground fuel dispensers
                                         - Provides aboveground
                                           access to dispenser
                                           valves, joints and
                                           connectors
 
                                         - Polyethylene and
                                           fiberglass construction
 
                                         - Certain features
                                           protected by patent
 
Bulkhead     Specially designed fit-     - Ease of installation
fittings     tings used to seal pipe/
and          sump connections            - Thermoplastic
reducers                                   construction
 
                                         - Certain features
                                           protected by patent
 
Tank         A polyethylene jacket       - Secondary containment
Jacket       that provides secondary
             containment and corro-      - UL-approved secondary
             sion protection for           containment and corro-
             steel underground             sion protection jacket
             storage tanks
                                         - UL-approved for
                                           gasoline and gasohol

                                       40
<PAGE>
 
                                         - Less expensive than
                                           fiberglass tanks

                                         - Ease of transportation

                                         - Polyethylene
                                           construction

                                         - Certain features
                                           protected by patent

Pipe         A telescoping poly-         - Secondary containment
Jacket       ethylene pipe that
             provides liquid con-        - Polyethylene construc-
             veyance and corro-            tion
             sion protection for
             rigid fiberglass or         - Certain features pro-
             steel underground             tected by patent
             piping systems

SALES ACTIVITIES

     General

     The sales of the Company's principal products and the sales of each product
as a percentage of total sales in 1995, 1996 and 1997 are set forth in the
following table:

                      Sales and Percentages of Total Sales

                                          Year Ended December 31,
                          ------------------------------------------------------
                                1995               1996                1997
                          ----------------   ----------------   ----------------
                                (Dollars in thousands)
Enviroflex and
  other piping...         $ 18,466   47.3%   $ 16,912   44.8%   $ 19,550   42.8%
Sump/risers and
  bulkhead fit-
  tings and
  reducers.......            7,696   19.7       8,374   22.2     10,168    22.3
Dispenser sumps..            4,732   12.1       4,876   12.9      5,060    11.1
Tank Jacket.....             5,983   15.3       6,008   15.9      6,109    13.4
Pipe Jacket......              774    2.0         624    1.7        485     1.1
Installation.....               --     --          --     --      1,977     4.3
Applicator equip-
  ment and other.            1,418    3.6         936    2.5      2,300     5.0
                          --------   ----     -------   -----    -------   -----
Totals...........         $ 39,069  100.0%    $37,730   100.0%   $45,649  100.0%
                          ========  =====     =======   =====    =======   =====

     Geographic Markets

     In addition to the United States, the Company's geographic market for its
products includes Canada, Mexico, Central and South America, Europe (including
the EEC, Hungary and Poland), Australia, New Zealand, Southeast Asia (including
Singapore, Thailand, Taiwan and Hong Kong), and the Middle East (including

                                       41
<PAGE>
 
Turkey and Israel).  The Company's net sales to customers outside the United
States in 1997, 1996 and 1995 were $12.5 million, $12.7 million and $12.3
million, respectively.  The Company's principal foreign end users are the major
oil companies.

     The following table sets forth, for the periods indicated, the net sales of
the Company's products by geographic market area.

                      NET SALES BY GEOGRAPHIC MARKET AREA
<TABLE>
<CAPTION>
 
                                         Year Ended December 31,
                                        -------------------------
                                         1995     1996     1997
                                        -------  -------  -------
                                             (In thousands)
<S>                                     <C>      <C>      <C>
Net Sales:
  United States.......................  $26,762  $25,001  $33,128
  Canada..............................    1,811    1,566    1,463
  Mexico, Central and South America.      4,957    6,028    6,412
  Europe and the Middle East..........    4,431    3,761    3,536
  Southeast Asia, Australia and
    New Zealand.......................    1,108    1,374    1,110
                                        -------  -------  -------
Total.................................  $39,069  $37,730  $45,649
                                        =======  =======  =======
</TABLE>

     Information relating to foreign operating income and foreign assets is set
forth in Note 13 of Notes to Consolidated Financial Statements included
elsewhere herein.

