NDE Environmental Corporation and Subsidiaries

                        Consolidated Financial Statements

                     Years ended December 31, 1996 and 1995




                                    Contents


Report of Independent Auditors..............................................F-2

Consolidated Balance Sheets   ..............................................F-3

Consolidated Statements of Operations.......................................F-4

Consolidated Statements of Stockholders' Deficit............................F-5

Consolidated Statements of Cash Flows.......................................F-7

Notes to Consolidated Financial Statements..................................F-8




                                       F-1

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                         Report of Independent Auditors



Stockholders and Board of Directors
NDE Environmental Corporation


     We  have  audited  the  accompanying  consolidated  balance  sheets  of NDE
Environmental Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated  statements of operations,  stockholders'  deficit, and
cash  flows  for the  years  then  ended.  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 in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in  all  material   respects,   the  consolidated   financial  position  of  NDE
Environmental  Corporation  and  subsidiaries at December 31, 1996 and 1995, and
the consolidated  results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.




                                                           /s/ ERNST & YOUNG LLP

Austin, Texas
March 27, 1997, except for
the second paragraph of Note 4
as to which the date is April 14, 1997


                                       F-2

<PAGE>


                 NDE Environmental Corporation and Subsidiaries



                           Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                                December 31
                                                                           1996            1995
                                                                       ------------    ------------
<S>                                                                    <C>             <C>
Assets
Current assets:
         Cash ......................................................   $  2,412,233    $    327,035
         Trade accounts receivable, less allowance for doubtful
              accounts of $837,480 in 1996 and $289,512 in 1995.....      5,735,550       2,162,593
         Inventories ...............................................        367,362         175,173
         Prepaid expenses and other current assets .................      1,578,097         245,645
                                                                       ------------    ------------
                                                                         10,093,242       2,910,446

Equipment and improvements, net (Note 3) ...........................      5,736,391       4,027,037

Goodwill, net of accumulated amortization of $55,122 (Note 2) ......      4,922,617            -
Patents, licenses and other intangible assets, net of accumulated
         amortization of $773,140 n 1996 and $578,247 in 1995 ......      3,374,962       1,292,360

Deferred financing costs ...........................................        922,424            -

                                                                       ------------    ------------
Total assets .......................................................   $ 25,049,636    $  8,229,843
                                                                       ============    ============

Liabilities and stockholders' deficit Current liabilities:
         Accounts payable ..........................................   $  1,673,470    $    751,944
         Accrued liabilities .......................................      4,885,260       1,322,457
         Accrued payroll and payroll taxes .........................      1,469,786         636,369
         Current portion of long-term debt (Note 4) ................      1,963,564       2,018,442
                                                                       ------------    ------------
                                                                          9,992,080       4,729,212

Long-term debt (Note 4) ............................................     14,192,011       3,739,653

Warrants with put option (Note 5) ..................................      1,600,000            -

Stockholders' deficit:
Series    AAA  Convertible  Preferred  Stock,  $.0001 par value;  authorized 400
          shares; issued and outstanding 1 share; stated at
          liquidation value of $5,000 per share ....................          5,000           5,000
Common Stock, $.0001 par value; authorized 50,000,000 shares; issued
          and outstanding 15,978,610 shares in 1996 and 2,274,420
          shares in 1995 ...........................................          1,598             227
Common Stock Subscribed, 5,482,254 shares in 1995 (Note 5) .........            -         1,303,410
Additional paid-in capital .........................................     27,578,446      25,134,457
Accumulated deficit ................................................    (28,302,374)    (26,663,376)
Cumulative foreign currency translation adjustment .................        (17,125)        (18,740)
                                                                       ------------    ------------
                                                                           (734,455)       (239,022)
                                                                       ------------    ------------
Total liabilities and stockholders' deficit ........................   $ 25,049,636    $  8,229,843
                                                                       ============    ============
</TABLE>

See accompanying notes

                                       F-3

<PAGE>


                 NDE Environmental Corporation and Subsidiaries



                      Consolidated Statements of Operations



                                                    Year ended December 31,
                                                     1996            1995
                                                 ------------    ------------

Revenues .....................................   $ 15,939,126    $ 11,347,591

Costs and expenses:
         Cost of testing services ............     11,085,062       7,062,456
         Selling, general and administrative .      6,581,337       6,428,433
Total costs and expenses .....................     17,666,399      13,490,889

Impairment of long-lived assets (Note 3) .....       (833,321)          -
                                                 ------------    ------------

Operating loss ...............................     (2,560,594)     (2,143,298)

Other income (expense):
         Interest expense ....................     (1,062,409)       (905,544)
         Other income, net ...................        214,641         156,203
                                                 ------------    ------------

Net loss before provision for income taxes and
         extraordinary gain ..................    (3,408, 362)     (2,892,639)

Provision for income taxes (Note 8) ..........        (43,785)          --

Extraordinary gain (Note 4) ..................      1,813,149           --
                                                 ------------    ------------

Net loss .....................................   $ (1,638,998)   $ (2,892,639)
                                                 ============    ============

Net loss per common share:
         Before extraordinary gain ...........   $      (0.45)   $      (1.45)
         Extraordinary gain ..................           0.24           --
                                                 ------------    ------------
Net loss per common share ....................   $      (0.21)   $      (1.45)
                                                 ============    ============

Weighted average number of common shares
         outstanding .........................      7,725,377       1,991,820
                                                 ============    ============

