Tanknology-NDE International, Inc. and Subsidiaries


                     U.S. SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-QSB
(Mark One)

  [X]     Quarterly Report Under Section 13 or 15(d) of the Securities  Exchange
          Act of 1934 for the quarterly period ended September 30, 1998.

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



                         Commission File Number 1-10361


                       Tanknology-NDE International, Inc.
        (Exact name of small business issuer as specified in its charter)


        Delaware                                           95-3634420
(State of Incorporation)                       (IRS Employer Identification No.)


              8900 Shoal Creek Blvd., Bldg. 200 Austin, Texas 78757
                    (Address of Principal Executive offices)


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





Check  whether the Issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 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 ninety days.

                                    Yes     [X]        No   [ ]


State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.







                        Outstanding at September 30,
Class                               1998
--------------       -----------------------------------

Common                           16,404,166




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

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               Tanknology-NDE International, Inc. and Subsidiaries




                                      INDEX

<TABLE>

                                                                                          Page Number

PART I    Financial Information
<S>           <C>                                                                                 <C>

Item 1.   Financial Statements (Unaudited)
              Condensed Consolidated Balance Sheets  (Unaudited)
                  September 30, 1998 and December 31, 1997 .........................................3

              Condensed Consolidated Statements of Operations (Unaudited)
                  Three Months and Nine Months Ended September 30, 1998 and 1997....................4

              Condensed Consolidated  Statements of Cash Flows (Unaudited)
                  Nine Months Ended September 30, 1998 and 1997.....................................5

              Notes To Condensed Consolidated Financial Statements (Unaudited)......................6

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations ....9



PART II   Other Information

Item 6.   Exhibits and Reports on Form 8-K.........................................................13
</TABLE>



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               Tanknology-NDE International, Inc. and Subsidiaries


PART I            Financial Information
Item 1.  Financial Statements (Unaudited)

                      Condensed Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                                           September 30, 1998   December 31, 1997
                                                                           ------------------   -----------------
ASSETS                                                                         (Unaudited)

<S>                                                                        <C>                  <C>
     Cash and equivalents..................................................$        --          $       193,627
     Trade accounts receivable, less allowance for doubtful accounts of
         $1,472,177 at September 30, 1998 and $1,066,331 at December 31,
         1997.......................................................             13,536,249           9,856,826
     Inventories...........................................................         594,038             482,107
     Prepaid expenses and other current assets.............................         684,306           1,149,950
                                                                           ------------------   -----------------
         Total Current Assets..............................................      14,814,593          11,682,510

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

     Equipment and improvements, net of accumulated depreciation of
         $13,117,871 at September 30, 1998 and $11,052,586 at December 31,
         1997........................................................             6,097,644           4,812,500
     Goodwill, net of accumulated amortization of $84,280 at September 30,
         1998.........................................................            2,442,277         --
     Patents, licenses and other intangible assets, net of accumulated
         amortization of $1,443,398 at September 30, 1998 and $1,169,104 at
         December 31, 1997.................................................       1,130,309           1,604,194
     Deferred financing costs, net.........................................         731,864             649,614
                                                                           ------------------   -----------------
         Total Assets......................................................$     28,216,687 $        21,748,818
                                                                           ==================== ===================
                                                                           ------------------   -----------------

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT

     Accounts payable .....................................................$      2,821,236     $     2,675,345
     Accrued liabilities...................................................       2,357,987           2,249,208
     Accrued payroll and payroll taxes.....................................       3,368,013           1,959,273
     Current portion of long-term debt.....................................       1,925,563           4,055,072
         Total Current Liabilities.........................................      10,472,799          10,938,898

     Long term debt, less current portion .................................      15,984,662          10,589,252

     Deferred license revenue..............................................         241,224             525,000

     Redeemable convertible preferred stock, at redemption value...........       1,500,000           1,500,000

     Stockholders' Equity (Deficit):
         Series AAA Convertible  Preferred Stock, $.0001 par value;  authorized,
              400 shares; issued and outstanding 1 share stated
              at liquidation value of $5,000...............................        --                     5,000
         Common stock, $.0001 par value; authorized, 50,000,000 shares;
              issued and outstanding 16,404,166 shares at September 30,
              1998, and 15,978,610 shares at  December 31, 1997............           1,640               1,598
         Warrants..........................................................         321,000             291,000
         Additional paid-in capital........................................      27,661,217          27,578,446
         Accumulated deficit...............................................     (27,959,499)        (29,659,297)
         Cumulative foreign currency translation adjustment................          (6,356)            (21,079)
                                                                           ------------------   -----------------
                                                                                     18,002          (1,804,332)
                                                                           ------------------   -----------------
         Total Liabilities, Redeemable Convertible Preferred Stock
                and Stockholders' Deficit................................. $     28,216,687     $    21,748,818
                                                                           ==================== ===================
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>