PRODUCT DEVELOPMENT

     The Company is committed to a program of continuous product evaluation and
continuous improvement in order to maintain the technological competitiveness of
its product line.  In addition, the Company is actively engaged in developing
new products for traditional markets in addition to expanding into non-
traditional markets.

NEW MANUFACTURING LINE

     In the fourth quarter of 1997, the Company completed the installation of a
new primary pipe manufacturing line at its Oaks, Pennsylvania facility.  Prior
to such completion, the Company, since its inception, had purchased its primary
pipe from Dayco Products, Inc., a subsidiary of Mark IV Industries.  See "Notes
to Consolidated Financial Statements -- Warranty Reserve" and "Item 3.  Legal
Proceedings."  With this equipment, the Company was able to redesign and
significantly improve certain important features of the Enviroflex and Omniflex
primary pipes.  This primary pipe carries the approval of Underwriters'
Laboratories.

     Also, the Company finalized the design and began producing a new pipe for
use in remote fill applications.  This pipe is a 4 inch corrugated composite
extrusion with field attachable

                                       42
<PAGE>
 
fittings.  The Company expects that this pipe will be sold principally overseas.

END USERS

     The principal domestic end users of the Company's products are major oil
companies and convenience store chains which purchase the Company's products in
connection with the installation of new and the retrofitting of existing Fuel
Containment Systems.  The Company's other domestic customers are primarily state
and local government bodies, utilities and other fleet vehicle operators.

     Substantially all of the Company's sales relating to oil company and
convenience store chain end users are performed pursuant to purchase orders or
non-exclusive contracts, neither of which provide for any minimum purchase
requirements.  During 1995 and 1996 the two previous fiscal years, the Company's
backlog of orders averaged less than $770,000.  In 1997, the backlog averaged
$1.7 million.  The Company typically ships incoming orders within approximately
seven days and, therefore, does not have a significant backlog.

COMPETITION

     The industry in which the Company operates is highly competitive and
dominated by a few companies. The companies compete on several factors including
product performance, service, and pricing.

     The Company's principal competitors in the market for underground piping
systems (including sump risers and dispenser sumps) are divisions or
subsidiaries of A. O. Smith Corporation and Ameron, Inc. both fiberglass
manufacturers, as well as Environ Products, Inc., a manufacturer of flexible
piping systems, and a new competitor of the Company, OPW Fueling Components
("OPW"), a division of Dover Resources, Inc.  (See "Item 3 - Legal
Proceedings").  Many of these companies have greater financial resources than
the Company.

     The Company's primary competition for Tank Jacket are manufacturers of
fiberglass, fiberglass clad, and steel tanks.  Of these competing manufacturers,
Fluid Containment, Inc. and Xerxes Corporation, are both fiberglass tank
manufacturers.

MANUFACTURERS AND SUPPLIERS

     During the fourth quarter of 1997, the Company began manufacturing the
primary pipe component of its Enviroflex and Omniflex flexible piping systems.
Prior thereto, the Company purchased its primary pipe from Dayco Products, Inc.,
a subsidiary of Mark IV Industries (See Item 3 - "Legal Proceedings").  The
Company also manufacturers its Tank Jacket

                                       43
<PAGE>
 
product, as well as molded bulkhead fittings and other seals, and fiberglass
tanks and dispenser sumps.

     Ten suppliers provide the Company approximately 75% of its purchases.
During 1997, the Company has entered into a written supply contract with
Cleveland Tubing, Inc. (which manufactures various extruded pipes for the
Company, including the Enviroflex secondary pipe).  The Company does not have
any written supply contracts with any other principal suppliers.

