<PAGE>   1

                         SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549

********************************************************************************


                                    FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                  For the quarterly period ended June 30, 1997

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 0-14992

                          SMITH TECHNOLOGY CORPORATION
             (FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
             (exact name of registrant as specified in its charter)


          DELAWARE                                              38-2294876
(State or other jurisdiction of                              (IRS Employer
incorporation or organization)                               Identification No.)

             3501 JAMBOREE ROAD, SUITE 304, NEWPORT BEACH, CA 92660
                    (Address of principal executive offices)
       Registrant's telephone number, including area code: (714) 737-7900

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 ___  No X

Registrant has not filed its Form 10-K for the twelve month period ended
September 30, 1996.

On August 8, 1997, the registrant had 6,402,218 shares of common stock
outstanding.
<PAGE>   2
                          QUARTERLY REPORT ON FORM 10-Q
                         FOR QUARTER ENDED JUNE 30, 1997

                          SMITH TECHNOLOGY CORPORATION
                                TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                            Page
<S>                                                                        <C>
       Item 1:  Financial Statements

           Consolidated Balance Sheets (unaudited) as of June 30, 1997
           and September 30, 1996                                            3-4

           Consolidated Statements of Operations (unaudited)
           for the three and nine months ended June 30, 1997 and 1996         5

           Consolidated Statements of Cash Flows (unaudited)
           for the nine months ended June 30, 1997 and 1996                  6-7

           Notes to Consolidated Financial Statements (unaudited)           8-12

    Item 2:   Management's Discussion and Analysis of

              Financial Condition and Results of Operations                13-19

PART II.  OTHER INFORMATION

    Item 1:  Legal Proceedings                                              20-21

    Item 3:  Defaults on Senior Securities                                   21

    Item 5:  Other Information                                               21

    Item 6:  Exhibits and Reports on Form 8-K                                22
</TABLE>


           Signature

           Exhibit 11 Computation of earnings per share, for the
           three and nine months ended June 30, 1997 (unaudited)

           Exhibit 27 Requirements for the format and input
           of financial data schedules (EDGAR version only)


                                       2
<PAGE>   3
PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                          SMITH TECHNOLOGY CORPORATION
             (FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)

                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   JUNE 30,   SEPTEMBER 30,
                                                                    1997          1996
                                                                   -------       -------
                                                                 (UNAUDITED)   (UNAUDITED)
<S>                                                               <C>           <C>
ASSETS

Current Assets:
         Cash                                                      $   535       $   625
          Accounts receivable, less allowance for doubtful
               accounts of $781 and $829 (Note 2)                   33,705        40,793
          Costs and estimated earnings of long-term
                contracts in excess of billings                      1,955         2,025
          Prepaid expenses and other current assets                  6,424         3,445
                                                                   -------       -------
               Total current assets                                 42,619        46,888

Property and equipment:
          Equipment                                                 19,462        19,330
          Land and buildings                                         4,017         4,017
          Leasehold improvements                                     1,107         1,107
                                                                   -------       -------
                Total property and equipment, at cost               24,586        24,454

          Less accumulated depreciation and amortization            13,427        11,582
                                                                   -------       -------
               Property and equipment, net (Note 2)                 11,159        12,872

Other assets:
          Intangible assets, net of accumulated amortization        
               of $2,753 and $1,878, respectively                   14,297        15,172
          Goodwill, net of accumulated amortization                                     
               of $1,011 and $714, respectively                     14,467        14,953
          Investment in unconsolidated affiliate                     1,022         1,561
          Other assets                                               3,998         4,038
                                                                   -------       -------
TOTAL ASSETS                                                       $87,752       $95,484
                                                                   =======       =======
</TABLE>


           See accompanying notes to consolidated financial statements


                                       3
<PAGE>   4
                          SMITH TECHNOLOGY CORPORATION
             (FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)
                     CONSOLIDATED BALANCE SHEETS (CONTINUED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                         JUNE 30,          SEPTEMBER
                                                                           1997            30, 1996
                                                                        -----------        --------
                                                                         (UNAUDITED)      (UNAUDITED)
<S>                                                                     <C>                <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK
     AND COMMON STOCKHOLDERS' EQUITY

Current liabilities:
           Accounts and subcontracts payable                            $    25,550        $ 22,597
           Accrued expenses and other liabilities:
                       Compensation and related fringes                       5,549           5,486
                       Severance and office closures                          2,389           1,688
                       Other                                                  4,573          10,686
           Billings on long-term contracts in excess of                         457              57
                       costs and estimated earnings
           Current maturities of long-term debt and
                       short-term borrowings                                 31,540           5,366
                                                                        -----------        --------
                  Total current liabilities                                  70,058          45,880

Long-term debt                                                                   --          22,381

Other long-term liabilities                                                   9,299           7,804

Convertible Senior Subordinated Note, 10% maturing
           in 2004, convertible into 4,642,683 and 4,210,953
           common shares, respectively at $3.28 per share                    15,228          13,812

Commitments and contingencies (Note 2)

Redeemable Preferred Stock, $0.01 par value; 78,000
           shares authorized; 66,356 and 74,438
          shares issued, respectively; 10% cumulative
           dividend; $100 redemption value                                    6,172           6,846

Junior Convertible Preferred Stock; $0.01 par  value;
           470,000 shares authorized; none issued                                --              --

Preference Stock; $0.01 par value, 1,000,000 shares
            authorized; none issued                                              --              --

Preferred Stock $0.01 par value; 550,500 shares
            authorized; none issued                                              --              --

Common stockholders' equity:
             Common stock; $0.01 par value; 20,000,000 shares
                       authorized; 6,402,218 and 6,107,440 shares
                       issued and outstanding, respectively                      61              61
              Additional paid in capital                                     17,428          17,379
              Deferred compensation                                            (404)           (404)
              (Accumulated deficit)                                         (30,090)        (18,275)
                                                                        -----------        --------
                       Total common stockholders' deficit                   (13,005)         (1,239)
                                                                        -----------        --------
TOTAL LIABILITIES, REDEEMABLE PREFERRED
     STOCK AND COMMON STOCKHOLDERS' EQUITY                              $    87,752        $ 95,484
                                                                        ===========        ========
</TABLE>

           See accompanying notes to consolidated financial statements


                                       4
<PAGE>   5
                          SMITH TECHNOLOGY CORPORATION
                (FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)

                      CONSOLIDATED STATEMENT OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                    UNAUDITED

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED               NINE MONTHS ENDED
                                                                   JUNE 30,                          JUNE 30,
                                                           ------------------------        --------------------------
                                                             1997            1996             1997             1996
                                                           --------        --------        ---------        ---------
<S>                                                        <C>             <C>             <C>              <C>
Revenues                                                   $ 33,759        $ 38,011        $ 117,048        $ 119,905

