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 Ac
          of 1934 for the fiscal year ended December 31, 1996

   [ ]    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

                          NDE ENVIRONMENTAL CORPORATION
                 (Name of small business issuer in its charter)



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

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

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,  1996  were
$15,939,126.

The aggregate market value of voting stock held by non-affiliates of the Issuer 
as of  April 2, 1997 was approximately $551,991.

As of  April 2, 1997, there were 15,978,610 outstanding shares of Common Stock, 
$.0001 par value,  of the Issuer.

                       DOCUMENTS INCORPORATED BY REFERENCE

Items 9-12  incorporate  information by reference  from the Issuer's  Definitive
Proxy  Statement for the 1997 Annual  Meeting of  Stockholders,  scheduled to be
held on or about June 24, 1997

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


<PAGE>


                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB




                                Table of Contents

<TABLE>
<CAPTION>

<S>      <C>                                                                                                <C>
                                                                                                            Page
PART I
         Item 1.  Description of Business....................................................................3
         Item 2.  Description of Property...................................................................11
         Item 3.  Legal Proceedings.........................................................................11
         Item 4.  Submission of Matters to a Vote of Security Holders.......................................11

PART II
         Item 5.  Market for Common Equity and Related Stockholder Matters..................................12
         Item 6.  Management's Discussion and Analysis or Plan of Operation.................................12
         Item 7.  Financial Statements .....................................................................17
         Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......17

PART III
         Item 9.  Directors, Executive Officers, Promoters and Control Persons..............................18
         Item 10. Executive Compensation....................................................................18
         Item 11. Security Ownership of Certain Beneficial Owners and Management............................18
         Item 12. Certain Relationships and Related Transactions............................................18
         Item 13. Exhibits and Reports on Form 8-k..........................................................18

SIGNATURES..................................................................................................23
</TABLE>






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                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


PART I

ITEM 1.       DESCRIPTION OF BUSINESS

General

     NDE Environmental  Corporation (the "Company" or "NDE") was incorporated in
Delaware  in 1988.  The  Company is a holding  company  that  conducts  business
through its  wholly-owned  subsidiaries.  At December  31, 1996,  the  Company's
subsidiaries  included  Tanknology/NDE  Corporation,   USTMAN  Industries,  Inc.
("USTMAN"),   Tanknology   Canada  (1988)  Inc.   ("Tanknology   Canada"),   NDE
Environmental Canada Corporation ("NDE Canada"), ProEco, Inc. ("ProEco"), EcoAm,
Inc., and ProEco, Ltd. The Company provides  environmental  compliance services,
installation of products,  and consulting to owners and operators of aboveground
and underground  storage tanks ("USTs") in the United States and internationally
through licensees. Customers purchase the Company's services primarily to remain
in compliance  with laws pertaining to  environmental  protection and to conduct
their  operations  in a manner  that limits  their  exposure  to  liability  for
incidental environmental damage.

Forward-Looking Statements

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

Mergers and Acquisitions

     The  Company's  business  has  developed  primarily  through  a  series  of
acquisitions  since March 1990.  The Company has  acquired  testing  technology,
licenses, testing vehicles and other assets.

Tanknology Acquisition

     On  October  25,  1996,  the  Company  acquired  substantially  all  of the
operating  assets and  liabilities  of the  Tanknology  UST Group of  Tanknology
Environmental,  Inc., (the "Acquisition"). The Tanknology UST Group's operations
were   principally   conducted   through   three   subsidiaries   of  Tanknology
Environmental,  Inc.: Tanknology Corporation  International ("TCI"),  Tanknology
Canada,  and USTMAN.  The Acquisition was accomplished by means of the Company's
purchase of all of the issued and outstanding capital stock of the subsidiaries.

     TCI was engaged in substantially the same business,  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 NDE. Immediately following the Acquisition,  the Company
caused its primary operating subsidiary, NDE Testing & Equipment, Inc., to merge
with  and  into  TCI,  and  the  surviving   corporation  changed  its  name  to
Tanknology/NDE Corporation.  The combined entity comprises the largest component
of the Company's  domestic  operations,  Field Services.  Management expects the
combination to result in a significant  increase in market share and elimination
of duplicate  administrative  costs.  However,  all  forward-looking  statements
contained  in  this   description  of  the  Company's   business  are  based  on
management's current knowledge of factors affecting NDE's business. NDE's actual
results may differ  materially if these  assumptions  prove  invalid.  A list of
certain  risks that may affect the Company's  operating  results is presented in
Item 6.



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                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


USTMAN

     USTMAN provides statistical inventory  reconciliation ("SIR") services. SIR
meets  the  post-1998   Environmental   Protection   Agency  ("EPA")   precision
requirement  for leak detection,  and management  believes that SIR is among the
least  costly  methods  of  complying  with  certain  regulations.  SIR may also
identify  other  conditions  of concern to tank  operators  such as pilferage or
flaws in record keeping.

Gilbarco Acquisition

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

Canada

     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,  NDE made the decision to phase out its operations in Canada
and entered into a licensing  agreement for western Canada. In 1996, the Company
secured a licensee for the eastern part of Canada, and prior to the Acquisition,
ceased the  operations of NDE Canada.  On February 20, 1997  (subsequent  to the
Company's  1996 fiscal  year end),  the Company  sold  substantially  all of the
operating assets of Tanknology Canada to the Company's eastern Canada licensee.

Lines of Business

     The Company  offers  comprehensive  services to its customer base of retail
and non-retail fuel distributors who own or operate USTs.