PATENTS AND TRADEMARKS, LICENSING AGREEMENTS

     The Company derives revenues from the sale of Enviroflex and Omniflex
piping systems and its Tank Jacket product, certain features of which are
covered by patent owned by, assigned to, or licensed to the Company.  The
Company relies on its intellectual property rights to protect its interest in
these design features.

     The Company has the right to practice certain claims with respect to piping
used in the Enviroflex and Omniflex system pursuant to an exclusive worldwide
license (the "license") covered under patents owned by OPW Fueling Components
Division of Dover Industries, Inc. ("OPW"), which also possesses the right to
practice these claims.  Under the license, the Company is obligated to pay a
royalty of three percent of net sales of the Company attributable to products
covered by the patents to OPW, payable quarterly, with a minimum payment of
$75,000 per calendar quarter.

     On April 1, 1994 the Company paid an advance of $1.5 million against the
royalties.  The Company used the last of the prepaid royalties during the fourth
quarter of 1997.  For information relating to litigation with OPW, see "Item 3.
Legal Proceedings."  See also "Competition."

     The Company also relies on unpatented proprietary information to maintain
and promote its commercial position.

EMPLOYEES

     As of December 31, 1997, the Company employed 257 persons, of which 17 were
engaged in marketing and sales; 4 were engaged in research and development; 138
were engaged in manufacturing and assembly; 54 were engaged in field service
installations; and 40 were engaged in finance, administration and management.
Of the total number of employees, 4 were located outside the United States.
None of the Company's employees are covered by a collective bargaining
agreement.

                                       44
<PAGE>
 
ITEM 2.  PROPERTIES

     The Company operates in a 125,000 square foot leased facility located in
Oaks, Pennsylvania.  The Company believes that the facility will accommodate its
administrative and manufacturing needs for the foreseeable future.

     Rene Morin, Inc. operates from a 12,000 square foot leased facility located
in Plainfield, Connecticut.

     American Containment, Inc. operates from several leased buildings, totaling
approximately 10,000 square feet, located in Bakersfield, California.

     TCI Environment operates from an office located in Antwerp, Belgium.  In
addition, TCI Environment has warehouse space in Antwerp, Belgium.

ITEM 3.  LEGAL PROCEEDINGS

     In January, 1998 the Company settled and terminated litigation with two
competitors who claimed that they possessed licenses to manufacture and sell
underground systems with retractability and other features covered by patents
licensed to the Company.  The purported licensees acknowledged that whatever
license rights they had were terminated and the Company paid $1.6 million to
them.

     During 1997, the Company was a party in litigation involving the owner of
the patents referred to above and a third party to whom the owner of such
patents proposed to transfer his business, including patent rights with respect
to the retractability feature of the underground containment systems sold by the
Company.

     In April, 1997 a court held that the owner of the patents was entitled to
transfer his business, including his patent rights.    The Company did not
appeal the Court's decision.

     During 1997, the Company initiated a legal action against Dayco Products,
Inc., a subsidiary of Mark IV Industries, in the United States District Court
for the Eastern District of Pennsylvania seeking, among other things, a judicial
determination that Dayco breached the provisions of two Supply Agreements,
entered into in 1990 and 1993 for the sale of primary pipe.  The Complaint
alleges that Dayco supplied pipe that was defective because it was susceptible
to microbial fungus.

     In its suit, the Company requests that the Court award damages, to cover,
among other things, the cost of inspecting and replacing defective pipe and
related costs in an amount to be determined at trial and for further appropriate
relief.  The Company, in consultation with its legal counsel, believes that it
is more likely than not that the Company will prevail with

                                       45
<PAGE>
 
respect to its material claims.  (See "Significant Accounting Policies -
Warranty Reserve.")