See accompanying notes


                                       F-4

<PAGE>


                 NDE Environmental Corporation and Subsidiaries

                Consolidated Statements of Stockholders' Deficit



<TABLE>
<CAPTION>
                                                                                                             Cumulative
                      Preferred Stock                 Common Stock                                           Foreign
                  ----------------------- ---------------------------------------- Additional                Currency    Total
                  Shares                  Shares             Shares                Paid-in     Accumulated   Translation Shockholder
                  Outstanding Amount      Outstanding Amount Subscribed Amount     Capital     Deficit       Adjustment  Deficit
----------------- ----------- ----------- ----------- ------ ---------- ---------- ----------- ------------- ----------- -----------
<S>               <C>         <C>         <C>         <C>    <C>        <C>        <C>         <C>           <C>         <C>
Balance at
December 31, 1994       570.5 $3,237,500    1,462,420 $  146      -     $    -     $21,902,038 ($23,770,737)   ($18,740) $1,350,207
----------------- ----------- ----------- ----------- ------ ---------- ---------- ----------- ------------- ----------- -----------
Conversion of
Series AAA
Convertible
Preferred Stock
to Common Stock       (256.5) (1,282,500)     511,000     51      -          -       1,282,449       -            -            -
------------------------------------------------------------------------------------------------------------------------------------
Conversion of
Series BBB
Convertible
Preferred Stock
to Common Stock       (253)   (1,650,000)     253,000     25      -          -       1,649,975       -             -           -
------------------------------------------------------------------------------------------------------------------------------------
Conversion of
Series CCC
Convertible
Preferred Stock
to Common Stock        (60)     (300,000)      48,000      5      -          -         299,995       -             -           -
------------------------------------------------------------------------------------------------------------------------------------
Subscription of
Common Stock
(Note 5)                  -          -            -           5,482,254  1,303,410       -           -             -      1,303,410
------------------------------------------------------------------------------------------------------------------------------------
Net loss                  -          -            -               -          -           -       (2,892,639)       -     (2,892,639)
------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995        1         $5,000   2,274,420 $  227  5,482,254 $1,303,410 $25,134,457 ($26,663,376)   ($18,740)  ($239,022)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       F-5

<PAGE>

                 NDE Environmental Corporation and Subsidiaries

          Consolidated Statements of Stockholders' Deficit (continued)


<TABLE>
<CAPTION>

                                                                                                             Cumulative
                      Preferred Stock                 Common Stock                                           Foreign
                  ----------------------- ---------------------------------------- Additional                Currency    Total
                  Shares                  Shares             Shares                Paid-in     Accumulated   Translation Shockholder
                  Outstanding Amount      Outstanding Amount Subscribed Amount     Capital     Deficit       Adjustment  Deficit
--------------- ----------- ----------- ----------- ------ ----------- ----------- ----------- ------------- ----------- -----------
<S>             <C>         <C>         <C>         <C>    <C>         <C>         <C>         <C>           <C>         <C>
Balance at Dec-
ember 31, 1995           1  $     5,000   2,274,420 $  227  5,482,254  $1,303,410  $25,134,457 ($26,663,376)   ($18,740)  ($239,022)
------------------------------------------------------------------------------------------------------------------------------------
Issuance of
Common Stock to
settle
licensing
dispute                  -        -          20,000      2      -            -           3,748       -             -          3,750
------------------------------------------------------------------------------------------------------------------------------------
Issuance of
Common Stock
Subscribed               -        -       5,482,254    548 (5,482,254) (1,303,410)   1,302,862       -             -           -
------------------------------------------------------------------------------------------------------------------------------------
Exchange of
Secured
Promissory
Notes for
Common Stock             -        -       8,000,000    800      -            -       1,035,082       -             -      1,035,882
------------------------------------------------------------------------------------------------------------------------------------
Company
contribution
to 401(k)
Plan                     -        -         201,936     21      -            -         102,297       -             -        102,318
------------------------------------------------------------------------------------------------------------------------------------
Cumulative
foreign
currency
translation              -        -            -        -       -            -           -           -            1,615       1,615
------------------------------------------------------------------------------------------------------------------------------------
Net loss                 -        -            -        -       -            -           -       (1,638,998)       -     (1,638,998)
------------------------------------------------------------------------------------------------------------------------------------
Balance at Dec-
ember 31, 1996           1  $     5,000  15,978,610 $1,598      -            -     $27,578,446 ($28,302,374)   ($17,125)  ($734,455)
====================================================================================================================================
</TABLE>

See accompanying notes.


                                       F-6

<PAGE>

                 NDE Environmental Corporation and Subsidiaries



                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>

                                                                              Year ended December 31,
                                                                               1996            1995
                                                                           ------------    ------------

Cash flows from operating activities:
<S>                                                                        <C>             <C>          
   Net loss ............................................................   $ (1,638,998)   $ (2,892,639)
   Adjustments to reconcile net loss to net cash
     provided by (used in) operating activities:
     Extraordinary gain ................................................     (1,813,149)           -
     Impairment of long-lived assets ...................................        833,321            -
     Depreciation and amortization .....................................      2,029,865       1,594,257
     Amortization of discounts and financing costs .....................        309,954         159,534
     Gain on sale of equipment .........................................       (214,641)       (187,708)

Changes in  operating  assets and  liabilities,  net of assets  and  liabilities
   acquired:
     (Increase) decrease in trade accounts receivable ..................      1,192,044        (702,942)
     Increase in inventories ...........................................        (45,689)        (47,141)
     (Increase) decrease in prepaid expenses and other current assets ..       (480,452)        144,836
     Increase in accounts payable ......................................        147,526          42,385
     Increase (decrease) in accrued liabilities ........................       (285,175)        593,145
     Increase in accrued payroll and payroll taxes .....................        833,417         114,880
                                                                           ------------    ------------
         Net cash provided by (used in) operating activities ...........        868,023      (1,181,393)

Cash flows from investing activities:
     Business acquisitions, net of cash acquired of $700,000 ...........    (11,299,757)           -
     Capital expenditures ..............................................     (1,120,752)       (464,608)
     Proceeds from sale of equipment ...................................        234,450         242,294
     Other .............................................................         10,737            -
                                                                           ------------    ------------
         Net cash used in investing activities .........................    (12,175,322)       (222,314)

Net cash from financing activities:
   Proceeds from issuance of long-term debt and warrants with put option     16,529,903       2,006,886
   Deferred financing costs ............................................       (959,413)           -
   Payments on long-term debt ..........................................     (3,177,993)     (1,020,635)
   Proceeds from issuance of debt (Note 5) .............................      1,000,000            -
   Proceeds from common stock subscriptions ............................           -            500,000
                                                                           ------------    ------------
     Net cash provided by financing activities .........................     13,392,497       1,486,251

     Net increase in cash ..............................................      2,085,198          82,544
   Cash at beginning of year ...........................................        327,035         244,491
                                                                           ------------    ------------
   Cash at end of year .................................................   $  2,412,233    $    327,035
                                                                           ============    ============
Supplemental disclosure of cash flow information: Cash paid during the year for:
   Interest ............................................................   $    487,334    $    631,231
                                                                           ============    ============
   Income taxes ........................................................   $       -       $       -
                                                                           ============    ============

</TABLE>

See accompanying notes.