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               Tanknology-NDE International, Inc. and Subsidiaries


                 Condensed Consolidated Statements of Operations
                                   (Unaudited)




<TABLE>
<CAPTION>
                                                    Three Months Ended                       Nine Months Ended
                                             -------------------------------        --------------------------------
                                              September 30,    September 30,         September 30,    September 30,
                                                 1998              1997                  1998             1997
                                             --------------   --------------        --------------    --------------

<S>                                          <C>              <C>                   <C>               <C>
Revenues.................................... $  17,405,934    $   9,889,309         $  44,513,355     $  25,407,707

Cost of services............................    12,830,362        7,410,762            33,044,725        19,211,475
                                             --------------   --------------        --------------    --------------

     Gross Margin...........................     4,575,572        2,478,547            11,468,630         6,196,232

Selling, general and administrative.........     3,256,279        1,853,215             8,377,025         5,971,560
                                             --------------   --------------        --------------    --------------

     Operating Income ......................     1,319,293          625,332             3,091,605           224,672

Other income (expense):
      Interest income.......................        31,641           66,202                93,437            66,202
      Interest expense......................      (447,258)        (810,570)           (1,243,597)       (2,481,934)
     Other income (expense), net............        13,702            --                   18,606           --
                                             --------------   --------------        --------------    --------------

     Income (Loss) Before Provision
         for Income Taxes...................       917,378         (119,036)            1,960,051        (2,191,060)

Provision for income taxes..................       226,356              600               260,253            25,900
                                             --------------   --------------        --------------    --------------

      Net Income (Loss).....................       691,022         (119,636)            1,699,798        (2,216,960)

Less - Preferred stock dividends............       (37,500)           --                 (112,500)          --
                                             --------------   --------------        --------------    --------------

     Net Income (Loss) Available to
         Common Shareholders................ $     728,522    $    (119,636)        $   1,812,298     $  (2,216,960)
                                             ==============   ==============        ==============    ==============

     Basic Income (Loss) Per Share.......... $        0.04    $       (0.01)        $        0.10     $       (0.14)
                                             ==============   ==============        ==============    ==============


     Diluted Income (Loss) Per Share........ $        0.03    $       (0.01)        $        0.07     $       (0.14)
                                             ==============   ==============        ==============    ==============


<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>



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               Tanknology-NDE International, Inc. and Subsidiaries


                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                             Nine Months Ended
                                                                     -------------------------------
                                                                      September 30,    September 30,
                                                                          1998              1997
                                                                     --------------   --------------
Cash Flows from Operating Activities

<S>                                                                  <C>              <C>
     Net income (loss) ...........................................   $   1,699,798    $  (2,216,960)

Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By
(Used in) Operating Activities

     Depreciation and amortization ...............................       2,270,124        2,933,932
     Amortization of discounts and financing costs ...............         207,445        1,101,222
     Deferred license revenue earned .............................        (127,282)            --
     Gain on sale of equipment ...................................            --            (75,589)
     Other .......................................................          14,723            3,184

Changes in Operating Assets and Liabilities

      Trade accounts receivable ..................................      (3,498,389)      (3,100,026)
      Inventories ................................................        (111,931)        (254,661)
      Prepaid expenses and other current assets ..................         488,365          331,476
      Accounts payable ...........................................         (13,647)         837,640
      Accrued liabilities ........................................        (336,832)      (2,386,785)
      Accrued payroll and payroll taxes ..........................       1,321,718          (58,339)
                                                                     --------------   --------------
      Net cash provided by (used) in operating activities ........       1,914,092       (2,884,906)

Cash Flows from Investing Activities

     Proceeds from sale of USTMAN ................................            --          5,250,000
     Proceeds from sale of  licenses .............................            --          1,947,500
     Additions to equipment and improvements .....................      (3,169,841)      (1,729,250)
     Business acquisition ........................................        (765,000)            --
     Proceeds from sale of equipment .............................            --             79,758
     Other .......................................................          (5,409)          (4,095)
                                                                     --------------   --------------
     Net cash provided by (used in) investing activities .........      (3,940,250)       5,543,913