Field Services

     The principal  business of the Company's  Field Services  division  ("Field
Services") is 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:
     o to comply  with  regulations
     o to certify  the system  as tight  after work  has been  performed on the 
       system 
     o to investigate inventory  discrepancies 
     o to satisfy environmental liability concerns 
     o to investigate the site for evidence of pollution or a fire hazard

     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 
     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

     Field Services provides "Stage II Testing" to ensure functionality of Stage
II  equipment  and to  verify  that it does not  leak.  During  refueling,  this
equipment  collects vapor  emissions  displaced from the tank receiving the fuel
and  incinerates  or  returns  the vapor to the UST.  Limitations  on fuel vapor
emissions are designed to help reduce ozone layer  depletion.  NDE also provides

                                      - 4 -

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                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


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.

     Field  Services  offers  installation  of Automatic  Tank  Gauging  Systems
("ATGS").  No  significant  revenue was derived by the Company from this line of
business in 1996. ATGS consist of a probe permanently  installed in the tank and
wired to a monitor to provide  information  on  product  level and  temperature.
These systems  automatically  calculate  the changes in product  volume that can
indicate a leaking tank. ATGS meet regulatory  requirements as a replacement for
manual inventory control (see Government Regulations - Leak Detection).

     Field Services also offers cathodic  protection  installation and a variety
of other corrosion  protection services including video internal tank inspection
("Petroscope") , compliance testing, and maintenance.  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 noncorrodible material. Corrosion
of USTs is eliminated by proper  application  of cathodic  protection.  Cathodic
protection  prevents  corrosion  by making the entire  steel  surface act as the
cathode of an electrochemical cell,  transferring corrosion from the UST's metal
surface to an external anode.

     In addition to testing and  upgrading  UST  systems,  Field  Services  also
provides  overfill  protection,  UST  cleaning  and value  added site  services,
including  survey and compilation of site  information,  and minor  maintenance.
Field  Services 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.

     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 (e.g.,  hospitals and hotels). In 1996, Field Services
revenues were approximately $14 million,  or 87%, of the Company's  consolidated
revenues.

Compliance Management Services

     In  1995,  the  Company  established  its  Compliance  Management  Services
division ("CMS") to enable tank owners and operators to outsource the regulatory
compliance   function.   CMS  provides  turn-key   administrative,   managerial,
technical,  data  processing,  and regulatory  liaison  services.  CMS helps UST
owners  and  operators   coordinate   regulated   activities  and  manage  their
relationship with regulators.  On behalf of its customers, CMS can: 
     o administer  UST systems in  compliance  with  regulations  
     o acquire and maintain operating and regulatory permits
     o respond to, report on and manage environmental incidents
     o report in accordance with SARA III community right-to-know requirements
     o resolve environmental notices of violation
     o track hazardous waste transportation via manifest
     o manage the liabilities  associated with the operation of USTs and storage
       of hazardous material
     o assist  in UST  owner  or  operator  management  reporting  and  capital
       budgeting
     o coordinate construction, maintenance, testing and contractor oversight
     o coordinate  the  provision  of services  from the  customer's  other UST
       vendors

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

Statistical Inventory Reconciliation ("SIR")

     SIR is a computerized statistical model that analyzes common inventory data
with  statistical  formulas and procedures.  Tank operators  provide USTMAN with
daily inventory  information  including  beginning and ending inventory  levels,
product receipts and sales. USTMAN's software produces a trend analysis by which
leaks  and  inventory  shrinkage due  to  other  causes can  be  identified  and

                                      - 5 -

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                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


detected.  USTMAN software meets all existing EPA protocols for SIR.

     There  is a  complementary  relationship  between  SIR and  tank  tightness
testing:  A customer may request SIR as an alternative  to some tank tests,  but
demand for other tests may be generated in response to SIR  findings.  It may be
advisable to conduct tightness testing before SIR monitoring begins and when SIR
monitoring  indicates  that tanks are  "leaking."  Before the  Acquisition,  NDE
employed USTMAN as a subcontractor.  Since the  Acquisition,  USTMAN serves as a
source of referrals for tightness testing work.

Government Regulations

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

Tank upgrades

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

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

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

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

Leak Detection

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

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


                                      - 6 -

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                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


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

     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 are relied upon as the leak detection
method. New or upgraded tanks using this method must be tested every five years.
Inventory control requires  comparing  "stick" inventory (daily  measurements of
tank contents using a calibrated  "stick,"  conversion  chart,  and mathematical
calculations) to "book" inventory (calculated from initial inventory, deliveries
and dispensing).

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

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

     With a probability of detection of at least 95 percent and a probability of
false alarm of no more than 5 percent, SIR must be able to detect leaks of:
     o 0.2  gallons  per  hour to  serve as a  monthly  monitoring  method 
     o 0.1 gallons per hour to serve as a replacement for tank tightness testing
     o 0.08  gallons  per  hour to  serve as a  replacement  for pipe  tightness
       testing

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

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

     The Clean Air Act requires Stage II vapor recovery  systems to be installed
in  ozone  non-attainment  areas  designated  by the  EPA,  typically  in  large
metropolitan  areas.  Management  anticipates a future increase in the aggregate
size of non-attainment areas.

     Some  state and local  jurisdictions  have  adopted  regulations  regarding
testing of UST's 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 the  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.

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                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


Distribution

Geographical

     During 1994, the Company moved its headquarters  from Torrance,  California
to  Austin,  Texas.  One  advantage  of the move is that the  central  time zone
enables the Company to better serve its nationwide customer base.

     Field  Services  distributes  its  services  throughout  the United  States
utilizing approximately 175 company- owned and operated service vehicles.  Sales
and  operations are managed  through 11 regional  offices as well as the Company
headquarters.

     CMS  markets  to  Field  Services  customers  and  prospects,   trade  show
attendees,  and  recipients  of industry  trade  publications.  CMS services are
marketed by CMS division personnel based at the Company's  headquarters,  by the
corporate sales and marketing departments, and by 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
and Virginia.