                                       F-7

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

                   Notes to Consolidated Financial Statements

                                December 31, 1996


1. Summary of Significant Accounting Policies

Description and History of Business

     NDE  Environmental  Corporation  and  subsidiaries  (the Company)  provides
regulatory  compliance and related  services,  primarily  tightness  testing for
underground  storage  tanks  (USTs) and  associated  pipelines.  Operations  are
conducted  in the United  States,  Puerto  Rico,  and the  District of Columbia.
Although  work is  occasionally  performed  outside  of the  U.S.,  the  Company
generally   operates   through   foreign   licensees.   The  Company  has  grown
significantly through acquisitions, financed primarily by debt.

Basis of Presentation

     The consolidated  financial  statements include the accounts and operations
of  NDE   Environmental   Corporation   and   its   wholly-owned   subsidiaries:
Tanknology/NDE  Corporation,  USTMAN Industries,  Inc., Tanknology Canada (1988)
Inc., NDE Environmental  Canada  Corporation,  ProEco,  Inc., ProEco,  Ltd., and
EcoAm,  Inc. All significant  intercompany  accounts and transactions  have been
eliminated  in  consolidation.  Certain  amounts in the  consolidated  financial
statements  for years  prior to  December  31,  1996 have been  reclassified  to
conform to the current year presentation.

Revenue Recognition

     Tank testing,  line testing and consulting  service revenues are recognized
when services are performed.  Revenues for contracts extending more than 30 days
are  recognized  on a  percentage  of  completion  basis.  Equipment  sales  are
recognized upon delivery to the customer.

Concentrations of Credit Risk

     The Company's customers are principally the retail fuel operations of major
oil  companies,   independently  owned  gasoline  retailers,  convenience  store
operators,  large  vehicle  fleet  owners and  governmental  entities.  Accounts
receivable  potentially  expose the Company to  concentrations  of credit  risk.
Generally,   accounts   receivable   are  due   within   30  days  and  are  not
collateralized.  Credit  losses  historically  have  not been  significant.  One
customer  accounts for approximately  20% of the Company's  revenues.  A payment
default by this customer could have a material  impact on the Company's  results
of operations.

Inventories

     Inventories  consist principally of parts sold by the Company in connection
with  the  performance  of  testing  services  and are  valued  at lower of cost
(first-in, first-out) or market.

Equipment and Improvements

     Equipment  and   improvements   are  stated  at  cost.   Depreciation   and
amortization  are computed  using the  straight-line  method over the  estimated
useful  lives of the  assets.  Leasehold  improvements  are  amortized  over the
estimated useful lives, or the term of the related leases, whichever is shorter,
using the straight-line method.

     The estimated useful lives used in computing  depreciation and amortization
are as follows:


          Tank testing equipment                 8 years
          Furniture and fixtures                 5 years
          Vehicles                           3 - 5 years
          Other equipment                    3 - 6 years




                                       F-8

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

Intangible Assets

     Intangible  assets are amortized  using the  straight-line  method over the
following estimated useful lives:


          Goodwill                                     15 years
          Patents                                  5 - 12 years
          Licenses                                     15 years
          Other intangible assets                   3 - 5 years

     The  carrying  values of  intangible  assets are  reviewed if the facts and
circumstances  suggest that they may be impaired.  If this review  indicates the
intangible   assets  will  not  be  recoverable  as  determined   based  on  the
undiscounted  cash flows  related  to the  intangible  asset over the  remaining
amortization  period,  the Company's  carrying value of the intangible assets is
reduced by the estimated  shortfall of cash flows. Such review did not result in
any writedown of intangible assets in 1996 or 1995.

Stock Based Compensation

     The Company has elected to follow  Accounting  Principles Board Opinion No.
25,  ("APB  25")   "Accounting  for  Stock  Issued  to  Employees"  and  related
Interpretations  in  accounting  for its  employee  stock  options  because  the
alternative  fair value  accounting  provided for under FASB  Statement No. 123,
"Accounting  for  Stock-Based  Compensation,"  requires use of option  valuation
models that were not developed for use in valuing employee stock options.  Under
APB 25,  compensation  expense is recognized only when the exercise price of the
Company's stock options is less than the market price of the underlying stock on
the date of grant.

Income Taxes

     The  liability  method is used in accounting  for income taxes.  Under this
method,  deferred tax assets and liabilities are determined based on differences
between  balances  recognized  for financial  reporting  purposes and income tax
purposes,  and are measured using the enacted tax rates and laws that will be in
effect when the  differences are expected to reverse.  Management  establishes a
valuation allowance for deferred tax assets where realization is not likely.

Loss Per Share Data

     Loss  per  share  is  computed  by  dividing  net  loss for the year by the
weighted  average  number of common  shares  outstanding  during each year.  The
effect  of the  convertible  preferred  stock,  options  and  warrants  are  not
considered as the effect would be antidilutive. The computation of fully diluted
loss per share was antidilutive and, therefore, not presented.

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.


2. Business Acquisitions

Tanknology UST Group (the "Acquisition")

     On October 25,  1996,  the Company  acquired all of the common stock of the
Tanknology UST Group of Tanknology  Environmental,  Inc. ("TEI"). The Tanknology
UST  Group  consisted  of  three  subsidiaries  of TEI:  Tanknology  Corporation
International  ("TCI"),  Tanknology  Canada (1988) Inc., and USTMAN  Industries,
Inc.  ("USTMAN").  The  Acquisition  was  accomplished by means of the Company's
purchase of all of the issued and outstanding capital stock of the subsidiaries.
The  Acquisition  has been  accounted  for as a  purchase  and thus  results  of
operations of the UST Group from the date of the acquisition are included in the
Company's  statement of operations.  The purchase price is subject to adjustment
based upon final closing adjustments, which are expected to occur in 1997.


