U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC. 20549


                                  FORM 10-KSB

(Mark One)

[X]  Annual Report Under Section 13 or 15(d) of the  Securities  Exchange Act of
     1934 for the fiscal year ended December 31, 1997

[    ] Transition  Report Under Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 for the transition period from to


                         Commission File Number: 1-10361


                       Tanknology-NDE International, Inc.
                 (Name of small business issuer in its charter)

            Delaware                                     95-3634420
State or other jurisdiction of                 (IRS Employer Identification No.)
incorporation or organization:

                    8900 Shoal Creek Boulevard, Building 200
                               Austin, Texas 78757
                     Address of principal executive offices

Issuer's telephone number, including area code:       (512) 451-6334

Securities registered pursuant to Section 12(b) of the Act:
Title of each class:                                            None
Name of each exchange on which registered:                      None

Securities registered pursuant to Section 12(g) of the Act:     None

Checkwhether the Issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

The  Issuer's  revenues  for the  fiscal  year  ended  December  31,  1997  were
$38,683,146.

The aggregate market value of voting stock held by  non-affiliates of the Issuer
as of March 25, 1998 was approximately $1,956,493.

As of March 30, 1998, there were 16,145,166  outstanding shares of Common Stock,
$0.0001 par value, of the Issuer.

                                DOCUMENTS OMITTED
Exhibit Numbers 10.45 through 10.65

                       DOCUMENTS INCORPORATED BY REFERENCE
None.

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]


<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB




                                Table of Contents
<TABLE>
<CAPTION>

                                                                                              Page
<S>      <C>        <C>                                                                       <C>
PART I
         Item 1.    Description of Business......................................................3
         Item 2.    Description of Property.....................................................12
         Item 3.    Legal Proceedings...........................................................12
         Item 4.    Submission of Matters to a Vote of Security Holders.........................12


PART II
         Item 5.    Market for Common Equity and Related Stockholder Matters....................13
         Item 6.    Management's Discussion and Analysis or Plan of Operation...................14
         Item 7.    Financial Statements .......................................................21
         Item 8.    Changes in and Disagreements with Accountants on Accounting and
                           Financial Disclosure.................................................21

PART III
         Item 9.    Directors, Executive Officers, Promoters, and Control Persons; Compliance
                           with Section 16(a) of the Exchange Act...............................22
         Item 10.   Executive Compensation......................................................23
         Item 11.   Security Ownership of Certain Beneficial Owners and Management..............27
         Item 12.   Certain Relationships and Related Transactions..............................28
         Item 13.   Exhibits and Reports on Form 8-K............................................30

SIGNATURES......................................................................................35
</TABLE>








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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


PART I

ITEM 1.   DESCRIPTION OF BUSINESS

General

     Tanknology-NDE   International,   Inc  (the   "Company"   or  "TNDE")   was
incorporated in Delaware in 1988. The Company is a holding company that conducts
business  through its  wholly-owned  subsidiaries.  At December  31,  1997,  the
Company's subsidiaries included Tanknology/NDE Corporation, 2368692 Canada, Inc.
(formerly known as Tanknology  Canada (1988) Inc.)  ("Tanknology  Canada"),  NDE
Environmental Canada Corporation ("NDE Canada"), ProEco, Inc. ("ProEco"), EcoAm,
Inc.,  Tanknology-NDE  Construction Services,  Inc. and ProEco, Ltd. The Company
provides environmental compliance services, equipment installation, construction
project  management and  consulting to owners and operators of  aboveground  and
underground  storage  tanks  ("USTs") in the United  States and  internationally
through licensees. Customers purchase the Company's services primarily to remain
in compliance  with laws pertaining to  environmental  protection and to conduct
their  operations  in a manner  that limits  their  exposure  to  liability  for
incidental environmental damage.

Forward-Looking Statements

     This  Annual  Report on Form  10-KSB  includes  forward-looking  statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act. The words  "anticipate,"  "believe,"  "expect,"
"plan,"  "intend,"  "estimate,"  "project,"  "will," "could," "may," and similar
expressions are intended to identify  forward-looking  statements.  No assurance
can be given that  actual  results may not differ  materially  from those in the
forward-looking   statements   herein  for  reasons   including  the  effect  of
competition,  changes  in  Environmental  Protection  Agency  ("EPA")  and other
regulations  affecting the Company or its customers,  the outcome of litigation,
the loss of a  significant  customer or group of customers,  disruptions  or the
failure  of  the  Company's  information  management  system,  or  technological
obsolescence.

Mergers and Acquisitions

     The  Company's   business  has  historically  grown  through  a  series  of
acquisitions   beginning  in  March  1990.  The  Company  has  acquired  testing
technology,  licenses,  testing  vehicles and other assets.  The Company expects
that it will continue to make strategic acquisitions in the future.

Tanknology UST Acquisition

     On  October  25,  1996,  the  Company  acquired  substantially  all  of the
operating  assets and  liabilities  of the Tanknology UST Group ("UST Group") of
Tanknology Environmental, Inc. ("TEI"), (the "Acquisition").  The Tanknology UST
Group's operations were principally conducted through three subsidiaries of TEI:
Tanknology  Corporation  International  ("TCI"),  Tanknology  Canada, 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 these
subsidiaries.

     TCI was engaged in  substantially  the same business and in the same market
as the  Company  and was  the  Company's  largest  direct  domestic  competitor.
Additionally, TCI was a provider of UST corrosion protection services, a service
not formerly offered by TNDE. Immediately following the Acquisition, the Company
merged its primary  operating  subsidiary,  NDE Testing & Equipment,  Inc., into
TCI, and changed its name to  Tanknology/NDE  Corporation.  The combined  entity
comprises the largest  component of the  Company's  domestic  operations,  field
services.  As a  result  of this  transaction,  the  Company  believes  that the
resulting  entity is the largest and only  nationwide  provider of UST services.
Management believes that the combination has resulted in a significant  increase
in market share and the elimination of duplicate administrative costs.


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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


USTMAN Disposition

     USTMAN provided statistical inventory  reconciliation ("SIR") services. SIR
meets  the  post-1998   Environmental   Protection   Agency  ("EPA")   precision
requirement  for leak  detection.  SIR may also  identify  other  conditions  of
concern to tank operators such as pilferage or flaws in record  keeping.  On May
22, 1997,  USTMAN was sold to Watson General  Corporation  (since renamed USTMAN
Technologies,  Inc.).  The Company did not realize any gain or loss on this sale
as the net  proceeds  from  the  sale  approximated  the  carrying  value of the
tangible and intangible assets of USTMAN.

Gilbarco Acquisition

     On April  11,  1994,  the  Company  acquired  the  principal  assets of the
Environmental  Services Division of Gilbarco,  Inc. ("Gilbarco ESD"), a division
engaged in testing USTs. In the Gilbarco ESD  acquisition,  the Company acquired
tank testing  vehicles,  related tank testing  equipment,  ancillary  equipment,
testing systems,  regulatory approvals,  intellectual property rights,  customer
information,  supplier and distributor  information and other intangible assets.
In 1996, the Company  recognized an extraordinary  gain of $1,813,149 related to
the early  retirement and  settlement of debt incurred in  conjunction  with the
Gilbarco  ESD  acquisition  and  recorded a $833,321  write down of the acquired
vehicles and test equipment due to permanent impairment of their value.

Canada Disposition

     An element of the Company's strategy is to focus financial, management, and
other  resources on operations in the United States and leverage its  technology
base  internationally  through  licensing  arrangements.  Consistent  with  this
strategy,  in 1995, TNDE made the decision to phase out its operations in Canada
and entered into a licensing  agreement for western Canada. In 1996, the Company
secured a licensee for the eastern part of Canada and, prior to the Acquisition,
ceased the  operations  of NDE Canada.  On February 20,  1997,  the Company sold
substantially  all of the operating assets of Tanknology Canada to the Company's
eastern  Canada  licensee.  The Company did not realize any gain or loss on this
sale as the net proceeds from the sale  approximated  the carrying  value of the
tangible and intangible assets of Tanknology Canada.

Lines of Business

     The  Company  expects  that  over  the next  two  years  that it will see a
significant  decline  in its  precision  tank  testing  services  as  government
regulations and enforcement thereof take effect. Accordingly,  the Company plans
to broaden beyond its historical service offerings to replace these revenues. In
1997, the Company entered into the construction  services field (see description
below) and also expanded its participation in the installation of Automatic Tank
Gauges ("ATG").  The Company expects that it may introduce new services  related
to its current business and may expand certain existing service offerings.

     The Company  offers  comprehensive  services to its customer base of retail
and non-retail fuel  distributors  who own or operate USTs. The Company has four
operating divisions that reflect its primary lines of business:  Field Services,
Compliance Management Services (CMS), Construction Services, and International.

Field Services

     Historically,  the  principal  business  of the  Company's  Field  Services
division ("Field Services") has been the precision testing of petroleum USTs and
associated  piping  to  detect  leaks.  This  service  also  is  referred  to as
"tightness  testing" or "integrity  testing."  UST owners or operators  purchase
testing services for a variety of reasons, including:

          o    to comply with regulations;
          o    to certify the system as tight after work has been  performed  on
               the system;
          o    to investigate inventory discrepancies;
          o    to satisfy environmental liability concerns; and
          o    to  investigate  the site for  evidence  of  pollution  or a fire
               hazard.


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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


     The  Company  uses a number of  proprietary  systems to  perform  tightness
testing on USTs. All of the Company's systems have been certified by independent
laboratories as meeting EPA standards for UST testing  methods.  UST testing has
the following general characteristics:

          o    it is performed periodically;
          o    the test system is moved between UST locations by van,  truck, or
               trailer;
          o    the test is  precise  --  capable  of  reliably  detecting  leaks
               smaller than 0.1 gallon per hour; and
          o    the preferred testing method may differ based upon  environmental
               or business conditions,  state regulations,  tank type, design or
               contents, owner or operator preference and other variables.

     Due to the final phase-in of EPA  regulations on December 22, 1998,  annual
precision  tightness  testing  will no longer be accepted as a primary  means of
meeting leak detection  requirements.  As a result, the Company expects revenues
from precision testing to decline substantially after 1998. Precision tests will
still be required in certain situations (such as prior to property transfers, to
confirm an inconclusive  SIR result or to confirm a leak indicated by an ATG but
at greatly reduced frequency.

     Field Services provides "Stage II Testing" to verify functionality of Stage
II  Vapor  Recovery  equipment  and to  verify  that it does  not  leak.  During
refueling,  Stage II  equipment  collects  vapor  emissions  displaced  from the
vehicle gas tank receiving the fuel and  incinerates or returns the vapor to the
UST. EPA  limitations on fuel vapor  emissions are designed to help reduce ozone
layer  depletion  and are  enforced  in  metropolitan  areas  that do not attain
emissions  targets set forth in the Clean Air Act. TNDE also  provides  pipeline
and container leak detection services ("Specialty  Testing").  Specialty Testing
vehicles are equipped to perform either hydrostatic or acoustic pipeline testing
and large storage tank testing.

     On July  16,  1997,  the EPA  issued  its new  air  quality  standards  for
particulate matter and ozone.  Implementation of these more stringent standards,
which are  currently  under  Congressional  review,  may  increase the number of
metropolitan  areas subject to Stage II Vapor Recovery  requirements.  The EPA's
On-board  Vapor  Recovery  ("OBVR")  requirements,  which call for automakers to
install  in-car  vapor  recovery  canisters,  start to phase-in  in 1998.  Forty
percent of all new cars for the model year 1999 must be equipped  with OBVR.  By
2000,  all cars must have OBVR,  and, by 2001,  light duty and heavy duty trucks
will be included.  Although full  implementation of the requirements  will, over
time,  replace most Stage II systems and greatly  reduce the Company's  Stage II
testing  services,  management does not expect the aggregate market for Stage II
testing to change significantly within the next five years.

     Field Services also offers installation of ATG. In 1997 the Company derived
more than 10% of its revenues from the installation, inspection, maintenance and
parts sales  associated with ATG. No significant  revenues were derived from ATG
in 1996. ATG consist of a probe permanently installed in the tank and wired to a
monitor to provide  information on product level and temperature.  These systems
automatically  calculate  the  changes in  product  volume  that can  indicate a
leaking tank. ATG meet  regulatory  requirements as an accepted means of monthly
monitoring.  After  December 22, 1998,  UST owners must  generally use a form of
monthly monitoring for leak detection  requirements (such as the installation of
an ATG or the use of Statistical Inventory  Reconciliation (SIR). However, tanks
owners may continue to use precision  tightness  testing at 5 year intervals for
ten years after the upgrades in most states. See "Government Regulations." It is
currently  anticipated  that the rate of UST  closure  and  upgrade  trends will
increase as the 1998 deadline approaches.

     Field  Services  also  offers  the  equipment,  design,  installation,  and
maintenance  of  cathodic  protection  systems  including  video  internal  tank
inspection ("Petroscope").  The EPA requires all USTs and associated underground
piping to be upgraded  with  corrosion  protection  by December  22,  1998.  See
"Government  Regulations." Cathodic protection is required unless the UST system
is lined with, or made of, non-corrodible  material.  Cathodic protection is one
of two viable corrosion protection alternatives for owners or operators of steel
USTs who wish to  upgrade  rather  than close or replace  their  USTs.  Cathodic
protection  prevents  corrosion  by making the entire  steel  surface act as the
cathode of an electrochemical cell,  transferring corrosion from the UST's metal
surface  to  an  external  anode.  Cathodic  protection  systems  are  typically
installed by drilling holes at various points around the UST and related piping,
inserting anodes within the holes, wiring the anodes together and connecting the
system to the facility's electrical system.  Cathodic protection systems require
periodic tests and inspections  which are services the Company  performs for its
customers.  For the same  reasons that annual  tightness  testing is expected to
decline,  the Company  expects  strong demand for cathodic  protection  services
through a period shortly after December 22, 1998. The degree to which the

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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


Company will experience a significant  increase in cathodic  protection revenues
or profits is not clear.  However,  in 1997,  the  Company  experienced  revenue
growth in this area and cathodic protection services accounted for approximately
12% of Field Services revenues.

     In addition to testing and  upgrading  UST  systems,  Field  Services  also
provides  overfill  protection,  UST  cleaning  and value  added site  services,
including survey and compilation of site information and minor maintenance.  The
Field Services division may, as a customer service, subcontract the upgrading of
USTs with spill  protection  but  typically  does not provide other UST services
such as secondary containment,  interstitial  monitoring or groundwater or vapor
monitoring.

     In 1997, Field Services revenues were approximately  $32.7 million, or 85%,
of the Company's consolidated revenues.

Compliance Management Services

     In 1995, the Company established its CMS division to enable tank owners and
operators to outsource the regulatory compliance function. CMS provides turn-key
administrative,  managerial,  technical,  data processing and regulatory liaison
services. CMS helps UST owners and operators coordinate regulated activities and
manage their relationship with regulators. On behalf of its customers, CMS can:

          o    administer UST systems in compliance with regulations;
          o    acquire and maintain operating and regulatory permits;
          o    respond to, report on and manage environmental incidents;
          o    report  in  accordance  with  SARA  III  community  right-to-know
               requirements;
          o    resolve environmental notices of violation;
          o    track hazardous waste transportation via manifest;
          o    manage the liabilities  associated with the operation of USTs and
               storage of hazardous material;
          o    assist in UST owner or operator management  reporting and capital
               budgeting related to UST upgrades;
          o    coordinate  construction,  maintenance,  testing  and  contractor
               oversight; and
          o    coordinate  the provision of services from the  customer's  other
               UST vendors.

     Currently,  the CMS  division  manages  the  environmental  compliance  for
approximately 11,000 tanks in the United States.

Construction Services

     In 1997, the Company established Tanknology-NDE Construction Services, Inc.
("CS") which provides  construction  management  services.  CS provides turn-key
construction  program  management to customers  that cannot,  or do not want to,
manage large-scale,  complex tank upgrade projects,  removals,  replacements and
other petroleum  related  construction.  CS program  managers have many years of
petroleum  construction and project  management  experience,  as well as several
excellent  customer  relations  that  complement  the  Company's  list of  major
customers.  Additionally, as the project manager, CS can usually influence which
sub-contractors  will perform the  construction  or related work. This allows an
opportunity for other TNDE services, with customer approval, to be specified for
work.  CS  provides  the  following  services  (among  numerous  others)  to its
customers:

             o      Single point program management;
             o      Site surveys;
             o      Project design and permitting;
             o      UST upgrades;
             o      UST tank and line removals;
             o      Above ground and underground tank installations;
             o      Canopy installations and modifications;
             o      Supply of parts and equipment;

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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


             o      Other petroleum related construction; and
             o      Coordination with services offered by other TNDE divisions.


International

     Through ProEco,  its wholly owned subsidiary,  TNDE licenses  technology to
service providers in Australia,  Brazil,  Canada, Chile,  Ireland,  Italy, South
Korea,  Mexico,  Malaysia,  New Zealand,  Puerto  Rico,  Portugal and the United
Kingdom.   Service  providers  receive  a  license  for  specific  countries  or
geographic  areas  and  purchase  or  lease  equipment  from the  Company.  TNDE
typically  reviews the test data,  issues the test  report,  provides  technical
support and receives license or processing fees on each test.

Government Regulations

     The primary  driver for the  Company's  services are various  environmental
regulations issued by the EPA and enforced by state  environmental  departments.
In  addition,   regulatory   interpretations  and  additional  requirements  are
determined by local and county officials,  which vary significantly from area to
area.

     In response to concerns about ground water contamination, Congress included
UST amendments in the 1984 Resource Conservation and Recovery Act ("RCRA").  The
RCRA  amendments led to federal UST regulations (40 CFR Part 280) that went into
effect in late 1988. The regulations  distinguish  between  "existing" and "new"
USTs.  Currently,  this distinction is interpreted to apply different regulatory
requirements based on whether the UST was installed before or after December 22,
1988. State regulatory  agencies were empowered to require earlier  deadlines or
additional requirements.

Tank Upgrades

     Federal rules require USTs installed  before  December 22, 1988  ("existing
USTs") to be upgraded with spill protection,  overfill  protection and corrosion
protection  by December 22,  1998.  Owners and  operators of existing  USTs must
either upgrade or close them.  Failure to comply timely can result in citations,
fines and reduction or elimination of insurance coverage provided by third-party
firms or state reimbursement funds.

     When closing a UST (including  closing prior to replacement),  the owner or
operator must notify the state regulatory authority before taking the UST out of
service  in case the  regulators  want to  monitor  the  activity.  The owner or
operator  must  determine  if  releases  from  the  UST  have  contaminated  the
environment  using the  results  of vapor or  groundwater  monitoring  or a site
assessment.  The state may require additional closure  assessment  measures.  If
contamination is found,  corrective action must be taken. Upgrading the tank, as
opposed to replacing it, postpones these requirements.

     To meet the corrosion protection upgrade requirements, existing steel tanks
must have cathodic protection, or be lined with non-corrodible material (such as
fiberglass), or both. Existing steel piping must have cathodic protection. Tanks
or piping made of non-corrodible material do not have to be upgraded to meet the
corrosion protection requirement.

     If a UST owner or operator decides to upgrade by adding cathodic protection
without also adding a lining,  the  integrity of the tank must be assessed by an
approved  monthly   monitoring  method,  two  tightness  tests  or  an  internal
inspection.  Regulations  require  a  qualified  cathodic  protection  expert to
design,  supervise  installation and inspect cathodic protection  systems.  Most
cathodic protection systems also require bimonthly inspections.

Leak Detection

     Since December 1993, leak detection has been required for all USTs.  Owners
or operators of USTs that do not have a leak  detection  method can be cited for
violations  and  fined.  Leak  detection  violations  can  prevent  the owner or
operator from obtaining  legally required  insurance  coverage and reimbursement
for cleanup costs.


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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


     There  are  two  categories  of  leak  detection:"monthly  monitoring"  and
"tightness testing".  Monthly monitoring methods must be able to detect leaks of
0.2 gallons per hour with a probability  of detection of at least 95 percent and
a  probability  of false  alarm of no more  than 5  percent.  Tightness  testing
methods  must be able to  detect a 0.1  gallon-per-hour  leak with at least a 95
percent  probability  of detection and no more than a 5 percent  probability  of
false alarm.