     A legal action was filed in the Fifth Circuit Court of the State of Hawaii
on September 16, 1997 by JJR Inc., James Jasper Enterprises, Inc., and others
with interests in a retail shopping center on the Island of Kauai, Hawaii,
against Company, Dayco, and Senter Petroleum, Inc. for damages allegedly
resulting from the failure of Company's Enviroflex piping system on or about
August 12, 1996 at The Little Gas Shack (the "Shack"), a retail gasoline service
facility supplied by Senter adjacent to the shopping center.  The Complaint
alleges that more than 1,800 gallons of gasoline were released onto the property
occupied by the Shack and the adjacent businesses and into a nearby stream and
the harbor where the shopping center was located.  Although the amount sought by
the plaintiffs is not specified in the Compliant, the attorney retained by the
Company's insurance carrier has ascertained that plaintiffs are seeking
approximately $23 million in damages.  The Company has and maintains insurance
with policy limits at the time of this claim of $3 million which may respond to
this claim, however, the amount claimed exceeds the liability limits.  Under the
Dayco Supply Agreement, Dayco is required to indemnify and hold the Company
harmless from all claims and suits by third parties based upon the manufacture
of Enviroflex primary pipe or the performance by Dayco of its obligations under
the Agreement.  Dayco, has not, as yet, agreed to honor this obligation.  The
Company has commenced litigation to enforce its rights against Dayco.  Based
upon the Company's investigation to date, the Company believes that the
Enviroflex secondary containment system functioned properly to contain the
overflow and was not responsible for the release, and that any loss was caused
by the failure of equipment manufactured and supplied by third parties.  The
Company believes that plaintiff's claims are grossly excessive and intends to
vigorously defend its position.  The Company believes that it has no material
uninsured liability in connection with this matter and that if it does, it is
covered by Dayco's contractual indemnity.

     The Company is also involved in various other legal actions incidental to
the conduct of its business. Management is contesting these cases vigorously and
believes it has meritorious defenses in each matter.  Management does not
believe the ultimate outcome of these various legal actions will have a material
effect on the Company's financial condition, results of operations or working
capital requirements.

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

     None.

                                       46
<PAGE>
 
ITEM 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers of the Company and their ages and positions with the
Company are as follows:
 
Name                   Age                 Position
----------------------------  ----------------------------------
 
Pierre Desjardins......   56  President and Chief Executive
                              Officer
Jeffrey A. Boehmer.....   32  Vice President Finance
Randolph B. Braun......   40  Vice President Sales and Marketing
David L. Gilbert.......   48  Vice President Engineering
Homer N. Holden........   61  Vice President - Research and
 Product Development
John R. Wright, Jr.....   37  Vice President Operations

     The principal occupation and business experience during the last five years
of the executive officers of the Company are as follows:

     Pierre Desjardins joined the Company in September 1996 as President and
Chief Executive Officer.  From 1990 to 1994, he was President and Chief
Executive Officer of Domtar, Inc., a publicly held Canadian pulp and paper
corporation.  He is currently a director for Discreet Logic, a publicly held
Canadian company that develops, assembles, markets, and supports systems for
creating, editing and compositing imagery and special effects for film and
video, as well as Canam Manac Group, Inc., a publicly owned Canadian industrial
corporation engaged in the manufacture of construction steel components and
trailers in Canada, the United States, France and Mexico.

     Jeffrey A. Boehmer joined the Company as an accountant in 1987.  From 1990
until 1996, Mr. Boehmer served as Operations Manager, Vice President Operations
from January 1996 until June 1997, and presently Vice President Finance.  Mr.
Boehmer has also served as Secretary of the Company since 1994.

     Randolph B. Braun joined the Company as Director of Marketing in April 1995
and became Vice President of Sales and Marketing in January 1996.  Prior to
joining the Company, from 1992 to 1995, Mr. Braun was a Sales and Marketing
Account Executive for Mark IV Automotive, concentrating on customers in the
Pacific Rim and the Japanese auto manufacturers transplanted in the United
States.