                                       F-9

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

     In  addition  to the  purchase  price  paid to TEI,  the  Company  incurred
approximately  $714,000  in  fees  and  expenses  related  to  consummating  and
effecting the Acquisition.  The Company also accrued approximately  $857,000 for
costs  related to the  planned  relocation  of and  reduction  in the former UST
Group's Field Services  management and administrative  groups.  Included in this
accrual are costs for severance, employment contract obligations,  personnel and
facility relocation costs,  excess lease expenses and other  acquisition-related
costs.  The Company  anticipates that the  consolidation of operations  acquired
will be  completed by June 30, 1997.  The Company  also  recorded  approximately
$758,000 for certain additional liabilities relating to potential purchase price
adjustments and liabilities  recognized  subsequent to the  acquisition,  which,
depending upon the outcome of the final purchase price discussions with TEI, may
or may not be realized.

     The purchase price was recorded as follows:


          Working capital, other than cash ..........   $  3,255,000
          Property and equipment ....................      2,950,000
          Intangibles, other than goodwill ..........      2,428,000
          Other assets ..............................         18,000
          Goodwill ..................................      4,978,000
          Accrued fees and acquisition  liabilities..     (2,329,000)
                                                        ------------
             Purchase price, net of cash acquired ...   $ 11,300,000
                                                        ============

     The following  summarized unaudited pro forma results of operations for the
years ended December 31, 1996 and 1995 assume the Acquisition occurred as of the
beginning of each  respective  year.  These pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of the results
of operations that actually would have resulted had the acquisition  occurred at
the beginning of the periods presented, or that may result in the future.

<TABLE>
<CAPTION>

                                                            Year ended December 31,
                                                             1996             1995
                                                        -------------   -------------
                                                                (Unaudited)
<S>                                                     <C>             <C>          

Revenues ............................................   $ 35,115,022    $ 35,954,911
Net loss before extraordinary gain ..................   $ (4,418,450)   $ (1,381,800)
Net loss ............................................   $ (2,605,301)   $ (1,381,800)
Net loss before extraordinary gain per common share..   $      (0.31)   $      (0.14)
Net loss per common share ...........................   $      (0.18)   $      (0.14)
</TABLE>


Sale of Acquired Canadian Operations

     On  February  20, 1997 the  Company  sold  certain  patents,  software  and
trademark  rights  as well as fixed  assets  associated  with the  operation  of
Tanknology Canada (1988),  Inc. for $1.2 million to the Company's eastern Canada
licensee.  The Company also canceled  certain  existing  license  agreements and
entered into new agreements, which will generate a future revenue stream.



                                      F-10

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

3. Equipment and Improvements

Equipment and improvements consist of the following:

                                                          At December 31,
                                                       1996             1995
                                                   ------------    -------------
Equipment ........................................ $ 12,474,380    $  9,448,292
Furniture and fixtures ...........................      334,261         278,954
Vehicles .........................................      277,812         244,413
Equipment replacement parts ......................      161,500            --
Leasehold improvements ...........................       99,672          60,148
                                                     13,347,625      10,031,807
Less accumulated depreciation and amortization ...   (7,611,234)     (6,004,770)
                                                   $  5,736,391    $  4,027,037
                                                   ============    ============

     In 1996,  due to the  acquisition  of more  efficient  and  effective  tank
testing  systems,  management  began  discontinuing  the use of the tank testing
technology  acquired  from  Gilbarco  ESD,  and future  undiscounted  cash flows
related to using this  technology  were expected to be  significantly  less than
anticipated.  Accordingly,  in the third quarter of 1996 management recognized a
loss on the  impairment  of these  assets  by  reducing  the book  value of this
equipment by approximately $833,000.


4.   Long-Term Debt

Long-term debt and financing agreements consist of the following:


                                                          At December 31,
                                                       1996            1995
                                                   ------------    ------------
Revolving line of credit .......................   $  2,000,000    $       --
Term loan ......................................      6,000,000         750,000
                                                   ------------    ------------
   Senior secured bank debt ....................      8,000,000         750,000

Senior subordinated note .......................      8,000,000            --
Less: Discount .................................     (1,532,359)           --
                                                   ------------    ------------
   Senior subordinated note ....................      6,467,641            --

Factoring agreement ............................           --         1,477,207
Debt related to Gilbarco acquisition and patents        300,000       2,396,703
Other collateralized notes .....................        902,312         616,820
Other non-collateralized notes .................        485,622         517,365
                                                   ------------    ------------
   Other long-term debt ........................      1,687,934       5,008,095

   Total long-term debt ........................     16,155,575       5,758,095
Less: Current portion ..........................     (1,963,564)     (2,018,442)
                                                   ------------    ------------
                                                   $ 14,192,011    $  3,739,653
                                                   ============    ============

     In October 1996, in connection with the Acquisition, the Company obtained a
total of $19  million  in two  separate  financing  agreements  ("the  Financing
Agreements"),  consisting of senior secured bank debt and a senior  subordinated
note (the "Note").  The senior secured bank debt consists of a revolving line of
credit for up to $5  million  and a term loan of $6  million.  The amount of the
Note is $8 million,  before discount.  Virtually all of the Company's assets are
pledged as security for the  agreements.  The Financing  Agreements  also impose
restrictions on the Company's  ability to incur  additional  indebtedness,  sell
assets, pay dividends, make additional business acquisitions,  repurchase shares
of common stock, make capital  expenditures and make certain management changes.
At December 31, 1996, the Company was in compliance with the financial debt

                                      F-11

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

covenants related to the Financing  Agreements as amended in April 1997. Related
to the Financing  Agreements,  a major  stockholder of the Company provided a $1
million  standby  commitment  in the event of a payment  default by the Company,
and, in  conjunction  with an affiliated  debt holder,  converted  $1,035,882 of
existing debt (principal and accrued  interest) into 8,000,000  shares of common
stock.  The  outstanding  balances  under an existing  term loan and a factoring
agreement  were paid off using  $2,526,970  of the proceeds of the two Financing
Agreements.

Senior Secured Bank Debt

     The senior secured bank debt consists of a three-year revolving credit line
of up to $5 million,  and a $6 million 5-year term note,  maturing  December 31,
2001.  The funds  available  under the  revolving  line of credit are based on a
formula as applied to the  eligible  accounts  receivable  of the  Company.  The
amount available to the Company has been reduced by $500,000, as compared to the
initial  agreement,  as a bank  condition  to release  the assets of  Tanknology
Canada (1988) from its collateral  (see Note 2). At closing of the  Acquisition,
$2 million  was funded  under the  credit  line,  and  remained  outstanding  at
December 31, 1996. Outstanding balances under the credit line bear interest at a
rate of prime plus 0.75% (9% at December 31, 1996).  The  commitment fee related
to the unused  portion of the $5 million line is 0.5%.  The $6 million term loan
bears  interest at of prime plus 1.5% (9.75% at December  31,  1996).  Principal
payments of $100,000 per month are due  beginning  January 1997. At December 31,
1996, the Company had $1,113,616  available for additional  borrowing  under the
revolving credit facility.