Cash Flows from Financing Activities

     Net proceeds from revolving line of credit ..................       2,857,333             --
     Preferred stock dividends ...................................        (112,500)            --
     Proceeds from long-term debt ................................       1,291,440        2,840,688
     Payments on long-term debt ..................................      (1,953,172)      (4,763,391)
     Repurchase of series AAA convertible preferred stock ........          (5,000)            --
     Restricted cash .............................................            --         (3,000,000)
     Deferred financing costs ....................................        (245,570)            --
                                                                     --------------   --------------
     Net cash provided by (used in) financing activities .........       1,832,531       (4,922,703)

     Net decrease in cash and equivalents ........................        (193,627)      (2,263,696)

     Cash and equivalents at beginning of period .................         193,627        2,412,233

                                                                     --------------   --------------
     Cash and equivalents at end of period .......................   $        --      $     148,537
                                                                     ==============   ==============


Supplemental cash flow information:

     Note payable from business acquisition ......................   $     750,000
     Common stock issued in business acquisition .................         195,313
     Warrants issued in business acquisition .....................          30,000
     Liabilities  incurred in business acquisition ...............         239,601

<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>

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               Tanknology-NDE International, Inc. and Subsidiaries


              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)


     NOTE 1: ACCOMPANYING UNAUDITED FINANCIAL STATEMENTS

     Basis  of   Presentation:   The   consolidated   financial   statements  of
Tanknology-NDE International, Inc. and its subsidiaries (the "Company") included
herein have been prepared without audit pursuant to the rules and regulations of
the  Securities  and  Exchange  Commission,  and, in the opinion of  management,
reflect all  adjustments  necessary to present  fairly the results of operations
for such interim periods.  Certain information and footnote disclosures normally
included in financial  statements prepared in accordance with generally accepted
accounting  principles have been condensed or omitted pursuant to such rules and
regulations;  however,  management believes that the disclosures are adequate to
make the  information  presented  not  misleading.  The  accompanying  unaudited
financial  statements  for the three and nine month periods ended  September 30,
1998 and 1997  contain all  adjustments,  consisting  of only  normal  recurring
accruals,  necessary to present fairly the financial  position of the Company as
of September 30, 1998 and 1997 and the results of operations  and cash flows for
the periods then ended.  The results of  operations  for the  Company's  interim
periods are not  necessarily  indicative  of the results to be expected  for the
entire  year.  It is  suggested  that  these  financial  statements  be  read in
conjunction with the audited financial  statements and notes thereto included in
the Company's annual report on Form 10-KSB for the year ended December 31, 1997.


     NOTE 2: INCOME (LOSS) PER SHARE CALCULATIONS

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


<TABLE>
<CAPTION>
                                                        Three Months Ended             Nine Months Ended
                                                    --------------------------   ---------------------------

                                                    September      September      September      September
                                                     30, 1998       30, 1997       30, 1998       30, 1997
                                                   -----------    -----------    -----------    -----------
Numerator:
<S>                                                <C>            <C>            <C>            <C>
     Net income (loss) .........................   $   691,022    $  (119,636)   $ 1,699,798    $(2,216,960)
     Preferred stock dividends .................       (37,500)          --         (112,500)          --
                                                   -----------    -----------    -----------    -----------
     Numerator for basic income (loss) per share
     -income available to common shareholders ..       728,522       (119,636)     1,812,298     (2,216,960)

     Effect of dilutive securities - preferred
     stock dividends ...........................        37,500           --          112,500           --
                                                   -----------    -----------    -----------    -----------
     Numerator for diluted income (loss) per
     share .....................................   $   766,022    $  (119,636)   $ 1,924,798    $(2,216,960)
</TABLE>



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               Tanknology-NDE International, Inc. and Subsidiaries


<TABLE>
<CAPTION>
                                                        Three Months Ended             Nine Months Ended
                                                    --------------------------   ---------------------------

                                                    September      September      September      September
                                                     30, 1998       30, 1997       30, 1998       30, 1997
                                                   -----------    -----------    -----------    -----------
<S>                                                <C>             <C>           <C>             <C>
Denominator:
     Denominator for basic income (loss) per
     share - weighted-average shares ...........     16,303,623    15,978,610      16,201,960      15,978,610

