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, 1998

[ ]  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

Check  whether 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,  1998  were
$66,845,455.

The aggregate market value of voting stock held by  non-affiliates of the Issuer
as of March 22, 1999 was approximately $1,521,709.

As of March 26, 1999, there were 16,745,040  outstanding shares of common stock,
$0.0001 par value, of the Issuer.

                                DOCUMENTS OMITTED
None.

                       DOCUMENTS INCORPORATED BY REFERENCE
None.

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


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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



                                Table of Contents

                                                                            Page

PART I
  Item 1.  Description of Business.............................................3
  Item 2.  Description of Property............................................13
  Item 3.  Legal Proceedings..................................................13
  Item 4.  Submission of Matters to a Vote of Security Holders................14


PART II
  Item 5.  Market for Common Equity and Related Stockholder Matters...........14
  Item 6.  Management's Discussion and Analysis or Plan of Operation..........15
  Item 7.  Financial Statements ..............................................22
  Item 8.  Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure............................23

PART III
  Item 9.  Directors, Executive Officers, Promoters, and Control
               Persons; Compliance with Section 16(a) of the Exchange Act.....24
  Item 10. Executive Compensation.............................................25
  Item 11. Security Ownership of Certain Beneficial Owners and Management.....29
  Item 12. Certain Relationships and Related Transactions.....................32
  Item 13. Exhibits and Reports on Form 8-K...................................33

SIGNATURES....................................................................40








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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 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,  1998,  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. ("Tanknology  Construction"),
Outbound  Services,   Inc.  ("OSI")  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.   Additionally,   through  OSI,  the  Company  provides   maintenance
management  services for retail quick service  restaurants as well as UST owners
and operators.  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") regulations and
other  regulations  affecting  the  Company  or its  customers,  the  outcome of
litigation,   the  loss  of  a  significant  customer  or  group  of  customers,
disruptions in 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 as a result of these
acquisitions.  The  Company  expects  that it will  continue  to make  strategic
acquisitions in the future.

Outbound Services, Inc. Acquisition

     On August 7, 1998,  the Company  acquired all of the  operating  assets and
assumed the liabilities of OSI. The acquisition was accomplished by means of the
Company's purchase of all of the issued and outstanding stock of OSI.

     OSI  engages in the  business  of  providing  site  service  management  to
primarily retail fuel and food service  providers.  It provides numerous service
capabilities  to  owners  and  operators  of  these  sites  such  as  seven-day,
twenty-four hour call center availability,  contractor  management and dispatch,
equipment  warranty  tracking and other services.  The Company believes that the
acquisition  of OSI allows it to expand the range of services  that it offers to
its existing  customer base,  which owns and/or operates USTs, and also to begin
penetrating the quick service  restaurant  market with its current services such
as construction management and equipment installation and repair.

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 "TEI Acquisition"). The UST Group's
operations  were  principally  conducted  through  three  subsidiaries  of  TEI:
Tanknology  Corporation  International  ("TCI"),  Tanknology  Canada, and USTMAN

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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



Industries,  Inc.  ("USTMAN").  The TEI Acquisition was accomplished by means of
the  Company's  purchase of all of the issued and  outstanding  capital stock of
these subsidiaries.

     Prior to the TEI  Acquisition,  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  TEI  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 the TEI
Acquisition,  the Company  believes that the resulting entity is the largest and
only nationwide provider of UST services.

USTMAN Disposition

     USTMAN provided statistical inventory  reconciliation ("SIR") services. SIR
meets the post-1998 EPA precision  requirement for leak detection.  SIR may also
identify other conditions of concern to UST operators such as pilferage or flaws
in record  keeping.  On May 22, 1997,  The company sold USTMAN 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.

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

     The Company  expects  that over the next  several  years that it will see a
significant  decline in its  precision  tank  testing  services  and  compliance
related  installation  services as new government  regulations  and  enforcement
thereof take effect.  Accordingly,  the Company plans to broaden its  historical
service  offerings to replace these revenues.  In 1997, the Company entered into
the Construction  Services field and also expanded its installation of automatic
tank  gauges  ("ATG").  In 1998,  the Company  entered  the  Service  Management
business  through the  acquisition of OSI and entered the ATG monitoring  ("Site
Sentry")  business.  The Company  expects  that it may  introduce  new  services
related  to its  current  business  and  may  expand  certain  existing  service
offerings.


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

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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 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 regarding USTs on December 22,
1998, annual precision tightness testing will no longer be accepted as a primary
means of  meeting  leak  detection  requirements.  Revenues  from  this  service
declined  both in annual  revenues  and as a  percentage  of revenues in 1998 as
compared  to 1997.  The  Company  expects  revenues  from  precision  testing to
continue  to  decline.  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 the  functionality  of
Stage II vapor  recovery  equipment and to verify that this  equipment  does not
leak. Stage II equipment collects vapor emissions displaced from a vehicle's gas
tank during  refueling  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.  Field  Services 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, began phasing-in in 1998. Forty percent
of all new cars for the model year 1999 must be equipped with OBVR  systems.  By
2000, all cars must have OBVR systems,  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, management does not expect the aggregate market for Stage II testing
to change significantly within the next five years. In 1998, revenues from State
II Testing increased from 1997 but declined as a percentage of revenue from 1997
due to the significant increase in other service areas.

     Field  Services  also  installs  ATGs.  In  1998,  Field  Services  derived
approximately 30% of its revenues from the installation, inspection, maintenance
and parts sales associated with ATGs, up from  approximately 17% in 1997. An ATG
consists 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. ATGs 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"  services).
However, UST owners may continue to use precision tightness testing at five year
intervals  for ten years after the  upgrades  in most  states.  See  "Government
Regulations." It is currently anticipated that ATG related revenues will decline
in 1999 as the  Company  completes  an upgrade  program  for one  customer  that
accounted for  approximately  60% of the ATG related  revenue in 1998 and as the
demand for ATG  services  wanes due to the  passing  of the  December  22,  1998
upgrade deadline.

     Field  Services  also  equips,  designs,  installs and  maintains  cathodic
protection   systems   which  can  include  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

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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



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. In 1998,  cathodic  protection related revenues
increased to approximately 24% of Field Services revenues from approximately 12%
of Field Service revenues in 1997.

In addition to testing and upgrading UST systems,  Field  Services also provides
overfill  protection,  UST  cleaning  and value added site  services,  including
surveying 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  secondary  containment,
interstitial monitoring or groundwater or vapor monitoring.

     In 1998, Field Services  revenues were  approximately  $53.9 million ($32.7
million in 1997), or 78% (85% in 1997), of the Company's consolidated revenues.

Management Services

     Management  Services are  operations  that focus on providing  information,
data  accumulation,   administrative,   licensing,  technical,  outsourcing  and
regulatory  related  services.  Development  of Management  Services has been an
integral  part of the  Company's  strategy to diversify  its service base and to
develop strong  relationships  with its customer base. The Company has developed
these services both through internal  development and through the acquisition of
OSI.

     In 1998 Management  Services had revenues of approximately $13.4 million or
19% of the  Company's  consolidated  revenues  compared  to  approximately  $4.3
million or 11% of 1997 consolidated revenues.

Compliance Management Services ("CMS")

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

         o     administer UST systems in compliance with regulations;
         o     acquire and maintain operating and regulatory permits;
         o     respond to, report and manage environmental incidents;
         o     comply with Superfund Amendments Reauthorization Act ("SARA III")
               community right-to-know requirements;
         o     resolve environmental notices of violation or noncompliance;
         o     track hazardous waste  transportation  via manifest and report in
               accordance with state requirements;
         o     prepare  and  file  state  specific   Certificates  of  Financial
               Responsibility;  
         o     manage the liabilities  associated with the operation of USTs and
               the storage of hazardous  material;  
         o     coordinate  construction,  maintenance,  testing  and  contractor
               oversight;  and 
         o     coordinate  the provision of services from the  customer's  other
               UST vendors.

     Currently,   the  Compliance   Management  Services  division  manages  the
environmental compliance for approximately 18,000 tanks in the United States.

Construction Services

     In 1997, the Company  established  Tanknology  Construction  which provides
construction  management  services.  Tanknology  Construction  provides turn-key
construction program management to customers that cannot, or do not want to,


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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


manage large-scale,  complex tank upgrade projects,  removals,  replacements and
other petroleum related construction.  Tanknology  Construction 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,   Tanknology
Construction  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.  Tanknology
Construction  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     UST installations;
         o     Canopy installations and modifications;
         o     Parts and equipment supply;
         o     Other petroleum related construction; and
         o     Coordination with services offered by other TNDE divisions.

International

     Through ProEco, TNDE licenses technology to service providers in Australia,
Brazil,  Canada,  Chile,  Columbia,  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 reviews certain test data, issues test reports,
provides  technical support and receives license or processing fees on each test
using the Company's technology.

Service Management (OSI)

     In 1998,  the Company  entered the service  management  business based upon
increased interest of existing and potential customers to out-source  facilities
and equipment repair and maintenance management activities.  OSI added extensive
expertise  in  managing  maintenance  activities  at  small  pad  retail  sites,
comprehensive  information  systems,  extensive  service history  databases,  an
experienced  call  center  operation  and an  established  network of  qualified
vendors. This business provides  comprehensive site maintenance  capabilities to
multi-site,  retail location owners and operators,  primarily in the retail fuel
and food provider market. OSI provides these services to more than 5,000 sites.

     Initially,  the Company  purchased  the assets and hired the employees of a
small  provider  of these  services  located in Ohio in May 1998.  In August the
Company  purchased  all of the  outstanding  stock of OSI  which is  located  in
Southern California.  The Company operated both locations during 1998 but closed
the  Ohio  operation  in early  1999 and  consolidated  its  operation  with the
operations of OSI. OSI provides the following  services (among numerous  others)
to its customers:

         o     Seven-day, twenty-four hour call center service;
         o     Services for food service  equipment,  car wash  equipment,  fuel
               storage and dispensing systems,  HVAC and refrigeration  systems,
               building,  lighting and electrical  systems and point-of-sale and
               retail automation systems and equipment;
         o     Extensive site, equipment and vendor data warehousing;
         o     Equipment/repair warranty tracking;
         o     Subcontractor/vendor dispatching and tracking;
         o     Invoice auditing;
         o     Vendor and contractor management;
         o     Customized performance analysis and reporting; and
         o     Coordination with services offered by other TNDE divisions.


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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


Site Sentry

     Site Sentry is an  twenty-four  hour  monitoring,  management and reporting
service  that  assists  customers  with  maintaining  compliance  with  EPA leak
detection  regulations  for  monthly  monitoring.  With  Site  Sentry,  ATGs are
remotely monitored seven days a week,  twenty-four hours a day through telephone
data lines or a satellite  connection by a central  polling  computer.  Required
monthly  reports are generated and  distributed to each location.  TNDE analysts
evaluate,  process and maintain all records which are made easily  accessible to
the customer via the Internet. If the ATG indicates an compliance or maintenance
issue, the problem is immediately  processed by the OSI call center to determine
if  on-site  service is  required  or the  problem  can be  addressed  remotely,
avoiding an unnecessary service call.

Site Sentry complements other TNDE services,  such as compliance  management and
maintenance  management,  and furthers the Company's  position as a full-service
provider of integrated solutions for UST management.

Government Regulations

     EPA's  regulatory  structure  is  the  primary  driver  for  the  Company's
services.  State  and  local  agencies  have  the  main  regulatory  enforcement
responsibilities  in this  structure.  Additionally,  many of these agencies add
requirements that are more strict than those of EPA.

     The EPA's  regulations  date back to 1984 when  Congress,  in  response  to
concerns about  groundwater  contamination,  included UST amendments in the 1984
Resource Conservation and Recovery Act ("RCRA").  The RCRA amendments led to the
federal UST regulations found in 40 CFR 280. These regulations  require that new
USTs  (those  installed  after  December  22,  1988)  meet  certain  performance
standards  and that older  tanks be  upgraded to meet  comparable  standards  by
December  22,  1998  or  face  closure.   The   regulations   also  require  UST
owners/operators  to provide  release  detection  for tanks and  piping,  follow
standards   of   maintenance   and  record   keeping  and   maintain   financial
responsibility.

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. If owners and operators of existing USTs do not
implement these upgrades, they must close those existing USTs. 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,  government  regulations  have required leak detection
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.
                        1998 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% and a
probability of false alarm of no more than 5%. Tightness testing methods must be
able to detect a 0.1  gallon-per-hour  leak with at least a 95%  probability  of
detection and no more than a 5% probability of false alarm.

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

     ATGs 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 is 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 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.

Maintenance, Record Keeping and Financial Responsibility

     Owners/operators are required to perform scheduled maintenance and testing,
report  suspected   releases,   follow  proper  closure  and  corrective  action
procedures   and   keep   applicable   documents   available   for   inspection.
Owners/operators must also demonstrate financial responsibility. They must be

                                      - 9 -

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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



able to pay the costs of cleaning up leaks and  compensating  third-parties  for
bodily injury and property damage caused by leaking USTs.

     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
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  created 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
continue  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.

     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's  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,
Michigan 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  services  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's headquarters.

     OSI markets to Field Services,  CMS and Construction  Services customers as
well as through  direct sales  efforts.  OSI performs  services  throughout  the
United States and maintains  administrative offices in Laguna Hills,  California
and Orange, Connecticut.

Information Systems and Products

     TOPS (Tanknology  Order  Processing  System),  CMSS (Compliance  Management
Services System),  Site Sentry, WRAP (Web Report Access Program) and Tracker are
the trade names for a group of proprietary  information  systems that facilitate
the environmental  compliance of UST  installations  and site management.  Other
systems  that  are used to  support  UST  installations  include  the  Company's
internet access system and hazardous material tracking system. TNDE's systems

                                     - 10 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


were developed in response to the growing  informational needs of UST owners and
operators in their  efforts to manage  complex  regulatory,  risk  avoidance and
operational  requirements.  While TOPS, CMSS, Site Sentry,  WRAP and Tracker 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.