     David L. Gilbert joined the Company in March of 1996 as Vice President
Engineering.  Prior to joining the Company, from 1992 to 1996, Mr. Gilbert was
Manager of Program Development with Mark IV automotive.  In this position he was
responsible for establishing new manufacturing plants in Europe.

     Homer N. Holden joined the Company as Director of Research in 1990 and
became Vice President - Research and Product

                                       47
<PAGE>
 
Development in 1992.  Prior to joining the Company, from 1988 to 1990, Mr.
Holden managed the Plastic Products Development Laboratory at Dayco.

     John R. Wright, Jr. joined the company in June 1997 as Vice President
Operations.  Prior to joining the Company, from 1982 to 1997, Mr. Wright was
Director of Materials Management for Lukens, a specialty steel manufacturer.
Prior responsibilities at Lukens included Corporate planning, manager, and
various sales positions.

                                    PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTER

     The Company's Common Stock (the "Common Stock") commenced trading on the
Nasdaq Stock Market National Market System ("Nasdaq NMS") under the symbol TCIX
on February 25, 1994, the date on which the Company completed its initial public
offering (the "Offering").  Prior to the Offering there was no public market for
the Common Stock.  As of February 27, 1998, the Company had 17 shareholders of
record and approximately 459 beneficial owners of the Common Stock.  The Company
has been advised by Nasdaq NMS that the Company's net tangible assets do not
meet NASDAQ's criteria for continued listing on the Nasdaq NMS.  On March 13,
1998, the Company's principal shareholder purchased from the Company 400 shares
of authorized perpetual preferred stock at $10,000, cash, per share or $4
million in the aggregate.  This $4 million equity infusion is expected to cause
the Company to meet NASDAQ's listing requirements and should permit the Company
to maintain its NASDAQ NMS listing over the foreseeable future.

     The following table sets forth the quarterly ranges of high and low sale
prices, and the closing sale price, for shares of the Common Stock for the
periods indicated.  Such prices represent quotations between dealers and do not
include mark-ups, mark-downs or commissions, and may not necessarily represent
actual transactions.

 
                     Sale Prices              
                  ------------------   Closing
                    High      Low     Sale Price
                  --------- --------  ----------
1997
----
First Quarter...  $ 3       $ 2 3/8   $ 3
Second Quarter..    3         2 1/4     2 5/8
Third Quarter...    2 15/16   2 1/4     2 5/8
Fourth Quarter..    2 7/8     2 3/16    2 3/4


                                       48
<PAGE>
 
1996
----
First Quarter...  $ 5      $ 3 1/4   $ 3 5/8
Second Quarter..    3 3/4    2 1/4     3 1/2
Third Quarter...    4 1/4    1 27/32   3 1/4
Fourth Quarter..    3 1/2    2 1/4     3 3/8

     The Company has not paid any cash dividends on the Common Stock in the past
and does not anticipate that any cash dividends will be declared or paid in the
foreseeable future. The Company's current line of credit facility prohibits the
payment of any dividends by the Company without the lender's prior written
consent.

ITEM 6.  SELECTED FINANCIAL DATA

     Information required by this Item is included on Page 3 of the Annual
Report.

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

     Information required by this Item is included on Pages 4 through 7 of the
Annual Report.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The audited Consolidated Financial Statements of the Company at December
31, 1996 and 1997 and for the three years ended December 31, 1997 required by
this Item are included on Pages 9 through 21 of the Annual Report. No
supplementary financial data is required to be included herein.

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

     On January 12, 1998, the Company engaged Grant Thornton LLP as the
Company's principal accountant to audit the Company's financial statements.  The
Company did not consult with Grant Thornton LLP regarding any accounting matter
during the two most recent fiscal years or any subsequent interim period prior
to engaging Grant Thornton LLP.


     The following information is set forth in accordance with the relevant
provisions of Item 304 of Regulation S-K:

Item 304(a)(1)--

     (i)       On December 3, 1997, Price Waterhouse LLP resigned as the
               independent accountants of the Registrant.