     Effect of dilutive securities:
     Stock options .............................      3,680,104          --         3,873,458            --
     Warrants ..................................      2,850,530          --         3,157,291            --
     Convertible preferred stock ...............      1,147,139          --         1,387,578            --
                                                   ------------    ----------    ------------    ------------
     Dilutive potential common shares ..........      7,677,773          --         8,418,327            --

     Denominator for diluted earnings (loss) per
     share - adjusted weighted- average shares
     and assumed  conversions ..................     23,981,396          --        24,620,287            --
                                                   ============    ==========    ============    ============

     Basic income (loss) per share .............   $       0.04    $    (0.01)   $       0.10    $      (0.14)
                                                   ============    ==========    ============    ============


     Diluted income (loss) per share ...........   $       0.03    $    (0.01)   $       0.07    $      (0.14)
                                                   ============    ==========    ============    ============
</TABLE>


     NOTE 3: COMPREHENSIVE INCOME

     In the first quarter of 1998,  the Company  adopted  Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting  Comprehensive Income." SFAS 130
requires  disclosure  of total  non-stockholder  changes  in equity  in  interim
periods and additional disclosures of the components of non-stockholder  changes
in equity on an annual basis. Total  non-stockholder  changes in equity includes
all changes in equity during a period except those resulting from investments by
and distributions to stockholders.  Total comprehensive income for the three and
nine month periods ended September 30, 1998 and 1997 was as follows:


<TABLE>
<CAPTION>
                                                  Three Months Ended            Nine Months Ended
                                              -------------------------    -------------------------
                                               September     September      September     September
                                                30, 1998      30, 1997       30, 1998      30, 1997
                                              -----------   -----------    -----------   -----------

<S>                                           <C>           <C>            <C>           <C>
Net income (loss) .........................   $   691,022   $  (119,636)   $ 1,699,798   $(2,216,960)
Foreign currency translation gain (loss)...        10,682         3,891         14,723       (13,212)
                                              -----------   -----------    -----------   -----------
    Total comprehensive income (loss) .....   $   701,704   $  (115,745)   $ 1,714,521   $(2,230,172)
                                              ===========   ===========    ===========   ===========
</TABLE>






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               Tanknology-NDE International, Inc. and Subsidiaries


     NOTE 4: COMMITMENTS AND CONTINGENCIES

     There have been no  material  changes  in the  information  reported  as of
December  31, 1997 as reported  on Form 10-KSB in Footnote 12  accompanying  the
financial statements.


     NOTE 5: IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     None.




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               Tanknology-NDE International, Inc. and Subsidiaries


Item 2. Management's  Discussion and Analysis of Financial Condition and Results
        of  Operations

Results of Operations

     The following table reflects the percentage  relationship to net revenue of
certain items  included in the Company's  statements of operations for the three
month and nine month periods ended  September 30, 1998 and 1997.  The results of
operations for the nine months ended September 30, 1998,  include the results of
operations  of  USTMAN  Industries  ("USTMAN")  which  was  sold in May 1997 and
certain Canadian operations ("Canada") that were sold in February 1997.


<TABLE>
<CAPTION>
                                           Three Months Ended                          Nine Months Ended
                                 --------------------------------------      --------------------------------------

                                    September        September        September       September
                                     30, 1998         30, 1997         30, 1998        30, 1997
                                 --------------   --------------   --------------   --------------

<S>                                      <C>              <C>              <C>             <C>
Revenues                                 100%             100%             100%            100%

Cost of Sales                             74%              75%              74%             76%
                                 --------------   --------------   --------------   --------------

Gross Margin                              26%              25%              26%             24%

Selling, General and
Administrative                            18%              19%              18%             23%

                                 --------------   --------------   --------------   --------------
Operating Income                           8%               6%               8%              1%

Interest Expense                           3%               7%               3%             10%

                                 --------------   --------------   --------------   --------------
Net Income (Loss) Before
Provision for Income Taxes                 5%              (1)%              5%             (9)%

Provision for Income Taxes                 1%              --                1%             --
                                 --------------   --------------   --------------   --------------
Net Income (Loss)                          4%              (1)%              4%             (9)%
                                 ==============   ==============   ==============   ==============
</TABLE>


Revenues

     Revenues  for the three months ended  September  30, 1998 were  $17,405,934
compared to $9,889,309 in the 1997 period, an increase of $7,516,625 or 76%. The
increase in revenues is primarily due to the following factors;  i) an over 150%
increase in revenues in the Construction Services Division , ii) continuation of
a large  upgrade  program for a major  customer that began in the second half of
1997,  iii)  an  over  165%  increase  in  cathodic   protection   installation,
maintenance,  repair  and  inspection  revenues  and  iv)  a  200%  increase  in
compliance management services revenues.