Cost of revenues                                             35,321          34,457          111,409          107,867
                                                           --------        --------        ---------        ---------

               Gross profit (loss) from operations           (1,562)          3,554            5,639           12,038

Selling, general and administrative expenses                  4,084           3,715           10,498           11,106
Amortization of intangible assets,goodwill and
          deferred financing fees                               509             490            1,521            1,467
Special items                                                    --              --            2,990              593
                                                           --------        --------        ---------        ---------

           Income (loss) from operations                     (6,155)           (651)          (9,370)          (1,128)

Interest expense                                              1,571           1,103            4,220            3,286
                                                           --------        --------        ---------        ---------

          Income (loss) before share in earnings
                 of unconsolidated affiliate, income
                 taxes and extraordinary charge              (7,726)         (1,754)         (13,590)          (4,414)

Share in earnings of unconsolidated affiliate                    --              --               --              500
                                                           --------        --------        ---------        ---------

          Income (loss) before income taxes and
              extraordinary charge                           (7,726)         (1,754)         (13,590)          (3,914)

Income tax (benefit) expense                                 (2,477)             30           (2,428)              80
                                                           --------        --------        ---------        ---------

          Income (loss) before extraordinary
              charge                                         (5,249)         (1,784)         (11,162)          (3,994)

Extraordinary charge on debt refinancing                         --              --               --            1,395
                                                           --------        --------        ---------        ---------

          Net income (loss)                                  (5,249)         (1,784)         (11,162)          (5,389)

Dividends and accretion Redeemable Preferred
   Stock                                                        211             182              653              452
                                                           --------        --------        ---------        ---------

          Net loss applicable to common stock              $ (5,460)       $ (1,966)       $ (11,815)       $  (5,841)
                                                           ========        ========        =========        =========

Weighted average number of common and
   common equivalent shares outstanding                       6,267           5,911            6,186            5,890
                                                           ========        ========        =========        =========

Loss per common and common equivalent share:

          Loss before extraordinary charge                 $  (0.84)       $  (0.30)       $   (1.80)       $   (0.68)
          Extraordinary charge                                   --              --               --            (0.23)
                                                           --------        --------        ---------        ---------

          Net loss                                            (0.84)          (0.30)           (1.80)           (0.91)
                                                           ========        =========       =========        =========
          Net loss applicable to common stock              $  (0.87)       $  (0.33)       $   (1.91)       $   (0.99)
                                                           ========        ========        =========        =========
</TABLE>


           See accompanying notes to consolidated financial statements


                                       5
<PAGE>   6
                          SMITH TECHNOLOGY CORPORATION
                (FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                    UNAUDITED

<TABLE>
<CAPTION>
                                                                      NINE MONTHS ENDED
                                                                           JUNE 30,
                                                                    -------------------------
                                                                      1997            1996
                                                                    --------        --------
<S>                                                                 <C>             <C>
OPERATING ACTIVITIES

Loss before extraordinary charge                                    $(11,162)       $ (3,994)

Adjustments to reconcile net loss to cash provided
          by (used in) operating activities:

          Depreciation and amortization                                3,384           3,443
          Gain on disposal of equipment                                 (257)           (260)
          Share in earnings of affiliate                                                (500)
          Deferred interest                                            1,416
          Compensation expense                                            32

Changes in operating assets and liabilities:

          Accounts receivable                                          7,088          13,740
           Costs and estimated earnings on long-term
                contracts in excess of billings                           70           1,386
          Prepaid expenses and other current assets                   (2,979)            635
          Other assets                                                  (305)            821
          Accounts and subcontracts payable                            2,953          (6,715)
          Accrued expenses and other liabilities                      (5,349)         (4,923)
          Billings on long-term contracts in excess of costs
               and estimated earnings                                    400          (1,044)
          Other long-term liabilities                                  1,200          (2,207)
          Other net                                                       81
                                                                    --------        --------

          Net cash (used in) provided by operating activities         (3,428)          1,194
                                                                    --------        --------
</TABLE>


           See accompanying notes to consolidated financial statements


                                       6
<PAGE>   7
                          SMITH TECHNOLOGY CORPORATION
                (FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)

                   CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                 (IN THOUSANDS)
                                    UNAUDITED

<TABLE>
<CAPTION>
                                                                                      NINE MONTHS ENDED
                                                                                           JUNE 30,
                                                                                   -----------------------
                                                                                     1997           1996
                                                                                   --------        -------
<S>                                                                                <C>             <C>
INVESTING ACTIVITIES

     Capital expenditures                                                          $   (244)       $(1,109)
     Distribution from affiliates                                                       539
     Proceeds from sale of fixed assets                                                 254            725
                                                                                   --------        -------

               Net cash provided by (used in) investing activities                      549           (384)
                                                                                   --------        -------

FINANCING ACTIVITIES

     Proceeds from revolving line of credit                                                         20,649
     Retirement of revolving line of credit                                                        (21,537)
     (Repayments) borrowings on revolving line of credit, net                           766         (1,171)

     Proceeds from term loan                                                          4,661          6,500
     Retirement of term loan                                                                        (3,400)
     Repayments on term loan                                                         (1,693)        (1,578)
     Borrowings from conversion of Senior Note                                                       1,998
     Payment of financing fees                                                         (148)        (1,096)
     Payment of early debt extinguishment penalty                                                     (287)
     Repayments of debt                                                                (470)          (420)
     Proceeds from exercise of stock options                                                            14
     Repurchase of Redeemable Preferred Stock                                           (15)          (179)
     Dividends paid on Redeemable Preferred Stock                                      (312)          (188)
                                                                                   --------        -------
               Net cash provided by (used in) financing activities                    2,789           (695)
                                                                                   --------        -------

Net (decrease) increase in cash                                                         (90)           115
Cash at beginning of period                                                             625            510
                                                                                   --------        -------
Cash at end of period                                                              $    535        $   625
                                                                                   ========        =======
Supplemental Cash Flow Information:
     Issuance of Stock for Bonus Compensation                                      $     43        $    47
     Issuance of stock for Defined Contribution Plan                                               $   107
     Non-cash conversion of portion of revolving line of credit to term loan          4,400
</TABLE>


           See accompanying notes to consolidated financial statements


                                       7
<PAGE>   8
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 1 - BASIS OF PRESENTATION

         The accompanying unaudited consolidated financial statements have been
prepared by Smith Technology Corporation, formerly Smith Environmental
Technologies Corporation, (the Company), pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes the disclosures
made herein are adequate to make the information presented not misleading. The
financial statements reflect all material adjustments which are all of a normal,
recurring nature and, in the opinion of management, necessary for a fair
presentation. The financial statements should be read in conjunction with the
unaudited consolidated financial statements and the notes to the unaudited
consolidated financial statements of the Company for the twelve month period
ended September 30, 1996 included in the March 31, 1997 Form 10-Q. The Company
has not filed its report on Form 10-K for the twelve month period ended on
September 30, 1996.