     USTMAN  provides  SIR  services  nationally  and  internationally  from its
offices in Denver,  Colorado.  Seven salespersons market the service,  and eight
independent  providers  employ  USTMAN  software  under  license.  SIR  data  is
transmitted  from customer  sites to USTMAN via hard copy,  fax,  diskette,  and
telephone line data transmission based on customer preference.

Information Systems and Products

     NDEOE  and  USTLine  are  the  trade  names  for  a  group  of  proprietary
information  systems  that  facilitate  the  environmental   compliance  of  UST
installations.  NDEOE and  USTLine  were  developed  in  response to the growing
informational  needs of tank  owners and  operators  in their  efforts to manage
complex regulatory,  risk avoidance and operational requirements.  While USTLine
and NDEOE 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
     o USTs distant from managerial oversight

     NDEOE 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 NDEOE
while  on-site.  The NDEOE database  provides  comprehensive  information  about
customers'  UST systems  which is useful for their  operational  and  regulatory
compliance functions and which can be sorted and analyzed electronically.

     USTLine is an information management and distribution product that provides
customers  access to the NDEOE system via the internet.  NDE installed the first
USTLine  system in a customer's  office in March 1994.  Since that time, NDE has
installed approximately 30 systems at various customers' facilities.

     NDE'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
NDE's technician while visiting the site, while regulatory  information would be
maintained on an associated  database by NDE  regulatory  affairs  personnel and
tied to a particular site location via zip codes.  Customer-specific information
could either be entered by the customer via USTLine or supplied to NDE personnel
either on disk or in hard copy.

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

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                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


information regarding all of the customer's sites. USTLine also allows customers
to print reports in their offices whenever required.

     These systems add value for UST owners in the following ways:
     o lower costs  resulting  from  diminished  paper  processing  and archival
       requirements
     o increased  efficiency  and speed through  computerized  storage,  filing,
       sorting, and data retrieval
     o real-time access to testing schedules, test results and site surveys
     o enhanced communication with NDE through integrated E-Mail
     o increased  efficiency in planning,  budgeting,  and scheduling due to the
       integrated data-base management tools
     o reduced re-keying of data;  USTLine data can be exported to most customer
       systems 
     o enhanced  regional  emergency  response (e.g.,  earthquake);  the USTLine
       system can sort the data by proximity to a  particular landmark and other
       site characteristics

International

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


Competition

     In the  Acquisition,  the Company  acquired  TCI,  formerly  the  Company's
primary national competitor.  However, the Company continues to face competition
for UST testing  services  from a number of smaller  testing  companies  serving
local or  regional  customers  and  using  inexpensive  technology.  Prices  for
tightness  testing have continued to decline due to excess  supply.  Competitors
may  refine  existing  technologies  or  develop  new  systems  that  render the
Company's technology obsolete or less competitive.

     Total demand for domestic UST testing is  declining.  Virtually  all of the
current  demand for the  Company's  UST  testing  services is from the owners or
operators of USTs that were  installed  prior to 1988 and have not been upgraded
in accordance with the EPA's 1988 requirements. The owners or operators of these
USTs may continue to use annual tightness  testing to meet EPA requirements only
until December 22, 1998.  After that date, they must close or upgrade the tanks.
Many of these  owners or  operators  may elect to close  their  USTs  instead of
upgrading them. For those who elect to upgrade (by either modifying or replacing
the  existing  UST),  the  frequency of tightness  testing will  decline.  After
upgrade, the frequency with which tightness tests will be ordered will depend on
the choice of UST upgrade and leak  detection  method.  For example,  the new or
upgraded  tank may need to be tested every two years,  five years or not at all,
rather than annually.  It is currently  anticipated that the rate of UST closure
and upgrade trends will increase as the 1998 deadline approaches.

     Cathodic  protection  is  one  of  the  two  viable  corrosion   protection
alternatives  for owners or operators  of steel USTs who wish to upgrade  rather
than close or replace  their USTs.  For the same reasons  that annual  tightness
testing  demand is  declining,  the Company  expects  strong demand for cathodic
protection  services  through a period ending  shortly after  December 22, 1998.
However,  the degree to which the company will experience a significant increase
in cathodic  protection revenue or profits is not clear.  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 are likely to be very price  sensitive.  Owners or
operators  who operate  nationwide  have the ability to exact price  concessions
from installation providers.

     The size of the market for SIR and for pipeline leak detection  services is
expected  to  increase  as the  number of USTs  subject  to  monthly  monitoring
requirements  increases.  However, both SIR and cathodic protection are provided
by a number of vendors.  Demand for Stage II testing  services  will increase if
more metropolitan  areas meet the "non- attainment area" definition in The Clean
Air Act.

                                      - 9 -

<PAGE>


                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB



     The  Company  does  not  believe  that  the  CMS  division   currently  has
significant  direct  competition,  and it has  developed a strategy  designed to
bring more USTs under CMS management.

Customers

     The Company  provides UST services to oil  companies,  independently  owned
gasoline  retailers,  convenience  store  operators,  fleet  owners,  government
facilities,  and other  operators  of USTs.  Below are  selected  customers  (in
alphabetical order) within a few of the Company's  major  customer  groups.  The
organizations  listed are not meant to be representative of the Company's entire
customer  base,  but  are  meant  to  give  an  indication  of  the  caliber  of
organizations that purchase NDE's services.
     o Oil  companies:  Amoco Oil Company,  B.P. Oil,  Chevron  U.S.A.  Products
       Company, Exxon U.S.A., Mobil Oil Corporation, Shell Oil Company
     o Convenience  stores:  Cumberland  Farms,  Dairy Mart,  Diamond  Shamrock,
       Southland Corporation
     o Fleet owners: Hertz Corporation, Ryder Truck Rental