     For the nine months ended  September 30, 1998,  revenues  were  $44,513,355
compared to $25,407,707 in the 1997 period, an increase of $19,105,648,  or 75%.
Revenues in the nine months of 1997  included  $105,787 of revenues  from Canada
and  $1,884,361 of revenues  from USTMAN.  Excluding the revenues from these two
sold entities,  comparable  revenues for 1997 were $23,417,559.  The increase in
comparable  revenues of  $21,095,796  or 90% from 1997 is  primarily  due to the
following  factors;  i) an increase in revenues of  $5,723,816  generated by the
Construction  Services  Division which did not begin  operations until the third
quarter  of  1997,  ii)  continuation  of a large  upgrade  program  for a major
customer  that began in the second half of 1997,  iii) an over 200%  increase in
cathodic protection  installation,  maintenance,  repair and inspection revenues
and iv) an over 200% increase in compliance management services revenue.


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               Tanknology-NDE International, Inc. and Subsidiaries


Cost of  Services

     Cost of  services  for the  three  months  ended  September  30,  1998 were
$12,830,362 or 74% of revenue  compared to $7,410,762 or 75% of revenue in 1997,
an increase of $5,419,600, or 73%. Gross margin was $4,575,572 or 26% of revenue
for 1998,  compared to  $2,478,547  or 25% of revenue for 1997.  The increase in
gross  margin  percentage  is  primarily  due to lower  depreciation  and higher
vehicle and technician capacity utilization.

     For the nine months  ended  September  30, 1998,  cost of services  totaled
$33,044,725  compared  to  $19,211,475  in  the  1997  period,  an  increase  of
$13,833,250  or 72%.  Gross  margin was  $11,468,630  or 26% of revenue in 1998,
compared to $6,196,232  or 24% of revenue in 1997.  The increase in gross margin
percentage  is  primarily  due to lower  depreciation  and  higher  vehicle  and
technician capacity utilization.

Selling, General and Administrative

     Selling,  general,  and  administrative  expense for the three months ended
September 30, 1998 was  $3,256,279  or 18% of revenue  compared to $1,853,215 in
1997 or 19% of revenue,  an increase of  $1,403,064 or 76% compared to the three
months  ended  September  30,  1997.  The  increase  in  selling,  general,  and
administrative expenses is due to additional sales and administrative  resources
to support the growth in revenue and varieties of services offered. The decrease
in the  percentage  of sales from 19% to 18% is due  primarily  to the growth in
revenue without having to add  proportionately  to SG&A expenses and to a lesser
extent reductions in insurance and telecommunications costs.

     For the nine  months  ended  September  30,  1998,  selling,  general,  and
administrative  expense were $8,377,025 or 18% of revenue compared to $5,971,560
in 1997 or 23% of revenue, an increase of $2,405,465 or 40% compared to the 1997
period. The increase in selling,  general, and administrative  expense is due to
the addition of sales and administrative resources to support both the growth in
revenue and the varieties of services offered by the Company.  Adjusting for the
disposals of USTMAN and Canada,  comparable  SG&A expense in 1997 was $5,810,443
or 25% of comparable  revenue.  The decrease in the percentage of sales from 25%
to 18%  is due  primarily  to  the  growth  in  revenue  without  having  to add
proportionately  to SG&A expenses and to a lesser extent reductions in insurance
and telecommunications costs.

Earnings before Depreciation, Amortization, Interest and Taxes (EBITDA)

     For the three months ended September 30, 1998, EBITDA was $2,154,014 or 12%
of revenues  compared to $1,535,054 or 16% of revenues in 1997.  The increase in
EBITDA of $618,960 or 40% was  primarily  due to the  increased  revenues in the
1998 period compared to the 1997 period.