     The results of operations for the three and nine months ended June 30, 1997
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 1997.


NOTE 2 - COMMITMENTS AND CONTINGENCIES

     The Company (previously known as Canonie Environmental Services Corp.)
filed suit in the Circuit Court, Multnomah County, Oregon in February 1995
against NL Industries, Inc., Gould, Inc., Johnson Controls, Inc., Exide, Inc.,
AT&T Technologies, Inc., Rhone-Poulenc AG Co., and Burlington Northern Railroad
Co. (the "PRPs" or "PRP Group") for breach of contract dated May 28, 1992 for
the remediation of soil on property located near Portland, Oregon (the
"Contract").

     The PRP Group initiated arbitration proceedings and on June 27, 1996 a
Construction Industry Arbitration Tribunal of the American Arbitration
Association issued, with one dissenting opinion, a binding award in favor of the
PRPs in the amount of $4.5 million against the Company. The Company's
counterclaim in the arbitration was denied; however, the Company's plant and
equipment at the site was awarded to the Company. The Company filed exceptions
and a motion to vacate the award with the Oregon Circuit Court which were
denied.

     On January 30, 1997, the Company and the PRP Group reached an agreement for
the resolution of the matter. The settlement agreement provides for payment of
the $4.5 million over a period of six years with interest at twelve percent. The
agreement provides semiannual payments which include interest as follows:
$150,000 which payment was made effective May 30, 1997; $300,000 in 1998;
$584,000 in 1999; $584,000 in 2000; $1,994,000 in 2001; and $3,786,000
thereafter. The agreement also allows a discounted prepayment of $2.5 million on
or before December 31, 1997 or $2.75 million on or before April 30, 1998 in
complete satisfaction of the obligation. The Company recorded a charge in fiscal
1996 of approximately $9.7 million consisting of an obligation to the PRP Group
of $4.5 million, the write-off of $1.5 million of accounts receivable and $2.5
million of equipment, and $1.2 million of related legal and consulting fees. The
settlement agreement provides that any proceeds from the sale of the equipment
be applied to payment of the settlement.


                                       8
<PAGE>   9
     The Company filed notice of a claim with its professional liability,
general liability, and property insurance carriers. The underwriter of the
general liability and professional liability coverage has filed an action in the
Supreme Court of the State of New York, New York County, requesting relief from
the Company's claims of coverage. The Company's claims against its general
liability and professional liability carrier have been resolved with the payment
of $500,000 to the Company.

     Transcontinental Realty Investors, Inc., on October, 1990, filed an action
against the Company's subsidiary BCM Engineers Inc. (BCM) and various unrelated
parties in the Superior Court of New Jersey, Burlington County. The action
sought to recover alleged damages exceeding $8 million based on breach of
contract and negligence. An agreement has been reached by the plaintiff and the
professional liability carrier of BCM to resolve all claims. The insurance
carrier will pay the agreed settlement directly to the plaintiff. The Company's
obligation is limited to reimburse the insurance carrier for the balance of the
unexpended portion of a self-insured retention of approximately $215,000 in
installments of $50,000 payable quarterly beginning September 26, 1996, with
final payment of any remaining balance due on September 30, 1997.

     U-Max Engineering and Construction Corp. filed claims based on project
delays and defective specifications against the project owner, Stroud Township.
The Township filed a cross-claim against BCM in May 1993. The United States
District Court for the Middle District of Pennsylvania awarded U-Max a judgment
of $2 million against Stroud Township. The Township has been granted a judgment
of $1 million against BCM. Stroud Township has appealed the judgment against the
Township and the $1 million judgment awarded in favor of the Township against
BCM. BCM's insurance coverage will respond to losses exceeding a $500,000
deductible of which approximately $220,000 will be expended through completion
of the appellate process. On November 27, 1996, BCM filed a notice of appeal to
the United States Third Circuit Court of Appeals with a motion to stay execution
and/or enforcement on the Township's judgment and to waive the posting of a
supersedeas bond pending BCM's appeal. The Company's counsel believes there are
grounds for reversal or modification of the judgment on appeal, however, the
likelihood of obtaining relief from the District Court judgment is unknown. The
difference between the insurance deductible and the amount expended of $280,000
is included in other liabilities in the accompanying balance sheets.

     A settlement agreement of the claim filed in the Court of Common Pleas of
Philadelphia County, Philadelphia has been reached with Mutual Pharmaceutical
Company, Inc. dated September 12, 1996, whereby BCM will be required to pay the
plaintiff for site investigation and carrying costs amounting to $207,000. This
amount is to be paid in 13 monthly installments beginning September 12, 1996 of
$16,000 in lieu of exposure to the remaining deductible and further litigation.
The July and August, 1997 payments have not been made. The claim is covered by
BCM's professional liability coverage which carries a $500,000 deductible. The
insurance carrier has approved the settlement agreement. Additionally, the
Company's subsidiary, BCM, understands a "No Further Action" letter from the
Pennsylvania Department of Environmental Protection, required as part of the
settlement will be issued subject to successful monitoring at the site for
approximately eighteen months and completion of a final report. If BCM fails to
pay the agreed amount or perform under the agreement, the plaintiff reserves the
right to recommence the litigation and claim additional out-of-pocket costs. The
agreement leaves open a possible claim for diminution of property value up to
$420,000 for up to 10 years and requires the Company and BCM to indemnify the
plaintiff for any third-party claims not to exceed $500,000 plus costs of
defense until September, 2001. The Company is unaware of any third-party claims
and has not been notified of any claim of diminution of value of the site.


                                       9
<PAGE>   10
     In November 1993, second amended complaints and initial complaints were
filed in the Circuit Court, County of Jackson, Mississippi, against multiple
defendants including the Company's subsidiary, Riedel Environmental Services,
Inc. (RES) asserting claims in 27 separate civil actions. These civil actions
involved approximately 219 plaintiffs and include two wrongful death claims.
Plaintiffs allege that RES was negligent in transferring and clean-up activities
of the chemical diethylamine released from an overturned tanker. Settlements of
the claims of eighty-seven plaintiffs have been completed without contribution
by RES; those claims have been dismissed leaving one hundred thirty-two
plaintiffs with claims remaining against RES, including the two wrongful death
claims. The special damages of remaining plaintiffs are approximately $800,000,
not including unstated general damages. RES will be entitled to a credit for
payments made by settling defendants allocated against any remaining plaintiffs.
The Company's pollution liability coverage, having an aggregate of $1 million,
is paying the costs of investigation and defense and will respond to losses up
to the coverage balance less those costs. The Company is vigorously defending
the described litigation. No provision for loss, if any, has been recorded in
the accompanying balance sheets.