     Leak  detection  is  required  for all "new"  USTs  after  installation  or
"upgraded"  USTs within 10 years of upgrade.  Such methods  include:  SIR,  ATG,
secondary  containment  with  interstitial  monitoring,   vapor  or  groundwater
monitoring or other methods approved by the state regulatory  authority that are
at least as precise as the EPA requirements.

     ATG provide an  alternative  to SIR, as a replacement  to manual  inventory
control procedures, to meet leak detection requirements in combination with tank
tightness testing or SIR. Secondary  containment consists of using a barrier, an
outer wall, a vault or a liner around the UST or piping. Leaked product from the
inner tank or piping is directed toward an interstitial  monitor located between
the inner tank or piping and the outer barrier.

     Tightness  testing combined with inventory  control is an acceptable method
of leak detection for existing USTs that have not been upgraded or for USTs that
have been  upgraded or installed  within the last 10 years.  For existing  tanks
that have not been  upgraded,  tightness  must be tested  annually if  tightness
testing  combined with  inventory  control are relied upon as the leak detection
method. New or upgraded tanks using this method must be tested every five years.
Inventory control requires  comparing  "stick" inventory (daily  measurements of
tank contents using a calibrated  "stick,"  conversion  chart,  and mathematical
calculations) to "book" inventory (calculated from initial inventory, deliveries
and dispensing).

     Tightness  testing  combined  with  inventory  control  does not meet  leak
detection  requirements for all types of piping.  If certain design criteria are
not met, a suction  line  requires a line  tightness  test  every  three  years,
monthly SIR,  monthly  interstitial  monitoring or monthly vapor or  groundwater
monitoring.  Pressurized  piping  must be equipped  with  certain  hardware  and
receive an annual  tightness  test or be  equipped  with  monthly  SIR,  monthly
interstitial monitoring, or monthly vapor or groundwater monitoring.

     SIR may be used  currently  and  indefinitely  to meet the  leak  detection
requirement for existing,  upgraded,  or new tanks and is one of the options for
leak detection with suction and pressurized  piping.  Generally,  few product or
site restrictions apply to the use of SIR.

     With a probability of detection of at least 95 percent and a probability of
false alarm of no more than 5 percent, SIR must be able to detect leaks of:

         o     0.2 gallons per hour to serve as a monthly monitoring method;
         o     0.1 gallons per hour to serve as a replacement for tank tightness
               testing; and
         o     0.08  gallons  per  hour  to  serve  as a  replacement  for  pipe
               tightness testing.

     Approximately 20 state  regulatory  authorities will accept SIR on the same
basis as EPA. Many states impose some  restrictions on the use of SIR, and a few
states do not accept it.

     Vapor  monitoring  measures  product  "fumes" in the soil around the UST to
check  for a  leak.  This  method  requires  installation  of  carefully  placed
monitoring wells. Vapor monitoring can be performed manually on a periodic basis
or continuously using permanently  installed equipment.  Groundwater  monitoring
senses the presence of liquid product floating on the  groundwater.  This method
requires  installation of monitoring wells at strategic  locations in the ground
near the tank and  along the  piping  runs.  It  cannot  be used at sites  where
groundwater  is more than 20 feet below the surface.  Both of these methods risk
attributing  releases  from  other  sources to the tank they were  installed  to
monitor.

     Some  state and local  jurisdictions  have  adopted  regulations  regarding
testing  of UST that are  stricter  than EPA  regulations.  The  failure  of the
Company's testing systems to comply with any such current or future  regulations
or the failure of the Company to obtain any necessary  certifications could have
a material adverse impact on the revenues and operating  results of the Company.
Management  believes  the Company and all of its testing  methods,  services and
practices are currently in compliance with all existing EPA regulations for

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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


which a lack of compliance would have a material adverse impact on the operating
results of the Company.


Distribution

Geographical

     As part of the Company's  business  strategy,  the Company has expanded its
service offerings, both through acquisitions and internal expansion. The Company
plans to take  advantage  of its broad  product  line by cross  marketing  these
services  to its  customers  who do not use all of the offered  services  and by
bundling  separate  services  into a combined  service  offering.  In 1998,  the
Company plans to create a national  sales  organization  to focus on selling the
entire  line of  service  offerings  to all  geographic  areas.  This group will
supplement the Company's existing regional sales force. In addition, the Company
plans  to  develop   relationships  with  other  service  providers,   equipment
manufacturers  and distributors  and others in order to more effectively  market
its services to a broader base of customers.  In late 1997, the Company  entered
into two separate  agreements  that it believes are  significant  first steps to
accomplishing its goals of more effectively  marketing its service offerings and
extending its customer base:

         1)    Ryder  Total  Compliance  Contract.  In an  agreement  with Ryder
               System Inc., the Company bundled its CMS, ATG  installation,  the
               purchase of the gauge and related  equipment,  system maintenance
               and remote  monitoring of the gauge in a single  turnkey  service
               called Total  Compliance (tm). In 1997, this new service offering
               covered approximately 325 USTs, and, in January 1998, the program
               was expanded to cover approximately 1,350 USTs for Ryder.

         2)    Strategic  Alliance  with  Veeder  Root.  In December  1997,  the
               Company   entered  into  a  strategic   business   alliance  with
               Veeder-Root  Company  ("Veeder-Root"),  a  subsidiary  of Danaher
               Corporation ("Danaher"),  which included an $8 million investment
               in the Company by Danaher.  Veeder-Root is the industry's leading
               manufacturer  of ATG and line leak detection  equipment.  Through
               its Simplicity Petroleum Data Services unit, Veeder-Root provides
               a turnkey  package  of ATG and line leak  equipment,  twenty-four
               hour remote monitoring, compliance reports, dispatching and field
               management services. The Company believes that this alliance will
               allow for joint  marketing  of the two  companies'  complementary
               service  offerings to provide  customers more value as well as to
               provide the Company with an expanded  distribution  capability by
               using   Veeder-Root's   established   direct   sales   force  and
               distribution network.

     Field  Services  distributes  its  services  throughout  the United  States
utilizing  approximately 175 vehicles.  Sales and operations are managed through
12 regional offices as well as the Company headquarters.  Field Services markets
its services  and products  primarily  to gasoline  retailers  (e.g.,  major oil
companies,  independent fuel retailers and convenience store chains), businesses
with vehicle fleets that are fueled from  internally-operated USTs (e.g. vehicle
rental companies,  package delivery  services or product  distributors) and tank
owners or operators who maintain tanks as a source of emergency  power,  such as
hospitals and hotels.

     CMS markets to Field Services and Construction Services customers and trade
show attendees and recipients of industry trade  publications.  CMS services are
marketed by CMS division  personnel  based at the  Company's  headquarters,  the
corporate sales and marketing departments and the regional Field Services office
management and salespersons. CMS services are performed primarily at the Company
headquarters.  The Company also has customer-dedicated  locations in California,
Connecticut and Virginia.

     Construction  Services  markets to Field Services and CMS customers as well
as through  direct sales and  attendance at trade shows.  Construction  Services
performs throughout the United States and maintains an administrative  office in
Atlanta, Georgia.

     International  operations are marketed  through  attendance at trade shows,
direct sales and advertising in trade publications. International operations are
managed from the Company headquarters.

                                      - 9 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


Information Systems and Products

     TOPS (formerly  known as, NDEOE) and CMS (formerly  known as,  USTLine) are
the trade names for a group of proprietary  information  systems that facilitate
the environmental  compliance of UST installations.  TOPS and CMS were developed
in response to the growing  informational  needs of tank owners and operators in
their efforts to manage  complex  regulatory,  risk  avoidance  and  operational
requirements.  While TOPS and CMS are not sold  individually,  they  represent a
value-added method of distribution which, management believes, gives the Company
a competitive advantage in serving large customers with:

         o     many tanks under management;
         o     geographical  coverage  spanning  regulatory  jurisdictions  with
               different compliance requirements; and
         o     USTs distant from managerial oversight.

     TOPS is primarily used by Field  Services.  It integrates the scheduling of
tests, the deployment of the service  technicians and test vehicle fleet and the
collection,  analysis  and  reporting  of test  data  and  billing  information.
Technicians  are equipped with laptop  computers,  and they input data into TOPS
while on-site.  The TOPS database provides  comprehensive  information about the
customers'  UST systems  which is useful for their  operational  and  regulatory
compliance functions and which can be sorted and analyzed electronically.

     CMS is a comprehensive  management  information system that tracks UST site
data, test/upgrade histories, contractor visits and regulatory inquiries to help
ensure full compliance information is available when needed.

     TNDE's database  management  system  features the flexibility  necessary to
efficiently build a bank of information  obtained from a variety of sources. For
example,  information  regarding  ground  water  level might best be obtained by
TNDE's technician while visiting the site, while regulatory information would be
maintained on an associated  database by TNDE regulatory  affairs  personnel and
tied to a particular site location via zip codes.

     Master  databases  are  centrally  managed at TNDE's  Austin  headquarters.
Customized  reports are generated which meet the needs of each particular client
or regulator. The TNDE database management systems have the built-in flexibility
required  to  generate  specific  report  formats  based  on  the  needs  of the
individual  customer.  Reports  can be faxed or hard  copies can be printed  and
mailed to the customer and/or regulatory agency.

         These systems add value for UST owners in the following ways:

          o    lower  costs  resulting  from  diminished  paper  processing  and
               archival requirements;
          o    increased  efficiency  and speed  through  computerized  storage,
               filing, sorting and data retrieval;
          o    real-time  access to testing  schedules,  test  results  and site
               surveys;
          o    enhanced communication with TNDE through integrated e-mail;
          o    increased efficiency in planning, budgeting and scheduling due to
               the integrated data-base management tools; and
          o    enhanced regional emergency response (e.g., earthquake), the TOPS
               system can sort the data by proximity  to a  particular  landmark
               and other site characteristics.



Competition

     In the  Acquisition,  the Company  acquired  TCI,  formerly  the  Company's
primary national competitor.  However, the Company continues to face competition
for UST testing  services  from a number of smaller  testing  companies  serving
local or  regional  customers  and  using  inexpensive  technology.  Prices  for
tightness testing, which have historically  declined,  were relatively stable in
1997,  although some price degradation  occurred in certain geographic  markets.
Competitors may refine existing  technologies or develop new systems that render
the Company's technology obsolete or less competitive.


                                     - 10 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


     Barriers  to entry  into the  business  of  providing  cathodic  protection
services are low.  "Small" owners or operators (those with relatively few tanks)
may experience  financial hardship relating to the upgrade and may be very price
sensitive.  Owners or operators who operate nationwide have the ability to exact
price concessions from installation providers.

     The  Company  does  not  believe  that  the  CMS  division   currently  has
significant direct competition.

     Construction  Services competes with local construction  companies,  larger
national  construction  companies and internal  construction groups within major
customers.

Customers

     The Company  provides UST services to oil  companies,  independently  owned
gasoline  retailers,  convenience  store  operators,  fleet  owners,  government
facilities  and other  operators  of USTs.  Below  are  selected  customers  (in
alphabetical  order) within a few of the Company's  major customer  groups.  The
organizations  listed are not meant to be representative of the Company's entire
customer  base,  but  are  meant  to  give  an  indication  of  the  caliber  of
organizations that purchase TNDE's services.

         o     Oil  companies:  Amoco Oil  Company,  B.P.  Oil,  Chevron  U.S.A.
               Products Company, Exxon U.S.A., Mobil Oil Corporation,  Shell Oil
               Company;
         o     Convenience   stores:   Cumberland  Farms,  Dairy  Mart,  Diamond
               Shamrock, Southland Corporation; and
         o     Fleet owners: Hertz Corporation, Ryder Truck Rental.

     Mobil Oil Corporation  accounted for approximately  21%, 20% and 13% of the
Company's 1997, 1996 and 1995 revenues,  respectively.  No other single customer
contributed more than 10% of the Company's revenues during these three years.

Other matters

Suppliers

     The Company  does not depend upon any single  supplier  for spare parts for
any of its technologies.  Substantially  all repair,  diagnostic and maintenance
functions are performed at the Company's headquarters.

Patents

     The Company owns or has obtained licenses for various rights in the form of
patents,  trademarks,  copyrights and/or  registered names.  TNDE's policy is to
vigorously  defend  these  rights,  and the Company is  currently  working  with
counsel to address infringements.  There can be no assurance that the rights, or
the  Company's  efforts  to  enforce  them,  will  provide  the  Company  with a
competitive  advantage.  The Company  believes  that the duration of its patents
generally  exceeds the life  cycles of the  technologies  disclosed  and claimed
therein.  Although  the patents it holds may be of value,  the Company  believes
that its success will depend primarily on its engineering, marketing and service
skills.

Research and Development

     The  Company  has  incurred  no  significant   expenses  for  research  and
development  since its inception.  Most  technology used by the Company has been
obtained through acquisition.

Insurance

     The Company's  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 substantial 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

                                     - 11 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


USTs containing volatile substances such as gasoline.  The Company or its former
licensees  could be held liable for damage to persons or property  caused by any
resulting  fire or explosion.  In addition,  most of the Company's  services are
provided by  technicians  driving  Company  vehicles  with the  attendant  risks
associated with operating motor vehicles.

     The Company maintains  professional and pollution liability insurance of $2
million per occurrence with a $2 million aggregate limit;  general,  product and
personal  injury  coverage  of $1  million  per  occurrence,  with a $2  million
aggregate limit; and fire,  legal liability  coverage to $500,000.  In addition,
the Company maintains  umbrella coverage for all sources of liability other than
professional and pollution  liability in the amount of $10 million.  Deductibles
are in the amount of $100,000 per  occurrence  for  professional  and  pollution
liability claims. The umbrella policy carries a $10,000 self-insured  retention.
All other  coverages  carry a $5,000  deductible  per  occurrence.  The  Company
believes  that the policies in force will 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.  The occurrence
of any  significant  uninsured loss or liability  would have a material  adverse
effect on the Company's business, financial condition and results of operations.

Personnel

     As of  December  31,  1997,  the  Company  employed  313  full-time  and 10
part-time personnel.  None of the Company's personnel are represented by a labor
union.  The  Company  believes  that  its  relationship  with its  employees  is
satisfactory.


ITEM 2.   DESCRIPTION OF PROPERTY

     The Company owns no real property. All operations are conducted from leased
premises.  The Company's  headquarters is located in approximately 17,000 square
feet of leased office space in Austin,  Texas.  The Company also leases regional
offices and storage facilities.

ITEM 3.   LEGAL PROCEEDINGS

     In February 1995, U.S. Test, Inc. ("U.S. Test") filed a lawsuit against the
Company  in the  United  Statesl  District  Court for the  Western  District  of
Louisiana.  The lawsuit is for a declaratory judgment that certain patents owned
by TNDE are invalid and unenforceable and/or that certain U.S. Test tank testing
systems do not infringe such patents. The relief U.S. Test is seeking includes a
final  determination  on the above issues,  a preliminary  injunction  regarding
actions taken by TNDE and attorneys'  fees and costs.  In May 1995, TNDE filed a
counterclaim  alleging that (1) the TNDE patents are valid and enforceable,  (2)
the U.S.  Test tank testing  systems  infringe such patents and (3) TNDE is owed
damages for such infringement.  The amount of damages owed by U.S. Test, if any,
has not been  specifically  alleged.  The patents at issue were transferred from
Gilbarco,  Inc. in the 1994  acquisition by TNDE of Gilbarco ESD. After numerous
delays,  an evidentiary  hearing  occurred in early 1998, and the parties are in
the  process  of  preparing  post  hearing  submissions.   There  have  been  no
dispositive  rulings to date.  The Company  does not believe that the outcome of
such litigation will have a material adverse effect on the Company's  results of
operations or financial condition.

     The Company also is subject to various  claims and litigation in the normal
course of business.  The Company  believes that the ultimate  resolution of such
matters  will not have a material  adverse  effect on the  Company's  results of
operations or financial condition.


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

         None.


                                     - 12 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


PART II

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     On July 20, 1995, the Company was delisted from the Nasdaq Stock Market for
failure  to meet  certain  listing  requirements.  These  requirements  included
maintaining  a minimum bid price,  minimum  capital  surplus and minimum  market
value of public float.  On December 22, 1995, the Company  voluntarily  delisted
from the Boston Stock Exchange for similar  reasons.  The Company's common stock
continues to be traded on the OTC Bulletin Board under the symbol "TNDE".

     The  following  table  sets  forth high and low bid prices of the shares of
Common Stock of the Company as reported in the OTC Bulletin  Board,  Daily Trade
and Quote Summary  Report for each  quarterly  fiscal period within the last two
fiscal years.  Quotations reflect inter-dealer  prices,  without retail markups,
markdowns or commissions and may not represent actual transactions.


                                                High         Low

               1996

               First Quarter                    $1/8        $1/20
               Second Quarter                  $5/16         $1/8
               Third Quarter                   $5/16        $1/16
               Fourth Quarter                  $9/16        $3/32

               1997

               First Quarter                   $9/16        $13/32
               Second Quarter                  $7/16        $3/16
               Third Quarter                   $11/32       $3/16
               Fourth Quarter                   $1/2         $1/8

     As of July 11, 1997, there were  approximately 174 holders of record of the
Company's Common Stock including those shares held in "street name". The Company
did not declare or pay any dividends during 1996 or 1997. The Company  currently
intends to retain any future  earnings to finance the  development and expansion
of its business.

Sales of Unregistered Securities

     In October  1996,  as part of the  consideration  given to Banc One Capital
Partners,  L.P.  ("BOCP") for a $8 million senior  subordinated  note (the "1996
Note")  issued in connection  with the  Acquisition,  BOCP received  warrants to
purchase  13,022,920 shares of the Company's common stock (the "Warrants").  The
Warrants were  exercisable at $0.325 per share and were  exercisable at any time
from October 24, 1996 through  December 31, 2005.  Both the number of shares and
the exercise price were subject to adjustment  based upon certain  factors.  The
Warrants were also subject to a put option whereby, under certain circumstances,
the BOCP could require the Company to  repurchase  the Warrants  (including  any
common shares owned as a result of a previous Warrant  exercise).  The appraised
fair market  value of the Warrants at issuance was $1.6 million and was recorded
as a discount to, and separately from, the  subordinated  note. These securities
were repurchased in December 1997. See "Management's  Discussion and Analysis or
Plan of Operation."

     In  December  1997 the  Company  sold 150  shares  of  Series A  Redeemable
Preferred  Stock with a liquidation  preference of $10,000 per share were issued
to DH Holdings Corp. ("DH"), a subsidiary of Danaher.  The shares are redeemable
at the option of the Company at any time after the later of June 30, 2001 or the
date upon which all principal and interest on the $6,500,000 senior subordinated
note (the "1997 Note") payable to DH is paid in full at the redemption price per
share. Any shares which are outstanding at December 31, 2004 will be redeemed by
the  Company.  Each share is  convertible  at the option of DH at any time after
December 31, 1997 into 20,000 shares of the Company's  common stock  (subject to
certain  adjustments  as defined in the  agreement).  DH is entitled to a annual
dividend of $1,000 per share,  payable  semi-annually  in arrears on June 30 and
December 31 of each year. Additionally,  in December 1997, the Company issued to
DH the 1997 Note. In consideration for the 1997 Note, DH also received a warrant
to purchase 4,500,000(subject to adjustment as defined in the warrant agreement)

                                     - 13 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


shares of the  common  stock of the  Company at an  exercise  price of $.375 per
share.  The warrant is exercisable in a single exercise at any time. The warrant
expires on December 31, 2002.

     In  consideration  of Bank One  Texas,  N.A.'s  consent  to enter  into the
refinancing  transaction  in December  1997, the bank was paid a $50,000 fee and
received a warrant to purchase  350,000 shares of the Company's  common stock at
an exercise price of $.375 per share.  The terms of this warrant are the same as
that issued to DH.

     The Company  acted in reliance with Rule 506 under the  Securities  Act and
Section 4(6) of the Securities  Act in not filing a registration  statement with
these transactions.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Forward-Looking Statements

     All  forward-looking  statements  contained  in this Annual  Report on Form
10-KSB and in  Management's  Discussion and Analysis of Financial  Condition and
Results of  Operations is based on the  Company's  current  knowledge of factors
affecting its business.  The Company's  actual results may differ  materially if
these assumptions prove invalid.