     CMSS 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.

     Site Sentry is a system developed to seamlessly collect remotely polled ATG
data including  compliance and operational  data. Site Sentry collects data from
ATGs produced by multiple manufacturers and displays the information in a common
format.  The information is accessible by customers and business  partners (such
as fuel haulers) via secure  connections to the Internet.  This allows customers
and  business  partners  to  focus  on the  data  instead  of the  mechanism  of
collecting the data. Data that are accessible via Site Sentry includes inventory
levels and alarm status.

     WRAP is TNDE's system which was developed in response to customer  requests
for accessing field reports via the Internet.  WRAP allows  customers to connect
securely via the Internet and review  completed  field  reports.  Customers  may
access the system  twenty-four  hours a day to view field  reports and invoices.
This system provides faster access to data and easily  organizes the reports for
quick access by customers.

     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 with
the exception of Tracker  which is  maintained  at OSI's offices in  California.
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  e-mailed  or hard copies can be
printed and mailed to the customer and/or regulatory agency.

     These systems add value for UST owners and operators 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.




                                     - 11 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB

Competition

     In 1996,  the Company  acquired  the  Tanknology  UST Group,  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
1998,  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.

     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.  Various  companies  compete on a national  or
regional basis with Site Sentry.

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

     OSI  competes  with local and  national  maintenance  providers  as well as
internal maintenance groups within major customers.

Customers

     The Company  provides  on-site and "back office" services to oil companies,
independently  owned gasoline  retailers,  convenience  store  operators,  fleet
owners,  government  facilities,  other operators of USTs and to restaurants and
fast food companies. 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  The
Company's services.

         o     Oil companies:  BP-Amoco, Chevron Products Company, Exxon U.S.A.,
               Mobil  Oil  Corporation,  Shell  Oil  Products  Company  and Star
               Enterprises;
         o     Gasoline distributors/retailers:  B&D Petroleum, Savings Oil, USA
               Petroleum;
         o     Convenience   stores:   Cumberland  Farms,  Dairy  Mart,  Diamond
               Shamrock,  Southland  Corporation E-Z Serve  Convenience  Stores,
               Tosco Corporation;
         o     Fleet Owners: Hertz Corporation,  Ryder Transportation  Services,
               Budget Rent A Car, and
         o     Government facilities: City of Philadelphia, Fort Bragg, Army and
               Air Force Exchange Service.

Additionally,  OSI performs services for petroleum companies (such as Conoco) as
well as companies in the quick serve  restaurant  market  (Pizza Hut, Taco Bell,
Einstein's Bagels).

     Mobil Oil Corporation  accounted for approximately  23%, 21% and 20% of the
Company's  1998, 1997 and 1996  consolidated  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

                                     - 12 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



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
USTs  containing  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.  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 of $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
carries similar coverages for its International  division.  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,  1998,  the  Company  employed  460  full-time  and 25
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 25,500 square
feet of leased  office space in Austin,  Texas of which the Company is currently
subleasing  approximately  4,000 square feet.  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  States  District  Court  for the  Western  District  of
Louisiana.  The lawsuit is for a declaratory judgment that certain patents owned
by the Company were invalid and unenforceable and/or that certain U.S. Test tank
testing  systems did not  infringe  such  patents.  The relief U.S.  Test sought
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 Company  patents
were valid and  enforceable,  (2) the U.S. Test tank testing  systems  infringed
such patents and (3) the Company was owed damages for such infringement. The

                                     - 13 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



patents  at issue  were  transferred  from  Gilbarco,  Inc.  as a result  of the
Company's 1994  acquisition of Gilbarco ESD. In 1998, the District Count entered
a decision basically  granting U.S. Tests relief,  denying the Company's counter
claim, and awarding no damages to either party.

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.


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
               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

               1998

               First Quarter                        $1 7/8        $1/8
               Second Quarter                       $1 1/8        $3/4
               Third Quarter                          $7/8        $5/8
               Fourth Quarter                      $1 1/32      $21/32

     As of April 15, 1998, there were approximately 167 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 1997 or 1998. 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 TEI 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,
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

                                     - 14 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



discount  to,  and  separately  from,  the  1996  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 to DH
Holdings  Corp.  ("DH"),  a subsidiary  of Danaher  Corporation.  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 at the  redemption  price
per share on the $6,500,000  senior  subordinated note (the "1997 Note") payable
to DH is paid in full.  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)  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  with DH 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.

     In August 1998, in connection  with, and as part of  consideration  paid to
the former  shareholders of OSI for purchase of their shares in OSI, the Company
issued 250,000 shares of its common stock.

     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 RESULTS OF OPERATIONS

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  are 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 service areas with new and profitable revenue streams.


                                     - 15 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


 Revenues

     Revenues for 1998 were  $66,845,455,  an increase of  $28,162,309,  or 73%,
compared to  $38,683,146  for 1997.  The increase in revenues in 1998 was due to
several factors:

         1)    Increased  revenues of $6,522,239 from the Construction  Services
               division which only operated for a partial year in 1997.
         2)    Increased  revenues  of  $860,095  generated  by  OSI  which  was
               purchased in August 1998.
         3)    Increased  revenues of $5,659,555  from an upgrade  program for a
               major customer.
         4)    Increased  cathodic  protection  related  revenues of  $9,288,420
               driven by the December 1998 regulatory deadline.
         5)    Increased  revenues  from other ATG  upgrade  work  caused by the
               December 1998 regulatory deadline.

     Revenues in 1998 were favorably  impacted by the increased demand generated
as a result of the December 1998, regulatory deadline. The Company also believes
that the revenue increases were driven by the increase in the number of services
offered,  increased marketing and sales efforts and growing awareness within the
Company's  customer  base of the  depth  and  breath  of the  Company's  service
offerings.  Revenue  increases were  experienced in all geographic  areas in the
United  States  and in all  services  areas  except  for tank  testing  and tank
cleaning.   The  upgrade   program  for  the  major  customer  noted  above  was
substantially  completed in 1998,  and there is no similar  program in place for
1999. The Company expects that tank testing revenues will continue to decline in
1999 as more and more UST are fitted with ATGs, other remote monitoring  systems
or are  cathodically  protected.  The Company expects that due to the passing of
the December 1998 regulatory  deadlines,  the level of business activity in 1999
will not be as  favorable to the Company as in 1998.  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
testing and upgrade driven  services.  In general,  the prices for the Company's
services were stable in 1998 with some price  increases  implemented  in service
areas  where  the  demand  for  services  exceeded  capacity  as a result of the
December 1998 regulatory deadlines.

Cost of Services

     Cost of services for 1998 was $48,285,993 (72% of revenue),  an increase of
$19,039,872,  or 65%,  compared to $29,246,121  (76% of revenue) for 1997. Gross
margin was  $18,559,462  (28% of revenue) in 1998 compared to $9,437,025 (24% of
revenue) in 1997.  The increase in gross margin  percentage  is due primarily to
increased  vehicle and  technician  utilization  as a result of the  increase in
revenues and to lower depreciation charges.

Selling, General and Administrative

     Selling,  general  and  administrative  expenses  ("SG&A")  for  1998  were
$12,276,887  (18% of revenue),  an increase of $4,423,885,  or 56%,  compared to
$7,853,002  (20% of  revenue)  for  1997.  The  increase  in SG&A  spending  was
primarily due to the establishment and staffing of the Company's  national sales
force,  increased marketing costs,  increased costs incurred to upgrade computer
systems  and IT  staffing  due to  increased  business  levels  and new  service
offerings,  increased incentive compensation costs due to the increased level of
Company  profitability and, to a lesser extent,  increases in the administrative
staffing  levels  required as a result of increase  in business  activity.  As a
percentage of sales, SG&A expenses declined from 20% in 1997 to 18% in 1998 as a
result of the increase in revenues.


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

     EBITDA for 1998 was $9,581,334, an increase of $4,086,196, or 74%, compared
to EBITDA of  $5,495,138  for 1997.  The  increase in EBITDA is due to increased
revenues  and  growth in more  recent  service  offerings  such as  Construction
Services.  EBITDA  represents  net  income  before  depreciation,  amortization,
interest  expense  and income  taxes.  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.  It is commonly  used to analyze and compare
companies  on the  basis  of  operating  performance,  leverage  and  liquidity.
However,  EBITDA is not  intended  to be a  performance  measure  that should be
regarded as an alternative to, or more meaningful than, either operating income

                                     - 16 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



or net  income as an  indicator  of  operating  performance  or cash  flows as a
measure of  liquidity,  as  determined in  accordance  with  generally  accepted
accounting  principles.  Also,  EBITDA,  as  computed  by  the  Company,  is not
necessarily comparable to similarly titled amounts of other companies.


Interest Expense

     Interest  expense for 1998 was $1,757,559,  (3% of revenue),  a decrease of
$1,447,916,  or 45%,  compared  to  $3,205,475  (8% of  revenue)  for 1997.  The
decrease in interest expense is primarily due to the 1997 Refinancing (described
below). The 1997 Refinancing lowered the amount of subordinated debt outstanding
from $8 million to $6.5 million, and lowered the interest rate on this debt from
13% to 10%, which both  contributed to  approximately  $385,000 of the decrease.
The 1997  Refinancing  also eliminated the accretion of the Warrants of $734,250
incurred in 1997 and reduced the accretion of the subordinated debt by $357,103.
These items  accounted for $1,476,353 of the decrease over 1997.  Interest costs
were  further  reduced  by  generally  lower  interest  rates  on the  Company's
revolving  credit facility and term loan where rates are tied to the prime rate.
However,  these reduced costs were more than offset by the increased debt levels
incurred in 1998 compared to 1997.

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 TEI  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.

Provision for Income Taxes

     The Company's  effective income tax rate in 1998 was approximately 17%. Due
to the  availability  of net operating  loss  carryforwards,  the Company has in
years prior to 1998 paid minimum  taxes.  In 1998,  as a result of the Company's
profitable operations the Company fully utilized its unrestricted federal income
tax  loss   carryforwards  as  well  as  its  applicable  1998  restricted  loss
carryforwards.  For  state  and  local  income  tax  purposes  the  Company  has
substantially  utilized  its tax  loss  carryforwards  in a  number  of  states.
Accordingly,  in 1998,  the  Company  provided  for a federal tax  provision  of
$601,000 and a state tax provision of $205,000.  Subsequent to 1998, the Company
will be subject to recording  and paying  taxes on income at the full  statutory
rates which are estimated at approximately 39%.

     The Company has  approximately  $22 million of remaining net operating loss
carryforwards which, as a result of a change in ownership of the Company's stock
in 1995  pursuant to Internal  Revenue  Code  Section  382,  are  restricted  to
utilization at the rate of  approximately  $100,000 per year through 2011,  when
they expire.

Net Income/Loss

     In 1998, the Company had net income of $3,903,797 (6% of revenue)  compared
to a net loss of $1,353,635 for 1997 (4% of revenue).

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 TEI Acquisition in October 1996.


                                     - 17 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


     The UST Group was purchased for an aggregate purchase price of $12 million,
subject  to  adjustment.  In  December  1998,  the  Company  and TEI  reached  a
settlement of the final  purchase price claims that resulted in a payment to the
Company of $230,000 and the reduction of certain indemnification  limitations by
the Company  provided for in the Stock Purchase  Agreement on behalf of TEI from
the previous limit of $1,250,000 to $600,000.

Sale of Canadian Operations

     In  February  1997,  the  Company  sold  the  business  and  operations  of
Tanknology  Canada  which it  acquired  as part of the TEI  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
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  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 its borrowing base, which reduced the Company's borrowing capacity
under the Company's  revolving  credit  facility with its bank.  The "block" was
subsequently removed as part of the 1997 Refinancing.


Sale of USTMAN

     On May 22, 1997 the Company sold USTMAN,  which was acquired as part of the
TEI 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 June 1, 1998 (the "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  $650,000  for  one-half of the
working  capital  adjustment  plus 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   $4,795,000  of  goodwill.
Accordingly, the Company did not realize any gain or loss on this transaction in
its 1997 results of operations.

Purchase of OSI

     On August 7, 1998, the Company  purchased all of the issued and outstanding
common stock of OSI. The terms of this transaction  called for a cash payment of
$765,000,  the issuance of a 10% subordinated  note of $750,000 payable in equal
installments  over 24 months,  the issuance of 250,000  shares of the  Company's
common  stock which were valued at  $195,313,  and the  issuance of a warrant to
purchase  500,000  shares of the Company's  common stock at an initial  exercise
price of $2.00 per share,  subject to  downward  adjustment  (but not lower than
$1.00)  based upon the future  performance  of OSI.  The  warrant  was valued at
$30,000. This purchase price is subject to downward adjustment for certain items
once the total of such adjustment  items exceeds  $50,000.  Any reduction in the
purchase price will be effected  through a reduction of the remaining  principal
balance of the subordinated note.

Financing

     In 1996, in connection  with the TEI  Acquisition,  the Company  obtained a
total of $19 million of financing (the "TEI  Acquisition  Financing")  under two
separate loan  agreements.  The TEI  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 TEI Acquisition and
the TEI 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 TEI
Acquisition Financing were used (i) to purchase the UST Group, (ii) to pay off

                                     - 18 -


<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


outstanding  balances under a then existing term loan and an existing  factoring
agreement  in  the  aggregate  amount  of  $2,526,970,  (iii)  to  pay  the  TEI
Acquisition's fees and expenses and (iv) as 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 TEI 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  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.