     For the nine months ended September 30, 1998,  EBITDA was $5,361,729 or 12%
of revenues compared to $3,156,604 or 12% of revenues in 1997. Adjusting for the
disposals  of USTMAN and Canada,  comparable  EBITDA in the first nine months of
1997 was $2,503,926 or 11% of revenues.  The increase in EBITDA, as adjusted, of
$2,857,803 or 114% was primarily due to the increased revenues in the first nine
months of 1998 compared to the first nine months of 1997.

     EBITDA represents net income before  depreciation,  amortization,  interest
expense and income  taxes.  The  Company  believes  that EBITDA is a  meaningful
measure of  performance  because it is  commonly  used to  analyze  and  compare
companies  on the  basis  of  operating  performance,  leverage  and  liquidity.
However,  EBITDA is not  intended  to be a  performance  measure  that should be
regarded as an alternative to, or more meaningful than,  either operating income
or net  income as an  indicator  of  operating  performance  or cash  flows as a
measure of  liquidity,  as  determined in  accordance  with  generally  accepted
accounting  principles.  Also,  EBITDA,  as  computed  by  the  Company,  is not
necessarily comparable to similarly titled amounts of other companies.

Interest Expense

     Interest expense for the three months ended September 30, 1998 was $447,258
or 3% of revenue  compared to  $810,570 or 7% of revenue in 1997,  a decrease of
$363,312 or 45%. The decrease in interest  expense is due to the  refinancing of
subordinated  debt in December 1997. This refinancing  reduced related accretion
expense for the third  quarter of 1998 by $150,000;  reduced the  interest  rate
from 13% to 10% resulting in lower comparable interest costs of approximately

                                     - 10 -

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               Tanknology-NDE International, Inc. and Subsidiaries



$41,000;  and replaced $1.5 million of the  subordinated  debt with  convertible
redeemable  preferred stock which eliminated  approximately  $48,000 of interest
costs  for  the  comparable  period.  This  refinancing  also  resulted  in  the
retirement of the warrants  with put options and  eliminated  related  accretion
expense of $200,250.

     For the  nine  months  ended  September  30,  1998,  interest  expense  was
$1,243,597 or 3% of revenue  compared to $2,481,934 or 10% of revenue in 1997, a
decrease of  $1,238,337  or 50%. The decrease in interest  expense is due to: i)
continued  pay-down of long-term debt, ii) the refinancing of subordinated  debt
in December 1997 which  reduced  related  accretion  expense for the first three
quarters of 1998 by $450,000,  reduced the  interest  rate from 13% to 10% which
reduced interest costs by approximately  $123,000,  and replaced $1.5 million of
the  debt  with   convertible   redeemable   preferred  stock  which  eliminated
approximately  $144,000 of interest  costs for the comparable  period,  iii) the
retirement  of warrants  with put options  which  eliminated  accretion  expense
totaling $600,750 in the first three quarters of 1997.

Income Taxes

     The Company has incurred tax losses  through 1997 and has  accumulated  net
operating  loss  carryforwards.  However  as a result of a change in  control of
ownership  of the  Company's  stock as defined by Internal  Revenue Code Section
382, the Company's  accumulated losses were substantially limited so that of the
approximate  $22 million  accumulation  as of the date of change of control only
$100,000 per year are  available to offset  current and future  taxable  income.
Subsequent  to the  change of  control,  the  Company  incurred  additional  net
operating losses and as of December 31, 1997 had  approximately  $2.1 million of
unrestricted net operating loss carryforwards available.

     Based on the Company's current forecast for 1998, the Company believes that
it will fully utilize all of the unrestricted  net operating loss  carryforwards
and the annual  Section 382  limitation in 1998 and realize  additional  taxable
income.  Accordingly,  in the third quarter of 1998, the Company has recorded an
income tax  provision on estimated  taxable  income  through  September 30, 1998
based upon its estimated 13% effective tax rate for the entire year.  Due to the
significant  leveraging  effect of the  utilization  of the net  operating  loss
carryforwards,  this effective tax rate estimate will vary if the actual results
for the year vary significantly from the projections.

Net Income (Loss)

     For the three months ended  September 30, 1998,  the Company had net income
of $691,022 before preferred stock dividend  requirements  compared to a loss of
$119,636 in 1997,  an  improvement  of $810,658.  This was  primarily due to the
increased  revenues in the 1998 period  compared to the 1997 period and the debt
refinancing that occurred in December 1997.