Senior Subordinated Note

     The  $8  million  senior  subordinated  note  has a 5 year  term,  maturing
December  31, 2001 and bears  interest  at 13%.  The debt  holder  received  put
warrants to  purchase  13,022,920  shares of the  Company's  common  stock at an
initial,  maximum  exercise  price of $0.325  per  share,  subject  to  downward
adjustment  based on the  Company's  financial  performance  during the 12 month
period prior to the exercise of the warrants. The downward adjustment is limited
to $0.20 per share,  for a minimum  exercise price of $0.125.  The proceeds from
the issuance of the senior  subordinated note and the warrants were allocated to
the  senior  subordinated  note and the  warrants  based  upon fair  value.  The
independently  appraised  fair market  value of the put warrants at issuance was
$1.6 million  resulting in a $1.6 million discount on the debt (See Note 5). The
discount is being  amortized  over the life of the  subordinated  note using the
effective  interest method.  Principal  payments of $500,000 per quarter are due
beginning on March 1, 1998.

Gilbarco Environmental Services Division ("Gilbarco ESD")

     The  April  1994  Gilbarco  ESD  acquisition  was  financed  in  part  by a
$2,450,000  six-year note bearing interest at prime minus 1%,  collateralized by
the assets  acquired.  In March  1996,  the  Company  obtained  from  Gilbarco a
prepayment  incentive  in exchange  for an  immediate  payment of  $256,000.  In
September 1996, the Company  settled the $2,450,000 note for $300,000.  The debt
had a carrying  value  including  accrued  interest  at the  settlement  date of
$2,113,149.  The settlement  resulted in an extraordinary gain of $1,813,149.  A
separate  note for  $300,000,  payable to  Gilbarco,  related  to patent  rights
purchased in November 1995, was  outstanding at December 31, 1996. The remaining
note bears  interest at a variable rate of  approximately  6% and is due October
2000.

Other Collateralized Notes

     Other  collateralized notes include financing  arrangements  collateralized
solely by the assets purchased, or by the Company's common stock, and includes a
6% one-year  insurance  note with a balance  outstanding at December 31, 1996 of
$403,710,  payable in monthly installments.  Maturities range from 1 to 5 years.
Interest rates range from 6% to 31% per year, with a weighted  average  interest
rate of 8%.

Other Non-Collateralized Notes

     Other  non-collateralized notes consist of subordinated notes and a note to
a  vendor.  Interest  on the  subordinated  notes is  payable  quarterly  at 8%;
principal  is payable  annually in equal  amounts  over five years.  The Company
recognizes interest expense on the vendor note at an imputed rate of 10%.

                                      F-12

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

Payments on the vendor note are due monthly in 1997 and 1998.

     The aggregate annual maturities of long-term debt and financing  agreements
at December 31, 1996 are as follows:


          1997                   1,963,564
          1998                   3,477,713
          1999                   5,344,963
          2000                   3,635,661
          2001                   3,266,033
                                17,687,934
          Less: Discount        (1,532,359)
                             -------------
                                16,155,575
                             =============


5. Stockholders' Equity

AAA Preferred Stock

     The Company's Series AAA Preferred Stock may be converted into Common Stock
at any time at the  initial  conversion  price of $2.50  per share  (subject  to
adjustment pursuant to anti dilution  provisions).  In May 1995, 256.5 shares of
the Series AAA  Preferred  Stock with a  liquidation  value of  $1,282,500  were
converted  into an aggregate  of 511,000  shares of Common Stock at a conversion
price per  share of $2.50.  One share  with a  liquidation  value of $5,000  was
outstanding at December 31, 1996 and 1995.

BBB Preferred Stock

     In  May  1995,  203  shares  of  the  Series  BBB  Preferred  Stock  with a
liquidation  value of  $1,400,000  were  converted  into an aggregate of 203,000
shares of Common Stock at a conversion price per share of $6.90. In addition, in
May 1995, 50 shares of the Series BBB Preferred  Stock with a liquidation  value
of $250,000 were converted into an aggregate of 50,000 shares of Common Stock at
a conversion  price per share of $5.00.  No shares were  outstanding at December
31, 1995 or 1996.

CCC Preferred Stock

     In May 1994, the Company raised $300,000  through the issuance of 60 shares
of Series CCC Preferred  Stock and five- year warrants to purchase 24,000 shares
of Common Stock at an exercise price of $7.50 per share. In May 1995, all shares
of the Series CCC  Preferred  Stock were  converted  into an aggregate of 48,000
shares of Common Stock at a conversion  price per share of $6.25. No shares were
outstanding at December 31, 1995 or 1996.

DDD Preferred Stock

     In January 1995, the Company obtained $500,000 from its major  shareholders
in exchange for a promissory  note  ("Bridge  Note").  The note bore interest at
prime plus 4% and became due,  after  extension,  on May 31, 1995. In June 1995,
the Company  completed a  restructuring  of the Bridge  Note.  The  shareholders
agreed to exchange the Bridge Note of $500,000 plus accrued interest of $25,644,
their promissory note for $273,038 plus accrued interest of $4,728,  and cash of
$500,000 for 261 shares of the Company's Series DDD Preferred Stock. This Series
DDD  Preferred  Stock was never  issued.  In March  1996,  pursuant  to the 1995
Recapitalization  Agreement  Amendment between the Company and the shareholders,
5,482,254  shares  of  Common  Stock  were  issued  in  lieu of the  Series  DDD
Convertible  Preferred Stock.  This transaction was recorded in the accompanying
financial  statements  as Common  Stock  Subscribed  in 1995 and as common stock
issued in 1996.


                                      F-13

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

Secured Promissory Notes

     In 1996, the Company entered into a series of Secured Promissory Notes (the
"1996  Notes")  with  its  largest  stockholders  in  the  aggregate  amount  of
$1,000,000.  Concurrent with the  Acquisition,  the 1996 Notes,  plus $35,882 of
accrued interest thereon were converted into 8,000,000 shares of common stock.