     (ii)      The reports of Price Waterhouse LLP on the financial statements
               for the past two fiscal years contained no adverse opinion or
               disclaimer of

                                       49
<PAGE>
 
               opinion and were not qualified or modified as to uncertainty,
               audit scope or accounting principle.

     (iii)  Not applicable.

     (iv)      In connection with its audits for the two most recent fiscal
               years and through December 3, 1997, there have been no
               disagreements with Price Waterhouse LLP on any matter of
               accounting principles or practices, financial statement
               disclosure, or auditing scope or procedure, which disagreements,
               if not resolved to the satisfaction of Price Waterhouse LLP,
               would have caused them to make reference thereto in their report
               on the financial statements for such years, except as described
               in (A) below:

               (A)  During the third quarter of 1997, the Company sustained a
                    $20.4 million operating loss due in large measure to an $18
                    million warranty charge and certain other charges of $2.4
                    million.  Based on its review of all evidence and other
                    information available to it at September 30, 1997, the
                    Company recorded a $6.8 million tax benefit represented by
                    deferred tax assets which management believes are fully
                    realizable, based on the Company's historical results of
                    operation, management's forecast of future taxable income,
                    and other factors.  Based on procedures performed in
                    connection with its review of the Company's unaudited
                    financial information for the quarter ended September 30,
                    1997, Price Waterhouse LLP stated the Company should record
                    a substantial valuation allowance because, in its view, the
                    objective evidence indicated it is more likely than not that
                    such deferred assets will not be fully realized.  This
                    matter was discussed by the Company's Audit Committee with
                    representatives of Price Waterhouse LLP.

                    This disagreement between the Company and Price Waterhouse
                    LLP, which occurred prior to the commencement of the 1997
                    year-end audit process, was not resolved at the time of
                    Price Waterhouse LLP's resignation.

                    The Company has evaluated whether a valuation allowance is
                    appropriate under all the facts and circumstances existing
                    at December 31, 1997, in connection with the 1997 audit
                    process and concluded that a valuation allowance of $275,465
                    is required to cover

                                       50
<PAGE>
 
                    various state net operating loss carryforwards with
                    relatively short carryforward periods.  Grant Thornton LLP
                    concurs with the Company's determination that no additional
                    valuation allowance is required.

                    The Company is unable to quantify the amount of the 
                    required valuation allowance. A substantial valuation
                    allowance would have reduced the Company's consolidated
                    assets, net worth, and net income by the amount of the
                    increase in the valuation allowance.

               (B)  The Audit Committee of the Registrant's Board of Directors
                    discussed the subject matter of the disagreement referenced
                    above with Price Waterhouse LLP.

               (C)  The Registrant has authorized Price Waterhouse LLP to
                    respond fully to the inquiries of Grant Thornton LLP,
                    concerning the subject matter of the disagreement referenced
                    above.

     (v)       During the two most recent fiscal years and through December 3,
               1997, there have been no reportable events (as defined in Item
               304(a)(1)(v) of Regulation S-K)).

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Incorporated by reference herein is the information appearing in the Proxy
Statement relating to the Company's Annual Meeting of Stockholders to be held on
April 17, 1998 (the "Proxy Statement") under the heading "Election of Directors
--Continuing Directors and Nominees for Election as Director" and under the
heading "Report of the Compensation Committee on Executive Compensation --
Additional Information Regarding Directors and Officers."

     Information regarding executive officers of the Company is presented in
Part I, Item 4A of this Form 10-K.

                                       51
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION

     Incorporated by reference herein is the information appearing in the Proxy
Statement under the heading "Report of the Compensation Committee on Executive
Compensation."

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Incorporated by reference herein is the information appearing in the Proxy
Statement under the headings "General --Principal Stockholders" and "Election of
Directors -- Security Ownership of Management."

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     None.