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

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

Research and Development

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

Insurance

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


                                     - 10 -

<PAGE>


                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


     The Company maintains  professional and pollution liability insurance of up
to $2 million per occurrence,  general,  product and personal injury coverage of
up to $1 million per  occurrence,  and fire liability  coverage to $500,000.  In
addition,  umbrella  coverage  for all sources of liability in the amount of $10
million is maintained. Deductibles are in the amount of $200,000 per occurrence,
$400,000 in the aggregate,  for professional and pollution liability  coverages.
The umbrella  policy carries a $10,000  deductible.  All other coverages carry a
$5,000  deductible  per  occurrence.  The Company  believes that the policies in
force are expected to be  sufficient  to cover all current and expected  claims.
The Company has not been denied any coverages sought.  However,  there can be no
assurance  that all possible  types of  liabilities  that may be incurred by the
Company  are  covered  by its  insurance  or  that  the  dollar  amount  of such
liabilities will not exceed the Company's  policy limits.  The occurrence of any
significant  uninsured loss or liability  would have a mateial adverse effect on
the Company's business, financial condition, and results of operations.

Personnel

     As of  December  31,  1996,  the  Company  employed  324  full-time  and no
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 in leased
premises.  In December  1993,  the Company  leased 2,000 square feet, in Austin,
Texas for its  headquarters.  This  lease was  amended  in May 1994 to add 6,000
square feet of space. In May of 1996, the Company moved from the previous Austin
location to its current  address  which has 11,500  square feet of leased space.
The Company also leases regional offices and storage  facilities.  The lease for
USTMAN's  facility  in Denver,  Colorado  was  assumed in the  Acquisition.  The
Tanknology Canada lease, also assumed in the Acquisition,  was one of the assets
disposed of subsequent to the 1996 year end (see Item 1. Description of Business
- Mergers and Acquisitions).


ITEM 3.       LEGAL PROCEEDINGS

     In February 1995, U.S. Test, Inc. ("U.S. Test") filed a lawsuit against NDE
Environmental  Corporation in the United States Federal District Court,  Western
District of Louisiana.  The lawsuit is for a  declaratory  judgment that certain
patents owned by NDE are invalid,  unenforceable,  and/or that certain U.S. Test
tank  testing  systems do not infringe  such  patents.  The relief U.S.  Test is
seeking  includes  a final  determination  on the above  issues,  a  preliminary
injunction regarding actions taken by NDE, and attorneys' fees and costs. In May
1995, NDE filed a  counterclaim  alleging that (1) the NDE patents are valid and
enforceable,  (2) the U.S. Test tank testing  systems are  infringing  upon such
patents,  and (3) NDE is owed  damages  for such  infringement.  The  amount  of
damages  owed by U.S.  Test,  if any,  has not been  specifically  alleged.  The
patents at issue were transferred from Gilbarco, Inc. in the 1994 acquisition by
NDE of Gilbarco's  Environmental  Services Division.  The parties entered into a
joint  scheduling  order  providing  for a trial which is currently  expected to
occur during the third quarter of 1997.  There have been no dispositive  rulings
to date. The Company does not believe that the outcome of such  litigation  will
have a  material  adverse  effect on the  Company's  results  of  operations  or
financial condition.

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


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

         None.


                                     - 11 -

<PAGE>


                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     On July 20, 1995, the Company was delisted from the NASDAQ Stock Market for
failure to meet 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 NDEC.

     The  following  table  sets  forth high and low bid prices of the shares of
Common Stock of the Company 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
                                  -----       -----
               1995
               ----
               First Quarter      $9/16       $5/16
               Second Quarter      $5/8        $1/4
               Third Quarter       $1/4        $1/8
               Fourth Quarter     $3/16       $1/20

               1996
               -----
               First Quarter       $1/8       $1/20
               Second Quarter     $5/16        $1/8
               Third Quarter      $5/16       $1/16
               Fourth Quarter     $9/16       $3/32

     As of April 2, 1997, there were  approximately 170 holders of record of the
Company's Common Stock including those shares held in "street name." The Company
did not declare or pay Common Stock  dividends  during 1995 or 1996. The Company
currently  intends any future  earnings to finance the development and expansion
of its business.


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

Forward looking Statements

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

     Significant risk factors include, but are not limited to,:
     o increasing price competition in the Company's marketplace
     o changes in government  regulations that decrease the requirements for the
       Company's testing services or adversely affect pricing
     o lack of achievement of the cost reductions and  operational  efficiencies
       anticipated as a result of the Acquisition
     o an excess of product  liability losses over the Company's  expectations 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


                                     - 12 -

<PAGE>


                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


 Revenues

     Revenues  for 1996 were  $15,939,126,  an  increase of  $4,591,535  or 40%,
compared  to  $11,347,591  for  1995.  NDE's  increased  revenue  was due to the
Acquisition  completed on October 25, 1996 and revenues for the year include the
results of the UST Group from that date.

     Historically,  the  Company's  revenues  in the second half of the year are
higher than in the first half. The 1996 results of operations  included only two
months of the  Tanknology UST Group's  results.  Due to  seasonality,  those two
months  of  combined  operations  accounted  for  substantially  all of the  40%
increase in revenues.  In general, the price of UST tightness testing,  which is
the Company's main revenue source,  continued to decline in 1996; however,  this
decline has been  mitigated  to some extent by increased  revenues  from CMS and
international licensing revenues.

Cost of Testing

     Cost of testing  services for 1996 was  $11,085,062  (70% of  revenue),  an
increase of $4,022,606 or 57%, compared to $7,062,456 (62% of revenue) for 1995.
The  gross  margin  was  $4,854,064  (30% of  revenue)  for  1996,  compared  to
$4,285,135  (38% of revenue) for 1995. The increased  costs are due primarily to
an increase in the number of tests due to the  Acquisition.  In  addition,  fuel
prices increased in 1996 over 1995, and vehicle  maintenance costs increased due
to the aging of the Company's fleet.