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.
As part of this  termination  agreement,  the Company  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 or (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  $20,000,000  as of January 1, 1999,  and through
March 31, 1999, the PCA expiration  date.  Such payment 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,  1998,  there has been no
occurrence of a Triggering  Event, and the Company is not aware of any potential
Triggering Events.

     The  funds  for the 1997  Refinancing  were  provided  by the  issuance  of
$1,500,000 of Series A Redeemable  Convertible  Preferred Stock, 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. 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 at the redemption  price per share to DH
is paid in full.  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
beginning March 31, 2000. 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
through December 31, 2002.


                                     - 19 -

<PAGE>
                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


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 Canadian  operations,  the amount
available  to the  Company  under the credit  line was  reduced by $500,000 as a
condition  to  obtaining  the  bank's  agreement  to  consent to the sale of the
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. In
1998, the Company  renegotiated  certain terms of the Revolving Line to increase
the  maximum  borrowings  from  $5  million  to $9  million  and to  extend  the
expiration date of the facility by one year to December 31, 2000.

     At December 31, 1998, the Company had $6,650,000 of borrowings  outstanding
under the Revolving Line and also had $735,000 in letters of credit outstanding.
As of December  31,  1998,  there was an  additional  $1,615,000  available  for
borrowing under the Revolving Line.

     The $6 million term loan carries an interest  rate of the bank's prime rate
plus 1%.  Principal  payments of $100,000 are paid  monthly.  During  1998,  the
Company  renegotiated certain terms of the term loan to reduce the interest rate
by 0.5% and to suspend the principal  amortization  for a six-month  period from
July 1, 1998 through  December 1, 1998.  Principal  payments  were resumed as of
January 1, 1999. At December 31, 1998, $4,200,000 remained outstanding under the
term loan.  Interest is payable  monthly under both the  Revolving  Line and the
term loan.  Under both the  Revolving  Line and the term  loan,  the  Company is
subject to certain restrictions and covenants. At December 31, 1998, the Company
was in compliance with all restrictions  and covenants  related to the revolving
credit line and term loan.

Gilbarco Note

     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, 1998,  bears  interest at a
variable  rate and is due in October  2000.  In the first  quarter of 1999,  the
Company  entered  into an  agreement to reassign the patents back to Gilbarco in
exchange for the note and the accrued interest  thereon.  The Company expects to
record a small gain from the sale of these patents in 1999.

     The aggregate annual maturities of long-term debt and financing  agreements
at December 31, 1998 are as follows:


               1999                            $       2,023,727
               2000                                   10,954,384
               2001                                    3,586,520
               2002                                    2,930,290
               2003                                      148,359
                                                      19,643,280
Less: Discount related to subordinated notes            (210,321)
                                               -----------------
                                               $      19,432,959
                                               =================


     At  December  31,  1998,  the  Company  had  positive  working  capital  of
$7,029,962  compared with working  capital of $743,612 at December 31, 1997. The
increase in working capital is primarily a result of the reclassification of the
$6,650,000  outstanding  under the Revolving Line to long-term  debt,  since the
Company does not expect to repay this debt in 1999.

     Cash flows provided by operating  activities in 1998 were $2,239,557 versus
cash  flows  used  in  operating  activities  in 1997 of  $2,225,165.  The  most
significant  factors  contributing  to the  positive  cash flow  from  operating
activities in 1998 were net income of $3,903,797,  depreciation and amortization
of $3,579,089 and increases in accounts  payable and accrued payroll and payroll
taxes of $4,356,314.  These positive cash flows were significantly reduced by an
$8,339,130 increase in accounts receivable and a $1,036,729 decrease in accrued

                                     - 20 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



liabilities.  The increase in accounts  receivable  was caused by an increase in
revenues in the fourth quarter of 1998 as compared to the fourth quarter of 1997
of approximately $9 million.

     Capital  expenditures  in 1998 were  $5,787,757  compared to  $2,841,530 in
1997.  The increase in capital  expenditures  in 1998 was  primarily  due to the
purchase of replacement and new service  vehicles,  increased  expenditures  for
computer  hardware and software and  purchases of  approximately  $2,500,000  of
automated tank gauges for a specific customer contract. The Company expects that
capital  expenditures in 1999 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 TEI  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 current  credit  facilities 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  1999.  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

     The Year 2000 issue is the result of computer  programs being written using
two  digits  rather  than four to define  the  applicable  year.  The  Company's
computer  equipment and software and devices with embedded  technology  that are
time- sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000.  This could  result in a system  failure or  miscalculations  causing
disruptions of operations,  including, among other things, a temporary inability
to process  transactions,  send  invoices or engage in similar  normal  business
activities.

     Tanknology has undertaken various  initiatives  intended to ensure that its
computer  equipment and software will function properly with respect to dates in
the year 2000 and thereafter. For this purpose, the term "computer equipment and
software"   includes  systems  that  are  commonly  thought  of  as  information
technology  ("IT")  systems,   including   accounting,   data  processing,   and
telephone/PBX  systems,  scanning equipment and other miscellaneous  systems, as
well as systems  that are not commonly  thought of as IT systems,  such as alarm
systems, fax machines or other miscellaneous systems. Both IT and non-IT systems
may contain  imbedded  technology,  which  complicates  the Company's  Year 2000
identification,  assessment,  remediation  and testing  efforts.  Based upon its
identification and assessment efforts to date, the Company believes that certain
of  the  computer   equipment  and  software  it  currently  uses  will  require
replacement or  modification.  In addition,  in the ordinary course of replacing
computer  equipment and software,  the Company  attempts to obtain  replacements
that it believes are Year 2000  compliant.  Utilizing both internal and external
resources  to  identify  and assess  needed Year 2000  remediation,  the Company
currently   anticipates   that  its  Year   2000   identification,   assessment,
remediation,  and  testing  efforts,  which  began  in  February  1998,  will be
completed by June 30, 1999, and that such efforts will be completed prior to any
currently anticipated impact on its computer equipment and software. The Company
estimates  that as of December 31, 1998, it had completed  approximately  30% of
the  initiatives  that it believes will be necessary to fully address  potential
Year 2000 issues relating to its computer  equipment and software.  The projects
comprising the remaining 70% of the  initiatives  are in process and expected to
be completed on or about June 30, 1999.

     The company is currently evaluating field service equipment, test equipment
and gauges at remote sites for Year 2000  compliance.  The  company's  Year 2000
identification,  assessment,  remediation,  and testing efforts will include the
current and future evaluation of all products,  equipment and gauges used in the
field.

     The  Company's  primary  systems are at less risk of date related  problems
due,  primarily,  to the fact that the average age of the systems is less than 5
years and were developed to operate beyond the year 2000.




                                     - 21 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



                                                                PERCENT
               YEAR 2000 INITIATIVE           TIME FRAME        COMPLETE
        ----------------------------------  ----------------  -------------
        Initial IT systems identification
           and assessment                      2/98-12/98          100%
        Remediation and testing
           regarding central system issues      8/98-5/99           85%
        Remediation and testing
           regarding departmental system
           issues                              10/98-4/99           90%
        Remediation and testing
           regarding tank Testing and
           truck equipment system issues       11/98-6/99           45%
        Remediation and testing
           regarding telephone/PBX             11/98-12/98         100%
        Electronic data interchange
           trading partner conversions         10/98-4/99           70%
        Identification, assessment,
           remediation, and testing
           regarding desktop and
           individual system issues            10/98-4/99           90%
        Identification and assessment
           regarding non-IT system issues       8/98-4/99           80%
        Remediation and testing                10/98-6/99           40%
           regarding non-IT system issues



     The Company has also mailed letters to its significant  vendors and service
providers and has verbally  communicated  with strategic  customers to determine
the extent to which  interfaces  with such entities are  vulnerable to Year 2000
issues and whether the products and services  purchased from or by such entities
are Year 2000 compliant.

     The  Company  believes  that  the  cost of its  Year  2000  identification,
assessment,  remediation and testing efforts,  as well as currently  anticipated
costs to be incurred by the  Company  with  respect to Year 2000 issues of third
parties,  will not  exceed  $150,000,  which  expenditures  will be funded  from
operating  cash  flows.  All of the  $150,000  relates  to  analysis,  repair or
replacement of existing software,  upgrades to existing software,  or evaluation
of  information  received  from  significant   vendors,   service  providers  or
customers. The Company presently believes that the Year 2000 issue will not pose
significant  operational  problems  for the Company.  However,  if all Year 2000
issues are not properly identified,  or assessment,  remediation and testing are
not effected  timely with  respect to Year 2000  problems  that are  identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's  results of  operations  or adversely  affect the Company's
relationships with customers, vendors or others.  Additionally,  there can be no
assurance  that the Year 2000 issues of other  entities will not have a material
adverse impact on the Company's systems or results of operations.

     The  Company  has not begun a  comprehensive  analysis  of the  operational
problems  that  would be  reasonably  likely to result  from the  failure by the
Company  and certain  third  parties to  complete  efforts to achieve  Year 2000
compliance on a timely  basis.  A  contingency  plan has not been  developed for
dealing with the most reasonably  likely worst case scenario,  and such scenario
has not yet been clearly  identified.  The Company  currently  plans to complete
such analysis and contingency planning by June 30, 1999.


                                     - 22 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



     The Company  will engage an  independent  expert to evaluate  its Year 2000
identification, assessment, remediation, and testing efforts.


ITEM 7.   FINANCIAL STATEMENTS

     The  following  Consolidated  Financial  Statements  of the Company and its
subsidiaries are attached hereto.
                                                                            Page
                                                                            ----
          Report of Independent Auditors.....................................F-2
          Consolidated Balance Sheets as of December 31, 1998
               and 1997......................................................F-3
          Consolidated Statements of Operations for the years
               ended December 31, 1998 and 1997..............................F-4
          Consolidated  Statements of  Stockholders'  Equity
               for the years ended December 31, 1998 and 1997................F-5
          Consolidated Statements of Cash Flows for the years
               ended December 31, 1998 and 1997 .............................F-7
          Notes to Consolidated Financial Statements ........................F-8


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

          None.




                                     - 23 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 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>
Officer and/or Director   Positions                                             Age
<S>                       <C>                                                   <C>
-----------------------   ---------------------------------------------------   ---
Jay Allen Chaffee         Chairman of the Board, Director, Officer               47
A. Daniel Sharplin        President, Chief Executive Officer, Director           36
David G. Osowski          Vice President, Secretary, Chief Financial Officer     46
H. Baxter Nairon          Vice President of Strategy and Business
                          Development                                            39
Charles G. McGettigan     Director                                               54
Michael S. Taylor         Director                                               57
Myron A. Wick, III        Director                                               55
Daniel J. Kubala          Vice President of Marketing                            35
Allen Porter              Vice President of Sales                                41
Lawrence K. Landers       Director                                               49
</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 a director and the  Company's  President,  and
Chief Executive Officer 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 was 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, age 39, was named Vice President of Strategy and Business
Development  of the  Company  in  December  1997.  Prior  to that  time,  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,  age 46, 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.  ("McGettigan
Wick"),  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 time, Mr. McGettigan was a Senior Vice President of
Dillon,  Read & Co.  Inc.  He  currently  serves on the boards of  directors  of
Cuisine Solutions,  Inc.,  Modtech,  Inc, Onsite Energy,  Inc., PMR Corporation,

                                     - 24 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



Sonex  Research,  Inc.,  and  Wray-Tech  Instruments,  Inc. Mr.  McGettigan is a
graduate  of  Georgetown  University,  and also  received a Masters of  Business
Administration  in  Finance  from  the  Wharton  School  at  the  University  of
Pennsylvania.

     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 at  Josephthal  Lyons & Ross,  Inc.
("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 a Managing  Director of McGettigan  Wick. Since
May 1991,  Mr.  Wick has been a general  partner  of PIM,  which is the  general
partner  of  Proactive.  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 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.

     Daniel J. Kubala, age 35, joined the Company as Vice President of Marketing
in August 1996. Before joining the company, from 1993 to 1996, Mr. Kubala served
as Technology Marketing Manager for the IC2 Institute,  assisting start-up firms
in licensing and marketing  NASA and CIA  technologies  for private  sector use.
Prior to that, Mr. Kubala was Product Manager for Quaker Oats Company's Gatorade
sports drink,  where he was responsible for pricing strategy,  forecasting,  new
flavors, and packaging.  Mr. Kubala holds a Bachelor of Arts in Mathematics from
the  University  of Dallas and a Masters  of  Business  Administration  from the
University of Texas.

     Allen Porter,  age 41, was named Vice  President of Sales in August,  1998.
From May,  1998 to August 1998,  Mr.  Porter was employed by the Company as Vice
President, Total Compliance.  Prior to joining the Company, from May 1985 to May
1998, Mr. Porter served in various  management  positions  including Director of
Sales and Vice President of Marketing and, most recently, as the Vice President,
Encompass Division at Arizona Instrument, Inc. Mr. Porter received a Bachelor of
Science from Marquette University.

     Mr. Landers has been a director since June 1998.  Since  September 1998, he
has been Vice President of Marketing for Veeder-Root Company ("Veeder-Root"),  a
subsidiary  of  Danaher  Corporation  ("Danaher"),  and  from  December  1996 to
September  1998 served as the General  Manager of  Simplicity  Data Services for
Veeder-Root.  Prior to that time,  Mr.  Landers was employed  with United Parcel
Service  as the  Vice  President,  Marketing  of  UPS  Worldwide  Logistics  , a
subsidiary  of UPS  from  June  1995  to  December  1996,  and as  International
Marketing  Manager for UPS from March 1994 to June 1995. Mr. Landers  received a
Bachelor  of  Science  from the  University  of Alabama in 1973 and a Masters in
Business Administration from Duke University in 1984.