     In December 1995, BellSouth filed a complaint for unstated damages in the
Circuit Court, Jefferson County, Alabama against the Company, and its
subsidiaries BCM and Canonie Technologies, Inc. The complaint, alleging
professional negligence, fraudulent and negligent misrepresentation,
non-disclosure, innocent misrepresentation and breach of contract, arises out of
BCM's alleged failure to provide oversight and certification of services
performed by BellSouth's asbestos abatement contractors. The plaintiff claims it
has expended an additional $1.6 million to perform asbestos removal which
allegedly was to have been performed by its prior contractor. BCM believes its
services were performed in compliance with all legal requirements, that it has
been released from BellSouth claims, and that a substantial amount of the claims
are barred by statute of limitations. The parties to the lawsuit have entered
into a settlement agreement dated April 21, 1997, which resolved all claims; the
agreement provides for the payment by BCM of $150,000 in monthly installments.

     Stroudsburg Municipal Authority filed a claim on January 23, 1997 against
BCM in the Monroe County, Pennsylvania, Court of Common Pleas for damages
exceeding $500,000 based on allegations of breach of contract and negligent
performance of design services. The Company and its professional liability
carrier have retained counsel to investigate the matter and defend the claim.
The Company's insurance coverage responding to this claim has a $150,000
self-insurance retention.

     The Borough of Stroudsburg has filed a claim on May 13, 1997 in the Monroe
County, Pennsylvania, Court of Common Pleas for damages exceeding $500,000 based
on allegations of breach of contract, breach of warranties, professional
negligence and unjust enrichment. The Company has notified its professional
liability carriers of this action. The Company and its professional liability
carrier are investigating the claim.

     BCM is the lessee of improved property formerly used as a laboratory and
office/warehouse space for field service personnel. The lease dated October 23,
1989 terminates May 31, 2000 and contains provisions for the confession of
judgment in favor of Gravers Company (the "Owner") in the event of default. The
Owner has, pursuant to the lease provisions, filed judgments on March 21, 1997
in the Montgomery County, Pennsylvania Court of Common Pleas providing for
ejectment of BCM and a money judgment against BCM in the amount of $1,094,039.
BCM has brought the lease payments current and is in the process of negotiating
an agreement providing for the deferment by the Owner of any action to retake
possession of the leased property or to take action to collect on the money
judgment so long as BCM remains in compliance with the underlying lease. BCM is
attempting to sublease this space to others.


                                       10
<PAGE>   11
                          SMITH TECHNOLOGY CORPORATION
             (FORMERLY SMITH ENVIRONMENTAL TECHNOLOGIES CORPORATION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)


     The Company is currently a party to other litigation and claims incidental
to the performance of services. The Company believes that these matters are
adequately accrued or covered by insurance, are without merit or the disposition
thereof is not anticipated to have a material effect on the Company's financial
position; however these matters, individually or in the aggregate, could have a
material adverse effect on future quarterly or annual results of operations or
cash flow when resolved.

NOTE 3 - CURRENT MATURITIES OF LONG-TERM DEBT

     The Company has in place a Loan and Security Agreement (the "Loan
Agreement") with The Chase Manhattan Bank and BTM Capital Corporation
(collectively, the "Senior Lenders"). Effective April 21, 1997, the Company and
its Senior Lenders executed the Fifth Amendment, Waiver and Consent (the "Fifth
Amendment") which waived prior defaults and consented to certain conditions
under the Loan Agreement. The Fifth Amendment restructured the revolving line of
credit (the "Revolver") to be based upon eligible billed accounts receivable
only and eliminated eligible unbilled accounts receivable from the borrowing
base. Advances against eligible unbilled accounts receivable were converted to a
term loan of approximately $4.4 million as of April 21, 1997. The amended Loan
Agreement includes a $24.5 million Revolver and term loans totaling
approximately $8.0 million including the balance remaining from the original
term loan of approximately $3.6 million. The term loans are being repaid on a
weekly and monthly basis and are being amortized at the rate of approximately
$2.9 million per year. Additionally, the Fifth Amendment provides for an
overadvance of $8.0 million against the Revolver borrowing base. The overadvance
provision was reduced to $6.0 million beginning August 1, 1997 and is eliminated
effective October 2, 1997 at which time the Revolver is reduced to $23.5
million. A mandatory term loan pre-payment or a further reduction in the
overadvance of $500,000 was also required by August 1, 1997. The Company has not
met its obligation to reduce the overadvance or make the mandatory term loan
payment and therefore is in payment default under the terms of the amended
agreement. Therefore in accordance with Financial Accounting Standards Board
Statement No.78 the Company has classified its bank obligations as a current
liability. The Senior Lenders have continued to fund under the agreement and in
conjunction with the sale of the Company's Engineering division, as described in
Note 4, have informally placed a loan ceiling of approximately $17.5 million on
the Company's Revolver without regard to the overadvance position which was
approximately $10.3 million as of August 20, 1997.

     Effective May 15, 1997, the Company and its senior lenders executed the
Sixth Amendment, waiver and consent (the "Sixth Amendment") which amended the
financial covenants through September 30, 1997 and extended to June 15, 1997 the
required issuance to the lenders of detachable warrants described above and the
delivery of audited financial statements as stipulated in the Fifth Amendment.
The Company has not met these requirements.


                                       11
<PAGE>   12
NOTE 4 - SUBSEQUENT EVENT

     On August 20, 1997, the Company announced the sale of its Engineering
division's assets to ATC Group Services, Inc. Consideration for the transaction
was approximately $12.7 million, including $5.4 million in cash, $3.0 million in
short term promissory notes, which have been assigned to the Senior Lenders, and
$4.3 million in assumed liabilities. Proceeds from the transaction were used to
reduce the Company's secured debt to its Senior Lenders and certain accounts
payable obligations. As a result of the sale, the Company will record a non-cash
charge in the fourth quarter of approximately $17.8 million which is primarily
related to unamortized goodwill and other intangibles associated with the
acquisition of BCM Engineers Inc. in September 1994.

NOTE 5 - INDUSTRY SEGMENT

     The Company operates within a single industry segment in the United States.


                                       12
<PAGE>   13
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, the
percentages which certain items from the consolidated statements of operations
bear to the revenues of the Company. This table and the Management's Discussion
and Analysis of Financial Condition and Results of Operations should be read in
conjunction with the unaudited consolidated financial statements and the notes
to the unaudited consolidated financial statements of the Company for the twelve
month period ended September 30, 1996 included in the March 31, 1997 Form 10-Q.
The Company has not filed its report on Form 10-K for the twelve month period
ended on September 30, 1996.