Selling, General and Administrative

     Selling,   general  and  administrative   expenses  (SG&A)  for  1996  were
$6,581,337  (41% of  revenue),  an  increase  of  $152,904  or 2%,  compared  to
$6,428,433  (57% of revenue) for 1995. The increase in SG&A was primarily due to
an  increase in the  staffing  levels  required  as a result of the  Acquisition
offset by  reductions  in these  expenses  due to tight cost  controls  on these
expenses prior to the  Acquisition.  Through the first nine months of 1996, SG&A
expenses  were  essentially   unchanged  from  the  same  period  in  1995.  The
elimination  of most of the  duplicate  expenses  for these  expense  categories
subsequent  to the  Acquisition  reduced  the  percentage  increase  from  1995;
however,  severance  costs  for  terminated  NDE  employees  and  the  costs  of
maintaining  additional  administrative  staff after the Acquisition through the
end of the year unfavorably impacted these costs.

Impairment of Long-lived Assets

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

Interest Expense

     Interest expense for 1996 was $1,062,409,  or 7% of revenue, an increase of
$156,865,  or 17%, compared to $905,544 or 8% of revenue,  in 1995. The increase
in interest  expense is due to the increased debt incurred for the  Acquisition,
non-cash  interest expense related to accretion of subordinated debt of $67,641,
and   amortization   of  the   deferred   financing   costs   incurred   on  the
Acquisition-related  debt of $36,989.  These  amounts were  partially  offset by
generally  lower interest rates on the new debt compared to the Company's  prior
financing arrangements.

Extraordinary Gain

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


                                     - 13 -

<PAGE>


                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


Net Loss

     The Company  recorded a net loss for 1996 of $1,638,998 (10% of revenue) as
compared  to a net loss of  $2,892,639  for  1995  (25% of  revenue).  Excluding
unusual items (impairment of long-lived assets and extraordinary  gain) the 1996
loss was $2,618,826 (16% of revenue).

Liquidity and Capital Resources

     The  Company's  operational  strategy has been to establish  and maintain a
national  presence.  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, and the Gilbarco ESD transaction in
1994.

     On October 25, 1996 (the "Closing  Date"),  the Company acquired all of the
capital stock of three underground storage tank services  subsidiaries (the "UST
Group") from TEI, Inc. (formerly  Tanknology  Environmental  Incorporated).  The
subsidiaries acquired were Tanknology Corporation  International ("TCI"), USTMAN
Industries,  Inc.  ("USTMAN"),  and Tanknology Canada (1988), Inc.  ("Tanknology
Canada").  Immediately following the Acquisition,  the Company merged its wholly
owned  subsidiary NDE Testing and Equipment,  Inc. into TCI and changed the name
of the merged entity to Tanknology/NDE Corporation.

     The UST Group was purchased for an aggregate  purchase price of $12 million
which was paid to TEI at  closing of the  transaction.  This  purchase  price is
subject to upward  adjustment for certain taxes that may be owed to TEI relating
to  operations  of the UST Group from  August 31,  1996 to October 25, 1996 (the
Interim  Period") and interest on the $12 million purchase price for the Interim
Period at 8% per annum.  The purchase  price  adjustment  will be reduced by any
claims the Company may have as a result of its  internal  post-closing  audit of
the acquired assets.

     In connection  with the  Acquisition,  the Company  obtained a total of $19
million of financing (the "Financing')  under two separate loan agreements.  The
Financing  consisted of senior secured bank debt consisting of a three-year,  $5
million  revolving  line of credit and a  five-year,  $6 million term loan and a
five-year,  $8 million  subordinated  note.  Substantially  all of the Company's
assets were pledged as security under the loan  agreements.  Concurrent with the
Acquisition and the 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 Financing
were used to purchase the UST Group,  to pay off  outstanding  balances under an
existing term loan and an existing  factoring  agreement in the aggregate amount
of  $2,526,970,  for funding of Acquisition  related fees and expenses,  and for
general  working  capital.  At December  31,  1996,  the Company had  $1,113,616
available for additional borrowing under the revolving credit facility.

Senior Secured Bank Debt

     The funds  available for borrowing  under the revolving  line of credit are
based on a  formula  as  applied  to the  eligible  accounts  receivable  of the
Company.  In  conjunction  with  the  February  1997  sale of  certain  Canadian
operations (see below),  the amount available to the Company under the revolving
credit was reduced by $500,000 as a condition to obtaining  the banks  agreement
to sell the  operating  assets  of  Tanknology  Canada.  At the  closing  of the
Acquisition,  $2 million was drawn under the revolving  credit line and remained
outstanding  at December  31,  1996.  The $6 million term loan carries a rate of
prime plus 1.5%.  Principal  payments of $100,000 per month on the term loan are
due  beginning  in January  1997.  Interest is payable  monthly  under both loan
agreements.  Under both the revolving credit line and the term loan, the Company
is subject to certain restrictions and covenants.


                                     - 14 -

<PAGE>


                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


Senior Subordinated Note

     The 13%, $8 million senior  subordinated note (the "Note") matures December
31, 2001.  Principal  payments of $500,000 per quarter  begin on March 31, 1998,
and interest is payable quarterly  beginning December 31, 1996. In consideration
for the Note,  the debt holder  also  received  warrants  with a put option (see
"Warrants"  below)  to  purchase  shares  of the  Company's  common  stock.  The
appraised  fair market value of the warrants at issuance  was  determined  to be
$1.6  million  and was  recorded  as a discount  to, and  separately  from,  the
Subordinated  Note. At December 31, 1996, the Note had a carrying value,  net of
unamortized discount, of $6,467,641.  Under the terms of the Note agreement, the
Company is subject to certain restrictions and covenants.