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

                                     - 25 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



Company and its subsidiaries during 1995, 1996 and 1997.
<TABLE>
<CAPTION>


                                                                   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         1998   $ 115,500 (1)   $ 200,000  (1)         --               --
Chairman of the Board     1997   $  90,000 (1)   $ 200,000  (1)    800,016   (2)         --
of Directors              1996   $  90,000 (1)   $ 150,000  (1)         --               --

A. Daniel Sharplin        1998   $ 225,000 (3)   $ 370,000  (3)          --        $    500 (5)
President and Chief       1997   $ 150,000 (3)   $ 100,000  (3)   1,200,024  (4)         --
Executive Officer         1996   $ 154,526 (3)   $  75,000  (3)          --        $  4,526 (6)

H. Baxter Nairon          1998   $ 138,000       $  93,762  (7)          --        $    500 (5)
Vice President of         1997   $ 138,000       $  58,000  (7)          --              --
Strategy and Business     1996   $  95,537       $  45,000  (7)     384,000  (8)         --
Development

David G. Osowski          1998   $ 135,000       $  93,762  (9)          --        $    500 (5)
Vice President,           1997   $ 135,000       $  47,625  (9)     250,000 (10)         --
Secretary and Chief       1996         N/A             N/A              N/A              --
Financial Officer

Daniel J. Kubala          1998   $  90,000       $  93,762 (11)          --        $    500 (5)
Vice President of         1997   $  80,000       $  38,500 (11)          --              --
Marketing                 1996   $  27,692       $  10,111 (11)     201,000 (12)         --

Allen Porter              1998   $  57,692       $  50,881 (13)     100,000 (14)   $    500 (5)
Vice President of Sales   1997         N/A             N/A              N/A
                          1996         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 1998.


(1)       In  July  1997,  the  Company  entered  into an  Executive  Consulting
          Agreement with Bunker Hill, of which Mr.  Chaffee is a principal.  See
          "Certain  Transactions."  In  1993,  the  Company  awarded  a bonus of
          $19,969 to Mr.  Chaffee,  which 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,  which was
          paid in 1998. In 1998, the Compensation  Committee awarded Mr. Chaffee
          a bonus for 1998 of $200,000, which will be paid in 1999.

(2)       In 1996, certain previously granted options were repriced. See "Fiscal
          Year End Options  Values." On July 1, 1997,  pursuant to the Executive
          Consulting Agreement,  Mr. Chaffee was awarded cash stock appreciation
          rights  ("SARs") for an aggregate of 800,016 shares of Common Stock at
          $0.2813 per share.  On July 2, 1997,  the Company  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.

                                     - 26 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


(3)       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's  1996  bonus  award of $75,000  was paid in 1997.  Mr.
          Sharplin's  1997 bonus award of $100,000 was paid in 1998. In 1998 the
          Compensation  Committee  awarded  Mr  Sharplin  a  bonus  for  1998 of
          $370,000, which was paid in 1999.

(4)       In 1996, certain previously granted options were repriced. See "Fiscal
          Year End Options Values." On July 1, 1997,  pursuant to the Employment
          Agreement, Mr. Sharplin was awarded 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.

(5)      Consists of the Company's 1998 contribution to the 401K plan.

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

(7)       In 1996,  the  Compensation  Committee  awarded Mr. Nairon a bonus for
          1996 of $35,000,  which was paid in 1997.  Mr.  Nairon was also paid a
          $10,000  bonus as an  inducement to join the Company in 1996. In 1997,
          the  Compensation  Committee  awarded  Mr.  Nairon a bonus for  1997of
          $58,000,  of which  $16,000  was paid in 1997 and  $42,000 was paid in
          1998. In 1998, the Compensation  Committee  awarded Mr. Nairon a bonus
          for 1998 of $93,762, which was paid in 1999.

(8)       In March 1996,  Mr.  Nairon was granted an option to purchase  384,000
          shares of Common Stock 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.

(9)       In 1997, the  Compensation  Committee  awarded Mr. Osowski a bonus for
          1997 of  $47,625,  of which  $28,125  was paid in 1997 and $19,500 was
          paid in 1998. In 1998, the Compensation  Committee awarded Mr. Osowski
          a bonus for 1998 of $93,762, which was paid in 1999.

(10)      In  December  1996,  Mr.  Osowski  was  granted an option to  purchase
          250,000  shares of Common Stock at  $0.40625,  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.

(11)      In 1996,  the  Compensation  Committee  awarded Mr. Kubala a bonus for
          1996 of  $10,111  which was paid in 1997.  In 1997,  the  Compensation
          Committee  awarded Mr.  Kubala a bonus for 1997 of  $38,500,  of which
          $8,500 was paid in 1997 and  $30,000  was paid in 1998.  In 1998,  the
          Compensation Committee awarded Mr. Kubala a bonus for 1998 of $93,762,
          which was paid in 1999.

(12)      In August 1996,  Mr. Kubala was granted an option to purchase  201,000
          shares of Common Stock at $0.15625,  the market price of the Company's
          Common Stock on Mr. Kubala's  employment  acceptance  date. The option
          vests ratably one-third each year starting on August 1, 1996.

(13)      Mr. Porter joined the Company in May 1998. In 1998,  the  Compensation
          Committee  awarded  Mr.  Porter a bonus for 1998 of $46,881  which was
          paid in 1999.  Mr.  Porter  also  was paid a $4,000  bonus in 1998 for
          completing certain goals as outlined in his initial employment offer.

(14)      In April 1998,  Mr.  Porter was granted an option to purchase  100,000
          shares of Common Stock at $0.78125,  the market price of the Company's
          Common Stock on Mr. Porter's  employment  acceptance  date. The option
          vests ratably one-third each year starting on April 15, 1998.


                                     - 27 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


     Option Grants in Last Fiscal Year

     The  following  table sets  forth  options  granted to the Named  Executive
Officers during the year ending December 31, 1998.
<TABLE>
<CAPTION>

                     Number of      Percnet of                                  Potential Realizable
                      Shares       Total Options                                  Value at Assumed
                     Underlying     Granted to     Exercise                     Annual Rates of Stock
                      Options      Employees in   Price Per                     Price Appreciation for
      Name            Granted       Fiscal Year     Share     Expiration Date       Option Term
<S>                  <C>          <C>             <C>         <C>               <C>         <C>
------------------   ----------   -------------   ---------   ---------------   ----------------------
                                                                                    5%         10%
Jay Allen Chaffee       --             --            --             --              --           --
A. Daniel Sharplin      --             --            --             --              --           --
H. Baxter Nairon        --             --            --             --              --           --
David G. Osowski        --             --            --             --              --           --
Daniel Kubala           --             --            --             --              --           --
Allen Porter          100,000         13.4%        $.78125     April 15, 2008   $ 49,132    $ 124,511
</TABLE>


     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 1998.


                     Numbers of Shares Underlying     Value of Unexercised
                        Unexercised Options           in-the-Money-Options
                        at December 31, 1998          at December 31, 1998
                     ---------------------------   ---------------------------
     Name            Exercisable   Unexercisable   Exercisable   Unexercisable
------------------   -----------   -------------   -----------   -------------
Jay Allen Chaffee        342,864         457,152   $   203,576   $ 271,434  (1)
                         440,000              --   $   330,000          --  (2)
                          50,000              --   $    37,500          --  (2)

A. Daniel Sharplin       514,296         685,728   $   305,363   $ 407,151  (1)
                         640,000              --   $   480,000          --  (2)
                          50,000              --   $    37,500          --  (2)

H. Baxter Nairon         256,000         128,000   $   176,000   $  88,000  (3)

David G. Osowski         166,667          83,333   $    78,125   $  39,063  (4)

Daniel J. Kubala         134,000          67,000   $    96,313   $  48,156  (5)

Allen Porter                  --         100,000   $        --   $   9,375  (6)


(1)       Represents (i) the difference ($0.59375) 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, 1998  ($0.875)  times (ii) the
          number of shares subject to the options.

(2)       Represents (i) the difference ($.75) 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, 1998  ($0.875)  times (ii) the number of
          shares subject to the options.

                                     - 28 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


(3)       Represents (i) the difference  ($0.6875) 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, 1998 ($0.875) times (ii) the
          number of shares subject to the options.

(4)       Represents (i) the difference  ($.46875) between the exercise price of
          the  options  ($0.40625)  and the per share fair  market  value of the
          Company's  Common Stock on December 31, 1998  ($0.875)  times (ii) the
          number of shares subject to the options.

(5)       Represents (i) the difference  ($.71875) between the exercise price of
          the  options  ($0.15625)  and the per share fair  market  value of the
          Company's  Common Stock on December 31, 1998  ($0.875)  times (ii) the
          number of shares subject to the options.

(6)       Represents (i) the difference  ($.09375) between the exercise price of
          the  options  ($0.78125)  and the per share fair  market  value of the
          Company's  Common Stock on December 31, 1998  ($0.875)  times (ii) the
          number of shares subject to the options.

     There was no other  director  compensation  paid during 1998 or 1997 to the
non-management directors.


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)


                              Amount and nature of
Beneficial Owner                       Beneficial Ownership   Percentage
------------------------------------   --------------------   ----------

Proactive Partners, L.P.                    13,869,828  (2)     54.71%
50 Osgood Place, Penthouse
San Francisco, CA  94153

Lagunitas Partners, L.P.                    13,761,818  (3)     54.29%
50 Osgood Place, Penthouse
San Francisco, CA  94153

Danaher Corporation                          4,500,000  (4)     17.75%
1250 24th Street, N.W.
Washington, DC 20037

Myron A. Wick, III                          10,083,523  (5)     39.78%
c/o Proactive Partners
50 Osgood Place, Penthouse
San Francisco, CA  94153

Charles C. McGettigan                       10,108,523  (6)     39.88%
c/o Proactive Partners
50 Osgood Place, Penthouse
San Francisco, CA  94153

A. Daniel Sharplin                           1,744,588  (7)      6.88%

Jay Allen Chaffee                              900,014  (8)      3.55%

H. Baxter Nairon                               384,000  (9)      1.51%


                                     - 29 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


                              Amount and nature of
Beneficial Owner                       Beneficial Ownership   Percentage
------------------------------------   --------------------   ----------
Lawrence K. Landers                                  --            --

Michael S. Taylor                               57,333 (10)       *

David G. Osowski                               166,667 (11)       *

Daniel J. Kubala                               134,000 (12)       *

Allen Porter                                    33,333 (13)       *

All executive officers and directors        17,289,763 (14)     68.20%
---------------------------

*        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 options or
otherwise.  In calculating  the total number of shares of Common Stock deemed to
be outstanding for the purpose of reflecting each 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  10,065,513  outstanding  shares of Common Stock,  including 25,000
shares owned  directly by Mr.  McGettigan.  Also includes (i)  3,721,305  shares
beneficially owned by Lagunitas Partners, L.P. and referenced in note (3) below;
(iii) 40,000 shares  beneficially owned by Mr. McGettigan and referenced in note
(6) below; (iv) 40,000 shares  beneficially  owned by Mr. Wick and referenced in
note (5) below; and (v) 3,010 shares 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  issuable  upon the  exercise of warrants at a price of $0.15 per
share and (ii) 10,040,513 shares  beneficially owned by Proactive and referenced
in note (2) above.

(4) Consists of currently  exercisable  warrants to purchase 4,500,000 shares of
Common Stock at $.375 per share owned by DH Holdings Corp.

(5) Includes (i) 40,000  shares of Common  Stock  issuable  upon the exercise of
stock options  granted to Mr. Wick under the Company's 1989 Long-Term  Incentive
Plan (the  "Incentive  Plan");  (ii)  10,040,513  shares  beneficially  owned by
Proactive and referenced in note (2) above (Mr. Wick is a general partner of PIM
which is the general partners of Proactive); and (iii) 3,010 shares beneficially
owned by  McGettigan,  Wick & Co. (Mr. Wick is a general  partner of McGettigan,
Wick & Co.). Does not include 184,410 shares owned by the Company's  401(K) plan
of which Mr. Wick is a trustee.

(6) Includes 25,000 outstanding shares of common stock. Also includes (i) 40,000
shares of Common Stock  issuable upon the exercise of stock  options  granted to
Mr.  McGettigan  under the Incentive Plan; (ii) 10,040,513  shares  beneficially
owned by Proactive and referenced in note (2) above (Mr. McGettigan is a general
partner of PIM,  which is the  general  partner of  Proactive);  and (iii) 3,010
shares beneficially owned by McGettigan, Wick & Co. (Mr. McGettigan is a general
partner of McGettigan, Wick & Co.).

(7) Includes  513,932  outstanding  shares of Common  Stock.  Also  includes (i)
26,360  shares  reserved for issuance upon the exercise of warrants at prices of
$7.50 and (ii) 1,744,588  shares reserved for issuance to Mr. Sharplin under the
Incentive  Plan. Does not include (i) 685,728 shares subject to options that are
not yet exercisable or (ii) 176,659 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,  which is an affiliate of Mr.  Chaffee.  Also  includes
900,014 shares subject to exercisable options granted to Bunker Hill under the


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                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



     Incentive Plan. Does not include (i) 457,152 shares subject to options that
     are not yet  exercisable  or (ii)  176,659  shares  owned by the  Company's
     401(K) plan of which Mr. Chaffee is a trustee.

(9) Consists of 384,000 shares  issuable upon the exercise of options granted to
Mr. Nairon under the Incentive Plan.

(10) Includes (i) 57,333 shares issuable upon the exercise of options granted to
Mr. Taylor under the Incentive  Plan and (ii) 4,000 shares  outstanding  held by
Mr.  Taylor's  wife.  Mr. Taylor  disclaims  beneficial  ownership of his wife's
shares.  Does not  include  66,667  shares  subject to options  that are not yet
exercisable.