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED            NINE MONTHS ENDED
                                                      JUNE 30,                     JUNE 30,
                                               ---------------------------------------------------
                                                1997           1996           1997           1996
                                               ------         ------         ------         ------
<S>                                             <C>            <C>            <C>
Revenues                                        100.0%         100.0%         100.0%         100.0%
Cost of Revenues                                104.6           90.6           95.2           89.9
                                               ------         ------         ------         ------
      Gross profit (loss)                        (4.6)           9.4            4.8           10.1

Selling, general and administrative              12.1            9.8            9.0            9.3
  expenses
Amortization of intangible assets,
  goodwill and deferred financing fees            1.5            1.3            1.3            1.2

Special items                                      --             --            2.6            0.5
                                               ------         ------         ------         ------

      Income (loss) from operations             (18.2)          (1.7)          (8.1)          (0.9)

Interest expense                                  4.7            2.9            3.6            2.7
                                               ------         ------         ------         ------

      Income (loss) before share in
           earnings of unconsolidated
           affiliate, income taxes and
           extraordinary charge                 (22.9)          (4.6)         (11.7)          (3.6)

Share in earnings of
   unconsolidated affiliate                        --             --             --            0.4
                                               ------         ------         ------         ------

      Income (loss) before income taxes
          and extraordinary charge              (22.9)          (4.6)         (11.7)          (3.2)

Income tax (benefit) expense                     (7.3)           (.1)           2.1            0.1
                                               ------         ------         ------         ------

      Income (loss) before extraordinary
          charge                                (15.6)          (4.7)          (9.6)          (3.3)

Extraordinary charge on debt refinancing           --             --             --           (1.2)
                                               ------         ------         ------         ------

      Net income (loss)                         (15.6)%         (4.7)%         (9.6)%         (4.5)%
                                               ======         ======         ======         ======
</TABLE>


                                       13
<PAGE>   14
GENERAL

     The Company provides a broad range of comprehensive environmental
consulting, engineering, and waste water facility design, and on-site
construction and remediation service for clients in the private and public
sectors in the areas of environmental contamination, water resources and
infrastructure. The timing of the Company's revenues is primarily dependent on
its backlog, contract awards and the performance requirements of each contract.
The Company's revenues are also affected by the timing of its clients'
activities. Additional detail regarding backlog is set forth under "Backlog" in
this section. Due to these changes in demand, the Company's quarterly and annual
revenues fluctuate. Accordingly, quarterly or other interim results should not
be considered indicative of results to be expected for any other quarter or full
fiscal year.

     The Company uses the equity method of accounting for incorporated joint
ventures and affiliated companies where ownership ranges from 20 to 50 percent.
The Company also includes its proportionate share in unincorporated joint
ventures entered into on large construction-type remediation contracts.

     Certain amounts from prior periods have been reclassified to conform to
current period presentation.


COMPARISON OF QUARTER ENDED JUNE 30, 1997 AND 1996

     Revenues for the quarter ended June 30, 1997 were $33.8 million compared
with $38.0 million for the same quarter in 1996, a decrease of $4.2 million or
11.1 percent. Increased remediation services revenues of $1.5 million from EPA
ERCS contracts were offset by reduced demand for construction, engineering and
commercial remediation services.

     Gross profit (loss) for the quarter ended June 30, 1997 was ($1.6) million
or 4.6 percent of revenues compared with $3.6 million or 9.3 percent of revenues
for the quarter ended June 30, 1996, a decrease of $5.2 million. The decrease in
gross profit was due primarily to the recognition of losses and reduced profit
margins of approximately $4.2 million on construction and remediation services
projects completed or substantially complete at June 30, 1997 and a decrease in
engineering and commercial remediation service revenues. Additionally, the
environmental construction and remediation market is extremely price competitive
which has reduced project profit margins. Indirect costs have been reduced to
partially offset the effects of the decline in project profit margins.

     Selling, general and administrative expenses for the quarter ended June 30,
1997 were $4.1 million or 12.1 percent of revenues, compared with $3.7 million
or 9.8 percent of revenues for the same quarter in the prior year. During the
quarter, the Company incurred increased consulting fees of approximately
$870,000, or 2.6 percent of revenues, comprised of $625,000 associated with a
federal tax refund request and $245,000 of fees associated with the engagement
of a management consulting firm to assist the Company in its working capital
management and turnaround efforts. Reduced accounting, business development and
other administrative costs as a result of cost reductions implemented during the
second half of fiscal year 1996 and continuing in fiscal 1997 were negated due
to the increased consulting fees described.

     Amortization of intangible assets, goodwill and deferred financing fees for
the quarter ended June 30, 1997 was $509,000, compared to $490,000 for the same
period in the prior fiscal year.


                                       14
<PAGE>   15
     Interest expense for the quarter ended June 30, 1997 was $1.6 million
compared with $1.1 million for the same quarter in 1996. The increase in
interest expense is primarily due to increased bank borrowings and higher
interest rates.

     In the quarter ended June 30, 1997, the Company recorded a federal tax
refund of approximately $2.5 million which was received in mid-July 1997. The
tax refund resulted from a ten year loss carry back of certain costs incurred
during its February 28, 1997 tax year. The Company provided $25,000 for state
income taxes during the quarter. The Company has not provided for any additional
federal taxes as a result of the loss for the current quarter. The Company has
significant net operating loss carryforwards to offset future federal tax
liabilities. A valuation allowance has been recorded to reduce the deferred tax
asset related to these carryforwards and other deferred tax assets to zero since
the realization of such benefit is not assured.


COMPARISON OF NINE MONTHS ENDED JUNE 30, 1997 AND 1996

     Revenues for the nine months ended June 30, 1997 were $117.0 million
compared with $119.9 million for the same period in 1996, a decrease of $2.9
million or 2.4 percent. Increased remediation services revenues of $16.1 million
were offset by reduced demand for construction and engineering services. In the
prior year period, revenues were negatively impacted by delays in the Federal
Government budget approval process affecting revenues under its EPA ERCS
contracts. Revenues from EPA contracts for the nine months ended June 30, 1997
were approximately $40.3 million compared with $31.5 million in the prior year
period.

     Gross profit for the nine months ended June 30, 1997 was $5.6 million or
4.8 percent of revenues compared with $12.0 million or 10.1 percent of revenues
for the nine months ended June 30, 1996, a decrease of approximately $6.4
million. The decrease in gross profit is due primarily to the recognition of
losses and reduced profit margins of approximately $4.2 million on construction
and remediation services projects completed or substantially complete at June
30, 1997 and a decrease in engineering and commercial remediation service
revenues. Additionally, the environmental construction and remediation market is
extremely price competitive which has reduced project profit margins. Indirect
costs have been reduced to partially offset the effects of the decline in
project profit margins.