Warrants

     As noted above,  the Company issued to its Note holder warrants to purchase
13,022,920  shares of common stock.  The warrants are  exercisable at $0.325 per
share and can be exercised  at any time from  October 24, 1996 through  December
31,  2005.  Both the number of shares and the  exercise  price may be subject to
adjustment based upon certain factors. The initial, and maximum,  exercise price
of $0.325 is subject to downward  adjustment  based on the  Company's  financial
performance  during the 12 month period immediately prior to the exercise of the
warrants.  The downward  adjustment  is limited to $0.20 per share for a minimum
exercise  price of $0.125.  These warrants are also subject to a put option (the
"Put") whereby, under certain circumstances,  the holder can require the Company
to repurchase  the warrants  (including any common shares owned as a result of a
previous warrant  exercise).  Unless,  and until, a "Qualifying Public Offering"
has occurred (defined as a sale to the public of at least $20 million of Company
stock),  the put is exercisable  after December 31, 2001, or after certain other
events such as a change in control,  certain mergers,  or uncured defaults under
the Note agreement. If the Note holder were to exercise the put, the cost to the
Company  would  be  calculated  based  upon  a  formula  and/or  an  independent
appraisal.

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

Gilbarco Financing

     Two notes were issued by the Company in  connection  with the  Gilbarco ESD
acquisition.  Both were payable to Gilbarco.  The first note,  in the  principal
amount of  $400,000,  became  due on March 31,  1995 and was paid in full by the
Company.  The second note was in the principal  amount of  $2,450,000.  In March
1996, the Company obtained from Gilbarco a prepayment  incentive in exchange for
an immediate  payment of $256,000.  In September  1996, the Company  settled the
remaining  note  balance  for  $300,000.  The debt had a  carrying  value at the
prepayment  date of  $2,113,149,  including  accrued  interest.  The  settlement
resulted in an extraordinary gain of $1,813,149.

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


                                     - 15 -

<PAGE>


                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


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

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

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

     At December 31, 1996, the Company had positive  working capital of $101,162
compared with a working  capital deficit of $1,818,766 at December 31, 1995. The
decrease in the deficit is due to the previously discussed Financing.  Cash used
in  operating  activities  during  1995  was  $1,181,393  and cash  provided  by
operating activities in 1996 was $868,023.

     Prior  to the  Acquisition,  the  Company  incurred  operating  losses  and
negative  cash flows from  operations  and relied  primarily  on it's  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 Financing,  completed in conjunction
with the purchase of the UST group as described  above, and cash flows generated
from operations will provide it with sufficient  borrowing capacity and funds to
meet the Company's normal capital expenditure  requirements,  operational needs,
and debt service  requirements for the next 12 months. This is a forward-looking
statement,  and the Company's  actual cash flows from operations 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.

     In  February  1997,  the  Company  sold  the  business  and  operations  of
Tanknology  Canada which it acquired as part of the Acquisition.  As part of 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 of
$1,200,000  were paid at closing.  $1,150,000 of the proceeds were  allocated to
the sale of the patent,  software and trademark rights and $50,000 was allocated
to the sale of the fixed  assets.  The net proceeds from these sales will reduce
the basis of the  acquired  assets  and will  have no  impact  to the  Company's
results of  operations  in 1997.  These funds will be used for  general  working
capital purposes.



                                     - 16 -

<PAGE>


                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


ITEM 7.           FINANCIAL STATEMENTS

     The  following  Consolidated  Financial  Statements  of  NDE  Environmental
Corporation and Subsidiaries are attached hereto.
<TABLE>
<CAPTION>

                                                                                                  Page
<S>                                                                                               <C>
Report of Independent Auditors                                                                     F-1
Consolidated Balance Sheets - December 31, 1996 and 1995                                           F-2
Consolidated Statements of Operations - Years Ended December 31, 1996 and 1995                     F-3
Consolidated Statements of Stockholders' Deficit - Years Ended December 31, 1996 and 1995          F-4
Consolidated Statements of Cash Flows - Years Ended December 31, 1996 and 1995                     F-6
Notes to Consolidated Financial Statements                                                         F-7
</TABLE>


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

              None.




                                     - 17 -

<PAGE>


                          NDE ENVIRONMENTAL CORPORATION
                        1996 ANNUAL REPORT ON FORM 10-KSB


PART III

     The  information  required  by Part III is  contained  under the  following
captions in the Company's Definitive Proxy Statement, expected to be filed on or
about April 30, 1997:

         Item 9.  Directors, Executive Officers, Promoters and Control Persons
         Item 10. Executive Compensation
         Item 11. Security Ownership of Certain Beneficial Owners and Management
         Item 12. Certain Relationships and Related Transactions


ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K

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

              (1) Index to Financial statements:
<TABLE>
<CAPTION>

<S>               <C>                                                                            <C>
                  Report of Independent Auditors.................................................F-2

                  Consolidated Balance Sheets as of December 31, 1996 and 1995...................F-3

                  Consolidated Statements of Operations for the years ended
                        December 31, 1996 and 1995...............................................F-4

                  Consolidated Statements of Stockholders' Deficit for the years ended
                        December 31, 1996 and 1995...............................................F-5

                  Consolidated Statements of Cash Flows for the years ended
                        December 31, 1996 and 1995...............................................F-6

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

              (2) Index to Financial Statement Schedules:

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

              (3) Exhibits:
<TABLE>
<CAPTION>
                     No.     Exhibit
                  ---------- ---------------------------------------------------
<S>               <C>        <C>                                                                         
                  3.01       Certificate of Incorporation of the Registrant, as 
                             amended, filed on May 24, 1989, File No. 33-28861-
                             LA (the Form "S-18").

                  3.02       Bylaws of the Registrant, as amended to June 22, 
                             1996.

                  3.04       Certificate of Designation, Preferences and Rights  
                             of Series DDD Preferred Stock of NDE Environmental  
                             Corporation.