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

(12) Consists of 134,000 shares issuable upon the exercise of options granted to
Mr. Kubala under the Incentive  Plan but does not include  67,000 shares subject
to options that are not yet exercisable.

(13) Consists of 33,333 shares  issuable upon the exercise of options granted to
Mr. Porter under the Incentive  Plan but does not include  66,667 shares subject
to options that are not yet exercisable.

(14) In  calculating  the total  number of shares of Common  Stock  owned by all
executive officers and directors, shares that the owners do not own but could be
acquired within 60 days or more are not included.



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<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 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 1998,  the Company paid
$374,601  to Bunker  Hill for the  services  of Jay Allen  Chaffee  and  related
expenses  as  described  below.  Mr.  Chaffee is the  Chairman  of the Board and
President of 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 agreement 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
agreement  supercedes the 1991 service  contract  between the Company and Bunker
Hill.  In 1998,  Bunker  Hill,  on behalf of Mr.  Chaffee,  received  $90,000 in
consideration for Mr. Chaffee's management services as an officer of the Company
plus a bonus of $200,000  earned but not paid in fiscal year 1998.  In July 1998
the Company  also  retained  Bunker  Hill,  on behalf of Mr.  Chaffee to provide
management and support  services in connection with the Company's  environmental
risk management function for a monthly fee of $4,250. Accordingly,  Bunker Hill,
on behalf of Mr. Chaffee was paid a total of $25,500 for these services in 1998.
In  addition,  $59,101 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  (the
"Employment Agreement") with A. Daniel Sharplin, its President,  Chief Executive
Officer and a director,  pursuant to which Mr.  Sharplin  will continue to serve
the Company as President, Chief Executive Officer and director.  Pursuant to the
Employment Agreement, the Company paid Mr. Sharplin a base salary at the rate of
$225,000 in 1998,.  Pursuant to the Employment  Agreement,  the Company will pay
Mr.  Sharplin 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.  On February 23, 1999,  the  Compensation
Committee of the Board of  Directors  voted to increase  Mr.  Sharplin's  annual
salary to $290,000  effective  January 1, 1999.  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.

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<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB



Refinancing

     In December  1997,  the Company  entered into several  agreements  with two
subsidiaries  of  Danaher  Corporation,  which  encompassed  both  a  commercial
agreement with Veeder-Root  Company and an $8 million investment by DH Holdings,
Inc.  Veeder-Root is a manufacturer of environmental  monitoring equipment and a
provider of supporting  services.  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 with DH Holdings Corp.,
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 Preferred  Stock that 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 DH
Holdings  Corp.  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  ("BOCP") and
repurchased all of the Company's 13,022,920 outstanding warrants which were held
by BOCP. Mr. Landers is a  Vice-President  of Veeder- Root and a director of the
Company.

     Subsequent to December 31, 1998, on February 8, 1999,  the Company  invoked
the Dispute  Resolution  provision of the  Distribution,  Services and Marketing
Agreement (DSM Agreement).  In response to the Company's notice,  Veeder- Root's
counsel advised the Company's  counsel that Veeder-Root also invoked the Dispute
Resolution  provisions  of the DSM  Agreement.  At this time,  the parties  have
elected to  continue  informal  negotiations  rather  than  initiating  a formal
arbitration  process.  We believe that the result of these negotiations and or a
formal  arbitration  proceeding  with  Veeder-Root  will not have a  significant
adverse effect on the balances of the Note Payable, Preferred Stock and Warrants
and the related Accounts Receivable from Veeder-Root at December 31, 1998.

Additionally,  we  believe  any  potential  claims DH  Holdings,  Inc.  may have
regarding the Purchase  Agreement will not have a significant  adverse effect on
the balance sheet at December  31,1998,  or results of  operations  for the year
ended December 31, 1998.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)   The following  exhibits are filed herewith or incorporated  herein by
           reference:

           (1)  1998 Financial Statements, Table of Contents.................F-1

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

                Consolidated Balance Sheets as of December 31, 1998
                    and 1997.................................................F-3

                Consolidated Statements of Operations for the years ended
                    December 31, 1998 and 1997...............................F-4

                Consolidated Statements of Stockholders' Equity for the years
                    ended December 31, 1998 and 1997.........................F-5

                Consolidated Statements of Cash Flows for the years ended
                    December 31, 1998 and 1997...............................F-7

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


                                     - 33 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


           (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.)

           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.)


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<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


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



                                     - 35 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 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.)

           10.25    Loan  Agreement,   dated  October  25,  1996,   between  NDE
                    Environmental   Corporation,   Tanknology/NDE   Corporation,
                    USTMAN  Industries,  Inc., ProEco,  Inc.,  Tanknology Canada
                    (1988)  Inc.,  and Bank One  Texas,  N.A.  (Incorporated  by
                    reference  from Exhibit  10.1 of Form 8-K dated  October 25,
                    1996.)

           10.26    Revolving  Note dated October 25, 1996,  issued  pursuant to
                    the Loan Agreement.  (Incorporated by reference from Exhibit
                    10.1a of Form 8-K dated October 25, 1996.)

           10.27    Term Note dated October 25, 1996 issued pursuant to the Loan
                    Agreement.  (Incorporated by reference from Exhibit 10.1b of
                    Form 8-K dated October 25, 1996.)

           10.28    Note and Warrant Purchase Agreement, dated as of October 25,
                    1996, between NDE Environmental Corporation,  Tanknology/NDE
                    Corporation,  USTMAN  Industries,  Inc.,  ProEco,  Inc., and
                    Tanknology Canada (1988) Inc. and Banc One Capital Partners,
                    L.P.  (Incorporated  by reference  from Exhibit 10.2 of Form
                    8-K dated October 25, 1996.)

           10.29    Senior  Subordinated  Note  due  December  31,  2001,  dated
                    October  25,  1996  issued  pursuant to the Note and Warrant
                    Agreement.  (Incorporated by reference from Exhibit 10.2a of
                    Form 8-K dated October 25, 1996.)

           10.30    Warrant  Certificate  dated October 25, 1996 issued pursuant
                    to the Note and Warrant Purchase Agreement. (Incorporated by
                    reference  from Exhibit  10.2b of Form 8-K dated October 25,
                    1996.)



                                     - 36 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


           No.     Exhibit
           ------  -------------------------------------------------------------
           10.31    Security Agreement,  dated as of October 25, 1996, among NDE
                    Environmental   Corporation,   Tanknology/NDE   Corporation,
                    USTMAN Industries, Inc., ProEco, Inc., and Tanknology Canada
                    (1988),   Inc.,   and  Banc  One  Capital   Partners,   L.P.
                    (Incorporated  by  reference  from  Exhibit 10.3 of Form 8-K
                    dated October 25, 1996.)

           10.32    Security Agreement - Pledge of Subsidiary Stock, dated as of
                    October 25, 1996, between NDE Environmental  Corporation and
                    Banc One Capital Partners,  L.P.  (Incorporated by reference
                    from Exhibit 10.4 of Form 8-K dated October 25, 1996.)

           10.33    Put Option Agreement,  dated as of October 25, 1996, between
                    NDE Environmental  Corporation and Banc One Capital Partners
                    L.P.  (Incorporated  by reference  from Exhibit 10.5 of Form
                    8-K dated October 25, 1996.)

           10.34    Registration Rights Agreement, dated as of October 25, 1996,
                    between NDE  Environmental  Corporation and Banc One Capital
                    Partners,  L.P. (Incorporated by reference from Exhibit 10.6
                    of Form 8-K dated October 25, 1996.)

           10.35    Preemptive Rights  Agreement,  dated as of October 25, 1996,
                    between NDE  Environmental  Corporation and Banc One Capital
                    Partners,  L.P. (Incorporated by reference from Exhibit 10.7
                    of Form 8-K dated October 25, 1996.)

           10.36    Co-Sale  Agreement,  dated as of October 25, 1996, among NDE
                    Environmental   Corporation,   Proactive   Partners,   L.P.,
                    Lagunitas L.P., Jay Allen Chaffee,  A. Daniel Sharplin,  and
                    Banc One Capital Partners,  L.P.  (Incorporated by reference
                    from Exhibit 10.8 of Form 8-K dated October 25, 1996.)

           10.37    Standby  Commitment,  made as of  October  25,  1996,  among
                    Proactive Partners L.P., NDE Environmental Corporation, Banc
                    Capital   Partners,   L.P.,   and  Bank  One   Texas,   N.A.
                    (Incorporated  by  reference  from  Exhibit 10.9 of Form 8-K
                    dated October 25, 1996.)

           10.38    Shareholder  Agreement,  dated as of October 25, 1996, among
                    Proactive Partners, L.P., Lagunitas L.P., Jay Allen Chaffee,
                    A.  Daniel  Sharplin,  and Banc One Capital  Partners,  L.P.
                    (Incorporated  by reference  from Exhibit  10.10 of Form 8-K
                    dated October 25, 1996.)

           10.39    Pledge and  Security  Agreement,  dated  October  25,  1996,
                    between  NDE  Environmental  Corporation  and Bank One Texas
                    N.A.  (Incorporated  by reference from Exhibit 10.11 of Form
                    8-K dated October 25, 1996.)

           10.40    Pledge and  Security  Agreement,  dated  October  25,  1996,
                    between  Tanknology/NDE  Corporation and Bank One Texas N.A.
                    (Incorporated  by reference  from Exhibit  10.12 of Form 8-K
                    dated October 25, 1996.)

           10.41    Pledge and  Security  Agreement,  dated  October  25,  1996,
                    between ProEco, Inc. and Bank One Texas, N.A.  (Incorporated
                    by reference  from Exhibit  10.13 of Form 8-K dated  October
                    25, 1996.)

           10.42    Pledge and  Security  Agreement,  dated  October  25,  1996,
                    between USTMAN  Industries,  Inc., and Bank One Texas,  N.A.
                    (Incorporated  by reference  from Exhibit 10.14 of Form 8- K
                    dated October 25, 1996.)



                                     - 37 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


           No.     Exhibit
           ------  -------------------------------------------------------------
           10.43    Amendment  No. 1 to Loan  Agreement  (Exhibit  10.25)  dated
                    April  10,  1997,   among  NDE   Environmental   Corporation
                    Tanknology/NDE Corporation, USTMAN Industries, Inc., ProEco,
                    Inc.  Tanknology  Canada (1988),  Inc. and Bank One,  Texas,
                    N.A.

           10.44    Amendment  No. 1 to Note and  Warrant  Purchase  Agreement (
                    Exhibit 10.28) dated April 10, 1997,  among NDE Corporation,
                    Tanknology/NDE Corporation, USTMAN Industries, Inc., ProEco,
                    Inc.  Tanknology  Canada  (1988),  Inc. and Bank One Capital
                    Partners, L.P.

           10.45    Note, Preferred 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,  Preferred  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
                    Preferred  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,  Preferred
                    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,
                    Preferred  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,  Preferred Stock and Warrant  Purchase
                    Agreement (Exhibit 10.45)

           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, Preferred 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, Preferred Stock and
                    Warrant Purchase Agreement (Exhibit 10.45)



                                     - 38 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


           No.     Exhibit
           ------  -------------------------------------------------------------
           10.54    Amendment  No. 1 to the Note,  Preferred  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 10.58)
                    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  10.59)  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.

           10.64    Amendment No. 4 dated as of June 26, 1998, to Loan Agreement
                    by and between the Registrant,  Tanknology-NDE  Construction
                    Services,  Inc., ProEco, Inc., 2368692 Canada, Inc. and Bank
                    One, Texas, N.A. dated as of October 25, 1996

           10.65    Amendment  No. 1 [sic]  dated as of July  10,  1998,  to the
                    Note,  Preferred Stock and Warrant Purchase  Agreement among
                    the Registrant,  ProEco, Inc.,  Tanknology/NDE  Corporation,
                    2368692 Canada, Inc., Tanknology-NDE  Construction Services,
                    Inc. and DH Holdings Corp. dated as of December 23, 1997

           10.66    Amendment  No. 5 dated as of November  5, 1998,  to the Loan
                    Agreement  by and  between  the  Registrant,  Tanknology-NDE
                    Construction  Services,  Inc., ProEco, Inc., 2368692 Canada,
                    Inc. and Bank One, Texas, N.A. dated as of October 25, 1996



                                     - 39 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 ANNUAL REPORT ON FORM 10-KSB


           No.     Exhibit
           ------  -------------------------------------------------------------
           10.67    Third  Amendment  dated as of December 7, 1998, to the Stock
                    Purchase  Agreement  dated  as of  October  27,  1996 by and
                    between the Registrant and Tanknology Environmental, Inc.

           10.68    Amendment No. 2 to the Employment  Agreement  effective July
                    2, 1997 by and between the Registrant and A. Daniel Sharplin

           21.01    Subsidiaries of the Registrant

           23.2     Consent of Ernst & Young, LLP

           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



                                     - 40 -

<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 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.

     Outbound Services,  Inc., a California  corporation,  incorporated on March
22, 1993, is a wholly owned subsidiary of Tanknology-NDE International, Inc. and
does business under the name of Outbound Services, Inc.