Common Stock

     In 1996 the Company  increased the authorized  number of common shares from
10,000,000 to 50,000,000.

Warrants

As of December 31, 1996, the Company had the following warrants outstanding:


     Number of Shares Issuable  Exercise Price    Expiration
     -------------------------  --------------  --------------
              175,000                 $.380       January 1998
               50,000                 $.150       January 1998
                5,000                $7.500     September 1998
               73,798                 $.150         April 1999
               38,035                $7.500         April 1999
               50,000                 $.125         April 1999
               12,000                 $.150           May 1999
               12,000                $7.500           May 1999
               58,334               $11.400      December 1999
               31,667               $21.000      December 1999
               32,219               $25.800      December 1999
           13,022,920                 $.325      December 2005
     -------------------------
           13,560,973
     =========================

     In 1996,  the  expiration  dates on warrants to purchase  122,220 number of
shares of common  stock that were  originally  scheduled  to expire in 1996 were
extended to 1999 in connection with the aforementioned  debt restructurings with
the Company's largest stockholders.

Warrants with Put Options

     In connection with the Acquisition, on October 25, 1996, the Company issued
to its senior  subordinated  note (the  "Note")  holder,  warrants  to  purchase
13,022,920  shares of common stock.  The warrants are  exercisable  at $.325 per
share of common  stock and can be  exercised  at any time from  October 25, 1996
through  December 31, 2005.  Both the number of warrants and the exercise  price
may be subject to adjustment based upon certain factors. These warrants are also
subject to a put option (the "Put") whereby,  under certain  circumstances,  the
holder can require the Company to repurchase the warrants  (including any common
shares  owned as a result of a previous  warrant  exercise).  Unless and until a
"Qualifying Public Offering" has occurred (defined as a sale to the public of at
least  $20,000,000 of Company stock),  the Put is exercisable after December 31,
2001, or after certain other events such as a change in control, certain mergers
or  uncured  defaults  under  the Note  agreement.  If the Note  holder  were to
exercise  the Put,  the cost to the  Company  would be  calculated  based upon a
formula stated in the put agreement and/or an independent appraisal.

     Based upon an  independent  appraisal  of the  warrants  and  attached  Put
option, $1,600,000 was allocated to these instruments.  The Company is unable to
determine if the holder will ever  exercise the Put,  and  accordingly  what the
purchase  price would be at that time.  However,  beginning in 1997, the Company
will estimate the possible  valuation as of December 31, 2001 (the earliest date
at which the Put is exercisable,  absent other events) based upon projections of
future results of operations and record an expense to accrete the carrying value
of the warrants with put option to such estimated redemption value.


                                      F-14

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

Stock Options

     The Company has elected to account for its employee stock options under APB
25. As a result, pro forma information  regarding net loss and loss per share is
required  by  Statement  123,  which  also  requires  that  the  information  be
determined  as if the Company  has  accounted  for its  employee  stock  options
granted  subsequent  to December  31,  1994 under the fair value  method of that
Statement.  The fair value for these  options was estimated at the date of grant
using a Black-Scholes  option pricing model with the following  weighted-average
assumptions for 1996 and 1995,  respectively:  risk-free  interest rates of 6.0%
and 5.8%; no dividend yield;  volatility factors of the expected market price of
the Company's common stock of 1.2; and a  weighted-average  expected life of the
option of 4 years.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     For  purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the options' vesting period.  The Company's
pro forma information follows:


                                         1996                1995
                                     -------------      --------------
Pro forma net loss:
    Before extraordinary gain ..........      $  (3,602,859)     $   (2,897,223)
    Extraordinary gain .................          1,813,149                --
    Net loss ...........................      $  (1,789,710)     $   (2,897,223)
                                              =============       =============
Pro forma loss per share:
    Before extraordinary gain ..........      $       (0.47)      $       (1.45)
      Extraordinary gain ...............               0.24                --
      Net loss .........................      $       (0.23)      $       (1.45)
                                              =============       =============

     Because  Statement 123 is applicable only to options granted  subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.

     A summary of the Company's stock option activity,  and related  information
for the years ended December 31 follows:


<TABLE>
<CAPTION>
                                                   1996                              1995
                                     --------------------------------    ------------------------------
                                                     Weighted Average                  Weighted Average
                                        Options       Exercise Price       Options      Exercise Price
                                     -------------   ----------------    ------------  ----------------
<S>                                  <C>              <C>                <C>           <C> 
Outstanding-beginning of year......        304,850   $         2.79          154,850     $       5.31
Granted ...........................      2,753,000             0.18          150,000             0.19
Exercised .........................           -                 -               -                 -
Canceled ..........................       (323,294)            2.58             -                 -
                                     -------------   ----------------    ------------  ----------------

Outstanding-end of year............      2,734,556   $         0.18          304,850     $       2.79
                                     =============   ================    ============  ================

Exercisable at end of year.........        609,667   $         0.13          113,183     $       5.93
                                     =============   ================    ============  ================
Granted ...........................      2,753,000             0.18          150,000             0.19
Weighted-average fair value of
options granted during the year....  $        0.14                                       $       0.15
                                     ===================                              ===================
</TABLE>



                                      F-15

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements


     Exercise prices for options outstanding as of December 31, 1996 ranged from
$0.05 to $0.44. The weighted-average remaining contractual life of those options
is 8.9 years.

     The following table summarizes  outstanding options at December 31, 1996 by
price range:


<TABLE>
<CAPTION>

                          Outstanding                                      Exercisable
-----------------------------------------------------------------   ----------------------------
                                  Weighted       Weighted-Average
 Number of        Range of         Average          Remaining       Number of   Weighted Average
  Options      Exercise Price   Exercise Price   Contractual Life    Options     Exercise Price
------------   --------------   --------------   ----------------   ---------   ----------------
<S>            <C>              <C>              <C>                <C>         <C>      
      45,000           $0.050           $0.050            9 years       -               -
   1,480,556            0.125            0.125          8.4 years     559,667   $          0.125
      55,000            0.094            0.094          9.8 years       -               -
     635,000       0.15-0.188            0.178          9.3 years      50,000              0.188
     180,000            0.250            0.250          9.4 years       -               -
     339,000       0.41-0.440            0.410           10 years       -               -
------------   --------------   --------------   ----------------   ---------   ----------------
   2,734,556   $0.05 - $0.440           $0.180          8.9 years     609,667   $          0.130
============   ==============   ==============   ================   =========   ================
</TABLE>

     As of December 31, 1996,  150,556 of the options  granted in 1996 under the
1989 Stock Option Plan (as amended) were granted subject to Shareholder approval
of an increase in the number of shares  available  to grant under the  Executive
Management/Director plan from the current 2,500,000 to 3,500,000.