     Selling, general and administrative expenses (SG&A) for the nine months
ended June 30, 1997 were $10.5 million or 9.0 percent of revenues, compared with
$11.1 million or 9.3 percent of revenues for the same period in the prior year.
The decrease in SG&A is primarily attributable to reduced accounting, business
development and other administrative costs as a result of cost reductions
implemented during the second half of fiscal year 1996 and continuing in fiscal
1997, offset by increased proposal and management and tax consulting expenses.
The management and tax consulting fees were approximately $945,000, or 0.8
percent of revenues.

     Amortization of intangible assets, goodwill and deferred financing fees for
the nine months ended June 30, 1997 was $1.5 million or approximately the same
as the prior fiscal year.

     Special items for the nine months ended June 30, 1997 were $3.0 million and
included $3.5 million of costs associated with the implementation of a plan to
reduce facility and equipment leasing obligations and severance and retention
costs associated with a staff reduction plan, reduced by the recovery of
$500,000 in the resolution of claims filed with its insurance carriers related
to the NL Industries arbitration settlement. Special items of $593,000 for
severance and relocation costs were recorded in the nine months ended June 30,
1996 in connection with office closings and consolidations.


                                       15
<PAGE>   16
     Interest expense for the nine months ended June 30, 1997 was $4.2 million
compared with $3.3 million for the same period in 1996. The increase in interest
expense is primarily due to increased bank borrowings and higher interest rates.

     The Company's share of earnings from an unconsolidated affiliate in the
nine months ended June 30, 1996 was $500,000. No activity was conducted by the
joint venture during the current fiscal year.

     In the nine months ended June 30, 1997, the Company recorded a federal tax
refund of approximately $2.5 million which was received in mid-July 1997. The
tax refund resulted from a ten year loss carry back of certain costs incurred
during its February 28, 1997 tax year. The Company has provided $75,000 for
state income taxes in the nine month period. The Company has not provided for
any additional federal taxes as a result of the loss for the current fiscal
year. The Company has significant net operating loss carryforwards to offset
future federal tax liabilities. A valuation allowance has been recorded to
reduce the deferred tax asset related to these carryforwards and other deferred
tax assets to zero since the realization of such benefit is not assured.

     The Company recorded an extraordinary charge of approximately $1.4 million
during the nine months ended June 30, 1996 as a result of refinancing its senior
credit facility. The charge includes unamortized financing fees and a prepayment
penalty in connection with the refinancing.


LIQUIDITY AND CAPITAL RESOURCES

     The Company is engaged in a business which at times requires substantial
working capital for construction, remediation and engineering services contracts
that require investments of personnel and equipment by the Company before the
Company is permitted to invoice the client. Many of the Company's contracts also
provide for progress or monthly invoices as certain benchmarks of performance
are reached or costs have been incurred. The Company's working capital and cash
have been significantly impacted by the amount of debt incurred in connection
with the acquisition of BCM Engineers, Inc. ("BCM"), Riedel Environmental
Services, Inc. ("RES") and the assets of RESNA Industries, Inc. ("RESNA") and by
costs associated with consolidating the acquired companies' operations into
those of the Company. As a result of these factors and current market conditions
for the environmental industry which reflect lower government spending, lessened
regulatory enforcement and lower project profit margins, the Company has and
continues to experience liquidity problems.

     The Company has in place a Loan and Security Agreement (the "Loan
Agreement") with The Chase Manhattan Bank and BTM Capital Corporation
(collectively, the "Senior Lenders"). Effective April 21, 1997, the Company and
its Senior Lenders executed the Fifth Amendment, Waiver and Consent (the "Fifth
Amendment") which waived prior defaults and consented to certain conditions
under the Loan Agreement. The Fifth Amendment restructured the revolving line of
credit (the "Revolver") to be based upon eligible billed accounts receivable
only and eliminated eligible unbilled accounts receivable from the borrowing
base. Advances against eligible unbilled accounts receivable were converted to a
term loan of approximately $4.4 million as of April 21, 1997. The amended Loan
Agreement includes a $24.5 million Revolver and term loans totaling
approximately $8.0 million including the balance remaining from the original
term loan of approximately $3.6 million. The term loans are being repaid on a
weekly and monthly basis and are being amortized at the rate of approximately
$2.9 million per year. Additionally, the Fifth Amendment provided for an
overadvance of $8.0 million against the Revolver borrowing base. The overadvance
provision was reduced to $6.0 million beginning August 1, 1997 and is eliminated
effective October 2, 1997 at which time the Revolver is reduced to $23.5
million. A mandatory term loan pre-payment or a further reduction in the
overadvance of


                                       16
<PAGE>   17
$500,000 was also required by August 1, 1997. The Company has not met its
obligation to reduce the overadvance or make the mandatory term loan payment and
therefore is in payment default under the terms of the amended agreement.
Therefore in accordance with Financial Accounting Standards Board Statement No.
78 the Company has classified its bank obligations as a current liability. The
Senior Lenders have continued to fund under the agreement and in conjunction
with the sale of the Company's Engineering division, as described in Item 5,
have placed a loan ceiling of approximately $17.5 million on the Company's
Revolver without regard to the overadvance position which was approximately
$11.0 million as of August 25, 1997.

     The Fifth Amendment also provided the Senior Lenders with detachable
warrants exercisable at a nominal price for 7.5 percent of the fully diluted
common stock of the Company. The warrants have not been issued, but represent
approximately 816,000 shares.

     Effective May 15, 1997, the Company and its senior lenders executed the
Sixth Amendment, waiver and consent (the "Sixth Amendment") which amended the
financial covenants through September 30, 1997 and extended to June 15, 1997 the
required issuance to the lenders of detachable warrants described above and the
delivery of audited financial statements as stipulated in the Fifth Amendment.
The Company has not met these requirements.

     The principal sources of liquidity for the Company's business and operating
needs are internally generated funds from operations and available revolving
credit borrowings under the Chase Facility. For the nine months ended June 30,
1997, operating activities used net cash of approximately $3.4 million,
primarily due to operating losses offset by decreases in accounts receivable and
increases in accounts and subcontracts payable. Investing activities provided
$549,000 in net cash principally from the sale of assets. Financing activities
provided net cash of $2.8 million primarily from increased borrowings under the
amended Loan Agreement. Cash generated from the collection of accounts
receivable is used to repay the Revolver and results in an increase of available
borrowings under the Revolver.

     As of June 30, 1997, long term debt, of which $31.5 million is classified
as current, was $46.8 million, the components of which were borrowings of $22.6
million under the Revolver and $7.5 million in term loans, $15.2 million of
convertible senior subordinated notes and $1.4 million of other notes and
capital leases.