                                    PART IV

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

     (a) The following documents are filed as part of this report:

1.   AUDITED FINANCIAL STATEMENTS

     The financial statements of the Company listed on the index set forth below
are filed as part of this Annual Report on Form 10-K.
                                                      PAGE OF THE
                                                     ANNUAL REPORT
                                                     -------------

Reports of Independent Accountants...............          8-9
Consolidated Balance Sheets as of December 31,
  1996 and 1997..................................          10
Consolidated Statements of Operations for the
  years ended December 31, 1995, 1996 and 1997...          11
Consolidated Statements of Changes in
  Stockholders' Equity for the years ended
  December 31, 1995, 1996 and 1997...............          12
Consolidated Statements of Cash Flows for the
  years ended December 31, 1995, 1996 and 1997...          13
Notes to Consolidated Financial Statements.......          14

2.  FINANCIAL STATEMENT SCHEDULES.

     A schedule setting forth the warranty reserves of the Company as of
December 31, 1995, 1996 and 1997 is attached as an Appendix to this Annual
Report on Form 10-K.

                                       52
<PAGE>
 
3.  EXHIBITS.

     The following is a list of the Exhibits required by Item 601 of Regulation
S-K and incorporated by reference herein or attached as Exhibits to this Annual
Report on Form 10-K.

 3.1      Certificate of Incorporation of the Company incorporated herein by
          reference to Exhibit 3.1 to the Quarterly Report of the Company on
          Form 10-Q for the quarter ended June 30, 1997.

 3.2      Bylaws of the Company incorporated herein by reference to Exhibit 3.2
          to the Quarterly Report of the Company on Form 10-Q for the quarter
          ended June 30, 1997.

 3.3      Certificate Representing Shares of Class A Floating Rate Preferred
          Stock and Related Statement With Respect to Shares - Domestic Business
          Corporation, with Attachments (Exhibit 1).

 4.1      Specimen of Common Stock Certificate of the Company, incorporated
          herein by reference to Exhibit 4(a) to Registration Statement No. 33-
          70456 on Form S-1 of the Company.

10.1      Stock Compensation Plan, dated January 14, 1994, incorporated herein
          by reference to Exhibit 10(a) to Registration Statement No. 33-70456
          on Form S-1 of the Company.*

10.2      Stock Compensation Plan, dated February 27, 1997 incorporated herein
          by reference to Exhibit 10.2 to the Annual Report of the company on
          Form 10-K for the fiscal year ended December 31, 1996.*

10.3      Employment Agreement between the Company and Marc Guindon,
          incorporated by reference to Exhibit 10(b) to Registration Statement
          No. 33-70456 on Form S-1 of the Company.*

10.4      Employment Agreement between the Company and Pierre Desjardins
          incorporated herein by reference to Exhibit 10.4 to the Annual Report
          of the Company on Form 10-K for the fiscal year ended December 31,
          1996.*

10.5      Employment Agreement between the Company and Homer N. Holden,
          incorporated by reference to Exhibit 10(o) to Registration Statement
          No. 33-70456 on Form S-1 of the Company.*

                                       53
<PAGE>
 
10.6      Employment Agreement between the Company and Jeffrey A. Boehmer,
          incorporated by reference to the Quarterly Report of the Company on
          Form 10-Q for the quarter ended March 31, 1994.*

10.7      Settlement Agreement between the Company Ameron, Inc., Environ
          Products, Inc., Michael C. Webb, Keith Osborne, Intelpro Corporation,
          and Buffalo Environmental Products Corporation, dated as of January
          26, 1998.  (Exhibit 2).

10.8      Secrecy Agreement, dated November 2, 1987, between the Company and
          Remcon Plastics, Inc., incorporated herein by reference to Exhibit
          10(m) to Registration Statement No. 33-70456 on Form S-1 of the
          Company.