         Significant risk factors include, but are not limited to,:

          o    increasing price competition in the Company's marketplace;
          o    changes in government  regulations that decrease the requirements
               for the Company's testing services or adversely affect pricing;
          o    product  liability  losses in excess of insured  limits and third
               party indemnifications;
          o    the loss of a significant customer or group of customers;
          o    a failure in the computer or communication systems used to manage
               the Company's geographically- dispersed operations;
          o    risks associated with technological obsolescence; and
          o    failure of the Company to replace anticipated revenue declines in
               its core tank testing  business with new and  profitable  revenue
               streams.

 Revenues

     Revenues for 1997 were  $38,683,146,  an increase of  $22,744,020  or 143%,
compared to  $15,939,126  for 1996.  The increase in revenues in 1997 was due to
several factors:

         1)    The start up of the  Construction  Services  division which began
               producing  revenues  in July  1997 and  generated  $2,857,564  of
               revenues for the year.

         2)    Increased  revenues  of  $1,049,869  generated  by the USTMAN and
               Canadian  operations that were sold in 1997. These two operations
               had  combined  revenues of  $2,001,530  and  $951,661 in 1997 and
               1996, respectively.

         3)    Revenues  from an ATG  upgrade  program  for a major  customer of
               $4,238,349.

         4)    Inclusion of 12 months of revenues of the Field Services division
               of  the  UST  Group  acquisition  compared  to  only  two  months
               inclusion in 1996.

     The Company  expects that in 1998  revenues for the  Construction  Services
division will increase  substantially as it was in operation for only six months
in 1997,  that the upgrade  program  revenues for the major customer noted above
will  decline  in 1998 as the  program  is  completed  and that  tank  tightness
revenues  will  decline as more and more UST are fitted with ATG,  other  remote
monitoring systems or are cathodically  protected.  The Company expects that due
to the  impending  December  1998  regulatory  deadlines,  the level of business
activity  in 1998  will be  favorable  to the  Company  as UST  owners/operators
endeavor to meet the regulatory  guidelines and may require use of services such
as those  offered  by the  Company.  Additionally,  the  Company  is  constantly
reviewing  additional  acquisitions as well as new internally  developed service
offerings  to replace  the  anticipated  decline in  revenue  streams  from tank
tightness testing and ATG installations after the regulatory deadline passes and

                                     - 14 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


UST owners become compliant with the regulations.  In general,  the price of UST
tightness testing,  which is the Company's main revenue source, as well as other
services were stable in 1997.

Cost of Services

     Cost of services for 1997 was $29,246,121 (76% of revenue),  an increase of
$18,161,059 or 164%,  compared to $11,085,062  (70% of revenue) for 1996.  Gross
margin was $9,437,025  (24% of revenue) in 1997,  compared to $4,854,064 (30% of
revenue) in 1996. The decline in gross margin percentage is due primarily to (i)
the inclusion of twelve  months of operations of the Field  Services unit of the
UST Group compared to two months inclusion of these operations in 1996, (ii) the
start up of the  Construction  Services  division in 1997,  which realizes lower
margins   in  general   than  other   services   since  it   primarily   manages
sub-contractors  and  (iii) a  planned  increase  in  capacity  in both  trained
technicians  and vehicles to prepare for increased  demand in the fourth quarter
of 1997 and an anticipated increase in demand for the Company's services in 1998
due to the approaching regulatory deadlines in December 1998.

Selling, General and Administrative

     Selling,  general  and  administrative  expenses  ("SG&A")  for  1997  were
$7,853,002  (20% of  revenue),  an increase of  $1,271,665  or 19%,  compared to
$6,581,337  (41% of revenue) for 1996. The increase in SG&A was primarily due to
the start-up of the Construction Services division,  increased costs incurred to
upgrade computer systems and  administrative  systems due to increased  business
levels and, to a lesser extent,  increases in the staffing  levels required as a
result of the Acquisition. As a percentage of sales, SG&A expenses declined from
41% in 1996 to 20% in 1997.  SG&A  expenses in 1996  reflect  only two months of
spending  subsequent  to the  Acquisition.  The  increase  in  revenues  and the
elimination of duplicate  SG&A expenses  subsequent to the  Acquisition  reduced
SG&A  expenses  as a  percentage  of  revenues  from 1996.  These  factors  were
partially  offset  by  increased  spending  in 1997 to  upgrade  systems  and to
start-up the Construction Services division as noted above.

Impairment of Long-Lived Assets

     In the third  quarter  of 1996,  the  Company  recorded  an  impairment  of
long-lived  assets of $833,321  relating to the  write-down of vehicles and test
equipment  purchased from Gilbarco ESD. This  write-down was based on a periodic
review to determine  whether there had been any  permanent  decline in values of
the Company's assets.

Earnings Before Interest, Taxes, Depreciation and Amortization and Extraordinary
Gains (EBITDA)

     EBITDA in 1997 was  $5,495,138  which was an  increase of  $6,025,877  from
negative  EBITDA of $530,739 in 1996. The increase in EBITDA is due to increased
revenues from the Acquisition and the absence of the $833,321 charge in 1996 for
impairment of long-lived  assets and growth in other service  offerings  such as
Construction  Services. The Company believes that EBITDA is an important measure
of the  Company's  financial  performance  as it is an  indication  of the funds
generated by operations  available for debt service,  capital  expenditures  and
payment of taxes.


Interest Expense

     Interest expense for 1997 was $3,205,475,  (8% of revenue),  an increase of
$2,143,066  or 202%,  compared  to  $1,062,409  (7% of  revenue),  in 1996.  The
increase in  interest  expense is due to the  increased  debt  incurred  for the
Acquisition  and due to the fact that the  Acquisition  debt was outstanding for
the full 1997 year  versus  only two  months  in 1996.  Additionally,  increased
non-cash  interest  expense  related to  accretion of the 1996 Note of $349,140,
estimated  accretion  of the Warrants of $734,250  (none in 1996) and  increased
amortization of the deferred financing costs incurred on the Acquisition-related
debt of $177,424,  accounted for  $1,260,814  of the increase  over 1996.  These
increases  were  partially  offset by generally  lower interest rates on the new
debt compared to the Company's prior financing  arrangements that were in effect
for the first ten months of 1996. The Company expects that interest expense will
decline in 1998 as a result of the refinancing in December 1997(see below) which
will lower the amount of subordinated debt outstanding from $8 million to $6.5

                                     - 15 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


million,  reduce  the  interest  rate  on  subordinated  debt  from  13% to 10%,
eliminate the accretion of the Warrants of $734,250  incurred in 1997 and reduce
the amount of subordinated debt accretion by approximately $357,000.

Extraordinary Gain

     In December 1997, the Company recorded an  extraordinary  gain on the early
retirement  of the  1996  Note and  associated  Warrants  that  were  issued  in
connection  with the  Acquisition  in 1996.  The 1996  Note had a cost  basis of
$6,884,422  at the time of  retirement,  net of  unamortized  discount,  and the
Warrants had a carrying value of $2,334,250.  These instruments were retired for
an  aggregate  cost  of  $8,500,000,  plus  $144,415  in  related  expenses.  In
connection with this transaction,  the Company wrote off the deferred  financing
costs  associated with the original  issuance of the 1996 Note of $353,760.  The
net gain on this transaction was $220,497.

     In September 1996, the Company recorded an extraordinary  gain on the early
retirement  of debt of  $1,813,149.  The retired  debt  related to a  $2,450,000
six-year  note which was  collateralized  by assets  acquired  in the April 1994
transaction  with Gilbarco ESD. At settlement  (September  30,1996),  the note's
carrying  value  of  $2,113,149   including  accrued  interest  was  retired  in
consideration of cash payments by the Company totaling $546,000.

Net Loss

     The  Company  recorded a net loss for 1997 of  $1,353,635  (3% of  revenue)
compared to a net loss of $1,638,998 for 1996 (10% of revenue).  Although EBITDA
(as defined above) in 1997 increased by $6,025,877 over 1996, increased interest
expense of $2,143,066, increased depreciation and amortization of $1,881,250 and
the reduction of the extraordinary  gains over 1996 of $1,592,652 largely offset
the improvement in EBITDA and contributed to the net loss in 1997.

     If the debt  refinancing  that occurred in December  1997,  had occurred on
January  1, 1997  (excluding  the  extraordinary  gain on the  transaction)  the
Company would have a pro forma net loss of $90,580 for 1997.

Liquidity and Capital Resources

     The Company's  strategy has been to build a national UST service capability
and to expand its service  offerings  both through  internal  growth and through
acquisitions.  A substantial  portion of the  Company's  growth has come through
acquisitions,  beginning  with the Pan  American  Environmental  Services,  Inc.
acquisition in 1990 and the Kaneb Metering  Corporation  transaction in 1991 and
continuing  with the domestic  ProEco  transaction  in January 1993,  the ProEco
international transaction in December 1993, the Gilbarco ESD transaction in 1994
and the Acquisition in October 1996.

     On October 25, 1996 (the "Closing  Date"),  the Company acquired all of the
capital stock of three underground storage tank services  subsidiaries (the "UST
Group") from TEI. The  subsidiaries  acquired  were TCI,  USTMAN and  Tanknology
Canada.  Immediately  following the  Acquisition,  the Company merged its wholly
owned  subsidiary NDE Testing and Equipment,  Inc. into TCI and changed the name
of the merged entity to Tanknology/NDE Corporation.

     The UST Group was purchased for an aggregate  purchase price of $12 million
which was paid to TEI at  closing of the  transaction.  This  purchase  price is
subject to upward  adjustment for certain taxes that may be owed to TEI relating
to  operations  of the UST Group from  August 31,  1996 to October 25, 1996 (the
"Interim Period") and interest on the $12 million purchase price for the Interim
Period at 8% per annum.  The purchase  price  adjustment  will be reduced by any
claims the Company may have as a result of its  internal  post-closing  audit of
the acquired assets. As of December 31, 1997, this purchase price adjustment was
still being  negotiated  between the Company and TEI. The Company  believes that
this matter will be  resolved  in 1998 and that any  settlement  will not have a
material impact on its financial position or results of operations.

Sale of Canadian Operations

     In  February  1997,  the  Company  sold  the  business  and  operations  of
Tanknology  Canada  which  it  acquired  as  part  of  the  Acquisition.  In the
transaction,  the Company sold certain patent, software, and trademark rights as
well as the fixed assets associated with the operation of the Canadian business

                                     - 16 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


and entered into a series of royalty  generating  license  agreements.  Payments
totaling  $1,200,000  were made at closing of which  $1,150,000  of the proceeds
were  allocated  to the sale of the patent,  software and  trademark  rights and
$50,000 being  allocated to the sale of the fixed assets.  The net proceeds from
this sale  approximated the carrying values of the assets sold, and,  therefore,
no gain or loss was  realized.  As a condition  of sale,  the Company  agreed to
"block" $500,000 from is borrowing base,  which reduced the Company's  borrowing
capacity  under the  Company's  revolving  credit  facility  with its bank.  The
"block" was removed as part of the debt  restructuring  in December  1997 ("1997
Refinancing") described below.

Sale of USTMAN

     On May 22, 1997 the Company sold USTMAN,  which was acquired as part of the
Acquisition,  to  USTMAN  Technologies,  Inc.  (formerly  named  Watson  General
Corporation). The terms of this transaction called for a cash payment at closing
of $5,250,000,  the execution of a $500,000 8.5% Note due on June 1, 1998 ("8.5%
Note"),  the assumption of certain  liabilities of the Company and an additional
payment based upon certain  calculations  of USTMAN's  working capital as of the
closing date. In December  1997, as part of a settlement of the working  capital
adjustment  the  Company  received  a payment  of  $150,000  for one half of the
working  capital  adjustment  and early  repayment  of the 8.5% Note.  The final
working  capital  payment of $150,000 was received in early 1998. As a condition
of the sale,  the Company  agreed to use  $2,000,000 of the closing  proceeds to
immediately  repay all of the then  outstanding  borrowings  under the revolving
credit facility and to place  $3,000,000 in a restricted  certificate of deposit
with the Company's  senior bank. The net proceeds of the sale  approximated  the
carrying value of the assets sold, including a $4,795,000 reduction of goodwill.
Accordingly, the Company did not realize any gain or loss on this transaction in
its 1997 results of operations.

Financing

     In 1996, in connection with the  Acquisition,  the Company obtained a total
of $19 million of financing  (the  "Acquisition  Financing")  under two separate
loan agreements. The Acquisition Financing consisted of senior secured bank debt
comprised  of (i) a  three-year,  $5  million  revolving  line of  credit  ( the
"Revolving Line") and (ii) a five-year,  $6 million term loan and (iii) the 1996
Note which was  refinanced  in  December  1997 as  described  below  under "1997
Refinancing." Substantially all of the Company's assets were pledged as security
under the loan  agreements.  Concurrent with the Acquisition and the Acquisition
Financing,  a major  stockholder  of the Company  provided a $1 million  standby
commitment  in the  event of a payment  default  by the  Company  under the loan
agreements  and,  in  conjunction  with an  affiliated  debt  holder,  converted
$1,035,882  of existing debt ($1 million of  principal,  plus accrued  interest)
into 8  million  shares of  common  stock.  The  proceeds  from the  Acquisition
Financing were used (i) to purchase the UST Group,  (ii) to pay off  outstanding
balances under a then existing term loan and an existing factoring  agreement in
the aggregate  amount of $2,526,970,  (iii) for funding of  Acquisition  related
fees and expenses and for (iv) general working capital.

Senior Subordinated Note and Warrants with Put Option

     As part of the consideration given to the holder of the 1996 Note issued in
connection with the Acquisition, the debt holder also received the Warrants. The
Warrants were  exercisable at $0.325 per share and were  exercisable at any time
from October 24, 1996 through  December 31, 2005.  Both the number of shares and
the exercise price were subject to adjustment  based upon certain  factors.  The
Warrants  were also subject to a put option (the "Put")  whereby,  under certain
circumstances,  the holder could require the Company to repurchase  the Warrants
(including any common shares owned as a result of a previous Warrant  exercise).
The appraised fair market value of the Warrants at issuance was $1.6 million and
was recorded as a discount to, and separately from, the 1996 Note.

     In 1997, the Company  recorded  interest expense of $734,250 to accrete the
value of the Warrants to their  estimated  value.  With the  retirement  of this
instrument, there will be no similar charges in the future.

1997 Refinancing

     In December 1997,  the Company  retired the 1996 Note, and the Warrants for
an aggregate price of $8,500,000, plus accrued, unpaid interest on the 1996 Note
through the closing date. As part of this termination agreement, the Company

                                     - 17 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


also entered into a Post Closing Agreement (the "PCA") with the lender.  The PCA
calls for  payment  to the lender  upon the  occurrence  of certain  "Triggering
Events"  as defined in the PCA,  which  include,  among  other  events,  (i) the
dissolution or  liquidation of the Company,  (ii) the merger of the Company into
another  entity in which (a) the Company is not the surviving  entity or (b) the
current  stockholders  of the Company hold less than 50% of the combined  voting
power of the surviving  entity.  Upon the occurrence of a Triggering  Event, the
Company  has  agreed to pay to the  lender 20% of the amount by which the Market
Determined  Value (as  defined in the PCA) at or as a result of the closing of a
Triggering Event exceeds the Target Amount. The Target Amount is $10,000,000 for
the period December 23, 1997 through March 31, 1998;  $12,500,000 for the period
from April 1, 1998  through June 30,  1998;  $15,000,000  for the period July 1,
1998 through  September  30, 1998;  $17,500,000  for the period  October 1, 1998
through  December  31,  1998;  and  $20,000,000  for the period  January 1, 1999
through March 31, 1999. The PCA expires after March 31, 1999. Such payment is to
the  lender  will  occur on the same  date  and will  take the same  form as the
payment  other  shareholders  of the Company would  receive.  As of December 31,
1997, there has been no occurrence of a Triggering Event, and the Company is not
aware of any potential Triggering Events.

     The funds for this  transaction were provided by the issuance of $1,500,000
of Series A Redeemable, Convertible Preferred Stock and the issuance of the 1997
Note and $500,000 of the Company's cash. Additionally, the Company's bank credit
agreement  was  modified to allow for these  transactions  and to amend  certain
other terms and conditions of the agreement.

Series A Redeemable, Convertible Preferred Stock

     As part of the  1997  Refinancing,  150  shares  of  Series  A  Redeemable,
Convertible  Preferred Stock with a liquidation  preference of $10,000 per share
were issued to DH Holdings Corp. ("DH"), a subsidiary of Danaher. The shares are
redeemable  at the option of the Company at any time after the later of June 30,
2001 or the date upon which all  principal and interest on the  $6,500,000  note
payable  to DH is paid in full at the  redemption  price per  share.  Any shares
which are outstanding at December 31, 2004 will be redeemed by the Company. Each
share is  convertible at the option of the holder at any time after December 31,
1997 into  20,000  shares of the  Company's  common  stock  (subject  to certain
adjustments  as defined  in the  agreement).  The  holders of shares of Series A
Redeemable,  Convertible  Preferred  Stock are entitled to a annual  dividend of
$1,000 per share, payable semi-annually in arrears on June 30 and December 31 of
each year.

1997 Note

     As part of the 1997  Refinancing,  the Company  issued to DH the 1997 Note.
The interest  rate on the 1997 Note is 10% and the maturity date is December 31,
2002.  Principal  payments under the 1997 Note are due quarterly in twelve equal
installments of $541,667 beginning on March 31, 2000.  Interest payments are due
quarterly  beginning  March  31,  1998.  The  1997  Note  is  collateralized  by
substantially  all of the assets of the Company.  In  consideration  for the1997
Note, DH also received a warrant to purchase 4,500,000 (subject to adjustment as
defined in the warrant  agreement)  shares of the common stock of the Company at
an exercise  price of $.375 per share.  The warrant is  exercisable  in a single
exercise at any time. The warrant expires on December 31, 2002.

Senior Secured Bank Debt

     The funds  available for borrowing  under the Revolving Line are based on a
formula  as applied to the  eligible  accounts  receivable  of the  Company.  In
conjunction with the February 1997 sale of the Tanknology  Canadian  operations,
the  amount  available  to the  Company  under the  credit  line was  reduced by
$500,000 as a condition to obtaining the banks  agreement to sell the Tanknology
Canadian operation. As a result of the 1997 Refinancing,  the $500,000 reduction
to the credit line was  eliminated and certain other terms and covenants of this
agreement were modified.  In  consideration  of the bank's consent to enter into
the 1997  Refinancing  the bank was paid a $50,000 fee and received a warrant to
purchase  350,000  shares of the Company's  common stock at an exercise price of
$.375 per share. The terms of this warrant are the same as that issued to DH.


                                     - 18 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


     At December 31, 1997, the Company had $1,792,667 of borrowings  outstanding
under the Revolving Line and also had $185,000 in letters of credit outstanding.
As of December  31,  1997,  there was an  additional  $3,022,333  available  for
borrowing under the Revolving Line.

     The $6 million term loan carries an interest  rate of the bank's prime rate
plus 1.5%.  Principal  payments of $100,000  are paid  monthly.  At December 31,
1997,  $4,800,000 remained  outstanding under the term loan. Interest is payable
monthly  under  both  the  Revolving  Line  and the term  loan.  Under  both the
revolving  credit  line and the term loan and the  Company is subject to certain
restrictions and covenants.  At December 31, 1997, the Company was in compliance
with all  restrictions  and covenants  related to the revolving  credit line and
term loan.

Gilbarco Financing

     Two notes were issued by the Company in  connection  with the  Gilbarco ESD
acquisition.  Both were payable to Gilbarco.  The first note,  in the  principal
amount of  $400,000,  became  due on March 31,  1995 and was paid in full by the
Company.  The second note was in the principal  amount of  $2,450,000.  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
remaining  note  balance  for  $300,000.  The debt had a  carrying  value at the
prepayment  date of  $2,113,149,  including  accrued  interest.  The  settlement
resulted in an extraordinary gain of $1,813,149.

     In November 1995, in  consideration  of the assignment of certain  Gilbarco
patents, the Company entered into a note to pay Gilbarco an additional $300,000.
The $300,000  note was  outstanding  at December 31, 1996,  bears  interest at a
variable rate (currently, approximately 6%), and is due in October 2000.