     The Company's inability to make timely payments to certain of its trade and
other creditors has resulted in the filing of multiple lawsuits against the
Company. The Company has disputed the amounts claimed in certain of these
actions and has entered into installment payment agreements or allowed judgments
to be taken against the Company in others. A number of vendors and
subcontractors have also delivered notice of non-payment to the surety company
providing payment bonds on projects being performed by the Company. Outstanding
judgments obtained by trade creditors exclusive of the Gravers Company judgment
discussed in Item 1 of Part II of this report and the Winstead Sechrist & Minick
judgment discussed in the 10-Q for the period ending March 31, 1997 total
approximately $253,000. The Company has entered into agreements to pay
approximately $1,747,000 in settlement of other creditor claims and judgments on
an installment basis, of which approximately $1,398,000 will come due during
this fiscal year. There are presently forty-two unresolved lawsuits involving
claims exceeding, in the aggregate, $1.5 million and claims made against the
Company's surety for non-payment exceeding, in the aggregate, $2.2 million. All
undisputed amounts have been included as liabilities in the Company's balance
sheet. These claims could also result in the termination of projects or
jeopardize the ability of the Company to continue performance under contracts.
Termination of projects would result in the loss of future revenues, create
potential liability for the Company to its clients and the surety company for
increased cost to complete projects and adversely affect the Company's ability
to pursue additional work.


                                       17
<PAGE>   18
     The Company has attempted to improve cash flow and improve working capital
through cost reduction measures and improved billing and collection procedures.
The Company has implemented a strategic restructuring program and as a result,
on August 20, 1997, the Company announced the sale of its Engineering division's
assets to ATC Group Services, Inc. Consideration for the transaction was
approximately $12.7 million, including $5.4 million in cash, $3.0 million in
short term promissory notes, which have been assigned to the Senior Lenders, and
$4.3 million in assumed liabilities. Proceeds from the transaction were used to
reduce the Company's secured debt to its Senior Lenders and certain accounts
payable obligations. Following the sale, the Company's total senior debt was
reduced from approximately $30.1 million at June 30, 1997 to $25.2 million
including additional interim term loan principal payments. In conjunction with
the sale, the Company is implementing further overhead reductions necessary to
align the cost of its remaining environmental remediation, construction and
turnkey design/construct operations.

     The Company is continuing to pursue, with the support of its Senior Lenders
under certain conditions, a recapitalization of the Company. These potential
transactions may require an increase in the Common Stock, the Preferred Stock
and the Preference Stock currently authorized by the Company's Certificate of
Incorporation. Proceeds from a capital investment or debt refinancing
transaction would be used to repay existing senior debt and trade payables,
subject to the approval of the Senior Lenders. In the event the Company fails to
improve the management of its working capital and conclude a capital investment
or debt refinancing transaction on a timely basis, its liquidity and financial
position will be materially adversely impacted and the Company would be required
to consider other measures of protecting its assets against creditors.


BACKLOG

     As of June 30, 1997, the Company had a contract backlog of orders of
approximately $80 million compared with approximately $107 million and $104
million at September 30, 1996 and June 30, 1996, respectively. The value of
unfunded or indefinite delivery order contracts ("IDO") was approximately $95
million as of June 30, 1997 compared with approximately $140 million and $141
million at September 30, 1996 and June 30, 1996, respectively. Approximately $30
million of the decrease in unfunded backlog was caused by a reduction in future
funding under the Company's nationwide subcontract to perform remedial services
for the Air Force. Funds available under that contract were utilized by the
prime contractor to complete work primarily in the East through alternative
subcontractors. The combined contract backlog as of June 30, 1997 was
approximately $174 million compared with approximately $247 million and $245
million at September 30, 1996 and June 30, 1996, respectively.

     Subsequent to the quarter end, the Company executed a contract for EPA ERRS
Region 7 to be performed over a five year period. The EPA contract provides an
additional $68 million to the Company's total backlog increasing the total
backlog to approximately $242 million. The ultimate value of the backlog is
subject to change as the scope of work on projects change. Customers often
retain the right to change the scope of work with an appropriate increase or
decrease in contract price.


                                       18
<PAGE>   19
OTHER ITEMS AFFECTING OPERATING RESULTS

     The Company generates a substantial portion of its revenues under its
Emergency Response Cleanup Services (ERCS) contracts for the Environmental
Protection Agency ("EPA"). The Company is the prime contractor for removal of
hazardous substances in EPA Regions 4, 5, and 7. The Region 4 contract estimated
at $50 million over a five year period was awarded to the Company in April 1997.
The Region 5 contract has been renewed through September 30, 1997, the final
option year with work to be completed by December 31, 1997.

     Revenues from EPA contracts for the three and nine months ended June 30,
1997 were approximately $12.2 million and $40.3 million, respectively.

     As a federal government contractor, the Company is required to comply with
various regulations and standards regarding its systems and procedures for the
accumulation and billing of contract costs and federal procurement requirements.
As a result of its federal government contract activities, the Company is
subject to audit to assure compliance with these requirements. Although the
Company to date has not experienced any materially negative audit results, an
unfavorable determining could impact the Company's ability to complete current
contracts and compete for future federal government work.

      The EPA procurements of future similar services are referred to as
Emergency Response and Remediation Services (ERRS). The Company has submitted
proposals in competition for award of future ERRS contracts covering Regions 3
and 10. The Company intends to actively seek the award of the EPA ERRS Region 5
contract and other future EPA and other federal government agency and department
remedial action contracts.


FORWARD LOOKING STATEMENTS AND INFORMATION

      This report and other reports and statements filed by the Company from
time to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward-looking statements and
information that are based on information available to the Company's management
and various estimates, assumptions and predictions made by the Company's
management. When used in SEC Filings, the words "anticipate," "contemplate,"
"estimate," "expect," "future," "intend," "plan," "predict" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to inherent uncertainties, including, in addition to any
uncertainties specifically identified in the text surrounding such statements,
uncertainties with respect to changes or developments in social, economic,
business, industry, market, legal and regulatory circumstances and conditions
and actions taken or omitted to be taken by third parties, including the
Company's stockholders, customers, suppliers, business partners and competitors,
and legislative, regulatory, judicial and other governmental authorities and
officials. Consequently, actual events, circumstances, consequences, effects and
results may vary significantly from those described in or contemplated by such
forward-looking statements or information.


                                       19
<PAGE>   20
                          SMITH TECHNOLOGY CORPORATION

PART II     OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS


GRAVERS COMPANY VS. BCM ENGINEERS INC.

     The Company's subsidiary, BCM Engineers Inc. (BCM), is the lessee of
improved property formerly used as a laboratory and office/warehouse space for
field service personnel. The lease dated October 23, 1989 terminates May 31,
2000 and contains provisions for the confession of judgment in favor of Gravers
Company (the "Owner") in the event of default. The Owner has, pursuant to the
lease provisions, on March 21, 1997 filed judgments in the Montgomery County,
Pennsylvania Court of Common Pleas providing for ejectment of BCM and a money
judgment against BCM in the amount of $1,094,039. BCM and the Owner have
executed a Forbearance and Subordination Agreement dated June 20, 1997 providing
for the deferment by the Owner of any action to retake possession of the leased
property or to take action to collect on the money judgment so long as BCM
remains in compliance with the underlying lease and the Forbearance and
Subordination Agreement. BCM is negotiating terms of a sublease of a major
portion of this space to others.