<PAGE>


                       TANKNOLOGY-NDE INTERNATIONAL, INC.
                        1998 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 29, 1999     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 29   , 1999
 --------------------------------------------             ----------
 Jay Allen Chaffee
 Chairman of the Board of Directors

    /s/ DAVID G. OSOWSKI                           Dated:  March 29 , 1999
 --------------------------------------------             ----------
 David G. Osowski
 Vice President and
 Chief Financial Officer
 (PRINCIPAL FINANCIAL and ACCOUNTING OFFICER)

     /s/ CHARLES C. McGETTIGAN                     Dated:  March 29 , 1999
 --------------------------------------------             ----------
 Charles C. McGettigan
 Director

     /s/ MICHAEL S. TAYLOR                         Dated:  March 29 , 1999
 --------------------------------------------             ----------
 Michael S. Taylor
 Director

     /s/ MYRON A. WICK, III                        Dated:  March 29 , 1999
 --------------------------------------------             ----------
 Myron A. Wick, III
 Director

     /s/ LAWRENCE K. LANDERS                       Dated:  March 30 , 1999
 --------------------------------------------             ----------
 Lawrence K. Landers
 Director

<PAGE>


                        Consolidated Financial Statements

                     Years ended December 31, 1998 and 1997




                                    Contents


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

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

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

Consolidated Statements of Stockholders' Equity (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, 1998 and 1997, and the
related consolidated  statements of operations,  stockholders' equity (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, 1998 and 1997,  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 19, 1999



                                       F-2

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                   December 31
                                                                               1998           1997
                                                                           ------------    ------------
Assets
<S>                                                                        <C>             <C>
Current assets:
     Cash ..............................................................   $    416,189    $    193,627
     Trade accounts receivable, less allowance for doubtful
           accounts of $1,798,044 in 1998 and $1,066,331 in 1997 .......     18,071,273       9,856,826
     Inventories .......................................................      1,218,271         482,107
     Prepaid expenses and other current assets .........................        521,909       1,149,950
                                                                           ------------    ------------
                                                                             20,227,642      11,682,510

Restricted cash ........................................................      3,000,000       3,000,000

Equipment and improvements, net ........................................      8,109,097       4,812,500

Goodwill, net of accumulated amortization of $125,442 in 1998 ..........      2,401,115            --

Patents, licenses and other intangible assets, net of accumulated
     amortization of $1,527,761 in 1998 and $1,169,104 in 1997 .........      1,070,446       1,604,194

Deferred financing costs, net ..........................................        674,531         649,614

                                                                           ------------    ------------
Total assets ...........................................................   $ 35,482,831    $ 21,748,818
                                                                           ============    ============

Liabilities, Redeemable Convertible Preferred Stock  and
     Stockholders' Equity ( Deficit)
Current liabilities:
     Accounts payable ..................................................   $  4,874,180    $  2,675,345
     Accrued liabilities ...............................................      1,649,020       2,249,208
     Accrued payroll and payroll taxes .................................      4,363,312       1,959,273
     Current portion of long-term debt and capital lease obligations ...      2,314,991       4,055,072
                                                                           ------------    ------------
                                                                             13,201,503      10,938,898

Long-term debt and capital lease obligations ...........................     18,271,743      10,589,252

Deferred license revenue ...............................................        207,135         525,000

Redeemable Convertible Preferred Stock, at redemption value ............      1,500,000       1,500,000

Stockholders' equity ( deficit):
Series AAA Convertible Preferred Stock, $.0001 par value; authorized 400 shares;
     issued and outstanding no shares in 1998 and 1 share in
     1997; stated at liquidation value of $5,000 per share .............           --             5,000
Common Stock, $.0001 par value; authorized 50,000,000 shares; issued
     and outstanding 16,735,040 and 15,978,610 at December 31, 1998
     and 1997, respectively ............................................          1,674           1,598
Warrants ...............................................................        321,000         291,000
Additional paid-in capital .............................................     27,733,366      27,578,446
Accumulated deficit ....................................................    (25,755,500)    (29,659,297)
Cumulative foreign currency translation adjustment .....................          1,910         (21,079)
                                                                           ------------    ------------
                                                                              2,302,450      (1,804,332)
                                                                           ------------    ------------
Total Liabilities, Redeemable Convertible Preferred Stock  and
     Stockholders' Equity (Deficit) ....................................   $ 35,482,831    $ 21,748,818
                                                                           ============    ============
<FN>
See accompanying notes.
</FN>
</TABLE>

                                       F-3

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

                      Consolidated Statements of Operations



                             Year ended December 31,
                                    1998 1997
                                                   ------------    ------------

Revenues ..........................................$ 66,845,455    $ 38,683,146

Cost of services ..................................  48,285,993      29,246,121
                                                   ------------    ------------

                Gross margin ......................  18,559,462       9,437,025

Selling, general and administrative ...............  12,276,887       7,853,002

                                                   ------------    ------------

Operating income ..................................   6,282,575       1,584,023

Other income (expense):
     Interest expense .............................  (1,757,559)     (3,205,475)
              Interest income .....................     124,304          97,800
     Other income (expense), net ..................      64,210         (11,420)
                                                   ------------    ------------

Income (loss) before provision for income taxes and
extraordinary gain ................................   4,713,530      (1,535,072)

Provision for income taxes ........................    (809,733)        (39,060)

Extraordinary gain ................................        --           220,497
                                                   ------------    ------------

Net income (loss)  ................................$  3,903,797    $ (1,353,635)

Less:    Preferred stock dividends ................    (150,000)         (3,288)
                                                   ------------    ------------

Net loss available to common stock ................$  3,753,797    $ (1,356,923)
                                                   ============    ============

Basic income (loss) per share:
     Before extraordinary gain ....................$       0.23    $      (0.10)
     Extraordinary gain ...........................          -             0.01
                                                   ------------    ------------
Basic  income (loss) per share ....................$       0.23    $      (0.09)
                                                   ============    ============

Diluted income (loss) per share:
     Before extraordinary gain ....................$       0.16    $      (0.10)
     Extraordinary gain ...........................          -             0.01
                                                   ------------    ------------
Diluted income (loss) per share ...................$       0.16    $      (0.09)
                                                   ============    ============



See accompanying notes.


                                       F-4

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

            Consolidated Statements of Stockholders' Equity (Deficit)



<TABLE>
<CAPTION>

                         Series AAA
                    Convertible Preferred
                           Stock           Common Stock           Warrants
------------------- -------------------- ------------------ ------------------ Additional                   Other      Stockholders'
                        Shares             Shares            Shares             Paid-in     Accumulated  Comprehensive    Equity
                     Outstanding  Amount Outstanding Amount Issuable   Amount   Capital       Deficit       Income       (Deficit)
-------------------- --------- --------- ----------- ------ --------- -------- ----------- ------------- ------------- -------------
<S>                 <C>        <C>       <C>         <C>    <C>       <C>      <C>         <C>           <C>           <C>
Balance at
December 31, 1996         1    $   5,000  15,978,610 $1,598       -        -   $27,578,446 $(28,302,374) $    (17,125)     (734,455)

Issuance of Warrants      -          -           -      -   4,850,000 $291,000         -            -             -    $    291,000

Dividend on
Redeemable Preferred
Stock                     -          -           -      -                                        (3,288)          -          (3,288)

Foreign currency
translation               -          -           -      -                              -            -          (3,954)       (3,954)

Net loss                  -          -           -      -                              -     (1,353,635)          -      (1,353,635)

Comprehensive  (loss)                                                                                                    (1,357,589)

Balance at
December 31, 1997         1    $   5,000  15,978,610 $1,598 4,850,000 $291,000 $27,578,446 $(29,659,297) $    (21,079) $ (1,804,332)
-------------------- --------- --------- ----------- ------ --------- -------- ----------- ------------- ------------- -------------
</TABLE>



                                       F-5

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries


      Consolidated Statements of Stockholders' Equity (Deficit) (continued)


<TABLE>
<CAPTION>

                         Series AAA
                    Convertible Preferred
                           Stock           Common Stock           Warrants
------------------- -------------------- ------------------ ------------------ Additional                   Other      Stockholders'
                        Shares             Shares            Shares             Paid-in     Accumulated  Comprehensive    Equity
                     Outstanding  Amount Outstanding Amount Issuable   Amount   Capital       Deficit       Income       (Deficit)
-------------------- --------- --------- ----------- ------ --------- -------- ----------- ------------- ------------- -------------
<S>                 <C>        <C>       <C>         <C>    <C>       <C>      <C>         <C>           <C>           <C>
Balance at December
31, 1997                    1  $   5,000  15,978,610 $1,598 4,850,000 $291,000 $27,578,446 $(29,659,297) $    (21,079) $ (1,804,332)
-------------------- --------- --------- ----------- ------ --------- -------- ----------- ------------- ------------- -------------
Issuance of Warrants                                          500,000   30,000                                               30,000
-------------------- --------- --------- ----------- ------ --------- -------- ----------- ------------- ------------- -------------
Dividend on
Redeemable Preferred
Stock                                                                             (150,000)                                (150,000)

Exercise of stock
options                                      175,556     18                         21,924                                   21,942

Exercise of warrants                         330,874     33                         87,708                                   87,741

Issuance of common
stock in connection
with the
acquisition of OSI                           250,000     25                        195,288                                  195,313

Repurchase of Series
AAA Convertible
Preferred Stock            (1)    (5,000)                                                                                    (5,000)

Foreign currency
translation
adjustments                                                                                                    22,989        22,989

Net income                                                                                    3,903,797                   3,903,797

Total Comprehensive
income                                                                                                                    3,926,786

Balance at December
31, 1998                   -   $   -      16,735,040 $1,674 5,350,000 $321,000 $27,733,366 $(25,755,500) $       1,910 $   2,302,450
====================================================================================================================================
</TABLE>


                                       F-6

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                      Year ended December 31,
                                                                                       1998            1997
                                                                                    -----------    -----------
<S>                                                                                 <C>            <C>
Cash flows from operating activities:
     Net income (loss) ..........................................................   $ 3,903,797    $(1,353,635)
     Adjustments to reconcile net income (loss) to net cash
         provided by (used in) operating activities:
         Extraordinary gain .....................................................          --         (220,497)
         Write down of assets ...................................................          --           16,396
         Depreciation ...........................................................     2,871,948      3,376,237
         Amortization ...........................................................       426,811        534,878
         Amortization of discounts and financing costs ..........................       280,330      1,366,713
         Deferred license revenue earned ........................................      (161,371)       (91,667)
         Gain on sale of equipment ..............................................          --          (22,758)
         Other ..................................................................        22,989         (3,954)
Changes  in  operating   assets  and  liabilities   net  of   acquisitions   and
dispositions:
     Trade accounts receivable ..................................................    (8,339,130)    (4,121,276)
     Inventories ................................................................      (736,164)      (114,745)
     Prepaid expenses and other current assets ..................................       650,762       (140,130)
     Accounts payable ...........................................................     2,039,297      1,001,875
     Accrued liabilities ........................................................    (1,036,729)    (2,942,089)
     Accrued payroll and payroll taxes ..........................................     2,317,017        489,487
                                                                                    -----------    -----------
         Net cash provided by (used in) operating activities ....................     2,239,557     (2,225,165)

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 ......................................................      (765,000)             -
     Capital expenditures .......................................................    (5,787,757)    (2,841,530)
     Proceeds from sale of equipment ............................................             -         80,258
     Other ......................................................................       (29,909)        (4,095)
                                                                                    -----------    -----------
         Net cash provided by (used in) investing activities ....................    (6,582,666)     2,082,133

Net cash from financing activities:
     Proceeds from issuance of long-term debt and warrants ......................     2,335,280      6,500,000
     Proceeds from issuance of common stock .....................................       109,683              -
     Preferred stock dividends ..................................................      (150,000)             -
     Proceeds from issuance of redeemable convertible preferred stock ...........             -      1,500,000
     Deferred financing costs ...................................................      (245,570)      (299,363)
     Payments on long-term debt .................................................    (5,378,722)    (6,966,968)
     Repurchase of series AAA convertible preferred stock .......................        (5,000)             -
     Proceeds from issuance of debt .............................................     7,900,000      5,690,757
     Repayment of long-term debt and warrants with put option ...................             -     (8,500,000)
                                                                                    -----------    -----------
         Net cash provided by (used in) financing activities ....................     4,565,671     (2,075,574)

         Net change  in cash ....................................................       222,562     (2,218,606)
     Cash at beginning of year ..................................................       193,627      2,412,233
                                                                                    -----------    -----------
     Cash at end of year ........................................................   $   416,189    $   193,627
                                                                                    ===========    ===========
     Supplemental disclosure of cash flow information: Cash paid during the year
         for:

                  Interest ......................................................   $ 1,312,861    $ 1,840,031
                                                                                    ===========    ===========
                  Taxes .........................................................   $   287,513              -
                                                                                    ===========    ===========

         Capital lease financing ................................................   $   960,666    $   170,704
                                                                                    ===========    ===========

     Items related to business acquisition:
         Note payable issued in business acquisition ............................   $   750,000              -
         Common stock issued in business acquisition ............................       195,313              -
         Warrants issued in business acquisition ................................        30,000              -
         Liabilities  incurred in business acquisition ..........................       239,601              -
<FN>
See accompanying notes
</FN>
</TABLE>

                                       F-7

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 1998

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  the Field  Services and  Management  business  segments.
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.  All
significant  intercompany  accounts and  transactions  have been  eliminated  in
consolidation.  Certain  amounts in the  consolidated  financial  statements for
years  prior to  December  31,  1998 have been  reclassified  to  conform to the
current year presentation.

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.

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 management  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  accounted for approximately  23% and 21 %of the Company's  revenues in
1998 and 1997  respectively.  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.


                                       F-8

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

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


Tank testing equipment                 8 years
Furniture and fixtures                 5 years
Vehicles                           2 - 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.

Fair Values of Financial Instruments
     The carrying amount of cash and cash equivalents,  accounts  receivable and
accounts payable reported in the  consolidated  balance sheets  approximates the
fair  market  value.  The  carrying  amount  of the  Company's  long-  term debt
approximates their fair value since most of this debt bears interest at variable
rates.

Advertising Costs
     The  Company  accounts  for  advertising  costs in  accordance  with  AICPA
Statement of Position No. 93-7,  Reporting  on  Advertising  Costs.  The Company
expenses  advertising costs as incurred.  Advertising  expense was approximately
$333,000 and $238,000 in 1998 and 1997, respectively.