     For the nine months ended September 30, 1998, the Company had net income of
$1,699,798  before preferred stock dividend  requirements  compared to a loss of
$2,216,960 in 1997, an improvement of $3,916,758. Adjusting for the disposals of
USTMAN and Canada,  the comparable net loss in the first nine months of 1997 was
$2,583,852  or 11% of  comparable  revenues.  The  decrease  in the net  loss of
$4,283,650 was primarily due to the increased  revenues in the first nine months
of 1998 compared to the first nine months of 1997 and the debt  refinancing that
occurred in December 1997.

Liquidity and Capital Resources

     At  September  30,  1998,  the Company had  working  capital of  $4,341,794
compared to working  capital of $743,612 at December 31, 1997.  Cash provided by
operating  activities of $1,914,092 for the nine months ended September 30, 1998
increased  by  $4,798,998  as compared to cash used in operating  activities  of
$2,884,906 in 1997. The cash provided by operating activities in the nine months
ended  September  30, 1998  increased  due to the increase in net income and the
increase  in accrued  payroll  and  payroll  taxes (due to increase in number of
employees  and the  timing  of  payments  of  related  withholdings  and  taxes)
partially offset by the decrease in depreciation.

     Cash used in investing activities totaled $3,940,250  (consisting primarily
of  $3,169,841  for capital  expenditures  and $765,000 for the  acquisition  of
Outbound  Services,  Inc.) for the nine months ended September 30, 1998 compared
to cash provided by investing  activities  of $5,543,913 in the 1997 period.  On
February 20, 1997, the Company sold substantially all of the operating assets of
its Canadian operation. The Company realized proceeds of $1,147,500 related to

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               Tanknology-NDE International, Inc. and Subsidiaries



the sale of the  business and  technology  licenses and $50,000 from the sale of
the fixed assets of the Canadian  operations.  On May 22, 1997, the Company sold
USTMAN realizing cash proceeds of $5,250,000.

     On August 7, 1998,  the Company  acquired  the shares of Outbound  Services
Inc. for $765,000 cash, a 10% note for $750,000 payable in monthly  installments
over two years and a final payment of $200,000,  250,000 shares of company stock
valued at $195,313 and warrants for 500,000 shares of company stock  exercisable
at $2 per share,  subject to  adjustment,  valued at $30,000.  The Company  also
incurred $239,601 of related acquisition costs.

     At  September  30,  1998,  the  Company  had  outstanding   long-term  debt
(including  current  maturities)  of  $17,910,225  compared  to  $14,644,324  at
December 31, 1997.  Required term-loan principal  repayments of $600,000,  a net
$2,857,333  borrowings on the revolving  credit line and other debt  repayments,
net of new borrowings,  of $61,732 were made during the first three quarters.
At September  30, 1998,  the Company had  $3,665,000  available  for  additional
borrowing under its revolving  credit  agreement.  As of September 30, 1998, the
Company was in  compliance  with the  financial  debt  covenants  related to its
long-term financing agreements.

     In July 1998, the Company  renegotiated  its revolving credit facility with
its senior lender. Significant modifications included an increase in the maximum
borrowings under the credit facility to $9 million from $5 million, extension of
the  maturity of the credit line to December  31,  2000,  suspension  of monthly
payments due under the term loan agreement for six months, and a number of other
modifications that allow for continued expansion of the business.

     This Form 10-Q contains  statements  which, to the extent that they are not
recitations of historical fact,  constitute  "forward looking statements" within
the meaning of Section 27A of the  Securities Act of 1933 and Section 21E of the
Securities  Act of 1934.  All  forward  looking  statements  involve  risks  and
uncertainties.  The forward looking  statements in this document are intended to
be subject to the safe harbor protection provided by Sections 27A and 21E. For a
discussion identifying some important factors that could cause actual results to
differ materially from those anticipated in the forward looking statements,  see
the Company's Form 10-KSB page 13  "Management  Discussion and Analysis" for the
fiscal year ended December 31, 1997.

Year 2000 Risks

     The Year 2000 issue is the result of computer software programs being coded
to use two digits  rather  than four to define the year.  Some of the  Company's
existing computer programs that have date-sensitive  coding may recognize a date
"00" as the year 1900  rather  than the year 2000.  This could  result in system
failures or  miscalculations  causing  disruptions  of  operations.  The Company
believes that the continuing existence of a significant non-Year  2000-compliant
systems and  applications  would have a material adverse effect on the Company's
ability to conduct business after January 1, 2000.