     The aggregate annual maturities of long-term debt and financing  agreements
at December 31, 1997 are as follows:


     1998                                           $       4,055,072
     1999                                                   1,389,647
     2000                                                   3,844,577
     2001                                                   3,458,438
     2002                                                   2,166,590
                                                           14,914,324
     Less: Discount related to subordinated notes            (270,000)
                                                    -----------------
                                                    $      14,644,324
                                                    =================


     In January 1995, the Company raised $500,000 from a significant shareholder
("Proactive")  in exchange for its promissory  notes (the "1995 Bridge  Notes").
The 1995 Bridge Notes were to mature on April 30,  1995.  In January  1995,  the
1995 Bridge  notes were  extended  to May 31,  1995.  In June 1995,  the Company
completed a restructuring of the 1995 Bridge Note and Proactive's portion of the
Subordinated  Debt.  Proactive  agreed to  exchange  (i) the 1995 Bridge Note of
$500,000  plus  accrued  interest of $25,644,  (ii)  Proactive's  portion of the
Subordinated  Debt,  which was $273,038,  plus accrued  interest of $4,728,  and
(iii) cash of $500,000 for 261 newly issued shares of the  Company's  Series DDD
Preferred Stock. The Series DDD Preferred Stock was never issued. In March 1996,
in lieu of receiving the Series DDD Preferred Stock,  Proactive received a total
of 5,482,254 shares of Common Stock.

     At December 31, 1997, the Company had positive  working capital of $743,612
compared with working  capital of $182,885 at December 31, 1996. The increase in
working capital was generated by the sale of USTMAN and Canada for aggregate net
proceeds  of  approximately  $7,100,000  and the sale of  certain  international
licensing agreements which generated cash proceeds of $800,000.  The Company has
deferred the revenue  generated from this sale and is recognizing the revenue on
a pro-rata basis over the term of the respective agreements.

     Cash flows used in operating  activities in 1997 was $2,225,165 versus cash
flows provided by operating activities in 1996 of $868,023. The most significant
factors  contributing  to  the  use of  cash  from  operations  in  1997  were a
$4,121,276 increase in accounts receivable and a $2,942,089 decrease in accrued


                                     - 19 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


liabilities.  The increase in accounts  receivable  was caused by an increase in
revenues in December  1997 as compared to December 1996 and delays in payment by
one large  customer  which was received in January 1998. The decrease in accrued
liabilities was primarily due to payments made for  liabilities  associated with
the Acquisition in 1996 including legal fees, accounting fees, severance, moving
costs and  reclassifications  made to certain  acquired  assets against  accrued
liabilities that were recorded at the time of the Acquisition.

     Capital  expenditures  in 1997 were  $2,841,530  compared to  $1,120,752 in
1996.  The increase in capital  expenditures  in 1997 was  primarily  due to the
purchase of replacement and new service  vehicles,  increased  expenditures  for
computer  hardware and software and the purchase of automated  tank gauges for a
specific  customer  contract.  The Company expects that capital  expenditures in
1998  will be  approximately  $2,500,000,  subject  to the  Company  identifying
additional investment  opportunities.  This is a forward-looking  statement, and
the Company's actual capital  expenditures may differ from management's  current
expectation  due to risk factors that may affect the  Company's  ability to fund
capital  expenditure  requirements,  changes  in  technology  that  may  require
substantial capital investments,  changes in government  regulations or customer
other business opportunities that may arise.

     Prior  to the  Acquisition,  the  Company  incurred  operating  losses  and
negative  cash  flows from  operations  and relied  primarily  on its  principal
shareholders for financing.  To a lesser extent,  the Company had relied on bank
financing,  lease financing,  vendor financing and seller financing with respect
to acquisitions.  The Company has  historically  utilized cash proceeds from the
issuance of debt and equity  securities  to satisfy its cash  requirements  from
operations.  The  Company  believes  that the 1997  Refinancing  and cash  flows
generated from operations will provide it with sufficient borrowing capacity and
funds to meet the Company's capital expenditure requirements, operational needs,
and debt service requirements for 1998. This is a forward-looking statement, and
the Company's  actual cash flows from  operations and capital  requirements  may
differ from management's current expectation due to risk factors that may affect
the Company's ability to fund capital expenditure  requirements,  operations and
debt service.

Impact of Year 2000

     Some of the Company's older computer  systems were written using two digits
rather than four to define the  applicable  year.  As a result,  those  computer
programs have  time-sensitive  software that  recognize a dare using "00" as the
year 1900  rather  than the year  2000.  This  could  cause a system  failure or
miscalculations  causing  disruptions  of  operations,  including,  among  other
things, a temporary inability to process transactions,  send invoices, or engage
in normal business  activities.  The Company has made an initial  assessment and
will have to modify or replace  portions of its  software  so that its  computer
systems  will  function  properly  with  respect  to dates in the year  2000 and
thereafter.  The total Year 2000 project cost is estimated at less than $250,000
as some of the Company's  systems are already Year 2000 compliant.  To date, the
Company has  incurred  some costs for this  problem,  however,  these costs were
incurred as part of the normal systems assessment and software enhancements that
the Company has made over the past year and as such is not identifiable.

     The project is  estimated  to be  completed  not later than June 30,  1999,
which is prior to any anticipated impact on its operating  systems.  The Company
believes that with  modifications  to existing  software and  conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer  systems.  However if such  modifications  and  conversions are not
made,  or are not  completed  timely,  the Year 2000 Issue could have a material
impact on the operations of the Company.

     The costs of the project and the date on which the Company believes it will
complete the Year 2000  modifications  are based on management's best estimates,
which were derived utilizing  numerous  assumptions of future events,  including
the continued  availability  of certain  resources and other  factors.  However,
there can be no guarantee  that these  estimates will be achieved and the actual
results could differ  materially from those  anticipated.  Specific factors that
might  cause  material   differences  include,  but  are  not  limited  to,  the
availability  of  trained  personnel  in this  area,  the  ability to locate and
correct all relevant computer codes, and similar uncertainties.





                                     - 20 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


ITEM 7.   FINANCIAL STATEMENTS

          The following Consolidated Financial Statements of the Company and its
          subsidiaries are attached hereto.
<TABLE>
<CAPTION>
                                                                                    Page
<S>       <C>                                                                       <C>
          Report of Independent  Auditors ......................................... F-2
          Consolidated  Balance Sheets as of December 31, 1997 and 1996 ........... F-3
          Consolidated  Statements of Operations for the years ended December 31,
               1997 and 1996 ...................................................... F-4
          Consolidated  Statements of Stockholders'  Deficit for the years ended
               December 31, 1997 and 1996 ......................................... F-5
          Consolidated Statements of Cash Flows for the years ended December 31,
               1997 and 1996 ...................................................... F-7
          Notes to Consolidated Financial Statements .............................. F-8
</TABLE>


ITEM 8.   CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

                None.




                                     - 21 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


PART III


ITEM 9.   DIRECTORS,   EXECUTIVE  OFFICERS,   PROMOTERS,  AND  CONTROL  PERSONS;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Executive Officers and Directors

The  following  table sets forth  certain  information  regarding  the Company's
executive officers and directors.

<TABLE>
<CAPTION>
<S>                          <C>                                                  <C>
Officer and/or Director      Positions                                            Age
--------------------------   --------------------------------------------------   --
Jay Allen Chaffee            Chairman of the Board, Director, Officer             46
A. Daniel Sharplin           President, Chief Executive Officer, Director         35
David G. Osowski             Vice President, Secretary, Chief Financial Officer   45
H. Baxter Nairon             Vice President of Strategy and Business Development  38
Charles G. McGettigan        Director                                             53
Michael S. Taylor            Director                                             56
Myron A. Wick, III           Director                                             54
Steven H. Sigmon             Director                                             42
</TABLE>


     Jay Allen Chaffee was elected to the Company's  Board of Directors in April
1991 and has been the Chairman of the Board since  December  1994.  He served as
the Company's  President,  Chief Executive  Officer and Chief Financial  Officer
from May 1991  until June  1995.  Mr.  Chaffee  has  served as  President  and a
director of Bunker Hill  Associates,  Inc.  ("Bunker  Hill") since 1985,  and he
continues to serve in these capacities.  Mr. Chaffee received a Bachelor of Arts
from Franklin & Marshall  College in 1974 and a Juris Doctor from the University
of Tulsa, College of Law in 1978.

     A. Daniel  Sharplin has been the Company's  President  and Chief  Executive
Officer and a Director since June 1995. He became the Company's Vice  President,
Western  Region,  in December 1991, was appointed the Company's  Chief Operating
Officer and Secretary in July 1992 and was appointed President in December 1994.
Prior to joining  the  Company,  Mr.  Sharplin  functioned  as an  environmental
service  industry  consultant  from April 1991 to December  1991.  Mr.  Sharplin
received a Masters of Business  Administration  from the  University of Texas in
1987.

     H.  Baxter  Nairon  was named  Vice  President  of  Strategy  and  Business
Development of the Company in December 1997.  Prior to that, he was President of
Field Services for the Company from April 1996 to December 1997.  Before joining
the  Company,  from 1989 to 1996,  Mr.  Nairon  was  employed  by  Booz-Allen  &
Hamilton, a global management consulting firm, where he achieved the position of
Principal,  specializing in engagements for large oil companies. He has received
a  Professional  Engineering  registration  and holds a  Bachelor  of Science in
Mechanical  Engineering  from the  University  of Tennessee  at Knoxville  and a
Masters of Business Administration from the University of Texas.

     David G. Osowski was named Vice  President,  Secretary and Chief  Financial
Officer in December 1996. Prior to joining the Company, from May 1991 until July
1996, Mr. Osowski served as Senior Vice President,  Controller and Treasurer for
Summagraphics  Corporation.  Mr. Osowski received a Bachelor of Science from the
University of Bridgeport.

     Charles C. McGettigan has been a director since 1995.  Since November 1988,
he has been a Managing  Director of  McGettigan,  Wick & Co. Inc., an investment
banking firm in San Francisco. Since May 1991, Mr. McGettigan has been a general
partner of Proactive  Investment  Managers,  L.P. ("PIM"),  which is the general
partner of Proactive  Partners,  L.P.  ("Proactive"),  a merchant  banking fund.
Prior to  co-founding  McGettigan,  Wick & Co., Mr.  McGettigan was a Principal,
Corporate  Finance,  of  Hambrecht  & Quist,  Incorporated.  Prior to that,  Mr.
McGettigan was a Senior Vice  President of Dillon,  Read & Co. Inc. He currently
serves on the boards of directors of Cuisine Solutions,  Inc. digital dictation,
inc., I- FLOW Corporation,  Modtech,  Inc, Onsite Energy, Inc., PMR Corporation,
Phoenix Network, Inc., Sonex Research, Inc., and Wray-Tech Instruments, Inc. Mr.
McGettigan is a graduate of Georgetown University,  and he received a Masters of
Business  Administration in Finance from the Wharton School at the University of
Pennsylvania.

                                     - 22 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB



     Michael S. Taylor has been a director of the  Company  since July 1992.  He
has  been  Senior  Vice-President-   Corporate  Finance  of  Gilford  Securities
Incorporated  since December  1996.  From March 1996 to November 1996, he held a
similar position with Laidlaw  Equities.  From June 1989 to March 1996 he was an
Associate  Director of Investment  Banking of Josephthal.  From early 1980 until
joining Josephthal, he was President of Mostel & Taylor Securities,  Inc. He has
been  involved  in the  securities  industry  since  1966 when he joined  Lehman
Brothers  Inc. as an  analyst.  He became a director  of New  Paradigm  Software
Corporation in April 1996. He attended Amherst College and Columbia University.

     Myron A. Wick,  III has been a director of the Company since November 1991.
Since  November 1988, he has been Managing  Director of McGettigan,  Wick & Co.,
Inc., an investment banking firm in San Francisco.  Since May 1991, Mr. Wick has
been a general  partner of PIM. From  September  1985 to May 1988,  Mr. Wick was
Chief  Operating  Officer of California  Biotechnology,  Inc., a publicly traded
biotechnology  firm. Mr. Wick is a director of Children's  Discovery  Centers of
America, Inc., digital dictation, inc., Modtech, Inc., Sonex Research, Inc., and
Wray-Tech  Instruments,  Inc.  Mr.  Wick  received a Bachelor  of Arts from Yale
University  in 1965  and a  Masters  of  Business  Administration  from  Harvard
University in 1968.

     Steven H. Sigmon has been a director  since  February  1998.  Since January
1997, he has been  President of Veeder- Root,  North America  ("Veeder-Root")  a
subsidiary of Danaher. Prior to that, Mr. Sigmon held positions with Veeder-Root
as Vice President of Marketing and Sales from June 1996 to December 1996, and as
Vice  President of Marketing and  International  Sales from October 1995 to June
1996.  Previously,  he held  positions  with  Emerson  Electric  Company as Vice
President of Marketing for the Emerson Power Transmission  Bearing Division from
January 1992 to June 1995 and as President of the Camco  Division from June 1995
to September  1995.  Mr.  Sigmon  received a Bachelor of Science in  Engineering
Technology from Clemson University in 1977.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended  (the
"Exchange  Act"),  requires the  Company's  directors,  officers and  beneficial
owners of more than 10% of the  Common  Stock to file  with the  Securities  and
Exchange  Commission  (the "SEC"),  initial  reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers,  directors and 10%  stockholders  are required by SEC  regulations  to
furnish the  Company  with  copies of all  Section  16(a)  forms they file.  The
Company believes that,  during the 1997 fiscal year, the filings required of its
officers,  directors or greater than 10%  beneficial  owners were timely  filed,
except that the Form 5's filed by Mr.  Sharplin and Mr. Chaffee were filed on an
untimely basis.


ITEM 10.  EXECUTIVE COMPENSATION

     The following  table sets forth all  compensation  awarded to, earned by or
paid to the most highly  compensated  executive  officers  of the  Company  (the
"Named Executive  Officers") for all services  rendered in all capacities to the
Company and its subsidiaries during 1995, 1996 and 1997. No other person who was
an executive  officer of the Company at the end of 1997 was  awarded,  earned or
received annual salary and bonus in excess of $100,000.



                                     - 23 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB

<TABLE>
<CAPTION>


                           Summary Compensation Table
                                                                       Long-Term
                                                                     Compensation
                                                                     ------------
                                                                        Awards
                                       Annual Compensation           ------------
                              ------------------------------------      Shares
        Name and                                                      Underlying       All Other
    Principal Position        Year       Salary          Bonus          Options       Compensation
<S>                           <C>    <C>             <C>             <C>             <C>
---------------------------   ----   -------------   -------------   -------------   ------------
Jay Allen Chaffee             1997   $  90,000 (1)   $ 200,000 (1)     800,016 (4)         ---
Chairman of the Board         1996   $  90,000 (1)   $ 150,000 (1)         ---             ---
of Directors                  1995   $ 113,671       $  19,969 (1)     440,000 (4)         ---

A. Daniel Sharplin            1997   $ 150,000 (2)   $ 100,000 (2)   1,200,024 (5)         ---
President and Chief           1996   $ 154,526 (2)   $  75,000 (2)          ---      $  4,526 (7)
Executive Officer             1995   $ 136,779       $  39,969 (2)     640,000 (5)        ---

H. Baxter Nairon              1997   $ 138,000       $  58,000 (3)         ---             ---
Vice President; President,    1996   $  95,537       $  45,000         384,000 (6)        ---
Tanknology-NDE                1995         N/A             N/A             N/A             ---

David G. Osowski              1997   $ 135,000       $  47,625 (8)                         ---
Vice President, Secretary     1996         N/A             N/A         250,000 (9)        ---
and Chief Financial Officer   1995         N/A             N/A             N/A             ---
</TABLE>


     The  Company  has agreed to pay or  reimburse  the travel  expenses  of its
directors  resulting from  attendance at Board  meetings.  Except as hereinafter
provided,  no other  cash  compensation  was paid to,  or on  behalf  of,  Board
members,  in  consideration  of their  services  provided as  directors in 1997.
Certain directors were provided  compensation for other services provided to the
Company as  described  above,  and,  beginning  in 1997,  the Board of Directors
agreed to pay Mr.  Taylor a per  meeting  fee of $2,250.  Mr.  Taylor was paid a
total of $6,750 for 1997 meeting fees.


(1)  In July 1997, the Company  entered into an Executive  Consulting  Agreement
     with Mr. Chaffee. See "Certain Transactions".  In 1993, the Company awarded
     Mr.  Chaffee a bonus of $19,969;  this amount was paid in  installments  in
     1995 and 1996. In 1996, the Compensation  Committee  awarded  Mr. Chaffee a
     bonus  for  1996  of  $150,000  which  was  paid  in  1997.  In  1997,  the
     Compensation Committee awarded Mr. Chaffee a bonus for 1997 of $200,000, to
     be paid in 1998.

(2)  In July 1997,  the Company  entered into an Employment  Agreement  with Mr.
     Sharplin. See "Certain  Transactions".  In 1995, the Compensation Committee
     awarded Mr.  Sharplin a $20,000 bonus which was paid in 1997. Mr.  Sharplin
     was also paid his 1993 bonus of $19,969 in 1995.  Mr. Sharplin's 1996 bonus
     award of $75,000  was paid in 1997.  Mr.  Sharplin's  1997  bonus  award of
     $100,000 was paid in 1998.

(3)  In 1996,  the  Compensation  Committee  awarded  Mr. Nairon a 1996 bonus of
     $35,000 which was paid in 1997. Mr. Nairon was also awarded a $10,000 bonus
     as an  inducement to join the Company in 1996.  In 1997,  the  Compensation
     Committee awarded Mr. Nairon a 1997 bonus of $58,000,  of which $16,000 was
     paid in 1997 and $42,000 was paid in 1998.

(4)  On June 22,  1995,  Mr. Chaffee  was awarded an option to purchase  440,000
     shares of Common  Stock at $0.125 per share which will expire in June 2005.
     The option vests  one-third each year from the date of grant  commencing on
     June 22,  1995. In 1996,  certain previously granted options were repriced.
     see "Fiscal Year End Options Values" below).  On July 1, 1997,  pursuant to
     the Executive  Consulting  Agreement,  Mr. Chaffee was awarded  convertible
     cash stock  appreciation  rights (the  "SARs") for an  aggregate of 800,016
     shares of Common Stock at $0.2813 per share.  On July 2, 1997,  the Company


                                     - 24 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


     converted  the SARs into a stock option for 800,016  shares of Common Stock
     at $0.2813 per share which will expire on December 31, 2005.

(5)  On June 22,  1995,  Mr. Sharplin  was awarded an option to purchase 640,000
     shares of Common  Stock at $0.125 per share which will expire in June 2005.
     The option vests  one-third each year from date of grant starting  June 22,
     1995.  In 1996,  certain  previously  granted  options were  repriced.  See
     "Report  on  Repricing  of  Options".  On July  1,  1997,  pursuant  to the
     Employment  Agreement,  Mr.  Sharplin  was awarded  convertible  cash stock
     appreciation  rights (the "SARs") for an  aggregate of 1,200,024  shares of
     Common Stock at $0.2813 per share.  On July 2, 1997, the Company  converted
     the SARs into a stock  option  for  1,200,024  shares  of  Common  Stock at
     $0.2813 per share which will expire on December 31, 2005.

(6)  In March 1996, Mr. Nairon was granted an option to purchase  384,000 shares
     of  Common  Stock  of the  Company  at  $0.1875,  the  market  price of the
     Company's  Common Stock on Mr. Nairon's hire date. The option vests ratably
     one-third each year starting on April 15, 1996.

(7)  Consists of matching  funds for the Company 401(k) Plan relating to Company
     contributions for 1992, 1993 and 1994 which were made in 1996.

(8)  In 1997,  the  Compensation  Committee  awarded Mr. Osowski a 1997 bonus of
     $47,625, of which $28,125 was paid in 1997 and $19,500 was paid in 1998.

(9)  On December 19, 1996 , Mr. Osowski was granted options to purchase  250,000
     shares of Common  Stock of the Company at $0.4063,  the market price of the
     Company's Common Stock on Mr. Osowski's hire date. The option vests ratably
     one-third each year starting on December 19, 1996.


     Option Grants in Last Fiscal Year

     The  following  table sets  forth  options  granted to the Named  Executive
Officers during the year ending December 31, 1997.