Stock Option Plan

     The purpose of the NDE  Environmental  Corporation  1989 Stock  Option Plan
(the "Plan) is to establish a compensatory  plan to attract,  retain and provide
equity  incentives to selected  employees,  consultants  and  directors,  and to
promote the  financial  success of the Company.  In 1996 the Plan was amended to
increase the number of shares issuable under the Plan from 248,250 to 2,500,000.
Options  granted may be either  "incentive  stock options" within the meaning of
Section 422 (a) of the Internal Revenue Code, or non-qualified options.

     The Plan is  administered  by the Board of  Directors  or a Committee  (the
"Committee") appointed by the Board of Directors.  The exercise price of options
(as  determined  by the  Committee)  may not be less than 85% of the fair market
value of the  Common  Stock on the date the  option is  granted.  In the case of
incentive stock options, the exercise price may not be less than the fair market
value of the Common  Stock on the date of grant  (or,  in the case of holders of
10% or more of the  outstanding  Common Stock,  110% of the fair market value on
such  date).  Options  may not be  exercisable  after ten years from the date of
grant  (five  years  from the date of grant  in the case of  options  issued  to
holders of 10% or more of the outstanding Common Stock).

Executive Compensation Plan

     Under the Plan, the Company adopted a senior executive  compensation  plan.
In 1996 the number of shares reserved under this plan was increased to 2,200,000
from 180,000.

     Effective  June 1995,  the  Company  adopted  the 1995  Incentive  Plan for
Non-management  Employees (the "Non- management Plan"). The Non-management  Plan
is administered by a Committee appointed by the Board of Directors.  The Company
has  reserved  an  aggregate  of 250,000  shares for  issuance  pursuant  to the
Non-management Plan.


                                      F-16

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

     In 1996 the Company canceled all options that had been previously issued to
outside  directors and issued 40,000 new options  priced at $0.125 (market value
at date of grant) to each of the four current outside directors

Common Shares Reserved for Issuance

     Common shares reserved for issuance under convertible securities,  options,
warrants and other arrangements are detailed in the following table:

                                                              Common Shares
                                                        Reserved for Issuance
                                                        ---------------------

Warrants                                                           13,560,973
Stock Options                                                       2,900,556
Convertible Preferred Stock (Series AAA)                                2,000
Shares issuable upon conversion of promissory notes                    24,725
  Common shares reserved for issuance                              16,488,254
                                                        =====================


6.  Fair Values of Financial Instruments

     The  following  methods  and  assumptions  were  used  by  the  Company  in
estimating its fair value disclosures for financial instruments:

Cash

     The  carrying   amount   reported  in  the   consolidated   balance  sheets
approximates the fair market value.

Long-term Debt

     The carrying amount of the Company's senior secured bank debt  approximates
its fair value because this debt bears interest at variable rates.  The carrying
amount of the Company's other long-term debt approximates their fair value.

Warrants with Put Option

     The carrying amount of the warrants with put option  approximates  its fair
market value as determined by independent appraisal.


7.  Related Party Transactions

     The  Company has a service  contract  with  Bunker  Hill  Associates,  Inc.
("Bunker Hill") to retain the services of Mr.  Chaffee.  Mr. Chaffee is Chairman
of the Board of the  Company.  The  contract  is on a  month-to-month  basis and
cancelable by either party without cause. The compensation  amount is subject to
approval by the Company's compensation  committee. In 1996 and 1995, Bunker Hill
earned or incurred reimbursable expenses of $318,775 and $179,640, respectively,
associated  with  both  the   aforementioned   services   contract  and  certain
Acquisition-related fees.


     During  1996,   the  Company   also  paid   $335,563  to  its  two  largest
stockholders, primarily for financing fees related to the Acquisition.



                                      F-17

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

8. Income Taxes

     Significant components of the Company's deferred tax assets and liabilities
at December 31, 1996 and 1995 are as follows:


                                                       1996          1995
                                                  ------------   -----------
Deferred tax assets:
    Net operating loss carry forwards .........   $ 9,333,000    $ 8,636,000
    Allowance for doubtful accounts ...........       143,000         98,000
    Nondeductible accruals ....................       290,000        145,000
                                                  ------------   -----------
Total deferred tax assets .....................     9,766,000      8,879,000
Less valuation allowance ......................    (9,072,000)    (8,377,000)
                                                  ------------   -----------
Net deferred tax asset ........................       694,000        502,000

Deferred tax liability:
    Book over tax basis of depreciable assets..       694,000        502,000
                                                  ------------   -----------
Deferred taxes, net ...........................   $      -       $      -
                                                  ============   ===========


     Due to changes in ownership of the Company's stock in 1995 as defined under
federal income tax law, the Company's  future  utilization of net operating loss
carry forwards incurred prior to such changes is subject to a substantial annual
and  cumulative  limitation.  As of  December  31,  1996,  the  Company  has net
operating  loss  carryforwards  of  approximately  $25,226,000.   The  valuation
allowance  for  deferred  tax  assets  increased  principally  as  a  result  of
operations.

     The  Company's  provision  for income  taxes  differs from the expected tax
expense  (benefit) amount computed by applying the statutory  federal income tax
rate of 35% to income before income taxes as a result of the following:


                                                      1996         1995
                                                   ---------    ---------

Income taxes at the statutory rate .............   $(592,000)   $(984,000)
Change in valuation allowance ..................     694,000      977,000
All other, net .................................    (102,000)       7,000
Tax on Income of Controlled Foreign Corporations      44,000         --
                                                   ---------    ---------
Income taxes ...................................   $  44,000    $    --
                                                   =========    =========

9. Leases

     The  Company's  office space and certain  equipment and vehicles are leased
under  noncancelable  operating lease  agreements  which expire on various dates
through 2002. Under the terms of most of the leases,  the Company is required to
pay  all  taxes,  insurance  and  maintenance.  Future  minimum  payments  under
noncancelable operating leases at December 31, 1996 were as follows:


               1997          $  356,851
               1998             348,586
               1999             188,780
               2000              32,242
               2001               9,614

     Rent expense under operating  leases totaled  $216,910 in 1996 and $159,283
in 1995.  As of December 31,  1996,  approximately  $92,000 of aggregate  future
minimum rentals are due to the Company under noncancelable subleases.