                  10.01      Stock Purchase Agreement, dated as of December 11,  
                             1993, among the Registrant, Jim R. Clare and Donald 
                             Valverde.

                  10.02      Secured Promissory Note, dated April 11, 1994,  
                             issued by the Registrant to Gilbarco Inc. in the
                             principal amount of $2,450,000.

                  10.03      Security Agreement, dated as of April 11, 1994,  
                             between the Registrant and Gilbarco Inc. securing
                             payment of the Secured Promissory Note attached  
                             hereto as Exhibit 10.02.

                  10.04      Patent License Agreement, dated as of April 11,  
                             1994, between the Registrant and Gilbarco Inc.

                  10.05      Third Amendment to NDE Environmental Corporation'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.

                  10.06      Second Amendment to NDE Environmental Corporation's
                             Subordinated  Note,  dated  as of March  31,  1995,
                             between the Registrant and Spears, Benzak, Salomon,
                             and Farrell.

                  10.07      First Amendment to NDE Environmental Corporation's  
                             Subordinated Secured Promissory Note, dated as of   
                             February 28, 1995, between the Registrant and  
                             Gilbarco, Inc.

                  10.08      Promissory note, dated as of January 17, 1995,  
                             between the Registrant and Proactive Partners, L.P.

                  10.09      First Amendment of The Promissory Note dated  
                             January 17, 1995, Amendment dated April 30, 1995,  
                             between the registrant and Proactive Partners L. P.

                  10.10      First Amendment of the Financing  Agreement between
                             the  registrant   and  Silicon   Valley   Financial
                             Services, dated June 20, 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.

                  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.

                  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.

                  10.14      Promissory Note, dated as of November 6, 1995,  
                             between the Registrant and Gilbarco, Inc.

                  10.15      Promissory Note, dated as of February 13, 1996,  
                             between the Registrant and Proactive Partners,
                             L. P.

                  10.16      Promissory Note, dated as of February 13, 1996,  
                             between the Registrant and Lagunitas Partners,
                             L. P.

                  10.17      Second Amendment to NDE Environmental Corporation's
                             Secured  Promissory  Note,  dated as of  March  22,
                             1996, between Registrant and Gilbarco, Inc.

                  10.18      Settlement Agreement dated as of November 30, 1995  
                             between the Registrant and Protank, Inc.

                  10.19      1996 Funding Agreement, dated as of March 27, 1996, 
                             between the Registrant, Proactive Partners
                             and Lagunitas Partners, L. P.

                  10.20      1996 Additional Funding Agreement, dated as of  
                             March 15, 1996, between the Registrant and
                             Proactive Partners, L.P.

                  10.21      1996 Second Additional Funding Agreement, dated as  
                             of June 13, 1996, between the Registrant
                             and Proactive Partners, L.P.

                  10.22      Revised     Agreement    to    NDE    Environmental
                             Corporation's  Secured Promissory Note, between the
                             Registrant   and  Gilbarco,   Inc.,   dated  as  of
                             September 15, 1996.

                  10.23      Stock Purchase Agreement between NDE Environmental  
                             Corporation and Tanknology Environmental, Inc.  
                             dated as of October 7, 1996.

                  10.24      First Amendment to Stock Purchase Agreement between 
                             NDE Environmental  Corporation and Tanknology  
                             Environmental, Inc. dated as of 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. (the "Loan Agreement").

                  10.26      Revolving Note dated October 25, 1996, issued  
                             pursuant to the Loan Agreement.

                  10.27      Term Note dated October 25, 1996, issued pursuant  
                             to the Loan Agreement.

                  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. (The "Note and Warrant Purchase Agreement").

                  10.29      Senior Subordinated Note due December 31, 2001,  
                             dated October 25,  1996 issued pursuant to the
                             Note and Warrant Purchase Agreement.

                  10.30      Warrant  Certificate dated October 25, 1996, issued
                             pursuant   to  the   Note  and   Warrant   Purchase
                             Agreement.

                  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.

                  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.

                  10.33      Put Option Agreement, dated as of October 25, 1996,
                             between NDE Environmental  Corporation and Banc One
                             Capital Partners, L.P.

                  10.34      Registration Rights Agreement,  dated as of October
                             25, 1996, between NDE Environmental Corporation and
                             Banc One Capital Partners, L.P.

                  10.35      Preemptive  Rights  Agreement,  dated as of October
                             25, 1996, between NDE Environmental Corporation and
                             Banc One Capital Partners, L.P.

                  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.

                  10.37      Standby  Commitment,  made as of October 25,  1996,
                             among  Proactive  Partners L.P., NDE  Environmental
                             Corporation,  Banc One Capital Partners,  L.P., and
                             Bank One Texas, N.A.

                  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.

                  10.39      Pledge and Security  Agreement, dated October 25,  
                             1996, between NDE Environmental Corporation and  
                             Banc One Capital Partners L.P.

                  10.40      Pledge and Security  Agreement,  dated  October 25,
                             1996,  between NDE  Environmental  Corporation  and
                             Bank One Texas, N.A.

                  10.41      Pledge and Security Agreement, dated October 25,  
                             1996, between ProEco, Inc. and Bank One Texas, N.A.

                  10.42      Pledge and Security  Agreement,  dated  October 25,
                             1996, between USTMAN Industries, Inc., and Bank One
                             Texas, N.A.

                  21.01      Subsidiaries of the Registrant

                  27.01      Financial Data Schedule
</TABLE>



                  (b) There was one Report on 8-K filed during the quarter ended
                      December 31, 1996, as follows:
<TABLE>
<CAPTION>
                            Filed               Dated
                      ------------------  -----------------
<S>                   <C>                 <C>                <C> 
                      November 12, 1996   October 25, 1996   Item 2, Acquisition or Disposition of Assets:
                                                             Acquisition of the Tanknology UST Group form
                                                             Tanknology Environmental, Inc.