<TABLE>
<CAPTION>


                       Number of       Percent of
                        Shares       Total Options
                      Underlying       Granted to        Exercise
                       Options        Employees in       Price Per
         Name          Granted        Fiscal Year          Share          Expiration Date
------------------   -------------   -------------   ------------------   ---------------
<S>                  <C>             <C>             <C>                  <C>
Jay Allen Chaffee      800,016 (1)          32%         $      0.2814      December 2005
A. Daniel Sharplin   1,200,024 (2)          48%         $      0.2814      December 2005
H. Baxter Nairon            ---             ---                ---               ---
David G. Osowski            ---            ---                 ---               ---
</TABLE>

         (1)   Issued pursuant to an Executive Consulting Agreement. See Certain
               Transactions above.
         (2)   Issued   pursuant  to  an  Employment   Agreement.   See  Certain
               Transactions above.


                                     - 25 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


         Fiscal Year End Options Values

     The  following  table  sets  forth  the  option  holdings  and the value of
unexercised  options  held by each Named  Executive  Officer as of December  31,
1997. None of the Named Executive Officers exercised options during 1997.
<TABLE>
<CAPTION>

                        Numbers of Shares Underlying          Value of Unexercised
                            Unexercised-Options               in-the-Money-Options
                            at December 31, 1997              at December 31, 1997
                        ----------------------------       --------------------------
Name                    Exercisable    Unexercisable      Exercisable   Unexercisable
---------------------   ------------   -------------      -----------   -------------
<S>                     <C>            <C>                <C>           <C>
Jay Allen Chaffee            114,288         685,728      $     3,572   $  21,429 (1)
                             293,333         146,667      $    55,000   $  27,500 (2)
                              50,000               0      $     9,375   $       0 (2)

A. Daniel Sharplin           171,432       1,028,592      $     5,357   $  32,144 (1)
                             426,667         213,333      $    80,000   $  40,000 (2)
                              50,000              ---     $     9,375   $       0 (2)

H. Baxter Nairon             128,000         256,000      $    16,000   $  32,000 (3)

David G. Osowski              83,333         166,667      $         0   $       0
</TABLE>

(1)  Represents (i) the difference  ($0.03125) between the exercise price of the
     options  ($0.28125)  and the per share fair market  value of the  Company's
     Common Stock on December 31, 1997 ($0.3125) times (ii) the number of shares
     subject to the options.

(2)  Represents  (i) the difference  ($.1875)  between the exercise price of the
     options  ($0.125)  and the per share  fair  market  value of the  Company's
     Common Stock on December 31, 1997 ($0.3125) times (ii) the number of shares
     subject to the options.

(3)  Represents  (i) the difference  ($0.125)  between the exercise price of the
     options  ($0.1875)  and the per share fair  market  value of the  Company's
     Common Stock on December 31, 1997 ($0.3125) times (ii) the number of shares
     subject to the options.

     In 1996, the Compensation  Committee determined that in connection with the
     granting of executive options in 1995, it would be in the best interests of
     the shareholders and the Company to reprice certain management options that
     had been  granted  in 1993 to a current  market  price  rather  than  issue
     additional  new  options.  The  Committee  believed  that  at the  existing
     exercise  prices,  the options were not  providing  the proper  performance
     incentive to management. Accordingly, the Committee repriced 50,000 options
     that had been previously granted to each of Messrs. Chaffee and Sharplin as
     well as 20,000  options that had been  previously  granted to Eric Hopkins,
     the former Vice President and Chief  Financial  Officer of the Company,  to
     the then  market  price of the Common  Stock  which was  $.125.  All of the
     aforementioned  options  previously  had exercise  prices of $3.75.  All of
     these options remain fully vested following the repricing.

     In 1992,  the  Company  granted  to each of its then  outside  directors  (
     including  Michael  Taylor and Myron A. Wick),  options to  purchase  4,000
     shares of Common Stock. These options were granted at exercise prices equal
     to the market  prices on the grant dates ($7.50 for options  granted to Mr.
     Wick,  $12.50 for the options  granted to Mr.  Taylor.  In March 1996,  the
     Company  canceled the prior options  issued to Messrs.  Taylor and Wick and
     granted   40,000   options  with  an  exercise  price  of  $0.125  to  each
     non-management director (Messrs. Taylor, Wick, and McGettigan). In December
     1996, the Board granted Mr. Bober 40,000  options to purchase  Common Stock
     at an exercise price of $0.40625.

     There was no other  director  compensation  paid during 1997 or 1996 to the
non-management directors.

                                     - 26 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB



ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth certain  information  as to the  beneficial
ownership  of the  Company's  capital  stock as of March 31,  1998 by:  (a) each
stockholder known by the Company to be the beneficial owner of more than 5% of a
class of voting stock, (b) each director,  (c) each of the executive officers of
the Company and (d) all executive officers and directors as a group.

            Beneficial Ownership of Common Stock(1)


Beneficial Owner                       Number of Shares   Percentage
------------------------------------   ----------------   ----------
Proactive Partners, L.P.(2                14,375,901        54.76%
50 Osgood Place, Penthouse
San Francisco, CA  94153

Lagunitas Partners, L.P.(3)               14,319,558        54.55%
50 Osgood Place, Penthouse
San Francisco, CA  94153

Danaher Corporation(4)                     7,500,000         28.57%
1250 24th Street, N.W.
Washington, DC 20037

Myron A. Wick, III(5)                     10,627,930         40.48%
c/o Proactive Partners
50 Osgood Place, Penthouse
San Francisco, CA  94133

Charles C. McGettigan(6)                  10,627,930         40.48%
c/o Proactive Partners
50 Osgood Place, Penthouse
San Francisco, CA  94133

A. Daniel Sharplin(7)                      1,359,823          5.18%

Jay Allen Chaffee/Bunker Hill(8)             639,059          2.43%

H. Baxter Nairon(9)                          256,000             *

Steven H. Sigmon                                   0             *

Michael S. Taylor(10)                         30,667             *

David G. Osowski(11)                          83,333             *

All executive officers and directors      16,811,783         64.04%

*        Less than 1% of the outstanding Common Stock

(1)  For the purposes of the above table and the following  notes, the shares of
     Common  Stock shown as  "beneficially  owned"  include all shares of Common
     Stock that the  "beneficial  owner" has the right to acquire within 60 days
     upon the conversion of other  securities,  upon the exercise of warrants or
     otherwise. In calculating the total number of shares of Common Stock deemed
     to be  outstanding  for the purpose of reflecting  the  beneficial  owner's
     percentage of the class,  the shares that other owners did not then own but
     had the right to acquire within 60 days or more are not included.

(2)  Includes  10,267,379  outstanding shares of Common Stock. Also includes (i)
     175,000,  105,874 and 50,000 shares reserved for issuance upon the exercise
     of warrants at prices of $0.375,  $0.15,  and  $0.125,  respectively;  (ii)
     3,721,305  shares  beneficially  owned  by  Lagunitas  Partners,  L.P.  and
     referenced to in note (3) below; (iii) 29,677 shares  beneficially owned by
     Mr. McGettigan and referenced to in note (5) below; and (v) 3,010 shares

                                     - 27 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


     issuable upon the exercise of warrants at a price of $0.15 per share issued
     to McGettigan,  Wick & Co., Inc. and to Proactive's  general partner,  PIM.
     See also note (7) below.

(3)  Includes  3,694,391  outstanding  shares of Common Stock. Also includes (i)
     26,914  shares of Common Stock  issuable upon the exercise of warrants at a
     price of $0.15 per share and (ii) 10,598,253 shares  beneficially  owned by
     Proactive Partners, L.P. and referenced to in note (2) above.

(4)  Consists of warrants to purchase  4,500,000 shares of Common Stock at $.375
     per share and 3,000,000  shares of Common Stock issuable upon conversion of
     Preferred Stock at $.50 per share.

(5)  Includes (i) 26,667  shares of Common Stock  issuable  upon the exercise of
     stock options  granted to Mr. Wick under the Company's  1989 Incentive Plan
     and (ii) the shares beneficially owned by Proactive and referred to in note
     (2) above (10,598,253). Mr. Wick is a general partner of PIM. Also includes
     3,010 shares  beneficially  owned by McGettigan,  Wick & Co. (Mr. Wick is a
     general  partner  of  McGettigan,  Wick & Co.)  but  does  not  include  an
     additional  13,333 shares subject to options that are not yet  exercisable.
     Also does not include 184,410 shares owned by the Company's  401(K) plan of
     which Mr. Wick is a trustee.

(6)  Includes (i) 26,667  shares of Common Stock  issuable  upon the exercise of
     stock options granted to Mr.  McGettigan under the Company's 1989 Long-Term
     Incentive  Plan and (ii) the shares  beneficially  owned by  Proactive  and
     referenced to in note (2) above  (10,598,253).  Mr. McGettigan is a general
     partner  of  PIM.  Also  includes  3,010  shares   beneficially   owned  by
     McGettigan,  Wick & Co. (Mr. McGettigan is a general partner of McGettigan,
     Wick & Co.) but does not include an  additional  13,333  shares  subject to
     options that are not yet exercisable.

(7)  Includes 513,932  outstanding  shares of Common Stock. Also includes 26,360
     shares  reserved  for  issuance  upon the exercise of warrants at prices of
     $7.50.  Also includes  819,531 shares reserved for issuance to Mr. Sharplin
     under the Company's 1989  Long-Term  Incentive Plan but does not include an
     additional   1,070,493   shares   subject  to  options  that  are  not  yet
     exercisable.  Also does not include  184,410  shares owned by the Company's
     401(K) plan of which Mr. Sharplin is a trustee.

(8)  Includes 67,150  outstanding  shares of Common Stock. These shares are held
     in the name of Bunker  Hill,  an affiliate of Mr.  Chaffee.  Also  includes
     571,909 shares subject to exercisable  options granted to Bunker Hill under
     the Company's  1989 Long-Term  Incentive Plan but does not include  718,107
     shares  subject  to  options  that are not yet  exercisable.  Also does not
     include 184,410 shares owned by the Company's 401(K) plan of which Mr.
     Chaffee is a trustee.

(9)  Consists of 256,000 shares issuable upon the exercise of options granted to
     Mr. Nairon under the Company's 1989  Long-Term  Incentive Plan but does not
     include 128,000 shares subject to options that are not yet exercisable.

(10) Includes 26,667 shares issuable upon the exercise of options granted to Mr.
     Taylor  under the  Company's  1989  Long-Term  Incentive  Plan but does not
     include 13,333 shares subject to options that are not yet exercisable. Also
     includes  4,000 shares  outstanding  held by Mr.  Taylor's wife. Mr. Taylor
     disclaims beneficial ownership of his wife's shares.

(11) Consists of 83,333 shares  issuable upon the exercise of options granted to
     Mr. Osowski under the Company's 1989 Long-Term  Incentive Plan but does not
     include 166,667 shares subject to options that are not yet exercisable.













                                     - 28 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During  the last  fiscal  year,  the  following  transactions  in excess of
$60,000 were entered into with related  parties.  During 1997,  the Company paid
$290,000 to Bunker Hill for services of Jay Allen  Chaffee and related  expenses
as described  below.  Mr.  Chaffee is the Chairman of the Board and president of
Bunker Hill Associates, Inc. ("Bunker Hill").

Employment Agreements

     In 1991,  the Company  entered into a service  contract with Bunker Hill to
retain the services of Mr. Chaffee. Mr. Chaffee is a principal of Bunker Hill, a
management  consulting firm based in Houston,  Texas.  Pursuant to the contract,
Mr. Chaffee has agreed to serve the Company in various  capacities as an officer
and director.  In July 1997,  the Company  entered into an Executive  Consulting
Agreement  pursuant to which the Company  agreed to pay a base retainer for such
services  at the rate of $7,500 per month with  additional  stock and cash bonus
consideration.  The term of the contract is three and one-half  years, it may be
extended for one or more additional periods,  and it can be terminated by Bunker
Hill on thirty days' prior  written  notice and by the Company at any time.  The
contract  supercedes  the 1991 service  contract  between the Company and Bunker
Hill.  In 1997,  Bunker  Hill,  on behalf of Mr.  Chaffee,  received  $90,000 in
consideration of Mr. Chaffee's  management services as an officer of the Company
plus a bonus of $200,000  earned but not paid in fiscal year 1997.  In addition,
$90,788 was remitted to Bunker Hill for secretarial support and reimbursement of
travel and out-of-pocket expenses related to Mr. Chaffee's services.

     In July 1997,  the Company  entered into an  employment  agreement  with A.
Daniel Sharplin, its President,  Chief Executive Officer,  pursuant to which Mr.
Sharplin  will  continue to serve the Company as President  and Chief  Executive
Officer and director. The Company paid Mr. Sharplin an annual base salary at the
rate of $150,000  through June 1997,  at which time his salary was  increased to
$200,000  pursuant  to the  Employment  Agreement.  Pursuant  to the  Employment
Agreement,  the Company  will pay him an annual base salary of $225,000  through
1998 and an annual base salary of $250,000  for all periods  after  December 31,
1998,  except  that  the  salary  may be  increased  but  not  decreased  at the
discretion of the Board of Directors.  Mr. Sharplin will also receive additional
stock  and cash  bonus  consideration.  The term of the  contract  is three  and
one-half years, and it may be extended for one or more additional periods.

     The agreements described above between the Company and Messrs.  Chaffee and
Sharplin (who for the purposes of this paragraph only will be referred to as the
"Employed  Person") provide for change of control protection in case of a change
of control,  (i) if the Employed  Person is terminated,  (A) the Employed Person
will be  entitled  to receive his base  compensation  for a period  equal to the
remaining  portion of the designated  term of the  relationship,  (B) all of the
stock  appreciation  rights or stock  options  of the  Employed  Person  granted
pursuant to the agreement which have accrued but not vested prior to the date on
which the change in control has occurred will automatically vest as of such date
and (C) all other rights and  benefits  the  Employed  Person may have under the
employee  benefit,  bonus  and/or stock option plans and programs of the Company
will be determined in  accordance  with the terms and  conditions of those plans
and programs,  and (ii) if the Employed Person is not terminated,  (A) the terms
and  provisions of the agreements  will remain in full force and effect,  (B) at
the election of the Employed  Person,  the stock  appreciation  rights and stock
options of the Employed  Person granted  pursuant to the  agreements  which have
accrued but not vested prior to the date of such change in control  shall either
(x)vest or (y) remain  accrued but not vested and (C) regardless of the election
of the Employed Person pursuant to the immediately  preceding clause,  the stock
appreciation  rights and stock options granted  pursuant to the agreements shall
continue to accrue after the date of the change in control.  A change in control
means a change in control of the Company  which shall be deemed to have occurred
if (i) there is an event  required  to be reported  with  respect to the Company
under federal  securities laws, (ii) any person shall have become the beneficial
owner, directly or indirectly,  of securities of the Company representing 40% or
more of the  combined  voting power of the  Company's  then  outstanding  voting
securities,  (iii) the  Company is a party to a merger,  consolidation,  sale of
assets or other  reorganization,  or a proxy contest,  as a consequence of which
members  of  the  Board  of  Directors  in  office  immediately  prior  to  such
transaction or event  constitute  less than a majority of the Board of Directors
thereafter or (iv) during any period of two consecutive  years,  individuals who
at the beginning of such period constituted the Board of Directors cease for any
reason to constitute at least a majority of the Board of Directors.

Strategic Alliance

     In December  1997,  the Company  entered  into a  strategic  alliance  with
Veeder-Root,  a  subsidiary  of Danaher,  which  encompassed  both a  commercial
agreement with Veeder-Root and an $8 million investment by Danaher.  Veeder-Root
is a  manufacturer  of  environmental  monitoring  equipment  and a provider  of
supporting  services  through its  Simplicity  offering.  Under the terms of the
commercial  agreement,  the Company and Veeder-Root will work to integrate their
complementary  service offerings.  Under the terms of the investment  agreement,
the Company issued (i) a $6.5 million Senior Subordinated Note with a 10% annual
interest rate and a 5-year term,  (ii) $1.5 million of  Redeemable,  Convertible
Preferred Stock  ("Preferred  Stock") which is convertible into 3 million shares
of the Company's  Common Stock and pays a 10% annual dividend with a 7-year term
and (iii) 4.5 million  warrants to purchase the Company's Common Stock at $0.375
per share with a 5-year term. If Veeder-Root exercises its warrants and converts
the Preferred Stock, its ownership would be approximately  25% of the Company on
a fully-diluted basis. With the proceeds of this investment and approximately


                                     - 29 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


$750,000 of cash, the Company repaid all of its  obligations to Banc One Capital
Partners,  L.P. ("BOCP") and repurchased BOCP's 13 million warrants.  Mr. Sigmon
is President of Veeder-Root and a director of the Company.



ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

          (a)  The following exhibits are filed herewith or incorporated  herein
               by reference:
<TABLE>
<CAPTION>
<S>            <C>  <C>                                                                 <C>

               (1)  1997 Financial Statements, Table of Contents........................F-1

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

                    Consolidated Balance Sheets as of December 31, 1997 and 1996........F-3

                    Consolidated Statements of Operationsfor the years ended
                         December 31, 1997 and 1996.....................................F-4

                    Consolidated  Statements  of  Stockholders'  Deficit for the
                         years ended December 31, 1997 and 1996.........................F-5

                    Consolidated  Statements  of Cash Flows for the years  ended
                         December 31, 1997 and 1996.....................................F-7

                    Notes to Consolidated Financial Statements..........................F-8
</TABLE>

               (2)  Index to Financial Statement Schedules:

                    All information  required in Financial  Statement  Schedules
                    for which  provision  is made in the  applicable  accounting
                    regulations  of the Commission (i) are included in the notes
                    to the financial  statements included in this report or (ii)
                    are  not  required  under  the  related  instruction  or are
                    inapplicable and, therefore, have been omitted.

               (3)  Exhibits:

               No.       Exhibit
               ------    -------------------------------------------------------

                3.01     Amended and Restated  Certificate of  Incorporation  of
                         the Registrant,  as amended May 22, 1996. (Incorporated
                         by reference from Exhibit 3.01 of Form 10-KSB/A for the
                         fiscal year ended December 31, 1996.)

                3.02     Bylaws of the Registrant,  as adopted November 29, 1988
                         and amended July 10, 1990.  (Incorporated  by reference
                         from  Exhibit  3.06 of Form  10-KSB for the fiscal year
                         ended December 31, 1991.)

               10.01     Stock  Purchase  Agreement,  dated as of  December  11,
                         1993,  among the  Registrant,  Jim R.  Clare and Donald
                         Valverde. (Incorporated by reference from Exhibit 10.76
                         of Form 10- KSB for the fiscal year ended  December 31,
                         1993.)

               10.02     Secured  Promissory Note, dated April 11, 1994,  issued
                         by the  Registrant  to Gilbarco  Inc. in the  principal
                         amount of $2,450,000.  (Incorporated  by reference from
                         Exhibit  10.83 of Form 10-KSB for the fiscal year ended
                         December 31, 1993.)

               10.03     Security Agreement, dated as of April 11, 1994, between
                         the  Registrant and Gilbarco Inc.  securing  payment of
                         the   Secured    Promissory   Note   (Exhibit   10.02).
                         (Incorporated  by reference  from Exhibit 10.84 of Form
                         10-KSB for the fiscal year ended December 31, 1993.)

               10.04     Patent License  Agreement,  dated as of April 11, 1994,
                         between the Registrant and Gilbarco Inc.  (Incorporated
                         by reference  from Exhibit 10.86 of Form 10-KSB for the
                         fiscal year ended December 31, 1993.)



                                     - 30 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


               No.       Exhibit
               ------    -------------------------------------------------------

               10.05     Third   Amendment  to   Tanknology-NDE   International,
                         Inc.'s  Secured  Notes,  Dated  as of March  31,  1995,
                         between the Registrant and Proactive Partners;  Spears,
                         Benzak,  Salomon, & Farrell;  Dan Purjes;  Peter Sheib;
                         Lawrence  Rice;  and  Joan  Taylor.   (Incorporated  by
                         reference  from  Exhibit  10.88 of Form  10-KSB for the
                         fiscal year ended December 31, 1994.)

               10.06     Second  Amendment  to   Tanknology-NDE   International,
                         Inc.'s  Subordinated  Note, dated as of March 31, 1995,
                         between the Registrant and Spears, Benzak, Salomon, and
                         Farrell.  (Incorporated by reference from Exhibit 10.89
                         of Form 10-KSB for the fiscal year ended  December  31,
                         1994.)