                                      F-18

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

10.  Significant Customer

     Sales to one  customer  comprised  20% of total  revenue in 1996 and 13% in
1995.  Management  expects the  significance  of this customer to grow,  both in
aggregate revenues and as a proportion of total revenues.  Loss of this customer
would significantly and adversely impact the Company's results of operations.


11. Commitments and Contingencies

Potential Liability and Insurance

     The Company's and its licensees' tank testing  activities,  consistent with
the  industry,  present  risks of  substantial  liability.  Spills of  petroleum
products  and  hazardous  substances,  or  the  creation  or  exacerbation  of a
contamination problem through errors or omissions in tank testing,  could result
in liability under federal and state anti-pollution  statutes and regulations or
from tort claims by those  suffering  personal  injury or  property  damage as a
result of such  contamination.  In addition,  many of the Company's tank testing
services  involve  volatile  substances  such as  gasoline.  The  Company or its
licensees  could be held liable for damage to persons or property  caused by any
resulting fire or explosion.

     The Company carries professional and pollution liability insurance of up to
$2,000,000 per occurrence;  general,  product and personal injury coverage of up
to  $1,000,000  per  occurrence;  and fire  liability  coverage to $500,000.  In
addition,  umbrella  coverage  for all  sources  of  liability  in the amount of
$10,000,000  is  maintained.  Deductibles  are in the  amount  of  $200,000  per
occurrence,  $400,000  in the  aggregate,  on  the  professional  and  pollution
liability  coverages.  Other coverages carry a $5,000 deductible per occurrence,
except for the umbrella policy, which carries a $10,000 deductible. The policies
in force,  in the opinion of management,  are expected to be sufficient to cover
all current and expected  claims - the Company has not been denied any coverages
sought.  However,  there  can  be  no  assurance  that  all  possible  types  of
liabilities  that may be incurred by the Company are covered by its insurance or
that the dollar amount of such  liabilities will not exceed the Company's policy
limits.

Litigation

     The Company is the  defendant in  litigation  involving a major  competitor
claiming  patent  infringements.  The  Company  owns  rights  under two  patents
acquired from Gilbarco in the Gilbarco  acquisition  of 1994.  Subsequent to the
acquisition,  the Company  embarked  upon a licensing  program for the  existing
users of this patent  technology,  as the existing users were then infringing on
the  patent  rights  owned by the  Company.  Some or all of the  said  suspected
infringers  were  customers  of the  plaintiff.  Thus,  the  plaintiff  filed  a
preemptive  suit against the  Company.  The Company  responded by filing  patent
infringement  counter-claims against the plaintiff. In April of 1996 the Company
filed a Motion to Certify Class Action and Designate Class Representatives in an
attempt to join the "users class" as a party defendant. This motion, if granted,
could make the plaintiff's  customers subject to any royalties the Company might
be granted if  successful in this suit.  This motion is currently  scheduled for
hearing in late April 1997. Although  significant  discovery has been completed,
additional  discovery remains and may have to be repeated because of the joinder
of  additional  parties.  This case has been  scheduled for a jury trial in July
1997, however, there is no assurance that the trial will not be postponed again.
Management  believes that the Company cannot be held liable to the plaintiff for
monetary damages and,  accordingly,  no litigation liability estimates have been
accrued.

     In  connection  with the  purchase of the UST group of companies in October
1996, the Company accepted the legal liability for certain  potential claims and
existing law suits and claims against the acquired companies.  These suits range
from former employee-related claims to environmental remediation claims incurred
in the course of UST's business activities. In connection with claims related to
product  liability,  the Company  assumed a liability of $658,450  (the "Assumed
Liability")  as part of the  acquisition.  To the extent  that  certain of these
claims are settled for an amount  exceeding the Assumed  Liability,  the Company
has been indemnified by the former owner of the UST group for any claims made by
the Company under the provisions of the acquisition agreement within three years
from the closing date of the  acquisition in an amount up to $1,250,000 over the
Assumed  Liability,  net of  any  insurance  proceeds  or  additional  insurance
premiums  that might become due as a result of such claims.  It is possible that
estimates relating to the $658,450 of claims and litigation  contingencies could
change.  In  connection  with  other  claims,  as  defined  in  the  Acquisition
Agreement, the Company is indemnified for claims asserted against the former UST
Group owner  within two  years from  the closing  date of  the acquisition in an

                                      F-19

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

amount up to $1,000,000 in excess of any liabilities transferred to the Company,
net of any insurance  proceeds or additional  insurance premiums that become due
as a result of such claims.  The Company believes that the liability assumed and
recorded in its  accounts and the  indemnification  from the former owner of the
UST  Group  are  sufficient  and that the  indemnification  is  enforceable  and
collectible  such that the  resolution of these matters will not have a material
adverse effect on the consolidated  financial  position or results of operations
of the Company.

     The Company is also subject to various  claims and litigation in the normal
course of business  not directly  related to the  Acquisition.  However,  in the
opinion of management,  the ultimate  resolution of such matters will not have a
material  adverse effect on the  consolidated  financial  position or results of
operations of the Company.


12. Employee Benefit Plan

     The Company has a 401(k) defined  contribution  plan covering all full-time
employees. Employees are eligible to participate in the plan after six months of
service.  At December  31, 1996,  approximately  275  employees  are eligible to
participate in the plan. The Company matches  annually at its  discretion,  with
equivalent  value of Company  stock (using the market value as of December  31),
50% of a  participant's  voluntary  contributions,  up to 3% of a  participant's
compensation,  and 100% for  contributions  between 3% to 6% of a  participant's
compensation.  The Company's expense for the plan totaled $102,318 in 1996 (none
in 1995). In 1996 the Company  contributed 201,936 shares of common stock to the
plan for 1992, 1993 and 1994 contributions.

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