10.9      Settlement Agreement, dated December 16, 1994, between the Company and
          the Settlement Counterparty, incorporated by reference to Exhibit
          10.14 to the Annual Report on Form 10-K of the Company for the fiscal
          year ended December 31, 1994.

10.10     Release of All Claims/Settlement Agreement, dated March 5, 1996,
          between the Company and James Lawrence, incorporated by reference to
          Exhibit 10.11 to the Annual Report of the Company on Form 10-K for the
          fiscal year ended December 31, 1996.

10.11     Commitment Letter from Commercial Bank dated January 17, 1998 setting
          forth terms of $10 million line of credit facility.

11        Statement re: Computation of per share earnings.

16        Letter of Price Waterhouse re:  Change in Certifying Accountant,
          incorporated by reference to Exhibit 16 to the Current Report on Form
          8-K/A of the Company dated December 15, 1997.

21        Subsidiaries of the Company.

27        Financial Data Schedule (December 31, 1997).

27.2      Financial Data Schedule (December 31, 1996).

27.3      Financial Data Schedule (December 31, 1995).
___________________

                                       54
<PAGE>
 
* Denotes compensatory plan or arrangement.

     (b)  Reports on Form 8-K.

     The Company filed the following Current Reports on Form 8-K during the
fourth quarter of 1997:

     (a) The Company's Current Report on Form 8-K, File No. 000-23454, as filed
with the Securities and Exchange Commission on December 10, 1997, and any
amendments thereto.

                                       55
<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.

                              Total Containment, Inc.
                              (Registrant)

                              /s/ Pierre Desjardins
                              -----------------------------------
                              Pierre Desjardins,
                              President and Chief Executive Officer

Dated:   February 27, 1998


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
 
Signature                            Title               Date
<S>                          <C>                    <C>
 
/s/ Pierre Desjardins        President and Chief    February 27, 1998
---------------------------
Pierre Desjardins            Executive Officer
 
/s/ Jeffrey A. Boehmer       Vice President         March 9, 1998
---------------------------
Jeffrey A. Boehmer           Finance and
                             Secretary (Principal
                             Financial Officer)
 
/s/ Marc Guindon             Director               March 13, 1998
---------------------------
Marc Guindon
 
/s/ Jean-Claude Arpin        Director               March 4, 1998
---------------------------
Jean-Claude Arpin
 
/s/ Marcel Dutil             Director               March 4, 1998
---------------------------
Marcel Dutil
 
/s/ Paul Gobeil              Director               March 4, 1998
---------------------------
Paul Gobeil
 
/s/ Nycole Pageau-Goyette    Director               March 8, 1998
---------------------------
Nycole Pageau-Goyette
 
/s/ Bernard Gouin            Director               March 4, 1998
---------------------------
Bernard Gouin
 
/s/ Charles Frey, Sr.        Director               March 10, 1998
---------------------------
Charles Frey, Sr.

</TABLE>

                                       56
<PAGE>
 
                                              Schedule VIII


                            TOTAL CONTAINMENT, INC.

                                    RESERVES

                        DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
 
<S>                                   <C>         <C>             <C>           <C>

                                      Balance at  Charged to                    Balance
                                      beginning   cost and                      at end
                                      of period   expenses        Deductions    of period
                                      ----------  -----------     -----------   -----------
<S>                                   <C>         <C>             <C>
Warranty Reserve December 31, 1995    $1,803,925  $ 8,073,005(1)  $(1,605,374)  $ 8,271,556
                 December 31, 1996    $8,271,556  $ 2,877,806(2)  $(6,666,348)  $ 4,483,014
                 December 31, 1997    $4,483,014  $18,596,329(3)  $(5,757,945)  $17,321,398

</TABLE>
___________________

(1)  Includes pipe warranty of $7,500,000 (See Notes 2 and 10).

(2)  Includes Dayco receivable for replacement materials (See Note 10).

(3)  Includes pipe warranty of $17,200,000 (See Notes 2 and 10).

                                       57