               10.07     First   Amendment  to   Tanknology-NDE   International,
                         Inc.'s  Subordinated  Secured Promissory Note, dated as
                         of  February  28,  1995,  between  the  Registrant  and
                         Gilbarco,  Inc. (Incorporated by reference from Exhibit
                         10.90 of Form 10-KSB for the fiscal year ended December
                         31, 1994.)

               10.08     Promissory Note, dated as of January 17, 1995,  between
                         the   Registrant   and   Proactive    Partners,    L.P.
                         (Incorporated  by reference  from Exhibit 10.94 of Form
                         10-KSB for the fiscal year ended December 31, 1994.)

               10.09     First  Amendment of the  Promissory  Note dated January
                         17, 1995, dated April 30, 1995,  between the registrant
                         and  Proactive   Partners,   L.  P.   (Incorporated  by
                         reference  from  Exhibit  10.96 of Form  10-QSB for the
                         quarterly period ended March 31, 1995.)

               10.10     First Amendment of the Financing  Agreement between the
                         Registrant and Silicon Valley Financial Services, dated
                         June 20, 1995.  (Incorporated by reference from Exhibit
                         10.97 of Form  10-QSB for the  quarterly  period  ended
                         June 30, 1995.)

               10.11     Notice of  Conversion  regarding  Series AAA  Preferred
                         Stock between the  Registrant  and Proactive  Partners,
                         L.P.; Lagunitas Partners, L.P.; and A. Daniel Sharplin,
                         dated as of April 17, 1995.  (Incorporated by reference
                         from  Exhibit  10.98 of Form  10-QSB for the  quarterly
                         period ended June 30, 1995.)

               10.12     Notice of  Conversion  regarding  Series BBB  Preferred
                         Stock between the  Registrant  and Proactive  Partners,
                         L.P.; Lagunitas Partners, L.P.; and A. Daniel Sharplin,
                         dated as of April 17, 1995.  (Incorporated by reference
                         from Exhibit 10.99 of Form 10-QSB for quarterly  period
                         ended June 30, 1995.)

               10.13     Notice of  Conversion  regarding  Series CCC  Preferred
                         Stock between the  Registrant  and Proactive  Partners,
                         L.P.; Lagunitas Partners, L.P.; and A. Daniel Sharplin,
                         dated as of April 17, 1995.  (Incorporated by reference
                         from  Exhibit  10.100 of Form 10-QSB for the  quarterly
                         period ended June 30, 1995.)

               10.14     Promissory Note, dated as of November 6, 1995,  between
                         the  Registrant  and Gilbarco,  Inc.  (Incorporated  by
                         reference  from  Exhibit  10.102 of Form 10-KSB for the
                         fiscal year ended December 31, 1995.)

               10.15     Promissory   Note,  dated  as  of  February  13,  1996,
                         between the  Registrant and Proactive  Partners,  L. P.
                         (Incorporated  by reference from Exhibit 10.103 of Form
                         10-KSB for the fiscal year ended December 31, 1995.)

               10.16     Promissory   Note,  dated  as  of  February  13,  1996,
                         between the  Registrant and Lagunitas  Partners,  L. P.
                         (Incorporated  by reference from Exhibit 10.104 of Form
                         10-KSB for the fiscal year ended December 31, 1995.)

               10.17     Second  Amendment  to   Tanknology-NDE   International,
                         Inc.'s Secured  Promissory  Note, dated as of March 22,
                         1996,   between    Registrant   and   Gilbarco,    Inc.
                         (Incorporated  by reference from Exhibit 10.105 of Form
                         10-KSB for the fiscal year ended December 31, 1995.)

               10.18     Settlement  Agreement,  dated as of November  30, 1995,
                         between the Registrant and Protank, Inc.  (Incorporated
                         by reference from Exhibit 10.106 of Form 10-KSB for the
                         fiscal year ended December 31, 1995.)


                                     - 31 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


               No.       Exhibit
               ------    -------------------------------------------------------

               10.19     1996  Funding  Agreement,  dated as of, March 27, 1996,
                         between the Registrant,  Proactive  Partners,  L.P. and
                         Lagunitas  Partners,  L. P.  (Incorporated by reference
                         from Exhibit  10.107 of Form 10-KSB for the fiscal year
                         ended December 31, 1995.)

               10.20     1996 Additional  Funding  Agreement,  dated as of March
                         15,  1996,   between  the   Registrant   and  Proactive
                         Partners,  L.P. (Incorporated by reference from Exhibit
                         10.108 of Form 10- QSB for the  quarterly  period ended
                         June 30, 1996.)

               10.21     1996 Second Additional Funding  Agreement,  dated as of
                         June 13, 1996,  between the  Registrant  and  Proactive
                         Partners,  L.P. (Incorporated by reference from Exhibit
                         10.109 of Form 10-QSB for the  quarterly  period  ended
                         June 30, 1996.)

               10.22     Revised  Agreement  to  Tanknology-NDE   International,
                         Inc's Secured  Promissory  Note between the  Registrant
                         and  Gilbarco,  Inc.,  dated as of September  15, 1996.
                         (Incorporated  by  reference  from Exhibit 10.1 of Form
                         10-QSB for the  quarterly  period ended  September  30,
                         1996.)

               10.23     Stock   Purchase   Agreement   between   Tanknology-NDE
                         International, Inc and Tanknology Environmental,  Inc.,
                         dated as of October 7, 1996. (Incorporated by reference
                         from Exhibit 2.1 of Form 8-K dated October 25, 1996.)

               10.24     First Amendment to Stock Purchase Agreement between NDE
                         Environmental Corporation and Tanknology Environmental,
                         Inc.,  dated as of October 25, 1996.  (Incorporated  by
                         reference  from  Exhibit 2.2 of Form 8-K dated  October
                         25, 1996.)

               10.45     Note,  Preferrred Stock and Warrant Purchase Agreement,
                         signed  as  of  December  23,  1997,   by  and  between
                         Tanknology-NDE   International,   Inc.,  ProEco,  Inc.,
                         Tanknology/NDE   Corporation,   2368692  Canada,  Inc.,
                         Tanknology-NDE   Construction  Services,  Inc.  and  DH
                         Holdings Corp.

               10.46     Senior  Subordinated  Note,  dated  December  23, 1997,
                         provided for in the Note,  Preferrred Stock and Warrant
                         Purchase  Agreement  (Exhibit  10.45)  by  and  between
                         Tanknology-NDE  International,  Inc.  and  DH  Holdings
                         Corp..

               10.47     Distribution,  Services and Marketing Agreement, signed
                         as of December 23, 1997, by and between  Tanknology-NDE
                         International and Veeder-Root Company

               10.48     Certificate of Designation of Preferences and Rights of
                         Series  A  Redeemable  Convertible  Preferred  Stock of
                         Tanknology-NDE   International,   Inc.,   meeting  held
                         December  22,  1997,  providing  for the  issuance of a
                         series of Perferred  Stock  designated  as the Series A
                         Redeemable Convertible Preferred Stock

               10.49     Preemptive Rights Agreement,  signed as of December 23,
                         1997, by and between Tanknology-NDE International, Inc.
                         and DH  Holdings  Corp.  entered  into  pursuant to the
                         Note,  Preferrred Stock and Warrant Purchase  Agreement
                         (Exhibit 10.45)

               10.50     Registration  Rights  Agreement,  signed as of December
                         23, 1997, by and between Tanknology-NDE  International,
                         Inc. and DH Holdings Corp. entered into pursuant to the
                         Note,  Preferrred Stock and Warrant Purchase  Agreement
                         (Exhibit 10.45)

               10.51     Co-Sale  Agreement,  signed as of December 23, 1997, by
                         and   between   Tanknology-NDE   International,   Inc.,
                         Proactive Partners, L.P., Lagunitas Partners, L.P., Jay
                         Allen Chaffee, A. Daniel Sharplin and DH Holdings Corp.
                         entered into pursuant to the Note, Preferrred Stock and
                         Warrant Purchase Agreement (Exhibit 10.45)



                                     - 32 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


               No.       Exhibit
               ------    -------------------------------------------------------

               10.52     Tanknology-NDE  International,  Inc. Security Agreement
                         - Personal Property, Signed as of December 23, 1997, by
                         and between Tanknology-NDE International, Inc., ProEco,
                         Inc., Tanknology/NDE Corporation, 2368692 Canada, Inc.,
                         Tanknology-NDE   Construction  Services,  Inc.  and  DH
                         Holdings  Corp.  entered  into  pursuant  to the  Note,
                         Preferrred   Stock  and  Warrant   Purchase   Agreement
                         (Exhibit 10.45)

               10.53     Tanknology-NDE  International,  Inc. Security Agreement
                         - Pledge of Subsidiary Stock, Signed as of December 23,
                         1997, by and between Tanknology-NDE International, Inc.
                         and DH  Holdings  Corp.  entered  into  pursuant to the
                         Note,  Preferrred Stock and Warrant Purchase  Agreement
                         (Exhibit 10.45)

               10.54     Amendment  No.  1 to  the  Note,  Perferred  Stock  and
                         Warrant  Purchase  Agreement  (Exhibit  10.45)  by  and
                         between  Tanknology-NDE   International,   Inc.,ProEco,
                         Inc., Tanknology/NDE Corporation, 2368692 Canada, Inc.,
                         Tanknology-NDE   Construction  Services,  Inc.  and  DH
                         Holdings Corp.

               10.55     Amendment No.3 to Loan Agreement (Exhibit 10.25) by and
                         between     Tanknology-NDE     International,      Inc.
                         Tanknology-NDE Corporation, Tanknology-NDE Construction
                         Services, inc., ProEco, Inc., and 2368692 Canada, Inc.
                         and Bank One, Texas, N.A.

               10.56     Amended and Restated Standby Commitment, dated December
                         23,  1997,  by  and  among  Proactive  Partners,  L.P.,
                         Tanknology-NDE  International,   Inc.,  and  Bank  One,
                         Texas, N.A.

               10.57     Termination  Agreement,  dated as of December 10, 1997,
                         by  and  between  Tanknology-NDE  International,  Inc.,
                         Tanknology/NDE  Corporation,  ProEco,  Inc. and 2368692
                         Canada Inc. and Banc One Capital Partners, LLC

               10.58     Employment Agreement,  effective as of July 1, 1997, by
                         and between Tanknology-NDE  International,  Inc. and A.
                         Daniel Sharplin

               10.59     Executive  Consulting  Agreement,   effective  July  1,
                         1997, by and between Tanknology-NDE International, Inc.
                         and Bunker Hill Associates, Inc.

               10.60     Amendment No. 1 to the  Employment  Agreement  (Exhibit
                         10.60)   effective   July  2,  1997,   by  and  between
                         Tanknology-NDE   International,   Inc.  and  A.  Daniel
                         Sharplin

               10.61     Amendment No. 1 to the Executive  Consulting  Agreement
                         (Exhibit 10.61)  effective July 2, 1997, by and between
                         Tanknology-NDE  International,  Inc.  and  Bunker  Hill
                         Associates, Inc.

               10.62     Amendment  to Stock  Purchase  Agreement  dated May 22,
                         1997  (Incorporated  by  reference  from Exhibit 2.1 of
                         Form 8-K dated  October  25,  1996) dated as of October
                         30, 1997, by and between  Watson  General  Corporation,
                         and Tanknology-NDE International, Inc.

               10.63     Asset Purchase  Agreement dated February 19, 1997 among
                         Precision  Tank  Testing  Limited,   Tanknology  Canada
                         (1988)    Inc.,    NDE    Environmental    Corporation,
                         Tanknology/NDE Corporation.

               21.01     Subsidiaries of the Registrant

               27.01     Selected Financial Data


          (b)  There were no Reports on Form 8-K filed during the quarter  ended
               December 31, 1997.

                              Filed                    Dated
                      ----------------------    --------------------
                               N/A                      N/A



                                     - 33 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


                                                                   Exhibit 21.01

SUBSIDIARIES OF REGISTRANT

     Tanknology/NDE   Corporation,  a  Delaware  corporation,   incorporated  on
December 27, 1991, is a wholly owned subsidiary of Tanknology-NDE International,
Inc. and does business under the name Tanknology/NDE Corporation.

     NDE Environmental Canada Corporation was incorporated on May 21, 1993 under
the  Business  Corporations  Act of Alberta,  is a wholly  owned  subsidiary  of
Tanknology-NDE  International,  Inc.  and  does  business  under  the  name  NDE
Environmental Canada Corporation.

     ProEco,  Inc.,  a  Delaware  corporation,   incorporated  as  Tank  Testing
International,  Inc. on March 19, 1990, changed its name to ProEco, Inc. on July
26, 1991, is a wholly owned subsidiary of Tanknology-NDE International, Inc. and
does business under the name ProEco, Inc.

     EcoAm,  Inc., a Florida  corporation,  incorporated  on July 15, 1991, is a
wholly owned subsidiary of Tanknology-NDE International,  Inc. and does business
under the name EcoAm, Inc.

     ProEco,  Ltd., a United Kingdom  corporation,  incorporated  in October 16,
1992,  as  EcoAm,   Ltd.,  is  a  wholly  owned  subsidiary  of   Tanknology-NDE
International, Inc. and does business under the name ProEco, Ltd.

     2368692  Canada  Inc.,  incorporated  in Ontario,  Canada is a wholly owned
subsidiary of  Tanknology-NDE  International,  Inc. and does business  under the
name Tanknology Canada (1988) Inc.

     Tanknology-NDE   Construction  Services,   Inc.,  a  Delaware  corporation,
incorporated on December 5, 1997, is a wholly owned subsidiary of Tanknology-NDE
International, Inc. and does business under the name Tanknology-NDE Construction
Services, Inc.


                                     - 34 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1997 ANNUAL REPORT ON FORM 10-KSB


                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this Annual Report filed on Form 10-KSB to be signed on its behalf by
the undersigned, thereunto duly authorized.

                        Tanknology-NDE International, Inc



Date:    March 31, 1998       By:       /s/ A. DANIEL SHARPLIN
     ----------------------      -------------------------------------------
                                 A. Daniel Sharplin
                                 President, Chief Executive Officer and Director
                                 (PRINCIPAL EXECUTIVE OFFICER)


     In  accordance  with the Exchange Act, this Report has been signed below by
the following  persons on behalf of the  Registrant and in the capacities and on
the dates indicated.


                /s/ JAY ALLEN CHAFFEE                  Dated:  March 31   , 1998
            --------------------------------------           -------------------
            Jay Allen Chaffee
            Chairman of the Board of Directors

                /s/ DAVID G. OSOWSKI                   Dated:  March 31   , 1998
            --------------------------------------           -------------------
            David G. Osowski
            Vice President and
            Chief Financial Officer
            (PRINCIPAL FINANCIAL and ACCOUNTING OFFICER)

                /s/ CHARLES C. McGETTIGAN              Dated:  March 31   , 1998
            --------------------------------------           -------------------
            Charles C. McGettigan
            Director

                /s/ MICHAEL S. TAYLOR                  Dated:  March 31   , 1998
            --------------------------------------           -------------------
            Michael S. Taylor
            Director

                /s/ MYRON A. WICK, III                 Dated:  March 31   , 1998
            --------------------------------------           -------------------
            Myron A. Wick, III
            Director

                /s/ STEVEN H. SIGMON                   Dated:  March 31   , 1998
            --------------------------------------           -------------------
            Steven H. Sigmon
            Director


                                     - 35 -
================================================================================

                        Consolidated Financial Statements

                     Years ended December 31, 1997 and 1996




                                    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>




                         Report of Independent Auditors



Stockholders and Board of Directors
Tanknology-NDE International, Inc.


     We  have  audited  the   accompanying   consolidated   balance   sheets  of
Tanknology-NDE International,  Inc. and subsidiaries as of December 31, 1997 and
1996,  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 Tanknology-NDE
International,  Inc. and  subsidiaries  at December  31, 1997 and 1996,  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 13, 1998



                                       F-2

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

                           Consolidated Balance Sheets
<TABLE>
<CAPTION>

                                                                                      December 31
                                                                                  1997           1996
<S>                                                                          <C>             <C>
                                                                             ------------    ------------
Assets
Current assets:
         Cash ............................................................   $    193,627    $  2,412,233
         Trade accounts receivable, less allowance for doubtful
               accounts of $1,066,331 in 1997 and $837,480 in 1996 .......      9,856,826       5,735,550
         Inventories .....................................................        482,107         367,362
         Prepaid expenses and other current assets .......................      1,149,950       1,659,820
                                                                             ------------    ------------
                                                                               11,682,510      10,174,965

Restricted cash (Note 2) .................................................      3,000,000            --

Equipment and improvements, net (Note 3) .................................      4,812,500       5,736,391

Goodwill, net of accumulated amortization of $55,122 in 1996 (Note 2) ....           --         4,922,617

Patents, licenses and other intangible assets, net of accumulated
         amortization of $1,169,104 in 1997 and $773,140 in 1996 .........      1,604,194       3,293,239

Deferred financing costs, net ............................................        649,614         922,424

                                                                             ------------    ------------
Total assets .............................................................   $ 21,748,818    $ 25,049,636
                                                                             ============    ============

Liabilities,  redeemable  convertible  preferred stock and stockholders' deficit
Current liabilities:
         Accounts payable ................................................   $  2,675,345    $  1,673,470
         Accrued liabilities .............................................      2,249,208       4,885,260
         Accrued payroll and payroll taxes ...............................      1,959,273       1,469,786
         Current portion of long-term debt (Note 4) ......................      4,055,072       1,963,564
                                                                             ------------    ------------
                                                                               10,938,898       9,992,080

Long-term debt, less current portion  (Note 4) ...........................     10,589,252      14,192,011

Deferred license revenue .................................................        525,000            --

Warrants with put option (Note 4) ........................................           --         1,600,000

Redeemable Convertible Preferred Stock, at redemption value (Note 5) .....      1,500,000            --

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 ...........          1,598           1,598
               Warrants (Note 6) .........................................        291,000            --
               Additional paid-in capital ................................     27,578,446      27,578,446
               Accumulated deficit .......................................    (29,659,297)    (28,302,374)
               Cumulative foreign currency translation adjustment ........        (21,079)        (17,125)
                                                                             ------------    ------------
                                                                               (1,804,332)       (734,455)
                                                                             ------------    ------------
Total liabilities, redeemable convertible preferred stock  and
stockholders' deficit ....................................................   $ 21,748,818    $ 25,049,636
                                                                             ============    ============
<FN>
See accompanying notes.
</FN>
</TABLE>

                                       F-3

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

                      Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                     Year ended December 31,
                                                     1997             1996
                                                 ------------    ------------
<S>                                              <C>             <C>
Revenues .....................................   $ 38,683,146    $ 15,939,126

Cost of services .............................     29,246,121      11,085,062
                                                 ------------    ------------

                Gross margin .................      9,437,025       4,854,064

Selling, general and administrative ..........      7,853,002       6,581,337

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

Operating income (loss) ......................      1,584,023      (2,560,594)

Other income (expense):
         Interest expense ....................     (3,205,475)     (1,062,409)
              Interest income ................         97,800            --
         Other income (expense), net .........        (11,420)        214,641
                                                 ------------    ------------

Net loss before provision for income taxes and
         extraordinary gain ..................     (1,535,072)     (3,408,362)

Provision for income taxes (Note 9) ..........        (39,060)        (43,785)

Extraordinary gain (Note 4) ..................        220,497       1,813,149
                                                 ------------    ------------

Net loss .....................................   $ (1,353,635)   $ (1,638,998)
Less:
               Preferred stock dividends .....          3,288            --
                                                 ------------    ------------

Net loss available to common .................   $ (1,356,923)   $ (1,638,998)
                                                 ============    ============

Basic and diluted loss per share:
         Before extraordinary gain ...........   $      (0.10)   $      (0.45)
         Extraordinary gain ..................           0.01            0.24
                                                 ------------    ------------
Basic and diluted loss per share .............   $      (0.09)   $      (0.21)
                                                 ============    ============