BELLSOUTH TELECOMMUNICATIONS INC. VS. BCM ENGINEERS INC.

     In December 1995, BellSouth filed a complaint for unstated damages in the
Circuit Court, Jefferson County, Alabama against the Company, its subsidiaries
BCM and Canonie Technologies, Inc. The complaint, alleging professional
negligence, fraudulent and negligent misrepresentation, non-disclosure, innocent
misrepresentation and breach of contract, arises out of BCM's alleged failure to
provide oversight and certification of services performed by BellSouth's
asbestos abatement contractors. The plaintiff claims it has expended an
additional $1.6 million to perform asbestos removal which allegedly was to have
been performed by its prior contractor. BCM believes its services were performed
in compliance with all legal requirements, that it has been released from
BellSouth claims, and that a substantial amount of the claims are barred by
statute of limitations. The parties to the lawsuit have entered into a
settlement agreement dated April 21, 1997, which resolved all claims; the
agreement provides for the total payment by BCM of $150,000 with an initial
payment of $25,000 and monthly installments of $10,000.


BOROUGH OF STROUDSBURG VS. BCM ENGINEERS INC. AND DANIS HEAVY CONSTRUCTION
COMPANY

     The Borough of Stroudsburg filed a claim on May 13, 1997, in the Court of
Common Pleas of Monroe County, 43rd Judicial District of the Commonwealth of
Pennsylvania against the Company's subsidiary, BCM Engineers Inc. ("BCM"), for
damages exceeding $500,000 based upon allegations of the negligent performance
of services, breach of contract, breach of warranties and unjust enrichment
arising out of design and grant management services relating to a subregional
sewage treatment and collection system. BCM has submitted these claims to its
professional liability carrier. The Company and it's professional liability
carrier is investigating this claim and preparing to defend this matter.


                                       20
<PAGE>   21
VENDOR CLAIMS

   The Company's inability to make timely payments to certain of its trade and
other creditors has resulted in the filing of multiple lawsuits against the
Company. The Company has disputed the amounts claimed in certain of these
actions and has entered into installment payment agreements or allowed judgments
to be taken against the Company in others. A number of vendors and
subcontractors have also delivered notice of non-payment to the surety company
providing payment bonds on projects being performed by the Company. Outstanding
judgments obtained by trade creditors exclusive of the Gravers Company judgment
discussed in Item 1 of Part II of this report and the Winstead Sechrist & Minick
judgment in the 10Q for the period ending March 31, 1997 total approximately
$253,000. In addition, the Company has entered into agreements to pay on an
installment basis approximately $1,747,000 in settlement of other creditor
claims and judgments, of which approximately $1,398,000 will come due during
this fiscal year. There are presently forty two unresolved lawsuits involving
claims exceeding, in the aggregate, $1,500,000 and claims made against the
Company's surety for non-payment exceeding, in the aggregate, $2.2 million. All
such amounts are included as liabilities in the Company's balance sheet. In the
event the Company fails to achieve the strategic restructuring discussed in Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations allowing for the resolution of the Company's accounts payable, the
financial condition and operations of the Company will be materially and
adversely affected by these and other potential vendors claims for unpaid
amounts.


OTHER LITIGATION AND CLAIMS

     The Company is currently a party to other litigation and claims incidental
to the performance of services. The Company believes that these matters are
adequately accrued or covered by insurance, are without merit or the disposition
thereof is not anticipated to have a material effect on the Company's financial
position; however, these matters individually or in the aggregate, could have a
material adverse effect on future quarterly or annual results of operations or
cash flow when resolved.


ITEM 3. DEFAULTS ON SENIOR SECURITIES

     The Company has not made timely payment of dividends accruing on the
Redeemable Preferred Stock. The unpaid dividends are approximately $412,000 at
June 30, 1997, comprised of $178,000 due June 30, 1997, $178,000 due March 31,
1997 and $56,000 remaining balance from December 31, 1996. The terms of the
preferred stock provide that a non-payment condition increases the dividend rate
to seven and one-half percent and to ten percent in the event two quarterly
payments are not made. The payment of quarterly dividends is restricted by the
Chase Facility while an event of default exists. The Fourth Amendment included a
consent of the Senior Lenders to make the third and fourth quarter dividend
payments.


ITEM 5.  OTHER INFORMATION

     On August 20, 1997, the Company announced the sale of its Engineering
division's assets to ATC Group Services, Inc. Consideration for the transaction
was approximately $12.7 million, including $5.4 million in cash, $3.0 million in
short term promissory notes, which have been assigned to the Senior Lenders, and
$4.3 million in assumed liabilities. Proceeds from the transaction have been
used to reduce the Company's secured debt to its Senior Lenders and certain
accounts payable obligations.


                                       21
<PAGE>   22
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

       (a)  Exhibits

            11      Statement regarding computation of earnings per share.

            27      Requirements  for the format and input of financial data
                    schedules (EDGAR version only)

       (b)  Reports on Form 8-K

                  Form 8-K dated May 15, 1997 was filed September 4, 1997 in
                  connection with (i) the execution of the Sixth Amendment,
                  Waiver and Consent dated as of May 15, 1997 by and among the
                  Registrant, BCM Engineers Inc. (a Pennsylvania corporation),
                  BCM Engineers Inc. (an Alabama corporation) Riedel
                  Environmental Services, Inc. and The Chase Manhattan Bank
                  (formerly known as Chemical Bank), as agent for the lenders,
                  (ii) the execution of the Agreement for Sale and Purchase of
                  Business Assets dated the 18th of August, 1997, by and between
                  ATC Group Services Inc., a Delaware corporation as Purchaser
                  and Smith Technology Corporation, a Delaware corporation, BCM
                  Engineers Inc., a Delaware corporation, BCM Engineers Inc., a
                  Pennsylvania corporation, BCM Engineers Inc., an Alabama
                  corporation and BCM Engineers Inc., a West Virginia
                  corporation collectively as Sellers. (Copies of schedules and
                  exhibits are on file with the Securities and Exchange
                  Commission).


                                       22
<PAGE>   23
                                   SIGNATURES



Pursuant to the requirements 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.


                                          Smith Technology Corporation
                                             (Registrant)

                                          By: /s/William T. Campbell
                                              ---------------------------------
                                                 William T. Campbell
                                                 Senior Vice President - Finance

Date:  September 11, 1997


                                       23