</TABLE>

                                     - 21 -

<PAGE>


                          NDE ENVIRONMENTAL CORPORATION
                        1996 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 NDE Environmental Corporation
and does business under the name Tanknology/NDE Corporation.

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

     EcoAm,  Inc., a Florida  corporation,  incorporated  on July 15, 1991, is a
wholly owned subsidiary of NDE Environmental Corporation 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 NDE  Environmental
Corporation and does business under the name ProEco, Ltd.

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

     USTMAN Industries,  Inc., a Delaware  corporation,  incorporated on May 29,
1992, is a wholly owned  subsidiary of NDE  Environmental  Corporation  and does
business under the name USTMAN Industries, Inc.

                                     - 22 -

<PAGE>




                                   SIGNATURES

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

                          NDE ENVIRONMENTAL CORPORATION



Date:    April 14, 1997    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:     April 14      , 1997
--------------------------------------------          -------------------
Jay Allen Chaffee
Chairman of the Board of Directors

            /s/ DAVID G. OSOWSKI                Dated:     April 14      , 1997
--------------------------------------------          -------------------
David G. Osowski
Vice President and
Chief Financial Officer
(PRINCIPAL FINANCIAL and ACCOUNTING OFFICER)

         /s/ CHARLES C. McGETTIGAN              Dated:     April 14      , 1997
--------------------------------------------          -------------------
Charles C. McGettigan
Director

           /s/ MICHAEL S. TAYLOR                Dated:     April 14      , 1997
--------------------------------------------          -------------------
Michael S. Taylor
Director

           /s/ MYRON A. WICK, III               Dated:     April 14      , 1997
--------------------------------------------          -------------------
Myron A. Wick, III
Director

             /s/ MARK B. BOBER                  Dated:     April 14      , 1997
--------------------------------------------          -------------------
Mark B. Bober
Director


                                     - 23 -

<PAGE>



                 NDE Environmental Corporation and Subsidiaries

                        Consolidated Financial Statements

                     Years ended December 31, 1996 and 1995




                                    Contents


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

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

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

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

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

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




                                       F-1

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                         Report of Independent Auditors



Stockholders and Board of Directors
NDE Environmental Corporation


     We  have  audited  the  accompanying  consolidated  balance  sheets  of NDE
Environmental Corporation and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated  statements of operations,  stockholders'  deficit, and
cash  flows  for the  years  then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

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




                                                           /s/ ERNST & YOUNG LLP

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


                                       F-2

<PAGE>


                 NDE Environmental Corporation and Subsidiaries



                           Consolidated Balance Sheets


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

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

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

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

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

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

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

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

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

See accompanying notes

                                       F-3

<PAGE>


                 NDE Environmental Corporation and Subsidiaries



                      Consolidated Statements of Operations



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

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

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

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

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

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

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

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

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

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

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

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

See accompanying notes


                                                        F-4

<PAGE>


                 NDE Environmental Corporation and Subsidiaries

                Consolidated Statements of Stockholders' Deficit



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


                                       F-5

<PAGE>

                 NDE Environmental Corporation and Subsidiaries

          Consolidated Statements of Stockholders' Deficit (continued)


<TABLE>
<CAPTION>

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

See accompanying notes.


                                       F-6

<PAGE>

                 NDE Environmental Corporation and Subsidiaries



                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>

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

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

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

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

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

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

</TABLE>

See accompanying notes.

                                       F-7

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

                   Notes to Consolidated Financial Statements

                                December 31, 1996


1. Summary of Significant Accounting Policies

Description and History of Business

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

Basis of Presentation

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

Revenue Recognition

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

Concentrations of Credit Risk

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

Inventories

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

Equipment and Improvements

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

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


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




                                       F-8

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

Intangible Assets

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


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

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

Stock Based Compensation

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

Income Taxes

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

Loss Per Share Data

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

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.


2. Business Acquisitions

Tanknology UST Group (the "Acquisition")

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


                                       F-9

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

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

     The purchase price was recorded as follows:


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

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

<TABLE>
<CAPTION>

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

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


Sale of Acquired Canadian Operations

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



                                      F-10

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

3. Equipment and Improvements

Equipment and improvements consist of the following:

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

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


4.   Long-Term Debt

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


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

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

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

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

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

                                      F-11

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

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

Senior Secured Bank Debt

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

Senior Subordinated Note

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

Gilbarco Environmental Services Division ("Gilbarco ESD")

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

Other Collateralized Notes

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

Other Non-Collateralized Notes

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

                                      F-12

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

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

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


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


5. Stockholders' Equity

AAA Preferred Stock

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

BBB Preferred Stock

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

CCC Preferred Stock

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

DDD Preferred Stock

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


                                      F-13

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

Secured Promissory Notes

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

Common Stock

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

Warrants

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


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

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

Warrants with Put Options

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

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


                                      F-14

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

Stock Options

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

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

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


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

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

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


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

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

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



                                      F-15

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements


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

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


<TABLE>
<CAPTION>

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

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

Stock Option Plan

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

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

Executive Compensation Plan

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

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


                                      F-16

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

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

Common Shares Reserved for Issuance

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

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

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


6.  Fair Values of Financial Instruments

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

Cash

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

Long-term Debt

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

Warrants with Put Option

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


7.  Related Party Transactions

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


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



                                      F-17

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

8. Income Taxes

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


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

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


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

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


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

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

9. Leases

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


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

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


                                      F-18

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

10.  Significant Customer

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


11. Commitments and Contingencies

Potential Liability and Insurance

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

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

Litigation

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

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

                                      F-19

<PAGE>


                 NDE Environmental Corporation and Subsidiaries


                   Notes to Consolidated Financial Statements

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

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


12. Employee Benefit Plan

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

                                      F-20