Income/(loss)  per common share
     Basic  income/(loss)  per share is computed by dividing  net  income/(loss)
available to common stockholders by the weighted average number of common shares
outstanding  during the period.  The  computation of diluted  income/(loss)  per
share is similar to basic  income/(loss) per share,  except that the denominator
is increased to include the number of  additional  common shares that would have
been outstanding if the potentially  dilutive common shares had been issued. The
effect of the  potentially  dilutive  common  shares  were not  included  in the
computation  of diluted  loss per share for the year  ended  December  31,  1997
because to do so would have been antidilutive.

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.

Comprehensive Income
     Other comprehensive income refers to revenues,  expenses,  gains and losses
that  under   generally   accepted   accounting   principles   are  included  in
comprehensive  income  but are  excluded  from net income as these  amounts  are
recorded directly as an adjustment to stockholders'  equity.  Tanknology's other
comprehensive  income is  primarily  comprised of foreign  currency  translation
adjustments.  The tax  benefit  or  expense,  as  well as any  reclassifications
related to the components of other comprehensive income were not significant.


                                       F-9

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

Segment Data
     During  1998,  the  Company  adopted  Statement  of  Financial   Accounting
Standards  Board's  Statement  of  Financial   Accounting   Standards  No.  131.
Disclosures  about  Segments of an Enterprise and Related  Information.  FAS 131
supersedes FAS 14,  Financial  Reporting for Segments of a Business  Enterprise,
replacing the "industry  segment" approach with the "management"  approach.  The
management approach designates the internal reporting that is used by management
for making  operating  decisions and assessing  performance as the source of the
Company's reportable  segments.  FAS 131 also requires disclosure about products
and services,  geographic areas and major customers. The adoption of FAS 131 did
not affect results of operations or the financial  position of  Tanknology-  NDE
but did affect the disclosure of segment information.

Year 2000 Compliance
     The  "Year  2000"  issue   results  from  an   industry-wide   practice  of
representing  years with only two digits instead of four.  Beginning in the year
2000,  date code fields will need to accept  four digit  entries to  distinguish
twenty- first century dates from  twentieth  century dates (2000 or 1900).  As a
result,  in less than one year,  computer  systems and/or  software used by many
companies  may need to be upgraded  to comply with such Year 2000  requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance.

Recently Issued Accounting Pronouncements
     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 133 ("FAS 133"),  Accounting for Derivative
Instruments  and  Hedging  Activities.  FAS 133 is  effective  for  transactions
entered  into after  January  1,  2000.  FAS 133  requires  that all  derivative
instruments be recorded on the balance sheet at fair value.  Changes in the fair
value of  derivatives  are  recorded  each  period in current  earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and the type of hedge transaction.  The ineffective  portion
of all hedges will be recognized in earnings.  Because of the company's  minimal
use of derivatives,  adoption of this statement will have not have a significant
impact on the Company's results of operations.

     In February 1998, the FASB issued  Statement  132,  Employers'  Disclosures
about Pensions and Other Postretirement  Benefits.  The Statement supersedes the
disclosure requirements in Statements No. 87 Employers' Accounting for Pensions,
No. 88,  Accounting for Settlements and Curtailments of Defined Benefits Pension
Plans and for  Termination  Benefits,  and No. 106,  Employers'  Accounting  for
Postretirement  Benefits Other than Pensions.  Statement 132 will have no affect
on the Company's results of operations, financial position or disclosures in the
future.

2. Business Acquisitions/Dispositions

Purchase of Outbound Services, Inc. (OSI)
     On August 7, 1998, the Company  purchased all of the  outstanding  stock of
OSI.  OSI engages in the  business  of  providing  site  service  management  to
primarily retail fuel and food service  providers.  It provides numerous service
capabilities  to  owners  and  operators  of  these  sites  such  as  seven-day,
twenty-four hour call center availability,  contractor  management and dispatch,
equipment warranty tracking and other services. The terms of the purchase called
for a cash  payment of  $765,000,  a $750,000,  10%  subordinated  note  payable
monthly in twenty four equal  installments,  the  issuance of 250,000  shares of
common stock which were valued at $195,313,  the issuance of warrants (valued at
$30,000) to purchase  500,000 shares common stock with an initial exercise price
of $2.00 (subject to downward adjustment based on the future performance of OSI)
and  the  assumption  of  certain  debt  and  liabilities  of the  Company.  The
acquisition  was  accounted  for as a purchase and  accordingly,  the results of
operations of OSI from the date of the acquisition are included in the Company's
statement of operations.  The purchase price is subject to adjustment if certain
assumed  liabilities  exceed the amounts  specified  in the  purchase  agreement
through a reduction in the principal amount of the subordinated note.

     In addition to the purchase price paid to  shareholders of OSI, the Company
incurred approximately $239,601 in fees and costs related to consummating and

                                      F-10

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

effecting the acquisition.

The purchase price was recorded as follows:


Working capital, other than cash               $      (288,251)
Property and equipment                                  75,071
Goodwill                                             2,469,269
Long-term liabilities                                 (276,175)
                                               -----------------
Purchase price, net of cash acquired           $     1,979,914
                                               =================

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.

     In December,  1998 the Company settled all of the remaining  purchase price
adjustments  with TEI  resulting in a payment to the Company of $230,000 and the
reduction  of  certain  indemnification  limitations  provided  for in the Stock
Purchase  Agreement on behalf of TEI from the previous  limit of  $1,250,000  to
$600,000 (see Note 12).

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
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.

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.

     As a condition of approval of the USTMAN sale  transaction by the Company's
senior  bank,  $3,000,000  of the cash  proceeds has 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.


                                      F-11

<PAGE>
               Tanknology-NDE International, Inc. and Subsidiaries

3. Equipment and Improvements

Equipment and improvements consist of the following:

                                                           At December 31,
                                                       1998            1997
                                                   ------------    ------------
Equipment ......................................   $ 17,823,586    $ 13,805,523
Furniture and fixtures .........................        191,679         154,046
Vehicles .......................................      3,319,341       1,677,664
Equipment replacement parts ....................        161,500         161,500
Leasehold improvements .........................         83,654          66,353
                                                     21,579,760      15,865,086
Less accumulated depreciation and amortization .    (13,470,663)    (11,052,586)
                                                   $  8,109,097    $  4,812,500
                                                   ============    ============

     The company  leases  vehicles and  miscellaneous  equipment  under  capital
leases. The gross amount of assets recorded under capital leases at December 31,
1998  and  1997  was  $3,342,096  and  $1,716,036,   respectively.  The  related
accumulated  amortization  was  $838,328  and  $445,765 at December 31, 1998 and
1997, respectively.

 4. Long-Term Debt

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

<TABLE>
<CAPTION>

                                                             At December 31,
                                                         1998             1997
                                                     ------------    ------------
<S>                                                  <C>             <C>         
Revolving line of credit .........................   $  6,650,000    $  1,792,667
Term loan ........................................      4,200,000       4,800,000
                                                     ------------    ------------
         Senior secured bank debt ................     10,850,000       6,592,667

Senior subordinated note .........................      6,500,000       6,500,000
Less: Discount ...................................       (210,322)       (270,000)
                                                     ------------    ------------
         Senior subordinated note ................      6,289,678       6,230,000

Capital lease obligations ........................        966,413         222,167

Other collateralized notes
                                                          845,646         613,119
Other non-collateralized notes ...................      1,634,997         986,371
                                                     ------------    ------------
         Other long-term debt ....................      2,480,643       1,599,490
                                                     ------------    ------------

Total long-term debt and capital lease obligations     20,586,734      14,644,324
Less: Current portion ............................     (2,314,991)     (4,055,072)
                                                     ------------    ------------
                                                     $ 18,271,743    $ 10,589,252
                                                     ============    ============

</TABLE>

                                      F-12

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

Senior Secured Bank Debt
     In 1998 the Company  amended its Senior  credit  facilities to increase the
revolving  credit line from  $5,000,000 to $9,000,000  and to extend the term of
this  facility by one year to December 2000 and to suspend  amortization  of the
5-year term note which  matures at December  31, 2001 for six months.  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% (8.50% at December 31, 1998). The commitment fee related to the
unused  portion of the $5 million line is 0.5%.  The term loan bears interest at
prime plus 1.0% (8.75% at December 31, 1998) with monthly principal  payments of
$100,000.

     At December 31, 1998, the Company had $6,650,000 of borrowings  outstanding
under the  revolving  credit  line and also had  $735,000  in  letters of credit
outstanding.  At December 31, 1998, there was approximately $1,615,000 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,  prohibits  payment of
dividends,  make additional business  acquisitions,  repurchase shares of common
stock,  make  capital  expenditures  and make  certain  management  changes.  At
December  31,  1998,  the  Company was in  compliance  with the  financial  debt
covenants related to the Financing Agreements as amended in December 1998.

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, 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 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 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

                                      F-13

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries



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,  1998,  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 and interest payments begin March 31, 2000.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, 1998,
the note had a carrying value, net of unamortized discount, of $6,289,678. Under
the terms of the Note agreement,  the Company is subject to certain restrictions
and covenants.

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.

Other Collateralized Notes
     Other collateralized notes include financing arrangements collateralized by
the  Company's  common  stock and a note  collateralized  by  certain  purchased
assets.  Original  maturities  on the notes are 7 years with an interest rate of
7.5% per year.

Other Non-Collateralized Notes
     Other  non-collateralized  notes consist of subordinated  notes, a note for
purchased  patent rights,  a note for gauge  financing and includes an 8.00% and
8.53%  insurance  note,  payable  in  twelve  monthly   installments.   The  10%
subordinated  note related to the OSI purchase (see note 2) is payable in twenty
four equal  installments.  Interest on the other  subordinated  notes is payable
quarterly  at 10%;  principal  is payable  annually in equal  amounts  over five
years.  The gauge financing note is payable in monthly  installments and matures
in five years with an  interest  rate of prime  plus 1% (8.75% at  December  31,
1998). 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.


                                      F-14

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries


     The aggregate annual maturities of long-term debt and financing  agreements
at December 31, 1998 are as follows:


1999                $          2,023,727
2000                          10,954,847
2001                           3,586,520
2002                           2,930,290
2003                             148,359
Thereafter                       186,899
                              19,830,642
Less: Discount                  (210,321)
                    --------------------
                    $         19,620,321
                    ====================

5. Leases

     The Company leases certain  facilities,  vehicles and equipment used in its
operations  which are leased under  noncancellable  capital and operating  lease
agreements  which expire on various dates through 2002.  Under the terms of most
of the  leases,  the  Company  is  required  to pay  all  taxes,  insurance  and
maintenance.  Future minimum annual lease payments under these lease  agreements
at December 31, 1998 were as follows:


                                                    Capital          Operating
                                                    Leases             Leases
                                              ------------------   -------------


1999 .........................................     $ 370,646      $  593,047
2000 .........................................       347,733         460,090
2001 .........................................       321,099         191,081
2002 .........................................       104,660           2,457
2003 .........................................          --               204
                                                   1,144,138
                                                   ----------
Less amounts related to interest .............      (177,725)
                                                   ----------
Present value of capital lease obligations ...       966,413
Less current portion .........................      (281,264)
                                                   ----------
Long-term capital lease obligations ..........     $ 685,149
                                                   ==========


     Rent expense under operating  leases totaled  $628,045 in 1998 and $420,426
in 1997.  As of December 31,  1998,  approximately  $13,338 of aggregate  future
minimum rentals are due to the Company under noncancellable subleases.

6. 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-15

<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.

7. 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.  During 1998,
the Company  repurchased  the one share which was  outstanding  at December  31,
1997.


Warrants
     As  of  December  31,  1998,   the  Company  had  the  following   warrants
outstanding:


 Number of Shares Issuable      Exercise Price          Expiration

            25,924                     $.150            April 1999
             3,675                     $.750            April 1999
            34,360                    $7.500            April 1999
             4,000                     $.150              May 1999
            12,000                    $7.500              May 1999
            58,334                   $11.400         December 1999
            31,667                   $21.000         December 1999
           500,000                    $2.000         December 2008
            32,219                   $25.800         December 1999
         4,850,000                     $.375         December 2002
--------------------------
         5,552,179
==========================

     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.

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 1998 and 1997,  respectively:  risk-free interest rates of 6.00%
and 6.15%; no dividend yield; volatility factors of the expected market price of
the Company's common stock of .86 and 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-16

<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:


                                         1998              1997
----------------------------------   ------------    -------------
Pro forma net income/(loss):
    Before extraordinary gain        $  3,673,752    $ (1,829,913)
    Extraordinary gain                      -             220,497
                                     ------------    -------------
    Net income/(loss)                $  3,673,752    $ (1,609,416)
                                     ============    =============
Pro forma income/(loss) per share:
Basic:
    Before extraordinary gain        $       0.22    $      (0.11)
    Extraordinary gain                       -               0.01
                                     ------------    -------------
    Net income/(loss)                                $      (0.10)
                                     ============    =============
Fully diluted:
    Before extraordinary gain        $      (0.15)   $      (0.11)
    Extraordinary gain                       -               0.01
                                     ------------    -------------
    Net income/(loss)                $      (0.15)   $      (0.10)
                                     ============    =============


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

                                ----------------------------   ----------------------------
                                          1998                            1997
                                ----------------------------   ----------------------------
                                                                              Weighted
                                            Weighted Average               Average Exercise
                                 Options     Exercise Price     Options        Price
                                ---------   ----------------   ---------   ----------------
<S>                             <C>         <C>                <C>         <C>         
Outstanding-beginning of year   5,131,929   $      0.23        2,734,556   $       0.18
Granted                           748,650          0.63        2,528,040           0.30
Exercised                        (175,556)         0.13            -               -
Canceled                          (78,333)         0.43         (130,667)          0.29
                                ---------   ----------------   ---------   ----------------

Outstanding-end of year         5,626,690   $      0.29        5,131,929   $       0.23
                                =========   ================   =========   ================

Exercisable at end of year      3,063,160   $      0.21        1,709,609   $       0.17
                                =========   ================   =========   ================

Weighted-average fair value of
options granted during the year $    0.63                      $    0.23
                                =========                      =========
</TABLE>

     Exercise prices for options outstanding as of December 31, 1998 ranged from
$0.05 to $1.125.  The  weighted-  average  remaining  contractual  life of those
options is 7.4 years.