<FN>
See accompanying notes.
</FN>
</TABLE>


                                       F-4

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

                Consolidated Statements of Stockholders' Deficit

<TABLE>
<CAPTION>

                         Series AAA
                   Convertible Preferred
                           Stock                       Common Stock                    Warrants
                    ------------------ ------------------------------------------ ------------------
                       Shares             Shares            Shares                 Shares
                    Outstanding Amount Outstanding Amount Subscribed     Amount   Issuable   Amount
<S>                 <C>         <C>    <C>         <C>    <C>         <C>         <C>       <C>
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Balance at
December 31, 1995        1      $5,000   2,274,420 $  227  5,482,254  $1,303,410      -         -
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Issuance of Common
Stock to settle
licensing dispute        -          -       20,000      2      -            -
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Issuance of Common
Stock Subscribed         -          -    5,482,254    548 (5,482,254) (1,303,410)
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Exchange of Secured
Promissory Notes
for Common Stock         -          -    8,000,000    800      -            -
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Company contribution
to 401(k) Plan           -          -      201,936     21      -            -
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Cumulative foreign
currency translation     -          -         -      -         -            -
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Net loss                 -          -         -      -         -            -
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Balance at
December 31, 1996        1      $5,000  15,978,610 $1,598      0            0      0         0
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
</TABLE>

TABLE CONTINUED ...
<TABLE>
<CAPTION>
                                                       Cumulative
                                                         Foreign
                                                         Currency
                               Paid-in    Accumulated  Translation Stockholders
                               Capital      Deficit     Adustment    Deficit
<S>                          <C>         <C>           <C>        <C>
-------------------          ----------- ------------- ---------- -------------
Balance at
December 31, 1995            $25,134,457  $(26,663,376) $ (18,740)    (239,022)
-------------------          ----------- ------------- ---------- -------------
Issuance of Common
Stock to settle
licensing dispute                 3,748          -          -            3,750
-------------------          ----------- ------------- ---------- -------------
Issuance of Common
Stock Subscribed              1,302,862          -          -             0
-------------------          ----------- ------------- ---------- -------------
Exchange of Secured
Promissory Notes
for Common Stock              1,035,082          -          -        1,035,882
-------------------          ----------- ------------- ---------- -------------
Company contributio
to 401(k) Plan                  102,297          -          -          102,318
-------------------          ----------- ------------- ---------- -------------
Cumulative foreign
currency translatio                -             -         1,615         1,615
-------------------          ----------- ------------- ---------- -------------
Net loss                           -       (1,638,998)      -       (1,638,998)
-------------------          ----------- ------------- ---------- -------------
Balance at
December 31, 1996            $27,578,446 $(28,302,374) $ (17,125) $   (734,455)
-------------------          ----------- ------------- ---------- -------------
</TABLE>



                                       F-5

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

          Consolidated Statements of Stockholders' Deficit (continued)
<TABLE>
<CAPTION>

                        Series AAA
                  Convertible Preferred
                          Stock                       Common Stock                      Warrants
                    ------------------ ------------------------------------------ ------------------

                       Shares            Shares             Shares                 Shares
                    Outstanding Amount Outstanding Amount Subscribed    Amount    Issuable   Amount
<S>                 <C>         <C>    <C>         <C>    <C>         <C>         <C>       <C>
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Balance at
December 31, 1996        1      $5,000  15,978,610 $1,598      -      $    -           -       -
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Issuance of Warrants                                                              4,850,000 $291,000
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Dividend on
 Redeemable Preferred
 Stock
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Foreign currency
translation
adjustments
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Net loss                 -               -              -      -           -        -           -
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
Balance at
December 31, 1997        1      $5,000  15,978,610 $1,598      -           -      4,850,000 $291,000
------------------- ----------- ------ ----------- ------ ----------- ----------- --------- --------
</TABLE>

TABLE CONTINUED...
<TABLE>
<CAPTION>
                                                       Cumulative
                                                       Foreign
                              Additional               Currency       Total
                               Paid-in   Accumulated   Translation Stockholders'
                               Capital   Deficit       Adjustment    Deficit
<S>                          <C>         <C>           <C>        <C>
-------------------          ----------- ------------- ---------- -------------
Balance at
December 31, 1996            $27,578,446 $(28,302,374) $ (17,125) $   (734,455)
-------------------          ----------- ------------- ---------- -------------
Issuance of Warrant                                                    291,000
-------------------          ----------- ------------- ---------- -------------
Dividend on
Redeemable Preferr
Stock                                          (3,288)                  (3,288)
-------------------          ----------- ------------- ---------- -------------
Foreign currency
translation
adjustments                                               (3,954)       (3,954)
-------------------          ----------- ------------- ---------- -------------
Net loss                          -        (1,353,635)       -      (1,353,635)
-------------------          ----------- ------------- ---------- -------------
Balance at
December 31, 1997            $27,578,446 $(29,659,297) $ (21,079) $ (1,804,332)
-------------------          ----------- ------------- ---------- -------------
</TABLE>


                                       F-6

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                                     Year ended December 31,
                                                                                      1997            1996
                                                                                  -----------     -----------
<S>                                                                              <C>            <C>
Cash flows from operating activities:
     Net loss ................................................................   $(1,353,635)   $ (1,638,998)
         Adjustments to reconcile net loss to net cash
             provided by (used in) operating activities:
                  Extraordinary gain .........................................      (220,497)     (1,813,149)
                  Write down of assets .......................................        16,396         833,321
                  Depreciation ...............................................     3,376,237       1,740,254
                  Amortization ...............................................       534,878         289,611
                  Amortization of discounts and financing costs ..............     1,366,713         309,954
                  Deferred license revenue earned ............................       (91,667)           --
                  Gain on sale of equipment ..................................       (22,758)       (214,641)
                  Other ......................................................        (3,954)           --
Changes in operating assets and liabilities:
         (Increase) decrease in trade accounts receivable ....................    (4,121,276)      1,192,044
         Increase in inventories .............................................      (114,745)        (45,689)
         Decrease in prepaid expenses and other current assets ...............      (140,130)       (480,452)
         Increase in accounts payable ........................................     1,001,875         147,526
         Decrease in accrued liabilities .....................................    (2,942,089)       (285,175)
         Increase in accrued payroll and payroll taxes .......................       489,487         833,417
                                                                                  -----------     -----------
                  Net cash provided by (used in) operating activities ........    (2,225,165)        868,023

Cash flows from investing activities:
         Proceeds from the sale of USTMAN ....................................     5,900,000            --
         Restricted cash received in the sale of USTMAN ......................    (3,000,000)           --
         Proceeds from the sale of licenses ..................................     1,947,500            --
         Business acquisitions, net of cash acquired of $700,000 .............          --       (11,299,757)
         Capital expenditures ................................................    (2,841,530)     (1,120,752)
         Proceeds from sale of equipment .....................................        80,258         234,450
         Other ...............................................................        (4,095)         10,737
                                                                                  -----------     -----------
                  Net cash provided by (used in) investing activities ........     2,082,133     (12,175,322)

Net cash from financing activities:
         Proceeds from issuance of long-term debt and warrants with put option          --        16,529,903
         Proceeds from issuance of long-term debt and warrants ...............     6,500,000            --
         Proceeds from issuance of redeemable convertible preferred stock ....     1,500,000            --
         Deferred financing costs ............................................      (299,363)       (959,413)
         Payments on long-term debt ..........................................    (6,966,968)     (3,177,993)
         Proceeds from issuance of debt (Note 4) .............................     5,690,757       1,000,000
         Repayment of long-term debt and warrants with put option ............    (8,500,000)           --
                                                                                  -----------     -----------
                  Net cash provided by (used in) financing activities ........    (2,075,574)     13,392,497

                  Net increase (decrease) in cash ............................    (2,218,606)      2,085,198
         Cash at beginning of year ...........................................     2,412,233         327,035
                                                                                  ===========     ===========
         Cash at end of year .................................................   $   193,627    $  2,412,233
                                                                                  ===========     ===========
         Supplemental disclosure of cash flow information:  Cash paid during the
                  year for:
                           Interest ..........................................   $ 1,840,031    $    487,334
                                                                                  ===========     ===========
                           Income taxes ......................................   $      -       $       -
                                                                                  ===========     ===========
                  Capital lease financing ....................................   $   170,704    $     60,153
                                                                                  ===========     ===========
<FN>
See accompanying notes.
</FN>
</TABLE>

                                       F-7

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 1997


1. Summary of Significant Accounting Policies

Description and History of Business
     Tanknology-NDE International,  Inc. and subsidiaries (the Company) provides
regulatory  compliance and related  services,  primarily  tightness  testing for
underground  storage tanks (USTs) and  associated  pipelines,  which the Company
considers to encompass  only one business  segment.  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  Tanknology-NDE  International,   Inc.  and  its  wholly-owned  subsidiaries:
Tanknology/NDE  Corporation,  2368692  Canada,  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,  1997  have been  reclassified  to  conform  to the  current  year
presentation.

Cash and Cash Equivalents
     Cash and cash equivalents  include cash on hand, money market funds and all
investments with an initial maturity of three months or less.

Revenue Recognition
     Tank testing,  line testing and consulting  service revenues are recognized
when services are performed.  Revenues for construction contracts,  generally on
short term projects,  are recognized as the work is performed.  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  21% 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
          Software                               3 - 15 years
          Other equipment                         3 - 6 years

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.

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,  primarily  net operating  losses,
that may not be realizable.

Basic and Diluted Loss Per Share Data
     In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share.  Statement 128 replaced the calculation of primary and fully
diluted  earnings per share with basic and diluted  earnings  per share.  Unlike
primary  earnings  per share,  basic  earnings  per share  excludes any dilutive
effects of options,  warrants and convertible  securities.  Diluted earnings per
share is very similar to the  previously  reported  fully  diluted  earnings per
share.  For the years ended  December 31, 1997 and 1996, the effects of dilutive
potential  common shares are not considered in calculating loss per common share
because their effects would be  anti-dilutive to the net loss reported for these
years.  All earnings per share for all periods have been presented to conform to
Statement 128 requirements.

     Basic loss per share has been computed by dividing net loss  (numerator) by
weighted  average  common  shares  outstanding  (denominator)  for  all  periods
presented.  The  numerator  (net loss) for the year ended  December  31, 1997 is
increased by preferred stock dividends of $3,288. There are no reconciling items
to net loss for the year ended December 31, 1996. Weighted average common shares
outstanding  at  December  31,  1997  and  1996 are  15,978,610  and  7,725,372,
respectively.

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.

Recently Issued Accounting Pronouncements
     In February 1997, the FASB issued SFAS No. 129,  "Disclosure of Information
about Capital  Structure." This statement  establishes  standards for disclosing
information about an entity's capital structure. This statement is effective for
financial  statements  for periods  ending after December 15, 1997, and will not
materially change the disclosures  currently included in the Company's financial
statements.

                                       F-8

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

     In June  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income."  This  statement  establishes  standards  for  reporting and display of
comprehensive income and its components (revenues,  expenses,  gains and losses)
in a full set of general purpose financial  statements.  This statement requires
that all items that are required to be recognized under accounting  standards as
components of comprehensive  income be reported in a financial statement that is
displayed with the same prominence as other financial statements.  The statement
is effective for fiscal years  beginning  after  December 15, 1997.  Adoption of
this statement will have no impact on the Company's results of operations.

     In June 1997, the FASB issued SFAS No. 131,  "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business  enterprises  report  information about segments in
annual financial  statements and requires that those enterprises report selected
information  about  operating  segments in interim  financial  reports issued to
shareholders.  It also  establishes  standards  for  related  disclosures  about
products and services,  geographic areas and major customers.  This statement is
effective for fiscal years beginning  after December 15, 1997.  Adoption of this
statement will have no impact on the Company's results of operations.

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"),  2368692 Canada,  Inc. (formerly named Tanknology Canada
(1988) Inc.) ("Canada"), and USTMAN Industries, Inc. ("USTMAN"). The Acquisition
was  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 final closing  adjustments,  which
are expected to occur in 1998.

     In  addition  to the  purchase  price  paid to TEI,  the  Company  incurred
approximately  $714,000 in fees and costs 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 costs and other  acquisition-related  costs. The
Company also recorded  approximately $758,000 for certain additional liabilities
relating to potential  purchase price adjustments and liabilities  recognized in
connection with the acquisition.

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


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
Canada,  Inc. for $1.2  million.  The Company  also  canceled  certain  existing
license agreements and entered into new agreements, which will generate a future
revenue stream.  The net proceeds from this sale  approximated  the basis of the
assets sold and had no material impact to the Company's results of operations in
1997.

     The Company recognized revenues and expenses related to Canadian operations
of approximately $111,000 and $84,000 in 1997 and $280,000 and $232,000 in 1996,
respectively.

                                       F-9

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

Sale of USTMAN Industries, Inc.
     On May 22, 1997,  the Company sold the stock of USTMAN,  which was acquired
as part of the  Acquisition.  The terms of the sale called for a cash payment at
closing of $5,250,000, a $500,000, 8.5% note due on June 1, 1998, the assumption
of certain  liabilities  of the Company  and an  additional  payment  based upon
certain  calculations  of USTMAN's  working  capital as of the closing  date. In
December  1997, as part of a settlement of the working  capital  adjustment  the
Company  received early repayment of the $500,000 note and a payment of $150,000
for one half of the working capital adjustment. The final adjustment of $150,000
was  received  in early 1998.  The net  proceeds  of the sale  approximated  the
carrying value of the assets sold. Accordingly,  the sale had no material impact
on the Company's results of operations for 1997.

     The  Company  recognized  revenues  and  expenses  related  to  the  USTMAN
operations of  approximately  $692,000 and $622,000 in 1997 and  $1,184,000  and
$1,552,000 in 1996, respectively.

     As a condition of approval of the USTMAN sale  transaction by the Company's
senior bank,  $3,000,000  of the cash  proceeds have been placed in a restricted
account with the Company's  senior bank and will be held as  collateral  against
outstanding Company loans. The remaining  $2,250,000 cash proceeds from the sale
were used to pay down amounts due under the revolving credit line.

3. Equipment and Improvements

Equipment and improvements consist of the following:

                                                        At December 31,
                                                     1997             1996
                                                 ------------    ------------
Equipment ....................................   $ 13,805,523    $ 12,474,380
Furniture and fixtures .......................        154,046         334,261
Vehicles .....................................      1,677,664         277,812
Equipment replacement parts ..................        161,500         161,500
Leasehold improvements .......................         66,353          99,672
                                                   15,865,086      13,347,625
Less accumulated depreciation and amortization    (11,052,586)     (7,611,234)
                                                 $  4,812,500    $  5,736,391
                                                 ============    ============

     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.


                                      F-10

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

4. Long-Term Debt

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


                                                        At December 31,
                                                    1997               1996
                                                ------------       ------------
Revolving line of credit
                                                $  1,792,667       $  2,000,000
Term loan ................................         4,800,000          6,000,000
                                                ------------       ------------
         Senior secured bank debt ........         6,592,667          8,000,000

Senior subordinated note .................         6,500,000          8,000,000
Less: Discount ...........................          (270,000)        (1,532,359)
                                                ------------       ------------
         Senior subordinated note ........         6,230,000          6,467,641

Other collateralized notes ...............           835,286            902,312
Other non-collateralized notes ...........           986,371            785,622
                                                ------------       ------------
         Other long-term debt ............         1,821,657          1,687,934
                                                ------------       ------------

         Total long-term debt ............        14,644,324         16,155,575
Less: Current portion ....................        (4,055,072)        (1,963,564)
                                                ------------       ------------
                                                $ 10,589,252       $ 14,192,011
                                                ============       ============

1996 Acquisition Financing
     In October 1996, in connection with the Acquisition, the Company obtained a
total of $19 million of financing  (the  "Financing")  under two  separate  loan
agreements.  The Financing consisted of senior secured bank debt consisting of a
three-year $5 million revolving line of credit and a five-year,  $6 million term
loan and an $8 million  subordinated  note which was refinanced in December 1997
as described below under "1997 Refinancing".

     In 1996,as part of the  acquisition  financing,  the Company  obtained a $8
million senior  subordinated note with a 5 year term, maturing December 31, 2001
with interest at 13%. The debt holder received  warrants to purchase  13,022,920
shares of the Company's  common stock at an initial an exercise  price of $0.325
per share which could be  exercised  at any time from  October 24, 1996  through
December 31, 2005. Both the number of shares and the exercise price were subject
to adjustment based upon certain factors.  These warrants were also subject to a
put option (the "Put") whereby,  under certain  circumstances,  the holder could
require the Company to  repurchase  the warrants  (including  any common  shares
owned as a result of a previous warrant exercise). The appraised market value of
the put warrants at issuance was  determined to be $1.6 million and was recorded
as a discount to, and  separately  from,  the  Subordinated  Note.In  1997,  the
Company  recorded  interest  expense of $734,250 in its results of operations to
accrete the value of the warrants to their estimated value.

     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, together 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 $8 million senior  subordinated note and warrants for 13,022,920 shares
were retired in 1997 - see 1997 Refinancing below.

1997 Refinancing
     In December 1997, the Company retired the then-existing Senior Subordinated
Note and the Warrants  with Put Option for an aggregate  of $8.5  million,  plus
accrued  interest on the Senior  Subordinated  Note through the closing date. As
part of this termination agreement, the Company also entered into a Post Closing
Agreement  (the  "PCA")  with  the  lender.  The  PCA  calls  for an  additional
contingent  payment to the lender  upon the  occurrence  of certain  "Triggering
Events"  as  defined  in  the  PCA,  which  include,  among  other  events,  the
dissolution or liquidation of the Company or the

                                      F-11

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

merger of the  Company  into  another  entity  wherein i) the Company is not the
surviving  entity or ii) the current  stockholders of the Company hold less than
50% of the combined voting power of the surviving entity. Upon the occurrence of
a  Triggering  Event,  the  Company  has  agreed to pay to the lender 20% of the
amount by which the Market  Determined  Value (as defined in the PCA) at or as a
result of the  closing of a  Triggering  Event  exceeds the Target  Amount.  The
Target Amount  increases from $10 million as of the date of the 1997 Refinancing
through March 31, 1998 to $12.5 million for the period April 1, 1998 to June 30,
1998,  to $15 million for the period July 1, 1998 to September 30, 1998 to $17.5
million for the period  October 1, 1998 to December  31, 1998 and to $20 million
for the period  January 1, 1999 to March 31, 1999.  The PCA expires  after March
31,  1999.  Such  payment to the lender is  required on the same date and in the
same form as payments to shareholders  of the Company.  As of December 31, 1997,
there has been no occurrence of a Triggering Event, and the Company is not aware
of any potential Triggering Events.

     The  funds for this  transaction  were  provided  by the  issuance  of $1.5
million of Redeemable  Convertible  Preferred  Stock (Note 5), the issuance of a
$6.5  million  Senior  Subordinated  Note and  $500,000 of the  Company's  cash.
Additionally,  the Company's  Senior Secured Bank Debt was modified to allow for
these  transactions  and to amend  certain  other  terms and  conditions  of the
agreement.

1997 Senior Subordinated Note
     In 1997, the Company obtained a $6.5 million senior  subordinated note with
interest at 10% and maturing December 31, 2002.  Required  principal payments of
$541,667 per quarter  begin March 31, 2000 and interest is payable  quarterly in
arrears  beginning March 31,  1998.This note, along with the Senior Secured Bank
Debt, is collateralized  by substantially  all of the assets of the Company.  In
consideration  for the note,  the holder  also  received  a warrant to  purchase
4,500,000  shares of the Company's  common stock at an initial exercise price of
$0.375 per share (subject to adjustment  pursuant to  anti-dilution  provisions)
and is  exercisable  in a single  exercise at any time.  The warrant  expires on
December 31, 2002.  The appraised  fair market value of the warrants at issuance
was  determined to be $270,000 and was recorded as a discount to, and separately
from the note.  The discount is being  amortized over the life of the note using
the effective  interest  method.  At December 31, 1997,  the note had a carrying
value, net of unamortized discount,  of $6,230,000.  Under the terms of the Note
agreement, the Company is subject to certain restrictions and covenants.

Senior Secured Bank Debt
     The Senior Secured Bank Debt at December 31, 1997, consists of a three-year
revolving  credit  line of up to $5 million,  and a 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.  In May 1997,  as a condition  to release the assets of USTMAN from its
collateral (see Note 2), the bank obtained as additional collateral a $3 million
restricted  certificate of deposit.  Outstanding  balances under the credit line
bear interest at a rate of prime plus 0.75% (9.25% and 9.0% at December 31, 1997
and 1996, respectively). The commitment fee related to the unused portion of the
$5  million  line is 0.5%.  The term loan bears  interest  at of prime plus 1.5%
(10.0% and 9.75% at  December  31,  1997 and 1996,  respectively)  with  monthly
principal payments of $100,000.