     Substantially  all of the  Company's  network  was built in the last  three
years. As a result,  the Company  believes that it does not have a investment in
legacy systems which has substantial Year 2000 issues.  However, the Company has
established  a project team to identify,  evaluate and address any existing Year
2000  issues.  This Year 2000  effort  covers the  Company's  telecommunications
services,  and other  operational and financial  information  technology  ("IT")
systems and applications. Also included in this effort are various other systems
such as building  operations and individual  personal  computers used by Company
personnel The project team is reviewing  the status of the Year 2000  compliance
effort of our key suppliers and other  business  partners and will be developing
business  continuity  plans  related  to Year 2000  issues.  While the Year 2000
project team is evaluating all potentially  non-compliant systems, the Year 2000
effort is structured  to give  priority to those systems  identified as "mission
critical".

     The project  team has  identified  the  following  principal  phases of the
project:   a)  assessment  and  planning,   b)  remediation,   c)  testing,   d)
implementation and monitoring, and e) contingency planning. The assessment phase
is expected to be  substantially  complete by January 31, 1999.  The Company has
established a target date of June 30, 1999, for remediation of mission  critical
systems.  Of the  applications  identified  as critical,  many have already been
remediated and are being tested.  Testing is expected to be completed by January
31, 1999, for all applications.  In addition, all new components being purchased
as part of the Company's  ongoing  network and IT  infrastructure  expansion are
being evaluated to ensure compliance.


                                     - 12 -

<PAGE>


               Tanknology-NDE International, Inc. and Subsidiaries


     There can be no assurances  that third parties will convert their  critical
systems and processes in a timely manner.  Such failure by any of theses parties
could disrupt the Company's business.  Therefore,  in addition to evaluating its
own  internal  systems,  the  Company  is  in  the  process  of  evaluating  and
documenting the status of Year 2000 compliance efforts by its key suppliers.

     The Company currently projects that it will incur and expense approximately
$150,000  through the end of 2000 in connection  with the Year 2000  remediation
project,  of which  less than  $25,000  has been  incurred  and  expensed  as of
September  30, 1998.  Such amounts are  exclusive of amounts  which were already
anticipated  to be spent on new hardware and software  purchases  resulting from
the  expansion  of the  Company's  network and other  business  operations.  The
Company  believes that a significant  portion of the Year 2000 expenses will not
be incremental  costs, but rather will represent the redeployment of existing IT
resources.  This  redeployment  may cause  delays in making  other IT or network
upgrades  or  enhancements;  however,  the  delays  are not  expected  to have a
material effect on the Company's operations.

     As part of its Year 2000  initiative,  the Company is evaluating  scenarios
that may occur as a result of the  century  change  and  anticipates  developing
contingency  and  business  continuity  plans  tailored  for  Year  2000-related
problems  by December  31,  1998.  These  plans are  expected to provide for key
operational back-up, recovery and restoration alternatives.

     The above  information  is based on  estimates,  which were  derived  using
numerous  assumptions of future events,  including the  availability  and future
costs of certain  technological  and other resources,  third party  modification
actions  and other  factors.  Given the  complexity  of these  issues  and other
unidentified  risks,  actual results may vary materially from those  anticipated
and discussed above. Specific factors that might cause such differences include,
among others,  the availability and cost of personnel  trained in this area, the
ability to locate and correct all affected computer code, the timing and success
of remedial efforts of our third party suppliers and similar uncertainties.



PART II       Other Information

Item 6. Exhibits and Reports on Form 8-K

          The following exhibits are filed herewith:

               2.3  Stock  Purchase  Agreement  by  and  between  Tanknology-NDE
                    International,  Inc.  and  Outbound  Services,  Inc. and the
                    Stockholders of Outbound  Services,  Inc. dated as of August
                    7, 1998.

               4.3  1989 Stock Option Plan

               4.4  1995 Incentive Plan for Non-management Employees


          Reports on Form 8-K:

               None.



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               Tanknology-NDE International, Inc. and Subsidiaries


                                    SIGNATURE

     In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                    Tanknology-NDE International, Inc.
                                    (Registrant)

Date:       November 12, 1998            /s/ DAVID G. OSOWSKI
          --------------------      ------------------------------------------
                                    David G. Osowski
                                    Vice President and Chief Financial Officer


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