                                      F-17

<PAGE>


Tanknology-NDE International, Inc. and Subsidiaries

     The following table summarizes  outstanding options at December 31, 1998 by
price range:

                 Outstanding                          Exercisable
---------------------------------------------   --------------------------
Weighted    Weighted-Average Weighted
Number of   Average          Remaining          Number of   Average
Options     Exercise Price   Contractual Life   Options     Exercise Price
---------   --------------   ----------------   ---------   --------------
45,000      $    0.05000           7 years         30,000   $    0.05000
55,000      $    0.09375         7.8 years         36,667   $    0.09375
1,327,400   $    0.12500         6.5 years      1,265,000   $    0.12500
201,000     $    0.15625         7.6 years        134,000   $    0.15625
492,000     $    0.18750         7.6 years        292,000   $    0.18750
155,000     $    0.25000         7.9 years        101,667   $    0.25000
2,000,040   $    0.28125           7 years        857,160   $    0.28125
65,000      $    0.31250         8.5 years         21,667   $    0.31250
310,000     $    0.40625           8 years        195,000   $    0.40625
310,000     $    0.43750         8.5 years        130,000   $    0.43750
325,000     $    0.50000         9.1 years          -       $    0.50000
90,000      $    0.62500         9.6 years          -       $    0.62500
100,000     $    0.78125         9.3 years          -       $    0.78125
40,000      $    0.81250         9.9 years          -       $    0.81250
100,000     $    1.00000         9.6 years          -       $    1.00000
11,250      $    1.12500         9.3 years          -       $    1.12500
---------   --------------   ----------------   ---------   --------------
5,626,690   $    0.28830         7.4 years      3,063,161   $    0.21200
=========   ==============   ================   =========   ==============

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 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 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
carrying 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


                                      F-18

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries


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 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.

     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 at December 31, 1998, under convertible
securities,  options,  warrants  and  other  arrangements  are  detailed  in the
following table:

                                                                   Common Shares
                                                           Reserved for Issuance
                                                           ---------------------
Warrants ..................................................        5,552,179
Stock Options .............................................        6,250,000
Series A Redeemable Convertible Preferred Stock ...........        3,000,000
Shares issuable upon conversion of promissory notes .......           14,835
  Common shares reserved for issuance .....................       14,817,014
                                                           =====================

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  1998  and  1997,  Bunker  Hill  earned  or  incurred
reimbursable expenses totaling $374,601 and $380,785,  respectively,  associated
with both the aforementioned  services contract and certain  acquisition-related
fees.  In July 1998 the Company  also  retained  Bunker  Hill,  on behalf of Mr.
Chaffee to provide  management  and  support  services  in  connection  with the
Company's  environmental  risk management  function for a monthly fee of $4,250.
Accordingly,  Bunker Hill, on behalf of Mr.  Chaffee was paid a total of $25,500
for these services in 1998.

     In December  1997,  the Company  entered into a series of agreements a 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

                                      F-19

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

$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. Landers
is a Vice President of Veeder-Root and a director of the Company.


9. Income Taxes

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


                               1998                   1997
                          --------------        ---------------
Current:
         Federal          $      601,000        $          -
         State                   205,000                 25,000
         Foreign                   4,000                 14,000
                          --------------        ---------------
    Total Current                810,000                 39,000


Deferred:
         Federal                   -                       -
         State                     -                       -
         Foreign                   -                       -
                          --------------        ---------------
    Total Deferred                 -                       -
                          --------------        ---------------
                          $      810,000        $        39,000
                          ==============        ===============

     The foreign taxes include withholdings on royalties from foreign countries.

     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, 1998 and 1997
are as follows:


                                                  1998           1997
                                               -----------   -----------
Deferred tax assets:
         Net operating loss carryforwards      $  431,000    $  989,000
         Allowance for doubtful accounts          592,000       412,000
         Nondeductible accruals                   395,000       698,000
                                               -----------   -----------
         Total deferred tax assets              1,418,000     2,099,000
         Valuation allowance                     (645,000)   (1,536,000)
         Net deferred tax assets                  773,000       563,000

Deferred tax liabilities:
         Book over tax basis of depreciable
          assets                                 (773,000)     (563,000)
Deferred taxes, net                            $        0    $        0
                                               ===========   ===========


     The  valuation  allowance  for  deferred  tax assets  decreased by $891,000
during 1998 as a result of the combined  effect of current year  utilization  of
net operating losses and current year activity which decreased the net amount of
deferred tax assets. At December 31, 1998, for income tax purposes,  the Company
had  net  operating  loss  carryforwards  of  $21,990,000.  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.

     Undistributed   earnings  of  the  Company's   foreign   subsidiaries  were
immaterial as of December 31, 1998.  Those earnings are  considered  permanently
reinvested,  and accordingly,  no provision for U.S. federal and/or state income
taxes has been provided thereon. Upon distribution of those earnings in the form
of dividends or otherwise,  the Company would be subject to U.S.  federal income
tax (subject to an adjustment for foreign tax credits), state income tax, as

                                      F-20

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries


applicable,  and additional  foreign taxes, as applicable.  Determination of the
amount of unrecognized U.S. federal income tax on those  permanently  reinvested
foreign earnings is not practicable because the amount is subject to the outcome
of future events.

     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:


                                                      1998             1997
                                                  -------------    -------------

Income taxes (benefit) at the statutory rate .....   $ 1,649,000    $  (460,000)
Change in valuation allowance ....................      (891,000)       156,000
Tax benefit for Alternative Minimum Tax Credit ...       (40,000)             -
Nondeductible interest ...........................             -        230,000
State taxes, net of Federal benefit ..............       133,000         25,000
Other, net .......................................       (41,000)        84,000
Tax rate differential - foreign jurisdictions ....             -          4,000
                                                     -----------    -----------
Income taxes .....................................   $   810,000    $    39,000
                                                     ===========    ===========

10.  Significant Customer

     Sales to one  customer  comprised  23% of total  revenue in 1998 and 21% in
1997.  Loss of this  customer  would  significantly  and  adversely  impact  the
Company's results of operations.

11. Commitments and Contingencies

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

     The Company carries professional and pollution liability insurance of up to
$2 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  deductibles  of  $1,000  to $5,000  per
occurrence.  Additionally  the  Company  carries  general,  auto  and  employers
liability insurance for its international operations.  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 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.



                                      F-21

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

Litigation
     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.  As part of the
resolution of the remaining  purchase price  adjustments  with TEI (see Note 2),
the Company  agreed to reduce  this  indemnification  limit to $600,000  for the
remaining period of the  indemnification  period.  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 was 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. This indemnification  expired in 1998. The Company believes that
the liability assumed and recorded in its accounts and the indemnification  from
the former owner of the UST Group are sufficient and that the indemnification is
enforceable and  collectible  such that the resolution of these matters will not
have a material adverse effect on the consolidated financial position or results
of operations of the Company.

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

12. Employee Benefit Plan

     The Company has a 401(k) defined  contribution plan covering all employees.
Employees are eligible to  participate in the plan after thirty days of service.
At December 31, 1998, approximately 460 employees are eligible to participate in
the plan. The Company matches  annually at its  discretion.  In 1998 the Company
amended  the plan  allowing  for the  Company  to make a flat $500 per  eligible
employee for 1998. In early 1999 the Company contributed  $191,500 to the 401(k)
plan for its 1998 matching  contribution.  There was no Company  contribution in
1997.


                                      F-22

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

13. Income (loss) per share calculations

     The following  table sets forth the calculation of basic and diluted income
(loss) per share:


                                                         For the Year Ended
                                                     ---------------------------
                                                            December 31,
                                                     ---------------------------
                                                        1998            1997
                                                     -----------    -----------
Numerator:
         Net income (loss) .......................   $ 3,903,797    $(1,353,635)
         Preferred stock dividends ...............      (150,000)        (3,288)
                                                     -----------    -----------
         Numerator for basic income (loss) per
         share -income available to common
         shareholders ............................     3,753,797     (1,356,923)

         Effect of dilutive securities - preferred
          stock dividends ........................       150,000          3,288
                                                     -----------    -----------
         Numerator for diluted income (loss)
         per  share ..............................   $ 3,903,797    $(1,353,635)
                                                     ===========    ===========

Denominator:
         Denominator for basic income (loss)
         per  share - weighted-average shares          16,329,073    15,978,610

         Effect of dilutive securities:
         Stock options                                 3,835,323             --
         Warrants                                      3,077,462             --
         Convertible preferred stock                   1,367,464             --
                                                     -----------    -----------
         Dilutive potential common shares              8,280,249              --

         Denominator for diluted earnings (loss)
         per share - adjusted weighted - average
         shares and assumed  conversions              24,609,322    15,978,610
                                                     ===========    ===========

         Basic income (loss) per share               $      0.23    $     0.09
                                                     ===========    ===========

         Diluted income (loss) per share             $      0.16    $    (0.09)
                                                     ===========    ===========


14. Segment Information

     The Company  manages its  business  segments  primarily  along two lines of
business, Field Services and Management Services. Field Services is comprised of
all services that are typically  performed out of the Company's regional offices
by field  technicians  operating  from the  Company's  fleet of  rolling  stock.
Management   Services  is   comprised   of   Compliance   Management   Services,
International, Remote Monitoring, Maintenance Management and Construction

                                      F-23

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries



Services.  These  services are  primarily  "back office"  functions  whereby the
Company  manages  customers'  information,  oversees  compliance or construction
projects  or  performs  technology  licensing.   These  services  are  primarily
performed out of the Company's corporate office in Texas (Compliance Management,
Remote Monitoring, International) or offices in California (Maintenance
Management) and Georgia (Construction Management).

     The accounting policies of the two segments are the same as those described
in the  "Summary  of  Significant  Accounting  Policies"  in Note 1. The Company
evaluates  the  performance  of its segments  based on segment  profit.  Segment
profit is defined as segment  revenues less those direct costs  associated  with
the  operations  and  does  not  include  depreciation,  amortization,  interest
expense, income taxes or certain corporate expenses that are managed outside the
reportable  segment  such as the costs of the  finance,  marketing,  information
technology,  legal,  executive management and national sales groups. The Company
does not  allocate  and manage its assets by segment.  Accordingly,  the Company
considers all assets to be Corporate  assets and as such no allocation of assets
has been made.

     Summary  information  by segment as of and for the years ended December 31,
1998 and 1997 is as follows:


                                                   1998                 1997
                                              --------------      --------------
Field Services:
   Segment revenues ....................         $53,922,391         $32,690,564
   Segment profit ......................          15,928,853           8,133,692
Management Services:
   Segment revenues ....................          13,434,438           6,164,820
   Segment profit ......................         $ 1,451,348         $   893,666

     Segment revenues in 1997 include $117,169 and $1,884,361, respectively, for
Canada  and  USTMAN,  both of which were sold in 1997.  Segment  profits in 1997
include $34,259 and $618,602, respectively, for Canada and USTMAN.

     A  reconciliation  of the Company's  segment revenues and segment profit to
the  corresponding  consolidated  amounts as of and for the years ended December
31, 1998 and 1997 is as follows:



                                                   1998                1997
                                               ------------        ------------
Segment revenues: ......................       $ 67,356,829        $ 38,855,384
Field Services revenues from
Management Services ....................           (511,374)           (172,238)
Consolidated revenues ..................       $ 66,845,455        $ 38,683,146


                                                   1998                1997
                                               ------------        ------------
Segment net profit: ....................       $ 17,380,201        $  9,027,358
Corporate expenses .....................         (7,798,867)         (3,532,220)
Depreciation and amortization ..........         (3,298,759)         (3,911,115)
Interest income ........................            124,304              97,800
Interest expense .......................         (1,757,559)         (3,205,475)
Other income/expense ...................             64,210             (11,420)
Income taxes ...........................           (809,733)            (39,060)
Extraordinary gain .....................               --               220,497
Net Income .............................       $  3,903,797        $ (1,353,635)


15. Subsequent events

                                      F-24

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries

Veeder-Root and DH Holdings, Inc.
     Subsequent to December 31, 1998, on February 8, 1999,  the Company  invoked
the Dispute  Resolution  provision to the  Distribution,  Services and Marketing
Agreement (DSM Agreement).  In response to the Company's  notice,  Veeder-Root's
counsel advised the Company's  counsel that Veeder-Root also invoked the Dispute
Resolution  provisions  of the DSM  Agreement.  At this time,  the parties  have
elected to  continue  informal  negotiations  rather  than  initiating  a formal
arbitration  process. The Company believes that the result of these negotiations
and  or a  formal  arbitration  proceeding  with  Veeder-Root  will  not  have a
significant adverse affect on the balances of the Note Payable,  Preferred Stock
and Warrants and the related  Accounts  Receivable from  Veeder-Root at December
31, 1998.

     Additionally,  the Company believes any potential claims DH Holdings,  Inc.
may have regarding the Purchase  Agreement  will not have a significant  adverse
effect on the balance sheet at December  31,1998,  or results of operations  for
the year ended December 31, 1998.


                                      F-25