     At December 31, 1997, the Company had $1,792,667 of borrowings  outstanding
under the  revolving  credit  line and also had  $185,000  in  letters of credit
outstanding.  Additionally,  at  December  31,  1997,  there  was  approximately
$3,000,000 available for borrowing under the revolving credit facility.

     Substantially  all of the Company's assets were 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, 1997,
the Company was in compliance  with the financial debt covenants  related to the
Financing Agreements as amended in December 1997.


                                      F-12

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

Gain on Extinguishment of Debt
     In December 1997, the Company recorded an  extraordinary  gain on the early
retirement  of the Senior  Subordinated  Note and  associated  Warrant  with Put
Option that were issued in connection  with the  Acquisition in 1996. The Senior
Subordinated Note had a cost basis of $6,884,422 at the time of retirement,  net
of unamortized discount, and the Warrant with Put Option had a carrying value of
$2,334,250.  These instruments were retired for an aggregate cost of $8,500,000,
plus $144,415 in related  expenses.  In  connection  with the  transaction,  the
Company wrote off deferred financing costs associated with the original issue of
the Senior  Subordinated Note of $353,760.  The net gain on this transaction was
$220,497.

     In September  1996,  the Company  prepaid a $2,450,000  note  relating to a
previous  1994  acquisition.  The debt had a carrying  value  including  accrued
interest  at the  settlement  date of  $2,113,149.  The  prepayment  of $300,000
resulted in an extraordinary gain of $1,813,149.

Other Collateralized Notes
     Other  collateralized notes include financing  arrangements  collateralized
solely by certain  purchased  assets,  or by the  Company's  common  stock,  and
includes a 7.6% insurance  note with a balance  outstanding at December 31, 1997
of  $613,119,  payable in  monthly  installments.  Maturities  range from 1 to 5
years. Interest rates range from 7.6% to 25.5% per year, with a weighted average
interest rate of 8.7%.

Other Non-Collateralized Notes
     Other  non-collateralized  notes consist of subordinated  notes, a note for
purchased  patent  rights and a note to a vendor.  Interest  on the  $645,335 of
subordinated  notes is payable  quarterly from 7.5% to 8%;  principal is payable
annually in equal amounts over five years. A note for $300,000 relates to patent
rights  purchased  in  November  1995  bears  interest  at a  variable  rate  of
approximately  6% and is due October  2000.  The vendor note of $41,036 bears no
interest. Payments on the vendor note are due monthly in 1998.

     The aggregate annual maturities of long-term debt and financing  agreements
at December 31, 1997 are as follows:


          1998                           4,055,072
          1999                           1,389,647
          2000                           3,844,577
          2001                           3,458,438
          2002                           2,166,590
                                        14,914,324
          Less: Discount                  (270,000)
                              --------------------
                                        14,644,324
                              ====================

5. Series A Redeemable Convertible Preferred Stock

     In December  1997,  as part of the 1997  Refinancing  (Note 4), the Company
issued  150  shares of it's  Series A  Redeemable  Convertible  Preferred  Stock
("Series  A  Preferred")  with a  liquidation  value of $10,000  per share.  The
Company  has  recorded  the  Series  A  Preferred  at its  redemption  value  of
$1,500,000.  The holders of Series A Preferred  are  entitled to receive  annual
dividends of $1,000 per share payable in arrears  semi-annually  beginning  June
30,1998.  The shares  are  redeemable  at the option of the  Company at any time
after June 30,  2001 or the date upon which all  principal  and  interest on the
$6.5 million senior subordinated note is paid in full at the redemption price of
$10,000 per share. Any shares which are outstanding at December 31, 2004 must be
redeemed by the Company.  Because these shares are mandatorily redeemable,  they
are not included in  stockholders'  equity.  These shares are convertible at the
option of the  holder at any time after  December  31,  1997 into  shares of the
Company's  common  stock at an  initial  conversion  price of  $0.50  per  share
(subject to anti- dilution and anti-inflation  provisions).  The Company has 150
shares of Series A Preferred authorized at December 31, 1997.

                                      F-13

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

     The  holders of Series A Preferred  will be  entitled  to 20,000  votes per
share of Series A Preferred, subject to anti-dilution provisions, on all matters
subject to a vote of stockholders of the Corporation (except as specified in the
Series A Preferred Certificate of Designation),  such that holders of the Series
A Preferred  shall have the same voting  rights as they would have if the shares
of Series A Preferred held by them had been converted into common stock.

6. Stockholders' Equity

Series AAA Convertible Preferred Stock
     The  Company's   Series  AAA  Convertible   Preferred  Stock  ("Series  AAA
Preferred")  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 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, 1997 and 1996.

Series 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 ("Series DDD
Preferred"). This Series DDD Preferred 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  Preferred.  This  transaction  was recorded in the  accompanying  financial
statements as common stock issued in 1996.

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,  bearing interest at 8%.  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.


                                      F-14

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

Warrants
     As  of  December  31,  1997,   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
                      3,675              $.750           April 1999
                     34,360             $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
                  4,850,000              $.375        December 2002
---------------------------
                  5,388,053
===========================

     In consideration of the bank's consent to enter into the 1997  Refinancing,
the bank was paid a $50,000  fee and  received  a warrant  to  purchase  350,000
shares of the  Company's  common stock at an exercise  price of $.375 per share.
The warrant is exercisable in a single exercise at any time and expires December
31, 2002.

     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.

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 1997 and 1996,  respectively:  risk-free interest rates of 6.15%
and 6.00%; 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.


                                      F-15

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

     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:


                                               1997             1996
                                          -------------    -------------
          Pro forma net loss:
              Before extraordinar.........   $  (1,829,913    $ (3,602,859)
              Extraordinary gain .........         220,497       1,813,149
              Net loss ...................   $ (1,609,416)    $ (1,789,710)
                                             =============    =============
          Pro forma loss per share:
              Before extraordinary gain...   $      (0.11)    $      (0.47)
              Extraordinary gain .........           0.01             0.24
              Net loss ...................   $      (0.10)    $      (0.23)
                                             =============    =============

     Because  Statement 123 is applicable only to options granted  subsequent to
December 31, 1994, its pro forma effect has been fully reflected in only 1997.

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


<TABLE>
<CAPTION>
                                              1997                             1996
                                  ----------------------------     ----------------------------
                                              Weighted Average                 Weighted Average
                                   Options     Exercise Price        Options    Exercise Price
-------------------------------   ----------  ----------------     ----------  ----------------
<S>                               <C>         <C>                    <C>       <C>
Outstanding-beginning of year     2,734,556   $        0.18          304,850   $        2.79
Granted                           2,528,040            0.30        2,753,000            0.18
Exercised                              -                -               -                -
Canceled                           (130,667)           0.29         (323,294)           2.58
-------------------------------   ----------  ----------------     ----------  ----------------

Outstanding-end of year           5,131,929   $        0.23        2,734,556   $        0.18
                                  ==========  ================     ==========  ================
Exercisable at end of year        1,709,609   $        0.17          609,667   $        0.13
                                  ==========  ================     ==========  ================

Weighted-average fair value of
options granted during the year   $    0.23                        $    0.14
                                  ==========                       ==========
</TABLE>

     Exercise prices for options outstanding as of December 31, 1997 ranged from
$0.05 to  $0.4375.  The  weighted-average  remaining  contractual  life of those
options is 8.1 years.


                                      F-16

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

     The following table summarizes  outstanding options at December 31, 1997 by
price range:

<TABLE>
<CAPTION>

                Outstanding                                 Exercisable
-----------------------------------------------  -------------------------------
                  Weighted     Weighted-Average                    Weighted
 Number of         Average         Remaining       Number of         Average
  Options      Exercise Price  Contractual Life     Options       Exercise Price
-------------  --------------  ----------------  ---------------  --------------
<S>                   <C>                       <C>                      <C>                    <C>
      45,000    $    0.05000            8 years         15,000    $     0.05000
      55,000    $    0.09375          8.8 years         18,333    $     0.09375
   1,493,889    $    0.12500          7.4 years      1,053,889    $     0.12500
     201,000    $    0.15625          8.6 years         67,000    $     0.15625
     492,000    $    0.18750          8.6 years        128,000    $     0.18750
     155,000    $    0.25000          8.9 years         50,000    $     0.25000
   2,000,040    $    0.28125            8 years        285,720    $     0.28125
      65,000    $    0.31250          9.5 years           -               -
     310,000    $    0.40625            9 years         91,667    $     0.40625
     315,000    $    0.43750          9.3 years           -               -
-------------  --------------  ----------------  ---------------  --------------
   5,131,929    $    0.23444          8.1 years      1,709,609    $     0.175
=============  ==============  ================  ===============  ==============
</TABLE>

Stock Option Plan
     In  1997,   the  1989  Stock  Option  Plan  was  amended  and  renamed  the
Tanknology-NDE  International,  Inc. 1989 Long-Term Incentive Plan("Plan").  The
purpose of the Plan as so amended and restated is to retain key  executives  and
other  selected  employees,  reward them for making major  contributions  to the
success of the  Company  and  provide  them with a  proprietary  interest in the
growth and performance of the Company and its subsidiaries. In general, the Plan
as so amended  permits  the award of  stock-based  compensation  in  addition to
options,  extends the term of the Plan,  increases the number of shares of stock
with respect to which awards may be made under the Plan and accommodates changes
in response to the enactment of section  162(m) of the Internal  Revenue Code of
1986 as amended (the "Code"), and the revisions to Rule 16b-3 promulgated by the
U.S.  Securities  and Exchange  Commission.  The Plan was amended to allow up to
6,000,000  shares to be awarded,  an  increase  from the  previously  authorized
2,500,000 shares.

     The Plan  provides  for the grant of any or all of the  following  types of
awards: stock options,  stock appreciation rights, stock awards and cash awards.
Awards of different types may be made singly, in combination or in tandem. Stock
options may be incentive stock options  ("ISOs") that comply with Section 422 of
the Code. No participant  may be granted  awards  consisting of stock options or
stock appreciation  rights exercisable for more than fifty percent of the shares
of Common  Stock of the Company  reserved for  issuance  under the Plan.  Awards
issued  under  the  Plan  as it was  constituted  prior  to this  amendment  and
restatement  are not being  canceled or reissued,  but shall remain in effect in
accordance with their terms.

     The Plan is  administered  by the  Compensation  Committee  of the Board of
Directors  (the  "Committee")  . Subject to the terms of the plan, the Committee
will have authority (i) to select employees to receive awards, (ii) to determine
the timing,  form,  amount or value and term of awards,  and the  conditions and
limitations, if any, subject to which awards will be made and become payable and
(iii) to interpret  the Plan and adopt rules,  regulations  and  guidelines  for
carryong out the Plan.  The Committee  may delegate  certain of its duties under
the Plan to the Chairman of the Board,  the President and other senior  officers
of the  Company.  The  Committee  may not,  however,  delegate to any person the
authority to grant awards to, or take other action with respect to, participants
who are subject to Section 16 of the Securities Exchange Act of 1934, as amended
, or section 162(m) of the Code.

     In 1996, the Committee  determined  that in connection with the granting of
executive options in 1995, it would be in the best interests of the shareholders
and the Company to reprice certain  management  options that had been granted in
1993 to a current  market price rather than issue  additional  new options.  The
Committee  believed that at the existing  exercise prices,  the options were not
providing  the proper  performance  incentive to  management.  Accordingly,  the
Committee  repriced  50,000  options  that had been  previously  granted  to the
Chairman of the Board and the Chief Executive Officer

                                      F-17

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

as well as 20,000 options that had been previously  granted to an officer to the
then market price of the Common Stock which was $.125. All of the aforementioned
options  previously  had exercise  prices of $3.75.  All of these options remain
fully vested following the repricing.

     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
of  underlying  stock  at date of  grant)  to each of the four  current  outside
directors

     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.

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 ..........................................              5,388,053
Stock Options .....................................              6,250,000
Series A Redeemable Convertible Preferred Stock ...              3,000,000
Series AAA Convertible Preferred Stock ............                  2,000
Shares issuable upon conversion of promissory notes                 24,725
  Common shares reserved for issuance .............             14,664,778
                                                     ==========================


7.  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 long-term debt approximates their fair
value since most of this debt bears interest at variable rates.

Warrants with Put Option
     The warrants  with put option which were  outstanding  at December 31, 1996
were carried at their fair market value as determined by independent appraisal.

8.  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 expiries December 31, 2000 and it may
be  extended  for one or more  additional  periods and it can be  terminated  by
Bunker Hill on thirty days notice and by the Company at any time.  The  contract
calls for a base  retainer  of $7,500 per month with  additional  stock and cash
bonus  consideration.   In  1997  and  1996,  Bunker  Hill  earned  or  incurred
reimbursable expenses totaling $380,785 and $318,775,  respectively,  associated
with both the aforementioned  services contract and certain  acquisition-related
fees.

     In December  1997,  the Company  entered  into a  strategic  alliance  with
Veeder-Root,  a  subsidiary  of Danaher,  which  encompassed  both a  commercial
agreement with Veeder-Root and an $8 million investment by Danaher.  Veeder-Root
is a  manufacturer  of  environmental  monitoring  equipment  and a provider  of
supporting  services  through its  Simplicity  offering.  Under the terms of the
commercial agreement, the Company and Veeder-Root will work to integrate their

                                      F-18

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

complementary  service offerings.  Under the terms of the investment  agreement,
the Company issued (i) a $6.5 million Senior Subordinated Note with a 10% annual
interest rate and a 5-year term,  (ii) $1.5 million of  Redeemable,  Convertible
Preferred Stock  ("Preferred  Stock") which is convertible into 3 million shares
of the Company's  Common Stock and pays a 10% annual dividend with a 7-year term
and (iii) 4.5 million  warrants to purchase the Company's Common Stock at $0.375
per share with a 5-year term. If Veeder-Root exercises its warrants and converts
the Preferred Stock, its ownership would be approximately  25% of the Company on
a fully-diluted  basis.  With the proceeds of this investment and  approximately
$750,000 of cash, the Company repaid all of its  obligations to Banc One Capital
Partners,  L.P. ("BOCP") and repurchased BOCP's 13 million warrants.  Mr. Sigmon
is President of Veeder-Root and a director of the Company.

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

9. Income Taxes

     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's  deferred tax assets and liabilities at December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>


                                                                       1997           1996
                                                                   -----------    -----------
<S>                                                                <C>            <C>
Deferred tax assets:
    Net operating loss carryforwards ...........................   $   989,000    $ 1,640,000
    Allowance for doubtful accounts ............................       412,000        143,000
    Nondeductible accruals .....................................       698,000        290,000
                                                                   -----------    -----------
    Total deferred tax assets ..................................     2,099,000      2,073,000
    Valuation allowance ........................................    (1,536,000)    (1,379,000)
                                                                   -----------    -----------
    Net deferred tax assets ....................................       563,000        694,000

Deferred tax liabilities:
    Book over tax basis of depreciable assets ..................       563,000        694,000
                                                                   -----------    -----------
Deferred taxes, net ............................................   $         0    $         0
                                                                   ===========    ===========
</TABLE>


     The  valuation  allowance  for  deferred  tax assets  increased by $156,000
during 1997 as a result of the combined  effect of current year  utilization  of
net operating losses and current year activity which increased the net amount of
deferred tax assets. At December 31, 1997, for income tax purposes,  the Company
had  net  operating  loss  carryforwards  of  $23,463,000.  Due to a  change  in
ownership of the Company's stock pursuant to Internal  Revenue Code Section 382,
the  Company's  future  utilization  of the  net  operating  loss  carryforwards
incurred  prior  to  such  change  will  be  subject  to  a  significant  annual
limitation. Remaining losses will expire in tax years 2004-2011.

     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:


                                                        1997         1996
                                                     ---------    ---------

     Income taxes at the statutory rate ..........   $(460,000)   $(592,000)
     Change in valuation allowance ...............     156,000      694,000
     Nondeductible interest ......................     230,000       25,000
     State taxes, net of Federal benefit .........      25,000            0
     Other, net ..................................      84,000      (93,000)
     Tax rate differential - foreign jurisdictions       4,000       10,000
                                                     ---------    ---------
     Income taxes ................................   $  39,000    $  44,000
                                                     =========    =========


                                      F-19

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

     Significant  components of the provision for income taxes  attributable  to
continuing operations are as follows:


                                                  1997         1996
                                                -------      -------
Current:
         Federal .........................      $     0      $     0
         State ...........................       25,000            0
         Foreign .........................       14,000       44,000
                                                -------      -------
    Total Current ........................       39,000       44,000

Deferred:
         Federal .........................            0            0
         State ...........................            0            0
         Foreign .........................            0            0
                                                -------      -------
    Total Deferred .......................            0            0
                                                -------      -------
                                                 39,000       44,000
                                                =======      =======

10. Leases

     The  Company's  office space and certain  equipment and vehicles are leased
under  noncancelable  operating lease  agreements  which expire on various dates
through 2000. 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, 1997 were as follows:


          1998          $  361,695
          1999          $  279,163
          2000          $  105,723

     Rent expense under operating  leases totaled  $420,426 in 1997 and $216,910
in 1996.  As of December 31,  1997,  approximately  $57,000 of aggregate  future
minimum rentals are due to the Company under noncancelable subleases.

11.  Significant Customer

     Sales to one  customer  comprised  21% of total  revenue in 1997 and 20% in
1996.  Loss of this  customer  would  significantly  and  adversely  impact  the
Company's results of operations.

12. 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 million per occurrence with a $2 million  aggregate limit;  general,  product
and  personal  injury  coverage  of up to $1 million per  occurrence,  with a $2
million  aggregate  limit;  fire and, legal liability  coverage to $500,000.  In
addition, umbrella coverage for all sources of liability other than professional
and  pollution  liability  coverage in the amount of $10 million is  maintained.
Deductibles are in the amount of $100,000 per occurrence,  for  professional and
pollution  liability claims.  The umbrella policy carries a $10,000 self insured
retention.  All other  coverages carry a $5,000  deductible per occurrence.  The
Company  believes  that the policies in force 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

                                      F-20

<PAGE>



               Tanknology-NDE International, Inc. and Subsidiaries

limits. The occurrence of any significant uninsured loss or liability would have
a material adverse effect on the Company's business,  financial  condition,  and
results of operations.

Litigation
     In February 1995, U.S. Test, Inc. ("U.S. Test") filed a lawsuit against the
Company  in the  United  States  District  Court  for the  Western  District  of
Louisiana.  The lawsuit is for a declaratory judgment that certain patents owned
by The Company are invalid and unenforceable  and/or that certain U.S. Test tank
testing  systems do not infringe such  patents.  The relief U.S. Test is seeking
includes a final  determination  on the above issues,  a preliminary  injunction
regarding  actions taken by The Company and  attorneys'  fees and costs.  In May
1995, The Company filed a counterclaim alleging that (1) the The Company patents
are valid and enforceable,  (2) the U.S. Test tank testing systems infringe such
patents and (3) The Company is owed damages for such infringement. The amount of
damages  owed by U.S.  Test,  if any,  has not been  specifically  alleged.  The
patents at issue were transferred from Gilbarco, Inc. in the 1994 acquisition by
The Company of Gilbarco ESD.  After  numerous  delays,  an  evidentiary  hearing
occurred in early 1998,  and the  parties are in the process of  preparing  post
hearing submissions. There have been no dispositive rulings to date. The Company
does not  believe  that the  outcome  of such  litigation  will have a  material
adverse effect on the Company's results of operations or financial condition.

     The Company also is subject to various  claims and litigation in the normal
course of business.  The Company  believes that the ultimate  resolution of such
matters  will not have a material  adverse  effect on the  Company's  results of
operations or financial condition.

     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
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.

13. Employee Benefit Plan

     The Company has a 401(k) defined  contribution plan covering all employees.
Employees are eligible to  participate in the plan after thirty days of service.
At December 31, 1997, approximately 319 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) or cash,  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.
There was no Company contribution of either stock or cash in 1997. The Company's
contribution  in 1996 for the plan  totaled  $102,318.  The Company  contributed
201,936 shares of common stock to the plan for 1992, 1993 and 1994 contributions
in 1996.

                                      F-21

<PAGE>